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Theory of Good & Bad Capital

Updated: Jul 4, 2022

At a basic level, there are two goals investors have when they put money into a company: growth and profitability. Neither is easy. Professor Amar Bhide showed in his Origin and Evolution of New

Business that 93 percent of all companies that ultimately become successful had to abandon their original strategy – because the original plan proved not to be viable. In other words, successful companies won’t succeed because they have the right strategy in the beginning but rather, because they have money left over after the original strategy fails, so that they can pivot and try another approach. Most of those that fail, in contrast, spend all their money on the original strategy – which is usually wrong.


The theory of good money and bad money essentially frames Bhide’s work as a simple assertion. When the winning strategy is not yet clear in the initial stages of a new business, good money from investors needs to be patient for growth but impatient for profit. It demands that a new company figures out a viable strategy as fast as possible and with as little investment as possible – so that the entrepreneurs don’t spend a lot of money in pursuit of the wrong strategy. Given that 93 percent of companies that ended up being successful had to change their initial strategy, any capital that demands that the early company become very big, very fast, will almost always drive the business off a cliff instead. A big company will burn through money much faster, and a big organization is much harder to change than a small one. Motorola learned this lesson with Iridium.

For those of you who do not know about the backstory – Motorola and its co-investors invested as much as $6 Billion in Iridium, to give the world a privilege to make calls from any corner of the globe. However, the whole B-plan failed to create enough traction owing to two major flaws, viz. the mobile handset weighed a pound, and a person had to be outdoors to place a call and so should have been the receiver of the call. Within 6 months, the business declared bankruptcy. It was only a decade later, when the business was sold for only $25 million.

That is why capital that seeks growth before profits is bad capital.


But the reason why both types of capital appear in the name of theory is that once a viable strategy has been found, investors need to change what they seek – they should become impatient for growth and patient for profit. Once a profitable and viable way forward has been discovered – success now depends on scaling out this model.


~excerpts from the book

HOW WILL YOU MEASURE YOUR LIFE

by Clayton Christensen

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