You’re the Boss Blog: Choosing Between Profits and Growth at TerraCycle

Courtesy of TerraCycleTerraCycle’s office in Brazil: A middle path?

Sustainable Profits

The challenges of a waste-recycling business.

In a venture-backed company like TerraCycle, there is an explicit expectation of aggressive revenue growth. So far, we have succeeded on that front, growing to more than $16 million in projected annual revenue this year — with a 103-percent yearly compounded growth rate since our inception. While this has put us on the Inc. 500 list, it hasn’t always synched with that other very important line on our profit-and-loss statement: the profit.

Until 2008 the more we grew the more money we lost. In fact, 2010 was the first year we produced a profit, a modest one at that. The question we have long faced is, should we invest as much as possible in revenue growth and merely demonstrate profitability? Or should we slow down and de-emphasize revenue growth in favor of profit growth? This question is top of mind because there has been consistent debate among our investors, those that favor a  short-term earlier exit versus those that are going for the big, long-term payoff. Me? I’m here for the long term.

When a business is large, mature and public, an emphasis on short-term profits may make sense and may be demanded by the public markets. That said, there is merit to the criticism that public companies are so focused on the next quarterly report that they often feel pressured not to make the strategic investments that would lead to longer term growth because they can’t afford to disappoint large blocks of impatient investors.

In the case of a small, private business  — particularly one, like TerraCycle, that has significant growth potential and limited competition — the emphasis on short-term profits seems counter-productive. In these circumstances, I believe the priority should be running a tight ship and investing every spare dollar above some minimum threshold of profit into growth. I understand the need to ensure that the business model is viable and sustainable, but beyond that, I think growth should be the priority.

Which brings up a larger question. One of the great things about public markets is that they allow investors to come and go freely, depending on their objectives and their belief in a company’s trajectory. For investors in a private company, an initial public offering can offer liquidity and an exit with a nice upside. It can also provide the company with access to capital markets. But we all know there are downsides to going public. If you don’t need capital to build your business or if you can find other ways (besides debt) to get that capital, and if you could otherwise provide an acceptable exit for investors who are ready to move on, wouldn’t staying private be the preferred option?

I’ve been giving this matter a lot of thought. Many companies I have admired — Stonyfield, Ben Jerry’s, Tom’s of Maine and Honest Tea, have sold to multinationals (all of which happen to be clients of TerraCycle). Investment banks call us regularly, suggesting it’s only a matter of time before we sell, too. The alternative might be an I.P.O., and the banks all suggest they have teams to assist us with that eventuality. Of course, if TerraCycle generates large enough profits, it could offer to redeem shares of investors who want to exit, but that would run against our strategy of prioritizing our resources for growth. And if the profits are that strong, wouldn’t the amount demanded by investors  also grow -– making buying them out with profits more difficult?

While this debate has gone on for years, we have seen the possibility of a middle path open up. Recently, a Brazilian investment group bought a minority interest in our Brazilian subsidiary. The group not only brought capital, but through their resources has been able to fuel our Brazilian operation with faster growth. Better yet, we can use the proceeds of this sale to bring liquidity to our investors in the parent company. This approach, should we choose to roll it out more broadly, might be a way for a relatively small company to develop strong local partnerships to turbo charge activities in foreign operations, while also creating cash to let earlier investors in the parent company exit. That would allow the company to remain private, independent and focused on growth.

So far, it seems like both our short-term and long-term investors like this approach.

Tom Szaky is the chief executive of TerraCycle, which is based in Trenton.

Article source: http://feeds.nytimes.com/click.phdo?i=08c5f4ddfb17132a55d70186c6eee901