Why Start-Ups Need More Strategic Planning, and Why Investors Should Help Provide It

Why Start-Ups Need More Strategic Planning, and Why Investors Should Help Provide It

Single-minded passion for the idea. That is a typical of what people think about when think about the success of a new product or service. The individual and his or her team that tirelessly drive toward their vision. The problem is, visions don’t exist in a vacuum. I have said this to startups for years. Even VCs and angel investors don’t understand the role of strategy. They may coach people about the reasons they started the business, how to hire the right managers, to make sure they have enough capital, location, high ambitions or financial robustness, but they rarely challenge the deep assumptions of the creator. I always do that, and it is because the vision of the entrepreneur is often very singular. They have seen a light and they are driving toward that light. Unfortunately, along the path to that light, the entrepreneur will be buffeted by social, economic, technological, environment and political issues over which he or she has no control. They will keep driving toward the vision, sometimes even after the path has been washed out. I think they should be reminded they live in a real world. It makes them stronger in the long run.

Recent work by Ron Conway and Paul Graham tell the tale of entrepreneurial missteps (see Ron Conway and Paul Graham startup success data for more) with 40% failure rates for startups (77% during bubble years). Serial entrepreneurs do better, at 66%, but that still means 44% of firms fail, even if the owner has learned something from past mistakes.

I think one of the reasons, and it isn’t discussed in the literature much, is that small startups don’t have a good handle on strategy in its broadest sense. In particular, I don’t think they do a good job of understanding uncertainty and its implications. If you come from the school of "the best way to predict the future is to invent it" you may well have a conceptual bias against understanding the issues that will derail your idea. You may have a visceral aversion to changing your idea because of some outside force blowing across your path to success. My sense is that those who do find their genes that unleash adaptation, and they unleash them early, are more likely to be successful than those who rigidly plan for a future biased by vision.

Bottom line: startups need strategy because no matter how smart or how experienced their team, they can’t foretell the future any better than big firms. Big firms have the money to invest in expensive, and lengthy strategic assessment. I would suggest to start-ups that this is part of their interview criteria for investors. If the investor doesn’t have a set of alternative scenarios that can be used by those they invest in, then all of their experience and success gets discounted. With 40% success rates, I find it interesting that Conway and Graham suggest "trusting your gut." The "gut" is obviously not always a good reality check.

I’m practical. I think startups need to have at least one partner who can help them name and navigate uncertainty in a robust way. The more that do, I think we will see a correlation between survival and failure. Unfortunately, the sample size is too small to test this because so many VCs think their guts are the best gauge. I think they are wrong. Investors would do better by their investments to spend money creating strategic frameworks and scenarios for the industries they invest in, rather than spreading their money strictly based on gut feel, good near-term fundamentals, personal relationships, track records or a good vision. None of those acid tests matters if the world shifts. A firm that has imagined, tested and created contingencies for different futures will be more nimble than one guided (or misguided) by gut and the arrogance that they will invent the future regardless of other forces in play.

Daniel W. Rasmus

Daniel W. Rasmus, Founder and Principal Analyst of Serious Insights, is an internationally recognized speaker on the future of work and education. He is the author of several books, including Listening to the Future and Management by Design.

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