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“Some venture capitalists do not do any financial modeling because they think it is useless for what they do. Other VCs would like to use more finance, but they do not do so because the tools are not easily accessible”.

“When asked, most VCs will rank “finance” far down the list of important VC skills. Instead, successful VCs tend to think of themselves as company builders (…) which is certainly more art than science”.

Andrew Metrick. Department of Finance at Wharton. Author of “Venture Capital and the Finance of Innovation”.

Back in the late nineties, after getting an MBA in marketing and finance I really thought that no project would succeed without putting together a business model showing some compelling ratios. About ten years later, I must confess I have developed a more flexible approach to this matter.

It should be noted that there are great ideas out there which do not receive the support they deserve because the innovators cannot properly communicate the value of their product or enterprise.

Most VCs are financial intermediaries as a VC fund takes money from its investors. So you will be expected to provide qualitative and quantitative insights helping the VC rationalize the fitness of the investment.

Needless to say that going through the exercise of crafting a business case helps entrepreneurs think through implications which, in turn, can be a source of innovation. 

• “The process creates a common starting point for the entire team”.
• “The process sets the goals and vision for the team”.
• “The process sets the path and identifies required resources”.
• “Writing the plan forces analysis”.
• “The process can help the team feel more confident about their ideas and strategy”.

Sean Wise’s Wise Words for the Toronto Globe

Some other times, good projects happen to be dramatically slowed down due to the so-called “paralysis by analysis” while some other get through the chain of approvals in spite of being based on ”garbage in - garbage out” exercises. Well intended complex models can end up being unmanageable, thus defeating the purpose which they were created for.

In the past few years, all of us have become aware of financial shenanigans involving well known corporations. As Karen Berman and Joe Knight point out in their book, “Financial Intelligence”, you can’t always trust the numbers.

“Unfortunately, the structure and design of most models have evolved without reference to an effective business-modeling methodology (…) the business models that provide the commercial justification for the idea are often poorly structured and, in some cases, simply inaccurate. The result is a misleading view of the financial strength of the idea”.

John Tennent and Graham Friend. Guide to Business Modeling. The Economist Books.

Quite a few entrepreneurs wonder how much of an effort they would really need to allocate to business modeling and if that will actually pay off, opposed to dedicating the company’s limited resources to develop the foundation of the business. In some cases, they chose financial bootstrapping allowing them to remain focused.

So, what’s your take? As usual I will appreciate your comments and emails.

José de Francisco López Chicago, 19 July 07

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This blog’s Long Tail:

• Innovator’s dilemmas and paradoxes
• Is innovation just about problem solving?
• The innovation gap 1
• The innovation gap 2
• The innovation gap 3
• The innovation gap 4

References and picture credits:

• Susan Wu’s “Do entrepreneurs still need to write business plans?”
• Sean Wise’s “Wise Words“

Consultaglobal’s Innovation Search Engine