In the last few years, I have been actively involved in mentoring aspiring start-up entrepreneurs. After a long career with a lot of twists and turns and experiences, mentoring an early-stage CEO gives me the opportunity to share what I know from having been to the movie several times. For most of the CEOs I have worked with this is their first start-up and/or their first time as a CEO. For others, they are on their second or third venture, but still want some help, guidance, and a sounding board. My overall goal as an advisor is to make whatever contribution I can to help the entrepreneurs maintain their inspiration and avoid desperation.
When an entrepreneur takes the leap of faith to launch a new venture, they demonstrate extraordinary inspiration. They have a vision for how they will turn a blank page into a successful business, and most are motivated by something in their life that provided the creative spark to dream up a commercial offering. It is never a decision they take lightly. Every entrepreneur knows that the odds are stacked against them, but they have the courage and belief that they will defy the odds with their inspired idea and their hard work. It is exciting to work with these enthusiastic entrepreneurs. They move very quickly, and they just keep driving forward.
Unfortunately, not all ventures make it. Good ideas for a product are not necessarily sufficiently good ideas upon which to build a company. Sometimes, the product just misses the mark, or the market just is not available or ready to purchase. Other times the problem is in the execution, and the early-stage entrepreneur and team just cannot muster the people, processes, and capital it takes to bring the idea to fruition. These outcomes are sad to see. One of the challenges as an advisor or mentor is to balance honest, negative feedback with positive encouragement. We do not want to burst the entrepreneur’s bubble, but I have certainly been in situations where the handwriting on the wall was pointing to failure. In those moments, the mentor or board’s role is to hold up a mirror and help the CEO to make an objective analysis of the situation. Too often, they find it very difficult to see the need to change course until it is too late.
The scenario that is most troubling is when the entrepreneur is on a positive path executing their vision, but simply running out of capital. This is often the moment when inspiration turns to desperation. They are close enough that they can see success, but they are out of fuel to achieve it. Typically, they have not checked quite enough boxes to attract additional institutional funding, and success is not such a sure thing that investors are lining up to inject the needed funds. As an advisor/mentor, this is the most disappointing outcome as you watch the enthusiasm of an inspired entrepreneur turn to desperation and frustration. Investors are making calculations about risks and likelihood of success, and their calculus has to show a satisfactory return on their investment. Their objective is to avoid throwing good money after ‘bad,’ but the result is that the entrepreneur is facing the end of the runway without enough lift to take off.
In my experience, one of the most valuable things an advisor can do is guide an entrepreneur to be realistic about revenue potential, cash flow, funding requirements, and the availability of capital. At the risk of being viewed as negative, the advisor has to challenge projections and timing, and question spending and hiring. The advisor has to help the entrepreneur to adequately plan for how much capital will be required, and avoid heading down a runway that is too short to achieve liftoff. One of the most common challenges I have encountered is when an entrepreneur has selected a niche market to serve, and is chasing institutional investment even though the total potential of the business is too small to justify the type of capital they are pursuing. Institutional investors, VCs and PE firms, seek businesses with the potential for very high returns. Not many businesses meet their investment criteria.
Many first-time entrepreneurs are naive about how institutional venture and private equity investors evaluate businesses and their thresholds for risk and return. My approach is to walk through a thought exercise with the entrepreneur. With their market analysis and projections, we do a back-of-the-envelope projection for the P&L over the next few years. Based on that guesstimate, we do exit-multiple math to see what the company may be worth in a few years. We then compare that valuation to how much capital they expect to need, and we do the math to see if the return would be attractive to a VC. Invariably, somewhere along the way the entrepreneur figures out that their total addressable market is to small, or their expenses are to high, or their sales ramp is too slow, or some other flaw in the way they envision their business will ultimately limit their ability to attract institutional capital.
Holding up the mirror enables the entrepreneur to see reality for themselves. In some cases, they realize they are chasing a business that will fulfill their dreams, albeit with a more modest growth trajectory that may be a solid lifestyle or family business. In other cases, the entrepreneur pivots and rethinks their path to aim for a brighter star. Frequently, the conclusion is to pursue alternative funding sources rather than venture capital. My objective is to help them find a path that keeps them inspired and avoids heading down a path that will lead to the desperation that comes from running out of runway.