How to Predict an Angel Group’s Outcomes

VC firms won’t disappear.  Angel groups still might.

I am on a lot of pitch event email lists.  One I recently received contained the following message about how founders can be successful with their raises:

The difference wasn’t the science or the spreadsheet. 
It was how they told the story.

I have seen this message rehashed for many years.  Advisory voices continuously offer it up to a persistently renewing pool of founders, most of whom still fail to raise capital.  There are even consultants for-hire, with communications and creative writing backgrounds, who sell story-crafting as a service to founders.

Does it feel like I’m going to now tear the advice apart?  I’m not.  I’m going to put it in its place (chronologically).

There is a very old concept in salesmanship that we can all relate to.  Would you rather sell a product that needs to talk its way through the customer’s door, or a product that “sells itself”?  A startup likely to succeed, with solution-market fit as I last wrote about, an experienced team, and other advantages is rather easy to construct a story around.  If the CEO struggles with pitching a value proposition that already sells itself, the solution isn’t to recraft the story, it’s to replace the one telling it.

But the vast majority of startups who aren’t likely to deliver ROI to investors do, indeed, find it challenging to tell a compelling story.  Sadly, they miss this signal to scrap their value proposition and start over.  But I wonder, when advised to get better at storytelling to raise capital, do founders walk away grateful for the advice?  How many advisors can offer practical suggestions for how to improve the story when doing so, without straying into dishonesty, depends on the quality of the underlying value proposition as it actually exists?

I have witnessed a CEO flub a pitch for a pretty solid value proposition, occassionally.  I regularly witness inherently, structurally, hopelessly doomed startups (when one is looking at quality signals) raise money from my angel peers due to a masterful pitch.  Not only does the pitch artist tell a motivating story, such are adept at knowing what information to include, what not to disclose, and don’t stray into direct dishonesty.

I may not love the fact that failure to disclose risks is not considered unethical behavior in our activity.  The excuse is that America has operated on the legal principle let the buyer beware.  In our activity, that means it’s the job of the investor to uncover what the startup fails to disclose.  But due diligence is a different topic.

Should great storytelling be a part of a startup pitch?  Of course it should.  But that should never be what opens doors or closes deals, pretending it to be a primary measure of startup success.  Rather, it should be the last step of the vehicle assembly, the clear coat on the exterior paint that adds a bit of shine to an already exciting machine.

So, consider storytelling put in its place, chronologically.

Yet, this is all preamble to the title of this article.

What most troubles me is the reaction I get whenever I appeal to those who lead audiences of founders and angel investors with messages like the one quoted above.  See, whenever they lead with these messages, they usually cannot help but press down aspects of fundamental analysis (“due diligence”) in order to raise the priority on their replacement advice.  Above, the author essentially said that the quality of the underlying value proposition is NOT what matters, it’s how one tells an emotive story about solving a theoretical problem.

Is such careless advice consciously intended?  I generally don’t believe so.  Advisors care, usually quite a lot, about their ecosystem constituents.  Rather than carelessness, I think it is cluelessness – being unattuned to fully appreciate the damage their mis-prioritized advice is doing.  We must unpack this, because when mis-prioritized advice is regularly proliferated with good intentions, why needs to be understood in order to untangle ourselves from parroting it.  (To be careful and specific, advising better storytelling is not the problem.  The problem is elevating it above validating the value proposition, which critically involves analysis of problem and solution approach (science) and multiple dimensions of customer behavior and market data.)

What’s really going on?  I say over and again in many circles: follow the money.  Whenever anyone offers advice to a general audience among us, it is always useful to consider how the advisor gets paid in order to consider potential bias.  There are many voices coming from all directions who speak into our ecosystem who are not investors with their own money.  These get paid wages as workers in, or fees for services rendered to, founders and investors.  Does this impact their judgement and advice?  It would be naïve to think otherwise.

It gets even more cloudy when we consider some of those voices who are both investors and workers pursuing earned income and investment income simultaneously.  There, we must ask where the majority of their income is derived, and how soon.

This does not mean that, categorically, advice from non-investors and also-investors cannot be trusted.  It would be irresponsible to conclude this.  Rather, it is to understand the context of advice offered and compare it with wisdom that agrees or disagrees with the core mission of startup investing.  What is the broad spectrum view we should consider here?

VC Firms get paid for performance.  If their investments do not consistently return substantially more capital than that invested, those firms stop being able to raise new funds and die.  Almost any new LP to a VC fund asks for and receives track record data about the fund and/or the management.

