I recently read “Outlive” by Dr. Attia, a book about longevity and wellness. In the book, he identifies four key areas that will ultimately lead to healthy longevity or set a path to unhealthy later years and premature death in all humans. He calls them the ‘Four Horsemen,’ referring to the four horsemen of the apocalypse from the New Testament. It made me consider a similar collection of key areas of corporate health that I believe lead to longevity and success or early corporate death (bankruptcy and decline). Here is my business version of the Four Horsemen:
Market Fit — Whatever business you create, you have to deliver something someone wants to buy. The phrase ‘will the dogs eat the food’ is a reference to launching a product that simply will not sell because nobody wants to buy it. Thinking about this Horseman through the lens of longevity expands the definition considerably. To build a sustainable business means you need to create an engine that produces offerings that people want to buy. This speaks to investing in innovation and market understanding. It also requires the business to make strategic decisions about choice of market. Investors look at ‘Total Addressable Market’ (TAM), which is the total potential set of buyers a company could possibly reach. If the TAM is too small, the business may flourish for a brief moment, but it will run out of people to sell to. Market Fit encompasses the product offerings, the market selection, the channels to get to market, and the sustainability of the engine to create new and improved offerings. If a company does these things poorly, the business is ultimately doomed.
Execution — There are lots of good ideas and well made plans, but if a business is consistently bad at execution, it has no hope of success. Execution is the ability to say what you are going to do, and then do it when and how you said it would be done. Businesses are complex machines with many interconnected parts that all come together to generate success. If some parts are unreliable or fail, the machine will grind to a halt. Even companies that excel at defining Market Fit (the first Horseman) will fail if they cannot execute. Execution is a discipline that leads to predictability. Companies that are good at execution typical have great respect for accountability and commitments in every aspect of their business. A byproduct of excellence at execution is customer satisfaction. When customers know they can trust and rely upon their vendor to deliver as promised, satisfaction scores go up. Execution also has a direct impact on the next Horseman —Culture, because it leads to a team that knows it can rely upon each other and it avoids the internal blame game that emerges from sloppy execution. As with Market Fit, a company that makes Execution a skill will be positioned for longevity and success, but one that consistently fails to execute is ultimately doomed.
Culture — This is the softest Horseman, but it underlies who a company is. We easily differentiate places that have a ‘toxic culture’ from the ones that are ‘a great place to work.’ Culture plays a role in recruiting and job satisfaction, and we know that ‘happy employees make happy customers.’ Many companies try to define their culture by publishing corporate values statements, but culture is derived from actions, not printed words. A strong positive culture will support a company through hard times, while a toxic or negative culture can destroy a healthy company. I originally trained in biology, and I remember growing bacteria on petri dishes. If we were careless, there was no telling what would grow on the dish, and usually the invading bacteria would destroy the experiment. To foster the bacteria we wanted to grow, we had to carefully tend to each petri dish and protect it. Business culture is no different. If we do not carefully tend to it and make it an intentional priority, there is no telling what culture we will get. As in my biology example, once a bad culture takes root, it is extremely difficult to eliminate it, but a positive culture will support longevity and success.
Finance — I saved this Horseman for last because it is the most obvious one, and it is the one that everyone recognizes and typically fixates upon. Of course, if financial and operational controls are bad, the business will likely fail. However, when we think about longevity and success, we have to go beyond accounting and measuring a point in time. In the book ‘Outlive,’ Dr. Attia describes a number of items like cholesterol or muscle mass that manifest themselves as problems in old age, but the seeds of the problem actually started long ago with unhealthy habits during earlier years. The Finance Horseman is similar. Looking narrowly at accounting, if we get the general ledger wrong at the start, it becomes a problem that is very hard to untangle years later. If we erroneously recognize or record revenues or expenses and create inaccurate financial statements, we inevitably make bad financial decisions that will become apparent in the future. But, this Horseman has even broader implications.
Similar to blood tests that let doctors know what is going on in our bodies, financial metrics are indicators of what is going on in a business. Focusing on business health, longevity and success, I have a few favorites. First is Unit Economics. This measure represents the micro-business model for the delivery of one incremental unit of the company’s goods or services. It compares incremental revenues and costs, and tells us if delivering our good or service is actually a positive contributor to financial success. It answers the question “can we make up the loss in volume.” We want positive unit economics, and we would like to see this as an improving metric over time. We all learned you cannot outrun bad unit economics during the .com bubble.
Next up is Profitability. This is obvious, but I focus on two diagnostics: gross margin and operating profit (EBITDA). Revenue less cost of goods sold gives us gross margin, which tells us what portion of revenue is available to fund operations, and is a macro indicator of how the unit economics come together. Improving gross margin reflects the efficiency of the engine for sales and marketing as well as control of the cost of producing the goods. Operating Profit is the next step in the flow that takes the contribution from Gross Margin and deducts all of the expenses of running the business that are not a direct part of the costs of goods sold. It reflects the efficiency of the overall business. Negative EBITDA is ultimately a killer when the cash runs out, so it is clearly a Horseman, but even if profit is positive, if it is minimal for too long, it is like a blood test that keeps showing that the patient is anemic. They are not really healthy, and they do not have the energy to thrive. Similarly, anemic profits over time limit the business’s ability to invest and thrive, and indicate that the operations are not very efficient at delivering a sustainable and successful outcome.
Lastly, how we finance our start-up business and fund growth in the early years will have a profound impact in later years. Institutional investors (VC, PE, etc.) raise capital and invest that capital in promising companies. They are not forever investors, rather they expect to generate a return in a finite number of years. When an entrepreneur accepts an investment from an institution, it is as if they are stamping a “Best If Sold By” date on the CEO’s forehead. Within the timeframe of the investor’s fund, they will want to sell their position, which will mean a liquidity event for the company. That decision to accept an initial investment in the early years of a company will materialize in later years to stunt longevity or shape future capitalization. Often, it strongly influences the company’s ability to invest in opportunities that will require nurturing beyond the investor’s hold period. Long-term capital planning and alignment with investor goals is critical. The Finance Horseman is the easiest to measure and ultimately establishes the success and longevity of the business.
As with the four Horsemen that set the path for our personal health and longevity, the four business Horsemen described above set the tone for long-term success or failure. The earlier the CEO and Board focus on the trajectory for the business Horsemen, the more they are able to establish a sustainable and valuable business. Ignoring the business Horsemen, just like ignoring your cholesterol level or your blood pressure, will ultimately put the business in peril.