This must-read introduction is the first excerpt from Skift's recent digital book For the Long Haul, in celebration of our sixth anniversary.
As businesses cycle ever faster, even the idea of what constitutes long-term is changing. A 2012 report from the consulting firm Innosight found that in 1958, corporations stayed on the S&P 500 for an average of 61 years. By 2012, that number had fallen to just 18 years, and there’s no reason to think it won’t continue dropping. Our business culture is oriented toward the quick exit. It’s easier than ever to sell out, especially given the domination of any tech-related market by the Big Five — Amazon, Apple, Facebook, Alphabet (Google), and Microsoft — that gobble up smaller potential competitors before they get a chance to gain too much traction, often shutting them down in the process.
But that doesn’t mean creating something for the long haul is impossible. In many ways, it’s never been easier. Advances in cloud technology have eliminated expensive entrance barriers, social media means detailed customer demographics are available, and millennials are valuing experiences over objects, opening new opportunities for travel brands. Survival is a balancing act that requires careful planning. “The way you build a great company is to build one that can meet the pressure of short-term mandates that also doesn’t truncate your ability to go for the long term,” Schlesinger says. Here are six ways to do so, learning from companies across industries.
Long-term success is as much about attitude as it is about execution. “People can give a speech about built-to-last, but their behavior is about built-to-flip,” Schlesinger says. Before launching a company, determine what constitutes long-term success. Then create goals and design workflow and office culture to achieve those measures, rather than getting distracted by quicker, easier wins that will ultimately hurt the business in the long run.
Berkshire Hathaway, perhaps the best example of a long-term business, benchmarks its performance against the S&P 500 on a rolling five-year scale. At Follian — a beauty startup that focuses on selling clean makeup and healthy skin care and natural beauty products — founder Tara Foley and her team dramatically limit the products they sell due to their exacting safety standards. “There’s a lot of greenwashing in our space,” she says. “A lot of products claim to be healthy and clean, but they don’t fit our standards. They may be really big brands that are growing fast, and by not being able to ride the coattails of their growth, we may have affected our growth, too.” Committing to Follian’s principals might have slowed growth in the short run, but Foley believes it will be beneficial long-term.
Sam Shank, a serial entrepreneur who’s currently CEO and founder of HotelTonight, built a workplace culture that can sustain the high employee turnover he and his executive team face because they are based in San Francisco. A key guiding company value is simplicity, something that’s intuitive and easy to grasp for new HotelTonight staffers. “Culture can perpetuate even as the individuals who are working on what we are doing are changing and evolving,” he says.
Focus on Cognitive Ambidexterity
A strong company built for the future is one that can focus in two places: the here and now, which will sustain the current enterprise, and what’s coming down the road, which can benefit in the future. These two factors, called prediction logic and creation logic, respectively, combine to create the idea of cognitive ambidexterity.
Two companies succeeding at this today are, unsurprisingly, Google and Amazon. Google is constantly innovating its suite of products that drive revenue, while also focusing on moonshots like self-driving cars. Amazon used the revenue from its consumer-focused business (and the capital it raised to cover losses) to help develop its rapidly growing and wildly profitable cloud business.
Kodak, on the other hand, is an example of a company that failed to take advantage of what was coming. While the camera manufacturer actually developed digital photography, they were too focused on the present moment (and the related revenues) to make new meaning for the marketplace. They had glimpsed the future but they didn’t know what was going to happen and how, and they got run over by more nimble competitors.
Cognitive ambidexterity isn’t a new idea, but today’s market makes it even more important. “The pace of change is so much faster and it’s a lot harder to predict what those rapid iterations will bring,” says Cynthia Franklin, the director of entrepreneurship at NYU Stern School of Business’ W. R. Berkley Innovation Labs. “But the marketplace is less forgiving of companies that focus on sustaining innovation and ignore disruptive innovation.”
Find a Niche
Specialization is a growing trend in virtually all markets, which makes it more difficult for new entrants. This is especially true in tech. “I think the reason we see so many young tech firms sell out is because of the winner-take-all nature of the platform business,” Bob Litan, a senior fellow in the Economic Studies program at The Brooking Institution, says. “We’ve become increasingly a platform economy and we suddenly have a limited number of platforms and it looks like the Big Five are the winners.”
Litan’s research supports this notion. He points to a study showing that about 600,000 startups launched per year before 2008 but the level dropped to 400,000 in 2009 and it hasn’t recovered since. One key to building a sustainable, long-term business is to find a place where the giants can’t, or won’t, compete. That’s what Foley did at Follian. “These products require so much education,” she says. “We don’t think that those businesses are going to be able to provide that in the short term to the same extent that we can.”
