Exaggeration vs approximation

Advertising, to many, seems like it is the ultimate in exaggeration. If you have something good, you call it great! If you have something bad, you call it the finest of its sort. If you do X, you claim to do 2X! Super ultra uber extreme are the words you might see. Why do they do this? Because it works! Sex sells, so use a mostly naked woman to sell shoes! Fear and humor sell, so put up the image of a nuclear explosion behind your runner looking back anxiously as other runners behind her get disintegrated in the ad for your running shoe (caption "You don't just have to outrun the bear!").

Naturally, when pitching to angel investors, folks try to put their best foot forward. But some go a bit too far. They may sound like an ad for the Popeel Pocket Pruner - and that will be mildly offensive, but if done well can be humorous - high risk strategy.

But this article isn't about style. It's about substance. We love great style in presenters, and it brings us confidence in the ability to sell. That's important to funding a company because if they cannot sell what they are offering, the business will fail. But when it comes to the facts about the business, the thing you are selling has to be something worth buying and the numbers and concepts have to add up.

The simple truth is best

This may be true of foolish consistency, but angel investors don't like to be tricked, and good ones look things up and check the facts to make sure they match up. Inconsistency is what I call "catching you in a lie" - but I usually say it more politely. "That seems to be inconsistent with your previous claim that ..." is more like what I will say. I don't necessarily think it's intentional, but it shows a lack of clear thinking and analysis on your part and it makes me suspicious of everything else you have said. You might be able to recover with an instant mia culpa.

A lot of the problems I see in this area stem ultimately from people who have not thought out their business well enough. ***

The opportunistic business

Most startups go through opportunistic phases. They are trying to find their niche, trying to make their first few sales, and any opportunity that comes, they jump at. That's fine. But that's now what investors fund. Investors fund businesses with a plan that makes sense.

The problem with opportunistic businesses is not that they fail to find and exploit outstanding opportunities. It's that they succeed at finding them. Lots of them. And they chase one after another leading to small successes. And thus the businesses succeed in making sales and a profit. And that's the problem.

Why is that a problem? Several reasons; (1) each tactical success consumes resources that could be spent on strategic success, (2) that's not what they were funded to do so they are misspending the investor's money, (3) those tactical successes are at the expense of strategic successes, and the strategic successes are where the big returns for the big risks come from, and (4) worst of all, the tactical successes preclude what seems to be a viable path forward when it does not reach the desired goals in the desired time frames.

The systematic business which pivots

The angel investor is normally investing in a plan that has been shown to them to be able to scale at a particular pace and produce an exit in a particular time frame for a particular valuation. That is the business they invested in. Each diversion from this focus usually means a slower and less likely path to the desired exit.

But every business finds problems en route and adapts over time. That's called a pivot. It's a strategic change caused by an assumption that is proven to be wrong. It could be proven to be wrong in a good way or a bad way. If the assumption is X sales of thing A and Y sales of thing B per month and you get 2X+Y sales, that's a good thing in that A is doing better than expected while B is doing as expected. The pivot might be to increase the effort to sell A and ultimately drop B, or it might be to spend more effort on B and less on A because evenness of the sales is strategically important. Or it might be to review the plan and see if there is an even better thing to do. That's a pivot. An adaptation a assumptions are turned into realities, and the assumptions should be made clear in advance, measured in reality, and validated or invalidated as the business executes

An example from right now

A firm that presented to Keiretsu Forum in the last 6 months and is now being funded and is part of the way through their round. They are starting to execute on their plan, and have an opportunity that they were aware of long ago to increase sales to some customers by building something that they cannot presently buy, in order to resell it and bring added value to their customer base.

The added value could greatly benefit their business including helping to build their recurring revenue and customer base, but it is not the reason they were funded and not part of the explicit plan they are executing. They have the opportunity to outsource the build and give away ownership and some of the profits from the thing in exchange for exclusive sales rights in a territory for a time, turning the build into a channel relationship.

This decision is being made today. Different advisors have advised the CEO to build vs. buy. One says "buy" and focus on what you are doing rather than side-tracking yourself. Another says "you could make more from the build than without the build". The CEO has already shedded another opportunity in order to focus on the business. And now the time has come to decide. Today, Jan 1, 2017, the CEO has to make up their mind.

No second chance

We don't know what the "right" thing to do is. And whichever the CEO chooses, we won't know if it was "right" later on, because we don't get to repeat the experiment taking the other choice. The CEO will decide (as all of us CEOs do), will be second guessed no matter which way they decide and what happens, and that's just how it is.

My advice? It's simple. Focus on what you are trying to achieve at the strategic level, make and follow your plans unless and until they start to have problems, give up other opportunities that diffuse your main focus, and only adapt when you figure out the adaptation is an actual improvement on the original plan.

In summary

Unlike most lifestyle businesses which do lots of opportunistic experiments and adapt all the time, and unlike large enterprises which can afford a range of experiments to test out different assumptions and business models, angel funded startups normally have too little resources and too little time to stray far from their pre-defined path. They win by focussing on the target they have laid out for themselves and avoiding all of the opportunistic distractions that lay before them.

If you are angel funded, focus on what you are doing to the exclusion of anything not directly relevant. When in doubt, keep your focus and don't diffuse your efforts even if they look like great opportunities. Pivot when you learn something that improves the model or its execution, but don't chase every opportunity out there.

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Copyright(c) Fred Cohen, 2017 - All Rights Reserved