Re-investing…

May 15, 2010 | Filed under: business

Lets say you run a business. The business makes $40k in a year. You are used to living on $40k, so you spend it, and have a reasonable life. Then suddenly things go well, and you make $50k the next year. Do you

a) Have a better year, buy better donuts, drink more beer and enjoy the $50k

b) Have a slightly better year, buy a few more donuts, spend $5k of the surplus and invest the other $5k in making the business better.

c) Stay as before and invest the whole $10k on making the business better.

I think most people are like a). I think a lot of people who work for themselves are like b), including me. I suspect that a lot of the dotcom billionaires are like c). I read once that valve basically took all the money from Half Life’s success and invested it in Steam and Half Life 2. I suspect this is true. I would guess that when World Of Warcraft was making tens of millions in profit, Blizzard took ALL that money and reinvested it. Then did the same when it made hundreds of millions. It turned out to work very well for them…

The problem is, no matter how much I may intuitively see this, and would even recommend it as a policy to others, I find it difficult to do myself. Maybe I’m just not as obsessed with running a bigger company as the dotcom guys, but when positech has a good year, I tend to bank some it (paranoid about having a bad year), spend a little bit more on the business (ooh look! some professional spaceship art), and buy a new TV. I tend to fear that if I don’t spend some of the company profits when there are some, it might crash and burn one day and I’ll have nothing to show for it, whereas with my current policy, at least I have a new TV.

I read Duncan Bannatynes autobiography, which is a great read. He made an absolute fortune from ice cream sales once. he then invested ALL of it in making retirement homes. he sold his car, re-mortgaged his house, even sold his TV to make the final payment on the first home. He had multiple maxxed out credit cards at that point. James Caan did the same. They went from having a good income to being penniless and in debt, because they could see the return in the long term being a whole step-change higher.

I don’t reckon I could ever do that. And even if I could, I’d be a nervous wreck doing it. What about you? Are you risk-averse? or a dotcom dude?

12 Responses to “Re-investing…”

  1. Rob Hale says:

    I’m number b. The big thing for me is that I don’t want to run a big business I just want to live a comfortable life doing what I want to do without the hassle that comes with running a large company.

    If you go the route of C then you will spend the best years of your life building up a company to a point where somebody wants to buy it from you for a few million so you can retire on the money when you are old and unable to do anything with the money than wait to die.

  2. radio_babylon says:

    “If you can make one heap of all your winnings
    And risk it all on one turn of pitch-and-toss,
    And lose, and start again at your beginnings
    And never breath a word about your loss;”

    “Yours is the Earth and everything that’s in it,
    And–which is more–you’ll be a Man, my son!”
    — excerpt from “If” by Rudyard Kipling

    im of the belief that the high aversion to risk (as well as thinking like “at least ill have something to show for it”) that most people have is little more than an expression of the fear of mortality. bottom line is, we come into the world with nothing, and we leave it with nothing. period. if you want to maximize the time spent between those two points, youve got to be willing to give it everything you have. if it doesnt work out the first time, well… youve been there before, and youll be there again before its all over. no biggie. you just keep inching towards daylight.

    ive been dirt poor (and i mean DIRT poor) more than once, and ive been modestly wealthy by most standards more than once as well… and ill tell you, its the getting there thats all the fun. i understand fully why someone would reduce themselves back to nothing for a shot at something greater, because once youve hit a “safe place” in your life… well, its boring. id rather go balls-out hell-bent-for-leather after that higher level at the risk of everything i have, than just sit on what ive got and get… old.

    but thats just me, YMMV, dont hunt me down if you find yourself living in a box :)

  3. Gavin Bowman says:

    I think the real c) type guys you mention come from a different planet to me, I could never sleep running a business like that. But they’d re-invest the lot, I don’t think they’d even think about enjoying the first $40K and having a comfortable life.

    I’d be more d) worry about how bad the next year might get, figure out how to live on less, bank whatever I can. Maybe I’m too paranoid, but I love doing this for a living, still being able to do it next year is always top priority.

