Venture design: The four fundamentals

Over the last 25 years I have started one commercial lighting retailer, three IT businesses, one marketing business and a social venture. Unfortunately, I’m nowhere near as wise, clever or as wealthy as I aspired to be, but then again, I do reckon I have learnt a thing or two along the way.

One of these things is that there is a critical topic missing off the table when most new ventures are started, or when business schools or “experts” teach you how to write a business plan.

I call it Venture Design. It’s the META level discussion about a new venture, the bits and pieces that successful serial entrepreneurs seem to be unconsciously good at and the rest of us tend to ignore as we get excited about the proposed opportunity.

At this stage, and my ideas are always evolving, I think Venture Design has to cover four fundamental areas – which form a major part of any Heads of Agreement for a new venture. It’s kind of like these components create the rules that you will play by as founders before you launch and build a shareholders agreement. The four areas are:

The Lifespan

You need to agree on when the venture will start, how long you expect to run it for and when it will finish. Remember, nothing lasts forever so it’s better to plan a couple of different endings. But if you do intend to try and run the business indefinitely, you should agree when you will be reviewing your activity, and what failure looks like.

Your different endings could include: buying a partner out, bringing in a new partner, swapping a partner, selling some equity, selling a part of the business or selling the entire business. You may be wise enough to include a formula for pricing, but remember, your ideas on value at day one are almost certain to be wrong. Don’t forget that you should review this issue at least annually, as market conditions change.

The Founders

All too often a co-founder is simply someone who was in the room when a decision was made. You need to identify exactly who are the founders of the business, what roles they will play today and tomorrow, and whether they are the best person to play that role. Once you have done this, you can determine their ownership and proposed remuneration in the venture. Its also worthwhile to examine what rights they will have if they choose to exit. Will they keep their equity? Do they have any rights to the idea if the business never launches? Understanding what their rights should be if they exit at different milestones is critical to avoid punch ups that will take your eye off the ball.

The Validation Milestones

Milestones that businesses celebrate tend to be very arbitrary (eg. our 100th customer) when they don’t have to be. The critical early stage milestones are the validation of:

• The Idea: Is it viable, can we actually make this happen in terms of our resources and talent?
• The Solution: Can the solution actually be created?
• The Customers: Will real customers actually pay for the solution?
• The Business Model: Can you actually create sustainable profits from the idea?

Identifying these milestones, which are the critical decision points in your early stage plan, is one of the most important things you can do when designing a successful venture. You should clearly identify success, failure and that murky middle ground that means you need to tweak your plan.

The Investment

The fact of the matter is that most start-up businesses will never receive investment from a third party in their first year. However, investment isn’t just about cash, its also about the resources you need to tap into such as skills or expertise, time that needs to be committed and other resources that need to be put on the table such as office space or IT equipment. This is also a great time to identify what “smart money” looks like. For example, they don’t just have cash, they have free services you could access, a customer base you could tap into, or relationships that can be leveraged.

Combine all this with an overarching objective and a quick overview of the proposed business model means you have practically written the H.O.A for the founders of a successful venture. I wish I knew that 25 years ago.

Brendan Lewis is a serial technology entrepreneur having founded: Ideas Lighting, Carradale Media, Edion, Verve IT, The Churchill Club and Flinders Pacific. He has set up businesses for others in Romania, Indonesia, Hong Kong and Vietnam and is the sole Australian representative of the City of London for Foreign Direct Investment. Qualified in IT and Accounting, he has also spent time running an Advertising agency and as a Cavalry Officer with the Australian Army Reserve.