Respect the Stick

by | Jan 30, 2014 | Commentary, Entrepreneurs, IT, Venture Capital | 0 comments

The hockey stick, that is.

High impact entrepreneurs know – or learn pretty fast – that most angel and even most venture funds outside of the major venture centers take a perverse satisfaction in telling entrepreneurs that they are being naïve when they build the proverbial “hockey stick” growth assumption into their business plans. A lot of self-identified “smart” high impact investors (particularly those of limited means) can be downright smug in their “you are not another one of those crazy kids carrying a hockey stick” comments as they flip through your pitch deck. “That kind of growth almost never happens.”

Well, I am here to tell you that the right response to those kinds of remarks – assuming, that is, you really have a venture capital worthy deal – is something like this: “Of course we are – we wouldn’t be here if we weren’t.”

It is indeed true that most venture-backed high impact startups either never get to the inflection point of the hockey stick growth curve, or if they get that far, fall off the curve shortly thereafter. That, though, says very little more than that most venture-backed high impact startup investments don’t come close to delivering the 10x returns which their venture backers were hoping for when they put their money down. If you focus instead on the deals that do deliver on their home run promise, you will find that most of those did – at some point – reach the inflection point and subsequently crawl pretty far up the growth curve.

The truth is, if you can’t convince a potential investor that there is hockey stick growth out there somewhere for you, how can you possibly show them a path for a 10x return on their investment? I suppose it might be possible in some cases to do that if you set the pre-money valuation low enough, but if you do that you are probably leaving nothing but crumbs on the table for you and your team.

No, if you want to raise real money from real venture investors for your startup, you are going to have to project hockey stick growth on some metric (revenue is the obvious one, but things like eyeballs can work in some markets), at some point, in your plan/pitch. An investor who thinks you are too optimistic about when you get to the inflection point on the curve may have a point. And so might an investor be right is saying that your deal will never get to that inflection point. But an investor who thinks hockey sticks just don’t happen, well, that investor just doesn’t understand her own business. Which, I think, is reason enough to look elsewhere for capital. Focus on investors who respect the stick.

More articles by Paul A. Jones

Paul Jones works with emerging technology companies and their investors as part of the Venture Best team at Michael Best & Friedrich LLP. A serial venture-backed technology entrepreneur and institutional venture capital investor, he is also the Entrepreneur-in-Residence at the College of Business at the University of Wisconsin-Oshkosh. He can be reached at pajones@michaelbest.com. This post was originally published on his blog at Paul Jones’ Blog. To learn more about the Venture Best team or information on entrepreneurs and emerging growth companies, please visit www.venturebest.com.

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