Growth, ROIC / RONIC and Growth + Sales in Digital Valuation (Tech Strategy – Podcast 102)


This week’s podcast is about growth and how it relates to value and valuation. ROIC vs. RONIC is an important part of separating past and continuing value.

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From the Concept Library, concepts for this article are:

  • Valuation
  • Growth, ROIC/RONIC and Value
  • Growth + Sales

From the Company Library, companies for this article are:

  • n/a

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I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

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Note: This content (articles, podcasts, website info) is not investment advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. Investing is risky. Do your own research.

—–Transciption Below

Welcome, welcome everybody. My name is Jeff Towson and this is Tech Strategy. And the topic for today, growth ROIC and growth plus sales. Now this is really, I guess the third topic I’ve covered under the sort of heading of digital valuation, which is not really the focus of this podcast. I’ve always been more on the strategy side, but I did wanna at least build out some of the thinking on that. I do teach this stuff actually. business schools and such. So we covered sort of how I approach this, which is a simplistic version of valuation versus what portfolio managers do. But I think it’s pretty solid. And then I talked about discounted cash flow, why it’s awesome, why it can kind of suck. For the subscribers, I sent you out kind of a long piece on discount rates. which I think is very important, unfortunately very, very problematic. And I guess the last bit would be growth, which is today’s podcast. Because you know, every time we start talking about these digital companies, growth ends up being one of, if not the biggest factor, a big surprise. People are investing for growth. So anyways, that’ll be the topic for today. For today. Now, those of you who are subscribers, I’ve been kind of sending you a lot of stuff. I feel somewhat guilty about that. I sent you a… pretty long bid on discount rates. There was a lot there. I mean, it was a bit of a beast to get through that one. And then I sent you quite a bit on growth as well. So I know I’m kind of, let’s say, overloading with the theory this last week. I don’t think I’m gonna stay too much on digital valuation. I kinda wanna get back to companies. But yeah, I think we’ve covered most of it. Anyways, I am aware that I’ve sent you kind of a ton. Going forward. What we’ll probably be covering is Shimmalea. Global E, expectations investing, which is kind of an interesting idea from Michael Malbuts. And we’ll talk a little bit about that, but probably not too much. Anyways, that’s what’s coming up next. So I’ll probably get out of this deep dive of theory on valuation pretty soon and get back to companies. Okay, now for those of you who aren’t subscribers, you can go over to, sign up there, free 30 day trial, try it out, see what you think, join the group. Yeah. And let’s see, last thing, my standard disclaimer, nothing in this podcast or in my writing or on website is investment advice. The numbers and information from me and any guests may be incorrect. If used in Opinions Express may not be accurate or no longer relevant. Overall, investing is risky. This is not investment advice. Do your own research. And with that, let’s get into the topic. Now, as always, there are a couple key concepts which are always in the concept library. We’ve got three of them for you today. First one is valuation. There’s sort of a growing library of articles and podcasts under the various valuation topics in the concept library. You can click over there and see that. The second one is new, which is growth, ROI, C, and value. And we’ll talk. Well, I’ll talk about that today, which is really the linkage of how growth, return on invested capital and value, how they’re all really sort of tightly interlinked. That’ll be one of the concepts for today. And the third one is growth plus sales, which is kind of a standard venture capital Silicon Valley tactic for growing. You’ll see a lot of stuff written about this. So I’ll sort of touch on that. So those are the three concepts for today. They’re listed in the show notes, and you can go over to the concept library and. Find out more about them. OK, so in the last week, I sort of began with this evaluation, digital valuation. How is that different? And I’m going to start going into the differences more and more. I kind of had to go through the basics before we could start talking about the differences. So that’s what I’ve been doing. So we’ll start talking about how digital valuation is a bit different. I went into discounted cash flow. And I like discounted cash flow. It appeals to my logical nature. I like that you can. really put your thinking there and you can be smarter than other people in the future operating performance of companies, which is, you know, these are complicated companies. That’s where the strategy matters. That’s when all this competitive, you know, digital strategy stuff matters. All of that plays out in projecting future performance. That plays out in discounted cash flow. Now that said, I did sort of have some gripes with that in how it’s used. I gave a whole podcast on why DCF sucks. And mainly my main gripe is that people don’t incorporate uncertainty analysis in the projections. How much