Focusing on what’s not said

I’ve recently been experimenting with a new approach in my discussions with entrepreneurs. While learning about the traditional elements like team, product, market size, competition, and current and forecast metrics which are necessary to evaluate an investment opportunity, I’m focusing on not only what the entrepreneur has included in their pitch but, more importantly, what they’ve excluded. My reasoning is that by digging deeper into what an entrepreneur doesn’t say, I may be able to unearth those areas which may represent the weaknesses of their pitch.

As a result of these experiments, I’ve discovered that sometimes an omission isn’t purposefully designed to conceal a weakness. In these cases, the entrepreneur is clearly able to explain why they didn’t include a particular competitor in their analysis or a particular metric to portray their performance. However, in other cases the initial reaction of the entrepreneur and the shakiness of their answer when questioned about an element excluded from their pitch suggest that the omission was indeed intended to hide a weakness of their business.
As a simple example, consider a recent e-commerce startup which presented their current performance metrics. The metrics which they disclosed in their initial presentation included the number of registered users, their revenue run rate, and their product return rate. Some of the important metrics which they omitted included the number of active users (for example those who have made a purchase within the last month), the percentage of their registered users who are repeat customers, and the average basket size. While the set of metrics which they originally presented portrayed a successful business, a deeper analysis of the other metrics revealed a low fraction of active users, a low percentage of repeat customers, and small basket sizes.
The implication for investors is clear. Focusing on what an entrepreneur doesn’t include in their pitch can be a great tool to get a balanced view of the startup. Pitches are designed to sell, with the sale in this case being a successful fundraise. To maximize the chance of a successful sale, it’s natural for an entrepreneur to highlight the positive attributes of what they’re selling while avoiding those areas which are tougher to talk about. However, I have yet to come across a startup where all is rosy. There’s always room for improvement. It’s exactly because it’s tough to talk about the weaknesses of a business that entrepreneurs need to confront these weaknesses head on. They may be able to raise a round from less rigorous investors by avoiding the discussion of certain aspects of their business but this is a short-term solution, not a path to long-term success.
The implication for an entrepreneur who wants to build an enduring business is that you need to openly talk about, get feedback on, and address the weaknesses of your startup. Investors can be a great sounding board for your thoughts and bring you a new perspective which helps you improve in those areas where you’re struggling. The startups who will ultimately be successful in your target market will be those that confront their weaknesses head on. If you want to be one of them, you need to be willing to discuss your weaknesses and partner with investors who can help you address them.