As an angel investor, I get to see lots of pitches. Many founders take pride in providing very detailed financial models, with lots of figures and very complicated business plans. The problem is that my eyes start glazing over very quickly, because this is too much information at this stage. On a first date, I really don’t want to listen to how her grandmother brought up 7 children single-handedly.
So why does the founder cram his slides with do much detail? He wants to prove that he is a domain expert, and feels that by providing lots of gory details, the investor will be impressed by the depth of his expertise about his product and market.
This actually ends up backfiring, because simplicity is actually far more valuable than complexity.
Simple Metrics Yield Results
In reality, there are only two or three key metrics which a founder needs to track diligently. Trying to measure too many variables results in a loss of signal, because it gets drowned by excessive noise. Often investors add to this problem, by insisting on regular MIS reports, which are full of vanity metrics. These end up being just “sound and fury, signifying nothing.”
The poor founder gets overwhelmed, and starts getting distracted by stuff which is not important. He finds himself overstretched because he’s not able to differentiate between what’s important and what’s not. His usual tendency is, “Let me track everything, because it could all be relevant.”
However, this just reinforces the impression that he is naive because he cannot separate the wheat from the chaff, and doesn’t know what is really worth measuring. This is a naïve approach.
Over time, he should realise that the Pareto rule 80/20 rule applies – and that only 20% of what he tracks is just going to give him 80% of the results. He should just ignore the other 80% altogether. KISS (Keep it simple, silly!) is a very useful rule of thumb!
The trouble is that too many metrics causes arrogance and overconfidence and then the founder starts confusing accuracy with precision. He feels because he’s tracking so many things and has so much data, he is on top of everything, but this is not true. He starts getting overconfident in his predictions, many of which are wrong because he is tracking the wrong metrics. This means he ends up going on a false passage – and continues to have a lot of misplaced confidence in his judgment.
The most important thing a good founder learns is to say No. There are lots of things he shouldn’t be tracking, because they don’t add any value to his business.
[This post by Dr. Aniruddha Malpani first appeared on LinkedIn and has been reproduced with permission.]
