Last week, I was invited to be a panelist along with two other entrepreneurs at a local meetup for startups.
Beside me in the hot seats were owners of two very different but successful companies.
One panelist, Avery Swartz, owns a tech/digital marketing training company called Camp Tech. The other guest, Jackie Schwarz, owns a dance program for youths, whereby the students make their own music videos and develop self-confidence along the way.
Avery has, to this day, never paid herself from her training business. Instead, she consults on the side to pay her bills. Her business is growing steadily as she continues to reinvest her earnings back into the company. Smart move.
Jackie is now starting to take some income from her company, but she has already sold multiple franchises of her business and is on pace to sell many more.
I have no doubt that both of these companies will be million-dollar businesses soon if they aren’t already. But what strikes me as interesting is that they put their business’ health before their own personal profits.
Never did they eat the fruits of their labour until (in Jackie’s case) the fruits were plentiful enough to eat AND grow the next crop at the same time.
Let’s continue with the fruit analogy.
When you’re a farmer, you start with a few seeds and perhaps a small plot of land. It’s your job to grow those seeds and nurture them until you have a ready harvest.
The problem I see with many startups is that when they plant the seeds in the beginning, they are already hungry. They have no stockpile or alternative means of survival.
So when the first harvest arrives, they need to eat some; half, most, or any.
And now they have the same amount of seeds that they had in the beginning, or even less. So, they put them back into the ground for another season and hope for a larger harvest next time.
Do you see the problem with this? By eating the fruits of their labour too soon, they never grow their output. They eat the fruit and the seeds, so the next harvest is simply a repeat of the last season, or worse.
When you’re starting a business, the biggest piece of advice I can give you is to:
- Have a stockpile so you don’t need to eat your own fruit too early.
- Reinvest as much of it as you can for as long as you can.
Does this work in the real world?
Many will know Amazon for the success that they are today. And if you follow the stock markets, you’ll know that for a LONG time people waited for Amazon to turn a significant profit, which they started doing somewhere around early 2015 (but I could be wrong so don’t hold me to that).
Nonetheless, we’re talking about more than a decade with almost no profit and major reinvestment.
They simply kept reinvesting their profits into new business models, new ventures, lowering overhead, etc., until one day they finally decided to turn a real profit.
Former Amazon Employee described their business strategy back in 2013 like this:
To me, a profitless business model is one in which it costs you $2 to make a glass of lemonade but you have to sell it for $1 a glass at your lemonade stand. But if you sell a glass of lemonade for $2 and it only costs you $1 to make it, and you decide business is so great you’re going to build a lemonade stand on every street corner in the world so you can eventually afford to move humanity into outer space or buy a newspaper in your spare time, and that requires you to invest all your profits in buying up some lemon fields and timber to set up lemonade franchises on every street corner, that sounds like many things to me, but it doesn’t sound like a charitable organization.
I was lucky enough back in 2014 to realize this truth.
While I was new to the stock investment game at the time, I knew they couldn’t hold off on taking profits forever without major shareholder upheaval.
I also knew they were investing in an entirely new business model, consisting of cloud services (AWS). I knew that their cloud services were slowly and quietly becoming massive.
You’d pay fractions of a dollar to upload or download gigabytes of data, and big organizations and small alike were using their hosting service to host their entire platforms. This was the future for Amazon, and the retail business was the tip of the iceberg.
So I invested in Amazon at about $330 per stock, and today it’s worth over $850. Not a bad ROI in roughly 2 years.
The moral of the story
The moral of the story is that if you truly want to build a business with a moat around it (lots of capital and a competitive advantage), you need to invest as much as humanly possible back into the business.
Buy the tools you need to grow, invest in the next employee or team member, take that course, go to that conference, spend that money on things that will enable you to sell more of what you sell in the future.
Don’t squeeze the oxygen from your business too early – it doesn’t matter what vanity metrics your take-home salary is at the end of the year. What matters is the long game.
But you need to find a way to survive while the long game plays out, and that’s where your resourcefulness as an entrepreneur comes into play. It shouldn’t be beneath you to have a job or side hustle while you build your early-stage business.
That’s what I did and I wouldn’t do it any other way.