I don’t remember much about my third grade biology class, except for the “big B little b” eye color gene exercises. I have a similar concept that I follow as a venture capitalist and I call this my Little r +Big D= Big L formula for successful start-ups and good venture investing. r is for research, D is for development and L is for liquidity.
Any successful startup wants to have a little bit of research, but a lot of development in order to get to product commercialization quickly. This leads to Big L. As the size of venture funds contract and lean start -ups stay in vogue, entrepreneurs and investors have to make sure that they are moving from small r to big D quickly and effectively. Many start-ups either never obtain funding because the r does not have a straightforward path to commercialization, or they never get a second round because Big D does not get developed with the first capital raised. Another aspect of this from the public policy side is that investments in core research (the foundation for BIG D) are being cut. The corporate labs are gone, national Labs are seeing budget cuts and Universities are having to focus more on sponsored or directed research/development in their never ending pursuit of the money trail. It all makes for a very tough financing environment and one that needs to get to proof points quickly. Look at Apple (or really Steve Jobs), he spends just 3% of revenues on research, and continues to generate incredible revenue winners. It’s a good example for start-ups to follow.
Entrepreneurs who are good at r commonly have less strength in D. It’s paramount to find a partner who has the knowledge to balance your deficiency. If you’re early in your engineering career, go to work for a company or individual who is sophisticated in D, and it will pay huge dividends. It will also guarantee you nearly lifetime employment as VC’s are constantly seeking executives who know how to ship the product that many customers desire. Making sure that big D is dominant in your resume also increases the probability of the BIG L (aka “the liquidity event). Entrepreneurs have to remember a lot of formulas, but none may be so lucrative as little r + Big D= Big L.