Brave Tech World

November 3, 2006

    Nick Hanauer from Second Avenue Partners gave a great talk on what he believes are the core traits of an entrepreneur, which are:

1. Ability to create transformational value;
2. Be a social outcast.

    About #2 it is pretty much a fact: Entrepreneurs are different from the risk and they usually believe in something that others cannot see.

    The interesting point is #1, "Transformational Value". Nick defines value as Benefit divided by Costs. Everybody knows that. But he adds something else to the equation, factor all that by the Benefits/Cost of your competitor to see the Transformational value.

    If competitor A has a product that is worth $5 and lasts 10 years, the value of that is 2 (10 / $5). If your product costs $10 and lasts 20 years with everything else being the same, your value is also 2 (20 / $10). If you divide your value by your competitors (2 / 2) you get 1, which means you didn't create any transformational value.

    He thinks that Startups should be looking into 10 to 100 times more value to be worth the trouble. Yeah, I agree to a certain extent.

He is missing something...

    Nick clearly defines Transformational Value, but IMHO he is missing an important aspect of when to decide to invest in a company (or start a company, which is a type of investment). The missing parameter is Risk.

    If the Transformational Value (TV) is 1 or less, that is not worth the trouble at all. If the TV is between 2 and 10, it might be a worthwhile investment if the risk is near zero. That is, if you can't loose and you will create some additional value, why not?

    VCs like him are more interested in high-risk high-reward deals, and that is fine. However a lot of good people watched that presentation and saw that they couldn't create (or justify) a 10x Transformation Value. Should they quit? Shouldn't they try? Maybe they will fail, and that will be a great learning opportunity, or, maybe, they will find a niche or a morphed product that will hit big.

    Failing is better than not trying in my book.

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