In truth, most startup entrepreneurs are emotional, while most savvy venture capital investors, the ones who bear the scares of actual entrepreneurial work, pack brutal demeanours preceded by intimidating poker faces. Most startups get married to their ideas. Most investors are masters of letting go. Startups think in terms of passion. Investors think in terms of value. Startups think and live in the now, while investors, the ones who have paid their dues, live in all parts of time simultaneously.
A while ago I sat down with a dear friend of mine; an entrepreneur-investor who has been in business for more years than I have been alive. This is someone who, since time immemorial, has seen startup entrepreneurs lining up under the proverbial gun, ready to dash off with what they intuitively believe will change their world and that of many others – and let’s not even mention their bank statements. But here is the thing; most never take off. We can allow the percentage of failed businesses to tell the story – and when all is said and done, it will not be hard to draft a comprehensive case study as to why the gun went off, but their businesses and ideas didn’t.
Our conversation started off with me telling her about the progress of our patented idea; and our deliberate, top-down strategy. It ended up with me seeing the parts of our business being well-dissected like a frog in a college laboratory. When I left the meeting, I couldn’t help but understand the revelation that entrepreneurship is nothing more than a strategic way of doing things. And all too often, it is the VCs who spend most of their time thinking and doing things in that manner. They know what an idea is and what a business is, and at what point those two things come together and translate into market capitalisation.
An idea, think about it, is not really a business by any stretch of the imagination. But a business, in the grand scheme of things, is a function of an idea – and the amalgamation of other things coming together. In and of itself, just by itself, and I hope to have my candour excused; an idea is worthless. It’s not worthless because it does not have a lifecycle. It does. But it’s worthless when it can’t capitalise on it. Everything, from the harsh reality of filing for IPOs at stock exchange institutions, to the nook and cranny of documentation in patent offices, is made up of ideas. The difference, though, is that the former environment is a place where ideas were allowed to breathe and continue with their lifecycle. The latter? Well, there is a reasonable amount of work to be done before an idea can be called anything beyond an idea. An idea is the first thing. But the business of the business is the main thing.
There are three reasons why start-ups should start thinking like venture capital investors:
Among the first things an investor wants to know when investing in your business is the value of it. The mistake we startups make is that we calculate value based on emotion: “how the idea came about”, “how I used my grandfather’s savings to get it started”, and “how I think it aligns with my ‘calling’”. In the ultimate, global scheme of things, nobody really cares. The scientific SI unit for emotion does not exist, and shouldn’t even matter when coming up with the value of your entrepreneurial outfit. Thinking like an investor will help you ask the right, hard and relevant questions about how you came up with the valuation of your business: its sales projections, EBITDA (earnings before interest, tax, depreciation and amortisation), its customers, market, and all other tangible aspects that affect your business, both internally and externally.
When you start thinking like a VC, you will be so honest with yourself, other parts of your heart will resent you for it. And you will certainly know whether or not the type of business you are building is the type of business you would invest in if someone pitched it to you. If in your heart of hearts you know that, without a doubt, if you were an investor, and a startup lad knocked on your door with that kind of business - the way its structures are presently - and you turned him down … surprise, surprise! Now you know that you are not running a business, you are babysitting an inanimate object.
Ideas and businesses are cyclical creatures. The life-span of an idea today is much shorter than what it used to be 20 years ago. At the end of three to four years, you may be starting to prepare for its old-age. So we need to know how to turn an idea into a business at the fastest possible speed. And when it starts becoming cash-float positive, we need to learn how to keep innovating to help it gain ascendancy in an ever-changing world. Peter Drucker spent the latter part of his life hypothesising about the philosophy that every single year, a business has to challenge its products and services by asking, “If we were not already doing this, would we be getting into it in the first place?” We need to learn how to live patiently in the now: dealing with the customers we are servicing now and operating the business of the business today. We need also to be future-ready: innovate, and that may sometimes mean overlooking what customers are looking for today, and giving them what they will need tomorrow. You know that this is not a collection of flowery hallucinations when you consider how Henry Ford streamlined his sentiments: "If I had asked people what they needed, they would have said they wanted faster horses.”
There are many ways to think in business, especially in this pell-mell pace of modern living. At the end of the day, and at the beginning of yet another, everyone does think. But a business will grow to the extent to which its founders think. Thinking like an investor who invests in businesses may just be the most productive thing you have ever done this year.
