Friday, June 18, 2010 by John Sharp (Hatcher+) 5,461 Views
Over the past twenty years, the folks behind this site have helped a number of entrepreneurs and startup companies raise tens of millions of dollars from venture investors. We've worked both sides of the table, as investors, and as struggling entrepreneurs.
We're about to share with you some highly-effective ways to create and distribute a business plan online. Most of the tools we're about to share have been used before to successfully raise venture capital - and some of our newer tools make it much faster and easier that ever before to do difficult, time-consuming tasks, such as creating multi-year financial projections, and a super-tight executive summary.
Want to know more about the process? We'll also be sharing some secrets, such as the best day *not* to contact a VC (Monday - partner meeting day), what VC's really think about your "conservative" projections (you're a wild-eyed optimist), and how much time to devote to presenting your pitch in a meeting (not more than 30%).
Hopefully, after reading this article, you'll learn some highly-effective ways to create and distribute your business plan, and have a better idea of the process. Not every tip in here is going to find agreement with every investor - there are exceptions to every rule - but that said, we've followed the advice here and successfully raised tens of millions of dollars in venture capital. Let's get started.
Ideas are cheap. As an entrepreneur, your job is not to just dream up a new technology, product, service, or solution, but to build a business around the people that find your invention valuable. For this to happen, you need to roll up your sleeves and build a tangible expression of your idea - i.e. a working prototype that people can experience - then come up with a plan that will allow you to add the essential things required to build and maintain a business - branding, infrastructure, staff, a support team, a product and technology development team, marketing and distribution channels - and capital.
|Add perspiration - The French mathematician Henri Poincare was once famously quoted as saying "the creative process moves through three stages - saturation, incubation, inspiration". Albert Einstein later quipped that Poincare had forgotten the fourth, most important stage - "perspiration". We think this story may provide a clue as to why "Einstein" is, today, a household name.|
When an investor is approached by an entrepreneur, they assume they are being sold equity in a corporation. If you haven't incorporated yet, do so - today, it can cost less than $100 to set up a company, and often takes less than a day. Make sure you seek advice re the best structure from your accountant or other financial advisors - when it comes to investment, some business structures, such as an LLP partnership, may hamper investment efforts. Learn more at CorporateCreations.com.
|Choosing a jurisdiction - many years ago, we tried to get funding from US investors for a startup based outside the US. Big mistake! Investors weren't interested in investing in our offshore-based startup. We quickly moved the company to Delaware, a state that offers considerable advantages to startups that incorporate there, and closed our deal.|
Many entrepreneurs spend considerable amounts of their own money getting to the post-prototype stage - but fail to formally keep track of these expenses. We strongly suggest you record every expense related to your new venture - doing so shows that you understand how to run a business, gives you a useful bargaining chip in the form of your accrued investment, and creates a company better-prepared for investor due diligence.
|Fun accounting fact - "bookkeeping" is the only word in the English language that contains three double letters, back-to-back. On that subject, if you don't have bookkeeping software yet, we recommend Quickbooks. We recently used it for a startup that went from zero to several million a year in revenue. It didn't miss a beat.|
Compare your startup to other businesses and ask yourself if what you're doing has the power to satisfy the needs of others. It doesn't matter if you're also enjoying using your technology - many companies, such as Microsoft and Google, started out as personal curiosities. The important thing is that your business satisfy an extra-personal need - one that preferably a lot of other people have!
|It's called a "hobby" for a reason - just because you found programming it fun doesn't automatically mean that people will find your product/service/solution valuable too. To be successful, you need to to focus on meeting the needs of an identifiable, preferrably large, group of humans. Which brings us to...|
Google organizes information so you don't have to. Amazon can track down any book (or product) on Earth. eBay and Craigslist can help you clear (or fill) your garage. Venture capitalists principally invest in innovations like these - inventions that have the potential to generate an exponential growth in value, by solving a problem that a large number of people have. To that end, VCs typically prefer to invest in technologies that:
|Thoughts to ponder - what problem does your solution uniquely solve? Try coming up with different ways of saying "The problem we uniquely solve is..." until you're convinced that: a) your solution is indeed unique, and b) your target customer is so well-defined you can name three people who'll buy your solution. You'll then be ready to...|
It's important to understand, as precisely as possible, the potential size of your market before putting together your sales projections. Not every business needs to target a massive market like NetFlix or Amazon - indeed, many highly profitable businesses tackle local needs and niche markets.
