Hi, I’m Rana Gupta.
In the last module, we introduced the notion of assumptions and how assumptions for our
plan are building blocks—they’re foundational to the plan.
Let me introduce you to three types of assumptions, three categories.
A primary assumption we’ll call a personal experience such as, “It takes me this long,
you know, so many minutes, to go from my house to the train.”
Or let’s say a trusted colleague or friend has also experienced something personally—that’s
a primary assumption.
A secondary assumption we’ll refer to as something that’s referenced.
So, it can go anything from a publication to a friend of a friend of a friend.
But it’s something to which you reference, but you, yourself, have not personally experienced
it.
A tertiary assumption is a guess.
Let’s call it—you know, I think it’s going to take three to six months, or it’ll
take $50,000 to $100,000.
And the point of the guess is not that you get it exactly right, but you’re conveying
to yourself and the audience for your plan that it’s not going to cost $500,000.
It’s going to cost, let’s say, $50,000 to $100,000.
Now, in your plan, however, you have to delineate which type of assumption a given assumption
is.
It actually adds credibility to your plan, not only that you’ve made these assumptions
but you’ve also labeled them accordingly.
Let’s back up.
Why are assumptions so important?
They’re so important because assumptions establish a business conversation.
In the absence of assumptions, you just walk in with a plan.
So, imagine you walk in and you state to an investor, “Here’s my plan.
I’m going to do this and then I’m going to do this.”
Now, the investor may say, “All right, but how are you going to do that?
How’s that going to go?”
What the investor is really asking is, “What are your assumptions behind that plan?”
Now, if you don’t have your assumptions to answer the how and the why you’re going
to do something, then what ensues is a very uncomfortable what I call parent-child conversation
where the investor is the parent and they just start to beat up on you and they start
to ask, “Well, why are you going to do it this way?
And how do you know it’s going to cost so much?”
And now you find yourself in a defensive position rather than if you have your assumptions,
you’re two adults engaged in a business conversation looking for a common solution,
which is the essence of a business conversation.
Recall something like this—here’s a life example for you.
You’re 12 years old.
You want to go to your friend’s house.
Now, you know you want to stay late tonight at your friend’s house.
You have one of two choices.
You can either go to your friend’s house, call your mom up at 10:00 tonight, and say,
“Hey, Mom, would you come pick me up?”
At that point, you will probably incur the parental wrath that you so well deserve.
Or you could say to your mother, “Hey, I want to go to my friend’s house, and could
you pick me up at 10:00 tonight?”
To which she might say, “Hmm, 10 is a little late; how about 9:30?”
Look, it’s a simple example, but it’s a perfect example of what it means to involve
your benefactor in your plan and your assumptions.
So, in front of investors, state your assumptions clearly and quantitively, even if it’s a
tertiary assumption—it’s a guess.
Say so.
State it cleanly, state it right up front, and say, “And I’m working on it.”
Because the goal here is to move from a position of looking for a weakness, which is what an
investor starts with, instead to one where you’re perhaps identifying the weaknesses
together.
Who knows?
Maybe the investor will know somebody that will help you take a tertiary assumption and
move it up to a primary assumption.
People want to help other people at heart, but you have to get them started with the
fact that you’re making the effort to propose quantitative assumptions that address the
constraints behind your plan.
Let’s try a little more extravagant example of going from here to Mars.
So, a child may say, “All right, I have my backpack.
I’m going to fill it up with water, fill up my spaceship with gas, and off I go.”
But, now, we, as adults, will have to be far more circumspect and quantitative about how
we’re actually going to go to a distant place, Mars.
And we have to quantify, because an investor is going to want to hear, well, how much gas
are you going to burn?
How long is it going to take?
What are you going to do when you get there?
How do you know you have enough to get back?
An investor wants to see your primary, secondary, and tertiary assumptions quantified because
an investor wants to make sure you didn’t just wake up that morning with an idea and
say to yourself, “I need money.”
Let me give you an example in my personal life.
When I started this company that I’m now doing, I spent a year talking to customers,
and one of the many assumptions I had to challenge was: How long was it going to take to engage
in a joint product development?
Almost unanimously, I heard from all the customers at least 18 to 24 months.
Okay, that’s a big number.
But then I learned, on top of that, once we’re finished with all the development, they’re
going to require another year before they can actually launch.
So, now, I’m looking at two to four years of development and cycle before I can actually
launch a product.
I did not know that before I started.
When I went in front of investors, I had primary assumptions from customer interviews that
gave me enormous credibility so that investors understood my plan and the assumptions behind
it.
Two points to be made here.
First, many people think of assumptions as extraneous and extra work, and they don’t
realize the power that they have to bring about a business conversation.
The second is, even if they do understand the power, they don’t do it.
Why?
Because it makes us feel vulnerable.
And then you might ask, “Well, why does pursuing assumptions make us feel vulnerable?”
Because the fact is, pursuing that hard work and the hard truths that underlie the quantitative
assumptions behind a plan—what we may find out after doing all that work is that our
idea isn’t viable, so we feel vulnerable about that.
Secondly, there’s discomfort associated with pursuing a complete set of assumptions
because in order to do it thoroughly, you have to get into areas such as marketing and
sales, which is out of a researcher’s comfort zone, traditionally.
So, for those two reasons, people avoid assumptions at their peril.
Up until this point, we’ve used life as an analog.
We’ve looked at the decisions that we make in life and realized, oh, those are the same
decisions that we have to make in our venture, to understand we already know how to do this,
actually.
But let’s look at life differently.
Let’s now include our lives in our plans.
So often, what we do is we say, “This is my life, this is my plan, and we keep them
separate.”