revenue is this company gonna have in two years? Well, we take the price and we take the number of units sold and we multiply them together and we get a revenue. And then you put it in the spreadsheet. No, bad, no. you figure out the number, but you also figure out the uncertainties in the number. What is the price? Well, it could be $1 plus or minus 20%. What is the volume? It could be 100 plus or minus 20%. And the uncertainties compound, but no one ever does that. They just use single numbers, which is ridiculous, which is why I don’t do explicit cash flow for more than three years going into the future, because the uncertainties compound and they just make it meaningless. But I also think it’s good for ruling out certain future scenarios. And then I think you can design probable scenarios in the future and just sort of use DCF to figure out what the cash flow is implied by those scenarios, which can be speculative, but it’s a good way to map out potential futures. And that’s kind of my way. And I like that. I think that’s all, if you’re sensitive to what is accurate and what is not, and you think about the uncertainties, you can really be smarter than other people with that approach, which is what I like. So I made the analogy that that is like measuring someone’s weight. It’s a good concept, it’s a clear concept, it makes sense, how much does someone weigh? There’s a machine that measures your weight, good, we have a scale. You gotta worry about the calculation uncertainty when you add numbers together. actually when you multiply them is when they compound. But the measurement uncertainty is not bad. The definitional uncertainty is not bad. It’s a pretty good approach. The contrast, I said, well, how do you measure someone’s happiness? Well, it’s a bad definition. It’s unclear, it’s fuzzy. There’s no way to measure it anyways directly. So it’s got huge definitional uncertainty. It’s got measurement uncertainty and then you add it all together. And I don’t generally like that. Now my problem with DCF is the first bit I like, you know, projecting the future, but then you divide that number, you discount it back to time zero, and you introduce the discount rate. And I do not like the discount rate as an idea, I don’t like it as a concept, I think it’s mostly nonsense. That’s like taking a very thoughtful, specific. projection of the future performance, like your weight, and then dividing it by your happiness. You know, you’ve got good thinking, and then you’re factoring in fuzzy, bad ideas and thinking, and it ends up being a muddy mess. So I try and minimize the discount rate as a factor in everything, because I just don’t think it’s a very useful, I don’t think it’s very accurate. I think it’s like happiness. It’s mostly kind of fuzzy and made up, and underneath the calculation of the discount rate, they’ve… broken it into all these formulas of cost of equity and weighted average cost of capital and beta this and you know that’s just like coming up with a complex equation for how to calculate my happiness. So you’ve replaced one fuzzy unclear concept with five fuzzy unclear concepts that you’re going to add together. Doesn’t make it more accurate. Anyway, so I don’t like that. So I focus on the projections and I try and minimize the discount rate as much as possible. Another way you could think about this is turds and raisins. If you have a bowl of raisins and you put in some rat turds, you don’t end up with raisins and turds. You basically end up effectively with a bowl of turds because you don’t know what’s what. So you don’t have to add too many turds to a raisin bowl to basically ruin the whole bowl. That’s kind of how I feel about discount rates. Yeah, once you add it in there, it doesn’t take too much to really mess up some very good thoughtful projections. Anyways, that’s kind of what I went through. Okay, so let’s talk about growth now. Now, growth is one of these subjects where the easiest thing in the world is just to say, well, let’s just take the top line. Let’s grow three to five percent next year. then we’ll take the gross margin, we’ll kind of assume the gross margin percentage is similar, maybe goes up or down one or two points, and then the operating margin up, and that’s how people do it. And I mean, I think the first thing to think about is that growth, return on invested capital, and value are all closely linked. You don’t wanna think about growth on its own as a separate idea. You always wanna think it linked to two other ideas. because growth can be very positive and can create economic value or it can create no economic value or it can almost create negative economic value. You know, because we have 10 stores and they make a certain amount of money but then I have to invest a ton of money to create 10 more stores, but the cost of capital is equal to the return on capital. I haven’t created any more actual wealth for shareholders. I’m just bigger. So you got to think about return on invested capital, return on new invested capital, RONIC, and then value and growth. Those are all sort of the same things. Now, the NYU valuation guru, Aswath Damodaran, God, I got to learn how to say his name. He writes a lot about this stuff. I’ve gone through all of his stuff. He’s got big books on valuation and dark valuation. I mean we see the world differently, but you know he’s the guru so Doesn’t mean I agree, but I’ll tip the hat a little bit He talks about like you know value is determined by four big