Don’t think strategy: Think like a venture capitalist!
One from the Archives (Circa 2001)
Don’t think strategy: Think like a venture capitalist!
To plan a successful strategy you need to learn to think like a venture capitalist. You need to consider both the risk and the return on your investment.
VCs begin by asking: How big is the Problem we are trying to solve?
What you are looking for is the BIG P.
Forget about opportunities. Invest in a strategy that solve big problems for you and your customers.
Next take a look at the proposed Solution. How complex is it? How expensive is it? How difficult is it to implement? What are the barriers we may encounter? How easy will it be to copy? The solution you are looking for must deliver you a competitive edge at a competitive price.
Now consider how this solution will change things. Will this solution work within the business or will you need to change the way you and your customers do things? If you do need to change. How much will you need to change?
Great solutions fail everyday in business simply because employees, suppliers and customers don’t want them.
Finally you need to know if your Management team can actually make this work? Do your team leaders, sponsors, partners and vendors have the experience to develop, deliver and integrate the solution into business? If not then you have a problem.
When you think like a venture capitalist measuring the strategic value of any project is easy.
The optimum strategy addresses a Big Problem with a small solution requiring minimum changes and little management expertise. Delivering a big return on your investment with low risk.
Anything else introduces increasing levels of risk and/or lower returns on your investment.
Strategic Planning is never about a single project. So you need to start thinking about how you will manage your strategic portfolio.
Again, thinking like a venture capitalist can help you improve your strategic planning process.
For a VC portfolio management is about spreading the potential risks across a number of investments.
Forget about the strategic plan and start thinking in terms of a strategic portfolio consisting a variety of projects. Each with a unique risk:return profile but complementary to the risk:return profile of the overall portfolio.
This will allow you to mix and match Risk and Return across the whole portfolio rather than on a case by case basis.
Finally, you should consider adopting the financial portfolio management techniques that permit Capital Projects (e.g. Software) to be recapitalised as ongoing operating expense items rather than depreciating capital investments.
Thinking like a VC not only means proactively managing the risk and return on your investment. It also means proactively managing the cashflow required to fund the execution of your strategy.
Other posts on Thinking Like a VC:
- Should I get my wallet out?
- What’s the Exit Strategy
- Risk or Return? Think about what you are pitching.
- Finding the right VC to fund your dream
[Updated 14-4-2010]
I discovered this post by Steve Blanks called “No Plan survives first contact with customers“. It is well worth a read for its pragmatic outlook on the “real World” value of Business (read Strategic) Plans
