Lots of startups achieve 2,000% growth but the founders still have to live with their parents. For a mature business, hitting double digits is like vanquishing Usain Bolt after six hours at Cheesecake Factory. The truth is – even mature businesses (and products) have one last dash of growth left. The trick is finding which dusty, under-used asset can power it.
When it comes to generating growth, everyone immediately looks at new products, services or markets. In reality, they generate the least enterprise value.
Then what will?
Here’s the maniacal method I use with corporations, startups, and PE portfolio companies to find undervalued assets at every stage of growth.
Stage 1: Introduction
When a new product or service is introduced – in the first 3-5 years of any startup, there better not be any assets collecting dust. If there are, I’ll personally summon your Angels to downgrade your organic kale chips to Pringles.
At larger companies, I often find unused patents or trademarks. Any attempts to monetize these should be purely opportunistic. That means someone has to seek you out AND do all the work. If any business I work with wastes time on marginal assets, I get paid upfront. That’s a bankruptcy dressed up like a business.
Stage 2: Growth
The growth stage is full of temptation, like George Alamuddin-Clooney at a Victoria’s Secret party. Growing companies are just starting to amass valuable assets – distribution channels, platforms, coveted customers…foosball tables. These are magnets for tempting partnership offers – to build new products or serve new segments. Most are a terrible idea. Existing markets are still underpenetrated, growth is over 20%, and the business should be too lean for slacking assets. It’s like telling ‘the birds and the bees’ to a six year old.
However, there are three exceptions to this rule:
Marketing & Distribution: Sometimes, I encourage growth companies to use existing distribution channels to sell complementary products that deliver expected services. For example, I advised a major web host to add complementary security and e-commerce tools to meet the minimum expectations of customers and prospects – at least until they could build their own.
The same goes for retail. Trader Joe’s sells 80% proprietary products and 20% branded. Why bother paying the premium? Some brands, like Fage Greek yogurt, have significant loyalty and shoppers expect to get it on their trip to a supermarket. Trader Joe’s needs it to be theirs and only theirs. (Recently, they launched their own Greek yogurt. For now, they exist side by side. For now.)
Platforms/Technology: Apple iPads and Google Chromebooks would make luxurious sushi trays if not for apps and plugins. Despite significant growth, both companies managed to scrape a few shekels together for partner -driven platforms: app stores. Whenever a product or service can be massively enhanced by others, I say give them the keys – and a massage!
Brand: In most cases, if no one knows your brand, no one wants to use it. But companies that rely on ecosystems of partners are different. They might want to play it loose with their brands and logos. Good examples are Amazon, Facebook and Twitter. At the height of their expansion, customers, partners, third party sellers, and every rapper sweating Kim Kardashian could plaster their logos everywhere – websites, marketing materials, commercials, even tattoos. All without a single call from some tightass at Facebook Brand Licensing. Why? Ecosystem brands need ubiquity and recognition. The payment networks I’ve worked for – MasterCard and American Express – are no different. Any brand that relies on partners, merchants or “influencers” to consider…just……letting………go……
Stage 3: Maturity
Maturity in business isn’t all that different from maturity in life: You’re still popular, but everyone knows all your jokes. You’re everyone’s spouse and nobody’s muse. Everywhere you go, you’re expected to be. And, you better pick up the tab, lest anyone wonder what’s wrong.
The good news is every company I’ve seen at this stage has an orgy of undervalued assets. But tread carefully. Most are still basking in the glory of well-earned glories. But there are plenty of signs that the heavy lifting is done. Operations run like a Tesla, but politics start seeping in. People defend budgets and headcounts instead of conquering the next hill. Sometimes, there are no new hills. Those gaps in purpose get filled with off-sites, “employee engagement” exercises, and consultants scribbling critical words like “critical” on whiteboards – or “innovation” or “platforms” or “strategic”.