levers four to five big drivers One he calls the growth lever which is like if you’re compounding Annual revenue growth over five years that is gonna have a huge impact potentially on the value. I mean don’t underestimate how much compounded growth can really add up. True. The second lever he points to is profitability as a lever which is look, you gotta think about the gross margins, you gotta think about the pre-tax operating margins. You know, does the growth translate into operating profits? Fine, that’s just another way looking at growth. You gotta think about the efficiency of growth. You know. That’s the example, if you spend a ton of money to open five stores and the cost of the stores is equal to the return on capital, you haven’t made any money. So what is the number he would point to is sales to capital ratio and the reinvestment rates. Are we just reinvesting a ton of money, but the growth we’re getting in operating profits basically just matches the reinvestment rate. So again, we’re not creating any wealth. Now all three of those are pretty much what I just said to begin with, that growth, return on invested capital, return on new invested capital, and value are all tied together. They all affect each other. He just uses a bit different language. Another one he points to, which I think is pretty cool, is he just talks about one-time events or changes that can create change value. He talks about negative events that are permanent. A lot of people are wondering about the China situation right now. Is the political events happening, which have been negative for some of the companies, are they permanent or not? Or number two, are they negative events that then return to a baseline of performance? Is Alibaba going to be back where it was in a year and a half? And then positive events. Okay. So we’re really talking about when does growth create economic value? And for the subscribers, I sent you a pretty long note on this yesterday, an article. Probably about half that article comes from the McKinsey Valuation Book, which I think is quite good. I mean, it’s long, I mean, it’s a textbook, but their section on growth, I think is one of the best I’ve ever seen. When people ask about growth, that is usually where I point. To read that section in the book, it’s really worth your time. I really think it’s the best. So about half of the thinking I put out was from them. Okay. So that’s kind of point number one is you got to think about how these things are related. Another way you can think about it is like, what does value follow from? Value follows from cash flow versus the cost of capital. Money in, money out. What does the cash flow come from? Well, it follows from revenue growth, and it follows from the return on any capital you put in to create that growth. We put in money, it creates growth, between those two factors we get cash flow. We pull out the cost of capital, that’s gonna get us our value. Okay, that’s kinda point number one. Point number two, ROIC versus RONIC, which I always say RONIC, I’m not sure people really say that. Super important. I mean, cannot be emphasized enough, super important. People like to look at return on invested capital, which is like a snapshot in time. It’s like a yield calculation. You build a hotel, you build a building. Over many years, you invest money in maintenance, you maybe do some upgrades. You have a net investment of capital in a building. Then we look at how much we’re renting and we look at the rental yields. Snapshot in time. based on net accumulated capital investment over time. Okay, that’s return on invested capital. Everyone likes to look at that, very useful. The problem of course, oh, and how do you normally calculate it? It’s a no plat divided by invested capital, the net operating profit or loss after taxes. So think pre-tax operating profits divided by invested capital. then you do want to take out taxes as well at a certain point. But okay, it’s a snapshot in time. It doesn’t really help you project the future that much. That’s when we start talking about return on new invested capital, RONIC. This is sort of what we think we’re going to make on the new projects. And man, it’s not that it’s not the same very often. It’s just not RONIC and ROIC. For most businesses, they’re not the same. The way I think about it is, okay, we built 10 stores, 10 Starbucks. We have them in different locations. They’re out in Bangkok. We put in $10 million. Maybe we’re making, let’s say, $1.8 million. So 18% return on invested capital against the $10 million invested. That’s our return on invested capital, 18%. That’s what we’ve done. And that’s our snapshot in time. It’s our yield. But we think about Roenick. Okay, now we’re going to open 10 new stores and we’re going to open these in another city. Well, we could see a very different return on invested capital in those stores. Maybe we’re not going to make 18%. Maybe we’re going to make 11%. Maybe we’re going to make 11% in our cost of capital. Let’s say it’s 10% in both. So in our existing stores, our return on invested capital is 18, but our cost of capital was 10%. But our Roenick for the new stores is 11% and our cost of capital is still 10%. So we’re only making 1%. And we see that scenario all the time. Like Walmart is famous for this. If you ever look at Walmart’s historical returns on capital, they made an absolute fortune in the Midwest of the United States where they started. Arkansas, places like that. They had