|Key point - make sure you know your maximum potential market before meeting with investors. One excellent tool for doing this is the Google Adwords Keyword Tool. Our test keyword (vitamins) showed that 13,000,000 people entered this term into Google last month - along with an additional 9,000,000 searches for "vitamin". 20 million+ searches a month? That's a lot of market potential!|
Scale is a word you'll hear a lot in VC meetings. What the investor is really asking if they ask you if your business can scale is one of four questions:
|Automation rules - to really scale your business, you'd better be ready to automate, batch-process, take calls, and outsource. To show how you intend to do this, it's a good idea to write an Execution Plan that explains precisely what you plan to do - as it happens, we include an Execution Plan within our free (and automated!) Business Planning Tool.|
Even "free" products need to be part of a path to revenue. And the easiest path to revenue is to price your products as high as the market will bear. Higher pricing means better margins and higher lifetime value - look for arguments from other markets that support the highest possible price for your solution (e.g. laser surgery costs 50% less than a single pair of glasses - and about the same as a year's worth of contact lenses) - and apply them to your startup.
|The importance of pricing high - Once your "high water mark" is established, you can always create lower-cost "competing" brands and position them down-market from your "flagship" solution.|
Many investors will insist that you show evidence that your solution has been protected prior to making an investment - but such steps can be costly. One approach often used is to include the cost of protection in your use of funds, and explain that one of the methods you will use ot create a return for the investor is to use their capital to better defend the intellectual property you've created.
|Protecting Your IP (Intellectual Property) - If your solution involves a new technology, material, or process, you've probably already started down the path of patenting and/or trademarking your solution with the USPTO. If not, you should be prepared to explain how you intend to protect your solution from competitive threats in market.|
Many venture capitalists state on their web site that they invest in teams. If you've played team sports, you know why - it usually isn't possible to be an outstanding pitcher and a great batter (if you're from a cricket-loving nation, insert "bowler" and "batsman" here!)
|Creating an "A" Team - as a future CEO, you should perhaps take to heart the hiring philosophy of (former Oakland A's manager) Billy Beane - and make sure your team includes cost-effective run-scorers, data-driven managers, uniquely-skilled pitchers, and a recruitment scoring system built on aptitude, not just good looks.|
Before you head off to meet with investors, you need to successfully pitch the most important partner your business will have - your spouse. If you're married, very likely, the first money into your business will come from them. You need convince them that monthly server bills are more important than dinners out or annual ski trips.
|Landing your first investor - it's time to sit down with your partner and take them through your idea, soup to nuts. Make sure you successfully address their conerns - if they "invest", they will be putting a lot on the line. Work on your pitch until your partner thinks your idea has a shot - when that happens, you'll be ready to start building the case for venture investment in your business.|
Forming a technical board of advisers that meets once a month via Skype is easy. Advisers typically sign on for one to five years, in return for a promise of stock options, and are tapped for their specific expertise (e.g. scientific knowledge), contacts (e.g. a Rolodex of top-tier venture partners), or gravitas (e.g. status as a former government minister, international diplomat, inventor, sports star, celebrity, university dean, or person of similar standing.)
|Not just gray hair... - a top-tier board of advisers can lend you and your team credibilty and give investors comfort that you are on the right path, and have access to good advice. Think of it as having your top five phone references together in one place, ready to be interviewed. And use these people - don't just list them on your web site.|
Yes, it's a bit of a disgusting image - but it's also one of the oldest axioms in seeking venture investment. You need to be able to show that someone values your product or service, and is willing to pay you money, either directly (e.g. via a shopping cart, or licensing deal) or indirectly (e.g. via advertising to your users). A business totally without customers - even beta users - will be a difficult sell to most investors.
|When a customer buys your product or service, they are telling the investor that the problem you solve exists, and illustrating what they think of its value. Do this enough times (and with enough variables, such as pricing, positioning, etc), and you'll be able to show your investors a research case based entirely on your own product and customer experience.|
Many inexperienced entrepreneurs believe that customer adoption and exponential growth can occur quickly, and continue indefinitely. However, in most situations, product/service adoption is slow to begin. At the other end of the adoption curve, growth almost always slows as competitors rush in to attack your business and steal your customers. Finally, there is the "lack of humans" problem (with four billion cell phone users now calling, cell phone makers may soon run short of new customers).
|The "S Curve" effect - to see the effect of attentuating exponential growth over time, sign up and try our free online business planning tools. The Five Year Sales Projections tool includes a month-by-month attenuation mechanism designed to arrest growth over time and approximate the more likely maturity curve your solution will experience in market.|
Back in 2005, legendary venture investor and industry commentator Guy Kawasaki posted a blog to his site entitled The 10-20-30 Rule in which he made the following recommendation to entrepreneurs - ignore it at your peril:
|The Kawasaki Rule: "A PowerPoint presentation should have ten slides, last no more than twenty minutes, and contain no font smaller than thirty points... this rule is applicable for any presentation to reach agreement: for example, raising capital, making a sale, forming a partnership, etc."|
Getting in front of the right decision-maker is important - as is knowing who you're meeting with. All VC partners/decision-makers have different ideas about what constitutes a good investment opportunity - and many have skills and experience that are specific to a particular area. Spend some time before your meeting on Google learning about your investor's past life and track record - you'll find this extremely useful when it comes to tailoring your presentation and providing examples.
