This post is on a term I hear often among investors here in Austin and in California.  They are generally viewing startups as having “binary outcomes” – either a total loss or a big win.

The notion is important.  It implies that entrepreneurs are thinking big and are willing to fail fast if bigness is determined not to be achievable.   And it implies that their investors are playing for more than enough 1’s to offset the 0’s. 

Later stage investors have the luxury of evaluating real numbers to project returns that make their portfolios successful.  They are less accustomed to losses, and they generally come to the table too late for the 100X wins on the most fortunate startups.  Running such funds can be very profitable, but it’s understandable why it’s hard to include startups in the mix and why some of the largest VC’s have set up special purpose sub-funds to play the binary game.   The mindsets are just very different.

The true startup investors prosper by bringing much more than money to the table.   They have a bench with “scaling entrepreneurs” who are appropriate for each phase of growth; they know which companies are marriage candidates when a standalone idea starts to look more like a feature or a product than a freestanding business; they have the right relationships with channel partners, brands, and other “make the company” opportunities; they comprehend the care and feeding of the brightest entrepreneurs; and they often rally around one lead investor, especially at the angel level, who is best able to guide and monitor the subject venture.   This level of investing is more hands-on, and close geographic proximity is desirable.

The worst outcomes for investors of any class are the zombies – the companies that get just big enough to hang on and keep the persevering entrepreneur’s dream alive but can’t reach escape velocity.  They’re like patients in an extended care facility; they need continual care and feeding but aren’t expected to die and have nothing to look forward to.  There are no real winners in this case.  The entrepreneur may earn a decent wage, but he or she is just marking valuable time that can’t be recaptured, and the investors are just stuck in something for which there are no likely buyers.

So, as an entrepreneur, how do you aim for the 1 in the binary game?

• Figure out a solution to a really big problem.
• Start with a big enough market where a large company can find room to grow.
• Do something so creative that you invent a new market.
• Raise so much money that you can buy a market.
• Recruit a leadership team that won’t settle for anything less.
• Get the right investors on board early.
• And, never underestimate the power of a bit of luck.

Keep in mind that’s it takes no more effort to shoot for a 1 than just a half or less, and you have only so many chances in life.  Use them to maximum advantage.

<image from Wikipedia>