One clear example of throwing money away, because it was someone else’s money only requires a quick look back in history during the explosion of the dot-com era of the late 1990’s.
Many of the dot-com CEO’s of the 90’s can attest to the foolishness of their ridiculous spending sprees after they received investment capital. The new extravagant buildings, the $8 million Super Bowl ad campaigns, the $200,000 cars, the multi-million dollar homes all were trophies purchased in honor of their newly found capital. The lavish parties and crazy spending practices they threw in honor of their public offerings, which drew them millions in cash, left most of their companies worthless on paper after the crash. These CEO’s burned through tens of millions of dollars in the matter of months by hiring far too many people and going on far too many crazy spending 40 sprees. This was all done with the promise of incredible profits for just about any type of product or service sold over the Internet.
Many dot-com executives purchased huge houses, cars, boats, vacation properties, and lavish offices with the investment capital, all in the name of growing a business. I don’t believe this was ever expressed or written in their business plans, but because they had money, they figured, “why not spend a little on me…?” These CEO’s and many investors fell victim to the over-spending bug and threw their companies into a rapid tailspin.
There were nearly 2,000 dot-com startups launched in the hey-day of the of Internet investment frenzy. The memories are still fresh in our minds of mega-failures such as Webvan and eToys, along with the Nasdaq’s staggering $4.4 trillion drop in market capitalization over the course of the 30 months. Between its peak in March 2000 and when it reached the bottom of the barrel in September 2002, not only did most of the dot-coms fail, so did many venture capital firms. We now know that the collective business consciousness overreacted to the market potential of the Internet, which led to an inevitable correction.
During this time investors and dot-com CEO’s made a very critical error: they somehow forgot to go out and sell something; control their costs; and in turn start turning a profit. It was an ugly time in the history of commerce.
The lesson we must learn is to make certain that we have the resources to complete our objective.The challenge is to forecast if the economy will still be doing well in five years; or that your team is still winning and bringing in ticket sales (revenue) and sponsors to cover costs; or to predict that oil prices will remain in tact…or a major war will not break out…or a thousand other things.
Stay the course and remain conservative in your spending. High costs mean higher prices, and higher prices result in unhappy customers.
So, it is important to maximize our cash and avoid extravagance or we risk losing property, loyalty, customers, brand equity and other good will.