But I have watched angel networks persist beyond 25 years without returning >1X net capital invested by the network and most of its members.  They always seem to be able to find new investors (often new to being investors) to replace the ones that they disillusion and churn.  Angel groups seemingly don’t need to prove track records with ROI.  They usually don’t offer a comprehensive review of actual realized results in their own storied membership presentation slides.  When asked, they highlight their best exits, but no angel group leads with comprehensive whole-portfolio (every investor, every investment) performance.  They don’t even track and have the data to be able to.  (But their hook remains – experienced operators sense they know what the data would say if they had it – and it isn’t good.)

Ironically, we could easily conclude that perhaps angel networks need to pay more workers with earned income for investment performance to improve this condition, but then they would simply become VC firms.  Instead, our forebears thought it good to carve out certain SEC exemptions and create a capital layer willing to invest at an earlier stage and take more risk, theoretically generating higher investment returns.

What was clearly not foreseen is how many angel groups, accelerators and other seed-stage ecosystem contributors this exempted framework would inspire to build a system that rewards transaction volume ahead of investment returns.  As a regulatory matter, by not permitting anyone to get paid based on investment selection, we essentially remove the logically critical mechanism that keeps everyone focused on investment outcomes.  VC GPs must invest well to keep operating.  Not so for angel networks.  Unfortunately, the exemption regulation does not address or impede finding other ways for actors in the system to be paid, so many actors have flooded into the system to be paid in all kinds of ways that have little or nothing to do with investment returns.

By this, many people, investors and especially non-investors, have carved out salaried jobs to run angel networks and accelerators.  They get paid to maintain meeting cadence and volume of presentations, uncorrelated with investment quality.  Many more have created consultancies in law, accounting, finance, entrepreneurial education, software tools & systems management, and more to sell services to founders and investors that revolve around fundraising activity, not ultimately concerned with investment outcomes.  Successful raising, not successful exits, generates the cash flow that pays for all this work.  This has extended further to angel networks being riddled with “members” who are not there to build high-quality investment portfolios, but for any other reason.  Adding insult, some active founders join angel networks to find an advantage to getting invested in, not invest in other startups.  We can give some grace to members who do have an active investment history that decide to jump back into founding or managing a startup – the order of operations matters here.

Taking all this into account, it is no wonder messages like I quoted above get sold and bought, over and over.  It’s the activity that counts, not exits (not really no matter how much lip service goes to hoping for exits).

And to my theme, it also explains why appealing to the authors of these messages sounds grating, falls on deaf ears, gets met with resistance and pushback, and erodes relationships with serious, intentional angel investors.  Asking the advisors to reconsider what they are really saying, somewhere deeply in themselves, feels like a threat to their livelihood and their freedom to pursue it.  They would ask” ‘who do any left among us, being discerning investors, think we are? “Purists”?’  (Connoted negatively)

It’s comical, a purist seems usually to be someone accused of returning to a core mission and reason for existing, especially when it has become watered down and polluted.  But there is no end to the moralization that those carrying the dirty water can pour on whoever may be trying to right a leaky and listing ship.  Stand in the way of someone’s right to tax an activity and prepare for a duel.

The VC industry (professional firms and fund management) are essentially, properly structured.  Get paid for achieving the goal.  Fees up front for access, facilitation and communications, back-end carried interest that motivates choosing investments that return profits.  The angel industry?  It is not well-ordered at all.  It is filled with activity but broadly, persistently dissatisfied with actual investment returns.  This is because it was unwittingly set up to fail, being self-defined and built by so many who can make money in it without investor returns.

Thus, my tag line.  VCs aren’t going anywhere, even when they suffer periodical cycles where they don’t seem to be going anywhere, if you catch my drift.  Funds fail and churn, but the investors don’t – they migrate to better managers.

What about angel networks?  They churn members constantly (who leave the activity permanently).  Thus, group and network survival depends upon new investors continuously being found who don’t know what’s actually going on, willing to hear and believe a good story about how great membership is and all the ancillary benefits.  Just don’t ask about ROI.

And, as soon as that novice investor’s membership begins, he or she can start enjoying messages about how founders can tell them better stories, getting them excited about writing checks to help them close their raises (and keep all the promoters and rent collectors employed) – exits be damned.  Rinse.  Recycle.  Repeat.

If, as a prospective and expectant investor, you see a lot from an angel network that points to investing in and closing rounds, and little about pursuit of regular exits and return of capital, you are almost guaranteed to be disappointed by your long-term results.  Investment success among these angel portfolios, quite literally, relies upon blind luck.  Indeed, you may meet a few long-running investor-members of that network who already know it’s just highbrow gambling, and they like it that way.  That’s why it’s fun (to them), and there is nothing to fix.  They already have enough money to burn.

Ahead of further discussion and debate, I do believe that for angel investing to survive for future generations, reform is sorely needed that returns significant accountability to the original mission of all financial investing by definition – positive ROI.

