Survive and Generate Cash Before Accelerating Expansion

Burn cash to expand, or work to survive? You: The “Matthew effect” is very pronounced now. As entrepreneurs, we constantly worry that unless we quickly become number one, competitors or outside forces may destroy us. But when you grow too quickly and burn cash heavily, less money remains in your pocket and your capacity to withstand risk weakens. Add a black-swan event like this coronavirus outbreak, creating enormous uncertainty, and how do you balance survival with growth? Yang: I have several views. First, survival is the core priority. A company that cannot survive has no basis for talking about development. Raise financing at an appropriate pace, but more importantly, develop your own ability to generate cash, ensuring enough cash flow to stay alive. Second, business development and growth are natural results of doing the right things, not simply goals to pursue. Many companies have strong ambition, so why do some succeed while others do not? One major prerequisite is whether your product or service creates more value for customers. More directly, will customers pay a reasonable price? If they will not, the value you create is not sufficient to sell. In the past, many companies burned cash on subsidies to grow quickly. People no longer consider that approach credible, and investors are not that foolish. We now care greatly about unit economics. Work out whether innovation in your business model, technology, or management can reduce acquisition, delivery, service, or production costs. Either economies of scale lower those costs, or differentiated innovation raises the premium you can charge. As long as customers remain unwilling to pay, the faster you go, the faster you die. Third, once survival and reasonable economics are secured, you have a foundation. That is when I think a company should accelerate expansion. ------- Yang: What drives growth during rapid expansion? There are three directions. One is the customer dimension: sell to more customers, increase their number and your market share, expand your territory, and acquire new business. Or, rather than selling to more customers, sell more to each one: earn more from every customer through repeat purchases, cross-selling, and solutions, rather than volume. You can also sell to better customers, again without relying on volume. The 20/80 rule says 20% of customers create 80% of profits. How do you find a more precisely defined market position and meet those customers' needs firmly? That is the first dimension: customers. Second is geography, with two approaches: go abroad into overseas markets, or go deeper, penetrating first-, second-, third-, fourth-, fifth-tier cities, and so on. The third dimension is business lines. Remember that company resources, whether money or time, are always limited. You cannot pursue every line and do everything. Work at a deliberate pace with clear priorities, strengthen your capabilities, and create greater value. ------ Yang: Act within your capabilities. Seek healthy, steady growth rather than growth on the surface. What creates this situation? I see three angles. First, early success may lead to excessive diversification. One opportunity and product follow another, and the company grows quickly. Overconfidence and an inflated assessment of ability create the belief that it can do anything. It launches too many businesses too early, cannot establish many of them, and leaves too little attention for the core business, failing to improve quality or bring costs under control. In a sense, early success also creates later failure. That is why I keep saying rapid growth must follow a completed phase of building solid foundations. Second, organizational management cannot keep pace with growth. I often see headcount swell from hundreds to a thousand, then thousands or even tens of thousands. Companies recruit rapidly and casually without rigorous screening for cultural fit, values, or capability. After hiring a crowd, they discover the business cannot grow and immediately start layoffs. Financial controls are another conspicuous problem. Without discipline, receipts and payments become a mess; plentiful money leads to casual investments and waste. In rapid growth, they are still using small-company methods to manage a large company. Because the old approach worked before, they keep using it. But a bigger business cannot depend on personal rule. Confused processes, everything controlled by the boss, and unclear departmental responsibilities create disorder and very low efficiency. The most fundamental issue is the founder's capability and breadth of perspective. If the founder does not learn fast enough, that person becomes the company's bottleneck and ceiling. ---- Original: https://mp.weixin.qq.com/s/0iZE_h6wY9jE0wc-r1-D-A