High impact/low probability events can be both the making and the un-making of a startup. I’m talking about the sort of killer deal that if it comes off will transform a company’s prospects, but is hard to predict with any certainty. It might be a distribution or OEM deal with a much larger go-to-market partner, say Yahoo! on the web or Cisco in software/networking, or it might be a venture deal with a top fund, or a sale of the company at a great price.
These sorts of deals are the ones we all get excited about and love to discuss around the board table and over drinks, after all, if they come off the company will be made. And a decent number do happen – our own recent acquisition of the 3i venture portfolio falls into this category, as does AOL’s acquisition of our portfolio company buy.at, and Imagine’s (also in our portfolio) distribution deal with the GAA in Ireland.
So pursuing high impact/low probability deals can most definitely be a good thing.
But, and this is a big BUT, it can also be a huge distraction. For every deal that comes off there are many more that don’t, and they all take a lot of work. The quickest of the three I listed above was 10 months in the making and a lot longer in the planning.
I think the thing here is to be ruthlessly honest about the chances of a deal coming off and to dial down the resources committed to it if for any reason success starts to look unlikely, and/or to avoid committing resources to it in the first place.
I have seen more startups struggle with this than handle it well, I think for the following reasons:
- Natural over-optimism
- Under-estimation of the distraction: lots of companies assume they can just work harder to keep these deals burning, but I think more often than not an organisation works to its capacity and resource allocated to one project has to be taken from another
- Displacement activity: chasing big deals can be much more exciting than grinding out a thousand small improvements in a company, particularly when your potential partner keeps having meeting after meeting with you with apparently senior people. Beware the tire kickers in large organisations! There are many, many, of them.
- Individuals get committed to making a deal happen, both by virtue of time committed and public statements on the likelihood of it coming off.
In every startup focus is an asset, and keeping it simple is good. Getting the right balance between preserving the chance to get lucky with a big deal and sticking to the knitting is tough. My purpose here is to help get that balance right, and if a potential deal doesn’t have either a lot of momentum, or a crystal clear rationale from the counterparty then it may not be worth pursuing.
This is a different sort of post to my usual. Please let me know if you found it useful (or patronising 🙂 ).