Brad Hargreaves | Building Things

Brad Hargreaves on entrepreneurship, community and life

Archive for the ‘Uncategorized’ Category

Occupy Wall Street is about student debt

with 27 comments

Up to this point I hadn’t thought much about the macro reasons behind Occupy Wall Street, assuming it was driven by a general disaffection with economic inequality. But when I checked out We Are the 99 Percent this weekend, I saw a clear common thread among the protesters: the presence of overwhelming student debt.

Student loans are a unique kind of financial instrument. They are the only kind of debt that can’t be forgiven through bankruptcy, even when the loans come from private sources rather than government-affiliated institutions (like Sallie Mae). These loans have been a pretty standard part of the American education system for the past decade, especially among private, for-profit universities, where 96% of students graduate with an average of $33,000 in debt [PDF].

Protestor at Occupy Wall Street

Indeed.

The past 70 years of American education have been built around a simple social contract: go through four years of liberal arts education, and there will be jobs waiting for you on the other side. You can even take on an otherwise unconscionable amount of debt to do it — after all, education is an investment, not just an ordinary expenditure.

Over the past three years, that social contract has been broken. The jobs that used to be available to young people with passion and drive but no appreciable skills are gone, and the graduates who would have taken those jobs are unemployed. But they still bought into the social contract, accepting suffocating amounts of student debt to get the education that didn’t give them the skills they actually needed to get a job. And just when these young people should be at the height of productivity — working hard, inventing things and starting companies — they are left deep in debt with no marketable talent.

So they’re angry, although without the channels or eloquence to express that anger in a meaningful way. So they lash out at the faceless financial-industrial complex — the people who ostensibly have created and maintained this destructive environment from behind the curtain.

But reality is much more complicated. While the folks on Wall Street have managed to hack the system, manipulating a need for liquidity and market inefficiencies to drive incredible financial returns, they’re hardly the only group at fault for a badly broken educational framework.

As a first stop, the frustrated graduates should take a look at the for-profit university administrators who adopted shady, over-promising marketing practices or the government officials who allowed often well-intended laws to be hijacked to saddle students with unforgivable debt. Or perhaps they should take a look at the state education heads and politicians who have resisted a move toward more practical, vocational education for some segments of Americans.

I maintain that unemployment is not high due to a lack of jobs — General Assembly, for one, has plenty of open positions. Rather, it is high due to a colossal mismatch of skills and market needs resulting from a dated and broken educational system.

The protestors at Occupy Wall Street are right to be angry. But articulating the problem is the first step in fixing it.

Written by Brad Hargreaves

October 9th, 2011 at 2:02 pm

What we don’t know

with 4 comments

[T]here are known knowns; there are things we know we know.
We also know there are known unknowns;
that is to say we know there are some things we do not know.
But there are also unknown unknowns – the ones we don’t know we don’t know.
                                                                                         - Donald Rumsfeld

I first heard the word “de-risked” from a Silicon Valley VC as he passed on the GoCrossCampus deal a few years ago. I’ve heard it a number of times since, always in the same early-stage investment context. It’s an odd word. It has always reminded me of the Rumsfeld quote, at once mixing political doublespeak with a certain higher-level truth and meaning.

And in a way, Rumsfeld and the venture capitalists are saying the same thing, although I think Rumsfeld said it more meaningfully. At the simplest level, de-risking has two components:

-     Converting the unknown to the known
-     Converting unknown unknowns to known unknowns

That is, de-risking is about taking the unknowns of a business and turning them into knowns. But it’s also about discovering what we don’t know; it’s about cataloguing the unknowns and scheduling them for future exploration.

I think this has some significant implications for the entrepreneur. I’ve found that much of the work an entrepreneur should do prior to seed funding is not simply “proving things out” but rather exploring the key unknowns that stand in the way between the entrepreneur and massive success. Said another way, I see entrepreneurs doing too much work discovering and not enough work figuring out what they should be discovering.

