A Finance Deep Dive

A couple of weeks ago, I completed a Finance for Senior Executives course at Harvard Business School. I took the course because, while I feel like I have a pretty good grasp of finance from business school and work experience, I wanted to refresh my brain on the fundamentals and go a bit deeper than I've been able to over the last several years. The course was excellent, and I highly recommend it for operating executives who find themselves in a similar spot. The content was designed for senior executives who don't work directly in the finance function. The course had a virtual portion followed by four days of in-person living and studying on the HBS campus. The class was grounded in the case study method, with 13 real-life case studies (including a great one where we had to try to rationalize Peloton's stock price in the Summer of 2019...). The class was filled with an incredible group of intelligent, thoughtful, energetic, and self-motivated students who were really fun and inspiring to get to know — 89 students from 21 countries. Just a great group. The syllabus covered six primary topics:

• Measuring Performance and Financial Ratios

• Discounted Cash Flow 

• Valuation

• Capital Structure and Leverage

• Mergers, Distress, and Recapitalizations

• Capital Allocation and Pursuing Margin and Growth

As we went through the coursework, I made a note of some of the more insightful reminders, ideas, concepts, and topics that stuck with me. I thought I'd share some of them here:

1/ The primary job of finance is to ensure that the company doesn't run out of cash and makes good financial investments. Watching working capital (current assets - current liabilities) closely is crucial — lots of very profitable companies run out of cash. I’ve seen this quickly become an issue for tech companies that don’t hold inventory and have taken their eye off working capital, as well as tech enabled healthcare service companies that have a revenue cycle lag.

2/ Terminal value of a company (its value in perpetuity) should be used carefully, as there's never really a company that runs forever. That said, over the long term, the discount rate will balance this and make the calculation more reasonable. The terminal value of a company should be calculated after growth and margin have stabilized.

3/ Net present value measures the dollar value an investment adds or subtracts by comparing the present value of cash inflows and outflows. Internal rate of return calculates the percentage rate of return that makes net present value zero.

4/ There's really no such thing as a "good" growth rate or margin or financial ratio. It all depends on the context and the particular situation. It's sort of like a size 10 shoe. Does it fit? Well, it depends. 

5/ You should care a lot more about the market value of a company than the book value of a company as that’s the value that investors will pay assign to the firm, though the latter is a lot easier to calculate and make sense of.

6/ Bad economics in an industry almost always beats great management over the long term. 

7/ Don't discount the fact that your debtholders are important stakeholders and investors. While interest payments cap their upside, they are the first investors to get paid in a liquidation, and returning their capital and providing them with interest payments drives substantial value. Too often, we only consider equity holders when we think about enterprise value creation.

8/ A good formula to memorize is valuing a company using its free cash flow projections. As I've written here many times, the value of a company is the present value of the discounted free cash flow you can take out of it. Free cash flow can be calculated using the balance sheet and income statement with the following calculation: EBIAT (earnings before interest after taxes) + depreciation - cap expenditures - change in working capital. It's not about memorizing the formula; it's about understanding how the balance sheet and income statement interact and how to use them to calculate the cash flows a company will generate.

9/ Debt is a government-subsidized form of capital. The tax deduction on interest is the major value in financing an investment with debt over equity. This is really meaningful. Obviously, it is less relevant for startups that still need to produce profits. 

10/ The "irrelevance hypothesis" says that in an ideal world with no market imperfections, the dividend policy of a company is irrelevant to its overall valuation because shareholders can create their own homemade dividends by selling their shares. Of course, real-life market imperfections always need to be logically applied when creating a dividend policy. 

11/ Operating leverage is an important metric to watch over the long term. High operating leverage means that small changes in sales lead to disproportionate increases in operating profit because fixed costs remain constant while revenue increases. 

12/ Businesses can be placed on a spectrum from "high tech," which are high growth/low profit, to "cigar butt" businesses which are low to no growth/high profit (companies that only have a few puffs left). There’s nothing thing wrong with a company that isn’t growing but is throwing off cash and not all companies need to stay in business forever. It's important to understand where a company is on this spectrum to guide where to place capital — invest in growth, return to shareholders, or pay down debt. 

