Introduction

In a company's early growth stages, wise resource allocation and maintaining a sharp focus are crucial, especially for smaller teams. Given that growth requires substantial cash and conditions budgets need to be kept tight, it's vital for small teams to have a shared decision-making framework. This framework should be designed to prioritize high return tasks. This keeps your team focused on what matters most: profitable growth. The most common reason direct-to-consumer brands fail to grow rapidly from ~$3m - $10m is allocating resources into low return initiatives.

Why?

• It’s easy to confuse them with Easy Wins (you’ll see below)

• They can be quick and satisfying, and do not require a lot of thinking.

• The team has not been trained on how to estimate the impact of an initiative or have benchmarks from their management team.

A two-part framework for allocating resources and focus.

1. Impact vs. Effort: This principle advocates for prioritizing projects based on their potential impact relative to the effort they require. It's a call to focus on initiatives that promise significant returns for comparatively minimal input, thereby optimizing resource allocation.

2. Defining Meaningful Impact: It's essential to establish clear, quantitative targets for returns on investment. This approach ensures that decision-making is guided by the potential for tangible, impactful returns, rather than subjective assessments of value.

Impact Versus Effort

The pitfall of incremental initiatives

The bottom left quadrant is a massive death trap that will annihilate growth.

Most founders know to avoid the Money Pit quadrant - it’s not rocket science…

Literature on impact VS effort will say that tasks falling into the Incremental quadrant should be done when there is “extra time available”.

That is a bad way to look at it because literature that says that is offering advice to managers at companies with $250m+ in revenue.

As a fast-growing brand with under $50m in revenue, the “extra time available” phrase does not apply.

Here’s why…

• If a business with under $50m in annual revenue has “extra time available” and can’t think of higher yield initiatives, then it’s a sign of bad management. Management’s job is to ensure everyone is focused on projects that generate high returns on investment. That’s what leads to exceptional growth.

• There is no shortage of projects you should in your pipeline that fall into Easy Wins & Big Bets. You are not running a massive old company with decades of optimization.

• Spending time on incremental initiatives lowers growth rate substantially. It’s simple math. What would happen if you invested all of your money in a company that returned 10% a year instead of 200% a year? Returns would be horrific.

• It’s easy to fall into the trap of working on incremental tasks because they do move the business forward, and can be satisfying to complete.

To name the most common examples.

• Conversion Rate Optimization (CRO) Experiments: While important, some CRO efforts yield negligible improvements, especially when they divert attention from more substantial growth opportunities.

• Developing Custom Apps: In many cases, these can be more efficiently outsourced, saving time and resources for higher-impact initiatives.

• Creating Elaborate Dashboards: These typically provide little actionable value, despite the considerable effort required to develop and maintain them.

Such initiatives, though seemingly beneficial, can significantly detract from focusing on projects that drive meaningful growth.

How to bring clarity to your team?

The solution is quite straightforward.

1. Ensure your team knows how to prioritize initiatives and allocate resources. Sharing this article can help with that.

2. Set targets that yield high returns, expressed numerically.

3. Consistently reinforce points 1 and 2 and hold your team accountable.

What is meaningful impact?

So, you're wondering how to measure the impact of an initiative quantitatively?

The two usual financial metrics for this are MOIC (Multiple on Invested Capital) and IRR (Internal Rate of Return).

Simply put, MOIC is the ratio of return on investment. If you invest $1 and get back $4, the MOIC is 4x.

IRR, on the other hand, is the discount rate that brings the net present value of an investment to zero. The reason we prefer IRR is that it factors in time.

However, in a startup setting, it's not always feasible to reliably calculate MOIC or IRR for every initiative.

What's possible, though, is a swift analysis to make sure you aren't overly focused on initiatives that would land in the incremental quadrant.

My advice? Aim high. Perhaps a target of 4x - 5x MOIC within a year.

While the target might initially seem steep, let's delve into the details:

• High targets serve as a safety net for potential failures or underperformance. They also inspire significant action, preventing the underutilization of capital. Excess cash in a business often signals inefficient management.

• Few initiatives require 100% resource deployment upfront. This should be taken into account when determining target returns, making the goal less intimidating. For instance, if you're dealing with a new supplier offering better pricing and net 30 terms from receipt of goods, the cost isn't incurred until 30 days AFTER product receipt. Essentially, you have an additional 30 days of sales before spending a dollar, excluding the time spent on sourcing.

• Consider the raw dollar costs and the time commitment from your team.

• The less concrete and quantifiable the impact, the higher the expected return on investment should be.

Implementing the strategy

1. Share this blog post with your team.

2. Establish your desired growth rate. What about EBITDA & revenue? Once these are defined, reverse engineer to identify the IRR required for initiatives in the pipeline.

3. Compile a comprehensive list of initiatives. Forecast the expected IRR for each one. Always consider when the financial or human resources will be invested - and when returns will be expected. This can significantly affect the internal rate of return!

4. Regularly review each initiative to ensure progress.

5. When a team member suggests an idea, encourage them to check if it aligns with the targets outlined in step 2. Empower them to do the calculations and explain their reasoning.