There's No Such Thing as Faith in Business
My company, Consumetrics, is currently in the process of raising money for operations. (Please forgive the terrible website. We know, and we’re working on it!) We’re considering several options for raising our first tranche — angel investors, high net-worth individuals, even a couple seed-stage venture capital funds — but our most recent attempt at raising capital was with the Texas Emerging Technology Fund.
Most people haven’t heard of the Texas Emerging Technology Fund, so I’ll spend a minute chatting about it. First, it’s usually called simply “the ETF,” much to the confusion of finance folks who always ask me how we’re going to raise funds from an Exchange-Traded Fund. The ETF is a unique program that uses Texas state taxpayer funds to operate what’s called a “gap fund” that invests in early-stage startup companies. (In this context, we’re talking about the funding gap described in Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers .) Anyway, it’s is one of the most (the most?) active early-stage VC funds in the world, with more than 100 investments either completed or in the pipe in only 3 years of operation. The ETF is a fascinating topic, and I’ll discuss it in more depth in another post.
At any rate, at the second level of the statewide selection process, Consumetrics was not recommended for the current round, but was invited to apply again in the next round. I’ll give a more detailed postmortem of that pitch later, but for this discussion it’s enough to say that we just didn’t sell Consumetrics to our audience right. While we presented them with a lot of hard data and evidence regarding why our business will be successful, the feedback we got after the presentation told us we didn’t close the loop in their mind. It’s a risk you run in any pitch, and this time it didn’t pay off.
After reflecting on what we could have done better, I’ve come to realize that our biggest mistake was asking our audience to take things on faith. Ryan and I have a strong and ambitious vision for our business. We both believe that’s one of the biggest reasons our business will succeed: we’re thinking farther and wider than the other guys. We see a lot of convergence happening, and that convergence presents a huge market opportunity, which Consumetrics is positioning itself to capitalize on. If you buy the underlying premise here — that convergence is happening, and there’s money to be made from it — then what Consumetrics is doing makes perfect sense. You’ll see that there’s a risk involved in building the business, as with all startups, but you’ll also see that the potential for payoff is so huge that taking the risk is justified. However, if you don’t see that convergence, or if you don’t buy that the convergence presents a huge opportunity, then you’ll see nothing but risk and no payoff. You’ll see a rainbow to chase with no pot of gold at the end. In our pitch, we explained our product well, we sold our ideas with eloquence, and answered questions with poise. But we asked our audience to take the convergence and opportunity we see so clearly on faith, which is why we were asked to come back. We didn’t tie our products and ideas to revenue well enough.
In business, the only thing that matters is what the market wants. Because the market is ultimately where money comes from, and business is all about making money, the voice of the market is the only thing most investors — especially non-professional investors — hear. As an entrepreneur pitching a company, your job is to convince your audience that “The market will pay money for X.” If you don’t convince them of that, then your plan to make money with X falls apart. Your business is a non-starter.
This is why there is no such thing as faith in business. There is only one meter stick — market performance — and if you can’t prove you measure up on that meter stick, you fail. As far as business is concerned, the only things that measure up are results and track records. If you claim “The market will pay for X” and have results to back it up, like revenue from the market paying for X, then people will believe it. It’s hard to argue with results. Likewise, if you claim “The market will pay for X” and have a track record to back it up, like taking a company based on “The market will pay for Y” public where X looks a lot like Y, then people will believe that, too. After you’ve got a hit under your belt, you’re an “expert” until you prove otherwise. (The soundness of that dubious logic is worth a whole post in itself.) However, if you claim that “The market will pay for X” while offering up only “because of A, B, and C” as proof, then most investors won’t believe it because you’re asking them to take future market performance on faith. You can put as many charts and graphs and numbers and quotes up as you want, but you’re still asking your audience to believe “A, B, and C means the market will pay for X” without proving it in the market.
So how does venture capital work? Companies with no revenue or track record get funded all the time. (Well, not lately, but you know what I mean.) If the only thing that matters are results and track records, then how do companies with ideas but no results get funded, and where do hit companies come from if no one can get funding without being a hit first? The answer is vision. You may not be able to convince a typical business audience that “A, B, and C” means “The market will pay for X” with numbers and charts and graphs, but if your audience has already convinced themselves of your claim, and you can demonstrate that you understand why “A, B, and C” mean what they do, then your audience will be ready to act, and if your audience is a VC, then that action is investing. This is why vision is so important in venture capital; it’s the only way good deals get done. (Of course, there’s a little thing called “risk tolerance” at play here too. You know, details.)
While vision is critical for VCs, as an entrepreneur you can’t just say “vision is your problem” and punt on making your business case absolutely airtight. Instead, as with all things in life, you have to hope for the best and prepare for the worst. That’s why Ryan and I will be spending the 3 months until the next ETF application deadline collecting results: market feedback, top advisors, and maybe even a customer.