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Where's Your Blind Spot?

We all have blind spots. But when your company has one, and it goes undetected, it can be very expensive. How to know what you don't know.
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We all have blind spots. We’re only human. But when your company has a blind spot, it can be very expensive.

When you’re starting a company, you want to do everything possible to reduce risk. It takes some self-awareness, and some serious reflection on what your team’s weaknesses really are. Even when you think you’ve done everything necessary, you usually aren’t done, because even the most carefully vetted hires end up having unexpected skills--and weaknesses. That means you need to constantly re-evaluate your team’s abilities.

What happens if you don’t? I worked with a company that ran into this problem. It was founded by three people: A visionary leader, an operations guy, and a technical guy. Their big idea was to provide financial services based on social data. It was their third start-up as a team, so they knew each other, they trusted each other, and they knew how to work together to build a great product.

At first, it seemed like they were doing everything right. They put together a comprehensive business plan and raised some seed funding. They set up their operational team and built an amazing technical platform to store and process social data to predict financial performance. They launched their product, and the first customers loved it.

So far, so good. Investors saw the growth potential and got excited. But when the team was trying to raise their A round of funding, they couldn’t get a valuation close to what they thought they deserved from top tier investors. 

Why? The team had a blind spot: fixed income. At its core, the company was evaluating the riskiness of loans. Two of the team members had MBAs and knew finance pretty well. They knew enough to convince themselves that they knew what they were doing. But every potential investor brought in fixed income experts who saw things in the numbers that the team hadn’t.  For instance, their customer default rates looked low, at least at first glance. But experts knew that a default early in a loan’s life is much worse for a lender than a default that comes later on. From this vantage point, the company’s loan defaults suddenly looked like trouble.

The team said they’d hire to fill the knowledge gap. But in a way, it was too late. Investors looked at the data and saw the mistakes the team had already made. That’s why they were getting the valuation discount--because they hadn’t been able to avoid this key risk. Even worse, some investors felt that the fact that the team had overlooked this issue made them even riskier. They didn’t know what they didn’t know, essentially.

How can you avoid this kind of problem? Don’t be fooled by your strengths. Get an outsider to review your strengths and weaknesses. Be brutally honest with yourself. If outsiders see a weakness, fix it. Think how differently this company’s funding round would have gone if they’d just been able to speak to the financial services part of their offering with the voice of experience.

What else do you think they should have done?

Last updated: Apr 26, 2012

ALEX KINNIER | Columnist

Alex is a partner at NEA. As a Director, he has been fortunate to work closely with - and learn from - the founders of The Climate Corporation, Solum, Pellion, Skybox Imaging, Reluceo, MyLikes, and several other efforts. Prior to joining NEA, Alex was a Partner at Khosla Ventures.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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