Doing this will enable a healthy incrementalism and structure, bringing the spirit of a scientific experiment to an otherwise qualitative exercise in guesswork. As unknowns are converted to knowns in a deliberate fashion, the business is “de-risked” and the door is opened to more significant relationships with partners and investors. Without this discipline, the entrepreneur risks wasting time exploring things that aren’t all that meaningful – or worse, will lead to the wrong conclusion about where the business should go.

And from a purely practical perspective, an entrepreneur may be surprised at how well a list of the unknowns in their business – framed as a robust list of the things that must be proven out with the money they are raising – will go over with any investor.

Written by Brad Hargreaves

August 28th, 2011 at 8:54 am

The Path

with 4 comments

There are a lot of philosophical divisions among entrepreneurs: bootstrappers versus fundraisers, platforms versus content, lean versus fat, et cetera. But one has struck me as particularly underappreciated: those who build user flows as a series of deterministic paths and those who don’t.

Paths are best understood in the context of user flows. In a path-driven business, each experience that a user — especially a first-time user — encounters is designed with the singular purpose of pushing a user to the next experience and perhaps collecting some information along the way. In the case of web businesses, each “experience” is a page. To generalize, a path is deterministic in nature; a subject’s destination on any particular page has been determined by the page’s design.

Free Awesome is a great example of a purely path-driven business. While there are plenty of links, there are really few options to leave the path, which presents the user with an alternating series of instant-win games and lead gen. This enables simple mathematical modeling and optimization of the business.

Don’t get me wrong — plenty of businesses aren’t driven by paths. General Assembly is about as far as you can get from a path business — we’re building value in a brand rather than a platform or cash flow — but we still think of large pieces of it in a path context.

But some of the best companies create products that feel like robust experiences but are actually just deterministic paths. Mint.com was a great example of this. While it felt like a comprehensive site, Mint really just guided the user down an inevitable path toward high-value lead gen offers, such as credit cards. That outcome was baked into the site’s raison d’etre at the highest level: users were ostensibly on the site in order to optimize their expenses and save money. So Mint would lead them down a path, collecting sensitive financial information along the way, with the eventual outcome of providing the user with an opportunity to get a low-APR credit card from Discover.

From a psychological perspective, Mint was brilliant. The “saving” component was the carrot hanging in front of the user the whole time. So when the user finally ended up on a page filled with the same credit card offers they get in the mail every week, they viewed those offers as opportunities to save money rather than just more ads.

Some entrepreneurs may look at path-driven thinking as limiting. After all, building your experience as a path discourages users from exploration and tends to focus the business on quantitative — rather than design-driven — decisions. It’s not for everyone. But I do recommend the path approach to many of the first-time entrepreneurs I meet for the following reasons:

Paths kill scope creep If you are designing your site as an experience that contains a bunch of different things that users can do, it’s awfully tempting to build yet another shiny thing for your users. This leads to scope creep, frustrating developers and pushing out timelines. When you are building a path, feature creep makes little sense: something either helps your user get to the next page or it doesn’t. Details can be A/B tested after launch.

Paths simplify evaluation As an early-stage entrepreneur, you want to figure out whether your idea flies as soon as possible. If you have a path, figuring this out is easy and requires little more than Google Analytics: either the conversion data adds up or it doesn’t. If you have a complex multi-dimensional user flow, it’s challenging if not impossible to figure out why the dog food isn’t getting eaten.

Paths end debates Passionate debates about design are one of the most painful parts of the early-stage startup process. As they simplify evaluation, paths make many of these debates far less necessary — if something is in contention, there is a clear quantitative conversion metric on each page to test it against.

I’m not arguing against design. But good design is hard, and design outside of the constraints of a deterministic path is really freaking hard. And if you’re a founder of an early-stage company, your job is already hard enough.

