The Money Mirage: 3 Measures to Define Early Progress and Avoid Temptation

If you’re too early, admit it and hold back. If you’re too late, recognize the cost of competing and evaluate if you’re really able to invest to win.

Michael Skok, Contributor
10/20/2013

The early stages of a startup are critical in so many ways. So how do you check you’re on track? Sometimes entrepreneurs follow the money, choosing to measure progress as getting funded. Don’t, it might be a mirage. Instead, look at the basics, such as whether you’re getting a product to market that wins customer loyalty and starts to prove the potential for repeatability. In a world of many variables, the reality is often a balancing act. Certainly, if you’ve got investors they may set important funding milestones. But don’t let progress toward funding tempt you toward a mirage.

Instead, I recommend three simple measures that you can define and apply for yourself.
1.Reducing Risk
2.Increasing Value
3.Converging on a meaningful opportunity

The key is then to validate these externally and then always do a gut check.

Reducing Risk
Startups are risky by nature so finding ways to assess and de-risk is key. The risks to focus on are
•Market risk
•Team risk
•Execution risk

Market risk
Assess whether the market is evolving according to your original vision and whether you have timed it right.
In the B2B world, specific questions here are:
•Is the market need moving from latent to blatant? •That is to say, is it more or less in demand?
•Is it more in evidence and obvious to people each day?
•Is the need moving from aspirational to critical? •That is to say, is the problem you set out to solve becoming more or less painful and with more people in need?
•Is it becoming more of a must have than a nice to have?
•Is there still white space or have many competitors crowded you out?

If you’re too early, admit it and hold back. If you’re too late, recognize the cost of competing and evaluate if you’re really able to invest to win. The external validation here is crucial. Are you continuing to push your solution and is that getting harder and harder or is it getting easier to find and engage customers. Ideally, you would get to a place that you are getting market pull (e.g. inbound inquiries). It’s an acid test of whether you’ve honed your messaging and value proposition enough to be attracting customers. Either way, at least you should have customers wanting to act as references for you and showing intent to expand their purchases.

The gut check questions here are around whether you feel you’re making progress faster than the market is evolving, or whether you feel it is slipping away from you and going toward better funded competitors who are moving faster?

Team risk
To use a theme that would typically be contrarian to HR thinking, I think of this as a numbers game.
Quantity/Quality * Multipliers = Speed
•Can you hire people on time? (quantity)
•Are you able to attract enough of them to be selective? (quality)
•When you hire people, are they multiplying your value or diluting it? (multipliers speed your progress)

Of course, the progress you want in your team is really not just a numbers game and this is a simplification that needs validation. But great hires that fit your needs and your culture will accelerate your business and you’ll know it internally and externally. Externally, check that all stakeholders are giving you great feedback about interactions with your team. (This is also a good reason to consider outside, independent advisors & board members) And then gut check that you genuinely feel you are effectively teaming with the hires you make and seeing them make a real impact.

Execution risk
If you’ve built a great team and you’re proving you’ve got a great market to go after, the remaining risk is execution. These risks are linked of course and great teams delight in executing and holding themselves accountable for results. So the good news is that this is the simplest one to validate: Are you exceeding expectations with your stakeholders? If not, you’re not executing.

Expectations can be as important as execution
If you’re not executing, address both the execution AND the expectations. In a startup, there’s no excuse for not being in sync about what progress looks like on your execution. Set clear measures for success at every level, make them visible and transparent and highlight progress and learning continuously.

Incidentally, these risks are also related to market risk. For example, if your market is not panning out, but your team is, then you’ll likely find a way to re-target or pivot and execute, despite challenges. It’s also why I didn’t include technology risk as one of the top three because surprisingly few of our companies ever fail for technology reasons alone. That’s because a great team will usually trump any technology challenges that arise.

Increasing Value
Ultimately, the only value that matters is the one perceived by your customers. So build ways to measure customer experience into everything you do. At the low level, that could be analytics on your product, or at the higher level, that might be things like your NPS (Net Promoter Score)

Customers are the benchmark
Agree with your customer what their measures for success with your product or service are and validate and benchmark continuously. With early customers this can be like a partnership, but ultimately you’ve got to be delivering more gain to your customers than the pain they have to adopt. If your gain/pain ratio is improving for your customers, you’re making progress.

