Are you in the money-making department or the money-burning department?

There has always been room for discussion on the positioning and role of different departments within a company. This article will take the distinction between "cost departments" and "profit departments" as a starting point to further explore the role and value of the new type of department, the "innovation department", in today's rising technology industry.

We all know that a company is usually made up of several different departments.

These departments can be divided into two categories: cost departments and profit departments.

For example, departments like administration and finance do not create value directly, but they ensure the normal operation of the company, so they are classified as cost departments. Some departments, such as sales, directly contribute to the company's profits, so they belong to profit departments.

The situation of some departments is very strange. Their goal is to become a profit department, but because their business has not yet been established, they only have cost input and no output, and are actually in a loss-making state. These departments are still cost departments in essence.

However, due to their potential for future profitability, such sectors are generally referred to as innovative sectors.

1. A department that continues to burn money?

I don’t know if you have ever come across this kind of innovative department. What they do is obviously hopeless or has a very low chance of success, but the company keeps throwing money at it.

Especially in the high-tech industry, such as artificial intelligence, metaverse, blockchain and other hot fields. Most of these technologies are still in the early stages, and the money invested is not related to the final commercial results.

It's not wise to invest so much money so early.

Because talents in the high-tech field are concentrated in the leading companies, they may eventually monopolize the market. Once the business model is determined, those leading companies can occupy the market with their technological barriers.

Therefore, even if many small and medium-sized enterprises succeed in the short term, they are likely to fail in the end.

I've worked in a company like this.

There is a team that does this kind of innovative work. The business direction has high technological content, but the technology is immature, the business model is even more vague, and the company itself has no technical advantages.

Everyone thinks that this is a money-burning project.

At the time, I was puzzled. Our employees had all noticed such an obvious problem, but how come the boss didn’t know about it?

2. Money-burning businesses can also make money

I read a piece of news recently and suddenly understood what my boss was thinking.

In the fourth quarter of 2023, BYD's electric car sales exceeded Tesla's, becoming the largest new energy vehicle manufacturer. This incident obviously affected Tesla, and Musk immediately responded online. He said that Tesla is an "artificial intelligence + robot" company, not just selling cars.

I think he said this mainly for valuation purposes.

The valuations of automobile companies and AI companies are different. Automobile companies are usually valued low because of their limited business models. But AI is different. The future belongs to AI. As long as there is a connection with AI, there is a lot of room for imagination. Capital is willing to invest more money for future profits, so the valuation of AI companies is naturally high.

Thinking about it this way, I understand why my previous company was willing to invest money in those high-tech innovations. The money earned by the company is far less than that earned by the stock market. Relying solely on annual profits, the maximum annual profit is 1 billion, and 20 billion in 20 years. But stocks are different . According to the normal price-earnings ratio of 15 to 20 times, the stock valuation of a company with an annual profit of 1 billion is about 15 billion to 20 billion.

But if your company has some high-tech concepts in this business, your company's P/E valuation can easily reach 40~50 times, or even higher. So the boss can double his assets by relying on a high-tech business, which is much better than doing business honestly.

Once you understand this, you will know that many money-burning businesses may lose money in operations but may make more money in the capital market than the main business.

3. Different positioning, different directions of efforts

Therefore, although they are all business teams, some earn commercial value by creating user value, while others earn commercial value by creating investment value. The positioning and direction of the two teams are different. If you don’t understand the positioning of your team and go in the wrong direction, you may not meet the expectations of your leaders and your efforts will be in vain.

To create user value, we must stand in the user's perspective, continuously optimize the experience, and create operating profits. For this kind of work, improving efficiency by 10% to 20% is very valuable, because the business model has been determined, and continuous iteration is the key to defeating competitors.

But if you want to invest in value, you have to look at things from the perspective of investors . In this case, optimizing a product by 10% to 20% is not very useful. Investors value exponential growth and the potential of new business models. This requires continuous creation of concepts and invention of new models. Whether this model can be implemented and continuously iterated and optimized is not that important. The key is to constantly come up with new concepts and prove the huge potential of this technology in the future.

IV. Summary

We don't judge which team is better.

However, I have to say a few words for businesses that create investment value. When I was young, I looked down on this model and felt that it was just for show and that the boss was just busying around for nothing. But now, although it has not created actual business value, this model is still positive. New technologies really rely on trial and error. If you don't create concepts and attract investment, new technologies won't be able to land faster.

So I think existence is reasonable. We should figure out the positioning of our work and not do things that are inconsistent with the positioning.

Finally, think about your business. What type of business is it?

Author: Fang Chaijun

WeChat public account: Sanyuan Variance (ID: sanyuanfangcha)