Why the measured portfolio approach is the real spray and pray.
When everything else fails, people will blame luck. Or time. Or genes. Or the government. Hardly will you see people blaming themselves.
And this is true anywhere, you see people adopt a portfolio approach to cover their misguided bets.
Venture capitalists raise a lot of money from limited partners. They look to invest in winners not because they ‘know’ who the winners are, but because they don't want to deal with the headache of a large portfolio. They want to invest a certain ticket size within their portfolio, want only nicely referred leads, spend between 3-6 months vetting their deal flow and ultimately close between 7-10 deals a year. They then wait for about 6-8 years for an ‘exit’ where they can recoup their profits. Typically a medium size fund does between 30-50 deals, and they will have 1-3 concurrent funds they are investing out of. Which of these 30-50 deals will be a home-run? Nobody knows for sure. Nevertheless, they take a lot of time on due diligence thinking they can predict what will happen to a dynamic, short product cycle, tech product company.
On the other hand, there are very early stage investors (e.g. 500Startups, Blume Ventures) who have a different philosophy. They will put down a small amount of money to get into a startup, and wait and watch for measures of success before they double down and wait for an exit. They travel hard, attract startups because they decide quick and don't want to waste the entrepreneurs’ time. They couldn’t care less if you failed because their model has an inbuilt risk capacity.
In the apparel world, top designers, stylists and brand ‘experts’ will design and develop a season full of styles. They will do fittings, stylings, mood boards, select colors as part of the trends, decide what the theme for the season is, and then put out between 25 and 60 ensembles – which will be mass-produced about four months before the season starts. They ‘bet’ that among the lot atleast 10-12% styles become bestsellers, talked-about and sell at the full retail price, so that they can cover their costs and make them some profits. They also ‘hope’ that atleast 25-30% styles will sell around 50% cost of their inventory at full retail. And they also ‘know’ that the other 50-60% of the styles will not even sell 10% of their inventory and will need to be liquidated. The problem is nobody knows which 50-60% of their chosen styles those are. Because they have some experience and expertise, they manage to muddle through multiple seasons, with as much serendipity as they have creativity. They do middling-to-great sales and their legacy retail footprint ensures brand recall.
Zara and Forever21 on the other hand, has no discrete seasons, do ‘Fast Fashion’ from concept to store in four weeks or less, they may run through 1000-2000 styles a year and may produce less than 300 units in a style. Both are multi-billion dollar businesses with very little dead inventory, and high profitability. Both have nimble, hard-working and low-profile owners who work hard every day to ensure they stay relevant.
People take bets / potshots but are not sure how their bets will work, and they get ‘lucky’ with 5-10% of their bets and that covers up the other 90% of their ineptitude. The point I’m trying to make is that the ‘measured’ portfolio approach is the ‘real' spray and pray simply because success can’t be predicted. What works is doing lot of things, very quickly, see what works and do more of it. Then do it again. There is a method in the madness.
People need to know that the portfolio approach is, what is causing big giants to react slowly to what people need. You, my dear startups are in the right place to take this antiquated practice and throw it out the window.
The weird part about this model is that it doesn’t just exist in the VC world or the apparel world. It exists in the car world, digital appliance world, corporate work culture, stock market, everywhere.
All opportunities are ripe for disruption. By you, by us!
This is a guest post by Pranay Srinivasan.Pranay is building sourceasy (link to www.sourceasy.co), a low cost sourcing service for merchants. Prior to that, he has owned and run offline apparel companies for over 15 years. He has a first hand knowledge of starting, building and growing product sourcing business in India and in the USA.