Repeatability at reducing cost
There are many other ways you may assess your progress. My favorite in the early days as an entrepreneur was simply to check whether I could sell the same product repeatedly without major modification to the same segment of customers, and make them reference each other so that our sales cycles decreased. (In today’s lingo that might be: Is your MVP working repeatedly in your MVS and causing your cost of customer acquisition to reduce?)

Gut check. Make sure you know what it’s taking to deliver this value. If it’s killing you early on, it’s going to kill you dead at scale. If it’s getting easier, you’re making progress. Ultimately you want to start measuring this against costs and see if you’re on a productive path to cost effectively acquire and serve customers.

Converging on a meaningful opportunity
Arguably this is the most important vector, and the hardest to assess. If you’re reducing risk and increasing value in your venture, you’re on track. But then the key question is where is that track taking you?

Don’t confuse activity with impact.
If your results are not converging on a large market opportunity where you can have the impact you want then face facts and course correct.

A degree off course becomes a mile fast in a startup.
Be honest with yourself and don’t let your conviction about something box you into a corner. If you are so convinced of your course that you just simply focus on reducing risk and fail to find “pull’ from the market, you’re unlikely to be increasing value, and you may expend your resources, leaving you in a corner with nowhere to go. This is why great entrepreneurs prove their worth every day by continuing to take enough risk to invest in breakthroughs that dramatically increase value and open up large opportunities rather than marginally improving outcomes and finding themselves stuck in a corner.

Corners are tough places to course correct!
Instead, look for every incremental step, or test, or investment you make to yield some proof of how you’re increasingly delivering value for your customers.

Try to balance persistence with perspective.
The challenge many entrepreneurs face is to balance the persistence it takes to execute with the perspective it requires to ensure you’re converging on a valuable opportunity. Find ways to listen proactively and check that you’re at least getting early validation; that you will be able to address the market in a unique and defensible way; and that you can envision a path to a business with leverage and ultimately a profitable business model. Otherwise, this may not be a track you want to be on.

Now here’s the hard part. This can rarely be assessed by anyone other than the entrepreneurs and founders with the original vision – because it requires insight from all the progress data. And it may require bold decisions like increasing risk again to find new value on a new track. It’s why, as investors, we look for and back great entrepreneurs first and foremost. Per the framework to the right, our role is not to reinforce assumptions that may come from an initial investment thesis but remain open to learning ourselves and support tough decisions around change as needed to enable entrepreneurs to find the larger opportunity. Otherwise we risk stultifying the entrepreneurial instinct.

Investor trap
One of the classic mistakes I see entrepreneurs make is that they become obsessed with hitting certain investor metrics or funding milestones, believing that’s the key to success because it’s enabling them to secure the next round of funding. It might be and certainly funding is vital. But this can also lead to myopic thinking. So while an obviously visible measure of progress is whether you increase your financing valuation, don’t breathe your own exhaust. A high valuation may be impressive, but until you have predictable metrics, it’s likely subjective and also sets high expectations.

Don’t confuse financing and valuation growth with business growth.
Early private company valuations are rarely a real measure of success because they often rely so much on future potential. So be careful what you ask for and again check your gut. Do you really feel you have grown into these britches or will they leave your trousers around your ankles when you step onto the stage?

Own your own plan
Never let others define your milestones. Instead, own your own plan and commit to it and live by it. Get others to buy in to it and agree what they will commit when you achieve it. In short:
Live by the sword, die by the sword, but make your own sword.
Investors will commend you for it and you will know if you deserve to raise more money and when you do, it will be authentic, convincing and compelling enough to attract more capital.
There are many ways to check your gut here as an entrepreneur. One of the obvious questions is literally at the basic level:
Is work getting harder and more tiring or easier and more inspiring?

Whatever you do, don’t fool yourself. Check your gut along the way. You’re investing your life. The opportunity cost is immeasurable. But if you’re having a blast and your conviction is increasing, then in the immortal words of Winston Churchill:

Never Never Never give up.

This is your life, invest it wisely.
Every business is different. Hence, this is clearly a general framework to measure your progress. Personalize it with your own measures for success, and validate them unambiguously externally. Customize it with your stakeholders so you can set and beat their expectations. Good things will happen when you do, and yes, the money will follow.

Congratulations, you’ve just avoided the temptation of a money mirage.

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