No Leftovers

There are countless decisions being made behind-the-scenes in an early-stage company. Who to hire, what to focus on, where to differentiate yourself? 

Sleepless nights. Drained credit cards. Merciless workloads. Forced adaptations. Constant mistakes. Self-doubt. Improvisation. Strained relationships…

The list goes on. Although these all sound quite daunting, the founders of successful companies tend to have one quality that somehow makes all the hardships behind incepting a company, bearable:
Passion. 

As the pathway gets paved, and the vision becomes clearer, things may start to ease up a little bit.  

A young company may start to experience some slightly more pleasing symptoms of entrepreneurship.

Recognition. Buzz. Revenue. Growth. Expansion. Increased balance of workload.  

However, one thing that you won’t see, and quite frankly, shouldn’t see within a company that’s in rapid growth period is:

Profit. 

Leftovers? What Does that Mean? 

Dividends, leftovers, bonuses – whatever you want to call them. 

The luxury of having leftover cash to pay out to the owners of a business after all expenses is, by all means, a blessing. If you’re a gigantic, billion-dollar public company, this translates to dividends. 

How wild is it that you can purchase shares in a company on the public market that is so big and profitable for all of its insiders that you, a retail investor, would get paid out a percentage of the profits… just for executing a buy order?

Thank you, Coca-Cola, McDonald’s, Royal Bank, CIBC, Disney… This is a truly a spectacular thing. 

However, we’re forgetting to mention something. 

These companies have been around for decades and decades. 

Way beyond their initial inception, development, and expansion phases, these companies have inflated to global domination and created a self-sustaining, revenue and profit-generating machine. 

Do you know what tangible thing that process requires, among many other things? 

Money. 

Yes, as we’re sure you’ve heard before, it takes money to take money. 

Marketing costs money. Growing your employee base costs money. Acquiring leases around the globe costs money. Massive inventory purchases cost money.

The amount of capital it takes to set your infrastructure up to churn out revenue on a multi-million (or even billion-dollar level) is very, very large. Not to mention the amount of time it takes. For a company looking to reach this level of pedigree, it requires the use of all available capital, and then some. 

Don’t believe us?

Amazon (NASDAQ: AMZN) is worth US$1,750,000,000,000 today. 

It was incepted in 1995.  

Throughout the latter half of the 90’s, Bezos’ company churned out hundreds of millions in revenue. 

When did it finally turn its first profit? 

2001. After selling over US$1,000,000,000. The profit for investors? A penny. $0.01.

Per share that is, reflected as 0.01 Earnings per share (EPS). 

Today, the ecommerce behemoth boasts an EPS of 41, a 400,000% increase from two decades ago. 

Not only did growing the business use up all of the revenues that the company brought in, Amazon lost millions of dollars for years by outpricing its competitors, paying to eat up market share.  

Do you think that this level of growth could have happened if Bezos decided to use Amazon’s available cash to pay out its partners instead? 

We highly doubt it. 

And who knows, perhaps we’d still have to wait more than two days for shipping… you know, like we’re back in the Dark Ages. 

Before You Open Those Quarterly Reports… 

If you happen to be taking the liberty to inspect one of your portfolio company’s financial statements, don’t forget to think about us. We will be the voice in your head, telling you it is okay to see net losses, rather than net profits.

Defined plans and strategies for expansion, acquisitions, and gross revenue growth are all signs of a growing company. However, there is a price tag to these tools of scaling, and you should be encouraging them to use all leftover cash to build the empire.

P.S. – Don’t forget to keep an eye on how a company is raising the funds to facilitate growth. Debt is good, but not too much of it. Lines of credit are preferable. Selling equity is great, too, but watch out for dilution.

If only there was some sort of formula to evaluate a company’s balance between debt financing and equity financing...