Helpers of early stage startups – incubators, accelerators, angels and advisors – sleep good at night. There is something samaritan about what they do. They serve the bottom of the economic pyramid on which our society rests. They facilitate jobs, and in turn taxes. Some get wealthy and part is poured back in to new ventures, jobs and taxes. A virtue indeed. Yet there is a dilemma. While high-end markets yields and numbers make the deal, the Startup Samaritan migrate towards helping “grown-ups” at the expense of startups. The cure: startup methodology.
While I was studying and working my own market research practice, I had the pleasure to work with a couple of fine venture finance agents. I did customer interviews, and created business plans and investor presentations. It was first when I got the assignment to carry out a method with the goal of evaluating risk in early-stage ventures that I understood the dilemma.
What I quickly learned was that there is a minimal quantifiable track record within a startup. Accordingly, analytic models get dismissed in favor of qualitative variables such as team, customer insight and technology. For a couple of reasons I believe that this creates a dilemma to the Startup Samaritan.
- The time utilized in facilitating a startup is pretty much equal to that of facilitating a grown-up. Risk is lower and more predictable at the later stages. The stake and respectively the compensation is often higher. For logical reasons the Samaritan’s focus gradually migrates towards grown-ups. High-end markets yield.
- With the theory of Disruptive Innovation, authors argue that most companies force teams to develop detailed financial estimates way too early, when their accuracy will necessarily be low. That using metrics such as net present value (NPV) or return on investment (ROI) as rank-ordering tools to make decisions is counterproductive [i]. Technological knowledge and qualitative unpredictability might cause a great headache to MBA scholars. Naturally such samaritans seek to utilize their knowledge and go after what is quantifiable.
Instead, early startup formation requires an understanding of entrepreneurial patterns – talking failure as well as success. Methodologies such as Customer Development and Lean Startup identify and learn from common challenges that occurs in startups and then describe methods that aid in overcoming such challenges. In exchange for meter-long spreadsheets, they embrace so-called Startup Metrics that are trackable, actionable and drive better product and marketing decisions. Of course you can not ignore financial data, but focusing on the assumptions behind the numbers is meaningful when there is no such track record. Dedication is more likely when motivation, knowledge and methods are aligned.
The bottom line:
- Focusing on patterns [through startup methodologies] instead of numbers enable entrepreneurs to better manage uncertainty and their good samaritans to sleep even better in the future.
- Principles of Disruptive Innovation can help explain why startup investors as well as entrepreneurs would want to educate in startup methodologies.
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[i] Mapping Your Innovation Strategy, by Scott D. Anthony, Matt Eyring, and Lib Gibson
I think that startups have more to fear about being disrupted by competition and/or a lack of overall internal effectiveness than they do from Disruptive Innovation.
For incumbents, on the other hand, we know that the potential for disruption is increased to the extent to which a firm’s new products are
– Based on existing technology/methodology
– Designed to attract sales from an existing market segment currently associated with the industry it considers itself a part of.
I would propose that strategy which works to purposefully insure that a proportion of a firm’s new product falls outside of these classifications can help drive a firm away from the potential of becoming disrupted.
What do you think – are we aligned?
Thanks for input. Point made is that early-stage startup investors and advisers tend to move up the stack. Even if this is not their intention. That existing methods in risk reduction and accounting must be re-considered in favor to new “startup methodologies”. As Steve Blank argues – startups are not smaller versions of large companies. Disruptive Innovation can help in understanding this. Evidently, programs such as Y Combinator and Techstars disrupt incumbent venture capitalists.