13/ Dividend payments are effectively the same as a corresponding investment in growth when the dollars generated and value creation are the same (the only relevant difference is that in one scenario, the money is in the investor's pocket versus the company's pocket). But the value is the same. This is a good reframing, similar to the importance of returning capital to debtholders. Capital is capital regardless of whether the investor holds it in your company or puts it in an index fund.

14/ Generally, markets value growth increases over margin increases because growth compounds on itself. The exception is low-margin businesses. You'll get more upside there from growth. All should be calculated through discounted cash flow analysis.

15/ High discount rates favor high-margin businesses, and low discount rates favor high-growth businesses. 

16/ Detailed discounted cash flow rates often aren’t used on a practical basis inside of companies. The reason, generally, is that there are often more ideas that exceed the discount rate hurdle than can be executed. That said, it’s crucial that all leaders understand discounted cash flow, NPV, and IRR.

I'm really glad I took the class. I'll look into other courses like this to deepen my knowledge in areas where I haven’t gone as deep as I’d like in recent years.

Growth Without Capital

In the early days, startups are very capital-intensive. They don't have a product generating positive cash flow, so they often rely on some outside capital (debt or equity) to grow their top line. This is a necessary evil in the early days to get a company up and running. With the need for capital underscoring the financing strategy for most startups, it's easy to forget that the best companies are companies that don't need capital to grow. An excellent example of this is a franchise like Subway that leverages franchisees' capital to open new stores and expand its footprint. In addition to a franchise model, there are lots of other business models that companies can use to grow without capital:

1/ Preselling or securing customer deposits: getting a customer to pay in advance or fund the development of a product. 

2/ Joint ventures and strategic partnerships where a partner provides the capital to grow. 

3/ Government grants and contracts.

4/ Revenue sharing and licensing agreements. Getting your own sales team to sell other people's stuff.

5/ Supplier financing. Getting very favorable payment terms from your vendors such that they can use funds elsewhere for some period of time.

6/ Revenue from Licensing Technology or IP: Companies can license their technology or intellectual property to other firms, generating revenue without direct investment.

7/ Network effects. Building a product that’s more valuable as more people use it, so there’s a built-in incentive for customers to market it for you.

Early-stage companies will be inclined to rely on organic growth as they get off the ground. But it's important to incorporate — or at least be thinking about — less capital-intensive growth strategies and business models as the company matures. Again, the best companies out there are those that can achieve high growth rates without a corresponding need for capital investment.

Thoughts On Founder Mode

Paul Graham's essay on Founder Mode made the rounds around tech Twitter and other places this week. The thesis, in short, is that there are two distinct ways to run a company: "founder mode" and "manager mode." The latter — which says, broadly, hire good people and give them room to do their jobs" is the conventional method taught in business schools, but it often fails for founders. Founder mode, still largely undefined, involves more direct engagement and breaks traditional management principles. The founder should dig into all of the important stuff and, in a sense, micromanage it. 

There are a ton of opinions flying around about this, which is somewhat surprising given how short and vaguely the concept is described. After reading it, two thoughts came to mind:

1/ Leaders are measured on the output of their organization. There are multiple ways to achieve an outcome based on the leader's skills, talents, organizational structure, markets, competitors, environment, etc. Concluding that one style is better than another in all cases, or even most cases, seems like a mistake. 

2/ Personally, I've found that one of my greatest skills is recruiting, engaging, and retaining incredibly driven and talented leaders. I spend an enormous amount of time and energy on doing so. The result for me has typically been to have teams that don't need to be micromanaged and can produce results at extremely high levels while feeling empowered, engaged, independent, and supported to do great things. If I didn't have this skill — or I didn't focus on improving it — I might be more inclined to micromanage as that would be the thing that would drive results.

