There has been plenty of discussion about the startup performance. One stream of such discussion relates to the selection of good startups and methods used for such selection. In my opinion there is a need for a combination of several different tools, including the heuristic analysis of the startup and its market potential, action driven cash flow models as well as portfolio risk analysis models.
Heuristic analysis should be useful because the traditional economic forecasting models cannot accurately predict the performance of a single startup due to many unknown factors in play. Action driven cash flow models help to understand the business model and market dynamics, and to identify the key metrics, customer conversion funnel as well as pin point the conversion problem areas once invested early on. From the portfolio point of view it is important to maximize the exposure to non-capped upside, i.e. positive black swans (Taleb, 2010), but limit the downside risk, both in terms of single failure, as well as interdependent systemic failure point of view. This should be great area for mathematical portfolio risk analysis models, such as the value at risk or shortfall (Goldberg, Menchero, Hayes, Mitra, 2010).
I believe that from the perspective of startup performance, however, what happens after the investment is much more important than before the investment, especially in the early stages of the startup life-cycle. In my opinion, the ‘trust’ between the venture financier and start up founders is vital. I made my thesis on the topic a few years back and formulated the ‘trust’ model in it (Risku, 2010). The model suggests that the ‘trust’ could explain the effectiveness of the relationship between venture financiers and start up founders and that the ‘trust’ could be the essential catalyst for startup performance. Behind this thinking is the premise that the ‘trust’ promotes agility. Interestingly, the recent ‘lean startup’ ideology proposed for example by Steve Blank (2007) and Eric Ries (2011) and ‘trust’ both point towards the ‘agility’.
Taleb N (2010) “The Black Swan, The Impact of the Highly Improbable”
Goldberg L, Menchero J, Hayes M, Mitra I (2010) “Extreme Risk Analysis”
Risku J (2010) “Trust Ecosystem: The Foundation of Startup Performance”
Blank S (2007) “The Four Steps to the Epiphany: Successful Strategies for Products that Win”
Ries E (2011) “The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses”