by Andy Perez

About 3 and half years ago, I was asked by an investor what the goal of every business was. Of course I gave what I thought was a logical answer. “The goal of every business is to make money.” Jon scoffed and said, “Wrong! The goal of every business is to increase perceived value!”

I relayed this anecdote to a partner I highly respect at a local Venture Capital firm. He turned to me shaking his head, a look of knowing disbelief and slight amusement brushed his face. “Andy, the goal of every business is to become a viable business.

Jon’s comment was the attitude that helped create the unrealistic circumstances and expectations that produced the bubble in 99 and 2000 here in Seattle. Dozens and dozens of “companies” were formed with no real viability. And it wasn’t the entrepreneurs fault solely. Investors were not performing their due diligence. Many were driven to invest into as many “dreams” as possible not really analyzing, much less guiding their viability. This became the construct and drivers for an economy based largely on smoke and mirrors.

Today Venture Capitalist and investors as a whole are performing a lot more due diligence as they evaluate investment. In essence they are looking for viable businesses models. This involves being able to answer the following questions:

a. What problem will you solve?
b. Who currently has the problem?
c. How will you solve it?
d. How big is the market potential? (Who are the analysts covering the space?)
e. What is your distinct advantage?
f. How does the competitive landscape look?
g. What are the financial implications?
h. How much capital will you need to develop the solution (and the company supporting it)?
i. What kinds of volumes and margins are reasonable to expect?
j. What are your team’s qualifications?

I have been amazed at how many investor pitch’s I have sat through where little thought has been put into answering these questions. Then the entrepreneurs are shocked when investors do not invest in the company.

More shocking is the amount of companies that have experienced significant growth in prior years but as they grow, forget about constantly addressing the above questions. They become companies more interested in increasing perceived value rather than becoming viable. They begin to struggle, experiencing, stagnant or declining sales, blooming costs and a lack of direction.

Asking and measuring yourself, on a constant basis against the above questions helps provide the rudder toward achieving a viable business and increased real value. This all leads to making money.

Andy Perez – Principal, Accord Global.

Photo via Flickr