Why do so many business ventures fail? Don’t they all begin with great promise, each initiated on the basis of a very good idea? Wasn’t the market appealing, the product amazing and the management sufficiently experienced? This question puzzled me for a long time and became even more pressing during the dark days of the Venture Capital industry. For those unfamiliar with this mystical actor, venture capitalists make their living placing large bets on their ability to find promising solutions to emerging market gaps. Typically, this entails creating businesses, often at great expense, with the
primary goal of generating greater investment return than those of the traditional capital market.
This class of assets is not for the faint of heart as the casualties are numerous. In the Venture Capital (VC) industry, business closures equate to losing large sums of money, but it is simply part of the game. At the great expense of the VCs, we all discovered that any investment model could only be sustainable when overall gains exceed overall losses. Perhaps this may seem a simple principle but it is far from trivial, judging by the empirical evidence when we look back at the past decade of VC activities.
This systematic inability to create value is certainly not caused by a lack of knowledge. In fact, the industry is comprised of very experienced individuals, namely scientists and businesses advisors. Despite all this knowledge, the industry has constantly failed to meet its goal of beating the capital market performance. Some observers are even alluding to the end of an era. There began my quest for wisdom—to understand what has gone wrong not only for the investment community but for the sake of all businesses—perhaps even for the survival of the race. Or simply to assess whether the current venture capital business model can survive in this challenging and ever changing global market! Looking back at 30 years of interaction with some 1,000+ companies, some successes and many failures, it became
evident to me that the current value creation process is flawed. The process is not only defective for start-ups, but gets even worse as some of those businesses reach later stages. Apparently we get so busy doing the stuff we do that no one seems to remember why we began doing it in the first place. Clearly, this shortcoming hides the many challenges of creating value through business ventures and inevitably impedes our ability to become successful.
Naturally, I started questioning the relevancy of our processes, wondering if we were paying too much attention to those things that don’t matter very much. Do we recognize that value is at the core of all things? Have we forgotten that only consistent value creation can sustain prosperity? Have we become like the Romans, so complacent and self-consumed that we don’t see our own folly? Furthermore, are we destined to arrive at the same outcome?
Traditionally, we have justified business opportunities by benchmarking the visible and asking ourselves this question: “Is it good enough to justify the investment?” Once we reach the comfort zone, we quickly assemble the business, usually with minimal capital, and so the chase begins. Generally, the identification of basic favorable features (i.e., growth rate, market size, presence of pains and the lack of a suitable solution) is sufficient to raise the minimum start-up capital from angel investors or early stage investment funds. Angel investors are usually less knowledgeable about the start-up specifics and tend to rely on their general business acumen. Angels will act on instinct. They are quick to make decisions, often underestimating the challenges of value creation. As a result, angels will often get diluted as the business seeks additional capital, leaving a bitter taste behind. We can still find some early stage investors, but this category has diminished, as many of the investors have either folded or moved to later stage investing.
The start-up is fuelled by early enthusiasm and optimism. The first miles of the journey are full of promise and the team is generally very busy building the first product. Then the business invariably runs out of steam when it faces some kind of difficulty before any indication of success appears on the horizon. Although favorable factors (growing market, competitive advantages, early clients, great product, experienced management, etc.) are essential in achieving any form of success, it is not sufficient to prevent the business from going under. Cemeteries are filled with businesses that provided superior products to fast growing markets, but failed to convert market opportunities into value. Conversely, many businesses have progressed very well with second-grade products or ventured into markets that most of us would not even consider. I remember the Kaufman brothers operating in the recycling business and closing their first year of operation with $1M profit, simply by recycling windshield wipers. Imagine picking up what we consider garbage! What about the “Dollar Store” case? It was a billion-dollar buy-out
deal for a company selling generic products for a dollar at a time.
The fact is that while great products and a fruitful market environment make for a strong probability of success, this alone does not ensure value creation. In light of this situation, why is it that so many businesses with superior products fail to take their rightful position in the market or provide adequate return to their stakeholders? What are those things that they should have considered before taking the journey? Where have they gone wrong? The attention given to the world’s giants, including Google or Apple, and even the paradigm shift suggested by the overwhelming success of web-based and social networking ventures such as Twitter, Facebook and LinkedIn, have somehow created a wrong expectation of easy success. In reality, the vast majority of start-ups won’t make it. Once the lifestyle businesses are removed from the equation, less than 10% of the so-called early stage businesses will show some form of success. Approximately 30-40% will provide some kind of capital preservation and the others will become a total loss for the stakeholders.
Through the years, I have witnessed the rise and fall of many businesses and have puzzled over the fatality rate in the business environment. The idea for the Business Paradox came from witnessing and working with very busy and dedicated entrepreneurs who were systematically failing to create value. Those experiences shaped my perception that, perhaps, success was not influenced by the positive things we traditionally benchmark, but by those negative elements that are too often simply swept under the corporate carpet. I realized that most of us end up spending a significant amount of time on things that have nothing to do with value creation. Does this sound familiar? If so, why is that? This is the paradox in business planning, as most business plans cover only the justification and not the things that count the most, namely those relating to the risk of failure. A simple analogy is found in the design of video games: a few simple goals, but mostly lots of traps to prevent the player from reaching them.
As a result, many businesses that initially appeared to have the ability to run the race failed simply because they misunderstood the inherent risks of cited opportunities. Challenges are numerous in business and, if not properly managed, can severely harm and even paralyse the business process. Once the business rationale is checked, attention must be focused on the risk issues—understanding those things that can go wrong. We must constantly re-examine the business objectives and their relevance, and consider alternative paths. We tend to concentrate on those things we are good at such as the strong links in the chain. If those links are strong enough, perhaps it is time to pay attention to the links that may break.
In this book, I will provide you with basic principles to avoid the traps in what I believe to be the primary sources of business failure: management, governance and time. The first concern is management, simply because the sooner you accept that individuals are fallible, the greater your chance of achieving success. The second concern is governance, because you need to know where you must go in order to assess whether you are getting any closer. The third concern is time, which is required for the business to grow to its full potential and maximize the value creation.
Over the years, I have advised many business leaders to carve out some time to observe their ecosystems, give special consideration to market shifts, and deploy corrective actions when required. It is as if the world has stopped thinking. Perhaps the managers of today’s reality have filled their agendas with too
many things that have nothing to do with value creation. No wonder the economy is in such a mess. Managing a business nowadays is just too complex to be informal. Decision-makers must go the distance in planning, be systematic in order to imagine possibilities, assess their likelihood, and act rapidly if
value is to be created.
I hope this book will motivate you to consider a different perspective—one that not only gives you justification to start your business but one that helps you to understand the obstacles you need to avoid in order to “Get a good kick at the can.”
You can buy The Business Paradox at: http://www.friesenpress.com/bookstore/title/119734000007973230/Jacques-D%C3%A9nomm%C3%A9e-The-Business-Paradox