Entrepreneurs Vs Corporate Drones - Budgeting
I had a conversation today with a friend that is a manager in corporate finance/data analytics at a fortune 1000 company. She was complaining about how dumb her new work associate is. This woman previously worked at an ad agency, has an economics undergrad, and has an MBA from a respectable top 100 program. I’m giving you her background to show that she’s not always a complete idiot.
Anyways, she’s telling me that this Fortune 1000 firm brought in an entrepreneur that has built and sold several Ecommerce companies in the 10’s if not 100’s of millions of dollars. This also goes to show that he’s no idiot either.
Why does she think he’s an idiot?
Because of his plan to grow the Ecommerce department through self funding. In short his plan goes something like this.
He’ll take the resources (budget, headcount, etc.) he has, test different media channels, scale the most profitable channels with his budget, and use the returns to reinvest in more people and more ad spend. He’ll do this up until the point that it is no longer profitable to do so. Essentially allocate excess capital to grow to the point of diminishing returns. Economics/Finance/Business 101.
To put it mathematically, let’s say he has a $100 dollar advertising budget and he finds a channel that has a 10 Return On Ad Spend (ROAS) with a 50% margin. His $100 in ad spend returns $1000 in revenue and $500 in margin minus the original $100 spent, leaving him with a $400 in profit. He plans to reinvest that $400 in profit in more ad spend, ultimately leaving him with $1,600 in profit after the second iteration. He plans to do this until the ROAS comes down to a 2-4.
Net Profit = Ad Spend X ROAS X Margin - Ad Spend
So why does she think he’s an idiot? Because that extra ad spend isn’t in the budget. Seriously. Think about the math! She couldn’t comprehend the idea of a self funding project. Only the rigid constraints of a corporate budget. After trying to explain this to her, her only response was “Well that’s not how a budget works.” I kept quiet but was screaming internally that “Well that’s how a business grows! Fuck the budget, reallocate the money!” I didn’t try to explain anymore after her statement, realizing that you can’t get through to someone that can’t have a unique thought.
For those of you reading that are still stuck in corporate America, working hard to get out. Heed this advice. The longer you spend your life learning from these drones, the more likely you are to become one yourself.
If you have a great corporate drone story, please drop it in the comments below.