There is room for many people providing all manner of advisory and management services.  But, they need to be the add-ons to a healthy functioning system, not the owners of a system functioning primarily for their health.  If that means that transaction volume might come down to improve quality and there is not room for as many of them, this is not somehow inherently wrong.  It is healthy and normal when unbalanced markets get right-sized as a function of free market economics.  That won’t prevent ones being displaced from getting angry about it.  Their ire can’t be the deciding factor.

The only individuals who should be holding the conversation and making decisions, as policy, regarding how capital gets deployed are committed, long-term, portfolio-building investors.  The primary voice that investors should listen to for feedback is founders and the primary voice founders should listen to for feedback is investors.  This is not somehow unfair exclusion of all others.  It is the only way to maintain mission focus and an efficient operational cadence so that everyone involved can enjoy a sustainable ecosystem, feeding anyone who actually contributes to efficiency and mission results.

Related Post (learn more):  Capital Raised vs. Wealth Created | Startup Ecosystem™

Capital Raised vs. Wealth Created: The Question Every Startup Ecosystem Should Ask

• • The startup ecosystem loves numbers.
  • Millions raised.
  • Rounds closed.
  • Pitch events attended.
  • Accelerators completed.
  • Founder coaching sessions delivered.
  • Mentor introductions made.
  • Investor meetings scheduled.

But perhaps the most important question is seldom asked:

How much wealth was actually created?

The Activity Trap

Recently, I reviewed a promotion for a founder fundraising event hosted by a well-known startup organization.

The message was compelling.

Founders were encouraged to improve their storytelling, strengthen their fundraising narratives, and learn tactics that help close investment rounds. The featured host highlighted participation in

over $430 million of capital formation.

At first glance, this sounds impressive.

Yet it prompted a question that should matter to every founder, investor, accelerator, angel group, and venture fund:

What happened after the money was raised?

• • Capital formation is important.
  • It is not the same thing as value creation.

The Wrong Scoreboard

Many ecosystem participants unintentionally celebrate the wrong metrics.
We celebrate:

• • Dollars raised
  • Number of investors
  • Number of pitch events
  • Accelerator graduates
  • Founder participation
  • Community growth

These are activity metrics. Activity metrics tell us something happened. They do not tell us whether anything valuable was created.

Imagine celebrating a football team because they gained yards but never scored touchdowns.

All too often the startup ecosystem often does exactly that.

We celebrate fundraising activity while overlooking investment outcomes.

The Questions That Matter

A stronger scoreboard would ask:

• • How many funded companies survived?
  • How many achieved profitability?
  • How many generated successful exits?
  • How much capital was returned to investors?
  • What was the aggregate MOIC?
  • What was the aggregate IRR?
  • How many jobs were created and sustained?
  • How much enterprise value was generated?

These are outcome metrics. They measure whether real value was created.

Storytelling Matters — But Only If the Story Is True

Some investors will immediately object:

“Founders need storytelling skills.”

They are absolutely right. Every successful entrepreneur must communicate vision, opportunity, and conviction. A founder who cannot articulate the future rarely attracts talent, customers, partners, or investors. Storytelling is a critical entrepreneurial skill.
However, storytelling is not a substitute for:

• • Product-market fit
  • Customer demand
  • Competitive advantage
  • Strong execution
  • Economic value creation

The best stories emerge from strong fundamentals.

The worst stories simply disguise weak fundamentals.

Investors who cannot distinguish between the two eventually pay the price.

The Ecosystem’s Hidden Conflict

A subtle conflict exists throughout the startup ecosystem.
Many organizations generate revenue from:

• • Founder memberships
  • Accelerator programs
  • Coaching services
  • Educational events
  • Sponsorships
  • Conferences

None of these are inherently bad.

In fact, many provide tremendous value.

However, these organizations often succeed financially whether investors succeed or not.

This creates a dangerous possibility:

The ecosystem can become optimized for helping founders raise capital rather than helping investors create returns.

Those objectives overlap, but they are not identical.

A founder can successfully raise money and still build a company that ultimately destroys investor capital.

Impact Investing Faces the Same Challenge

The challenge becomes even more important in impact investing.
Impact matters.

Most investors want to support companies that improve lives, strengthen communities, and solve important problems.

Yet impact and returns should not be viewed as opposing forces.

The most sustainable impact companies eventually become self-sustaining businesses.
Without financial success:

• • The mission stalls.
  • Future capital disappears.
  • The impact remains limited.

Good intentions do not replace business fundamentals.

Neither do compelling narratives.

A Better Question

Instead of asking:

“How much capital did we help raise?”

Perhaps startup ecosystems should ask:

“How much wealth did we help create?”

Instead of asking:

“How many founders pitched?”

Ask:

“How many founders built enduring companies?”

Instead of asking:

“How many rounds closed?”

