“For everything you have missed, you have gained something else; and for everything you gain, you lose something else.” — Ralph Waldo Emerson (from his essay ‘Compensation’)
A swinging pendulum — a good analogy for the regular changes in zeitgeist in the business world — spends more of its time at or near its two extremes, rarely resting in balance in the middle. This motion aptly describes how the business world (particularly the world of private, venture-backed, high growth businesses) oscillates between being ‘all about growth’ and ‘totally committed to cash generation.’
From Growth to Efficiency
From mid 2020 through mid 2022, businesses focused on driving top-line growth, at almost any cost, encouraged by the very low cost of capital and the huge availability of equity from a range of funds.
All investment ideas seemed like good ideas. And growth was valued super highly.
Then, then pendulum swung, and swung aggressively to the other side.
Interest rates rose and capital became much harder to secure. (Except for anything to do with AI, where funding is pouring into all ideas, seemingly without discrimination.)
For the last 2+ years, efficiency has been the #1 priority of all businesses, even start-ups whose entire raison d’etre is to disrupt the status quo through investing in innovating, untested ideas and growing rapidly.
Required business reading included:
Paul Graham’s piece, Default Alive or Default Dead? (from 2015), and,
David Sacks piece on The Burn Multiple as a metric for start-ups to measure capital efficiency.
Getting to a sustainable positive free cash flow has become the focus of every CEO. Board presentations spend much more time examining free cash flow and understanding its drivers. CEOs and CFOs have to work much harder to justify increased spending and new investments (unless they are somehow related to AI.)
To increase efficiency many companies have done layoffs or many others have frozen hiring. Simultaneously, they have re-examined all non-people spending, demanding that all investments (be they marketing, software, or benefits for employees) be justified by an RoI (return on investment) substantially in excess of their cost of capital. CFOs have gained power in decision-making, having a greater say in approvals on most cash outflows.
At first glance, a deep focus on efficiency sounds wonderful, particularly to investors and finance leaders. After all, companies are valued on their future cash flows discounted back to the present. Isn’t the focus on efficiency simply eliminating wasteful spending which in turn increases cash flows and thus drives up valuation thereby maximizing shareholder returns?
As contributing members of society, each of us wants our tax dollars to be spent ‘wisely’. Not surprisingly the DOGE effort being implemented by Elon Musk in the US is fairly popular.
The Trade-Offs of a Single-Minded Focus on Efficiency
As with most things in life which are nuanced and complex, there is no free lunch.
The single minded focus on efficiency creates multiple knock-on problems which reduce long-term value creation.
First, the focus on efficiency is like having a hammer, where every problem looks like a nail. So only reductive ideas (those which reduce or eliminate) get considered. However, building a better future requires creativity and the investment of time and effort to convert potential into reality. Thus an intense pursuit of efficiency discounts creative thinking at least anything around building something new through investment. Humans find meaning in their life through building, creating and contribution. A second order impact of this reductive approach is that it robs work of its meaning.
Second, efficiency is by its nature short-term oriented. Innovative, long-lasting, valuable businesses are built when leadership has a long-term orientation.
Third, efficiency can cause a focus on the ‘wrong’ metrics. Metrics linked with efficiency tend to be those that can be measured easily, quickly, and have low volatility. Experienced finance leaders know that not everything that matters can be measured easily.
Fourth, technology (AI, chat-bots, agents etc.) are great resources at times. But we shouldn’t assume every efficient tech-driven interaction is a good replacement for human interaction. All of us, sometimes want an emotional connection (even with the people in our workplace). More time consuming in-real-time and in-real-life interactions can have lasting long-term value. Inefficiency in the short term, can drive greater feelings of being cared for and heard leading to greater productivity and output in the longer term.
What To Do Instead?
When faced with a goal, particularly one that seems really easy to understand, a valuable question to ask oneself is: “What is the goal of the goal?” (See recent writing by Dan Heath in his new book Reset on this question.)
