Friday, January 15, 2010

Two Ways to Hold Entrepreneurs Accountable (for Harvard Business Review)

The next part in the series I am writing for Harvard Business Review is online. This time, I'm discussing the challenge for corporate CFO's and VC's alike in holding entrepreneurs accountable. Of course, the method I recommend, that of using quantified learning as a yardstick, is of equal interest to disciplined entrepreneurs. After all, the hardest question to answer in entrepreneurship is: are we making progress?

As usual, if you would take an extra two minutes of your day to click through and join the discussion on HBR's site, I would appreciate it. Leave a comment or reply to someone else. Fostering that dialog is important.
Two Ways to Hold Entrepreneurs Accountable - The Conversation - Harvard Business Review
Way back when the money was doled out, the team made a compelling pitch about the large market that was going to adopt their new innovative product or service. The rules of a fundraising pitch are straightforward: pitch the largest "total available market" that you can credibly claim to be capturing. Behind this analysis is a spreadsheet model, complete with detailed metrics for a set of customer behaviors that show just how valuable the new product will be.
And when companies pursue sustaining innovations — like a product line extension or a new technology designed to serve an existing customer segment — this procedure makes complete sense. A good general manager is expected to use all the tools at their disposal — market research, competitive analysis, customer focus groups — to figure out a plan that will work. The logic of the CFO when presented with such a plan is also straightforward: once the plan is approved, either the team will deliver the promised results, or the project can be safely shut down. Safely because it is clear that the manager in question didn't do his homework.

This whole framework breaks down when teams confront entrepreneurial situations in which they're trying to build something new under conditions of extreme uncertainty. This is the domain of disruptive innovation, projects which are inherently low-ROI in the short term. They are long-term bets on the development of a new line of business, a new technology platform, or the creation of a new market.

Let's return to our team that's failing to hit their targets. They are on-schedule and on-budget, but their gross metrics are way off. Usually, they are delivering only a fraction of the revenue they promised. For a little while, the team can resort to the last defense of entrepreneurs in trouble: the promised hockey-stick.

One thing that is often overlooked about the hockey-stick growth shape: its most distinctive characteristic is the long, flat part.

 Read the rest here... Two Ways to Hold Entrepreneurs Accountable
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