MONEY TALKS by Andrew Waitman
Recognize the important random variables that will improve your odds of success. In venture capital fundraising, qualify the venture firms thoroughly and quickly.
Learning to embrace the unpredictable while avoiding the badlands
From SCAN's Print Edition
The universe, and life itself, likely began because of it. Biological diversity and evolution depend on it. You (yes, I mean you the reader) exist because of it. With just one “random” perturbation or small change in the lives of your parents, grandparents or great-grandparents, your entire history evaporates: In fact, you evaporate.
Scientists call this “sensitive dependence on initial conditions.” Disease and war that didn’t kill your ancestors and the fact that your ancient ancestors were clever enough to allude predators, the choice of school your parents went to, who they met prior, the emotional and environmental factors that made them physically engage, the health of your mother’s uterus, the competency of the doctor delivering you (did he wash his hands properly after performing an autopsy that morning), and a myriad of other circumstances could have slightly changed and there would be no you right now.
Randomness (uncertainty and unpredictability about future events or outcomes) envelops everything, everywhere, everyday in our world. It surprises me that this insight is not widely understood or appreciated.
Scientists would argue that a great deal that seems random actually behaves predictably or deterministically according to the known laws of science. These processes are often extremely complex and only unpredictable when not knowing the initial conditions. Scientists concede that this is not necessarily so at the quantum mechanical level where randomness reigns. But for practical purposes, in the chaotic nature of most observable systems, such as our universe, the earth, weather, biological evolution and so on, we perceive a great deal of randomness.
In business this is particularly true in a myriad of ways. Attempt to understand how market forces set prices, for example. Why is a Starbucks’ cappuccino $4 and one at Tim Horton’s is half that cost? Why does Bear Stearns stock trade at $30 a share on a Friday, sell for $2 a share the following Sunday? Why do certain products succeed while others fail, such as the iPod versus the RIO MP3 player? Why are some CEOs heroes one day and villains the next? Why does an economic crisis occur somewhere in the world every few years? Do government attempts to prevent the next crisis reduce or increase the odds of it occurring? In politics, if Florida election organizers had improved their voting ballot, would there have been no invasion of Iraq? A Canadian mother traveling to Hong Kong with her son dies from SARS in Toronto and the country is paralyzed with the fear of a pandemic.
How does the entrepreneur embrace this unpredictable and random nature of life and business? First, one must recognize that outcomes are not entirely random. There are many variables that can be controlled to increase the probability of the desired outcomes. Historically, military battles have been won by technical superiority, tactical innovation and focused leadership. This is true in business as well.
Narrowing the scope of what cannot be controlled or predicted while attending to those variables that have succeeded in the past will improve the probability of success. The 1963 Bay-of-Pigs military fiasco in Cuba, pursued by the United States, demonstrated the limits of controlling the outcome with poor planning, perspective and purpose.
The efforts and variables involved in raising venture capital are often unappreciated or poorly understood. As in many business processes, venture fundraising is fraught with complexity and unpredictability. The numerous random variables include your timing in approaching a fund and its availability of capital, the connections you have to its principles and their understanding and interest in your market space, the macro economic environment affecting their desire to deploy capital in your industry, your company’s competitive dynamics and awareness of these factors and the personal chemistry between you and the principles at the funding firm are all important.
The “random dragon” can never be slayed entirely but it can be tamed. How? First, don’t waste time or resources chasing the dragon in the badlands. Badlands are low probability regions. Recognize the important random variables that will improve your odds of success. In venture capital fundraising, qualify the venture firms thoroughly and quickly.
If a venture fund has not raised new funds in the past five years, don’t waste your time. If you are a semiconductor start-up doing a series B financing and the target fund has only invested in early-stage software start-ups, don’t bother. Am I stating the obvious here? In fact, I’m not: Too many entrepreneurs waste too much time chasing the low-probability.
Second, recognize that most complex situations with unpredictable outcomes are at heart a numbers game. This means that you can improve your odds of a positive outcome by increasing the number of events in which you participate.
For example, take customer and revenue growth: The more high quality prospects in the pipeline, the less likely that one purchasing manager getting fired prevents you from making your quarterly revenue. Numbers matter. This is the cardinal rule of most business processes. Success follows hustle, but it must be high quality hustle. Hustle in the badlands is just wasted time. The more high quality activity, the more you achieve results. In fact, some of the most successful tirelessly pursue a myriad of ideas, prospects and customers, experimenting constantly until something works. High selectivity in high volume can keep the random dragon tamed.
Finally, embrace the fact that no one can know or control everything. Therefore, unexplored opportunity lies everywhere. The great unpredictable nature of business ensures that success can be found where others presume it cannot. IBM did not stop Microsoft. Microsoft and Dell did not stop Apple’s rebirth. Microsoft did not stop Google. Google Video did not stop YouTube. MySpace did not stop Facebook. Complexity, chaos and randomness mean that there will be no end to entrepreneurial opportunity. Next column I will explore the single greatest failure of many start-ups.
Andrew Waitman is managing partner of Celtic House Venture Partners, specializing in early stage investments in high technology companies.