Ask:

“How many investors would enthusiastically invest again?”

The Startup Ecosystem We Need

The healthiest startup ecosystems do all three:

1. 1. Help founders tell better stories.
   2. Help investors make better decisions.
   3. Help companies create lasting value.

Fundraising is important.

Impact is important.

Community is important.

But none should become substitutes for the ultimate objective:

Creating durable companies that generate meaningful value for customers, employees, founders, communities, and investors alike.

Capital raised is a milestone.

Wealth created is the destination. 

Related Post (learn more):  How to Predict an Angel Group’s Outcomes | Startup Ecosystem™

Managing a startup team isn’t just about delegating tasks; it’s about steering a fast-moving ship through highly unpredictable waters. To secure that championship win and scale successfully, you have to balance aggressive execution with sustainable team dynamics.

Here is a blueprint for managing a startup team for ultimate success:

1. Anchor to a “North Star” Metric

Startups pivot—it is the nature of the beast. To prevent team whiplash when strategies change, your core mission and primary goal must remain rock solid.

• Define the Win: Ensure every single person understands the primary metric the company is currently optimizing for (e.g., user acquisition, retention, or revenue).

• Connect the Dots: Regularly draw a clear line between an individual’s daily tasks and the company’s ultimate goals so they know exactly how they contribute to the bottom line.

2. Foster Psychological Safety

High growth means high stress and inevitable failures. If your team is terrified of making mistakes, they will stop innovating.

• Decriminalize Failure: When an experiment flops, focus the post-mortem on what the data taught you, not on who to blame.

• Encourage Candor: Create a culture where a junior developer feels comfortable pointing out a flaw in the founder’s logic. Honest feedback loops are a startup’s best defense against fatal errors.

3. Master Tactical Execution

Big visions are great, but execution is what gets you to an IPO. You need a system that keeps the team moving fast without spinning their wheels.

• Sprint Cycles: Break monumental goals into tight, two-week tactical sprints. This creates a constant sense of forward momentum.

• Ruthless Prioritization: Time and capital are your scarcest resources. Continually ask the team: “Is this task the absolute highest leverage use of our time right now?”

4. Hire for Adaptability Over Pedigree

The skills required at Day 1 are vastly different from the skills required at Year 3.

• Seek Swiss Army Knives: Especially in the early stages, look for generalists who thrive in ambiguity and are eager to figure things out on the fly.

• Filter for Resilience: Startup life is a rollercoaster. You need people who don’t easily crack under pressure and can maintain their composure when things go sideways.

5. Protect the Team’s Energy

“Hustle culture” has a very real ceiling. You cannot sprint a marathon, and burnout is a silent startup killer.

• Model Boundaries: If the founder is sending emails at 3:00 AM, the team feels obligated to be online at 3:00 AM. Show them what sustainable pacing looks like.

• Celebrate Milestones: Don’t just wait for the exit to celebrate. Acknowledge the shipped features, the successful pitches, and the tough bugs squashed to keep morale high.

TeamDNA™ is designed to deliver value at multiple points in a startup’s journey—not just at launch. Here are other ways that TeamDNA™ can enhance decision-making and support at key milestones:

At Application

• • Provide a structured lens to identify strong but unconventional teams who might otherwise be missed.
  • Enhance confidence in selection decisions—especially when combined with DealIQ Lite.
  • Flag team cohesion, role alignment, and risk indicators before interviews.

At Team Changes

• • Offer immediate insight when a founder leaves, or a new co-founder or hire joins.
  • Support better integration and role-fit decisions, improving team stability mid-program.
  • Create a diagnostic tool for mentors working through team issues or pivot strategies.

At Application for Funding 

• • Equip teams with a data-backed narrative on readiness, role clarity, and cohesion—useful for fundraising.
  • Increase investor confidence with fewer false positives and stronger follow-on interest.
  • Reinforce your program’s value-add with evidence-driven insights and team growth over time.

The Origins of TeamDNA™

TeamDNA™ was built by Solvers—people who look at a messy human problem and think, “We can make this better if we understand it deeply enough.”
Solvers are driven by sincerity—the belief that good intentions, systematic analysis, and careful modeling can make the complex understandable.

TeamDNA™ began as a response to one of venture capital’s most persistent mysteries: why do some founder teams execute brilliantly while others fracture under pressure? For decades, investors have measured markets, models, and margins, but not the team’s inner architecture: trust, alignment, adaptability, and cohesion.

The Solvers behind TeamDNA™ combined behavioral science, psychometrics, and startup experience to build a model that quantifies team readiness with fidelity and nuance. Its purpose was not to replace the builder’s intuition or the investor’s gut—but to enhance them, to make them repeatable and evidence-based.