I wrote about my approach to this in my User Guide six years ago, most of which remains true today. Relevant excerpt:

“Micro-management vs. Hands-off:

I definitely fall on the hands-off side of this spectrum. My high-level theory is that I try to hire superheroes that are going to figure out what needs to get done and will go get it done. When we aren’t hitting goals I will seek more information and transparency. There’s a see-saw dynamic here: good results means I need less information and transparency, poor results means I need more information and transparency. Understand this and manage to it. Get ahead of my concerns.

I don’t like micro-management and I don’t need all the detail. I’ll generally let you decide how much detail I need. I prefer that you consider me your thought partner and you should provide me with enough detail to do that. I don’t want to measure your inputs but I want to understand them.

Frameworks are very important to me. I’ll often be less interested in the decision you made and more interested in the framework you used to make the decision.”

As leaders, we need to leverage our strengths, minimize our weaknesses, and operate in a way that's going to produce results. There are probably a thousand different styles and equally as many ways to brand those styles. The fact is, most of us pick from them as needed. The real skill isn't in choosing a management style and sticking to it; it's using the style and management tools that work for us in the right place at the right time to produce the most optimal outcomes.  

Who Should A Company Serve?

A reader responded to my Hospitals & Financial Engineering post, where I made the case that hospitals should be protected from various financial engineering tactics that allow for short-term profits for investors that result in major challenges for the company in the long term. From my post:

”I'm a big fan of capitalism, and I generally support the work of private equity firms in delivering returns to their shareholders, many of which are large pension funds, endowments, and foundations. But Steward's collapse is an important signal that our most important and prized institutions shouldn’t be operated as attractive targets for short-term, financially engineered profits.

Hospitals are different. They're a special thing. And regulators should ensure they're treated that way.”

The reader asked: Shouldn't these regulations apply to every company? Why just hospitals? Should private equity investors be allowed to hurt any company in the interest of taking their own short-term profits?

It was with this question in mind that I came across this piece in the WSJ, titled Private-Equity Firms Desperate for Cash Turn to a Familiar Trick. The piece points out that private equity deal volume is way, way down since the increase in interest rates. There just aren't that many deals happening in this environment which is making the investors that invest in private equity firms rather anxious. They'd like to start to see some returns and get some liquidity. Because private equity is illiquid and doesn't trade in the public markets, these firms can't get their investors liquidity until they sell the companies they invested in. But this isn't a great time to sell; it's hard to do because of the low volume, and you might not get a great price. 

So, to give their investors liquidity, private equity firms are doing what's called a dividend recapitalization. That is, some firms are having their companies take on a large amount of debt and then taking the cash and giving it to their investors in the form of a dividend. From the piece:

”Among the largest dividend recaps so far this year is a $2.7 billion recapitalization by auto-body repair center Caliber Collision, according to data from PitchBook LCD. The company is backed by investors including the private-equity firm Hellman & Friedman. A report from S&P Global Ratings said the money was used to pay existing debt and distribute a $1 billion dividend to its equity holders.

In March, rail and transportation services company Genesee & Wyoming completed a roughly $2.7 billion recapitalization. The company, backed by investors including Brookfield Infrastructure Partners, used the transaction to pay a $761 million dividend, according to S&P.”

So investors get some short term return and liquidity without the PE firm having to sell the company. This leaves the company with a new, potentially very large debt obligation without a corresponding asset to show for it. So you're potentially hurting the company in the long term in the interests of short-term profits for investors.

Similar to the point I raised in the hospitals post, are these transactions that benefit investors in the short term at the cost of the company's health in the long term ethical?

Rather than answering that question directly, I think it's worth first asking who a company is meant to serve. A company isn't a living thing, so it technically can't be hurt by or benefit from such decisions. What a company actually is is a set of stakeholders who have an interest in it: leadership, employees, investors, vendors, customers, and the community. 

That's a lot of stakeholders with different incentives and different desires and timelines for the company. Who should the company serve first?

The technical, business school answer is that a company's purpose is to maximize returns for shareholders. Not employees. Not management. Not future investors. So if you believe that, and the company's board believes that taking some cash out of the business — by putting a lot of debt on the balance sheet that might harm employees in the long term and might result in less return for future investors — is good for current investors, then that's what they should do. 