Written by Brad Hargreaves

August 14th, 2011 at 11:39 am

Selling to Middle America

with 2 comments

Jump Ramp Games founders Alex Betancur and Tony Vartanian are teaching a class on Selling to Middle America at General Assembly next week. I don’t typically blog about GA classes, but I think this is one that everyone should take. Not only are Alex and Tony great guys, but they have a rare understanding of how to craft products and marketing campaigns to appeal to Middle America. At one point, this class’s working title was simply “Schlock”, which should give you a good idea of what it’s about.

We’re teaching this for a few reasons. First, selling to Normals isn’t easy. Lots of startup folks think that appealing to Middle America is intuitive, which is totally untrue for most of us. Rather, the people who do get it typically come out of the offline direct response world — think bulk mail and magazine subscriptions. Traditionally, these have been the things that have gotten Middle America to open its wallets. But as online products get better and faster, it remains an open question to see which startups can get Middle America to buy in.

Some examples of companies that have done this well on the web include Zynga and PCH, both of which make compelling use of games to engage. And let’s not forget NYC’s least well-known successful consumer web company, PlasmaNet (where are you, Adrienne Jeffries and Alyson Shontell?)

Second, the payoffs from building a rapport with Middle America are overwhelmingly larger than serving the tech niche. Not only is the market much bigger, but it is often more willing to pull out its wallet while asking fewer questions and demanding less. It’s shocking what can work on the web with normal Americans — I was certainly blown away when I first saw the success of a coreg path from the publisher’s side.

And it’s important to note that Middle America is a diverse place with lots of different markets and psychographics. It’s easy to lump all of “Middle America” into one group — which I’ve been doing for most of this post — but even the most jaded hipster wouldn’t confuse a Hot Topic with a TJ Maxx. Understanding psychographic-specific marketing and what tactics work with what groups are critical parts of growing a mainstream business.

As a final word of warning, don’t confuse poor aesthetics with poor design. Lots of sites — such as PlasmaNet’s FreeLotto — are ugly and challenging to navigate. But they don’t look like that for want of trained designers — rather, they are compulsively driven by analytics and build what works. And in many cases, schlocky-looking stuff plays with Middle America in a way that sleek, intuitive design doesn’t.

Written by Brad Hargreaves

June 29th, 2011 at 10:32 am

Heisenberg Raises Money

without comments

The principle of quantum uncertainty, published by Werner Heisenberg in 1927, approximately states:

Certain pairs of physical properties of a particle — such as present position and momentum — cannot be simultaneously measured beyond a certain arbitrarily high precision.

Stated another way, simply measuring the system will cause a change in its state, making precise knowledge of both position and momentum impossible. That theme — that a system can be changed merely by observation –is common in quantum mechanics (see Schrödinger’s cat) and is one of the most challenging concepts for non-practitioners.

But I think the concept is more broadly relevant, which is why I’m bringing it up here. As my fellow General Assembly partner Jake Schwartz noted, the uncertainty principle can be applied to raising money for your startup. He doesn’t blog, so I’m taking the liberty of explaining on his behalf.

In much of economics, there’s an assumption of perfect information — in this context, that entrepreneurs know the market interest and valuation of their companies, or can at least discover it with minimal transaction cost. But economic principles rarely translate perfectly to the real world. In reality, it is impossible to discover the interest in and valuation of your company without changing it.

This is often referred to as a part of the social proof you need to raise capital. According to that point of view, early stage financings are driven less by the fundamentals of companies and more by investors’ pscyhology. The positive filter of social proof has been reasonably well-discussed: specifically, how “in demand” the deal appears to be and which other investors are participating. But the negative filter of social proof –that is, the risk that a deal seems to have been “shopped” or been on the market for too long – can be far more insidious and powerful.

This is where the Uncertainty Principle of Capital comes in. Since early stage valuations are so dependent on social proof, the mere act of discovering the “market” interest and valuation of your company will inevitably change it. Or more formally, in the early stages of fundraising, the accuracy of a valuation and the momentum of a deal cannot be simultaneously known beyond an arbitrarily high number. A quick attempt to get a “market” valuation on an early-stage company can send the interest level in a deal spiraling downwards as it gives the company the feel of being “shopped” and alienates potential sources of capital.