unbelievable returns on capital. As they got bigger, they started moving to New York, California, the coast. Their RONIC was not nearly as good. I mean, they were really a cash machine coming out of the middle of the country and then some not awesome cash production on the coast. We see that a lot of times in business because you tend to grow where you’re most profitable, but then you sort of run out of the sweet spot and companies keep growing into less attractive areas. It’s pretty common picture. Anyway, so when I think about Roenick versus ROIC, I always think new stores versus existing stores. And of course, this is like incredibly important in digital, because what are we always talking about? We’re talking about new projects. Yes, you’ve got a big transportation mobility business in Uber, but what about Uber Eats? What about freight, right? Their products. And you were always trying to figure out the value of those. Now, what’s nice about digital is often the new stuff can be more powerful and more attractive, like… You know, Alibaba, awesome in e-commerce. That’s a great ROIC business. They go into food delivery, Ulema, not terribly exciting. And then they say they’re going into cloud. Okay, that’s really exciting from an ironic calculation. So, you know, you kind of, and this is where the strategy thinking I focus on comes into so much, because you’ve got to assess the attractiveness of the new business, of the new invested capital against the new returns. Now if you’re just opening 10 more Starbucks, we kind of know what that is, but if you’re a digital company jumping from product to product to product, you got to know the strategy. That’s kind of why I focus there. Like I focus like a huge amount of my time on new products, new digital services, and the rhonic of those versus the existing core business. Okay, so the takeaway there, future incremental returns on capital will differ from historical returns on capital. It’s the big question. It’s what drives value creation in the future to a large degree. Okay. Next point, growth. Generally it’s expensive. It’s almost always hard to sustain. It’s tough. People think it’s going to be easier than it is. It never is. Well, not never as people think it’s going to be cheaper than it is. It isn’t people think it’s going to come faster than it is. Nope. It’s always takes longer and costs more than you think. Now again, this is a place where digital starts to look really cool because digital can scale cheaply and easily and rapidly. That’s why you get such powerful growth or value creation. Cost money. You’re also often going to invite a competitive response. You try and move into someone’s business, they’re going to come back at you. You’re going to try and grow market share at someone’s expense, they’re going to come back at you. That generally makes the cost of growth more expensive. And then probably I guess the biggest problem is everyone wants growth, growing faster than the GDP of a country. But most countries don’t, I’m sorry, most companies don’t have that many natural growth opportunities. There are usually some, but you usually kind of exhaust those. I mean, you can go global, companies do that for a long time, you can move into developing economies, but markets mature and you are what you are. and you have so many Saks Fifth Avenue stores in cities and that’s what you have. So, you know, that’s kind of a fundamental problem is how do you grow long-term faster than the GDP of a country? There’s a great McKinsey chart which I will put in, well I guess I can’t put that in the show notes, it’s public. Basically shows that if you look at the distribution of growth rates, inflation adjusted revenue growth, vast majority of companies are zero to 5%. Once you get, some get to five to 10%, very few, like 10% of companies get above 10% growth rates. And then you also have to think about the other direction, which is as common. For every company that’s growing at 5%, there’s a company that’s shrinking at 5%, for every company that’s growing at 10%, there’s one that’s negative 10%. Nobody ever puts those in their future calculations, right? It’s always zero or up. It’s not really how the things work. So anyways, growth, super hard to sustain. It does tend to get more and more difficult the bigger you get. It’s harder and harder to find new products or services. the existing products and services you have mature. But once again, this is an area where digital seems to have a natural advantage. Scale’s easier, the cost of growth is cheap, and it’s relatively, let’s say easier, to jump into other products and services and start cross-selling. So anyways, okay. Let’s see, one last point here. Growth is… Mostly determined at the product and service level, not at the hey, let’s look at the whole company and grow. Doesn’t really work that way. Most products and services begin with an S-curve, slow initial growth, then it takes off, and then it flatlines, or it sort of keeps going up at the rate of GDP growth. So you’re looking at multiple products in a portfolio, and you gotta figure out. when they’re gonna S curve, when they’re gonna flatline. And that’s assuming you have a competitive advantage. If you have a competitive advantage, what you would hope to see is products and services that all produce a cash gross margin. They do their S curve, then they flatline, then they’re relatively stable because they’re protected. Then you sort of begin to stack gross margins one on top of