What do venture capitalists care about more: how your business is doing now, or how well it will do in the future?
Annoyingly and perhaps predictably, the answer is both. But bestselling author and corporate strategy genius Geoffrey Moore thinks that a focus on present performance alone is a flawed approach for those looking to gain investment.
We have a lot of performance metrics and if you look at compensation, particularly in public companies, the executive compensation is very performance-oriented, and typically it’s tied to stock price, says Geoffrey.
The Power vs. Performance Paradox
‘They’re trying to build a connection to the investor through total shareholder returns or the moral equivalent thereof. So performance is when you take your existing power and you harvest it, using your existing power to create financial returns.’
In this context, ‘power’ can be thought of as potential. It’s the ‘long’ of the long and short of it, everything you do to build the foundations for your business’s next big wins. You can’t have performance without power. But your power supply won’t last forever without being replenished, and an overreliance on performance metrics means that teams are often disincentivised to spend time on power-building activities.
In this environment, building power quickly becomes a ‘nice-to-have’ peripheral project — something for staff to do in the background, in their own time, during a quiet week. This focus on performance might seem sensible initially — after all, it’s what pays the bills. But what happens when the people you need to impress the most are scanning for power instead?
The Investor Perspective
As it happens, an increasing number of investors are focusing on building power to monetise in the future from the safety of under their wing. And with scalability being increasingly associated with high startup IPO valuations, relegating power generation to a side quest is a mistake.
‘The early stage venture people have a very simple equation: “We only invest in power,”’ says Geoffrey. ‘What you want to do is get performance to a vector where people will give you an extraordinary multiple on a company that’s basically breaking even. So, obviously, nobody’s buying the historical performance of the company. They’re buying 100% of the power of the company.’
‘That’s pretty straightforward. But private equity has expanded its purview dramatically. The technological landscape has now had so many layers of infrastructure built up that you can play a less disruptive, more global game sooner than you could before. But that gives private equity the same problem that the public equity people have, which is “How much of my budget should I allocate to performance versus power?”
The Dangers of Neglecting Power
Part of the problem lies in the unfocused nature of power-building projects. Performance metrics give you something quantitative to aim for. You either hit the target or you don’t. Assessing the effectiveness of projects designed to foster potential, which may not pay off for years to come, is much harder.
The difficulty in measuring the cost of not building your brand’s future is why many businesses shy away from investing in their brand long-term. But focusing on performance and neglecting power is like picking all the fruit from a tree without watering it.
Similarly, endlessly watering a tree without ever making the effort to harvest and sell the fruit is equally… well, fruitless. And Geoffrey is keen to warn businesses against getting stuck in this pattern.
‘Look, you don’t want power for the sake of power. You want power,’ he says. ‘Ultimately the performance zone is what matters. That’s what affects the world. So we’re always investing in power to create future performance. And there are people who live in the incubation zone their whole life, which means they’re always creating these incredible futures that they never actually take responsibility for.
‘In a lot of large companies, the incubation zone is really just a corporate playground. It’s corporate entertainment, and it’s not okay. It’s dangerous because you think you’re catching up and you’re not — you’re just goofing off. I think the venture operating model is not playful. Holding that zone accountable and saying “Look, you need to show me demonstrable changes in power.”’
Bridging the Gap: Showing Investors You Have Both Power and Performance
So, with that in mind, what should businesses be focusing on to show investors that they’ve got both sides of the coin?
‘All the venture metrics are power metrics. So, did you create a minimum viable product? Did you get your first customer? Did you get your first lighthouse reference? Have you crossed the chasm, and do you have a repeatable use case? Have you dominated your first target segment? Those are power metrics. The financial returns from those in a large corporation are de minimis, but the power returns are real.’
As well as running her own boutique agency, Duckman Copy Ltd, Ornella is house writer for the Unicorny podcast which is sponsored by Selbey Anderson. She’s happy to turn her pen to all types if content from white papers to websites, from billboards to board game instructions and contributes regularly to Unicorny.co.uk, Selbeyanderson.com and Stateofdigital.com.