TL:DR
- Achieving financial independence is going to be a core competency and competitive advantage in the coming decade.
- Startups need to design the map they will use to achieve the financial independence right for their company and objectives.
- Working on the core components of financial independence empower startups with greater maneuverability to build stronger businesses and increase their attractiveness to investors and stakeholders.
In our last post, we discussed the rise of financial independence as an important theme we will hear more about in the coming decade. Startups are increasingly assessed (and scrutized) as more than a center of innovation, but as a business capable of delivering disruptive innovation and technology.
That does not mean startups and founders have to go it alone.
In the second part of our financial indepedence series, we share a guide on the core components to building a financial independence strategy , and how to start making decisions to help you achieve this critical competitive advantage.
Navigate Your Strategy With A Map
For most startups, going it alone isn’t as easy as Prince Harry (who had a tidy trust fund to fall back on) or Princess Meghan (who was an established and capable actress who had her own career prior to joining the royal family).
Creating a financial independence strategy requires a thorough assessment to form a plan forward. To help the process we outline four important components of financial independence to assess and work towards.
1. Define the strategic intent
Financial independence – if achieved – is liberating and empowering, but the question leadership teams should be asking is why does your company need and want it?
There are many reasons why a company strategically chooses financial independence, including controlling how the company will grow and monetize, whether to take external capital (and need to take more again in the future), or set the company up to quickly seize future opportunities. It is vital to understand how the company will look in 2, 5, and 10 years into the future and how this strategy will materially impact the company.
The other part to this assessment is about execution – to define what it takes – time and resources – to achieve a financial independence strategy. Are there skills, people, product development, capital, or other resources that are required? How will the company acquire what it needs? What are blocks within the company to commit to this strategy?
These are hard questions that require more than soul-searching but a rigorous assessment of known information to drive a conclusion. The goal is not creating absolute certainty of the future, but to envision the pathway to the future your company wants to create.
2. Rigorously design and test the business model
At the core of the financial independence strategy is a defendable and sustainable business model. One of the top 10 reasons for startup failure is a product without a business model. This is a risky way to build a company, and one that takes the company further away from financial independence.
In our experience, the best business models are rigorously designed and tested. This means creating hypotheses about what business models are relevant to the company’s value proposition and objectives. This is followed by an iterative process of testing, refining and testing again.
Ideally this process starts from the very beginning, but for companies that are a year or more into existence, tend to use the business model they started with – often adopted from another “comparable” company – and do not work on this.
No company is “stuck” to their business model, especially if it does not get them onto a path that will lead them to financial independence. What is crucial is that the business model is built around the value delivered to customers and is aimed towards financial independence. Companies can be creative, and draw from outside their traditional industry, as long as they design the model right for their company, product, and customers.
3. (Re)gain pricing power
One of the challenges to a successful financial independence strategy is the loss of pricing power. As value is given away through poor pricing, companies need to offset the per unit revenue loss with increased volume or customer acquisition. This is a challenging (and costly) calculus to manage when pursuing financial independence.
Companies that are often best positioned for financial independence are those that have strong price management. This includes now the billion-dollar public company Atlassian to designer water bottle brand S’well (with more than $200M in sales), to mainstream companies such as Apple and Netflix.
Gaining pricing power is not only vital for any financial independence strategy, but creates a unique competitive advantage to do more with pricing to win new markets and customer segments.
Pricing power is not just the output (price level), but is the pricing strategy and pricing design created to extract the right monetary value, for the right customers. This is a process that market leading companies are constantly working on to master, and one startups can start on right now.
4. Leadership driven, stakeholder supported
Any pursuit of financial independence starts with the leadership team. It can be a leadership team of one or many, but there needs alignment on why a financial independence strategy is necessary and the steps to get there.
The importance of leadership goes beyond strategy and philosophy, but also in decision-making. Companies are faced with trade-offs, where decisions must be made on deals or opportunities that can impact the pathway to financial independence. A disciplined and aligned leadership team is better positioned to navigate these situations than those where there is fragmented and compromises lead to further complexity.
In addition to leadership, is the support from other company stakeholders which include team members, investors and advisors. Pursuing financial independence can change the way the company does business, makes decisions, and the results achieved. Having the entire team rallied around the strategic intent is critical. Having the conversation early and often is required.
Final Thoughts
One important theme that will rise in the new decade is the need for financial independence, and the action (or inaction) companies take to adopt and achieve this strategy.
Growth at all costs is no longer the only way to build companies and create markets. Instead more fundamentally strong companies focused on financial independence are on the rise. This trend will continue as scrutiny increases on companies to not only build incredible products, but to build busiensses that support the development of more products well into the future.
To ensure companies are better prepared, it is vital that they receive the right support to develop right building blocks. Like building a company, financial independence is a process, but one that can empower companies and founders to realize the vision they set out to build for years to come.
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