The devil in the detail…

A common mistake founders make at the early stages of a company is to put too much detail into their business plan. Sometimes we see a level of detail which amounts to spurious accuracy given the stage the company is at and the attendant uncertainty. Two concerns follow:

  1. The founder doesn’t understand how much things change in startups (or, worse, are trying to project a greater level of certainty than they feel)
  2. They may not be flexible enough to ride with the punches

This happens most often with projections about how products will work and with financial models. I won’t name companies but one we spoke with recently was building a three sided marketplace. They were pre-launch but had developed a complicated six step transaction flow they thought their customers would go through which included commission splits and transaction timelines. They had taken users through the potential flow and got positive feedback but I was left thinking that the questions they asked those users wouldn’t have passed the Mom Test and that there was a high chance that when they launched the process would bamboozle even their early adopters. For me, it would have been much better if they had focused on describing the value participants would garner from using the service and either planned to manage transactions manually in the early days or documented a very simple transaction flow. That would have shown me that they understood the inherent uncertainty in building products and would have had the additional benefit of really hammering home the value proposition.

When it comes to financial models people sometimes take false comfort from the spurious detail they’ve built in, which results in relying on the model rather than on common sense. I’m thinking now of an ecommerce company that was in its first six months post launch. Pretty much all their traffic came from Google and in their plan they had projections for growth in organic traffic and for traffic from Facebook, referrals, and other new channels. That showed they were planning to diversify their sources of traffic and understand the different options available to them which isn’t a bad thing in and of itself. However, when we asked them to explain why they believed their customer acquisition costs would reach the levels they were projecting their answer was pretty much “because the model says so”. Models can, of course, be made to say anything and their answer left me feeling that they didn’t really understand the drivers of their unit economics. It would have been better to say “We believe the major levers for reducing customer acquisition costs will be increasing organic traffic and reducing our CPAs on Google. Based on [insert justification here] we believe that X and Y are achievable.” Modelling at that level would have been sufficient too, with commentary about plans to expand to other channels in the pitch deck.

Don’t let over detailed plans distract you from the bigger picture and the flexible thinking required to navigate the startup ecosystem successfully.