Editor's note: This article written by Alan Hall originally appeared on Forbes.com and is being reprinted with his permission.
Venture capitalist Fred Wilson, of Union Square Center, wrote an interesting piece on sustainability. Specifically, he wrote about the dilemma of balancing short-term profit with long-term business health.
Typically, a hired executive is a hired gun who will manage for near-term profits. An entrepreneur, however, has survival instinct wired into his gut.
Wilson notes that if you want to stay in business forever, you have to focus on the long term. You need a model that builds confidence and trust with your customers and keeps them coming back day after day, year after year. I agree.
However, the classic conundrum is how to properly balance the long-term potential of the company with near-term profitability. While most advisers (42 percent according to the Chartered Institute of Management Accountants) believe the two goals are not mutually exclusive — that they can and should coexist — opinions on how that should happen are all over the map. As Wilson notes, Clay Christensen (an associate and in some respects a contemporary of my own) talks frequently about the way corporate executives calculate a return on investment (ROI) on any investment they make. If the return isn't greater than the minimum hurdle, they don't go forward — and then some smaller competitor comes along, makes the investment and ends up eating the big company's lunch.
Near-term and relative near-term ROI is the cleaner equation for Wall Street investors as well. They use a simple profit equation to decide if they want to invest in your company or not. In your own company, however, survival instincts are the better tools. What will be the right decision to keep your company in business for 10, 50 or 100 years? What if the decision you make to protect long-term viability eliminates near term profit, or even causes the company to pivot entirely or to temporarily run at a loss?
Sadly, most executives make the former choice, Wilson observes. What is the primary reason why entrepreneurs make these hard choices readily when executives don't? They have survival instinct.
Entrepreneurs think like owners. As Wilson puts it: "They don't want their baby to die."
In contrast, executives are often hired guns. Even in key roles, they are typically focused on maximizing the success of the business (and their compensation) over the short period they will reside in the corner office, he says. They have no incentive to think about what happens in 20 or 50 years.
I have known and experienced both types of company leaders. Fishbowl, for example (headed by CEO David K. Williams), used the savings it had amassed before the recent recession to double down on marketing during that difficult time. Its company grew tremendously, while its former top competitor failed and its next largest competitor severely contracted.
Conversely, another highly successful company in our region took in significant outside funding, removed its founder and brought in a new management team that immediately halted all efforts other than those designed to get the company successfully acquired. Sensing this, the employees immediately disengaged. The company may or may not be successfully acquired, but its culture, along with its long-term viability, has been changed.Comment on this story
One leader exhibited survival instinct. The other did not.
So when you construct your own business model and create the culture of your own venture, I advise you to take this lesson to heart. I suggest you emphasize sustainability over profit maximization within everything you create.
This does not mean you should ignore profit. Profits are essential, and they are the essence of survivability. But long-term viability should be your highest priority. Consider, as well, that even if you are creating a business that will eventually be acquired, the very best way to prepare for a successful acquisition (or IPO) is the same — to build a sustainable business — not to create a business you are hoping to sustain for just long enough to take it public or to get it acquired.
Alan E. Hall is a co-founding managing director of Mercato Partners, a regionally focused growth capital investment firm. He founded Grow Utah Ventures, is the founder of MarketStar Corp. and is chairman of the Utah Technology Council.