Get the Full Story

The facts are clear:

• • Sub-$5M rounds, once the majority of U.S. VC deals (over 70% a decade ago), have now fallen to less than half that share.
  • Multi-stage funds are crowding out traditional seed investors by offering larger checks and stronger brand pull -> even if they offer less hands-on support.
  • Startups are playing into the dynamic, using momentum and FOMO to justify higher valuations and raise more capital, often at the expense of boutique seed firms.

The consequences are also clear:

• • Early-stage investors like us are being pushed further from the table unless we bring a truly differentiated value proposition.
  • Founders chasing big names may find themselves stranded when their startup needs operational help the most.
  • Traditional seed-stage dynamics, rational valuations, meaningful ownership, and high engagement are harder to maintain.

Shrinking sub-$5M rounds compresses opportunity for high-conviction angel investing. It also sharpens the need for tools like TeamDNA(r) and DealIQ(r), which can help investors de-risk earlier decisions and help founders stand out without simply inflating the raise size.

We’re not imagining this shift. It’s systemic.

Learn what precipitated this post –  The incredible disappearing sub-$5 million round – PitchBook

Is your mental filter “could” or “should”?

During the last year as the chairman of an angel group, I have been asked (paraphrased from various iterations):

• • “Before applying, can I just pitch you first to see if you will be interested?”
  • “I don’t see the point of providing you with this information (so can I skip this task)?”
  • “I’m a great startup raising money, so will you schedule time on my calendar?”
  • “No one else has asked this question except you (so do I really need to answer it)?”
  • “My investment group invested in this company – so is your group going to?”
  • “I’ve already been down this road – if you keep asking for more information, you’re going to decide not to invest (right)?”

Throughout the seed-stage startup ecosystem, the term that keeps popping into my head from such questions is “entitled”, the core meaning being inherently deserving. When a founder or syndicator approaches other investors with an expectation of their wallets, it is already an unforced error. It is never perceived as positive and is always a turnoff. So, why does it happen so often?

There is the error, and then there is the underlying belief. I think the error happens because chronically entitled people don’t objectively sense they are entitled. Inherently means it is obvious on its face. ‘Anyone would naturally see what I see in my pitch, so if you don’t see it, there’s something wrong with you.’ However, for those who are more polished and avoid committing the error from the start, they still often hold an underlying belief that their deal is inherently deserving of our dollars. Start digging into corners they prefer remain dark, and the belief eventually expresses itself.

I give some grace to first-time founders in their first startup. But elsewhere, I have opined that there should never be a startup CEO who has not already been a CxO in a prior startup. Reducing the incidence of entitlement is further down on a long list of reasons for this. I have less mercy for those who have lost investor capital before and haven’t cultivated humility yet. Syndicating investors who expect their peer investors to jump on their bandwagon sans diligence are really inexcusable.

So how do we hit the reset button on appropriate expectations in the ecosystem?

A good self-test for all of us is properly ordering our ‘shoulds’ with our ‘coulds’. For founders:

‘I could raise the capital that I need because I should do the requisite work up-front to demonstrate how I can rationally return capital to investors.’ This works much better than ‘investors should provide the capital I need because I could pull out a win if everyone realizes how great my ideas or accomplishments are and do as I ask.’

For syndicators: ‘I could safeguard my own investment and help my portfolio company succeed because I should demonstrate that I did the investigative work to corroborate the company’s ability to deliver intended results.’ This works much better than ‘more investors should pile in with me on the deal because it could be a win if the company doesn’t run out of money.’

Now, in the same way that sentiment surveys are unreliable and should not be the only evidence supporting a business strategy, pithy ideals like what I’m calling for here don’t get us anywhere without acting on them and deciding to do things differently. So, what do we need to do differently?

This is really something for startup CEOs to solve. A good attorney does not ask a question at trial that they don’t already know how the witness will answer. A good CEO does not allow anyone to speak for the company without already knowing what that surrogate will say. The CEO is the chief of all company messages. In addition, asking for money should feel like being on trial and it never helps to be a hostile witness. Answering every examining question calmly, rationally, and with evidence in hand sways the jury.

An effective CEO does not expect to find enough capital from those who will invest in an idea (and that one’s enthusiastic confidence) alone. If such investors part easily with money, then that’s dumb luck. But the CEO should assume no such investors exist and treat them all like professionals who will do the risk analysis. CEOs should expect to be asked to prove their claims and be happy and eager to prove them all. By “prove”, I mean subjecting plans and hoped-for outcomes to various tests of rationality built upon prior human/economic experience. A lot of data collection and analysis is required to perform those tests for every risk.