Again, without taking a side in these debates, the point I'm trying to get to is that as an investor or operator, it's important to zoom out and remember who the company is trying to serve. The answer can be different depending on a variety of factors such as its industry, stage, and the way it’s financed. And seeing these very public financial engineering tactics brings this issue front and center. Getting alignment and transparency around this point is crucial in aligning all stakeholders and managing difficult tradeoffs so management and boards can make good, consistent, clear-minded decisions in the short and long term.

Growth, Innovation, And Knowing Who You Are

On a podcast the other day, Ben Thompson made the point that Meta (Facebook) has taken a lot of heat in that they haven't innovated and built a great new product in a long time. Sure, they have Instagram and WhatsApp, but those were acquisitions, they didn't build those products themselves. 

He made the point that the mistake wasn't that Meta didn't create great new products; it's that they even tried.

Thompson noted that creating big, new products that scale is not only extremely difficult but also almost never works. Of all the ideas that new founders have and that existing companies try, very, very, very few make it. A better strategy for a mature and cash-flush company like Meta is to let its innovative employees leave, raise venture capital, build great products, and acquire the ones that work.

This last point is so important and can’t be overstated. Startups have such an advantage when it comes to innovation.

1/ They have full focus from their best people. When companies get big they have so many competing priorities that have nothing to do with innovation. I imagine a top 3 priority for Meta right now is dealing with international regulators. What an incredible distraction that no startup has to deal with.
2/ Failure isn’t an option. If a product leader inside a large company fails they move on to the next thing. If a startup fails, the company dies.
3/ They have unlimited freedom. They’re not constrained by customer commitments or burdens and processes and systems that were setup in the past. They have full freedom to be flexible and innovate.

All of this is to make a larger point. You have to know who you are. I see this challenge a lot with companies that succeeded through the low interest rate period and are looking to get back to high growth. They look at Rule of 40 and say, let's get to 30% growth and 10% operating margin because investors still favor growth companies over profit-focused companies. Related, see this great chart from Logan Bartlett at Redpoint. It shows the multiple of the importance of growth vs. profitability. In February of this year, the market valued a point of growth 2.9x more than a point of free cash flow. Obviously, it's nothing like it was in 2021, but you can see that investors are still very growth-focused. 

Boards and leadership teams know this and are setting their companies up to plug into higher valuations. But, many of those companies have saturated the market for their core products and don't have a great second act. It's time for many of these companies to flip the switch to a focus on EBITDA and free cash flows. 

Obviously, every company is different. And if you have a great idea and a great team that can execute on innovative growth and the management capacity to go all in and the risk appetite for it, then, by all means, go for it. But remember that we all have egos, and it’s easy to get caught up in what’s exciting versus what we’re capable of and what’s best for the company. We all want to be on the growth side of Rule of 40. Operational efficiency isn't as exciting as launching a giant new product. That's a lot more fun, and you'll get a lot more credit. But it might not be right for you right now. 

You have to know who you are.

Investor Alignment

Managing different investor priorities, objectives, and incentives is one of the most difficult things to do when leading a company. I wrote about the importance of understanding your investor's context and incentives a while back. Even at the venture stage, your angel investors and VCs may have very different ideas on how they define a good outcome. Depending on their own situation, some may be taking a very long-term view of the investment; others may want a shorter-term win. This intensifies significantly as you transition into the growth stage and, ultimately, an IPO, at which point you can literally have millions of investors with competing needs and priorities.  

To help manage this, someone once told me that in a board meeting, I should try very hard to step out of my own incentives and not behave on behalf of Brian Manning but instead behave on behalf of the company. The company has no voice. Everyone in the room has their own incentives and that's typically what they represent. It's important for someone to step up and speak for the company. 

This sounds like great advice, but it's almost impossible to do because how does one define the incentives of the company when the incentives are really a bundle of competing self-interests? This makes driving investor alignment extremely difficult. 

