Organizations, including customers, don’t always do what is in their best interest
Last week, I wrote a blog post describing the 5 things that serial entrepreneurs typically do better than first time entrepreneurs when pitching to VCs. One of the lessons that readers found the most interesting was the concept of opening the enterprise black box, so I would like to expand on that, and use an analogy from the field of international relations.
In international relations, two competing schools of thoughts can be broadly defined as realist and liberal. A realist framework supposes that nations will always make decision that maximize their interests (power, wealth, resources, etc.). A liberal framework on the other hand, argues that a nation’s decisions can only be understood by looking at the model of government within the "black box".
The strongest liberal argument is the theory of democratic peace, which states empirically that no two democracies have ever been at war with each other (with almost no exceptions). Thomas Friedman puts in more colorfully in the Lexus and the Olive Tree by saying "no two countries that have a McDonald’s ever went to war with each other".
For liberals, the logical conclusion from the theory of democratic peace is that the nature of the government model within a country (in this case democracy) greatly affects its decisions, and that one can not treat countries as black boxes the way realists would suggest.
In entrepreneurship, I suggest the equivalent of a liberal framework when thinking about your business model, and pitching to a VC. In this case, the client organization is the black box that needs to be opened.
Very often, startups pitching to me make a very convincing case for why their client would be better off buying their product or service. Sometimes, it is even possible to mathematically prove that the value to the client (through either revenue or cost savings) clearly exceeds the cost. This is necessary but not sufficient.
The next step is to understand the inner dynamics of the client organization, and present a clear case, hopefully supported by early evidence, for why certain individuals within the company will become customers. Here are some of the many questions that need to be answered:
- Who exactly within the company has this problem or need?
- Are they already aware of it? Actively searching for solutions? (On Google for example)
- Would they be purchasing it for themselves of for someone else to use?
- Do they have the right incentives to fix this problem, and pay for a solution?
- Do they have a budget for this? Is it discretionary? Do they need high level approval?
- Are there obstacles to adoption? High switching costs from current solution?
- Do they need to convince other colleagues to for it to be useful? (eg. Yammer)
- Would there be a high career risk in case of failure?
- Is this a decision that needs to be taken at the business unit level, or the corporate level?
- Does your product upset the power dynamics within the company? (I’m considering writing a separate blog post describing some really interesting examples of this point!)
These inner dynamics are one of the most important reasons why a VC may turn down a deal. It is also one of the items on which we will perform the most due diligence. But more importantly, it is often a reason why many startups fail despite having an otherwise great product. Organizations don’t always do what is in their best interest.
For all these reasons, it is important to open the client organization’s black box when writing a startup business plan, when raising capital, and most importantly, when executing on your business plan to create a successful company.
Comments welcome, as always, in the section below.