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.

J 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.

In my previous posts I discussed why YTD forecasting doesn’t work and outlined an improvement over YTD – trailing twelve months (TTM) – which provides a moving average of past performance to highlight the trends of your business performance.

While TTM is an improvement over YTD, it still fails to shed light on future business conditions.

A more enlightened approach to forecasting and budgeting is a method I’ve been using with clients over the last ten years; it’s called the 24 Month Rolling (24MR) financial forecast.

The Power of the 24MR Financial Forecast

The 24 Month Rolling (24MR) method incorporates the elements of TTM and goes one step further — by keeping the field of vision consistently forward.

24MR incorporates TTM and includes 12 months of projections, all in one statement, to present an even clearer picture of business performance—past, present, and future.

The 24MR method is more powerful than TTM because it keeps your field of vision 12 months ahead at all times, rather than focused on just the current date. In essence it is the ideal tool to manage the risk profile of your business while providing yourself with the “benefit of hindsight.”

To create a 24 Month Rolling forecast for any financial statement, add twelve months of predictions to each line item in your TTM. The result is a blend of your TTM history and a prediction of the next twelve months.

Ownership of the 24MR Financial Forecast

It’s important to ensure that someone within the company takes ownership of this process. The common assumption is that, because forecasting is numerical, the CFO should own the process. But before accepting this kind of arrangement just because that’s how it’s always been in the past, ask yourself this question:

Who in your business is best qualified to predict and influence the future?

The most common answers to this question are: CEO, COO, Sales Manager, or Operations Manager, but rarely is it the CFO. So is the CFO really the best person to own your documented vision of the future? While the CFO will be integral to the process, a better result may be achieved if the whole executive team gets involved, with the CEO at the helm.

And, will you get resistance from your team by switching to 24MR? Most likely. Many people are resistant to change, and transitioning to 24MR forecasting initially creates more work for your team. Before you start, check out the common pitfalls when implementing 24 Month Rolling financial forecasting.

But after you’ve implemented it, you’ll have a powerful view of your business performance – past, present and future, all in one statement.

For more details on the nitty gritty steps of 24MR, download our complimentary ShortTrack CEO eBook and check our concept #1:

1. Your CFO is not giving you all the numbers you need to confirm your everyday decisions.