|Do not - under any circumstances - take a meeting with a VC firm unless you've thoroughly researched the firm and its partners. You might yourself in front of a group that has just invested in your main competitor (this happened to friends of our a few months ago - who, sadly, ignored our advice on this subject!) You might also find yourself pitching an web analytics idea to a bunch of solar energy experts. Do the research!|
Imagine the following scenario: someone you've never met walks into your office and asks you for money. What might your reaction be? What kind of things might you want to know about this person before writing them a check? Would you prefer to sit wordlessly through a powerpoint or have a conversation with the person, face to face, about why they need the money?
|This is one of most important tips: Keep your presentation (and demo, if you do one) short, so you can allow plenty of time in your meeting for conversation. Not only do your investors need to get to know you, but you need to get to know them, and answer all their questions. You can't do that if your powerpoint runs 59.5 minutes!|
Often, experienced VC partners will ask questions designed to elicit a better understanding of you - the founders of the business. These questions are usually designed to try and understand how you might operate in the presence of a large potential partner - or how you might react in a stressful situation. Be true to yourself and answer every question honestly (except questions related to "final product delivery date" - everyone in the room knows they're about to hear a half-truth when it comes to that!) The important thing is: you're here to build trust. The only way you can do that is to be true to yourself, and honest about your strengths, weaknesses, and beliefs.
|"Don't Be Evil" - Google's famous "slogan", composed by (GMail creator) Paul Buchheit and Amit Patel, was originally created to informally guide internal policy - and a statement to the rest of the industry (and a not-so-subtle jab at a then-larger, more-established software company). It got Google a lot of attention, but also some respect as well.|
Not every investor is going to get your story. Robert Persig went to over 450 publishers with his classic "Zen and the Art of Motorcyle Maintenance." JK Rowling was forced to work as a part-time teacher after seeing "Harry Potter" rejected and settling for a measly $4,000 first advance. The key to handling rejection is understanding that often, the words "not interested", "not right", and "not ready" may not actually be criticisms of your business but statements about the investor's business, based on their Investment Criteria.
|Investment Criteria: Many investment firms have strict rules about what kinds of businesses they can invest in. Don't take a "no" personally - your business might simply be too "early-stage" (i.e. not yet generating significant revenues), or outside the scope of the combined experience of the partners.|
In some cases (such as the Demo show, or Jim Breune's Finnovate conference), your allocated presentation time can be as short as a mere handful of minutes. Do not waste them. Make sure you are still able to present your business - even if the lights go out in the meeting room!
|Bring the print-outs - we strongly recommend you take print-outs with you (but not distribute them, as some folks may flip ahead and miss important parts of your presentation) - and put together a canned demo of your technology, if your demo relies on Internet access, so you can quickly revert to it if something goes wrong.|
We were recently shown a PowerPoint deck in which the balance sheet and income statements did not add up - literally! The entrepreneur showed little concern when we pointed this out, leading us to assume they would treat an investor's capital as unwisely as they treated their financial planning.
|With great tools like DealHorizon Startup at your disposal, there is no reason for your financials not to be professional, and dollar-perfect. Take advantage of the models available here, and create a set of financial statements that you can be proud of.|
VCs understand that many entrepreneurs build their financial projections on a "best-case" scenario - i.e. everything goes right, gets delivered on time, gets into the channel in sufficient quantities, and is supported to a level that generates high customer satisfaction (and higher customer lifetime value.) To an investor, such a scenario is probably overly optmistic. Which is why it is best not to describe such projections as "conservative" - doing so reduces credibility and could actually harm your investment chances.
|Don't discount your plan - your job is to present the usage data and research that best supports your arguments, and leave it for the investors to decide if they agree (VCs and angel investors will almost always apply their own models to determine the likelihood of your business reaching your projected goals) - not to present a worst-case, "conservative" scenario.|
Calling up your college buddy and asking him to represent you (because you just heard he passed the bar and needs the work) is a bad idea for first-time entrepreneurs. It's quite possible you might save a few bucks today, but unless you buddy knows what he's doing, you could be leaving millions on the table. Hire an experienced law firm.
|Lawyers can provide advice and insights far beyond changes in drafting - and many lawyers are also well-connected in the VC community, know the lawyers on the opposing side, and can help you structure a better deal based on the knowledge gained of the particular investor through prior dealings.|
We're fans of "Shark Tank" - the TV show in which investors put money into businesses that ordinary people pitch during the show. But few VC investments are structured as a simple percentage ownership (we suspect "Shark Tank" uses this approach because, well, it's a TV show - and a long conversation about how the investor will require a 2x participating liquidation preference might not play well on prime time!)
