The 2 goals when you invest in your/a company are Growth and Profitability. Both hard to achieve. And again we will see timing is everything.

Professor Amar Bhide showed in his Origin and Evolution of New Business that 93% of all companies that become successful had to abandon their initial strategy – because the original plan proved not to work out.

So successful companies do not succeed because they have the right strategy at the start; but rather, because they have money left over after the original strategy fails (learn fast), so that they can pivot and try another approach based on what they have learned.
Those who fail, in contrast, spend all their money on their original strategy… which is usually wrong.

So the theory of Good Money and Bad Money based on Bhide´s work goes like this:

In the early stages of a new business (when the winning strategy is not yet clear or proven), good money from us as an investor needs to be patient for growth, but impatient for profit.

In this stage the company needs to figure out a viable strategy as fast and with as little investment as possible (so you do not spend a lot of capital chasing the wrong strategy). Remember the 93%…meaning small companies burn little and big companies burn huge amounts of cash.

This why capital that seeks growth before profits is bad capital.

Once a viable strategy has been found (proven), as an investor we need to change what we look for, we should become impatient for growth and patient for profit. Once a profitable strategy has been found, success now depends on scaling the model.

Note: Now it is also easier to see why companies that are financially constrained in the early days have a bigger chance of success. Their focus often is on profits.

You get what you focus on, so focus on what you want.

Choose wisely. 🖖

*From “Origin and Evolution of New Business“, Amar Bhide and “How Well you Measure Your Life“, Clayton M. Christensen