VC: Too many entrepreneurs' business models rely on a 'cascade of miracles'

“A Cascade of Miracles” — I’ve found myself using this catchy phrase more and more frequently these days, which was first introduced to me about 20 years ago by Monty Shapiro who was the superb CEO of General Instruments, a New York Stock Exchange company. Monty was an old-fashioned business leader who recognised that everything doesn’t go in one direction to produce a compounding outcome of higher revenues, greater profits, and as a result, higher terminal valuations upon exit. He learned the hard way early on that whatever can go wrong will and making assumptions that everything will move in a positive direction, particularly in unison, was specious reasoning.After many years of having put this phrase of Monty’s on the sidelines, I have found myself increasingly referring to it in the past year in situation after situation. I observe many well-meaning, young, unseasoned entrepreneurs violating all the principles that Monty preached and are basic to making a profit in business. To begin with, (shades of the disc drive business in the 1980s), too many entrepreneurs are chasing too many rainbows in the form of business strategies. These plans are, in one or another, a form of the same model with a slight twist — yet another delivery company, yet another food service company, yet another company based on the principles of the sharing economy, so on and so forth. Almost all present their pitch disregarding the myriad number of other companies that are pursuing the same customers. Thus taking the point of view that the market opportunity is open ended and that they have discovered a particular niche.I can’t count the number of business plans focused on building traffic, almost at any cost, to get to a volume level that will hopefully sustain a viable business model, even if in the interim they run a neutral or even negative gross margin. While all the while sustaining a business with increasing amounts of investor capital! How many business plans do we have to see with hockey stick revenue projections as a result of customer count building with salesforces growing and sales productivity increasing, churn rates reducing, prices holding firm with little concern for competition eating into the market? Not to mention the fact that for many of these same companies a large part of their customer base may be from other startup companies with similar fragile economics.But above all else, too many entrepreneurs are feeling the pressure from investors to project unsustainable growth rates and revenues, with concomitantly the cost attendant to those growth rates, because without these revenue growth rates investors won’t keep feeding the beast. So grow faster, spend more, lose more to attract the next round of investors (Rather than restraining the instinct to raise more and instead create capital efficient sustainable growth rates.). The alternative of projecting organic growth with approximately matched funding simply won’t attract investors.

To quote Monty, “If you count on a cascade of miracles and everything to work in perfect unison, you may be doomed for the scrap pile.” We will see in the next five to ten years how many of our current “unicorns” will get through the minefield supported by the huge piles of money they have been funded, to prove the axiom outdated.

And remember, for some of the companies who have been financed at recent stratospheric valuations they will need another “miracle,” which is a continuing ebullient public market to provide further capital or to provide an exit that doesn’t just go in one direction. If not, there may be a limited number of potential acquirers for an M&A transaction to achieve a similar outcome.

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