A CEO poised to succeed recognizes the critical value of a lead investor in every round who has performed comprehensive diligence and is willing to share it without having ever been seen by the startup. Company-led rounds, rounds crediting a small investor as the lead, rounds with diligence the company purchased and helped to review, and rounds led by investors who didn’t perform complete diligence (combined, the vast majority of the deals we are seeing today) seriously undermine credibility. Add the unforced error on top, and a CEO confirms that entitled expectation is their fuel, because it is not rational confidence.

But if we investors expect CEOs to be a star witness during the diligence trial, then we need to stop with the entitled expectations among ourselves. Who is going to lead and do the diligence work? If nobody wants to, then there is no deal to be shared among us. If one investor (group) wants to write an aspirational check on little diligence, fine. But don’t expect anyone else to, and accept the added risk that the company won’t fill out the rest of its round – such investors are better off filling whole rounds themselves.

As an ecosystem, every deal should be led by an objective investor. If one investor or group doesn’t have the SMEs available to do an all-points diligence review, then make a syndication of investors/groups who agree to cooperate on performing a combined diligence effort that can cover all the bases and share credit as co-leads. Never share the diligence report with the company – investor eyes only. CEOs getting frustrated (at the risk of coming off as “entitled”) because they keep being called back onto the stand to be asked the same questions over and over have good cause to complain about witness-badgering. If a startup has been asked an examining question and delivered a complete and factual response once, that should be showing up in the lead investor’s trial transcript (that is, DD report) for others to review and not ask it again.

So, CEOs, if you are paying attention and understand what I’m advocating for here, you very much want a lead investor with a reputation for producing excellent diligence that is easily syndicated. These are perennially available to well-prepared, investable startups (because such startups number so few in actuality). If you cannot find a credible lead, you probably are not offering a sufficiently compelling investor proposition. The answer is not to go raise from anyone you can find anyway, as you will all likely just lose together and spread the pain around. The answer is to get some objective assistance in finding out what’s wrong with your startup and fixing it if you can.

July 23, 2024 – Ben Yoskovitz – Founding Partner at Highline Beta | Author of FocusedChaos.co

I’m a huge Lean Startup fan. The concept of Build -> Measure -> Learn makes a ton of sense to me. A simple, elegant loop where you figure out what to build, measure the results, and learn. You iterate as quickly & frequently as possible to increase the odds of “figuring it all out”.
Unfortunately like most frameworks, it’s oversimplified. When Alistair Croll and I wrote Lean Analytics, we decided to expand on the concept w/ The Lean Analytics Cycle

1. Pick the One Metric That Matters and Draw a Line
   1. Decide on the biggest problem you’re facing. Be honest. Focus wins. In my experience most founders KNOW what it is, they just don’t want to admit it or don’t know how to fix it. They mess around on the edges hoping for a miracle.
   2. Once you know what the biggest problem is you can identify the right metric to track (OMTM).
2. Find a Potential Improvement & Write a Hypothesis
   1. Bring the whole team together for an ideation session. I’ll share how to do this in the comments. The top problem at your company is EVERYONE’s problem. So get ’em aligned.
   2. You can also look at data. What are your best users doing compared to those that churn? What commonalities exist amongst your best users? Data can drive hypotheses.
   3. Quickly prioritize the top 1-3 ideas based on value vs effort. Then write assumptions. Literally. Write them down. So many startups skip this step & do not get the team aligned or forget what they’re focusing on and why.

3. Design a Test
   1. Now run a test. Could be small. Maybe it’s not even adding a new feature. Try taking a feature out! Or changing a process. Deploy something to half your users. Run a fake door test. Or f**k it ship it and build something new and launch.
   2. No test should take longer than 2 weeks to develop. If it does, your team should immediately question whether things can be done faster/better. Some things take longer, but recognize the risk in a longer cycle/learning time.
   3. Analysis paralysis is the enemy. Doing something is better (most of the time) than nothing. In the absence of data, use your gut.
4. Measure the Results
   1. Did your test move the needle?
   2. Maybe the test failed. You can give up, try again, or pivot. A failed test is still LEARNING.
   3. Chances are the test worked, but maybe not well enough. In that case, test again and again. You’re probably running multiple simultaneous tests; this makes it tougher to know what worked, but startups aren’t built in labs.
   4. Eventually, tests drive diminishing returns. Going from 10% to 7% churn might be easy, 7% to 6% is tougher, 6% to 5% harder still. If you get to 5.5%, maybe you stop and draw a new line. Focus on something else. Going from 5.5% to 5% may be too costly and not worth it for the stage you’re at.

➡ Whenever you focus on one thing, it generally tells you where to focus next. If you reduce churn enough, it’s time to go to the top of the funnel and get more leads. It’s a fairly logical process in an insanely chaotic one (building a startup).

Friends in the startup world, please consider advice from the Fremont Group below and then return here.

