One hundred years ago, preeminent economist John Maynard Keynes famously wrote, “In the long run we are all dead. Economists set themselves too easy, too useless a task, if in tempestuous seasons they can only tell us, that when the storm is long past, the ocean is flat again.”
Were he alive today, he might well say the same thing about the CEOs of high-growth digital businesses.
Winner-takes-all markets use a growth at all costs approach
In the low interest rate environment that prevailed for 15+ years until 2021, the long run was very much in focus. In the winner-take-all markets that many of these digital businesses try to win, getting to scale fastest can be a logical strategy.
Ten years ago, Marc Andreesen wrote (my emphasis):
“In normal markets, you can have Pepsi and Coke. In technology markets, in the long run, you tend to only have one…. The big companies, though, in technology, tend to have 90 percent market share. So generally, these are winner-take-all markets. Generally, number one is going to get like 90 percent of the profits. Number two is going to get like 10 percent of the profits, and numbers three through 10 are going to get nothing.“
Examples of this abound:
- Google (Alphabet) dominated the search engine market with over 90% market share, overshadowing competitors like Yahoo, AltaVista, and Bing.
- Facebook outcompeted social media platforms like MySpace, Friendster, and Google+ to become the leading social network with over 70% market share at its peak.
- Amazon established a dominant position in e-commerce and cloud computing, overshadowing competitors like eBay, Barnes & Noble, and Oracle.
- Apple has dominated smartphone profits for years. Even as the market has matured, in 2022, Apple had the highest profit share ever, with 85%. People barely remember the once-important BlackBerry, Nokia, and Palm.
- Uber disrupted the taxi industry and now dominates the ride-sharing industry with 70% market share in the US, overshadowing competitors like Lyft (whose founders just resigned), Sidecar, and traditional taxi services.
- Airbnb has 70% of the home-sharing market, dominating competitors like HomeAway, VRBO, and Vacasa.
To support the winner-takes-all strategy, the biggest, fastest-growing digital businesses had access to a firehose of cheap capital. With a low cost of capital, investment hurdle rates were low, so every growth investment looked sensible.
Management teams who believed they were in such markets, and had the support of their investors, faced a binary choice: invest like crazy to become the winner and reap the rewards, or go home and give up. It wasn’t much of a choice at all, and the promise of victory was worth any temporary “tempestuous waters” they might find themselves in. After all, if you build a large enough fleet, even a bad storm might only sink a few boats, while the rest survive and thrive in the aftermath.
The pandemic supercharged the strategy. Interest rates continued to be low, fiscal stimulus preserved consumer buying power, and consumers changed their buying habits from local in-person services and experiences to online-first services.
Post-pandemic markets force companies to prioritize profitability
In 2021, it all changed. As central banks started raising interest rates, the hurdle rates on investments got higher. That was true inside cash-burning startups. More importantly, it was true for their funding sources. As venture capital wallets closed, it became clear that a growth-at-all-costs strategy might not survive long enough to win.
The new reality is a different choice: grow more slowly and methodically, but live to fight another day, or run headlong into a brick wall. That’s an easy choice, too.
A different strategy requires a different operating plan. One that prioritizes liquidity, a longer cash runway, and a focus on improving operational excellence and profitability. Rather than trying to build a long-term product or distribution advantage, the focus is more on business fundamentals.
The good news for CFOs: during the boom years, no one was interested in hearing about hurdle rates, margins, tradeoffs between one investment and another. There was always a long-term winner-take-all story to be told of what was possible with enough belief and innovation.
But now, all of the winners I mentioned above, and many others besides, have taken a turn toward prudence. They’ve shed employees, hoarded cash, announced the “year of efficiency”, and downplayed long-term investments. And the smaller, private companies hoping to be in the next generation of winners have done the same.
To maximize profitability, improve your processes and your Finance metrics
For CFOs, this is a time to step into a much stronger operating role, driving business fundamentals strategy rooted in detailed data about what the business is doing today, not what it might do in the long run. This approach puts CFOs who have their pulse on their business, their customers, and their profitability, on the bridge of the flagship of their corporate fleet, navigating through the storm to the calmer waters beyond.
The CFOs who will win in this era are actively looking at:
- How has the distribution of gross margin for every customer, product, and category changed in the last month? In the last week? How can we fix or trim bottom decile performers? How we can double down on top decile performers?
- Are discount codes, refunds, returns, dispute rates, credit redemptions, and other adjustments to revenue behaving this week the way they did last week? Last month? Are allowances causing any surprises, or deferring excessive revenue?
- Can they recognize revenue on a line-item basis or do system limitations force them to recognize revenue based on the most conservative item in a multi-line-item invoice?
- Putting systems in place so the FP&A team can spend its time advising the business rather than gathering and processing data?
- Shortening month-end close for revenue to a day or two and eliminating order to cash irreconcilable differences.
Wondering if you have the data to command your fleet through the storm?