As a leader, your job is to maximize shareholder value, but on what timeline? Should you optimize valuation for a year from now or 3 to 5 years from now? Depending on your answer, your short-term goals and actions will vary significantly. You might say your job is to drive value over the long term. But what is the long term? Should companies seek to stay in business forever at the cost of shorter-term returns?

In the early stages, to help manage this, I've found it's enormously useful to optimize around funding rounds — seed, Series A, B, C, etc. Leaders should set specific goals associated with the next raise. As an example, a team at a high-growth startup might say they want to raise their Series A in December of 2025, and by that point, they want to have:

• $X in the bank

• $X in revenue

• $X in monthly burn rate

• X% growth

• X in headcount

• X in number of customers

• X, Y, and Z in product milestones

• $X in company valuation (this one will obviously be a loose estimate based on some market-driven multiple)

• X gross margin, Y operating margin (though these should be prioritized after product/market fit, burn rate, and cash are more of the focus early on)

Leadership should then be transparent with the board and investors about these metrics so everyone knows what the company is chasing. Leaders and even front-line employees should know these metrics and keep them top of mind. While this approach is far from perfect and won't align all of the different competing interests, transparency and disciplined tracking against clear metrics is a huge step forward in managing the day-to-day tradeoffs and difficult decisions that come with running a company. 

Bookings As A Lagging Indicator

Bookings (the value of contracts signed within a specific period) is a crucial metric for companies to watch. Investors watch this number very, very closely. Boards will put enormous emphasis on it. When a deal is booked, the product then gets delivered to the customer, which turns the booking into revenue generated in a specific period, which equates to the top-line growth of the company. Bookings are the tip of the spear. It’s a leading indicator for revenue.

Investors will also look closely at qualified pipeline (the pool of potential sales opportunities that are deemed highly likely to convert into bookings) as that is a leading indicator of bookings.

Bookings and qualified pipeline are watched closely and are heavily scrutinized.

The problem with placing too much focus on these numbers is that a sales and marketing team is limited in how much they can move these numbers one way or another in a specific period. If a company crushes their bookings in a period, it generally means that there was a bluebird deal or that goals weren’t set accurately or that there was an external macro event that caused a large swing. Rarely are sales and marketing teams able to swing these numbers up and beyond expectations in a major way. The reason is that bookings are capped by the TAM (total addressable market) or, more specifically, SAM (serviceable addressable market) available to them. I wrote about TAM, SAM, and SOM a few years ago, find that post here. So, the reality is that while sales and marketing teams can do great things, they are limited by the stuff they have in their proverbial bag that they can sell. To really move these numbers and continue to grow, companies need to create new SAM at a high rate. So, while pipeline is a leading indicator for bookings, SAM creation is a leading metric for pipeline.

To make this point more concise, bookings growth is dependent on product investment decisions that were made 1, 2, 3, or even 5 years ago.

So, while it’s obvious that companies should be focused on in-period bookings and retention and profitability metrics, arguably it’s more important for companies to be focused on in-period SAM creation such that the cap on bookings growth in future periods gets higher and higher. The reason this is arguably more important is that product investments made now can drive far larger swings in growth in future periods than a sales and marketing team can in the current period. If two years ago a company made large investments in new products and new SAM creation, bookings will be high in the future. If two years ago they made no investments in new products and new SAM creation then bookings will be low in the future.

So, while obviously investors should be asking companies how bookings are going in a specific period, they’re really looking at a lagging indicator for good or bad investment decisions that were made in the past. They should place equal emphasis (arguably more) on how much new SAM is being created in that same period, as that’s the number that’s going to drive material and sustainable growth.

Valuation Fundamentals

The 10+ year period of near-zero interest rates caused a lot of investors and leaders to deemphasize the fundamentals of valuing companies. As I’ve written many times, we know that a company’s value is equal to the present value of the amount of cash you can take out of it over time. That is, the amount of cash you can take out of the company over time discounted to present-day dollars. When you’re in a zero-interest environment, there is no discount rate. When there’s no discount rate (or no risk-free way to make money), investors take more risk to find a return, thus the overflow of money into venture capital and other high-risk investment vehicles during that period. When there’s no risk-free bar to clear to find a return, an investor is more open to non-traditional investments. When interest rates are high and low-risk treasury bills are paying out 6%, in order to invest in something risky, the investor has to be comfortable that any investment will exceed 6%, causing money to flow out of venture capital and other high-risk investments.

