Question: Thank you for the INCOSE webinar you held, I found it very compelling. I’m curious as to how you would ‘sell’ this approach to VCs if you were a startup founder and were pitching. Of course, a lot of VCs may be blinkered by the lean approach.
The quick answer is that FIT Startup can be a tough sell for VCs, certainly the ones—as you say—are “blinkered by the lean approach”.
If you’re going the VC route, yes there are ways in which FIT as an approach can make your venture stronger, and there are investors using FIT to evaluate and screen ventures (more on this further below), but ultimately we have found a misalignment between how most VCs make money and FIT’s focus on delivering more robust, profitable ventures at a lower cost.
A core objective of the Built to Hold Lab is to change that investor dynamic, but we’ve found it’s more likely to start with a different class of investor than venture capital.
For a longer answer, it’s worth articulating why most VCs are so beholden to the lean startup approach, and are fixated on product/market fit and hyper-growth potential in particular.
The source of that fixation is the “power law” at the heart of an investment strategy, famously illustrated by Bill Gurley of Benchmark as “[Venture capital is] not even a home run business. It’s a grand slam business.”
That is to say, venture capital funds are built around power law dynamics applied to a portfolio of ventures: very few “grand slam” winners drive the entire portfolio’s return and there is a long tail of many ventures that tried for a massive success, but failed.
In her recent book, World Eaters, Catherine Bracy lays out the implications of this strategy:
“By the 2010s, venture capitalists weren’t just of the belief that power law returns occurred as a natural result of investing in high-risk startups. They believed that power law returns could be reverse engineered by optimizing their funds to contain as many potentially astronomically returning companies as possible. Today, the power law has now become more than definitional; it is a methodology pursued by almost every venture capitalist in business.”
That power law strategy has made some venture capitalists extremely wealthy, and yes, enabled some high profile venture successes, but it has also pushed a lot of ventures to fail. As Bracy later describes in World Eaters, most funds push ventures to achieve mass scale, even if it means taking on unnecessary risks.
All of this describes why FIT has been a tough sell for traditional VCs: as a systems-based, profitability- and risk-reduction-focused approach, it runs counter to the power law needs of most venture capital portfolios.
That said, there is some good news:
First, not all investors are venture capitalists and even VCs will tell you that as an investment vehicle, they are not a fit (😉) for all ventures. There are plenty of investors—whether corporate, private equity, angel or impact-driven—who don’t need or want a power-law driven return.
Second, as mentioned previously, there are also investors using FIT for venture evaluation and selection, including VCs. FIT fundamentals provide a basis for assessing commercial potential and a structured assessment of risk, particularly for market creating ventures. As an active part of the Built to Hold Lab, we are working with aligned investors to develop better evaluation tools and practices using FIT, with the ultimate objective of increasing the number of investors supportive of building ventures using a systems-engineering-based approach.
Third, founders can also use FIT to better demonstrate the commercial potential of their venture to investors and to navigate the “search space” of potential use cases to unlock ones that have the greatest potential for profitability and sustainability. You can use this to attract aligned investors, or make a more informed decision on whether to participate in the venture capital “grand slam” business instead.
Even with all the above, we still face a key challenge in that—as the most famous investment class—people still look to venture capital and VC-backed companies as the paradigm for venture building. Even when they shouldn’t.
Changing that paradigm is a core purpose of the Lab, catalyzing a community of both founders and investors who prioritize profitability and systems-based, economical approach to building ventures.