Much of the game entrepreneurs play when talking to investors is about minimizing the effects of the Uncertainty Principle of Capital. This can explain the adage

“If you ask for money, you’ll get advice. If you ask for advice, you’ll get money.”

This doesn’t mean “be sneaky”. But it does mean that, as an entrepreneur, you’ll need to be able to deal with no small amount of uncertainty — and will need a compensating amount of patience. For veteran entrepreneurs, this shouldn’t be a surprise. For those of you just launching entrepreneurial career, get used to the queasy feeling of uncertainty now, as it surely won’t be the last you’ll see.

Written by Brad Hargreaves

June 23rd, 2011 at 5:34 am

“Until then, there’s life”

with one comment

My first childhood house was deep in the woods of rural southern Arkansas — about 30 miles away from the nearest grocery store and 100 away from the nearest mall, to give some perspective. The place was unabashedly country, not quite David Lynch but certainly not Rockwell or even Garrison Keillor in the pantheon of rural American archetypes. My dad loved trees — it’s what got us out there in the first place — and he spent a fair bit of time growing what a hipster might call an artisanal arboretum* in our backyard. To him, he was just growing interesting trees. A variety of pine, sycamore, cypress, poplars and other plants probably not meant to grow in the south rose out of the ground behind our house.

But the distance from civilization was taxing. The talk of moving was always close at hand, but it took several false starts before it finally happened.

During one of those false starts — I was probably 8 or 9 — I came upon my dad planting a new sycamore tree a hundred feet from our back deck. As my mind was occupied with thoughts of a move, I asked him: “If we’re moving next year, why’re you planting something? Why does it matter if we’re just going to leave?”

He paused for a moment as he put down his shovel, catching his breath in the humid southern spring day. And he said something that I’ve remembered to this day:

“Until then, there’s life.”

With that, he picked back up his shovel and kept digging.

When starting a company, it is easy to focus on the destination rather than appreciating the journey. Entrepreneurship is somewhat unique in this way — most teachers, for instance, are content to be teachers. They don’t consider “teaching” something that happens along the way to a greater goal. There’s a certain stability and peace in this. But because the popular lore of entrepreneurship has been built around the huge mega-exit, many founders focus solely on the goal and forget that until then, there’s life.

This is why I advocate entrepreneurship as a career choice as opposed to than the one-off notion of “doing a startup”. The venture business is a long game best played by those with time and patience. As as the canon of entrepreneurship is written by people like Eric Ries, Fred Wilson, Mark Suster, Steve Blank and others, the gulf between the founders who have taken the time to learn entrepreneurship as a vocation — usually by doing it repeatedly and immersing themselves in the community — and those who have not will widen. In the end we’ll judge ourselves not by the destinations we’ve reached, but the journeys we took to get there and the stuff we did along the way.

* As of this writing, there are zero results on Google for the phrase “artisanal arboretum”. You can thank me for this addition to the lexicon of artisanal things at a later point.

Written by Brad Hargreaves

May 15th, 2011 at 1:49 pm

Posted in Uncategorized

Tagged with , ,

Speaking the Same Language

with one comment

For thousands of years, cultures were separated by communication difficulties enforced by language barriers. But today, communication barriers have little to do with native tongue, as English has become the common language of international business, academia and government. Rather, the communication barriers of the 21st century are our differing familiarities with communication technologies. As technologies evolve, these “cultural” differences will become just as powerful as language barriers.

Just this week, I was speaking with a New York State employee who had called me in an attempt to get a corporate issue resolved. I had a complete a form, and part of the conversation went something like this:

Me: How do I find the form?
Her: Are you near a pen and paper?
Me: No, I’m walking. Can you email me the URL?
Her: We can’t use email. I have to spell it out to you.
Me: Okay, but I’m not near a computer or a pen. Can I call you later today?
Her: I don’t have a direct number. I’ll call you.
Me: Okay, so then I mail you the form? What’s your address?
Her: We prefer fax.