When the risk-free rate is very low, investing gets hard because there are no guarantees, so you start to use proxies and benchmarks for future returns. This was particularly true in SaaS which really emerged in a big way during the 10+ year period. Things like Rule of 40 and 35% EBITDA margins and 70% gross margins became solidified as proxies for investable software companies. We needed those proxies because they provided guidance for what to invest in in a world where almost anything “could” be a good investment.

Now that investors have raised the bar on what they’ll invest in and there are real questions about the future of SaaS margins due to the emergence of new pricing models and pricing pressure from AI duplicating SaaS products at a far lower cost, it’s time to return to the fundamentals of valuation. Remember:

Growth is just a proxy for future cash flows.
Gross margins are just a proxy for future cash flows.
Operating margins are just a proxy for future cash flows.
Net income is just a proxy for future cash flows.

None of them alone can tell an investor the amount of cash they can take out of the company over time.

Now that we’re back to desirable risk-free rates, and CIO budgets have tightened, and high interest rates have squeezed company margins, it’s time to be more flexible and get back to the fundamentals of valuation. There are numerous ways to get there that might not fit with the traditional SaaS benchmarks we’ve used as a reliable guide over the last decade.

Good Conversations & Good Selling

As a sales leader, I’ve often told my teams that, while I want to close every deal we can, it’s perfectly fine if we don’t, as long as we understand exactly why the buyer didn’t buy.

As a seller, I used to have this mindset during sales conversations: I wanted to be sure that if the buyer didn’t buy, I could explain why in great detail to anyone who asked.

The trick here is that forcing yourself to understand why a buyer didn’t buy also forces the right sales behaviors. You have to do a bunch of good things to be able to do this well. You have to:

• Talk to the right people.

• Understand their role.

• Understand their decision/buying process.

• Understand their incentives and priorities.

• Understand their problems

• Understand what other solutions they have.

• Understand what they like/don’t like about the product.

• Understand how they view the competition.

• Understand how they think about ROI for the product.

You can’t understand these things if you’re not having good conversations. And good conversations are the thing that drives sales. Sellers should be less interested in making the sale and more interested in deeply understanding the mindset of the decision maker, regardless of the ultimate decision. This mindset, repeated over time, leads to better and better high-quality conversations. And better conversations = higher win rates.

Humility & Truth Seeking

I've always placed a lot of value on people who are humble. I've written about it here. I've always thought about humility in the context of getting better at what you do. If you have the humility to know that you aren't the best at everything, that drives you to improve. And of course it makes you much more fun to work with. 

I had a conversation with someone the other day who pointed out another reason why humility is such a great attribute: it's a signal that you see the world clearly. If you have the humility to see your weaknesses (which we all have) and to understand that whatever success you've had required the support of lots of luck and lots of support from other people, then you see the world more clearly than someone that doesn't. And an undervalued skill in the workplace is the ability to see the world clearly. To seek the truth.

An executive's job is to make good decisions. You can't make good decisions if you're not seeing the world as it is. Being able to see the world as it is might be the most important thing an executive can do. Often once you know the truth, making the decision is often the easy part. Humble people are naturally better at this. and this is just another reason why that value is so important in the workplace. 

Making Your Values Real

I sent this podcast from Andreessen Horowitz (a16z), the prominent venture capital firm, to my team last week. I'm a huge fan of Ben Horowitz and his perspective and insights on culture and leadership. It's worth listening to the entire podcast, but what stood out to me was the notion of making your company values real and actionable. As an example, a16z has a value where they require their partners to treat founders with great respect. It's one thing to say that, but many venture capital firms do the opposite because they're the ones with the money, and the founder is asking for the money, so the firm acts like they're the one in control (I've seen this many, many times over the years). To make this value real and actionable, the firm has a policy where for every minute that you're late to a meeting with a founder, you are fined $10. I can imagine some of their partners thinking, "whoa, this is weird, it wasn't my fault that I was late, why do I have to pay this money, my last company didn't make me do this."

