Most authors are terrible at running a business. The only ones worse are internet marketers, mainly because they are full of sh*t.
Let me give you an example.
Most of the talk as far return on investment by marketers and authors is on ad spend.
“I get $2 of sales for every $1 I spend I have a 200% ROI.
I measure your return on investment only on dollars that went in and out of the business.
Publishing businesses can have massive ROI. I don’t know many companies that can scale like an author’s business and deliver the return I’ve seen.
But return on ad spend is hinky math.
Mistaking that hinky math for business performance is a bigger issue.
The act of you reading this makes you different.
While you may currently partake in the dark financial arts of believing you have great returns on ad spend. You will be deprogrammed from its thinking.
By leaving behind that thinking, you will build a business that truly takes care of investor needs. You will be able to fund that blueprint your inner architect has rolled out on the table.
Furthermore, I’ll provide you the engineering to ensure the plumbing is installed for a building that has running water (cash).
Steve Wynn used other people’s money to build his first casino. After he built the Mirage, he could scale up with those cash flows to build bigger.
Those who gave him that money to get started did so because they believed the plan would return their money plus extra. They also made sure they got paid before Steve did.
They didn’t invest in a Bellagio sized project until he completed a Mirage and Treasure Island sized projects.
Authors you admire may be lousy business operators. While they may be successful writers, they don’t know how to run a business that produces a positive cash flow.
I know this because of what I’ve seen in my private practice.
Let me be clear: all entrepreneurs are in this boat. There is little information on how to structure and operate a small business. You don’t learn this stuff getting an MBA.
Misinformation and rumor perpetuate dangerous practices.
But you’re different.
In these emails, you’ll see best practices that will give you an advantage. It is not just a marketing advantage, but an equally (maybe more) powerful one in how you use your business’s lifeblood — capital.
One last point in this rant:
Saying that you’re creative and therefore you don’t have the skills or interest in running a business is lazy and stupid (ouch). Taking that approach results in you not being prosperous or, worse, being taken advantage of by others. Stop it! Don’t buy into this thinking.
One of the most important things you can do to make your business thrive and become anti-fragile is to run your business focusing on what your investor (you) needs.
If I were to invest in your publishing business, I would expect a return. It may be simple interest, or it could be ownership and a cut of the profits.
Either way, I’m going into the transaction intending to see a return on my investment, just like those guys that backed Steve Wynn.
As a small business owner, you’re driven by the love of what you do or the freedom you get from being your own boss. While these are intangible returns, you still need to deliver a return on the business’s money invested.
If you expect your books to earn the funds to publish future books, you need a positive return.
The number one hurdle that most new publishers never clear is where books return the capital spent to produce them, plus enough to get the next books to market.
The next hurdle is to produce the cash to keep your business growing.
Until you pay yourself back, you have no return on investment.
Let me repeat that…
Until you take the money out of your business that you have invested, you don’t have a return on investment.
In this startup phase, your business is in its most fragile state.
Its survival is contingent on how long you can continue to fund the operation from sources other than book profits.
If you’re not published, do you have the ability to fund the operation for three to five years?
Startups take that long to build up an audience for most authors.
Ensuring you align your business with what the investor needs will keep the financial feedback loops humming.
There will be a conflict between your higher-order goals of investor needs and customer delight, and that’s by design.
Deciding what takes precedence between the two will determine the right growth rate for your business.
In the beginning, you’re priming the pump. Going back to our well analogy, we use cash to get more money to come out of the well. Step one is to stop the flow of cash from you and jump-start the cash well.
Next is the reinvestment phase, where profit from your books goes back into your business to get bigger. Having a portion going back into the well to siphon more flow from the well is essential, but we can’t forget about getting water for you.
You need to balance the money that stays in the business to grow and what you need to have come out to investors. This financial negotiation will determine the appropriate growth rate. There will be more on this topic in later emails.
How do you know your business is performing well?
The long-term average of the S&P 500 is 9.24%.
Deciding to put $1,000 into your publishing business should produce at least 9.24% compounded annually. Otherwise, you could get a similar return by putting the money in the S&P 500 and not have to work as hard.
This doesn’t mean that you have $1,092.40 at the end of the year to take out of the business. Rather, you should have at least an additional $92.40 to take out of the company or reinvest back into the business.
Here’s a back of the envelope calculation. If you paid $1,000 to publish a book and it had a 30% compounding return, it would take three years to get your initial investment back.
If that was a stock, you would be pretty happy to double your money in three years. The benchmark is 9.24%. If your business equaled the benchmark, it would take eight years to get your money back.
Many authors think they can make six figures with a few books and in a short amount of time. This puts undue stress and expectations on the business having an investor with unrealistic desires.
Conversely, continually tipping more and more money into a venture with no prospects of a return is equally unrealistic.
How much time have you spent thinking about what you want out of your business?
Have you thought about where it is right now? Realistically what stage is it, and what are the investor needs for that stage?
I’ll leave you to ponder those questions. Take some time to think about it as next week we will explore investor needs further and talk about the right growth rate.
P.S. A final reminder that I’m running an author mastermind on the subject of community building. If you would like to learn more click here.