Posted by: @spdlm | 20 Jul 11

The digitalness of Start-ups – Is your start-up ON or OFF?

This is an area I often discuss with start-ups because the digitalness of the start-ups is frequently misunderstood or even completely missed.

“We believe that our passion will bring success eventually”

“We don’t think that we want to dilute our company too much”

“We are not in it for the money only”

“This product is my baby”

These are the statements I hear often amongst the start-ups. I have no disagreements with these statements specifically, but I want to talk about misalignment of interest and expectation amongst start-ups and the inability to make purely logical decisions on what is supposed to be a logical process.

Is your business in "1" or "0"?

Digitalness

In the world of financial derivatives, there is an instrument called Digital Option (aka Binary Option). It is called that because the payoff characteristics is either “on” or “off”, 1 or 0, it pays or it doesn’t. Options are also instruments whose payment is triggered by an event, such as price of oil reaching a certain level, default on loan payment or any other trigger that can be quantified. So, when I talk about the Digitalness of the start-ups, it is about the necessity of certain “events” that need to take place for the business to become “1”, from “0”.

The Events

So, what are these events that can act as this trigger? Examples of these include;

  • Funding
  • Advices and Mentors
  • Various Expertise
  • Collaboration
  • Critical Mass
  • Economic Climate
  • Media Coverage
  • Idea/Inspiration
  • Team formation

Each of these events (and many others) can make or break a start-up and indeed make “1” from “0”. Many entrepreneurs I talk to have a good idea how and when they are going to make their business to a state of “1”. They seem to be well informed of how others did it and try to follow the proven methods. Regrettably, far too often, I come across a situation where the entrepreneur just does not understand that they may not be in the position to choose which event is their “event”. For example, a founder of a Web 2.0 company I once knew had a fantastic product with fantastic team behind him. He also had a very good idea how he thought he would get funded. Because he waited for the ideal investor to come by for too long, the prime time for the angel investment came and went and he is now forced to revert to bootstrapping, which is extremely difficult once the business has been geared up for VC investment. You would be very lucky to be able to choose the “event” for you. They often choose you.

The business decision

In my view, however wonderful your product is, unless you become “1”, it is no more than an academic exercise. If you once made a conscious decision that you are going to brave this tough world, putting your idea and product out to the world in return for financial reward, it is a business decision. This may not be the case if you are only after recognition and awards, but most entrepreneurs would not say no to financial rewards, which means that almost all entrepreneurs are in it as a business challenge. So, the decision is, do I need to exploit this “event” to turn my business into “1”, then there really should be no reason not to act on that event. Even if it is likely that without an investment from a certain type of VC, the growth of the business will follow a slower path or into a slightly different direction, these outcomes are both “1”. Not getting invested and waiting for the ideal event to occur is an extended period of “0”. The question is, can you afford it?

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