Thinking Long And Short
In the recent past, I met CEO’s of startups, who sometimes, cannot think beyond a few products/services. This is an understandable phenomenon considering long surviving corporations were not built in a few years. It could be termed ‘short term’ thinking.
However, innovation has to be constant and continuous. Therefore, it could be deliberate (i.e. too many products launched at the same time could cannibalize business and the startup could lose steam). Otherwise, sustainability is threatened.
The target market, on the other hand, has to be broad enough or should grow fast enough for the startup to grow within it. There is also the case where a target market is not visible such as Steve Jobs talking about knowing consumer needs before the consumers themselves know. The point here is: scalability has to be thought of at the outset with the market being a great proxy for total headroom.
How Long is Long Term?
TIL, the East India Company, was world’s oldest joint-stock corporation spanning 274 years. It was run by wealthy merchants, beyond government control, had its own private armies and ruled a sub-continent by means of political and economic subjugation.
The longest surviving, though, is the Hudson’s Bay Company (HBC; French: Compagnie de la Baie d’Hudson) which was incorporated by English royal charter in 1670 (374 years old). It was a Canadian fur trading business for most of it’s life.
So, does built to last mean surviving 2 or 3 centuries? It could. It’s a much harder question today. One thing both the companies mentioned above have in common is that both of them functioned like de facto governments. No startup would want to have a private army much less function like a government. But then again, what do I know about entrepreneurial ambitions?
Most entrepreneurs think about early exits. Other build on their ideas to last. In either case, the long term plan transforms into the short term plays.
How Short is Short Term?
The most recognizable symptom of short term thinking today is focusing on quarterly results. However, for companies punished for poor results on stock exchanges, this kind of thinking is hardly a surprise. Therefore, there are great advantages to staying private longer. The American Prosperity Project is trying to build a framework that balances long and short term thinking.
As per the Atlantic:
The average holding time for stocks has fallen from eight years in 1960 to eight months in 2016. Almost 80 percent of chief financial officers at 400 of America’s largest public companies say they would sacrifice a firm’s economic value to meet the quarter’s earnings expectations. And companies are spending more and more on purchasing their own shares to drive stock prices up, rather than investing in equipment or employees.
With machine learning and AI, MIS can be instantaneous. Short term can be much shorter than a quarter. Lean way of thinking and Agility is highly sought after. For a startup, therefore, short term can be tomorrow.
How Too Much Success Can Become an Issue
Consider an example of a startup that launched a product on Indiegogo ( a popular crowdfunding platform) and grossly underestimated it’s demand.
The actual demand did not outstrip supply but it put a heavy demand on the startups supply chain.
The result was massive delays in shipment. The CEO, instead of apologizing and owning up, put the blame on the team and responded by giving a 30% discount on a related accessory.
This enraged backers and the startup lost a great deal of its reputation. Moral of the story: startups may not be able to absorb reputational risks.
Therefore, short term launch plans should build in a great deal of variability.
Hiring Talent To Bridge The Short With The Long Term
“I will only hire someone to work directly for me if I would work for that person,” Zuckerberg told a group in Barcelona. “It’s a pretty good test.”
For talent to believe in a startup, they have to clearly see the future the way the CEO of the startup may see. Of course, the other option is a reality distortion field or hypnosis. I don’t know too many practitioners of those art forms.
For CEO’s, it could mean explaining the road map of the next year, two years or 3 years depending on the type of startup. For instance, a completely new product that is an experiment may not have accurate projections beyond a year broken down into months. This is because of the way cash flow might get distributed.
The right talent can therefore bridge the short and the long term while the CEO focuses on the long term. A great co-founder cannot be overemphasized.
Some common synonyms of thinking long term is looking at capital expenditure as long term and at revenue expenditure as short term.
Thinking of strategy as long term and tactics as short term. Thinking of capital structure decisions as long term but looking at dividend payouts as short term.
CEO’s of listed companies are loathe to take hard decisions that would impact quarterly earnings. Startups may not have that pressure unless they obtain VC funding in which case the cash burn out ratio will be hawkishly monitored.
Lessons for Entrepreneurs:
- Built to last would then mean adaptability. In other words, entrepreneurs should be wise to build a deliberate pipeline of products/services and not just rely on one product/service. Think scalable and sustainable from day 0.
- An established multinational can bear shocks to its reputation but a startup may not survive a tarnished reputation even if it was because of delays in shipments. So, spreading the risk can be a sound move. Also, build ‘too much success’ into the business plan just as you would failure.
- Acknowledge and own mistakes. CEO’s can try compensating but the success of the remediation cannot be predicted.
- Remaining private longer is an option. NASDAQ Private Markets is a great example. If you think that listing your startup can stifle innovation, wait! Staying private will allow you to stay closer to your convictions longer.
- There are no shortcuts. If you can predict success, it is not a startup, its a sound business.
- In certain markets such as data science, there is a war for talent. For talent intensive startups, the biggest expenditure can be on human capital.
- In the end, society defines the framework within which the business operates. As per Amancio Ortega (CEO of Inditex-Zara) “the client has always driven the business”
- Competition will always come from unexpected corners. Being paranoid is good but being too paranoid can limit your long term thinking. Don’t think about highly improbable events. They are events not worth losing sleep over.
- Venture Capital may not be your only option. Governments, Corporate Venture Capital, Private Markets are also options. Maybe, Initial Coin Offerings (ICO’s) could become mainstream.
- In the end, besides your passion, a lot of stars have to align to produce not just hockey stick growth but rather any kind of growth.
Thinking long term and short term is therefore not either or but simultaneous states of minds. To all entrepreneurs:
Welcome to Quantum Thinking!!