Her customers aren’t shopping based on ease of ordering and price competition, two places where she’d never be able to beat Amazon. As a result, Follian remains insulated from major competition. Shank offers another idea: Find the distribution channel, and then build a product and a company around it. With HotelTonight, he saw an opportunity to use the App Store to create an avenue to rent hotels at the last minute, which didn’t exist before. Another example in the travel space is Trivago, which relies heavily on television to spread the word. “People focus too much on product and then only afterward figuring out how to get it in front of people,” Shank says.
Ride The Wave of Changing Consumer Behavior (Or Change It Yourself)
The younger demographic of consumers is infatuated with authenticity, supporting companies that give back. “Consumers are a lot more aware about transparency, where products are coming from,” Sumeet Shah, an investor and venture capitalist at Brand Foundry Ventures, says. “When you are able to get consumers’ brand loyalty early, more brand loyalty means more revenue in the end.” For Shah, the key is to build influence in the marketplace and build out the larger ecosystem as well.
Of course, this trend toward consumers who care only goes so far. These shifts toward labor responsibility and environmental sustainability are “over-reported,” Schlesinger says. “Do I believe at the end of the day that there’s been a massive shift in consumer behavior that’s oriented towards getting companies to behave in the long run? No. I say no, definitively.”
In that case, another solution is to change hearts and minds. That’s Follian’s goal, along with other companies in the clean-beauty space. They are working together to educate consumers, which will expand the market opportunity. “For us to grow, the consumer mindset has to change,” Foley says. “That’s the goal: to change that mindset together. Once that mindset has changed, we’ve won and our business will be quite big.” When she’s pitching investors, they are interested in the positive health benefits, but it’s an added bonus. They see that clean and healthy beauty business is growing at a much faster rate than beauty overall, making companies like Follian more likely to survive.
Don’t Be Afraid to Pivot
Thinking long-term doesn’t mean you have to stick with one idea. “So many entrepreneurs stay on for the original dream too long,” Shank, also a startup advisor, says. “Within six months, you’re going to know if you’ve hit it or not.” When he launched HotelTonight, he and his team established a series of goals for the first month. They blew them out of the water — except the number of actual bookings. “It took about five months for us to feel good about having a product that not only were people buzzing about but that they were using,” he says. “I don’t know if I would have gone much further if it hadn’t changed. I’ve seen people repeat the same mistakes over and over again of trying to make something work that doesn’t have the product-market fit.”
Foley recently tweaked Follian’s business model to focus more on e-commerce. When she started the company in 2013, Sephora was the only brand selling beauty products online because customers weren’t used to purchasing them without being able to see, smell, and touch them. But that’s changed, and Follian needed to change as well. They were doing roughly 85 percent of their business in their brick-and-mortar stores, but Foley wants to alter that percentage dramatically.
“We realized that there are so many women out there who want clean beauty products and the opportunity is so big that we’re not going to be able to take advantage of it by building stores,” she says. “We built a tech stack, worked with experts to build what’s going to become a robust site experience. We’ll continue to build stores but we’ll be building to reflect more education online.”
Flexibility makes it easy to glide past business bumps and market changes. Your team is what lets you survive; focus on it from the beginning. “Start with the right foundation,” Shah says. “When you invest in the future of something, you’re investing in people. It’s easier to invest in great people who don’t have the right product than a great product that doesn’t have the right team.”
Focus Now, Riches Later
If and when success comes, acquisition offers will follow. Resisting these inquiries, no matter how appealing, is the final step toward building a long-term business. When considering the offer, think about three groups of constituents: the investors, the customers, and the employees. What are the benefits and disadvantages of selling out versus staying the course for each group?
Often, staying the course will be the correct play. And founders can benefit financially by staying involved. They frequently overestimate the financial benefit of selling out. In a post on his website, entrepreneur Bill Flagg demonstrated some math. The sale of a business making $1 million in pre-tax profit per year that was sold at a 10x multiple would return less than $400,000 per year after taxes if invested at an 8 percent annual return. That’s significantly less than the approximately $600,000 in after-tax profit that the founder was making annually when they owned the business. The long haul can pay off.
Noah Davis (@noahedavis) is co-founder of Three Point Four Media and a freelance writer.
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Photo credit: Airline jet wing on a long-haul flight. Skift's new book looks at long-lasting travel brands. Visual Hunt