Dear Aunty B,
I left a high paying job to start a business with two partners. We are barely eking out a living and work much longer hours, which is OK for my two partners, but I have a young son.
I often reflect back on the pay check, the big office with a beautiful Chinese antique sitting on carpet a metre thick, and heating that actually worked all the time, and compare it to my life now. The point is I would stick it all out if I knew it was going to pay off by being able to sell the business for a big gain.
But for that to happen it has to be doing better than it is now. My question is how do I make an assessment about whether my company is going to be a success or not?
Freezing cold in Fitzroy
Dear Freezing cold in Fitzroy,
So you have a small business, under $1 million revenue I guess. The first thing to understand is that the stats are against you. Only about 7% of privately owned businesses ever get beyond more than $2 million revenue.
Having said that; why not you? Why can’t you be the one to go against the odds, build an empire and flog it off to retire to, well, I was going to say Europe, but maybe somewhere hot in Asia would be more fun.
There was a great article published in the HBR in November 1998 which is like a cheat sheet for venture capitalists to decide whether to invest in a company that was probably a bit beyond your stage. But it is a very useful reality check and reminds you how many things you have to get right at once to pull the whole show off.
Individual event and probability
- Company has sufficient capital: 80%
- Management is capable and focused: 80%
- Product development goes as planned: 80%
- Competitors behave as expected: 80%
- Production and component planning goes as planned: 80%
- Customers want product: 80%
- Pricing is forecast correctly: 80%
- Patents are issued and enforceable: 80%
- Combined probability of success? A measly 17%.
And that is based on larger businesses than yours that one would assume carry less risk. Now, venture capitalists can be a gloomy bunch of pessimists – well to an entrepreneur anyway. So don’t just take their word for it. Do your own model. Write down all the things you need to get right to grow and then honestly assess the chance that you will.
I am not sure how worthwhile this exercise will be, but may I suggest you print out your findings. And then go and buy a burner thingo at the local hardware and start a small fire. At least if you are not any the wiser, you will be a lot warmer.
Your Aunty B
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