Managing high impact/low probability opportunities

image 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 🙂 ).

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  • http://lmframework.com/blog/about David Semeria

    Dovetails nicely with Mark Suster's post about hunting deer rather than elephants or rabbits.

    ps. When I read the title, I was hoping you were going to tackle the VC angle, ie the trade-off between the potential size of the business in the future (high impact) and the probability of it actually happening.

  • http://www.theequitykicker.com brisbourne

    Thanks David – I was thinking about within startups, but you are right that VC investing is all about managing these sorts of opportunities. Our decisions to keep supporting a company are more binary than a company chasing a partner though, which may be one of the reasons I dwell on this topic.

    I will think about a post on how we approach risk vs reward trade-offs when doing deals.

  • http://www.picturetheuk.com/ James Penman

    Hi Nic,

    Useful, very useful. I’m sure many people reading this have been through the process you describe anyway. We went through a 14 month period with a shopping engine, Mayfair M&A people and some of the big UK media groups. Amazing learning curve but wish I’d read a post like this before I went through it. Live and learn etc 😉

  • John Storey

    I understand your point about the dangers of distraction, and how commitment to a deal that was probably never going to achieve can waste time and resources. However, any investment balances risk with reward, and high-multiple rewards go hand in hand with high levels of risk. From the other side of the counter (ie someone in receipt of VC investment) I know that the applicant who meets a potential investor with patience and real vision is very lucky indeed, as I was. They are few and far-between, but they are the ones who will enable the giant leaps, rather than the me-toos and incremental projects. Hope you’re one of these!

  • gwong

    Hows your integration of 3i's portfolio going? did you guys acquired the partners also or just the portfolio?

    good post as ever.

    @GarethWong

  • http://www.hirelabs.com/ Saleem Qureshi

    Insightful! I can relate to one of the situtatoins mentioned. My company, HireLabs, a startup was invited by the Saudi governement last summer for an acquisition. Despitemany meetings with high-level government officials, the deal did not end up going through. From that we learnt next time we entertain a high-level client we charge them a consulting fee.

  • http://www.theequitykicker.com brisbourne

    I try to be John!!

  • http://www.facebook.com/SophisticatedFinance Robert Hacker

    This is an excellent post, which you should repeat annually. Perhaps you should consider a series on the over optimism of entrepreneurs and the various manifestations. Further thoughts on the subject are at http://sophisticatedfinance.typepad.com/sophist

  • http://www.facebook.com/SophisticatedFinance Robert Hacker

    This is an excellent post, which you should repeat annually. Perhaps you should consider a series on the over optimism of entrepreneurs and the various manifestations. Further thoughts on the subject are at http://sophisticatedfinance.typepad.com/sophist