If you run a fast-growth startup with a national or global potential as one of only a slice of “small businesses” that the Fremont Group addresses below, are they addressing you in relation to your business in startup or early-stage development?

In truth, the Fremont Group probably has a book of established lifestyle business clients. It would also be hard to argue with their advice to these clients. This seems to be to be not only sound advice but advice that is rather fundamental. Yet, I know from having been a consultant for over 20 years with a book of clients like theirs, that they are right in saying most don’t budget or manage to budget well at all. I’ll throw you another statistic. Fewer than 10% of lifestyle businesses make any entity profit, and a chunk of those profits are less than what the owner could earn selling the same skill set as an employee in a large company.

But, you are not a lifestyle biz, you are a “fast-growth” innovation startup. You are pre- or early revenue. You are not “established” yet. Heck, your sub-industry might not even be established yet as it exists in such an innovative, developing capacity.

So, does the advice apply to you? Yes, it does, and here is how….

Change the word “budget” to “capital-plan(-to-exit)” and “small business owner” to “startup”, then re-read Fremont Group’s advice.

Still every bit as true, isn’t it? If you don’t agree, you shouldn’t run a startup. Sorry, but this is simply a core truth.

And equally true as your lifestyle management counterparts, most innovation startup managers don’t have a thorough, robust, bottom-up-built capital-plan-to-exit to which they manage. This is why you (even more of you than lifestyle starts) fail.

Some will argue that there are all kinds of reasons for failure, and that’s fair. But I recall a survey done some years ago by a global research firm. Of 100 reasons, the #2 reason listed by founders that they failed was this: they ran out of cash!

<Duh moment.>

A business as an entity exists when it has cash in the bank, and ceases when it doesn’t (for 30-ish days typically). Looking over the list of their other 99 reasons for failure, it’s simple logic to argue that all 99 other reasons caused the out-of-cash condition. 99 reasons for running out of cash lead to really the one reason for going out of business – it’s a universal dependency chain. Cash is king. Cash measures all other results!

Therefore, if you are going to manage to keep a business from going out of business – you must manage the cash first, right? All other decisions are made in light of present and future impact on cash. Try to argue your way around this, if that’s how you learn, or accept the root premise and read the conclusion below.

A “capital plan to exit” is the plan for all cash coming in (investors, debt, from sales, etc.) and all cash to go out on the way to a liquidity event for you and your investors. If the balance ever dips below zero, you’re out. If it ever dips anywhere within sight of near zero, you’re margin of error probably means you’re out.

OK, so what? Well, the very activity of making the plan forces rational thought into how every assumed number gets conceived and added up. It puts you on the hook for your assumptions, and defending those assumptions to yourself, your colleagues, and your investors. It grounds you to manage in keeping to the plan to reach milestones or else explain deviations from the plan while you continuously adjust it.

Thus, when you don’t do this, as probably a top-3 primary ongoing activity of running a startup, you’re just shooting at ducks on a moonless night. You might be able to make out a few shadowy lines for what is in front of you, but you’re mostly just hunting blindly for success and your risk of failure is “magnifold” (my silly mash-up of “magnified” and “hundred-fold”.

The last generation of seed investors has been too gracious to startups for various wide-ranging reasons better left for a sociologist to blog about (OK, Boomers?). The incoming generation of more data-reared seed investors, who are fewer to-boot, aren’t going to invest so subjectively or emotionally. We will be less emotive in our investment decision-making and expect anyone asking us for money to show more rationality in their business execution plans than perhaps you are prepared for, or even the entrepreneurial educational ecosystem prepared you for.

But change is coming, in expectations, for everyone. Some who see it ahead will adjust and thrive (founders and investors alike), but many more will be blindsided, and complaining about it after the fact will only be confirmation that your project isn’t a risk worth taking.

Just shooting you straight.

Early-stage founders frequently struggle to put a price tag on their company when still early in development and commercialization.

The ‘why this is’ is revealed by identifying the solution.

First, we need to understand that capital markets are competitive. Interest rate “spreads” are the easiest way to understand risk vs. financial reward. When a U.S. Treasury bond (considered “safe”) pays 5%, then how much more needs to be paid for a riskier investment? For example, a home mortgage, inventory loan, or an investment in a pre-clinical oncology company?!

The more risk taken, the more that should be paid to take that risk. The spread between 5% and whatever the return is represents the size of the risk of failure and loss.

In today’s dollars, the valuation that a company applies to its business when making an investment offering must be defined to ensure a fair return to the investor at the exit, relative to the risks of failure ahead for the company and the price being paid today for both similar and different levels of risk available elsewhere.

The solution, therefore, necessarily depends on forecasting an estimated ROI to a new investor today. This subsequently depends on actually doing the planning to conceive of how much money the company will need to raise, at various points and terms, to reach each milestone that leads to the exit.

