It's harder than you think!

One of the things successful companies do over time is increase their maturity. We use the Capability Maturity Model (CMM) approach for this purpose, identifying companies and the things they do as ranging across a nominal scale including "None", "Initial", "Repeatable", "Defined (and documented)", "Managed", and "Optimizing". For details you can look at last month's article.

As part of our efforts to mature the understanding of companies, we have a Business Growth Metrics™ program that has now been applied to something like 100 presenting companies who have come through our Go To Angel presentation process lately. As always, we are surprised by the results when we first measure things, then we start to try to understand why things are as they are, then we come to believe we know.

Some preliminary results and speculation

Of course we don't actually know, but we do speculate, test, and confirm or refute our hypotheses. I figured, for those who have filled in these metrics, and for those who look at the results, we would let everyone know some very preliminary analytical results.

We do analysis using statistical methods. I am not a statistician, and I don't play one on TV, but one of my daughters knows a lot about this area, so I have some idea of how far off I am on most of the things I am about to tell you. I think the standard answer to whatever question you have is "It depends". But you can ask...

Here's the basic result, applied to a reasonable subset of the data, in roll-up form. The numbers are related to valuation as identified by the company. So a larger positive number means more of the valuation is associated with more of the factor at hand.

Multiple regression analysis for 6 variables and 29 (29 non-zero) samples
AreaMultiplierStdErrT-stat
Governance and Management$222,251 $1,039,526 0.21
Marketing and Sales$2,389,743$2,098,1931.14
Execution and Fulfillment-$1,306,839$2,207,179-0.59
Intellectual Property and Special Sauce$847,623$1,767,1300.48
Financial Situation and Path$3,122,845$2,398,2451.30
Legal Situation-$1,514,943$2,330,906-0.65
R^2=0.19* [adj. 0.01*], N= 29, K= 6, Ybar=$13,245,034

Here's the important part, and we have observed it for other data sets as well. Note that there is a substantial negative correlation between Execution and Fulfillment and valuation. In other studies, we found a negative correlation between Governance and Management and valuation.

What does this mean exactly?

At first blush, this would seem to mean that the more capacity you have to fulfill orders from customers, the less you are worth. But this makes no sense, since if you cannot fill orders, you cannot expect to grow and succeed. Indeed if you have worse management, you should be worth less.

So we looked a bit deeper, and we figured out that there is a positive correlation of all of the "Areas" for companies whose valuation was based on a current or previous round with actual investments.

It took a bit of effort for us to figure out what we think is happening. Companies who have not actually gotten to market and tried to expand, and companies with less complete or less experienced management over-value themselves.

In other words, It's harder than you think.

A more generous interpretation would be to say that entrepreneurs are optimistic. I might add the caveat ... until they have to face reality.

So what do I do with this data?

I don't share it, and I don't sell it. Of course if a company wants me to provide it to an investor, I will help the investor make better decisions with it.

There is another use that lots of people notion might be a good idea, and that's to use the results to try to adjust valuations. Based on successful fundings, and adjusting for stage of business, market size over time, etc. you can calculate an estimated valuation for a company. We can do this, and we do these sorts of calculations, but we don't use them for that purpose. Rather, we do two things:

As the situation changes, companies advance one area and then have to move on to the next higher priority. This is ever changing for all companies, but the prioritization in the process of maturation is far more distinctive and less incremental in nature for early stage companies which have to survive as they advance.

A call to action

If you want to inform your prioritization of investment and make sense of why you choose to do what next, metrics can help you do it. If you want to use our metrics, you will have to either present at one of our meetings or decide to become a client. Otherwise, you will have to keep doing your best by using our FREE resources! ... Please enjoy our content and sign up for our mailing list if you might be interested "some day".

If you want us to help you move forward, the best first step is to:

Go To Angel

In case you missed it - if you want to engage with us on a more detailed level, the process starts with your presentation of your company to us.

In summary

I like optimism, but I like it informed by realism. So I measure things and compare them to things I understand more about. Like a checklist for flying a plane, it doesn't make you a better pilot, but it helps you make fewer mistakes. And that makes you a better pilot, at least for your passengers.

Copyright(c) Fred Cohen, 2020 - All Rights Reserved