|Without a solid understanding of valuation techniques, liquidation preferences and preference share structures, you can have the best idea in the world and lose 100% of your ownership, simply by making one or more common "first timer" mistakes. Leave valuation discussions to your lawyer, banker, or finder - or talk to folks that have navigated these waters before and bone up beforehand.|
We've used finders over the years with varying degrees of success. In some cases, they have provided introductions to strategic investors that would have been tough to get an audience with otherwise. But generally, we avoid using finders unless they are licensed, and operate entirely on a "shared success" basis.
|SEC Reg D - rules and regulations regarding finders have been reinterpreted more strictly by US courts in recent years. With few exceptions, any finder who asks for a commission on your fundraising needs to be licensed as a broker-dealer by the SEC. If they disagree with you on this based on a stated exemption, refer them to your law firm.|
Here's two good reasons why, as entrepreneurs, you should only plan on raising capital a maximum of once every eighteen months.
|Another good reason - Too little time between rounds can dilute your ownership by not allowing you time to execute your plan - by waiting longer, and giving your team members time to execute, you may get a higher valuation for your next round (assuming you still need capital, of course)|
The "term sheet" contains the basic terms an investor is willing to offer, in abbreviated form, and signifies a semi-official start to negotiations. Though usually non-binding, once issued, term-sheets are usually honored by most VCs and accredited investors. But that doesn't mean you shouldn't try for better terms - either from them, or from a difference capital source.
|Looking at Term Sheets online - Wilson Sonsini Goodrich and Rosati, one of the top law firms in Silicon Valley, has created an excellent tool for startup entrepreneurs they call a Term Sheet Generator. Check it out at the Wilson Sonsini web site.|
The reason you're here is because when your father met your mother, at least one of them followed up! Treat your business - your baby - with the same care. Follow up and communicate daily with your investors through the due diligence period and up until the closing. This is the most important set of actions you will take.
|Selling equity involves the same skills as selling product - Your approach to selling your equity will provide your investors with a strong indication of how well you will do selling your product, post-investment. Follow up. Provide additional info (including your latest customer sales figures). Be persistant. Don't give up.|
Most businesses succeed or fail based on the strength of their pricing, the energy and connections of the sales team, the uniqueness of their solution, the ability of their development teams to stay on schedule, and the ability of their operations staff to implement processes that enable the business to scale. VCs can help you plug strategic gaps in these critical areas and enhance your chances for success.
|How VCs can add additional value - VCs can often help by suggesting ideas, vendors and strategies that have worked for other companies in their portfolio, by improving your board-level governance, and by adding folks to your management team on either a temporary or permanent basis. VCs can also be strong advocates for your product or service, via blog posts and/or conference appearances.|
In one of our recent blogposts entitled Too Much Money, Not Enough Entrepreneurs we came to the conclusion that there is currently more money out there than there are good ideas to soak it up. That said, VCs rarely take chances on badly-formed or incomplete plans. You need a plan that demonstrates you can take their investment and provide a good return on it.
|Remember, VC's can only earn money for their LPs (Limited Partners - the "fund of funds" folks that give them money to invest) if they say occassionally say "yes" to a deal. Use the tips and tools available here, and the advice available on the leading VC blogs, and you'll greatly improve your chances of landing that investment.|
Yes, you've come to the "shameless plug" part of the page! But we really do think our tools can help you achieve your goals in less time, with less hassle. Sign up using the link at the top right of the page and take the site for a test-drive.
John is a Partner at Hatcher Plus, the leading data-driven venture capital investment firm. John has extensive commercial experience at the senior management level, having been the Chief Executive Officer of Authentium, Inc. the Managing Director, Asia, of WorldSpace, and CEO of Hatcher, the precursor company to Hatcher+. A tenacious and driven executive with longstanding board-level and C-suite level management experience within high-growth companies, John also brings a strong history of capital raising from an extensive network of investors globally. As Chairman and CEO of cybersecurity pioneer Authentium (acquired by CYREN in 2010), John co-authored three US patents and developed and sold cybersecurity solutions to some the largest organizations in the world, including the US Department of Commerce, NASA, AOL, British Telecom, Comcast, Cox Communications, Google, McAfee, Microsoft, Symantec, and Telstra. As CTO at Hatcher+, DocDoc, Heardable, and ThoughtRiver, John has designed and developed several highly-innovative technology platforms using cutting-edge approaches to data processing, user interface design, and workflow optimization. John is a frequent blogger and an in-demand speaker at venture events globally, and has extensive experience implementing ESG solutions as Chairman and/or board member of numerous start-ups, including director roles at trade finance provider ASYX and payment aggregator Mozido, and roles as Chairman of MENA-based financial services pioneer Telr, and the leading Cambridge-based legal services technology company, ThoughtRiver.
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