This year’s Phocuswright Conference is themed around the new
age(nts), picking up on what generative artificial intelligence has already delivered while building up the
momentum for new paradigms and new entrants in this great age of opportunity. To be sure, these are dynamic, disruptive and
dislocating times in our industry — the ideal conditions for entrepreneurial
experimentation.
In fact, I’m seeing an enormous amount of creative and
thoughtful hypotheses developed by super-smart entrepreneurs and innovators. Many
of these experiments will secure some early financing so they can go out and
test their theory in the market.
The upside for investors and for entrepreneurs is
clear. Successful experiments will raise
subsequent capital and will enter the dynamic phases of growth that ultimately
lead to enduring value. That said, some experiments
just won't work — that’s the way it is.
But there’s another component here I want to take a closer
look at: the human relationship and interaction between entrepreneur and
investor when the signals aren’t so clear. We’re in a time when both the risk and reward
are heightened. That’s great, but when the signals are murky, the entrepreneur is
significantly more at risk than the investor of walking into a nightmare. They may be giving life to what will become a
zombie company.
The risk of time
Last time I wrote that the buzz around genAI shouldn’t blow
the business basics out of the water. It’s always worth reinforcing that for a
startup to become an enduring business, which is what it’s all about, it needs
to solve real problems and generate real revenue with attractive gross margins.
The ultimate value of a startup at exit is almost always a function of
somebody's projection of the net present value of all future cash flows, that’s
a truism that has just never gone away and is the ultimate hedge against
“hype.” Building an enduring company is
why we experiment in the first place. This is the objective.
The biggest risk for entrepreneurs isn’t failure of the
experiment. That’s part of the
game. The greatest risk is launching a
zombie company. A zombie company is one that does just well enough to stay
alive but lacks the inherent potential to be enduring. There are dozens of factors that lead to
zombie companies but the outcome is always the same: an underpaid founder who
loses a decade or more of their professional life and, most importantly, the
opportunity to drive another experiment.
This is also a one-sided risk primarily born by the
entrepreneur. The risk to investors in
this scenario is minimized thanks to portfolio theory. If they’ve hit a home run with one business
in their portfolio then there’s room to accommodate the occasional zombie, and a
temptation to continue to hold the original value mark on their books. To that end, bits of bridge capital are used
to delay the inevitable. I’ve seen it happen.
So, to avoid getting caught up in a zombie business, entrepreneurs
need to know there's nothing wrong with failing fast. In a way, that’s what entrepreneurship is
about. Again, I’ve seen it. I know lots of people whose third company is a
grand slam home run and they make life changing money. If they had got stuck in
company number two because they allowed it to become a zombie, they never would
have done number three.
In the end of the day, the only thing that differentiates
people who have great success from people who don’t is that “successful people”
tend to have 10 times the number of failures in their careers. It’s all about at bats.
Straight talk
It’s even more critical during this great phase of
experimentation with genAI that entrepreneurs and investors are clear and sober
with each other from the outset. Entrepreneurs need to articulate to their
investors the objective of the experiment: “This is what we were betting on.
And if that happens, we're going to keep going. If it doesn't happen, we're
going to close this thing up.” If
investors aren’t willing to enter into that agreement, be careful.
This agreement, by the way, comes with an obligation to
finish the job regardless the outcome. Closing
things up properly is a necessary sub-thread when talking about failure.
There's nothing worse than an entrepreneur who bails on a company and leaves
the pieces open.
If you're a proper entrepreneur, you stick around during the
clean-up before moving on, otherwise you’ll get a rep as an accidental tourist
and no-one’s going to fund a return visit.
Takeaways for entrepreneurs in the new age(nts) of travel
- The risk/reward profile during the era of genAI-driven experimentation is calibrated in favor of the investors, but there are ways for entrepreneurs to hedge their exposure to this imbalance. Be direct with your investor about not only the success-defining signposts and KPIs but also your strategy as an entrepreneur if these signposts and KPIs are missed.
- A dragged-out zombie business on your CV is worse than a failure, even if your investor might have his or her own reasons for trying to convince you otherwise. Failure, when handled maturely, is part of the learning curve and can be turned round into a success with a new hypothesis; zombie businesses are a drain on the entrepreneurial energy and enthusiasm.
- Startups are already knocking it out of the park when it
comes to B2B and B2C travel tech use cases for genAI, but use cases need a business
case. Without a focus on customer acquisition costs, cashflow and margins and
go-to-market strategy, entrepreneurs will end up pitching a standalone proof-of-concept
into an over-saturated market when what you really need to stand out is an MVP.About the author...Chris Hemmeter is co-founder and managing partner at Thayer Investment Partners.