Updated: May 22, 2020
Want to raise money or grow your business? Start by defining success.
We meet with lots of founders that say they want to raise money. Raising money might help your company grow. Some companies are a good fit for venture capital, but a larger number of them aren’t a good fit. Whether or not they are a fit is a matter of how they define success.
Whether or not to raise outside capital, how much to raise, and from which funding source are all valid questions. These questions all assume that “raising money” is a good fit for what you are trying to accomplish with your company.
That’s why we start with the question, “What is your definition of success?”.
Another way of saying “What is your definition of success?” is “What is the most desirable end-state for your company?” Would you feel successful with 10% MoM growth? Acquisition? $50M in yearly revenue? Intellectual property sale? Making just enough money to pay 5 people on your team every month? $17.7M EBITDA?
These may seem like trivial questions, but the answer you give will give you a “North Star” and help you navigate uncertainty around future decisions you make about your company, including:
Do you even care to “grow” your company at all? In what way?
Who do you want on your team? Who are you missing to reach your Definition of Success?
What products and solutions do you want to invest in building, and on what timeline?
What are your plans for the next 90 days?
Should you raise money at all?
What funding sources make the most sense for your goals?
How do you communicate progress to your investors, partners, and team?
Who do you actually compete with?
How do you know you’re being successful?
This is why we start our work with a company by helping founding teams define their definition of success.
The components of a good definition of success are the following:
What are you building?
What are the value drivers in your company?
Who are you most trying to help / add value to?
What metrics do you use to measure progress towards success?
Let’s break these down a bit.
1. What are you building?
How you define what you’re building can help you in explaining your value to teammates, potential teammates, customers, and can even drastically change the value of your company to investors.
In defining this, try to keep it to one sentence. Make it realistic, but aspirational. This is not a mission statement or company slogan. Rather, it is what you are actually doing, as you describe it to yourself, your team, and your investors.
Here are some examples to help you develop your own answer:
Petzl: A company that provides “off-the-ground” safety. (Notice, not a “rock climbing” company, which would limit their potential size).
Viberoll: The world’s most compact, pro-quality, products for fitness recovery. (Notice, not a “muscle roller” product.)
Linkedin: A way to find and contact people you need through people you trust. (Notice, not a “jobs/classified” company).
In his essay What Is the Theory of Your Firm, Todd Zenger points out that clarifying a corporate theory, like “what you are building”:
“reveals how a given company can continue to create value. It is more than a strategy, more than a map to a position—it is a guide to the selection of strategies.”
2. What are the value drivers in your company?
Knowing what type of company you are actually building clarifies your value drivers, the parts of the business that you use to drive toward your definition of success. Value drivers are your “winning edge” or your “secret weapons”. They are the activities, assets, and resources that you continually use to drive the value of your venture.
Zenger illustrates the link between what you are building and value drivers with an example from Walt Disney. In the map below, Disney shows a clear understanding of his core value drivers: creative talent of studio and theatrical films.
Creative talent of studio and theatrical films are Disney’s core value drivers. This means that every time Disney invested resources into creative talent and films, their business flourished.
Knowing your value drivers, and showing evidence of your value drivers in action, is a key to being investable and reaching your definition of success. This communicates that you’re focused on using your resources (and outside resources) on the things that matter most.
3. Who are you most trying to help / add value to?
Many people see this question as “Who is your customer?”, but we encourage founders to think a bit bigger. A better way to think about this question is “Who are the most important stakeholders that you add value to?”
We think of these stakeholders in a few buckets:
Primary stakeholders: Users — Who actually uses your product or service?
Primary stakeholders: Buyers — Who pays for your product or service (with money or another resource)? This might be the same person or entity as the user, but not always.
Secondary stakeholders: Partners, distributors, investors, acquirers, other market players — Who isn’t a direct “customer” but gains value when your company gains value? Who makes money when you make money?
A good example of this is a company that uses distributors. The more successful you make your distributors, the more successful you become.
Articulating your key stakeholders continually focuses you on creating value for them. As you invest in creating value for your key stakeholders, your company becomes more valuable. With the right support, your stakeholders can even become one of your company’s core value drivers.
4. What metrics do you use to measure progress towards success?
Imagine your business was a basketball game. If you looked up at the scoreboard, what would you be measuring to know if you’re winning?
Another way to say this question is “What is your company’s scoreboard?” This question can help you start to keep score on your progress, and reveal whether decisions you make get you closer or farther away from your definition of success.
One of the best ways to answer this question is to educate yourself on the metrics investors use to measure progress in companies like yours. Remember, two businesses almost never have the same metrics. An online marketplace for outdoor products will measure different metrics than will a B2B sales organization, as will a micro-lending non-profit.
Here is an example of a “scoreboard" for a company that will largely use Kickstarter as a sales channel:
Airbnb also published a piece describing a specific set of metrics that defined success for Airbnb (see section #1 of Lessons Learned Scaling Airbnb):
“For Airbnb, liquidity on the supply side is crucial. Cofounder Nate Blecharczyk is highly quantitative and had determined that 300 listings, with 100 reviewed listings, was the magic number to see growth take off in a market.” —Jonathan Golden on metrics that helped Airbnb know they were being successful in a new city.
So, what metrics would tell you if you are being successful?
One thing to notice is that while a definition of success may have overlap with a “mission statement”, it is not the same thing. A mission statement is broad, generally unmeasurable, and is often designed for marketing purposes. A good definition of success helps you make real decisions about your business, both day to day and year to year.
If you don’t spend time developing your own definition of success, like many companies we talk with, you are liable to end up building someone else’s definition of success.
Creating your own definition of success can help you build the company that aligns with your personal values, can reveal whether or not raising outside capital will help or hurt, what types of capital will add value at different stages of your company’s lifetime, and help you make an actionable capital strategy.