Lost Opportunities

Knock, knock. Who’s there? Opportunity. Do I know you?

Companies do not maximize profits consistently. They lose deals they should win, waste money on programs that won’t deliver the expected returns, and price their products incorrectly. Similarly, Venture Capitalists (VCs) do not maximize profits with any consistency either. They bypass investments they should make, invest in companies that won’t deliver the projected returns, and value companies incorrectly.

Why are minimized profits common? Certainly, it’s not what businesses desire. It’s the result of behavior. Businesses make investment decisions based on their instincts and habit, rather than on analytical reasoning. Opportunity loss prevails. 

Lost Business Opportunities

Every quarter, you see businesses languishing in the vicious cycle of despair. It goes something like this:

1. Leadership team is shocked when they miss their revenue targets
2. Leadership team runs the usual plays – marketing campaign, sales spiff, price cut, change in product direction to chase the competitor of the day, etc.
3. Leadership expresses confidence that the next quarter will turn out better
4. Repeat step 1. 

The reality is that business leaders do not have the information they need to better understand their businesses. They cannot maximize profits because they lack:

• Accurate and timely access to the right data they need to drive impactful decisions
• Data that can be correlated across business functions (product, marketing, sales, finance and operations) to drive end-to-end decisions.

Without this information, it’s impossible to thoroughly evaluate the business. If you can’t fully understand the business, how can you hope to accurately measure what effect different actions will have on profitability?

Even those few business leaders who have the right data lack predictive and prescriptive analytics to deliver:

• Timely answers to their questions (everything is done manually)
• Answers to the questions they haven’t thought to ask (everything is done on-demand)
• Changes over time (everything is done as a one-off).

Without the right analytics against the right data, you can’t control the levers of the Go-to-Market (GTM). Without control of GTM, how can you hope to drive the business and profitability?

In the absence of information and analytics, everybody “goes with their gut,” which means they keep doing the same thing they’ve always done. And they get the same results—shortfalls on profitability. It's the epitome of Einstein’s definition of insanity.  

Do you know what the scariest part of this situation is? Every company – even ones that are currently hitting or exceeding their revenue targets – suffers from this challenge. Every company could be more successful with better data, better analytics, and better decisions. But they don’t change. Why? “Because we’ve always done it that way.” 

Lost Venture Capital Opportunities

Every year, VCs leave money on the table. No, that’s not the beginning of a joke about how a lawyer, a VC, and a tax collector walk into a bar. It’s true.

The most successful startups – high tech or otherwise – succeed because they find market inefficiencies. Maybe that inefficiency comes from new technology (GPUs, flash, FPGAs), new algorithms (page rank, inline deduplication), new business models (freemium, pay-as-you-use), or underserved market segments (low-income international, tweens). Regardless, the most successful new companies build a product or service that conventional wisdom did not see coming—and the impact it has on business.

As a result, you would think that VCs would be searching for companies that are DIFFERENT than everything else out there: different technology, different perspectives, and different approaches. You’d think they’d prioritize independent thought in the companies they fund and try to approach the market differently than the other VCs. Once again, growth comes from market inefficiencies – seeing the gaps that others don’t. So, they must be relentlessly searching for diversity, right?

While there are many ways to grade the diversity of VC investment, let’s focus just on the founders/co-founders as an example. Here’s what happens with $58.6B invested across 4,520 deals:

• They look for people they’ve funded before
• They look for people who come from the “right” companies and “right” universities
• They look for people that run in the same circles and social networks as they do
• They look for people who LOOK like people who start companies (technical white males)
• They look for companies that another VC is about to fund (safety in numbers)
• They look for companies that are exactly like companies that other VCs have already funded.

In other words, VCs don’t stray far from their comfort zone and do almost exactly the opposite of searching for market inefficiencies. 

Focusing in on specific segment again, let’s look at gender diversity in tech sector investments. The numbers bear this out:

• Despite the fact that 20% of tech executives are women, only 7% of funding goes to tech startups with female founders/co-founders
• When they are funded, female-founded tech startups, on average, get 1/3 of the Series A funding compared to male-led tech startups
• In case you think, “Maybe women aren’t trying to found tech startup companies,” according to a Kauffman Foundation survey of nearly 350 female tech startup leaders, 80% used personal savings as their top source of funding for launching their new startup. 

“Every year that goes by where we continue to fund the exact same pool of overwhelmingly male, overwhelmingly white founders is one where we are missing out on the opportunities to find important new innovations.” –Ethan Mollick, a professor of management at Wharton.

Do you know that zero Tech startups with Female Founders received Series A VC Funding in March 2017 (Women's History Month)? While 14 Tech startups with male founders received Series A VC Funding with an average of $9.3M.

Diverse leaders will see the market differently and uncover those unique, high-value opportunities for which every VC hungers. 

Again, this is just ONE of the many VC blind spots.

Like the businesses, those blind spots cause the successful VCs to leave money on the table. 

Root Cause and Solution

There are two reasons that businesses and VCs run their businesses in a suboptimal fashion.

First, they lack the data and tools needed to truly understand and evaluate the impact of their decisions. We talked about this on the business side. Businesses need to gather, analyze, and drive GTM decisions based on data that connects marketing, sales, and finance.

VCs will need a similar approach to address their challenges. They’ll need to quantify the degrees of diversity in their investments and measure the results. Then, like any business, they’ll need to execute targeted tests to evaluate which types of diversity yield the best results. It all begins, however, with new measurements and analytics. 

Second, people don’t like to change. “We’ve always done it that way” is one of the most insidious arguments that plague anybody trying to improve things. Despair.com has a wonderful poster – “Just because you’ve always done it that way, doesn’t mean it’s not incredibly stupid.” If you’re waiting for people to change on their own, you’re no smarter than they are. Furthermore, it’s not just about people; it’s the culture. Thus, when VCs tout “diverse” hires, it’s common to watch them make the same type of judgements as anybody else in the firm. Until the VCs realize the opportunities they’re leaving on the table, they will never change. Until the “gut instinct or archaic pattern matching” and “culture” are put in check by the reality of what gets VC funding today, nothing will truly change. 

There are three key steps to solving these challenges:

1. Organizations need executive sponsorship to do something different
2. They need advanced analytic systems to drive the change, so that people, process, and decisions are fairly evaluated
3. They need somebody to ensure that the data is accessible, accurate and reliable (i.e., a Chief Data Officer).

The Future is Now

Every day; tradition, instinct, and inertia create friction and inefficiency inside businesses and VC firms; at a minimum, the business result is lost profitability and lost opportunity. Companies with great products fail. Companies that could become great never get off the ground. Innovative solutions never make it to market. The lost opportunity is unquantifiable. If you care to do it differently, you may be asking “how?” The answer won’t come from repeating the failed approaches of the past: making superficial changes, delivering inspiring speeches, or forming committees. To maximize profitability businesses and VCs need to make real changes and seek opportunities outside the status quo. There is a solution. Future maximized profitability will come by applying intelligent mathematical algorithms to carefully collected data. That future is here. Waiting. Make the choice.