VC Cliche of the Week

I can't tell you how many times I have heard the phrase, "its binary, either we succeed or we fail".

Mostly its used to justify some kind of risky financial move, like borrowing a bunch of money instead of doing a safe but dilutive equity financing, or taking on a big lease, or licensing some technology that has large payments out in the future.

The logic goes like this.  It really doesn't matter what the terms of this deal are because either we make it and the cost of these deals will be manageable, or we don't make it and we go under and we don't have to worry about these payments in the future.

But I am telling you that every time I hear this line of reasoning come out of someone's mouth, I cringe and feel like running away.

Because nothing is binary.  It's naive to think that way.

The truth is "making it" is an evolutionary thing.

I've never seen a business plan executed exactly like it was drawn up on paper.

The best entrepreneurs get into a market and evolve, weave and bob, and get where they want to go with a few twists and turns.

And it always takes more money and more time.

And so when you buy into this "it's binary" thinking, you are making a huge mistake.

Because just when the bills start coming due, at a point when you thought you'd either have "made it" or not, you will actually be in the middle of your second weave and bob, with not that much to show for it, but lots of promise.

And then the bills will crush you, make it impossible to finance the company, and you'll be hosed.

I've seen this movie and its always ends badly.

Because nothing is binary.

Comments

[Matt]

...beside life and death. ;-)

[Dan Marques]

A great cliche!

One of the Invenio portfolio companies is in that binary phase. They are so highly leveraged and their potential contracts are of such high volume that their options are essentially close one of the deals (which would put them instantly into positive cashflow) or run out of investment capital. While it may be a cliche, in some cases it can be somewhat true.

[Dan Cornish]

I would like to add a corollary to this term and it is "enough runway" as in "the company needs more financing to get more runway." This too is a very binary event. An experienced engineer will design an airplane to take off on a runway of a known length, not hoping they can raise enough money to make the runway longer after the plane has begun its takeoff roll.

I once had someone who I was working with, when were close to running out of money say to me "do you want to hit the wall going 100 miles and hour or 30 miles an hour?" Another binary event. My initial thought was are you out of your f-ing mind? In the six businesses I have started, the thought of hitting the wall was never an option. We nonetheless veered around the wall. This I think is the binary place where the interests of entrepreneurs and some investors diverge.

Entrepreneurs by their nature are not diversified and investors are. Good investors expect failure and plan for it, and good entrepreneurs do not. Good entrepreneurs take risks which are survivable, and in some cases the shoot the moon kind of risks investors can sometime demand leave no survivors and sometimes not even a corpse. The biggest lesson I have learned is to always have an escape plan to survive a large risk in business, never have no other option. This is because the best advise I ever got in running a business was "Never run out of Money."

[Mark Sigal]

Well, one thing should be binary: core values. If you have established a culture in your company and set values that you as founder, your executive team and the rank and file invest themselves in building as the bedrock of the business, that should be as binary as possible.

Specifically because almost everything else about the business is zig-zaggy by nature, SOMETHING has to be binary. That something is core values.

[charlie crystle]

These are all great comments. If you lay people off to avoid the wall your risk actually increases because you've reduced the presumably valuable team(reducing the value and investablity, potentially), but if you keep them on you might have to lay them off anyway. We've gone through periods where I've had to say "we can pay you this week but I'm not sure about 2 weeks from now", and that gets tiresome. As we reach sustainability in the next month these issues change to marketing risk--if we've proven the model at $10k a month (arbtrary number) can we extrapolate to 50k a month and get 5 times the sales? The risk then is in spending your excess cash flow on marketing on the assumption the market will respond linearly. Nothing is binary in a startup, no.

[John Seiffer]

Wonderful Distinction.

My clients are usually too small to have such investor issues, but they often have partnership issues. It's common for partners to discuss and commit to paper how they'll share things when the company makes it. It's not as common for them to do this with a failure event, but with a little prodding they see the benefits of same.

The most common occurance, however, is none of the above. The company is not doing well enough to buy the private plane. Nor is it doing poorly enough to shoot it in the head. But now the partners have to live and work with each other in some middle ground of requiring more effort than they expected with less pay back, but still some potential.

Obviously a partnership agreement can't cover all the eventualities, but with some scenario planning you can figure out some ways to deal with it.

[Max Niederhofer]

Nothing is binary?!

My friends on alt.binaries.mp3s.complete_cd would certainly disagree!

[David Gibbons]

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[Rick]

This is a great post.

It always takes more money and the business plan always has to be modified.

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