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"How To Manage Investors Before Ever Taking Money" in Humanizing Technology

I just had an idea that I think might help temper expectations over a long time horizon that is a startup.

If we think of the rounds of investment at their most pure level, it’s about a series of green lights or gates to prove whether the business should continue.

What if, instead of everyone assuming the startup will be successful, we assume the startup won’t be? And at every funding round or gate, we have to pass a test in order to keep going (both investors and entrepreneurs). Because why would you want to continue wasting time and money on something that you thought might work but the market clearly says it won’t (timing, idea, etc).

In addition I think we need to chart a line graph that plots the “we are here” at every stage of growth and where we’re headed so folks understand that not much happens in the beginning until it starts happening all at once. Per below.

Gates at each funding round should determine whether entrepreneurs keep working and investors keep investing.

So you see 3 different colored lines with 3 different equations:

  1. Red straight growth (linear)
  2. Blue in-between growth (exponential)
  3. Green supercharged growth (super exponential)

For most investors, they really want the green line kind of growth (2^x). But that’s pretty rare and often hard to determine when you’re at the Seed stage because what you actually see is that a straight line growth (50x) looks like the business is performing much better than an exponential growth.

So, what you have to decipher at each “gate” for both the people who have to spend their valuable time and brain power on and investors who spend their valuable resources on, is which type of growth you’re working with.

Great products really do spread by word of mouth. The major metric should be WoM growth. You need a way to track that. And often, that’s where social media comes in. Organic social media.

That’s where you get the ROI that marketers have always been looking for. Do you have passionate super users who are screaming about it to everyone and trying to invite everyone? If so, you might be on the super exponential green line growth curve.

However, if you’re buying traffic and customers using Facebook and Google ads, then get a pretty consistent conversion rate to purchase, then you might be on the red straight line growth curve.

The in-between blue line growth is okay. It’s still exponential, just not supercharged. At each gate, I think both investors and entrepreneurs need to understand which colored line they’re on. If green, throw as many bodies and cash as possible. This is Uber and Didi. You’ve got a 100x return. If blue, then invest without much fear. If red, you can still invest but it’s going to be slow growth and returns might not be huge.

But if you have Green-caliber people working on a Red-caliber company, then you need to change something. Stop investing their time and brains on something that will never have super-exponential growth. And stop investing your money. It would be better to eat the losses on the sunk costs of the red business. And redeploy the people and cash into a Green business.

The only way to do this is to constantly re-asses. Every month. Every quarter. Every funding round.

People talk about pivots, which is sort of like this, but pivots often refer to a business that isn’t working, rather than one that is. If you can get a better return on brain power and cash, then it doesn’t matter how much time, customers, or capital have been previously invested.

You must stop immediately and redeploy into a Green business. Even if you have to spend years to find a Green business, it’s worth it because look at the line graph above. It will still grow faster than anything else you might be doing in the meantime.

— Sean

How To Manage Investors Before Ever Taking Money was originally published in Humanizing Technology on Medium, where people are continuing the conversation by highlighting and responding to this story.

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from Sean Everett on Medium http://ift.tt/1U2CG0j