Striving for Known Unknowns in Company Building
Some technologies are just harder to fall in love with than others. Having witnessed Google’s self-driving cars in action a number of times in Silicon Valley, I always marvel at the amazing feat of engineering. And I also appreciate the future, without traffic jams on highways and cities without parked cars in the streets.
And yet I really enjoy driving. Thanks to technology, it’s becoming easier and easier too. Take navigation. You can drive anywhere in the world without knowing the way, simply by following instructions. “In three hundred meters, take a right.” And if you miss that turn, the navigation app will simply recalculate, and send you to the next available street.
That operational mode, of having a pre-defined route that can be recalculated based on actual location, is a perfect metaphor of how businesses should be run.
I vividly remember how I wrote my first business plan. My co-founder and I were six months into our legal services startup, and we literally had no idea what we were doing. We started with a few simple administrative templates, then came clients who wanted more complicated documents, sales and employment contracts. We served them as they showed up, playing around with prices and product descriptions. And then we decided to raise money. When we met the first serious angel investor who showed interest in us, he asked us to send him a business plan with financials.
After a few sleepless nights (during the day, we were still working at our old jobs), we had a 10-page Word file that looked like something we found on Google. The investor looked at it, smiled, and went on to write us a check after a few more meetings.
I remember feeling both smart and guilty about the business plan: on the one hand the highly theoretical exercise seemed to “fool” the angel into believing in our plans, but on the other hand, we now had to execute on assumptions we pretty much made up, and the quite obvious opportunity of missing the milestones felt like a heavy burden we had put on our own shoulders.
In the months that followed we underachieved on some of the indicators, overachieved on some others, and rewrote the plan so often that it barely resembled the original version. I learned to appreciate it a lot, especially the first tab of the financials spreadsheet, the one with a dashboard that shows you forecasts based on actuals and assumptions in P&L and cashflow.
Much like Google Maps for an exciting road trip, the business plan shows the drivers (founders) how to get to a desirable goal (traction), allowing for adjustments based on traffic congestion (market risk) and missed turns (founder risk).
Perhaps one of the best ways to tell a serious investor from an opportunistic one is the approach towards financial plans. As “doing startups” has transformed from being the domain of geeks and outsiders to mainstream occupational prestige, and obtaining venture funding to being perceived as a business success, many founders started believing in the idea that numbers is something the investor should be worried about, while all it takes for an entrepreneur is to have a fiery pitch and a grand vision to “break things”. The fact that many investors use the adage “we don’t invest in business plans” as marketing doesn’t help either, as it can trick inexperienced founders to believe that business plans are irrelevant.
I recall how that thought crossed my mind seven years ago, after putting together my first business plan.
This is one of the many cultural traits of “disruptive” entrepreneurship that translates poorly to the reality of dealing with high-risk companies. The skills required to write up a business plan and financials are a commodity; every office of more than 10 people has someone who’s good at this. The vision and entrepreneurial grit that are needed for taking a startup to traction and revenue, in contrast, are very rare skills. It is therefore logical to assume that someone with the rare skill will have an easy time doing the mainstream part of the work, either themselves or by outsourcing it. But by no means can this “boring” part be omitted.
Based on my experience with founder teams going from exciting startup to a company with market traction and revenue, one of the most reliable ways to predict founder success, next to serial experience, is the founders’ ability to handle unknowns. The fewer unknown unknowns in a company, and the more known unknowns; the higher the chance of surviving the Valley of Death and getting to revenue validation and growth.
That seemingly boring and useless business plan and financial model are key instruments for managing the startup unknowns, and rationally converting them from unknown unknowns to known ones.
And as I engage with hundreds of companies and hundreds of investors in growing a platform for matching angels with track record to exciting investment opportunities, I finally learned what seemed such a strange thing when I first started in startups: that continuously checked and updated business plans and financials are to companies what navigation is to travelling.
At Cross Border Angels, we are committed to helping the best entrepreneurs around the world connect with the most useful angel investors. We also work with our companies in building top-notch market analysis, financial models, and business plans, which we call the Investment Pack. Learn more about CBA and our services.