I have been reviewing a lot of business plans this Spring. It seems to be a combination of student projects, student competitions, early stage ventures looking for money and case studies up on a pedestal. No matter how much is written about or how much preaching is done, entrepreneurs (and students of entrepreneurship) all seem to forecast the ever elusive J curve for financial projections.
The message they send: we are not going to make much this year, but in 5 years, we’ll hit $50 million, through an exponentially rising revenue curve! Oddly, that’s what most investors seem to want too. It’s just that is doesn’t really happen that way. I call attention to the fact that neither Oracle, nor Microsoft, had come close to $50M by year 5. They did by the 5th year after a stable product with market acceptance was created….but getting to that point was unpredictable and several years of hard work and experimentation.
New business ventures are almost always a series of experiments. Some things work, some don’t. But the more things you try, the more you learn what works and what the market will buy (some technocrats don’t care what the market wants to buy). So the real path to revenue is a few false starts, some intermittent down time, and eventually a solid product emerges that gets some real revenue traction. But it is difficult to predict WHEN that break point occurs and how FAST revenue will grow thereafter. This is due to the experimental nature of new ventures. We simply cannot know everything about the market in advance when a never before introduced product arrives on the scene.
So then why don’t we have an honest conversation with the investor about that process? A savvy investor knows this, and the rest are just being snowed. Why not forget the J curve and speak reality? I can suggest several reasons why we don’t (even though we should):
1. It’s about valuation. Gee, if we admitted ventures are experiments, the cost of money might be a lot higher….
2. It’s about pride. Hmmm.., if we admit the venture is an experiment, we might be seen as a neophyte who doesn’t know what he’s doing….
3. It’s about fear. If we call the venture an experiment, we’ll never raise money…
And probably a handful of others.
Honesty from the entrepreneur indeed could lead to more confidence. And from the investor….. well that 10 year VC fund business model just might be in trouble. Or it already is….how many venture funds made money in the last 10 years?
During the Internet bubble, it was common to think an upstart could go public within 2-3 years after launch. Prior to that, it was common to think 5-7 years was the window. I suggest by “getting real”, innovation will lead to a better recovery. Growing companies takes time…more than 5-7 years….and it takes time to get from the idea to a product that produces revenue….more than the commonly believed 6-18 months…it takes several years if done right. I believe there are no short cuts unless you plan to sell a house of cards. Let’s get real.
