February 24, 2004:
Including (but not limited to)…Copernicus, Heliocentricity, Financial Models,
Bill Murray, and Why Entrepreneurs Should Adopt the Lazy Manager Rule.
by
Bill Snow
Whew, that’s a rather
divergent grouping of topics. Let’s dive in. A Google search for the term,
“included, but not limited to” produced over 5 million hits. This is obviously
a pretty common phrase -- dare I say, a clichéd term? I used it two weeks ago
while preparing a proposal for someone, and it got me thinking that this term
nicely sums up the nature of entrepreneurship, and by proxy, the world of
venture capital. “Including, but not limited to” sums up the ambiguous nature
of entrepreneurship. If you want to play, you better be able and willing to
wear many different hats.
But you better make sure you
can tell you’re wearing the right hat…and the right time.
Heliocentric…or egocentric? How about the Path of Stupidity?
Nicolaus Copernicus was a Polish astronomer who lived in the 16th
century. As much as I wish I could tell you he invented pierogi and founded the
Zywiec brewery, he did neither. Instead, Copernicus hoisted upon the world
the
novel concept that the earth was not the center of the
universe. This caused much consternation and gnashing of teeth for the
followers of Ptolemy. Ptolemy, after all, had asserted the earth was the center
of everything. After learning their idol’s earth-centric view was incorrect,
the Ptolemy fan club disbanded and each former member swore an oath to never
venerate someone whose name starts with two awkward consonants. “Thank goodness
that SOB died a few millennia ago,” many of them were rumored to say.
Before Copernicus,
astronomers had a difficult time explaining
retrograde, the apparent “loop-de-loop” motion of the planets as compared to
the steady backdrop of the stars. Based on their Ptolemaic dogma, these
astronomers had to create ever more complex systems to try to explain the motion
of the planets. But no matter how much time and energy they invested in adding
more and more layers of complexity to their model, their model never really
worked.
Stay with me, I’m about to
make a point. Two points, actually.
1. After our friend
Copernicus pointed out the obvious, that we inhabit a heliocentric universe,
where the sun is in the middle and all planets (including the earth) orbit it,
astronomers found it very easy to construct a model that shows the movement of
all the planets. In other words, the Ptolemaic process of adding layer upon
layer of complexity to a system that was fatally flawed was nothing more than a
vigorous walk down the path of stupidity.
2. Self centered thought is
usually the hallmark of children. Children lack real life experience and have
little or no ability or inclination to engage in introspective thought and
self-criticism. Because they lack these things, children tend to put themselves
in the middle of everything: the world revolves around the child.
I mention these seemingly
divergent topics for a reason: Far too many early stage entrepreneurs are guilty
of taking the Ptolemaic approach to their business “idea” and resulting business
plan. In other words, everything revolves around the idea and the plan. No
matter if the crux of the plan actually works, makes sense, or features a target
market that will pay for the product, far too many entrepreneurs are guilty of
plowing head first into a world of, “if it doesn’t work, I’ll just jury-rig it
by adding another layer of complexity.” This is called the “path of
stupidity.” All points within the path make complete sense, but the problem is
the path is pointing in the wrong direction.
Further, too many
entrepreneurs put themselves squarely in the middle of the venture capital
world. They can think of no other alternatives to their solution, and as a
result, they often have a tough time grasping the concept that their “great
idea” is merely the over abundant flora of VC’s email and snail mail systems.
As one Chicago VC recently told me, “We probably look at over 3000 plans each
year, and we typically make less than 10 investments per year.” Like children,
too many entrepreneurs just don’t get it: Entrepreneurs need VCs more than VCs
need entrepreneurs.
Financial models
All this talk about models
leads up to one of the most over looked parts of entrepreneurship: the financial
model. Entrepreneurs can screw up their chances for funding in many ways when
it comes to the financial model. For example, just because your financial model
kicks off enormous amounts of revenue and profit from a small amount of
investment capital, doesn’t mean you have an idea that works! In fact, most
investors will jettison a plan that features a model that grows from zero to
$500 million in sales in 5 years with only a single solitary investment of, say,
$2 million. Please repeat the mantra: If you show a financial model that claims
you will grow from zero to $1 billion, or $500 million, or even $100 million in
five short years, with only a very small amount of investment, you are merrily
cascading down the path of stupidity.
A few weeks ago, Darrell
Williams from Du Sable Capital joined me at my usual lunchtime haunt, the
Northside Cafe. While we ate a very healthy lunch of bacon cheeseburgers
and fries, we discussed a number of topics, and not surprisingly, we talked
about financial models. Darrell mentioned four constraints in putting together
financial models: rate of return, the amount of leverage the operation supports,
the time it takes to get to break even, and the impact of dilution on
shareholders.
Essentially, a given amount of money can only grow to a certain size in a
certain period of time. The longer it takes to get to breakeven, the more money
the entrepreneur will have to raise, and the more the entrepreneur will be
diluted. If you have a tough time grasping the basics of accounting, it is time
to take a refresher course at a local college.
Lazy Manager Rule
As much as I was impressed
with Johnny Depp’s spot-on Keith Richard’s impersonation in “Pirates of the
Caribbean, “ it was Bill Murray’s character in “Lost in Translation” who
proffered my favorite recent quote:
“The more you know who you
are, and what you want, the less you let things upset you.”
This is the “Lazy Manager
Rule” to a tee! In other words, be lazy. Keep it short and to the point.
Don’t get bogged down in things that don’t matter. Don’t let things bother
you. Life is too short to get hot and bothered by thing after thing. Chill
out, dude, and let laziness reign.
I’m saying this with
tongue in cheek, of course, but if things are getting too complicated, perhaps
your business model is starting down the path of stupidity. If you have to
constantly stand over your employees and correct their work, find new
employees. If you are repeating yourself, if you are repeating steps, over and
over again, find ways to eliminate those steps. You should be driven by
maximizing your efforts, not spending a maximum amount of time getting that
effort. If you know what you want, if you know what works, you won’t get bent
out of shape. You’ve avoided the path of stupidity. Embrace your
inner-laziness and get it done with a minimum of fuss.
Has your company been profiled by Bill Snow? Send
an email to introduce your company:
bill@billsnow.com
About the author
Bill Snow runs this site. If you haven't figured that out yet, I can't
help you.
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