Entrepreneurs – Know Your Fundamentals
It is essential that you, as an entrepreneur, deeply understand the fundamental mechanics of your business. Your mid- to longterm projections might be off (and likely they will be), but you need to know how the pieces fit together.
Yesterday I had the great pleasure to sit on a panel to talk about fundraising at the SU Ventures Incubator together with two incredible and incredibly successful founders, Paola Santana and Philipp Pieper. One of the participants asked about common mistakes founders make when they pitch their company to an investor.
I latched onto one of my biggest pet peeves and one mistake I sadly see too many founders continuously make: Founders not understanding the fundamental mechanics of their respective businesses.
Most often this expresses itself in the financial projections – you see the revenue slide (which seems to always move on an exponential curve) and compare it to the associated cost and headcount and the holes become glaringly obvious: A company moves from three people and no revenue to ten people and million dollars in revenue to 15 people and twenty million dollars in revenue… It just doesn’t work that way (in 99.999% of cases at least). As you grow your revenue, your cost will grow as well – and typically quite a bit.
When I then ask the founder why they believe they can service $20M in revenue with just five additional headcounts compared to their $1M projection, they stumble. And immediately lose all their credibility as they have demonstrated that they simply do not understand the basics of their business.
So, please, do the work. However, don’t just do it for your pitch – the better you understand the fundamentals of your business, the higher your chances of success running it as you will truly understand all the pulleys and levers you have to work with.