  4. Anthony says:

    If you are working on or in the company, then paying yourself more is investing more in the company, so in a way a), b), and c) aren’t exclusive. It might not be a wise investment from the point of view of the company’s future growth, but on the other hand it might be. Same goes for giving raises to existing employees, or hiring more employees. The basic idea is similar: more input (higher salaries) -> more output (more future profit).

  5. Brad says:

    I’m B I guess. I have a good year, I buy some new toys but put the rest into my mortgage. I guess my home is my long-term ‘business’. Bonus – in case of emergency I still have access to my mortgage’s surplus but in the meantime it’s reducing my debt and interest repayments.

    Those types Cs don’t always end up being ‘dotcom billionaires’ some of them end up living with their parents in their 40s, spending all their income on their next failed project. I know a few =\

  6. Fargo says:

    I’m a self employed IT type person, have been for about six years going on seven, and I’m pretty firmly in the b) camp.

    For me a part of it is the relative impact of spending that money. For instance, buying some great artwork, or doing some kind of continuing education in my case, enhances the actual product. By itself this is great, from a satisfaction standpoint, but doesn’t inherently expand the business.

    Marketing, obviously, is driven solely towards that end. but is frequently (in my own low budget experience) not even very good at it. I haven’t tried online ads, since my service is so very localized, but print ads have never worked out for me. Word of mouth and networking, however, feed my dumb overworked ass and keep some manner of shelter around me. There aren’t many easy ways, that I know of, to expand such purely social advertising via more money. About the only one that springs to mind is joining more Chamber of Commerce organizations around the state.

    Anyway. That’s the general trend of my thoughts, but bear in mind that I am very tired right now.

  7. kone says:

    I guess I’m like Fargo to some point.
    I’am normally enployed – but can’t think of stuff to ‘bank’ it which would improve my ‘business’.
    Except of course:
    1. further education
    if you are interested in a book or something which costs money and even if it has only some slight things in common with the stuff you do now – go for it!
    As I normally lack the interest in the main fields of my current work I will become ‘wide’ educated, thought not very ‘deep’.
    I hope this will pay off at some point in time…

    2. Co-operation
    I try to keep being informed about all projects my company has, where I have the slightest interests in. I normally have loads of ideas and I spend them trying to understand and improve the other’s projects.
    Unfortunately in the most cases such feedback is not very high appreciated but I like to make me believe that I already had some good influence on some projets.
    I hope this point will pay off at some point in time too…

  8. AR says:

    I feel that C is the one to aim for. But a new TV might be just the thing you need to relax and recharge yourself – so it could be considered an investment in yourself and therefore your business.

    Of course, a TV is a pretty lousy example. For relaxation purposes, you can probably get far better bang for your buck.

  9. hermitC says:

    The billionaire’s way is something I can’t understand/support. Finally running a big business ends in exploiting (human) resources until there is nothing left.

    b) is definitely my choice. Improving life as well as business seems to be a good compromise.

  10. I’m pretty much squarely between B and C. We started aggressively budgeting a couple of years ago for better investing. So – I’d probably increase my budget about $2K, and then invest the other $8k – though not all necessarily back into the same business, unless it was very clear that I’d get a better return on my dollar than I could elsewhere (probably true, but always worth re-visiting).

  11. […] Re-Investing… (Positech Games […]

  12. Eric says:

    Totally an old post, but I want to reply:)

    You seem to have predictable results from each game you make (you get more money back than you spend to make it).

    If you take that 10000, just do what you’re doing now, but maybe pay someone to do some more of the work you do, you could have an extra game or two that you normally wouldn’t have completed otherwise. You’d effectively have doubled your output, allowing you to earn twice as much as before in the same amount of time.

    This would of course be risky. What if the game flops, what if the work you hired out stinks.

    But if you’re confident in your games, and the people you send work to, you can get more done in the same amount of time and build your game library faster.

    This is my unexperienced thoughts on the matter!