each other. where five years ago you had gross margins from three products and today you have gross margins from six products. You’re stacking products, but that’s if you’re protected. If you’re not protected, you don’t have a competitive advantage. The product goes up, it’s got an S-curve, and then competitors copy it and then it drops back down. So it doesn’t look like an S-curve with a plateau, it looks a lot more like a bell curve. It goes up and it goes down. Now if you’re in that business, life is actually quite difficult because you are what they call on the portfolio treadmill, where you have to continually introduce new successful products or variations just to keep your revenue where it is because your existing products are always being commoditized or the price is being driven down. So you’ve got to sort of keep playing that game forever. It’s a very difficult game to play. I far prefer the stacking of gross margins. And Philip Fisher actually used to talk about this in the 1950s, that he would invest in companies like Hewlett Packard. And he would show graphs of like how they spend R&D and then the cash margin, gross margin that those create and that they’re protected and stay stable going forward three, five, ten years into the future. And then every wave of R&D would add another layer to the stack and the revenue would keep going up and up and up. That’s Motorola, that’s Gullit-Packard, 1950s, 60s, 70s. Okay, I think that’s what I wanted to say about the sole sort of intersection of growth, value, and return on invested capital. In the McKinsey Valuation book, there is a great chart. I don’t think I can reproduce it here publicly. It’s exhibit 7.2. 7.2 if you wanna look it up. And they base, it’s called the value of major types of growth. And they’ve basically taken apart the numbers and they kind of say like, look, there’s one, two, three, eight different types of growth. Which ones create value and which ones don’t? And I’m just gonna read it to you because I’m not sure if I can reproduce it. The types of growth that create above average value is when you create a new market with new products. So that’s Blue Ocean Strategy. Obviously, no competitor, you’ve got the space to yourself. It diverts customer spending from one area to you. That’s awesome. The problem with that strategy is it’s got a low probability of success. Most companies can’t create entirely new products. Like the Blue Ocean Strategy, if you’ve ever read that book, they talk about Cirque du Soleil and these companies that just didn’t exist before. So that’s fine. I think it’s low probability. another mechanism of growth that gets you above average value if you convince existing customers to buy more of a product. That’s pretty good. One of the benefits is low, high probability of success, but you’re also not taking market share from a competitor. You’re not inviting a competitive response. It’s like we all, we have five companies, we all sell our products and the entire pie just got bigger. So let’s just all convince the market to buy more of this. No competitive rivalry, we all just go. Another version of that would be attracting new customers to a market. Let’s get more people to shop online. That doesn’t take money from JD versus Alibaba, we’re just bringing more people in. Now it does take money, I guess, from traditional retailers, but most of the competitors benefit and there’s not that much risk of retaliation. Okay. Those are kind of the good ways to create value with growth. Average ways, they listed two. Number one in this area would be gaining market share in a fast growing market. So look, I’m gonna take market share from my competitor. However, the market is growing fast, so it’s probably gonna be okay because they can still grow and actually make more money at the end of the day, even if I took 5% of the market share from them. you’re gonna get a retaliation, but it’s a moderate risk of retaliation. In a flatline market, you take market share, it guarantees a retaliation. Another one for sort of average value creation is making bolt-on acquisitions to sort of accelerate product growth. You know, just stick new products in your existing platform, add complimentary products to your existing products, things like that. And then let’s see, three mechanisms that are not awesome for value creation, three growth mechanisms. Making large acquisitions. This is one of those ones where a lot of companies do grow by acquisition, but obviously it depends on how much you pay. Some companies are very, very good at this because they do a lot of it and they know how to price appropriately. A lot of companies don’t. They don’t do enough acquisitions so that when they do buy stuff, they overpay and it doesn’t create value. Trying to gain share from your rivals through product promotion and pricing. Pricing wars. to take market share. Bad idea. Generally a bad idea. And then incremental innovation that gets you market share from rivals. Basically any time you’re trying to steal market share from your rival, they’re probably going to come back at you. Okay. And that’s pretty much it for this topic. So we’ll put all of this under the concept of valuation, which is one of the key concepts for today, and growth ROIC and value, which is another concept today. And we’ll do one other topic, which is growth plus sales. OK, growth plus sales is, I’m bringing this up just because you hear it so much in digital. There’s great paper by Andreessen Horowitz