Entrepreneurs are the lifeline of any economy, and high-growth start-ups in particular are responsible for the great majority of new job creation. It’s worrying, then, that according to several reports the number of new businesses being created in the U.S. has been stalled since the end of the recession.
As a mentor to many start-up entrepreneurs, I find this slow-down concerning, and I see one reason that’s rarely spoken about and needs a closer look: what I call spreadsheet asphyxiation. I repeatedly hear from young entrepreneurs that, as fund managers come in, they introduce too many controls for cash flows, income projections, budgeting, risk analysis, financial modeling – the list is endless.
Start-ups can’t be assessed using conventional business metrics. Yes, they require diligent oversight. But in my experience, this can be achieved without an excessive emphasis on controls if a start-up entrepreneur has clarity at all times on
First, what specific problem are you solving? Building a new product or service in itself is not adequate, even if it’s a brilliant innovation. The litmus test is whether it solves a unique problem or offers a unique solution to an existing problem.
Second, who will be willing to pay a premium for your product or service? Be crystal clear about who your customer is. Once you drill down to this target group, the question is what they want to buy, not what you want to sell. Is the thing that differentiates your product critical to the customer? Why would they be willing to pay for your service?
Third, who do you want on your core team? You need to know why you’d want to hire an individual: what he or she contributes to the set of core competencies that you need. You also need to know what the individual gets out of working for you. And does that objective align with yours?
Finally, why are you doing this? Is the startup being built to last, to sell, or because you enjoy solving a challenging problem? Understanding the raison d’être is necessary as each of destinations implies something about your time frame, the resources you need, and your metrics for success.
It’s not that investors should be held at arm’s length and considered only as sources of cash. Fund managers can help entrepreneurs succeed by bringing outside perspectives and challenging supposed best practices – but only if they don’t unwittingly destroy what’s original about the start-up.
A final subtlety: Making money is the foremost goal of the investor, to be sure, but it’s not always the primary mission of the start-up founder. As AngelList COO Kevin Laws points out, “The business model exists to serve the mission, not the other way around.” Wise investors know that this split exists – and they’re able to help entrepreneurs find the right balance between the two goals.