How Big Hairy Audacious Numbers Hurt Founders
Yesterday, a founder was having a tough time trying to convince me on his business plan. After the umpteenth attempt, he asked out of sheer frustration, “How is it that xxx company with shitty service and many issues gets all kinds of funding but you can you not give me the initial seed capital to prove myself?”
He was right in a sense, many companies like Ola, Oyo, Swiggy, Flipkart etc. went through phases when their products/services were shitty. They had numerous consumers complaining about them on social media sites and there were questions about whether they would survive the horrible reviews. How is it then that they could raise so much money? How could they convince early investors that they will become these massive unicorns?
In my opinion, it was the founder’s ability to convince the investors on the existence of a market segment that was under served, accurately depicting (for the investor) the issues that this targeted segment is facing. Put simply, they were able to showcase the size of the target segment that could be served right away and the potential addressable size. This is usually the most difficult part for investors to believe and the least researched part by founders.
Many investor presentations have Big Hairy Audacious Numbers (BHAN) which ignite wows, oohs and aahs from family and friends, but that number does not hold up to a deeper dive. It quickly shrinks as the investor digs deeper. The easiest way to shrink the BHAN is to ask the founder which customers he will say no to and which ones simply don’t face the problem he is solving. Every founder needs to ask himself/herself the question, “which customers are too small for me and which customers am I too small for?”. Once those boundaries are set, usually the BHAN shrinks to a fraction of the original, in this case it shrunk over 90%.
Even though that sliver of the original number could be huge, it would make me, (or any other investor) doubt whether the founder clearly knows how to get the most bang for the limited budget that an early funding round provides. It also destroys the credibility of the traction that the founder has achieved until that moment because it raises questions as to whether a large chunk of the current customer base include customers that the founders don’t intend to serve!
These doubts cost the founders dearly and while they can come back with better research and understanding, it will require nothing short of a home-run to re-convince me or any other investor.
As far as the questions on the shitty services are concerned it is impossible to have 100% satisfied customers, 100% of the time. There will always be some slippages, but if the new solution is a little better than the old one and the founders demonstrate a culture of constantly evolving their venture to improve this solution, customers will forgive and continue to use their product/service. Therefore OYO, Ola, Swiggy, and Flipkart should be an inspiration and not a point of frustration for founders that are getting rejected.