I never thought I’d have to tell an entrepreneur that making money is an essential aspect of business and that it is the prime driver of investing.
A business doesn’t exist to learn, adapt or fine-tune its plan. It does not exist to move as the market moves or to reposition the company as new business realities somehow become clear.
A business exists to make money. There are certainly other important societal elements, but without profit, the company will cease to exist.
I’d thought everyone in business knew this. I was wrong. I recently spoke with a new economy business that, after a few years of operations, has yet to make a profit. The leaders literally don’t know how to make money. Not that they are poor at doing so; they really don’t know what to do to make money from their product.
They never got around to figuring out what their value proposition is. They just went ahead with operations, hoping they might stumble onto some way to make money because what they did was so cool. In a way, it’s a tribute to the members of management that they can continue to extract funding from their investors, but that’s about the only positive comment I can make about their operations as a business.
The managers are bright, charming and hopelessly lost. The company is doomed, and the managers seem only faintly aware that it will all come crashing down. I cannot explain their mindset. I know that hubris has not set in, for they somehow know they are failing. At a recent meeting with management, I wish I’d used a two-by-four to beat reality into them instead of being polite and, after a pleasant chat, being dismissed as superfluous.
They just didn’t get it, which is the phrase many entrepreneurs use to describe investors when explaining why they didn’t get funding. In this case, the entrepreneurs just didn’t get that they needed a plan to earn a profit.
At least I got something out this experience. The basic tenet of my consulting practice is for the client to have a clearly defined value proposition. Nothing could have reinforced the importance of this as a foundation any better than my experience with this company. My clients must know what they do and how they will make money doing so. If they don’t, the first thing we do is develop a value proposition.
You can make money selling a product at the manufacturing level, at distribution or at retail. Advertising revenue can be earned by TV and radio broadcasting, print publication and, to some degree, the Internet. Attorneys, accountants, and consultants charge for the services they provide and investment banking companies earn revenue from their advisory and underwriting functions.
There is a value proposition in every case. A company sells you a car, you pay for it. An accounting firm prepares your taxes, you pay the fee. These are very simple value propositions. What I provide to you is of value, for which you are willing to pay.
A version of an old joke was applied to an online pet supply companies that sold product below cost hoping to make it up in volume. In actuality, members of management planned to build a large and loyal customer base, then increase pricing to bring the company to profitability. No matter how poorly the business plan was thought out or executed, they at least had a plan of how they were going to make money.
Before my recent encounter with this dot-com, I viewed the “elevator speech” or “30 words to tell what you do and how you will make money” as a way to succinctly explain your value proposition. I never thought of it as a test to see if management had even thought about making money.
I will now.
Erwin Bruder is president of The Gordian Organization, which provides business planning and structuring services to startup and growing companies. He can be reached at (216) 292-2271.