I’ve discussed the government technology gap before — clearly, there is a disconnect in native communication platforms between my company and New York State and likely a comparable disparity between myself and this employee. But this is not simply a hierarchy of tech savvy. For instance, while both an average American teenager and I are technologically competent, we live on different platforms — I live on email and Skype and am occasionally annoyed whenever someone sends me an important note via Facebook or over a text message. We communicate in a different technological language.

As communication evolves at an ever-increasing rate, my native platforms will continue to diverge from both the teenager’s and the NY state government employee’s. By the time New York State, for instance, adopts email, I will probably have moved on to a totally different communication platform. But at the same time, new technology quickly yet unevenly spreads across our society, leaving us in the position of being unable to communicate effectively — not across cultural or linguistic barriers, but across technological ones.

On a related note, I have seen several examples of employers making hiring decisions based on a potential employee’s presence on the social web — not in the negative sense that you hear about in the news, but rather to ensure that a new team member participates in the same communication platforms as the rest of the team: Facebook, Twitter et al. This has become a big piece of the “cultural fit” that so many companies — especially startups — talk about.

Communication barriers tend to amplify over time. This is how species are created and languages are formed. If it is difficult for Group A to understand Group B due to a slight language difference, they are less likely to communicate. But with less direct communication between the groups comes a continued divergence of language, which can eventually lead to an entirely new language being created — and the groups totally unable to understand each other. While the opposite process has been happening for the world’s languages, I worry that divergence will begin again on top of technological barriers.

I’m not sure there is an effective solution here. “Education” is one answer, but in reality the problem is rarely an unfamiliarity with technology in general — it is either a lack of comfort with particular platforms or regulatory barriers that prevent its effective use.

Written by Brad Hargreaves

May 1st, 2011 at 11:18 am

The Democratization of Gaming

with one comment

On June 4th, my own General Assembly will be co-producing its first conference: the Mobile Gaming Summit. The fairly literal title of the event belies a deeper meaning — a meaning that speaks to me as well as to General Assembly’s mission. In many ways, the Summit should really be called “The Democratization of Gaming Summit”, or more broadly, “the re-democratization of application development”.

The first mobile platform

I started programming in middle school, building games on my TI-83 calculator while bored in class. Word of mouth was the only way to share applications — typically games — and doing so required connecting the two calculators with a special cable. It was hardly a scalable distribution channel, and I can only imagine where Texas Instruments would be today if they had built a robust app store and marketed it to bored hackers in junior high. While Objective C is certainly more challenging than the BASIC* we all learned for the TI-83, the relative openness of the Apple and Android app stores nonetheless represent a remarkable democratization of game development.

Unfortunately, I don’t believe there is any secular force ensuring that this trend has to continue. The creation of popular native PC apps fell out of popular reach over a decade ago and hasn’t come back. There are a number of reasons for this, but ultimately, the continued democratization of mobile platforms must be in the hands of the platforms’ minders — Apple, Google and to an increasing extent, Microsoft — to ensure. While I hear a lot of complaining about Apple’s strict and often Byzantine app store rules, I think the biggest threats to the democratization of app development come not from top-down restrictions and regulation, but from the sneaky and un-competitive practices of established studios.

To give a specific example, it is remarkably easy for well-capitalized developers — be they established studios or spammers — can buy good market positioning by purchasing app downloads. To keep competition fair and developers honest, those who control the platforms must put some limits on these practices.

For the rest of us, it’s all about education. Apple and Google will do whatever they’ll do, but it’s on us to make sure that we as developers know the best practices and methodologies of working within the system. That’s what the Summit — and General Assembly’s educational offerings — are all about. Some of the most creative, interesting and transformative products are created when regular people are given the tools to create and the avenues to distribute and monetize those creations. The more regular people know how best to work the system, the cooler stuff we’ll be able to create.

