Should Executives Be More Like Venture Capitalists?
A guide for incrementally funding your experiments.
I work with both software and hardware companies all around the world.
In all of these companies, I’ve found that the wrong funding model can drive quite a bit of dysfunction when creating new products and businesses.
For example, your team won’t need $100k for a landing page, but on the other hand, they can’t drive meaningful traffic to a page without any budget at all.
Having a funding framework that resembles a VC model, will help you avoid some of this dysfunction.
However before we dive into the details, I want to first point out some big differences I’ve observed over the years in Silicon Valley.
The first big difference is patience.
Several innovation labs and incubators I absolutely admired have been shut down within the span of 1–3 years of their existence. This is largely a side effect of the corporate obsession with short term ROI (Return on Investment).
When you compare this to how VC’s operate, they look to longer time horizons on their investments.
I’ve experienced this first hand, when the VC funded startup I joined in 1999 took 7+ years before we were acquired. We didn’t find Product/Market Fit until about 3 years into our journey, when we pivoted from B2C to B2B.
If our startup had been a corporate venture, we would’ve been killed off right before we found our groove.
The second big difference is portfolio size.
Corporations need to invest in many different types of opportunities and think of this more like a portfolio. It’s what Alex Osterwalder illustrates with the Business Portfolio Map. At the very least you need to visualize how many opportunities you are investing in Explore vs Exploit. Far too often that bottom half of the Explore map is an innovation wasteland.
When you compare this to the number of startups in a VC’s portfolio, they look to diversify across several because they know, no matter what they do, most of them will fail.
The third big difference is micromanagement.
VC’s are pretty hands off, but management in corporations is far too hands on.
Think for a moment if VC’s acted more like corporate management.
- VC’s would send you an email about reallocating your team members to other startups.
- VC’s would schedule endless meetings to tell you that the button should be blue, and not red.
- VC’s would take your funding away, a month after they gave it to you.
Startups are already hard and this behavior would make it utterly impossible to succeed.
And yet this behavior is typical when we are creating new products and businesses inside corporations.
Seed — Launch — Growth Funding
I don’t think the solution is as simple as immediately adopting all of the things that VC’s do.
I do think we can begin to be more VC-like with how we fund our internal experimentation at corporations.
1. Seed Stage
Seed stage is about early opportunity experimentation.
Seed Stage Learning Goal
- Learn how assess the opportunity of an idea
Your team needs to learn about the market opportunity for their idea. They need to get some experience what it’s like to be early stage cofounders. Ideas are easy, but turning those ideas into opportunities is difficult.
Seed Stage Funding
It’s important not to overfund a team exploring opportunities at the seed stage. They can do quite bit of scrappy market validation without a great deal of money. If you give them too much funding, they’ll prematurely make the leap to feasibility and start building elaborate solutions.
Seed Stage Experiments
- 70% Desirability
- 20% Feasibility
- 10% Viability
Majority of seed stage experimentation is going to be focused on desirability. Are there customers with this problem that you can solve? I recommend briefly sketching out a business model, just to have a basic idea of how it could sustain later on.
2. Launch Stage
Launch stage is about Problem/Solution Fit experimentation.
Launch Stage Learning Goal
- Learn how to rapidly test MVP’s in the market with customers
This isn’t launch in the traditional sense of launching a product as a foregone conclusion, but instead launching MVP’s in the market to test with customers. The team has evidence that the value proposition resonates, but will people use the solution? How much will they pay for it?
Launch Stage Funding
- $50k — $500k
This is where management needs to put up the money behind their words. It’s not cheap to test multiple MVP’s in the market, but you can’t jump from value proposition testing to a finished product anymore. It’s far too risky and you’ll not be able to pivot once you’ve built the wrong thing.
Teams should be focused on acquiring customers for their MVP testing and reducing churn.
Launch Stage Experiments
- 20% Desirability
- 50% Feasibility
- 30% Viability
Much of the launch stage experimentation is going beyond landing pages and sketches to having a real value exchange between the customer and the product. These MVP’s are often a combination of manually executing the product with the customer (Concierge MVP), manually executing the product behind the scenes (Wizard of Oz MVP) and wiring together existing products or services to make it happen.
3. Growth Stage
Growth stage is about finding Product/Market Fit.
Growth Stage Learning Goal
- Learn if the product is a business worth growing
The team has tested several MVP’s with customers and can no longer keep up with customer demand.
Think of it this way:
“If we spend more than _____ hours a day doing _____ , then we need to automate.”
They use the learning from their repeated MVP testing to build a more robust solution. The team isn’t pressured to scale their MVP, and isn’t penalized for throwing it away and building it the right way.
Growth Stage Funding
This stage is about taking what you’ve learned from iterating in the market with customers to inform your product design. You’ll need to expand the team so it can build this the right way and grow the product into a business.
Growth Stage Experiments
- 10% Desirability
- 40% Feasibility
- 50% Viability
It’s not that you ignore desirability entirely, but you have a much better handle on it now. The focus shifts to building it the right way and finding a viable business model.
Funding Drives Function
Corporations are embracing experimentation and beginning to address the issue of focus. This is one of the main reasons I’ve been pushing Assumptions Mapping so hard over the last few years. I find that it gives teams a way to focus their experimentation, so that they aren’t ignoring leap of faith assumptions.
However the challenges of experimentation do not stop with focus.
Funding experiments is our next big challenge. Let’s start addressing it together.
Interested in how to test your business ideas? Feel free to contact me.