Driving enterprise value

This essay is a broad articulation of how I think about business building, particularly in the context of building businesses that have the objective of maximizing enterprise value. I do not profess to be an expert business builder, nor do I think I am particularly great at giving advice, so this essay is not exactly destined for success but the below “framework” of sorts is a style of thinking that I return to often when problem solving and figuring out what to work on.

THIS IS NOT ADVICE, TO BE CLEAR.

It is rather a simple prompt I ask myself on a recurring basis (~weekly or so): “Is how I am spending my time oriented towards maximizing enterprise value?” or “How am I driving enterprise value today?”

It is a bit of a robotic question to be asking yourself—you may roll your eyes thinking oh my this is such a ridiculous, removed business school style question to be thinking about…but I actually find it immensely clarifying.

Because in business, and especially in startups (mainly my experience) but I can imagine business more broadly—there is SOOOOO much motion. There is so much opportunity to drive incrementality, so much opportunity to make noise—as a result it is so immensely easy to find yourself working on something that really does not drive enterprise value for the business.

I argue that if your objective is to scale alongside your business or deliver impact or what not—and the objective of your corporation is to drive enterprise value, and you find yourself outside of the current. Well, that is not where I think you want to be.

Now, a quick aside/overly wordy disclosure of sorts—not every organization is truly optimizing for driving enterprise value. Enterprise value is not _clearly_ the *right* point of optimization, and is certainly not the correct focus area for _all businesses_ (for example, there are plenty of passion project businesses where the proprietor would view the project to be a failure if it, let’s say, required them work 80 hours a week, even if the enterprise value was rising. I am not writing this essay to invalidate anyone’s preferences, just to make that clear).

Enterprise value is a complicated? to triangulate metric because in practice, especially at scale, it is often determined by third parties. In other words, your businesses’ enterprise value is effectively the price you can sell it for in the market. Figuring out what the market will pay for it at any given time is not particularly straightforward of an exercise.

In the public markets, you can look at the stock price. This is effectively the market telling you your price. The market determines this price by looking at a number of quantitative and qualitative factors that have to do with your business, metrics, and prospects for the future.

In the private markets—where there is no daily ticker price—enterprise value estimates lean towards an art form more than a pure science, as they (THE INVESTORS) are very much an underwriting of the likelihood that a particular founder is going to build a particularly large, outsized business in a particular space.

So if you are asking yourself, okay, I am going to be ruthless about prioritization by asking myself: “What can I do that will drive enterprise value?” then you may find yourself thinking…wait a minute…I do not actually understand what drives the value? You would be surprised (or not) but it is not just rank and file employees or the new guys who may not know this answer with 100% clarity—it is likely many founders do not perfectly understand the true mechanics of this equation for their business.

And that term right there—EQUATION FOR THE BUSINESS—is the one you want to highlight and star and circle because that right there is the game of maximizing enterprise value.

Step one is to identify what the equation of your business even is. This equation should be present before you reach massive scale and it should basically remain consistent for an extremely long time so you do not really have to worry about changing it often.

Finding your equation of your business is extremely productive in the capacity that it helps you understand the variables that matter and thus you can prioritize your time against what really matters.

So what does really matter? Well, it depends. Not a super helpful answer but the truth is that you need to figure out what matters to your business.

Lately, and by lately I mean let’s say over the last five decades of economic progress, we have found ~The Market~ to skew towards valuing assets that grow CONSISTENTLY. Business models like recurring revenue businesses, especially software-driven ones, tend to fit the model of consistency because, well, they are highly scalable (in the capacity that the marginal cost of deploying software rounds down to zero—note not exactly at the enterprise scale but you get the gist of the notion that software is scalable) and high gross margin (meaning there is room to adapt the business as you scale). We can also imagine that the market likes businesses that can grow for a long time, meaning they must exist in markets that have room for them to grow into so they can become sufficiently large.

The above explanation is certainly incomplete—but let’s imagine for a second that we have created an imaginary sandbox of sorts where we are now talking about your business that exists to create enterprise value, and does so by building a business that consistently grows (likely using a business model of recurring, high margin revenue, in a large total addressable market). This made up sandbox is your business.

And with your business, you know your equation therefore must effectively answer: “what variables will drive consistent growth?”

Once you have this articulated (I would literally suggest writing it down), your game of business moves from being abstract concepts to a game of risk management.

I believe that business is _really_ a game of RISK MANAGEMENT.

How you invest your time basically becomes a reaction to the status of your equation. What part of the equation is weakest? Where are you most uncertain? What is riskiest? What should we de-risk first? And second? Why?

