“Regardless of reported profit, a business or product is worthless unless it compounds and returns the cash invested in it.”
Think of the most innovate company you know of that is still in business. The reason it is in business is because part of their innovation is getting money out of their products which exceeds the investment they have put in to them.
Exceeds not by a little, but by an awful lot.
There are many amazing ideas out there, new ones every day, but the ones we all know about are the ones that a lot of people regularly pay for.
I read an interesting paper written in the 1972 by Bruce Henderson of the Boston Consulting Group, Bruce states that the vast majority of products in a company are cash traps. Consistently profitable on paper but to launch them, maintain a competitive position, support them and then develop them in order to keep customers buying them, you will find that they have absorbed every penny they generated over their lifetime.
All that work and on the product’s best day it has only managed to stand still. No forward momentum. The true profit in a company with multiple product lines tends to come from a small number of major hits.
For everything else that is not a giant in the market in which it competes the outlook is bleak. Customers want more features, sooner. They want support for older versions, longer. Competitors will try and discount you out of a contract renewal, in every customer of yours they can get a meeting with. All of these eat into whatever "respectable" profit you think you’re making. That product that isn't exactly a hit is now not even worth the effort.
If you have been involved in detail or in passing with Enterprise IT products you have seen, or used, or sold heartbreakers. Amazing ideas that make wonderful products which go nowhere. Everyone agrees the idea and the product are great, but there’s never an economic payback which exceeds not doing the product in the first place.
You will find heartbreakers in startups that do not make it. Startups which do make it but never capitalise on the breakthrough they have made. You will find heartbreakers at small companies who think they have something but don’t and at big companies, who people on the outside think do not know the value of the heartbreaker they have.
What all of these have in common are that the economics of the product are incorrect at the moment of its creation. The equation is wrong.
According to Bruce to escape the cash trap you need to be the leader. Be the whale product in its market space with competitors far in the rear view mirror. But fast growing products alone are not enough, they are more dangerous because you spend money at a faster rate to grab market share. Racking up deep losses you might never recover any cash from.
What if you can’t be the leader? Stop. Take your money and go do something where you can be the leader.
I see a lot of new products at various points of gestation. Early on in the process some are experiments which cost little but from which you learn much. Others might generate one or more patents, which while not delivering cash does potentially add value to the company if the patents prove to be of economic value to the company owners later. Fortunately what I have not seen are products made to make the organisation feel good about itself. Vanity projects of no practical value done only to show how much engineering can be engineered by the company engineers. Great to wheel out on stage in front of the press with a delusional sticker price and no expectation of any sales.
I usually sit in every new product meeting asking myself the question “who can I sell this to?” That might have been the wrong question all along. Perhaps I should be asking myself “who can I sell an awful lot of this to before the competition does?”
Growth that locks in your advantages is great. Growth that puts you deeper into a cash trap is worse than an outright failure. At least when you see your failure you adapt, a cash trap product hides the failure. It's just a mirage you truly believe in.