And that's exactly the point.

That means that this company has a culture that is actually true to its values. It's distinct from other cultures. The $10 fine is a way to make the team feel this distinctiveness. To feel the values.

All of this reminded me of working at Zocdoc many years ago. Our #1 value was "Patients First." That meant we would always prioritize the patient when making a difficult decision. This was real. I recall a time when an enormous healthcare provider wanted us to build a feature for them that would result in a suboptimal experience for the patient. This organization was willing to pay us a lot of money for the feature and it would’ve made hitting our quarterly sales target a lot easier. It was a tough call. We weren't sure what to do. So we deferred to our values. Patients first. We told them no.

As Ben says in the podcast, culture isn't what you want it to be or what you say it is, it's what you actually do. If the team can't see and feel a company's values on a practical, day-to-day level, that means that values and behaviors aren't in alignment. Which means your values aren't real. They're simply words on a wall.

The Human Element In Corporate Failures

Business media and business school case studies love to cite big business failures (Kodak, Borders, Blockbuster, Blackberry, etc.) and talk about how foolish and incompetent management was for leading the company into the ground. It's fun to look back on management's mistakes, discuss them, and hopefully learn from them. When you review these mistakes in hindsight, a certain comfort comes from thinking you wouldn't have been so dumb.

The thing that these stories and case studies miss is the real-life context surrounding management that contributed to the decisions they made. And to me, that's a lot more interesting. I'd argue that often — perhaps most of the time — these people aren't dumb at all. It's much more complicated.

In real-life corporate decision-making, there are multiple factors that contribute to decision-making that those looking back from the outside can't see.

1/ Incentive structures and timelines that drive short-term thinking, e.g., a CEO who's incentivized to focus on this year's stock price. That incentive is in perfect conflict with longer-term strategic transformation (Kodak investing in digital cameras at the time would’ve been an expensive and risky bet that likely wouldn't have paid off during that CEO's tenure, as one simple example).

2/ The personal motivations of individual leaders. In many ways, a company is just a vehicle to drive individual people's self-interest (investment returns, personal compensation, resume-building, fulfilling the company's mission, having power, etc.), and more often than not, that self-interest isn't in full alignment which makes strategic decision making extremely difficult.

3/ Politics around strategic direction. Related to incentives, leaders, in the moment, particularly leaders who may be struggling in their role, often aren't aligned with the long-term growth of the company. They might be thinking about saving their job this week or this month. With that context, leaders are more inclined to lean towards "people pleasing" versus doing the right thing for the company. So, if a board of directors wants to go in one direction and management wants to go in another, management may defer to the board (to keep their job). Or one leader may defer to another leader to improve their reputation with that leader because that leader has a better relationship with the CEO. There are hundreds of little dynamics like this inside any company that are in conflict with doing the right thing. Put more clearly, “keeping one’s job”, in many cases, negatively correlates with good long-term strategic decision-making.

4/ Distractions. When a company is operating at scale, there are always fires to put out and urgent threats to the existing business. This can distract management from spending adequate time on larger, longer-term threats that are harder to see. Of course, the answer is to focus on both. But depending on the complexity and severity of the urgent threats, that’s a lot easier said than done and inconsistent with human nature. These distractions and their importance rarely make their way into case studies or the business press.

I could go on and on.

Leading companies at scale is extremely difficult. It's easy to say that Kodak should've dropped everything and invested in digital cameras. Or that Blockbuster was too late on video streaming. That's easy and, frankly, not that interesting. Identifying that gives you a C+ or a D-. It's much more interesting to try to understand the context that makes doing what seems like the obvious thing so incredibly difficult. Learning from that and creating an environment where leaders and leadership teams can make the best possible decisions is a much more challenging task. Leaders and leadership teams that can do that deserve an A+.