about this written by Peter Lauten and Martin Casado. Martin Casado, I’ve been noticing his stuff. He works at Andreessen Horowitz. He writes about things like the economics of machine learning in businesses. Really good stuff. Like. I mean, it really jumped out at me when I first started reading some of his stuff. That’s a good thinker right there. Pay attention to that guy. Okay, so they wrote an article about growth plus sales, which is, it’s a go-to-market strategy. We see it in companies like Slack, Atlassian, Zoom, GitHub, Stripe. And basically the idea is, if you’re on the enterprise side, you’re selling to companies. Microsoft, things like that, Enterprise, SaaS. Traditionally, the sales approach, starting back in the 80s, IBM, Microsoft, is you do direct sales. You have sales teams, you go and you deal with the company and you convince their IT department to adopt your product and to put it in, and there’s a lot of problems with that strategy. It’s a long sales cycle. It’s difficult. But what a lot of these new companies did, Stripe, Slack, Zoom. they did what the venture capitalists, or at least these venture capitalists, called growth plus sales, which is sort of a hybrid approach. It’s sort of like a guerrilla tactic where you get everyone at a company to start using Dropbox, or to start using Box, or to start using Slack as a famous example. People just start using it individually. And… Over time, suddenly more and more people within a company are doing their business on Slack. They just signed up on their own. And then at a certain, that’s the growth part. And then at a certain point, the company which sees this will then call the company and meet with their IT department and say, hey, by the way, we noticed that like 10% of your employees are already using Slack to do their business. Maybe you should do an enterprise version of this. Oh, and by the way, security is an issue. Do you really want this out of your control? So that’s the sales component. So it’s growth plus sales. It’s kind of a guerrilla tactic to get yourself into businesses. It’s pretty cool. I mean, you could argue that the first company that really did this, it’s almost like B2C taking over B2B. Like Steve Jobs was probably, I think, the first to do this. It used to be if you worked in corporate America, you had a BlackBerry. Everybody had a Blackberry. I used to have one. I actually liked the Blackberries. But then the iPhone came out and people loved the iPhone. Consumers loved the iPhone. And people, executives, managers at company after company after company started going to their boss and saying, look, I don’t want to carry the Blackberry. I want my iPhone. I love my iPhone. And eventually the companies kind of relented and say, okay, I guess we have to make our internal systems work on the iPhone because everyone loves it. It’s like B to C takes over B to B. I think that was probably the first one, but definitely Slack and stuff like that. So now it’s a bit tricky as a mechanism because you end up doing two routes to market at the same time. You’re not just selling to one group. You’re kind of doing two parallel processes of growth. You’re growing your say, let’s say consumer adoption, and you’re doing direct sales. You’re kind of doing both, but. there are a lot of benefits to this approach. And I will sort of summarize the thinking by Martin and Peter. This is their thinking, not mine. They talk about startups and look, startups are able to focus on product market fit without having to build a big sales organization. Right, so you can kind of get to see what products work and what don’t before you spend a long time doing enterprise sales. You basically avoid the high stakes. long-term relationship driven sales cycle, which is harder, it takes forever, it’s expensive. You tend to get better products, because traditionally what has happened in enterprises is someone pitches a product or service to the IT department and the CEO, they adopt it, it gets put in place, it’s usually complex, and only then do users start to engage, the actual employees start to use it, The experience is not awesome. This sort of puts the users first. They become the key decider of, hey, I like this product. This really works well. So you end up getting better products. You kind of avoid the vendor discovery process and all of that. But really, the big benefits, and this is from the article, is the best products win. You know, instead of going through the IT departments and then one day the product ends up in the hands of users, no, no, no, this is the best products win because people adopt them organically. They just love them. And that’s, I think that’s what we see with Zoom. That’s what we saw with Slack. That’s what we saw with the iPhone. Product discovery is no longer about sales calls. It’s about word of mouth, right? And you know, that is kind of your foundational. marketing approach. You can do a lot of tricks and growth hacks, but ultimately you’re going to, they can amplify word of mouth, but generally word of mouth is what you’re going to live and die on in the age of abundance. And then you can also do sort of consumer style growth hacks, which I’ve talked about before. Virality, Zoom is viral, Slack is viral, promotions, all those sort of growth hacks we always talk about. I mean, suddenly you can apply those to which generally you can’t otherwise. So there’s just a lot to like about it. Last point on this, okay, why does growth plus sales