And that’s why I’m thrilled to be working with the Mobile Gaming Summit. I hope many of you can join us there.

* You also could build TI apps in Assembly, but c’mon.

Written by Brad Hargreaves

April 23rd, 2011 at 4:08 pm

Culture is Vocabulary

with 4 comments

It is common knowledge among startup founders and CEOs that there is a distinct need to build a company culture. But most people in early stage companies have no idea what this means. We figure it means things like asking your co-workers how their weekend went, going out to dinners as a team and supporting your co-workers during rough times. And certainly all of that is important.

But I’ve come to realize one thing in particular over the past several months. Culture is vocabulary. Culture is built through the small choices of words you make on a day-to-day basis in a team’s everyday conversation. Culture is how a CEO structures his or her sentences and how problems and questions are verbally addressed. While spending time away from work with your team is important, the vast majority of a company’s culture is set in the tone and word choices that all team members make in their daily dialogues.

Here’s a simple example: Culture is beginning a counterargument with “I hear you, and” instead of “I hear you, but”. Improv comedians are trained to do this to keep a conversation flowing and avoid the perception of error and/or conflict by the audience. Think of this (obviously oversimplified) construction, which allows Comedian A to bounce back without apparent conflict:

Comedian A: The sky is yellow!
Comedian B: Yes, and much of it is blue!
Comedian A: Oh, and what a pretty blue it is!

Compare that to the following, in which Comedian B directly negates Comedian A’s point. Unlike in the last construction, here Comedian A is left in an awkward position, and the audience will typically notice the discontinuity:

Comedian A: The sky is yellow!
Comedian B: No, it is blue!
Comedian A: Oh, I guess you’re right!

And in a team, it’s just as important — nothing builds a culture of defensiveness, politics and anxiety like the frequent use of phrases that are heard as accusatory and conflict-oriented. Avoiding that linguistic trap is where positive culture is built.

This could be called the Sapir-Whorf hypothesis of corporate culture. That is, the way your employees view your company and their role in it is defined by the structure of the language that is used in day-to-day conversation. The concept, of course, can expand beyond culture to things like roles, team hierarchy, company values and strategy. If a specific team member always addresses his or her peers as a CEO would, an “assumed leadership” may be developed — for better or worse. That is, it’s not always the official titles or recognition that drives vocabulary and tone, but the other way around. This isn’t necessarily a good or bad thing, but it should be recognized for what it is.

Understanding the impact of vocabulary isn’t always the easiest thing for folks in a startup culture that often looks more like investment banking than a bunch of small teams of people pursuing their dreams. Unfortunately, a male-heavy culture with a deep lore built around exceptionalism, independent brilliance and long hours isn’t always conducive to driving happiness. But I’m betting that many of us got into this startup game to avoid bad cultures and bosses, not replace them with equally bad situations due to our lack of understanding of the words we use.

This post owes no small debt of gratitude to Jerry Colonna for inspiration.

Written by Brad Hargreaves

April 10th, 2011 at 10:15 am

Posted in Uncategorized

Tagged with , ,

A Modest Proposal for a Waterfall Hackathon

with 2 comments

Hackathons are the new hot thing. We’ve done a few at General Assembly, and we’re planning to host more — such as Lean Startup Machine this April.

But there’s a gap in our hackanthology. Specifically, almost all of these hackathons employ “lean” or “agile” development tactics, a vague and unproven yet trendy fad. Thus, I make a modest proposal: that we may have a Waterfall Model hackathon, showcasing the best that 1960s-era manufacturing process theory has to offer.

Getting it together is simple enough. All you need is a group of consultants to come up with business ideas, a handful of business-oriented “product people” to design specs, a bunch of developers — but only for a few hours given our constrained development timeline — and an expert QA team. Here’s my proposed schedule:

Friday 6PM: Consultants assemble to brainstorm project ideas. Ideas are evaluated on size of market and apparent complexity of the end product. Consultants must have no prior relationship with anyone participating at any other stage in the process and only a rough, high-level understanding of the industry behind “hacked”.

