How EBITDA killed innovation

What kills innovation in companies?What makes a young, growing company stop

in its tracks and stay fixed there?

Often, it has something to do with

EBITDA.

EBITDA is a company's earnings before interest, taxes, depreciation, and

amortisation – which helps to determine a company’s operating

profitability.

Many tech companies regularly trade innovation and long-term gains for a better EBITDA measurement or to boost their share position.

But this can have disastrous long-term effects on a company’s ability to innovate.

The ability to think long-term and dominate a market can often be down

to the funding structures in place behind the company.

Forbes reports that VC backed companies have less focus on EBITDA, instead choosing to focus on the ‘race for long term market dominance’.

Yet, private equity firms who usually come in after a VC are more conservative and risk-averse in their outlook, instead using EBITDA as a measure to determine business performance.

Companies who are focused on EBITDA due to

a pending merger, acquisition or are having to meet quarterly targets to satisfy shareholders, don’t have the room to

take risks and instead end up stagnating, doing the

same thing with the same resources.

Think about all the technologies that have wiped out their predecessors:

Vacuum companies who haven’t invested in cordless technology may be out of business in 2 years’ time when the market shifts to cordless devices.

Car manufacturers who haven’t spent money on R&D for electric vehicles may be a few years behind their competitors and unable to compete effectively over the next 10 years.

Read the article in full:https://www.linkedin.com/pulse/how-ebitda-killed-innovation-david-ricketts

This realisation has led a number of tech businesses moving away from the pressure of quarterly earnings calls and forecasts, to concentrate on sustainably growing their

business.

Dell recently took the decision to go private while it figured out its

place in the new competitive world of

enterprise technology and cloud.

Google also recently spun off a number of its business segments so that it could better focus on each area, and be able to invest heavily in certain businesses without hampering the performance of its run-rate search engine business.

Without the room to fail and risk money on a

project,

great things rarely happen.

https://www.linkedin.com/pulse/how-ebitda-killed-innovation-david-ricketts

We often say that smaller companies are able to innovate quickly due to their flexibility and size – making them able to pivot and change course without tiers of management to wade through.

But maybe that ability to innovate is less to do with the structure, because after all, having the resources of an IBM or Microsoft must be an enabler to innovation.

Maybe the innovation killer is actually more to do with the fact that once a company generates a significant level of interest or revenue, the focus on its EBITDA position overshadows all of its other dynamic and entrepreneurial pursuits in favour of the share price.

Read the article in full:

https://www.linkedin.com/pulse/how-ebitda-killed-innovation-

david-ricketts