So here’s where growth might be hiding critical at this critical stage:
Platforms & Technology: The charitable name for mature platforms is “legacy systems”. (From the same agency that renamed “old folks homes” “senior citizen centers.”) Many have evolved into a complex patchwork of proprietary and third party software, loaded with customizations only a mother could love. When I joined Citi in 2006, the company was still integrating acquisitions from the late 90’s! With new cloud platforms and API’s, I’m far more optimistic about finding diamonds in this mine.
Mobile networks like Sprint, Verizon and AT&T are making a killing letting third-party MVNO’s like Ting, LycaMobile and Straight Talk run on their network. The MVNO’s do the marketing and servicing, but get network access at bulk rates.
Maybe the best example is Amazon Web Services, which was developed to run Amazon’s business, but expanded to cloud hosting for others. Now, it’s a massive $5 Billion enterprise with a suite of services for all kinds of companies.
Marketing, Distribution & Traffic: My favorite Eureka! moments are finding a massive mailing list, hefty client portfolio, or loads of web/in-store traffic. But as I mentioned for the Growth Stage, I’m not a fan of letting third parties have their way with these. I look for controlled ways to complement the existing business.
In brick and mortar, Best Buy is doing just that – capitalizing on in-store traffic and space to build stores within a store. Department stores have used mini ‘brand stores’ for ages – to my vengeful scorn.
On the web, Amazon Marketplace, Seamless, and AppSumo have mastered distribution. Their traffic and subscribers have become primary marketing channels for their customers.
Operating Assets (equipment, inventory): Most mature companies have operations figured out. From sourcing direct inputs like cocoa to running a fleet of delivery vans like it’s SEAL Team 6. (PS – nothing good ever happened in a van. Buy a proper truck.)
Sometimes, I hesitate to use operating assets for growth because I hate investing serious resources in what might amount to a side business. There are three scenarios where I’ve come to terms with it. All are variations on excess capacity:
- White labeling: On the flip side of Trader Joe’s private label empire is a horde of manufacturers willing to sell excess capacity and inventory at a discount with someone else’s label.
- Outlets: Outlet malls, Nordstrom Rack, and Gilt only exist to clear excess inventory.
- Service diversification: Companies like Uber now use their fleet to deliver food and other local items.
Brand: For every company making a killing extending its brand, there are five killing their brand by extending it. Like good looks, a great brand attracts more frogs than princes. Everyone wants to claim Apple as a client, or say they invested in Uber, or romanced Sophia Loren. (No, you don’t have to say when.)
The biggest challenge I find is clients not knowing where their brand can and can’t stretch. I’m writing a full piece on it. (Sign up for updates here.) Until then, consider this list of the top 30 brand licensors.
Remember the name Kathy Ireland? Aside from sharing my humble roots in modeling (feet, in my case), Kathy quietly built a $2B licensing empire. Yeah, that’s a “B”. You’ll find Kathy’s name on clothes, furniture, missiles… Her brand monetization is mostly hands-free. By comparison, Marvel is hands-on with its licensing, developing content for its universe of characters. Others, like Jessica Alba, take operating roles at Honest companies they affiliate with.
Capital: I treat capital like garlic. It’s not a great standalone dish, but it can do wonders in pasta or stir-fry. There’s a lot of capital propping up zombie products, ineffective campaigns, and bridges to nowhere. I prefer to deploy excess capital to acquire capabilities. Though outside of tech, I find most companies need help absorbing new capabilities. Google is among the best. Virtually all of its services, besides search, came from acquisitions. They even do a good job of integrating with their venture investments, like plugging Google Wallet and Maps into Uber, a portfolio company. (You can read more about this in my last Google report.)
There’s also been a huge spike in corporate venturing. In practice, the average fund lasts only a year. So it’s less a growth engine than a way to claim an airy slice of the startup bubble – and delay distributing cash stockpiles to shareholders.
Expertise & Data: By middle age, companies accumulate a wealth of wisdom. From retail queue management to driving web traffic to making the perfect growth chart, ahem. Sure, some of these should stay proprietary. But most – I’m not kidding, stop hoarding – most expertise can be turned into training, subscriptions, or other services. At MasterCard, we accumulated deep expertise in card marketing, analytics, and loyalty. That was the foundation for two of my launches – SpendingPulse and Commerce Intelligence.
