Anthony Stevens (pictured below) is the founder and CEO of Digital Asset Ventures and co-author of the book Chasing Digital: A Playbook for the New Economy (Wiley). In this guest post, he argues technology is increasingly taking the risk out of those considering their own start-up…
Conventional wisdom says that 90 per cent of start-ups fail. But the data says otherwise. Cambridge Associates, a global investment firm based in the US, tracked the performance of venture investments in 27,259 start-ups between 1990 and 2010.
Its research reveals the real percentage of venture-backed start-ups that fail (as defined by companies that provide a one times return or less to investors) has not risen above 60 per cent since 2001. So, what are start-ups doing right these days?
For starters, they’re more agile than ever. They’re able to move fast and get things done because they reward and promote managers who are highly efficient and focus on execution, rather than just talking about it. But these types of managers aren’t just in start-ups. They are in every organisation – including yours. In my experience, there is a particular, commercially oriented mindset that will optimise your return on investment. That mindset can be summed up by three distinct attributes
- Understanding the cost of regret
As strange as this concept might sound, regret has a tangible cost. It is incurred when a project needs reworking or is a failure. Regret is the human response to making the wrong decision. The cost of regret can lead decision makers to spend long periods of time collecting information to make a perfect decision, and can paralyse managers from making any decision at all. Regret aversion has a particular bearing on digital transformation because many pre-digital businesses know it as a hangover from the era of traditional IT projects.
There was a time when implementing technology always meant big and expensive and untested, so leaders spent years planning and building project roadmaps in an attempt to ensure success. Now, thanks to capabilities like cloud computing, companies can deliver much smaller ‘pieces of value’ for a nominal cost.
As a leader, you have a role in communicating the new truth that a single project failure no longer destroys the bottom line, and can be fixed and improved upon quickly. This will minimise the regret incurred and free your best managers to act, rather than over-engineer a solution. The cloud removes the need for costly on-premise infrastructure, and allows organisations to build and deploy solutions from anywhere in the world.
It has also led to the creation of new delivery approaches that allow for rapid development times and shorter customer feedback loops, enabling a more iterative approach. Managers who understand that the cost of regret varies, depending on the size and flexibility of the project, will spend the appropriate amount of time collecting the minimum necessary information to make a decision, so they can spend more time on execution.
- Focusing on burn rate
Burn rate refers to the rate at which a new company spends its initial capital. But the concept has broader uses as well. Every time your teams run a meeting, for example, have your managers considered how much it costs? They could calculate the cost using this formula: Combined salaries (as hourly rate) of participants x meeting length = cost of meeting
Have you calculated the cost of your team for a day? Thinking about projects in terms of burn rate often changes your mindset around how you make decisions and what is actually important.
A project is just a controlled burn of money. It’s important to remember that the money is limited, but the results aren’t. Great managers can control this burn, get the maximum output, and deliver higher quality.
Here are a few tips on how to do this:
- Measure at all times. Acknowledge the cost of time in absolute and opportunity cost terms. This will help you recalibrate decisions more regularly.
- Less is more. Managing large, expensive teams is difficult and adds unnecessary pressure in terms of the related burn rate.
- Do not conflate hourly rates and output – they are not the same thing.
- Actively assessing value
Businesses often get caught up in the projects of consulting engagements, architecture assignments and planning. These initiatives can deliver well-researched information and recommendations to the buyer of the services. Too often, however, the resulting reports are not distributed widely enough, or contain recommendations that require a different level of executive stakeholder buy-in to implement. The reports can also be costly. Has the business realised the value of that investment?
Investment-oriented leaders think differently, repeatedly questioning and assessing where the value lies. This continuous process needs to be applied to everything, from projects to personnel. This approach has less of a temporal element than return on investments, allowing the manager to focus on quality outputs, rather than just wins.
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