dangletech

Startups get into trouble in making the decision of how broad to go in their approach. I have seen more mistakes which fall into the category of ‘solving world hunger’ than being too focused but the latter appears from time to time as well.

It takes a cool head and a dispassionate view of business prospects to pick the right target and that is something that is in short supply with new CEO’s. But how do you pick the right target?

I suggest this: the primary objective of most startups (unless you have an idea as big as say Google) is ‘mean time to profitability’ to get out from under ‘extra help’ from investors and ensure survivability. This is because many small companies die because they run out of runway. Their funding dries up. Their initial estimates of progress turn out to be too optimistic because the challenge of creating a comprehensive solution to a problem turns out to me much more involved than they thought.

So now you find yourself with a half finished solution and investors who have lost faith in your ability to forecast what it will take to get to a rational business offering. Sometimes this is caused by project creep; you start out to build a row boat and you are now at the point where you have half of an aircraft carrier. As we all know, the second half turns out to be 90% of the cost and without a steady stream of financing you are cooked. Better to set your sights on something much more achievable to get to sales and profitability and some independence over your future where you can see a path that does not involve more equity financing. This is one of the only sure fire ways to ensure survivability.

So ‘open ended’ goal hunting is dangerous.

Setting your sights too low or too focused is a much less common but a dangerous path as well. If you pick a market segment that is super focused then all your eggs are in one basket. Any change in the landscape can kill you. Examples of this are:

·    The market you were sure was ripe turns out to be a dud because they do not see the value in your offering or it turns out to difficult to find the exact buyers, or ....

·    Your competition gets there before you or competition you did not anticipate targets the same space or ...

·    The market segment you picked runs into economic problems and is not buying

·    And on and on ...

The right solution

·    Maintain a broad Vision so all of your stakeholders (investors, employees, etc.) can see the eventual full value in your proposition.

·    Pick a target that is relatively safe, can produce at least several fold returns to what you need to become profitable but not so big that you are forced out of business (ex. Sales that go from zero to a million units because you signed a deal with Home Depot).

·    Pick a timeframe (and double it if possible) to profitability that is agreed with your investors.

·    Have a plan B that you can bridge to as a contingency and make sure your investors know what it is in your ‘risks and contingencies’.

This plan should manifest itself in TWO* projections of revenue and profitability. The Business Plan version and the Unconstrained Demand version - i.e. if I had all the money I needed and all the right people and no ugly surprises, this is the potential of this company - but no promises until we are established. The former is what investors should expect and the latter is the answer to the question “Why should I take a chance on you?”

Good luck and as usual your rebuttal or comments are much appreciated.

* The idea of having 2 forecasts can be controversial but I think it is a fight worth winning. If you have one forecast you will have pressure to make it bigger and more attractive to investors - when you make it bigger you will have complaints that it is unrealistic. You need to kill two birds here. Be realistic but attractive - so I say you need to COMMIT to a realistic plan (a stretch but very achievable) for credibility and a plan B “go for massive growth plan” if everything falls into place - everything being the following:

·    No ‘show-stopper’ impediments to growth