Looking through the Keyhole

Investors’ and Board Members’ view of a startup’s inner workings resembles peeking into another room through a keyhole.

Why? Because there are so many things whirling around inside a startup, and there is no practical way for an investor or Board member to keep up with all the moving parts. Even when doing due diligence on a potential investment, there are still too many nuances and moving parts to develop a perfect picture.

Think, for the moment, of the following factors that make this true:

• The startup has a whole team of people working full-time accomplishing various tasks to problem-solve and move the various elements of the startup forward. No one checking in periodically can see all the moving parts. In fact, even the startup team has to work hard to keep track of it all!
  
  
• Smart startups are always learning, reacting to new information, integrating new insights, and formulating new responses and strategies at various interlocking levels. The magic is in the details!
  
  
• Responsive startups will shift priorities, solve problems, and execute every move as effectively as possible. No one outside the startup can possibly keep up!

So, what is my point?

No one looking in from the outside can see everything happening in there. You can catch a glimpse of the action, see shadows, and spot movements, but be wise and remember that unless you are in the room, you cannot see the whole picture.

As a fundraising and then executing startup team, you have to simplify your story and make it accessible to those who only have time for a partial view. It is imperative that you lay out the all-important skeleton of the business (an adult human skeleton has 206 bones) because since potential investors are not full-time team members, no investor has time to grasp all the muscles (640 in a human adult) and nerves (7+ trillion!) that enable that skeleton to make forward progress. As a startup team, you are operating the “whole body” of your startup, but by focusing on the major pieces (bones) you can show an investor the shape of what you are building. It is incumbent on the startup team to make the essential elements clear and to not create confusion by getting into overly detailed levels. The same concepts need to be applied in communicating with Board members and investors to inform them about important progress milestones without making them experience every step between them.

This keyhole perspective is why when, as an Investor, you are assessing potential investments, concentrate your assessment on the most critical levers (the skeleton) – such as the team’s capability, the strength of the need, and the value to the customers of the innovative solution. Rather than assuming you can grasp all the elements of the business, look for indicators of good execution, knowledge of the essentials of business building, knowledge of the unmet need, and how that need may be creatively addressed. Investors need to recognize that there is always risk because startups are doing something new, and there are both known unknowns and unknown unknowns along the journey toward developing something innovative. If you want a no-risk investment, stay away from startups. If you wish to place a bet on the upside potential of a new business that could be big, make sure you can afford to lose and jump into the deep pool of the craziness and excitement of startups!

If you are not inside the startup, have some humility about your ability to grasp the nuances. Listen, decide whether to take the risk and make the bet, and do not underestimate the damage you can cause by getting excessively involved or forcing change. You will not be able to gauge all the ripple effects of an externally forced action – and it may turn out that what you were hoping to accomplish is swamped by the unintended consequences of your action. What you can do is be supportive and encouraging to that hard-working team that is trying to figure out how to move the startup forward into a successful future. While capital is often a critical enabler for a startup, much more goes into the joint creation of success. Investors and Board members, stay in your lane with eyes open and fingers out, and contribute what you can! Startup team, respect those who have funded you and do your best to translate that funding into a valuable business!