Good news! There are only two obstacles between you and glory for your startup.
Bad news. The first obstacle is your competitors.
Worse news. The second obstacle is your investors, who don’t want to hear about the first obstacle. That’s why the first obstacle doesn’t appear in your business plan.
Good news! There’s hope despite your competitors and investors.
I’ve listened to pitches for investment funding, I’ve been told what to say in pitches for funding I sought, I’ve heard business plans in business schools and in real-life businesses. So has my colleague Ben Gilad, who’s also served on a venture-capital company’s board. So have you.
We all know the recipe for success:
- Show skyrocketing graphs of how big the potential market is. Ideally it’s tiny now, but it’ll nova in about three minutes. (It helps also to verbify nouns.)
- Gush about how unique and unprecedented your product or service is. Assert that customers will instantly recognize its utility despite its novelty.
- Radiate certainty that the numbers in your business plan are conservative.
But let’s be clear on what “success” is in that recipe. “Success” means getting funded. It doesn’t mean creating a business that will make money or that you can sell for a medium-sized island after four minutes.
Business plans describe business success; they assume business success. They say this is what’s going to happen when our strategy works. That’s not a bad place to start. It is, however, a bad place to stop. That brings us back to those two obstacles.
Any market opportunity good enough to excite you will excite someone else too, and that someone else will compose their own business plan and hunt their own investors. Unless you are very, very lucky, you are going to have competition. That you will have competition is not a failure on your part. Not preparing for competition, though, is.
Most business plans trust their lives explicitly to a cool product and implicitly to competitors’ inability to displace it. Such technological trust has bred much strategic failure. Ben and I have run business war games where shocked managers have blurted “I didn’t know our competitors could do that.” We’ve run strategy simulations where stunned managers discovered their textbook-perfect plans would trigger ruinous retaliation. (The shocked, stunned, and wise managers thus saw the failures before they happened, so they could — and did — prevent them.)
Those managers weren’t stupid, sinister, or shallow. They’d proposed by-the-book plans that no one would question unless they’d heard some grumpy essayist rant about competition.
Human beings are overconfident, and that’s one reason why business plans minimize the potential pain of competition. Another reason comes from investors, the second obstacle.
I’ve heard the questions investors ask investees. Their questions are overwhelmingly about something like due diligence. How do you know the market will nova. How far along are your patent applications. Do you have any experience with actual customers using your product. Where did that number come from. They’re making sure you’ve done your homework and they’re minimizing their risk. If you pass, they will expect you to make the plan’s numbers come true. If they don’t reap what you’ve sown, someone will seek or be shown the exit.
Investors aren’t stupid, sinister, or shallow either; they’re just doing a by-the-book investor critique. Competitive strategy is your job, not theirs. Unfortunately, their ironic desire for certainty in the risky business of investing helps cause excessively rosy plans and makes people pretend competitors are no obstacle.
Getting to glory
Optimism is a job requirement for entrepreneurs. No entrepreneur says “I burn to enter this business but I think it’ll fail.” I’m not saying optimism is bad. I’m saying the odds against success are daunting enough, and it’s really not necessary to make them worse.
Remember again what “success” is in the funding dance. Success is not creating a robust, internally consistent competitive strategy. Success is making a deal. The deal is about finance, not strategy. That’s not wrong; it’s the nature of the transaction both sides seek. But as the entrepreneur you have to go further to ensure your business’ success. The investor would be wise to go further too.
For the investor. Don’t expect entrepreneurs to reveal risks you don’t want to hear. Frank discussion about competition shows your candidate is serious. Glossing over potential competition, confusing technology and strategy, happy talk about sailing endless blue oceans… those are danger signs, not comfort food.
For the entrepreneur. I know you’re eager to ruin your personal life by working 20/7 and I’m grateful you’ve read this far. Friendly advice: you simply must strategize for how everything your business does will create distinct value in your marketplace. That’s not about slowing down any more than air bags are about staying home. Based on what Ben and I have seen, that process will result in strategies that’ll energize you and the troops even more than the product and operational plans you’ve already built.
For the competition. Dear potential competitors. We’ve been inspired by this grumpy essay. We’re ready for you. You’ve been warned.
This article was originally published as a guest feature in Start Up Beat.