The Professional CEO Blog -- Valuable Insights for Mid-Market CEOs

The Five Rules for Managing J Curve Investments

In my last post I discussed the importance of understanding how many J Curve investments you’re undertaking within your company at any given time. This post will address how to manage the 3 phases of a J Curve investment and cover the 5 rules for managing J Curves.

J Curve investments are vital to entrepreneurial success, so it’s important to actively manage them. The trick is to clarify and quantify the objectives, timelines and success of each J Curve investment during the J Curve, instead of afterward. This provides your executive team with a clear understanding of the status and performance of each, and empowers them to make real-time decisions using real-time information.

By actively managing your J Curves, you reduce your risk in each and help to remove the emotional connections that can often cloud good business judgment (when things go wrong).

The 3 Phases of J Curve Investments

Phase 1 – Investment

J Curve investments obviously require an outlay of capital for a projected future return, so every J Curve starts out with an investment. This is the innovation stage, where companies and product development teams consume time, effort and resources to create or purchase something that should improve the future value of the business.

The challenge with innovation is that, regardless of how carefully it’s planned, it typically takes twice as long and costs at least twice as much as projected … while carrying the risk that the investment might not pan out.

Company size doesn’t typically affect the challenge of the innovation stage – even the biggest companies can struggle with the innovation. Remember Microsoft’s challenges with creating Vista? Over three years into development they ended up scrapping the entire operating system and starting over.

Phase 2 – Catch Up

The intent of a J Curve is that after the phase 1, the investment will start to yield benefits. While the lifetime cash flow of the investment is still negative (investment phase net cash flow drain is higher than the catch up phase net cash flow gain), the overall cash drain is reducing. This is phase 2 or the “Catch Up” phase.

If a J Curve never makes the turn into Phase 2, Catch Up, it will begin a downward course called a ski slope. When a J Curve investment enters a ski slope, it’s time to abandon it and write off the investment.

Identifying a ski slope is more an art than a science, so there aren’t hard and fast rules for determining how and when to enter the catch up phase. But if you determine that you’re on a ski slope, you should abandon the J Curve in every instance.

This isn’t always an easy decision because people become emotionally attached to certain J Curves. Mitigate this risk by focusing your people on getting through the Risk Zone as fast as possible, and have everyone understand that if you decide that you’re on a ski slope, you’ll write off the investment.

Phase 3 – Blue Sky

Once the gains of the catch up phase exceed the drain of the investment phase, the investment is cash flow positive. The investment has now entered the “Blue Sky” phase.  This is the goal of all J Curve investments.

Rules for Managing J Curve Investments

While the time and costs of moving through the Risk Zone is different for every J Curve investment, there are 5 rules that can help you better manage them and prevent them from going awry.

1. Measure and manage depth and breadth of the valley

Be prepared for the valley between phase 1 and phase 3 to be deeper and wider than anticipated. Encourage open discussions about costs and timeframes, and create an environment where new ideas are welcomed.

2.  Create and manage a plan to quickly move from phase 1 to phase 3

Focus on the critical transition between the innovator and the implementer by using clear communication, documentation, and procedures. And beware of innovators who will not let go of their baby!

3. Do NOT become emotionally connected to a J Curve

Watch out for ski slopes, and (again), emotional arguments to keep them going. Examples are sunken costs and people management.

4. Do NOT take on too many macro J Curves at once

Identify, prioritize, and stagger J Curves. Understand how many your company can handle at one time. Understand “aggressive” versus “passive” introduction, and ask two questions when considering any new J Curve:

  • Will it benefit the business?
  • Is now the right time?

It’s important for mid-market CEOs to understand how many J Curves they’re currently undertaking and the status of each, because J Curves cost more than just the short-term drain on cash flow, return, and profit; they absorb substantial “executive head-space” and opportunity cost.

5. Establish a J Curve register

The register will track the number of J Curve investments active in the business, along with the phase of each and the projected date to enter into the next phase. This is critical for senior management to track, as it’s best to stagger the phases of J Curves so you don’t have too many in phase 1 or 2 which can drain substantial capital, executive mind space and opportunity cost.

Maintain the register in a spreadsheet, and update it every 30 days. The register isn’t a project management system; it’s a higher level view of all strategic investments in the business.

By carefully planning, managing and tracking the progress of your J Curve investments, you can avoid the serious pitfalls that can sink even a good company.

Too Many J Curve Investments Can Sink a Good Company

J Curve InvestmentsJ Curve investments are strategic decisions to spend money today to receive a benefit tomorrow. J Curve investments create short term financial loss with the intention of recovering the investment in the future, and overriding it with long-term strategic gains.

Every business has J Curves. Here are some examples:

  • Adding a new product line
  • Accessing a new market
  • Making a new staff hire
  • Purchasing new equipment
  • Opening a new location
  • Moving manufacturing overseas
  • Investing in R&D
  • Acquiring competitors

J Curve investments can also be broken down into “macro” and “micro” J Curves. Acquiring a competitor is typically a macro J Curve investment, while building a new website (for most mid-market companies) is typically a micro J Curve investment.

How important is it to properly undertake and manage J Curves?

I’d argue that the process of identifying, prioritizing, and managing J Curves is the most important determinant of entrepreneurial success.