So many early-stage companies try to raise money after the initial self- and F&F investment without actually having done this level of planning. They get stuck focusing only on what it’s going to cost to reach the next set of milestones and then trying to raise that amount of money on looser concepts of what they think their solution idea is worth to the world, instead of what investing in it ought to be worth to serious and professional investors.

But the plan-as-you-go style of setting up a startup mostly always fails for this simple reason: planning all the way to exit reveals hidden risks the founders weren’t aware of until they had to quantify the costs and potential setbacks of the company’s entire lifecycle to the hoped-for exit. But when not planned for, if they get far enough to encounter those unexpected risks and setbacks with no pre-conceived backup plans, the first setback often becomes the failure point as investors flee the struggling enterprise.

In effect, when a founder sets a valuation without a fully conceptualized birth-to-exit financial and dependent capital plan of their company, it is the same as doing a top-down revenue forecast.

A well-done revenue model is built bottom-up from bits by counting reachable customers, available capacity, and costs of executing a plan that produces at capacity and acquires those customers. (This itself is only a very summarized explanation. Revenue planning is a detailed exercise that takes a lot of time and research to construct.) But when you create a bottom-up revenue plan, you discover the assumptions you need to make about details you weren’t thinking about and inevitably “don’t add up” or seem realistic. In the discovery of those problematic assumptions, you have the opportunity to work out alternative business and operational methods to overcome those unrealistic assumptions.

Similarly, a bottom-up valuation is built from the company exit – backward, not from the present point forward. In the same way, then, a company forces itself to make a set of assumptions which, in the conceiving of them, sometimes will shout out degrees of unrealism at the founders that force rethinking and replanning.

Therefore, a company should first define what it thinks the final milestone is to be achieved from scaling, and what it believes will make the enterprise worth it to the acquirer (or at IPO, etc.). This involves various methods of comparative and parallel analysis of acquisitions of revenue streams from similar types of solutions sold in the marketplace. (Yes, some solutions are new, without direct comparables. Parallel analysis is the study of what other things were worth, in inflation-adjusted dollars, when those solutions were new.

Next, a company should build a timeline backward from there of each major milestone it should achieve, leading up to the final one, which should represent a significant value inflection for the company, until it arrives back at where it presently stands.

Then, a company can do the requisite and traditional operational financial planning to determine how much it’s going to cost to reach each inflection point (inputs like material & labor, administrative and overhead costs, marketing & costs of sales, etc.) (It should buffer this for risks of costing more or taking longer than anticipated!)

The company can proceed then to overlay a fundraising plan that raises sufficient capital well ahead of the necessary use of funds along the way, balancing when money will be needed against when milestones that add value have been achieved that build ongoing investor confidence.

Finally, bell curve norms of the amount of the company (%) that should be sold at each round, including set-asides for incentive options, can be applied that add the last element needed to construct a mathematical capital model. A model allows one to run multiple scenarios to test assumptions at each point and make a judgment about the exit outcome and the return to new investors in the next round. When a scenario is found that estimates a worthwhile return for investors at each round relative to the risks remaining after that round, the company has achieved a logic-based, defensible plan that impresses investors at every stage! A capital model is also a vitally valuable living tool that can continue to be refined as the company progresses, adding to the founders’ intuition in their continued planning.

In summary, with a fully conceptualized capital plan, a company can calculate the estimated ROI to new investors now, THEN ask whether that seems fair relative to the execution risks ahead for the company, and then trial-and-error various valuations until they settle on one that seems attractive and investable.

When talking about this level of planning, the not-so-clearly stated pushback often received boils down to ‘that’s a lot (or more) planning work than I anticipated doing by this point, or that I even know how to do at this point’. It’s true, this is more planning work than most founders anticipate and goes beyond the education in strategic financial planning that anyone has taught them or asked them to do, especially among a deep well of educational and coaching resources that don’t necessarily have deeply bought-into methods of teaching strategic finance themselves. I continue to believe that Finance is the resource in least supply when it comes to building businesses of any type (from mom & pop to Fortune 500 companies.)

But, does ‘it’s hard’ or ‘I don’t know how’ defeat the need to do the planning to succeed, to succeed? The obvious if the uncomfortable answer is ‘no’. It must be done, or else a very large layer of unmitigated and unforced risk of not having done it is being added on top of all the other risks a startup faces, and investors investing anyway really are just engaging in a slightly more refined gambling night out in Vegas. The analogy is appropriate because remember that in Vegas, not knowing your odds is part of the fun. It’s illegal to count the cards or be a human supercomputer – that’s not fair to the house!! But we shouldn’t be applying house rules to startups. We should know the odds, and we should be paying appropriately and knowledgeably for quantified risks.