fail? And this is from Peter and Martin. It’s actually kind of hard to do both of those at the same time. Getting word of mouth organic enthusiasm is actually really, really hard. Now you could say that’s good because only the best will rise to the top. It’s very difficult. I mean, my standard advice to startups and companies is like, look, there are too many options in this world now. If you are not a nine out of 10 or a 10 out of 10 in somebody’s mind, walk away and do something else. Now if you suck, if your product is a two out of 10, you kinda know your product sucks. Look, nobody likes our chicken. But the problem is when you have a five, six, or a seven, because you think you’re pretty good, and you’re getting some traction, but it’s not awesome, and then you do a lot of marketing spend to keep yourself going, but you’ve got some churn. Dude, there’s too much stuff in the world now. You don’t wanna be a five, six, or seven. You wanna be a nine or a 10. or do something else. You need to wow people. You need to knock them over. And for most companies, you’re not gonna do that with a huge mass market. You’re gonna do that with a niche. And that’s really what I try to do to tell you the truth, is I try to be one of the most valuable sources of information for a small group of people. That’s what I’m doing. I wanna be a nine or a 10. And I won’t be that for a huge number of people, but I’m very niche. But that’s what I’m going for. Okay, so word of mouth organic growth being a wow product. That’s a coupon term. Like if you ever look at the coupon, South Korean e-commerce company, they talk about, that’s one of their terminologies is we need to create wow experiences for our consumers. I always thought that was pretty great summary of a lot of thinking like you need to be a wow product. Balancing when you do organic growth within companies and when you try and lock down the sales, you gotta kinda time those right. Oftentimes if you switch over from growth to sales, you start to become weaker on the organic side because now you’re getting contracts. So maybe you become weaker on the organic wow aspect. You can neglect the growth if you start getting lots of sales contracts. So it’s a bit of a challenging strategy, but overall it’s pretty cool to think about it. I think it’s good to keep in mind on the B2B enterprise SaaS side. But yeah, I think that’s just what I wanted to talk about today. So that’s concept number three, growth plus sales. I’ve put that in my tower under tactics at the bottom. I think it’s great. I put virality and first mover in the same bucket of tactics. I think they’re great. I think they’re powerful, but I think it’s a tactic. I don’t think you can build a big business on that long term. It’s usually a short term phenomenon. Okay, and those are the three concepts for today. Valuation, growth, ROI, C, and value, and growth plus sales. As for me, it’s been a pretty spectacular couple days. Like, shockingly awesome as a couple days. I’m heading out to Germany in a couple hours here. Gonna give a talk to an investment group, which is like literally my favorite thing to do. Like, one, you get to go to Berlin. I love Berlin. I’m gonna go have some schnitzel and currywurst and all of that. Then I get to talk to investors who are always like wicked smart. So you have to kind of really know what you’re talking about. So that’s kind of like a nice high bar to try and clear. So I love that. And yeah, I’m looking forward to that. It’s gonna be a great couple of days. And then you ever have one of those weeks where like everything just works out? Like. Like there’s a lot of issues I had last week with my visa not coming through. I was going to get stuck in Europe for two to three weeks waiting for that to get cleared up. Anyways, it all sort of, and then my plane flight got moved like a day. The airline just told me, oh, your flight’s not on Monday. Now it’s on Tuesday. I was like, what? All this stuff. Anyways, they all sort of cleared up and it was kind of crazy. Like, oh, visa’s done. Airplane flights moved back. No problem. You don’t oh and by the way Friday Thailand announces The number of days you have to quarantine or sandbox in Phuket, which is quarantine on the island is changed from 14 to 7 So I don’t have I don’t have to hang out in Phuket for two weeks Which is not terrible, but now it’s one week and I even emailed the hotel and all this stuff And I said hey the sandbox is being cut. What do we do about the money? I paid they said oh, we’ll return it all to you the half of it. I Didn’t even have to argue Like, it was just a weird couple days where like everything in life seemed to work. I’m not sure what that’s about. That probably means that next week will suck. I think that’s how that works. So anyways, sunny, beautiful day here. I’m getting ready. Been riding my scooter around Bangkok. Yeah, life is pretty good. So I’m trying not to take that for granted. Anyways, that’s it for me. I guess the next podcast I’ll be doing that from Phuket, which is really great. I mean, being locked into Phuket. for a week or two weeks, that’s still pretty awesome. So you don’t have to stay in the hotel, you can go around and do what you want. So anyways, that’s where I am. Life is pretty good. Anyways, I hope everyone is doing well. I hope everyone’s staying safe and that this is helpful. But that’s it for me. Take care and I will talk to you next week. Bye bye.


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