Don't Eat Your Seed Corn

THE STORY
When I travel around North America, I like to visit old historic sites. On the east coast, there are many historical sites of the first settlers who traveled from Europe in search of the New World. As you move west, there are historical sites of the first settlements of the pioneers as they conquered the harsh and untamed wilderness.

Although the stories at each site differ, there is often, sadly, a similar theme. At some point in the early years of the settlement, there will be a time when the agricultural crops do not produce enough food to last the winter. In order to keep from starving, the small settlement will start to eat the seeds they had been saving to plant in the following spring.

When spring finally comes, the settlement does not have any seeds to plant. As a result, there is no harvest that year and the people begin to die of starvation. At this point, either the settlement is abandoned or the settlement dies along with the deaths of its residents.

THE ANALOGY
Just as many of these settlements lasted only a few years, many businesses last only a few years. One of the purposes of strategic planning is to help ensure that businesses last a long time. The reason these settlements died is because they ran out of food. Similarly, the reason many companies die prematurely is because they run out of cash flow.

If the settlements were to have enough food to last the winter, they needed to have a good harvest from their farms the prior autumn. The size of the harvest in autumn, in turn, is related to the size of the planting in the spring. Hence, the more seeds you plant in the spring, the better your chances of having enough food for the winter.

Businesses operate in a similar manner. Profits are like harvests and investments are like seed plantings. If you want to produce profits, you need to make investments. The more investments you make today, the better your chances of producing sufficient profits in the future.

The interesting thing about seeds is that they are made of the same substance as the food we eat. A seed of corn that we are saving to plant next year looks just like the seed of corn that we grind up into corn meal to eat for dinner. The dried pea that we use to make pea soup today looks identical to the dried pea that will be planted as a seed the following spring.

They do not come with individual labels, saying “I am to be used for food today” or “I can only be used as a seed next year for planting.” We have to choose each day whether that seed is to be eaten or saved for planting. If we eat too much of the crop today, there will not be any seeds for next year.

The same is true of business cash flow. Just as this year’s food looks identical to next year’s seeds, money taken out in profits this year looks just like money that could be invested for future profits. We have to choose every day how much money we will take out and consume as profits today and how much money we will invest as seeds to produce future cash flows. If we take all of our money out today as profits, there will be no investment capital for tomorrow.

During the late 1990s, there were thousands of new internet companies that appeared in the marketplace. Today, most of these companies no longer exist. They disappeared as suddenly as they once appeared. The internet businesses followed a path very similar to the frontier settlements in North America a few hundred years ago. They were young, adventurous people blazing a trail into a new territory.

Profits were hard to come by in the internet space, so these companies began spending all of their initial investment capital on everyday operating expenses. Often times, these companies were very extravagant in their spending, giving themselves huge salaries and throwing lavish company parties. Once the initial investment capital ran out, the companies had not invested in anything with long-term potential, so they died. In other words, these companies ate their seed corn rather than planting it in a worthwhile investment.

THE PRINCIPLE
The main principle from this story is that for businesses to succeed long term, they must invest in the future. There is only so much grain in the storehouse. If all you do is eat the food that has already been harvested from prior investments, eventually you will run out of food. You need to take some of that grain and invest it in future crops if you plan on surviving.

The pressure to produce high levels of profitability today is enormous. It can tempt us to take the money that should be invested in the future and instead pay it out in earnings today. Although that may make us feel fat and happy now, this approach will ultimately cause us to run out of profits and die.

Now some of you may be saying that the old investments your company made many years ago still keep producing profits year after year after year. Why should I make new investments when the old investments continue to produce profits? Well, there are several reasons for doing so.

First, even old investments need upgrading. Factories need new equipment, retail stores need remodels, computer software needs upgrading, and so on. If you starve the old businesses of investment capital, they will eventually break down or become obsolete. To return to the faming analogy, if you do not invest in fertilizer to revitalize the land you are currently farming, eventually even the best land will run out of nutrients and stop producing crops.

Second, as business models mature over time, they tend to become more like commodities. Intense competition over time will drive out excess profit-taking. It becomes harder to charge a premium for your product or service, so profits tend to drop to levels near or below the cost of capital. If you want higher profits, you need to invest in newer businesses where there are more profits. As the old saying goes, the greater the risk, the greater the reward. If you want high rewards, you need to take some investment risks.

Third, your current business model may suddenly become obsolete. For example, you might be the best manufacturer of photographic film in the world, but if everyone switches to digital photography, you are out of luck. Unless you invest some of your film profits into digital technology, you may go out of business. These changes often occur faster than you think. Sony, who never invested in traditional photography, is now in a few short years one of the leaders in digital photography. To learn more about how quickly a strategy can become obsolete, see the chapter on “Your Room is Smaller Than You Think.”

Therefore, one of the primary roles of strategic planning is to make sure that companies have a proper balance in the use of their money between near term profits and long term investments. Planners need to ensure that companies do not eat all of their seed corn today, but instead plant the seeds into investments related to achieving the long range strategic plan.

How much money should be invested in the future? That depends on what business you are in. But there are a couple of guiding principles:

• Just as not every seed will end up producing a good harvest, not every investment will end up producing great returns. Therefore, a company needs to invest in enough early stage experiments so that if even only one out of ten succeeds, there is are enough successes to help reach your strategic goal. In the early stages of investment, never bet the entire company on only one investment.
• Just as there is a time gap between when a seed is planted and when a crop is harvested, there is a time gap between when an investment is made and when it pays off. Therefore, a company needs a portfolio of investments in different stages of development, so that there is a constant flow over time of investments that are paying off, to help fund the investments yet to pay off.

Finally, unless you are a professional investment company, it does not make sense to invest in every good idea that comes along. Your resources are limited and you have a plan to accomplish. Make sure the investment money is focused on projects designed to help you accomplishing your strategic plan. If you don’t invest in your plan, the plan will never come to pass.

SUMMARY
To keep a company from dying prematurely, it must make investments into the future. The temptation to take all of the money out today in profits is very great, so special effort must be taken to ensure that enough money is being invested into ventures that will yield long term benefits that move a company in the direction of their long-term plan. Otherwise, the company will be like the frontier settlements that ate their seed corn and eventually died, because they had nothing to plant for future harvests.

FINAL THOUGHTS
Don’t confuse hoarding money with investing money. Large storehouses of grain will eventually rot. The grain is only valuable if it is eaten or planted. The same is true of money. You will not achieve your strategic plan by amassing large sums of money and sitting on it. It needs to be invested or returned to your investors. Otherwise, all you will attract are robbers.