Saturday 8AM: Business teams assemble. Projects are assigned to business teams through a process of drawing straws. For the next 12 hours, the business teams will begin the grueling process of writing and assembling spec docs. As with the consultants, business teams must have no prior relationships with the people involved at any other stage in the process, especially the previous day’s consultants. Preference is given to MBAs.

Saturday 8PM: Developer recruiting dinner. Business teams sit down with hackers over wine at a pricey yet mediocre Midtown steakhouse.

Saturday 11PM: Implementation phase unofficially begins. Although developers have five hours on Sunday (plenty of time) to complete the projects defined earlier in the weekend, no one will complain if they start work a bit early.

Sunday 9AM: Implementation phase officially begins.

Sunday 2PM: QA Handoff. Developers hand off their completed work to a crack QA team assembled of NYU students and the homeless.

Sunday 8PM: The main event! Final products are judged on the following criteria:

- Adherence to the spec document
- Apparent time it took to develop from the perspective of a non-technical person
- Number of lines of code
- Resumes of consultants who came up with the original idea

So who’s with me?

Written by Brad Hargreaves

March 28th, 2011 at 12:49 pm

Wealth

with 3 comments

A diagram of wealth and how it is built

Written by Brad Hargreaves

February 26th, 2011 at 11:30 am

Posted in Uncategorized

Tagged with

The Long Game

with 8 comments

I was having drinks with a few entrepreneurs last week, and the topic of business plan competitions came up. I ran Yale’s competition for a year while I was a student there — a sobering experience. Ostensibly, the winners of the contest were the best potential entrepreneurs. In reality, the top awards were often swept by Yale MBA candidates who spent the entire year perfecting a 30-40 page business plan with little intention of starting a real business. They’d take the award money alongside their McKinsey or Goldman signing bonus.

Most experienced entrepreneurs — or at least most of us around the table that night — agree that business plan competitions suck. But is there a way to improve them? One CEO in attendance suggested that business plan competitions be revised to focus on the real tools of a VC pitch — that is, a slide deck and in-person presentation. It’s certainly a better basis than a business plan, but I don’t think it solves the problem. Rather, it still perpetuates a false and harmful archetype of how venture money is raised.

In reality, raising capital is a long game — a process to be measured across years and companies, not weeks and pitches. The people who “win” the real venture capital game are those entrepreneurs who spend years — if not decades — building their reputation and their relationships with investors. This doesn’t mean that first-time entrepreneurs can’t raise money, but that they’re far better off spending their time setting metrics-driven goals and hitting those goals in order to build trust in the investor community than writing a business plan or shopping a deck.

Business plan competitions can’t build a comparable experience, so they’ve created a generation of first-time entrepreneurs who falsely believe that money is raised in front of a Powerpoint rather than series of coffees and beers.

If you made me redesign the business plan competition, I’d do something pretty nontraditional: a unit economics competition. The contest would be in-person and just takes five minutes per contestant: explain your business concept in 1-2 minutes and walk through one Excel worksheet presenting the unit economics in the next 2-3 minutes. No long-form writing or slides, just the basic math that explains the core cost and revenue drivers and assumptions of your company. And no 3-5 year projections, either. While it might be beneficial for entrepreneurs to fully think through their company by spending 150 hours writing a business plan, modeling out your unit economics will provide 90% of the value at a fraction of the time.

Furthermore, the winners of a unit economics contest would be more likely to build successful companies. Unlike a business plan, with a 3-5 year projection at its core, a unit economic model tends to focus the entrepreneur on the near-term opportunities with the highest likelihood of success: the kind of things that will create grounded and focused businesses rather than speculative, multi-threaded companies. And if you’re a broke student hoping to start a business straight out of a university-sponsored competition, which would you rather have?

Written by Brad Hargreaves

February 12th, 2011 at 3:19 pm