The first rule of threes for building a venture capital business is about what to have in place when looking for VC investors: market opportunity, proprietary technology and the team to execute. The second rule of threes is about the next step – execution and delivering on promises. Excellent execution is key to venture backed businesses. Once you have the investment the fuse is lit, and you need to deliver promised revenue and profits in the target timeline.
Execution for entrepreneurial companies is a balancing act between opportunities and focus. Delivering the plan is key to not running out of money, and to attracting the next tranche of investment. But the world is unpredictable and building a business even more so. Thus, the second rule of threes: have three active shots on goal – three, not more, not fewer, commercial opportunities in play.
Having three realistic options prevents a roadblock in development, regulatory pathway, supply or commercialization in the Plan A from derailing the entire company. Having more than three can strap resources and prevent achieving any of them. These different shots on goal are differentiated products, market segments or commercial approach.
Some examples from my career:
I was at a start-up company with an innovative ultrasound guided laser surgery technology. The first application was in prostate surgery, but the technology also had exciting possibilities in cardiac procedures. Leadership decided to focus on the US prostate application as more accessible and minimize international investment and let the cardiac work atrophy. In consultation with the FDA, we embarked on a large multi-center one year patient follow up 510k trial. At the end of the trial the FDA decided to reclassify the device to a PMA, which meant a multi-year delay to US commercialization. Clearance in the EU had been achieved and there was a small international presence. However, the decision to relentlessly pursue only the US prostate application ultimately killed the company, as money ran out before the commercialization was achieved.
Another company, a monitoring technology, had applications in a multitude of acute care markets. Clinical trials were started opportunistically in disparate clinical areas leading to many, many publications, but very little commercial traction. A focus on only three market segments, and deploying company resources into commercial success rather than multiple diverse clinical trials, could have led to growing revenue. Instead, they struggled to fundraise and build company value, as potential investors and partners saw no commercial traction as a lack of customer interest in the technology.
One of my most successful start-up experiences had three shots on goal built around different products from a core blood separation technology. The first shot was an orthopedic blood salvage system with a low regulatory barrier that was fast to market, and brought near-term revenues. The second was a better way to do advanced blood collection that attracted a strategic investor that ultimately acquired the company. The third was a revolutionary whole blood collection technology. It was ultimately never commercialized by the acquirer. However, it was a groundbreaking technology that excited important customers and allowed us to build partnerships that increased the company credibility, attracted key investors and ultimately increased the company value.
Of course, execution is not just about having the right number of opportunities. It is also about all of the good principles of project planning, accountability, communication and risk management. However, priority setting is in my experience one of the most difficult aspects of execution for start-up companies. You have a blank slate infrastructure, an innovative technology or concept, and a creative high energy team. The ideas and possibilities almost always outstrip the capacity to complete projects. Time is the most precious resource for start-ups, spending it wisely is key to success. A three shot on goal approach helps provide that discipline.
Having three shots on goal gives you the opportunity to pivot when you hit obstacles and to leverage different opportunities to grow the business. Having more than three becomes very difficult for a small company to effectively manage. Keeping the rule of threes means sometimes putting an idea on the back shelf. Don’t pursue that fourth opportunity without dropping one in play, make a choice, set a priority. At the same time don’t put all of your proverbial eggs in one basket. Even if there is one huge opportunity and all others are smaller, still keep two back-ups alive. One of them might turn out to be the opportunity that brings in the revenue and investment, even through a rough spot in company development. The second rule of threes keeps the focus, without sacrificing flexibility.
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