There’s an old college admissions question that goes something like this: “Is it better for my kid to get a B in the advanced math class or an A in the standard track?” Well, it’s better to get an A in the advanced math class, the admissions officer will tell you.
Entrepreneurs, if they’re good, are experts at optimizing the allocation of scarce resources to hit goals. They don’t respond well to the above answer because it’s in some ways an irrational one. And yet, unfortunately, investors offer an analogous demand. An entrepreneur might ask, “Is it better for my business to have moderate potential with a very simple value proposition and execution path or have huge potential and require multiple lines of business with a complex growth pattern?” The answer is that it’s better to have huge potential and a very simple value proposition and execution path. Something “big and clear.”
This is why not all businesses are a good fit for venture financing. One of a number of reasons. And of course, investors have a range of appetites for business model complexity just as we have a range of appetites for stage. (Our appetites for potential, unfortunately, range from large to empire status in order to meet return expectations across a portfolio of risky investments.)
If you have complex growth assumptions, consider the following:
- Investors will give you real credit for existing lines of business with proven value and potential; similarly, obvious opportunity (e.g. ability to layer advertising into content consumption) will lend credibility to projections. On the other hand, theoretical/in-process business lines without market validation will often be heavily discounted. If you’re reliant on such business lines to arrive at large potential, do everything in your bootstrapped power to validate the market opportunity (make calls, cull research, pre-sell, etc).
- Investors value focus because its relentless pursuit tends to yield positive results. Question whether there are ways to focus your business model and simplify.
- Don’t be tempted to outline in depth the 15 untrod, optional paths to success, each utilizing a different model. While business model evolution is a key part of successful entrepreneurship, it takes an exceptionally reasoned entrepreneur to pull off this kind of a pitch and an exceptionally patient investor. Evidence the capacity to adapt and you will have made the appropriate point. If the objective is to indicate opportunity, point out the most attractive avenues, indicate that others exist, and allow for questioning to suss out the details if there is interest.
There’s good news under the expectations header, and that’s that rising operating efficiencies in many businesses are allowing for slightly lower top-line (revenue) expectations. Ultimately, that means it’s easier to work under a simple value proposition and execution path. It’s still hard to build something big and clear.
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Photo credit: Untitled, originally uploaded by nealpage
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