I was recently asked how much a business should invest in growth initiatives. Here’s my answer for businesses in “Growth Mode” who are committed to significantly increasing their revenue trajectory. TLDR: Invest as much as you can afford without putting your entire business at risk. When in growth mode, businesses usually sacrifice predictability, stability, profit, and sanity. Below are different formulas to help determine the appropriate amount to invest based on the category, margins, and cash position of the business.
First: Are you committed to Growth Mode?
Not all businesses are really committed to having a growth mindset. For some, a flat or single-digit increase on top-line is enough, and they hope to eke out a few points better than that in margin to increase profit. That is awesome, it’s fine, and it’s a great way to run a business. But you’re not in growth-mode, and you probably shouldn’t hire someone like me to be your growth coach.
What is Growth Mode?
First – let’s define “Growth Mode” in practical terms: A business that wants to substantially increase the trajectory of their revenue and is willing to sacrifice other comforts to achieve it. I won’t quantify it specifically, but I will say our plan for 3-5 years out should be in nice round multiples (2x, 5x, etc.) not in a few % points.
What are we sacrificing in Growth Mode?
Depending on the kind of growth a business needs and the end-game for achieving it, a business in Growth Mode is likely giving up quite a few creature comforts compared to a more stable company. These are likely to include:
- 📊 Predictability – Every company I’ve seen at the growth stage is terrible at predicting their revenue 12 months from now. Many are pretty decent at predicting next week, and even next month (so long as whatever wave they’re riding doesn’t crash), but when you are committed to growth, you’re unlikely to do an amazing job at even quarterly projections, much less annual ones.
- ➡️ Stability – Growth Mode companies are unlikely to have the same stable environment, resources, or processes as a more mature business. Stability is often traded for flexibility, agility, and speed.
- 💸 Profit – This is predictable (and fellow cynics saw this coming), especially after seeing quite a few DTC darlings crash and burn after failing to ever reach profitability. But it’s kind of a given that companies in growth mode are willing to sacrifice some/most/all profit in the short-term to invest in growth opportunities that will pay off in the long-term.
- 🤕 Sanity – Growth Mode is a rollercoaster ride. It’s exhilarating, it’s terrifying, and it can be very, very stressful. There is something to be said for founders choosing not to grow as fast because it makes their lives better. And if it’s your business, and you are not beholden to investors who expect a certain growth clip, slowing down may be exactly what’s needed. No judgment from me; I’m quite literally trying to do this in my own business as I write this!
I should mention – I’m not a fan of the strategy of raising a bunch of money so that a business can grow unprofitably with an end-game of getting profitable at a certain scale. Although I did witness that first hand, from inside the market when DoorDash raised almost $2B in less than a year, and then starved out the rest of us on negative unit economics.
I do, however, see instances when leveraging some capital (ideally your cash reserves, but banked or raised funds when necessary) can help drive scale within profitable unit economics that will help unlock substantially better growth long-term. For example, if raw materials at X scale are 50% more than they are at 3x, it may be worth it to secure funding to quickly scale up and bring COGS down as quickly as possible.
So seriously, How Much?
The easy answer is “as much as you can.” More practically, that’s going to depend on the category, your margins, and your cash position, but as a thought experiment, you could separate your thinking into “Base Business” and “Expansion.”
Base Business: This is your “normal” business as it exists right now, and as it likely would exist if you didn’t change anything. For example, this could be all of your existing customers, and you’ll count new customers as growth. Or if you’ve been fairly stable, you could consider anything equal to last year’s revenue as “base” and anything above that as “Expansion.”
Expansion: This is business that is here because of your efforts to grow the business! New customers, new product lines, new partnerships, etc., could all be counted as long as you’ve made an intentional effort to try something outside your normal base. Caveat: if you’re expecting a serious change in trajectory, don’t just do the same thing you’ve always done in base, but with a 10% higher marketing budget and call it growth. That’s just a slightly more aggressive version of your base business.
With those definitions, here are some formulas you could play with to decide how much to invest in growth:
- ✅ All Your Base Business’ Profit
((BASE Revenue x BASE Gross Margin) - BASE Marketing - BASE OPEX)= GROWTH Budget- This one is as simple as it gets. If you’re committed to growth mode, take what your total business can afford to give without losing money, and use that to fund your growth.
- ✅ All of your New Customers’ Gross Profit
(New Customer Revenue - COGS of New Customer Sales) = GROWTH Budget- This option is slightly more conservative, but it may make sense, especially if you have an established base, thin margins, and you need to start small. This assumes that your base business can pay for the overhead of your total business, so you can afford to give 100% of the gross margin on new customers back to growth.
- ✅ All of your Expansion Business’ Gross Profit
(Expansion Business Revenue - COGS of Expansion Sales) = GROWTH Budget- Same as above, but if new customers are not a huge part of your growth plans, you may choose to use new products or services that are being sold to existing customers as your “expansion.”
- ⚠️ All Of Your New Customer Revenue (Negative Margin)
New Customer Revenue = GROWTH Budget
- I include this because I think a lot of people might default here, but I think it’s important to call out that this will actually drain cash from your business. While it’s easy to think about getting to “positive ROAS” in digital media ($1 spent returns > $1 back in revenue), it completely ignores COGS of what was sold, so it is not a profitable way to think about growth. *****This is a very aggressive way to grow, and it only makes sense if you have a clear path to profit long-term, for example in a subscription business that can lose money on the first order but has enough cash to wait-out the negative cash dip.
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