J Curve Investment Ownership

As you’re considering your own J Curve investments, are you able to name the person who is in charge of each of them? Is a single person responsible for managing and tracking their phases and their progress, and for measuring results and ensuring that they don’t drastically damage the company? And, do you have one person who is responsible for overseeing ALL of the J Curve investments?

In many mid-market companies (companies between $1 MM and $100 MM in revenue), no single person owns this responsibility. In other companies, it may be a group of executives. And most businesses do not have a formal process for evaluating and managing strategic investments.

Mid-market CEOs and their leadership teams intuitively understand when they’re taking on J Curves. But it’s rare for a mid-market company to measure and track either the performance of the J Curve as an independent entity, or its impact on the business as a whole. Should they, you ask?

Absolutely.

It’s important for mid-market CEOs to understand how many J Curves they’re currently undertaking and the status of each, because J Curves cost more than just the short-term drain on cash flow, return, and profit; they absorb substantial “executive head-space” and opportunity cost.

The Risk in J Curves

Whenever I run across a company with no J Curve investments, I know that I’m seeing a company that isn’t going to stay in business for the long haul. You just can’t adapt to constant changes in the marketplace (opportunities and threats) without undertaking J Curves.

And when a company has a J Curve that fails, it’s possible that it can severely damage the business. Sometimes, it can be fatal.

But what about the forward-thinking company that undertakes numerous J Curves, seeking to innovate and stay ahead of the market? This can present just as much risk as having a failed J Curve or having no J Curves; having too many J Curves at once can sink a booming company.

Example – Rolls-Royce Declares Bankruptcy from Too Many J Curves

Rolls-Royce, a company known for engineering and quality, declared bankruptcy in 1971, sixty-five years after its founding. Much of the publicity surrounding the bankruptcy centered on the technical problems of the RB-211 jet engine, which eventually became one of the most popular jet engines in the world over the next 10 years.

To keep the weight of the engine down, Rolls-Royce engineers used lightweight carbon fibers for the fan blades, which shattered when hail or birds were sucked into the seven foot fans. Deadlines were missed and production costs skyrocketed—common occurrences with J Curve investments.

But the engine’s problems didn’t cause the bankruptcy—for years Rolls-Royce had been committing itself to too many costly development projects simultaneously. At the time of the collapse, almost 40% of its employees were working on engines that were not yet profitable. Too many J Curves was one of the major contributing factors of Rolls Royce going bankrupt.

You can see why J Curves are so important. Too many, too few, or failed J Curves can be fatal to a business. By properly managing your J Curves investments, though, you can eliminate much of this risk.

There a 5 rules for managing J Curves, which I’ll outline, along with the steps to manage individual J Curves, in my next post.

Create Buyer Personas to Resolve a Sales Problem

Yesterday I was chatting on the phone with a former colleague from my days in San Francisco. We had worked together 15 years ago in B2B sales, and he’s now running the operations of a $40 MM engineering division of a mid-market company. He had called to discuss his new opportunity of taking over as the VP of Sales for the entire company, and to ask for advice regarding a problem that was polarizing the company.

“The biggest problem I see with our sales team,” he commented, “is that they sell and service our general contractor and municipality clients exactly the same way, when they’re actually very different and have unique needs.

“Our general contractor clients already have an existing relationship with us and have completed many of these types of projects. Their main concern is that their materials and workers show up on the job on time so they can complete their projects and get paid. They care about speed and accuracy and they don’t need any hand-holding.

“But the engineers running a municipal project rarely have completed a similar project before and need to be nurtured and guided throughout. Our sales reps provide few details during the bidding phase and are not consulting them during the project. These engineers have daily questions and need to understand specific details about the work we’re performing, as it affects their long-term plans. It’s a major problem – I’m in danger of losing two huge municipal projects to my largest competitor right now because of this.”

He continued by asking for advice on market research resources, thinking that he had two different markets and needed to provide a report to the senior management committee.

The reality is that the general contractors and the municipalities are part of the same market — they are just different segments of a single market.

Buyer Personas to Represent Market Segments

To resolve his problem, we created two fictional people for his buyer personas, or human representations of his two distinct market segments:

  • Gerry the General Contractor
  • Marty the Municipal Engineer

We profiled each in great detail, defining each person’s:

  • Role in the organization
  • Main problem they are tasked with resolving
  • Experience level
  • Department characteristics
  • Age group
  • Needs on a job
  • Personal interests
  • Life stage

Then we mapped out the appropriate marketing and sales messages and service to deliver to each. As it turns out, their current marketing and sales spoke directly to Gerry but not to Marty. It’s surprising that they had won any municipal projects.

And few of the current sales team had the right style and personality to provide the nurturing and consultative sales approach Marty required; my colleague realized that he was going to have to hire different reps to sell to and service this segment.

Creating buyer personas is a nice way to bring your market segments to life, creating a “real” person so you can better understand how to provide the value that they need.

Market segmentation is a standard exercise for MBAs and professional marketers, but it’s common for many mid-market companies to have grown successfully for decades and never put pen to paper to define them. Why? Many mid-market company’s marketing efforts are led by their VP of Sales and the sales team, who typically have little training or experience in marketing strategy, segmentation and competitive positioning.