Incentivizing Balanced Growth

I’ve been thinking a lot about growth over the past few weeks. I went to the Omeda conference last week, and it was so interesting to see the two buckets of media companies.

On the one hand, there’s the fast-growing GovExec, with CEO Tim Hartman joining me on stage for an episode of the podcast. On the other hand, there are companies growing by 3% year-over-year. Or, they’re staying flat but can eke out efficiencies to keep profits increasing.

These are two fundamentally different approaches to running a business. I spoke with one operator this week about the category of slow growth, and he said, “3% growth? That feels like death.” I couldn’t help but agree.

However, is growth at all costs also the right approach?

Last night, I hosted a roundtable with marketing executives and asked how they were preparing for a possible recession. The discomfort was palpable. But as I pushed the conversation, they all started to share that they were all preparing for it.

I mention this because growth at all costs works when the economy is strong. I talked with one founder over a year ago, and when I asked if his business was profitable, he said, “not right now, but that’s by choice. We’re investing in growth. We could be profitable tomorrow if we wanted.”

That attitude comes to mind when I ponder whether things will really slow down. If you’re investing in growth and can be “profitable tomorrow if we wanted,” what happens when revenue drops 20%? Can you still get profitable tomorrow?

I think about the “darling” media companies that have fallen back to Earth over the past couple of years. BuzzFeed is worth about $500 million when it used to be valued in the billions. Vice is talking about selling itself for parts to pay off debt. They attempted to grow at all costs. Profitability would come. Look at them now.

But the opposite side is also dangerous. Growing at a tiny rate each year is complacency, which really hurts businesses. Is the team empowered to try new things and be entrepreneurial?

My first job out of college was at a company like this. The team talked about being entrepreneurial, but it was a 3rd, borderline 4th generation family business. They said growth mattered, but it didn’t. They said they were a “family” business, which offered stability, but they fired people every year the week after Thanksgiving. Why? The company wasn’t growing; there was a refusal to invest, and, ultimately, the only thing that mattered was the very extended family getting its dividend every year.

Calcified media companies are just as bad as irresponsibly grown ones. In both cases, bad times can cause true chaos because they both depend on a flush economy. There has to be a balance between the two. Media companies should not accept no growth, but they also need to be disciplined with how they grow.

Sustainability must be the first principle for this sort of strategy. You’ll notice I didn’t say maximum profitability. You can’t have maximized profitability when you’re growing. Amazon, for years, didn’t show any profit because it was reinvesting money back into the business. It was hyper-focused on cash flow and always knew how much it could invest at any given period of time. Obviously, we’re not building Amazon-like companies here, but that’s my definition of sustainability.

Growing requires spending money. And in some years, as you’re growing, margins may compress but should ideally never disappear. However, I find that once you’re willing to move aggressively into the red and things don’t immediately go wrong, entrepreneurs start getting a little laxer. Therefore, every investment should be thought of with sustainability in mind.

This, I think, is where many of those same media “darlings” went wrong. They made all sorts of investments, but they never did it with an eye on sustainability. They invested in big branded content teams but were focused on revenue, not margins. They threw a ton of money into video but never stopped to consider whether they could support said investments with ad dollars. They went into the red pretty aggressively without a clear understanding of how to sustain what they were trying to do.

And yet, various companies are doing this well that I am very fond of. I’ve written about many of them over the years. Look at Industry Dive. It has grown to $100m+ in revenue and is still sustainable. GovExec and Endeavor Business Media have acquired dozens of companies between them and are sustainable. Dotdash decided to purchase a company many times bigger than itself (Meredith) and is doing well. There are the Aging Media guys with their growing and profitable media companies. We’re growing really fast at Morning Brew, but our margins are still strongly positive.

What do all of these companies have in common?

They are either all founder-led or, in the case of GovExec and Dotdash, the CEOs and executive team have a stake in the business’s success. And I think that matters a lot more than people realize. For example, last year, I met an operator running a family business (he’s not in the family). Multiple people have told me he’s a fantastic operator. But his business is growing at an anemic rate. He’s incentivized to deliver the annual dividend to the family, not grow the business.

Incentives matter. When you incentivize people to grow but do it sustainability, you get outcomes similar to the above companies. When people feel as if they have a stake in the business’s success, they will strive toward helping that business. There is a reason sales teams are offered a commission. That incentivizes them to sell more. What media companies have to figure out is incentivizing the broader organization.

But to offer an incentive, we have to figure out the metrics to warrant an incentive. Sales teams get a commission because it’s straightforward to track. You brought a dollar in, so here’s a part of said dollar. On the editorial side, it can get very convoluted. How do you judge success? The number of stories broken? Pageviews? Newsletter sign ups? Impact? How do you decide?

I don’t have a good answer. But I’ve worked at a couple of organizations that have rewarded very simply: do great work, and you’ll get a bonus. That’s possible when you run a sustainable business. And if you factor investing in your people as an investment in sustainability, rewards become much easier to stomach.

Not growing isn’t an answer. And growing irresponsibly is also not an answer. But if you want to grow at all, there need to be proper incentives in place. People need to feel as if they’re rewarded for doing good work. Unfortunately, many media companies have forgotten this. And it’s what leads to the calcification.

Thanks for reading today’s newsletter. Join the AMO Slack to discuss or shoot me a reply. And as always, have a great weekend!