When you start your business, you generally face at least one of two big risks:

  • Market risk: If you build it, will anyone care?
  • Execution risk: Can you build it?

I generally recommend starting with the former—Market Risk—and then working your way to the latter (as you will spend decades potentially executing, scaling, breaking, succeeding and repeating that loop over and over. Many businesses fail to de-risk their market early on—so they build this beautiful product of sorts that no one really cares about. You are up to bat, bottom of the 9th, you hit the homerun, and then no one cares. This sucks and is an avoidable situation—if you prioritize producing a movie trailer of sorts early on in your company’s lifecycle you can figure out if people buy into the vision before you have to shoot the whole movie.

Once you get past the market side, it becomes ALL ABOUT derisking the execution side of things. Note, in many businesses the two sides are linked but for the sake of one mental framework—consider them sequential. Figure out if people want what you could make—PROMISE MARKET FIT—and then go make it. Repeat.

You can derisk the execution side by EARNING REVENUE, which comes generally from getting customers, making them happy, building product, hiring people, raising money, etc. These are all steps to de-risk the business.

Often times people think about risk in the wrong order. It is not exactly obvious what the right order is—but you can see it pretty easily when you see someone doing things out of order.

Just because you can de-risk something does not mean you should. For instance, you may see a founder worry a lot about having a fancy logo—this does not necessarily make their business more likely to succeed RIGHT NOW. It does not de-risk their business. Or they may have a fancy office. Or fancy swag. Sure, they can have those things, but how do they contribute to de-risking the business and how do they truly unlock enterprise value.

The above is hard to write out—at least for me—because RUTHLESS PRIORITIZATION is something you kind of have to see to truly understand. You have to see another person operating at a clip of intensity where ALL THEY CAN SEE is de-risking. Nothing else matters. They are not distracted by how people feel or how Twitter feels or how investors feel. All they care about, and maybe to a fault at some times, is answering the question of what is going to drive enterprise value (note: sustainable enterprise value is generally what I mean here, not this one off episode of sorts, well, because the market would rarely value that).

The ability to put the blinders on—that is a superpower. The ability to not get distracted by the advice givers and the rest of the ecosystem—that will save you so much time—so much less time spent on things that do not matter. That is the benefit of the risk management framework. If you look at everything your business must do as a risk management mechanism—then choosing the right things to invest your time in and ignoring the menial stuff can save you a ton of time.

If you can watch someone operating like this, you will be amazed. Truly amazed. They are not a little more productive. They are 100x more productive. Truly 100x more productive. And it is generally not because they type faster or think faster or are doing math faster.

It is because they are working on the things that matter.

There is an urgency. There is PRIORITIZATION.

And that—that becomes the name of the game. And it is hard. Really hard. It is so tempting to veer of course.

But prioritization wins out. Look at what you achieve over a year. Not an hour. Progress will be obvious.

You do not have to be perfect. In fact, you cannot be. So you have to do your best to prioritize as best as possible—and the good news is that best is not a law of physics but rather is defined by you in many ways (according to your interpretation of your business equation).

As you can see by the sprawling thoughts, I find that I think a lot about risk management, both in my professional and personal life. I find that the easiest way to be better at risk management is actually to just think about it. Simply being intentional with how I spend my time—analyzing my calendar or looking back on my week every so often and asking myself: “Is this going to drive enterprise value?” If not, I better I have an amazing reason for doing said thing.

Know that the objective is not to just do valuable things. That is hard but possible. The objective—the game of business—is to do the MOST valuable thing (again big assumption is that you operate with mindset of trying to increase enterprise value). This MOST VALUABLE THING objective is hard because it incorporates the notion of the opportunity cost. Just because you can do a thing, does not mean it is the optimal thing to do. You can balance this paralysis—this thinking and thinking and thinking—with the cost of inaction and opportunity cost of time.

This is a hard game! I emphasize that. I think the prizes are very much worth it—but I also think that those who play casually are set up for failure compared to those approaching THE ENTERPRISE VALUE GAME WITH EXTREME DEDICATION, CONCENTRATION, AND DISCIPLINE.

Those attributes compound over time and across people. It feels obvious when you walk into a startup that GETS IT—the intensity is there. We do not have time for all the frills, because every morning we simply ask ourselves: are we doing the most optimal things to drive enterprise value? If the answer is no, well, we should rethink our strategy and how we spend our time. Because digging in the wrong direction, well, is a total waste for everyone involved.


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