Why are we trying to be efficient? To what end? Not merely to save money, but likely to do something else with these additional funds saved through efficiency. Strong finance leaders who are pursuing efficiency are able to articulate this greater goal.
The Role of the CFO: Allocate Capital to Value Creating Initiatives
The primary role of the CFO is to allocate capital. In mature or declining businesses, that role does require maximizing efficiency and returning capital to investors. However, in all other situations, capital allocation involves taking thoughtful risks and investing (even if selectively and carefully) in potential future drivers of growth.
Companies are like living organisms that consist of two interconnected parts which need to remain in balance: (i) a Cash Flow machine, and (ii) a Growth Machine.
The Cash Flow Machine consists of existing customers in established or mature lines of business. This is where the focus should be on productivity and efficiency, though not purely short term oriented. It is the part of the business where the risks are mostly known, there is a playbook for execution, and it generates cash which can be re-invested in the growth machine.
The Growth Machine involves taking risks and making investments in both people and new business ideas. The goals of the growth machine are to attract new customers as well as generate new ideas that turn into incremental, add-on products and services or entirely new lines of business.
The finance leader following the capital allocation mandate is willing to invest in the growth machine. Ideally the organization proposes growth experiments with relatively short feedback loops (measured in months or a quarter). And at the same time, thoughtful finance leaders understand and support some investments with longer term paybacks (several quarters or a year plus) that have large potential upsides.
A Bird In the Hand - What is it Worth?
An old proverb reminds us that “a bird in the hand is worth two in the bush.” Maybe sometimes that is true. But often in business it is not. By not taking risk, an merely capturing the immediate opportunity, we often forgo a huge potential breakthrough and associated benefit.
Long term business success requires leaning into trying new things because our customers expect that and our competitors are always innovating. Skilled finance leaders also need to get comfortable with not knowing how things will turn out (ideally even admitting this publicly) while still making investments in the future - in both the employee base and their innovative business ideas.
Ensure Both Sides Get Fairly Heard
We often hear that the Finance leader’s job is to ‘say no’. While amusing it is short-sighted. Our mandate is to not let either pole (growth or efficiency) get overrepresented in the internal business conversation.
When the conversations are all about the merits of growth, remember to ask a few questions about efficiency. Growth is critical to survival. And, it needs to create future cash flows and increase value.
When the focus at the Leadership Team and Board levels is all about free cash flow, remember that great businesses are only built through innovation and growth. So make sure that there are enough new ideas being funded. And be willing to go out on a limb to recommend them.
It is hard to see the present with clarity. Yet, I am hopeful that 2025 will be a year with greater balance in the Boardroom and in Leadership Team meetings. A year when we understand that efficiency matters in certain areas of the business world (and the world at large), and investing in new, somewhat risky initiatives is the right way forward in many other areas.
After all, don’t all of us want to build a better future?
Hello Adi,
I hope this communique finds you in a moment of stillness.
Have huge respect for your work.
We’ve just opened the first door of something we’ve been quietly crafting for years—
A work not meant for markets, but for reflection and memory.
Not designed to perform, but to endure.
It’s called The Silent Treasury.
A place where judgment is kept like firewood: dry, sacred, and meant for long winters.
Where trust, patience, and self-stewardship are treated as capital—more rare, perhaps, than liquidity itself.
This first piece speaks to a quiet truth we’ve long sat with:
Why many modern PE, VC, Hedge, Alt funds, SPAC, and rollups fracture before they truly root.
And what it means to build something meant to be left, not merely exited.
It’s not short. Or viral. But it’s built to last.
And if it speaks to something you’ve always known but rarely seen expressed,
then perhaps this work belongs in your world.
The publication link is enclosed, should you wish to engage with it.
https://helloin.substack.com/p/built-to-be-left?r=5i8pez
Warmly,
The Silent Treasury
A vault where wisdom echoes in stillness, and eternity breathes.