A typical start-up created by an inexperienced entrepreneur has about a 10% chance of success.
But if that same entrepreneur pivots, or starts a second company, the odds of the next venture succeeding jumps to about 20%. And that makes sense because you learn a lot during your first failure, and you make a lot of contacts that can be useful later.
If you go up the odds chain, an angel investor with twenty investments in different companies might have a 70% chance of doing well because of the value of diversification.
A start-up incubator does a similar thing by holding equity in a diverse portfolio of start-ups. If only one out of ten succeeds, that can be enough to make the incubator profitable.
You get even better odds investing in established companies that are part of an index fund, so long as you hold for a long time. Let’s say the odds of that working out for you are closer to 90%. Diversification always seems to be a good idea.
So I asked myself how a start-up could get some of the benefits of diversification while still keeping the advantages of being a start-up with a single focus. The answer, I hope, is a Systems Business Model.
I wrote the book (literally) on why systems are better than goals in most complex environments. Most start-ups are goal-focused. They might have one product (plus a few features) and too much optimism about market demand. That’s how you get to a 10% odds of success, or 20% if you are experienced at this sort of thing. A Systems Business Model attempts to improve those odds.
The start-up I co-founded (CalendarTree.com) might be the first example of a systems approach to a start-up. When we relaunch this summer you will see a portfolio of software solutions around the domain of scheduling, calendars, and time. We are able to quickly create solutions in this area because we developed a deep understanding of the market and the relevant technology while creating our original scheduling product. Once we had the knowledge and the technology platform in place we could add a dozen related but independent products to the upcoming relaunch. We’ll change our name to better fit the new offerings.
We have no idea which ones of the new products will capture people’s attention. When we relaunch we will solve about fifty common problems (I counted them) in the schedule and calendar field. (Note: We do not compete with calendars. Our job is to make your existing calendar more useful, among other things.)
If you ask me how we plan to make money, I’ll tell you I have no idea. But if any one of our products is a runaway hit, we will organize around it. If people like them as a package, we can work with that too. Maybe someday we will add some premium features. Maybe someday the app upgrade will cost one dollar. Maybe someday there will be an advertising component. We can go in any of those directions. We designed those doors to stay open.
Clearly this is not the kind of story you want to tell your potential angel investors. Those cats want to know the names of your first customers, see letters of intent, or know that you are already experiencing organic growth. No investor wants to hear “whatever” as part of your plan to monetize.
But “whatever” is exactly what makes a diversified portfolio of stocks a good investment. The whole point of “whatever” is that humans are shitty predictors of anything. But numbers are numbers. Diversification always seems to improve odds.
A Systems Business Model is designed to improve your odds of success even as you are failing on individual tasks and projects. Each failure increases our insight into what works and what does not in our chosen field. And you decide in advance that you will be taking a deep dive to find value. You won’t find many diamonds on the surface. Each failure makes us technically smarter and more insightful. And soon we will have diversification on our side. If you don’t feel a compelling need for nine of our solutions, you might get jazzed about the tenth.
This model obviously has big challenges for branding. But we figured out a way to make it work for us in this case. I’ll tell you more over the summer.
And obviously funding is a problem with the “whatever” story. But we’ll be fine long enough to know what we have. Maybe if the Systems Business Model works for us, investors will take notice.
Is this sort of blog post interesting? I really can’t tell.
In Top Tech
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