There’s been a sea change in how companies innovate.
When we talk about business innovation most of us immediately think start-ups and Fortune 500 companies, skipping over the vast majority of private companies that make up the bulk of the economy and truly drive progress in business. This segment of companies is remarkable because:
- They employ more Americans than Fortune 500s and start-ups combined.
- They are owned by the people who started them (not passive shareholders or professional investors).
- They are profitable.
- They are self-funded.
- They are usually small businesses that serve large companies.
Think about that. While the headlines wail about the latest startup to raise gobs of money for a robot that can fetch vegan ice cream or high-flying corporate take-overs, privately-held companies that solve everyday business problems are transforming the economy. I call them “moneymakers”—companies that make money (thus the name) and use their own profits and ingenuity to fuel growth.
That Fortune 500 companies buy small tech startups to grow the smaller business is a fallacy. More often there’s a strategic reason behind the acquisition. Perhaps it’s to capture a talented team (this is called an “acqui-hire”) or to grab all of their customers. These deals are cheap and fast. For the seller the payoff can be underwhelming.
Consider 2 scenarios:
1. The high tech startup that has raised money 5 times before being bought. The “founder” is left with 5% of the business after raising money over and over again, his own share diluted each time. Even if this company is sold for $100 million, the founder walks away with $5 million for years of hard work.
After paying taxes on that money, this founder is going to have to get a job.
2. The “moneymaker” that grows revenues to $20 million and profits to $2 million at time of sale. If sold for 1x revenue or 10x profits, this company may trade for $20 million.
Not bad for years of hard work.
Moneymakers are acquired all the time but it’s usually for common sense reasons: profits and the potential for growth. The prices paid for these companies reflect that. I’ll give you an example.
Jere Simpson’s software development firm, Kitewire, had a staff of 25 and a backlog of work. The company was pulling in $4 million a year but Jere didn’t like the business model. As the owner, the only way he could make more money was by paying his workers less. He was fundamentally out of alignment with his employees, and it bothered him. Eventually, he would work closely with his team to introduce a new cloud based SaaS product, totally transforming the company’s underlying economic model. Today, Kitewire does $75 million in revenue with about the same headcount: 25 employees. That’s ingenuity fueled growth.
Creating companies that can survive and thrive takes years to build. Building an enterprise that will scale beyond just the founder to one that’s led by a seasoned management team is maddeningly difficult. It takes endless experimentation to build an economic model that can grow beyond its “small business” roots like Jere did.
Kitewire is now worth about 100 times what it was before the transformation. While Jere currently has no plans to sell, if he ever does, he’ll be richly rewarded for his hard work (See scenario 2). What got him there was being a moneymaker who leveraged innovation to scale.
Moneymakers are incredibly dynamic. They have a talent for spotting and implementing innovations that attract customers and capital. You won’t get a great price for your company if you only bring revenues and profits. To get the top price, you’ve also got to bring something new to the table: a new way of delivering your service or charging for your product. A new kind of customer acquisition strategy. The most valuable businesses combine profits with growth and innovation.
Which brings us to a new paradigm that I call “moonshots and moneymakers.”
Moonshots, you know who you are. You’re the tech guys and gals sitting in Starbucks right now, polishing a PowerPoint pitch explaining why someone with money should invest in your idea. Your charts show fast “hockey stick” growth and you put barriers like “build a world-class management team” and “generate $1 million in revenues in year one” in a slide in the back of the deck.
Here’s a different approach: find a moneymaker to buy or invest in and inject new technology to make it worth a great deal more than it is today. Pivot a B2B business from the corporate market to an e-commerce platform. Figure out a way to use excess inventory to identify a totally new customer. Create a low-cost model of the service using technology.
There are so many moneymakers out there right now, poised to be discovered by moonshotters. There are also many moneymakers ready to turn their own businesses into a moonshot; to breathe new life into them by seeing an opportunity in a different way or by applying technology that makes a profitable business into a scalable business.
Moneymakers and moonshots have a natural synergy. Your idea for a vegan ice cream delivering robot can make real sense when placed in an actual moneymaker that can reduce labor costs through increased use of robots. Watch those multiples rise when you help a solidly profitable company expand its gross margins and discover new markets.
The time has come for moneymakers to reevaluate their businesses and discover financial model transformations that will unleash the true enterprise value of their businesses. And those moonshotters, who dream of creating the next Uber or AirBnB, you might be surprised how many moneymakers are right around the corner, waiting for someone who thinks just like you.
Originally published in Forbes, March 4, 2020. Reprinted with permission from the author.
Lewis Schiff is the Chairman of the Board of Experts for Birthing of Giants Fellowship Program. He is the executive director of Moonshots and Moneymakers, the Oxford Innovation Conference for American Entrepreneurs. He is the author of 4 books on success and has built two start-ups that were sold to publicly traded companies.
To learn more about Lewis, go to Birthing of Giants.