Ah, data…the perennial tease. Everyone knows theirs is priceless but few have made fortunes with it. Here’s a piece I wrote called Never Sell Data. Need I say more?
Talent: At maturity, employees who get frustrated by the routine of a well-oiled machine start to leave. New prodigies opt for startups or growth stage companies. Some are overpaid to join, frustrating both them and the old faithful. A handful, identified as high potential, get to change jobs, geographies, or take on more responsibility.
What rarely happens is identifying narrow, unusual abilities – or even moments of brilliance – that defined the success of a given project or program. It could be design, operations, or finance. I’ve never failed to find an individual – or entire department – that you couldn’t build a great business around. Or, use to make an existing one shine. These gems are buried under piles of bureaucracy, cookie cutter expectations, and slabs of mahogany.
Here are a few of the questions I like to ask to uncover hidden talent:
- What one thing made the difference in achieving [insert biggest achievement here]?
- What one thing would our top customers say we’re known for?
- Who’s fought and lost a big political battle recently and what did they want to achieve?
Stage 4: Decline
Generally, three or more consecutive quarters of declining share (or sales) are a problem. If it’s years, please drop your laptop or baby and call me – or a priest, immediately.
When resources get tight, I look for signs of hope – a feature that got surprisingly good reviews, unexpected upticks in a new region, a promising new offering from a business partner or vendor. At this point, I expand the scope to consider assets beyond outside the core business.
Still, some areas are better bets than others.
- Brand: At this point, branded consumer opportunities become scarce. It gets much easier to move downstream than up, like what Macy’s is doing with its new Backstage discount stores.
- This is the best time to get creative with Marketing & Distribution. Any standout traffic numbers or customer lists are a great starting point. I look for deals with brands or products that can elevate slumping perceptions. Hello, Kylie Jenner… But some premier relationships or exclusives might be out of reach after a brand is considered a dinosaur.
- At this stage, my main focus is usually on the back end. That sounded dirtier than expected… But the best assets at this stage are often platforms, technologies and other operating assets. The question to ask is: would anyone else pay for this? When the voice in my head (likely not God) says ‘yes’ or ‘maybe’, it’s worth exploring how.
- I’d never suggest that a growing or mature company in, say, enterprise software like Oracle, consider building an accounting, recruiting, or software development shop. However, a truly excellent business function – at this stage – must be considered. The best candidates are companies that provide shared services to multiple business units. If you can do HR, IT, or finance for multiple business units, you can do it for third parties. A good example is GE Capital, which provided financing for GE, then extended that capability to other companies and consumers.
- Capital: When budgets are more Wendy’s than Le Cirque, it’s best to concentrate capital on a handful of high potential projects. To free up growth capital, deals like selling off undervalued buildings, inventory and land or outsourcing functional departments might make sense. This is a good time to say goodbye to corporate venturing or other experiments with long payback periods. Bury them with honor.
Gambling is not for you
Many powers diminish in decline, especially attracting talent and selling services or expertise.
- Talent – When the best and most ambitious have left, many of those remaining feel defeated – or worse, they’ve settled into a routine. It’s hard to pry young, urban creatives and techies away from hot industries for the burbs of Toledo at a struggling brand. The best option is to concentrate top talent on a handful of top growth initiatives. Small successes breed bigger ones and attract new talent.
- Expertise & Data –Who wants expertise from a company in decline? Consider the challenges Dell and HP faced in growing their professional services businesses. Now HP is spinning its off. A clean slate can help eliminate some bias.
How to Choose
Here’s a simple diagram of two simple questions I ask when looking for undervalued growth assets:
- How good are you at it? If the answer is ‘just OK’, it’s unlikely to be undervalued. But I look several layers in – and use objective evidence to judge like customer reviews, sales inquiries, outside assessments, etc. I’ve found nuggets of brilliance buried in many a failed venture.
- Does it fit our core mission? (The only time to entertain non-core assets is in the decline stage.)
Whatever’s left in the upper right hand box, I prioritize based on size and err on the side of whatever is most core and most outstanding.