Unh-uh; can’t do that.
The fact is, it’s your life; it’s your plan; it’s your venture.
And you have to include your life in your plan, but we avoid doing that.
Personal assumptions are primary assumptions.
They’re actually the easiest ones to make.
But here comes the reality disconnect.
They’re the ones we choose not to incorporate.
Even worse, we actually convince ourselves that by ignoring them, we can keep our personal
needs and our venture separate.
Huge risk here—technically speaking, we call it a double whammy.
Risk number one is to the venture.
Risk number two is to your personal needs.
So, we avoid it.
But self-reflection is difficult, and that’s why we choose not to do this because, just
like vulnerability, we have another emotional reaction here, which is that we’re afraid
that if we incorporate our personal needs into our plan, we’ll find out they’re
not compatible.
Here’s the thing—you owe it to yourself to know.
Look, this venture could take three, five, nine years of your life.
There will be life-changing events, some of which you want to take place, that will take
place in the course of this venture.
You have to include you in your venture and all the assumptions that that includes.
Again, I’m not saying you have to share with investors every little piece of your
life, but you do owe it to yourself to set yourself up to succeed by including the detailed
needs of your personal life in your venture.
Let me introduce two concepts to help you introduce your life into your venture’s
plan.
The first is personal constraints.
Let’s be as specific as we have to be.
You’re a wife, you’re a mother, and you’re a researcher.
And now you want to start a company?
Well, then your goal has to be to include your personal constraints—time and money,
quantified—into your plan.
So, while you’re sitting around dreaming and thinking about how wonderful this technology
is and all the good you’re going to do for patients and doctors, you have to incorporate
your life into your plan, specifically.
One of the objectives of these modules is to set ourselves up to succeed, to be true
to ourselves, and not ignore or pretend the reality that is about to take place.
This brings up a third rule.
Rule number three—there are no “coulds.”
You may not say the word “could.”
I could do it if….
I could make the time if….
The fact is, we all know exactly how much time we have, extra, on top of our current
lives, to start a venture.
We all know how much money we require to make ends meet.
You may not exaggerate the amount of time, and you may not decrease the amount of money
that you need.
You may not use the word “could.”
Let’s say this out loud.
If you’re expecting this venture to be your primary source of funding, you must write
yourself into the plan.
And, again, I’m not saying that you have to tell investors the details of your personal
needs, but you owe it to yourself to write the needs that you have into your plan.
And the danger is if you use the word “could,” that you’ll find yourself, at some future
date, desperately looking for money to fund not just your venture but your family and
yourself.
And that’s the dangerous situation that we alluded to in the last module when we talked
about, there, running out of gas between exits.
But at this point, it’s a much more dangerous, frightening situation to be running out of
money in-between fundings when that’s what we’re relying on for our personal needs.
The second concept for incorporating your life in your plan goes like this.
Ask yourself, “What’s my objective?
What’s my objective in starting this company?”
I’ll give you some examples.
Maybe your objective is you’ve always wanted to start a company.
Or you want to run a company.
Or you want to learn to be a businessperson.
Or you now want to be a researcher and a businessperson.
Or the one that I hear the most often, which is, I just want to get my technology out there.
Those are all perfectly fine objectives.
Every single one of them is a reasonable objective; however, there are two results from this.
Once you’ve realized what your objective is, the first is going back and visiting your
personal constraints; for example, if you want to be a researcher and a businessperson,
that’s a huge demand on your time.
Make sure you can meet those needs.
Now, the second result from knowing one’s objective is your financial plan.
Each one of those objectives, it stands to reason, has a different financial path, different
financial mechanisms that you’re going to use to reach your objective.
Let’s say, for example, your objective is, “I just want to get my technology out there.”
So, it’s a technology commercialization objective.
Well, I’m going to maintain that venture capital may not be the right financial means
for you to reach your objective.
Why is that?
A venture capitalist’s objective is to make a lot of money.
Your objective is to commercialize your technology.
This is a mismatch.
It’s a bad fit.
I like to call it a bad marriage, actually.
It gets people’s attention, certainly.
So, in my company, when I realized what this technology is and I thought about what my
objective is, and I realized it’s to build this company and it’s probably going to
take 10 to 20 years, actually, so I realized venture capital at the early stage is probably
not a good fit for me.
It may be at a later stage but not at this time because a venture capitalist fund has
a cycle of about ten years.
Realizing my objective is to grow this company for probably more than ten years, I realized
it’s not an optimal fit at this time but maybe at another time.
Here’s a marriage analogy for you to drive home the point.
Let’s say we know two young people in a serious relationship.
One of them doesn’t want to get married and wants to live in New York City in an apartment.
The second one wants to get married, have children, and move to the suburbs of Detroit.
We have ourselves a mismatch.
We have the potential for a bad marriage.
Now, let’s take it back to the example with your investors.
If you and your investor don’t share similar objectives, the probability is you’ll both
fail.
So, you have to state your objectives, and the onus is on you, actually, to find the
appropriate funding that will help you reach that objective.
Otherwise, you’re going to end up with a mismatch, and you’ve increased the probability
of not succeeding.
What have we covered in this module?
This module attempted to lay out the bare truths that we have to incorporate our personal
constraints into our plan.
These are primary assumptions.
These are known data.
And you have to quantify your personal needs into your plan.
To thine own self be true.
You have to do that; otherwise, you’re not setting yourself up to succeed.
And if you don’t incorporate yourself into your plan, then the rest of these modules
are just going to be academic because that’s the reality of how you can set yourself up
when you make sure that your needs are taken care of as part of your plan and you’ve
found the appropriate funding to do that for yourself.