currency symbols floating in blue seaI was talking to a buddy of mine yesterday who works at a fairly large public corporation (~$1.5B in revenue) about their lack of investment in new technology and products.  As we talked it got me thinking, so I brought up a private company I know of who was offered 17x their free cash flow as a purchase price.  Okay, so once we all stop with the “but that doesn’t happen frequently” and “that’s ridiculous” (or similar) comments, I’ll tell you why.  Well, honestly, it’s because their product was really innovative and it had the potential to change the way a consumer looked at this type of product.  The reason the multiple was so high was the potential, not the bottom-line, and the PE fund that offered the 17x multiple saw just that. The company had been feeding so many dollars into new product development and R&D, that if they were a $4B company with abysmal EBITDA performance an analyst might criticize their choices – but that’s why I liked this company!  They know the product is great, they believe in its viability and they’ve also lined up quite a bit of investment to help show the world what being innovative looks like and what it takes.

Building on the thought, we started to talk about his company and what might change the mindset.  Unfortunately, for public companies, an analyst’s viewpoint is somewhat driven by EBITDA, and I personally do see that as a key performance indicator of success, but not always for long-term potential.  Then, of course, there is also the shareholder scrutiny and wanting a dividend or buyback.  But, when you only focus on the bottom-line you get scared and stop or limit investment into R&D, human capital, etc. and by doing so you err of the side of caution when it comes to innovation.  Think about some of the fastest-growing companies out there (Apple, Google, Uber, Gilead Sciences, Tesla…), look at what it took to get there, and then compare that to what your company is doing.  For many companies, the amount of investment into new product development as a % of sales (threw that in so we can normalize the metric) is increasing year-over-year, which is great, but each company needs to look at their own investment strategy (and not another company’s strategy).  Looking elsewhere for insight and then scrambling to get something “productized” and to market more quickly will not result in anything but becoming more of a laggard in the future.  Also, as it is quite important, if you don’t have the right people and methods to take an idea-to-product-to-market, well, then your concerns should be much more than just where / how you invest in R&D.

To truly be innovative, it does take time, commitment and usually some $$ investment (especially if you’re looking at acquisitions). If you are investing in cost reduction efforts, leaning out your organization, etc. I urge you to take a step back and consider the “what if” of using those dollars to grow your top-line and grow the business.  Stop looking down all the time (at your bottom-line) and focus on looking forward and upward at where you want to be in the future.

WHY?… Because you do have significant impact on the people who use your products (or services) and who knows, maybe you could accelerate your growth to become the first company with a $1T market cap – we know the companies mentioned above are gunning for it, with Apple and Google being current front-runners…  and sure, you can knock it or say that your company can’t do that, but look at Apple’s growth from 2001 to present and tell me who wouldn’t want to TRY and ride an earnings curve like that…