Perfect Information is Rare

1
Perfect Information is Rare

• Touch my new car and I will have you arrested.
• If you smoke in the office, you will be fired.
• If you guess the exact number of red balls, you
  win that new Cadillac STS.

2
The New Venture Setting

• Extreme Information Imperfection

3
New Venture Characteristics

• (with a focus on THE IDEAL TYPE - new / unique
  high potential, high growth ventures)
• Asymmetric information
• Asymmetric expectations
• Thin markets
• Urgency
• Surprise threats and opportunities
• Very scarce resources
• highest uncertainty
• highest risk

4
The extreme situation affects -

• Business strategy
• Evaluation
• Valuation
• Financing

5
What is Imperfect Information?

• Non existent information
• Right information but
• Difficult to find
• Changing rapidly
• Too complex to comprehend
• Secret
• Wrong information

6
Variables

• Gravity Is an answer valuable?
• Nature Is the domain technical or efficiency
  related or both?
• Do options exist?

7

• What is the resource cost to get the information?
• Human
• Financial
• Time
• What resources are in hand?
• Situationally Specific Tacit / Explicit Knowledge
• Money
• Time

8
Solutions Adaptation

• Give up on new information
• Bricolage (decide with information and other
  resources in hand)
• Improvisation (novel action using information and
  other resources in hand) (extemporaneous
  composition and execution of novel action)
• Effectuation (decide with resources in hand, but
  focus on the effects)
• Intuition (gut feel) (supernatural)
• Heuristics (flash routines based upon ACE
  mental shortcuts)

9
Solutions - Incremental Actions to Gain
Information

• Low cost Information gaining
• Trial and Error (experimentation without a small
  sample focus) (action evaluation and
  reformulation)
• Real options thinking
• Tacit knowledge (ACE)
• Experimentation (small sample focus plus
  intentional trial and error)
• Real options thinking
• Tacit knowledge

10
Solution Risk Sharing

• Subcontracting
• Partnering
• Licensing
• Joint venturing
• Strategic alliances

11
Financiers Additional Responses

• Diversification
• Personal relationships with the venture creator
• Monitoring of the venture creator

12
End Note

• The VC method of valuation
• Predict EBITDA and a comparables ratio out 6
  years
• Take the present value at 100
• The new VC term sheet
• Multiple benchmarks and tranches