The past year has been a roller-coaster for many businesses. The disruption in many sectors and general uncertainty among customers has thrown many plans into disarray. But If you’re one of those that has come through the last twelve months in a strong position you may be tempted to think the hard work is done and take your foot off the pedal.
We recommend you put the champagne on ice. Even if you’re proud of the results you’ve achieved in the past, when it comes to the value of your business, it’s your future that is critical. While the past is clearly important it’s your growth potential that will drive the value of your business.
One metric that acquirers may use to evaluate your growth potential is your revenue per employee.
Alphabet (Google’s parent company) generates around $1.3 million in revenue per employee. Compare that to the advertising agency WPP Group, whose average revenue per employee is around $100,000. For every dollar of revenue, WPP needs more than ten times the employees than Alphabet does.
It takes time to recruit, train, and motivate people, which is why WPP has grown more slowly and suffers much lower valuations when compared to a less people-heavy company.
Measuring your revenue per employee is just one of the many ways investors may evaluate how quickly they are likely to grow your company.
If the revenue/employee ratio of your business isn’t looking good, neither is the future value of your company.
Looking to the sky.
Here’s an interesting case study of a business that built value by looking both to the future, and to the sky.
An entrepreneur called Jonathan Evans started a company called Skyward in 2012 when he saw that companies like Amazon and Walmart were using drones for package delivery. Evans was working as an air ambulance helicopter pilot and realized widespread use of drones would eventually create air safety issues.
Evans saw an opportunity where others hadn’t and launched Skyward to develop software that could safely route drone traffic. While he wasn’t a programmer, his extensive aviation experience enabled him to understand how the current airspace management guidelines could be turned into applications that created “digital train tracks” for drones.
Early adopters like utility, construction, and media companies used Skyward’s software to manage their drone fleets. But it wasn’t just business owners who were excited by Skyward. Investors came calling too. Within a few years, Skyward had raised approximately $8 million worth of capital.
One of those investors was Verizon. Drones would require fast and reliable Internet connectivity to operate safely, and the telecom giant wanted a piece of the future. Airbus came calling too, and when Verizon heard of the aerospace corporation’s interest, they leaped into action and offered to buy the company. For Evans, marrying his nascent technology to the country’s largest telecommunications giant was a match made in heaven.
Within days, Evans had sold Skyward to Verizon for top dollar, while investors enjoyed returns of between three and five times their original investment.
Given the growth of the industrial drone market, Verizon knew Skyward had the potential to expand quickly as significant companies started to adopt drones. Verizon also understood that as Skyward grew, so too would the customer’s need for Verizon’s data because drones rely on a data connection to communicate with the ground.
No matter what business you’re in, it’s critical to remember that the value of your business is determined less by what you have done in the past and more by what you will likely do in the future.
No-one can predict what tomorrow will bring, but you can make your business more investable by ensuring that you’re not living off past glories and focusing on the months and years ahead.