This is an MP3 recording from the venture capital panel at a Garage
event called The Art of the Start. In this panel, five prominent
venture capitalists from Silicon Valley firms discuss entrepreneurship,
fund raising, and market sectors. The panel occurred in 2005 (that is, after the dotcom implosion), so the information is still highly
relevant to startups raising capital.
Moderator: Mohanjit Jolly, Garage Technology Ventures
Panelists:
In the spirit of anti-bozosity that Pam Slim’s posting recently established, here is an interview with Bob Sutton. Bob is a professor of management science and engineering at the Stanford School of Engineering.
His latest book, co-authored with Jeffrey Pfeffer, is called Hard Facts, Dangerous Half-Truths, and Total Nonsense: Profiting From Evidence-Based Management. It’s a great read for people dealing with a management that’s fascinated with the guru and magical solution du jour. Asking management to read it, however, may be a CLM (career limiting move). :-)
Question: Isn’t your book essentially saying that most bloggers, gurus, authors, and speakers (including me) are full of shiitake?
Answer: Of course 90% of everything is crap. That goes for academic research too. But Hard Facts helps you decide who to believe. Are they claiming that the same old ideas are brand new? Are they claiming to be lone geniuses? Do the claim to have breakthrough ideas? All of us—I plead guilty too—are full of it at times.
I hate to give you a compliment, but while you are funny and have attitude, I’ve never seen you act as if you are a lone genius who has reinvented modern management. You just help people focus on acting on what they already knew. That is what the best gurus do—they do not act like false geniuses.
Question: Do you believe in any gurus, authors, or speakers?
Answer: I like C. K. Prahalad. Note how pompous and overblown Gary Hamel has become without him after they wrote one of the best management books of all time (Competing for the Future). Look at the great work that Prahalad now does by himself.
I also love Larry Prusak, the knowledge management guy. He is smart, well-read, humble, opinionated, and evidence-based. And much better read in academics than any academic I know.
David Kelley of IDEO is the most creative person I’ve ever met–and one of the most caring. His brother, Tom Kelley, author of The Art of Innovation, and now The Ten Faces of Innovation, is simply the best and most inspiring management speaker I’ve ever seen. These guys aren’t evidence-based in the academic sense, but they both have something that is really the key to practicing evidence management, which Pfeffer and I call (borrowing from philosophy) “the attitude of wisdom.” They both are confident enough to act on what the know and humble enough to learn from what happens to them —and IDEO.
I also like Malcolm Gladwell and Steve Levitt and their models of evidence-based management. Although, I think that Blink is much weaker than The Tipping Point because Gladwell misses that the instant judgments he praises are developed through years of experience. You have to do a lot and think a lot about something before you can do the blink thing.
Finally, a prediction, I think the next big guru, at least if ideas and ability to present them counts, is Chip Heath of the Stanford Graduate School of Business. He has a book coming out with his brother called What Sticks about the kinds of ideas that people remember and what persists. It not only is based on sound research, it is also hugely practical (I’ve seen executives get so excited by his stuff that they immediately grab him for gigs). Chip is such a compelling person that when he and Tom Kelley speak, the rest of us gurus and wanna-be gurus lag behind.
Question: Let’s suppose that there appears to be “evidence” for something. Still, how does one differentiate between correlation and causation?
Answer: There is a thing called logic. If you have a controlled experiment, where you change something, as they do at Yahoo! and Harrah’s all the time, that is best. But short of that you can at least make sure that the cause happened before the effect.
That is why I think that the book The War for Talent is such crap. They measured performance that occurred in the years leading up to the talent management practices and then said the talent practices caused the performance improvement. It is like concluding that cancer causes smoking.
Another of my pet peeves is Bain. Bain is a great company, but why do they have to claim “our clients outperform the market 4 to 1.” It is marketing BS. It is more reasonable to claim that, “You need to be rich to afford our services.”
Question: What does a company do when there’s no evidence because it’s trying to “create” a market that doesn’t exist yet?
Answer: Great question. There are two kinds of approaches. One is to look for a market that might want your product that doesn’t have it yet. There is a Stanford grad, Brian Rikuda who started a hip-hop company called Conduit Entertainment. Brian got angel funding for it after the dotcom he was working at went bust. He figured out that there was no Little Rock, Arkansas sound, and it was a decent sized market, so he started there. It was successful because he had no competition and could start his own sound. Now it’s moved to a larger market.
Or you can do all sorts of little experiments. In fact, what it takes to test a market on the web and what is considered valid evidence has changed. John Lilly was CEO and founder of Reactivity, a company that did web design and incubated new companies during the dotcom boom. It’s now an enterprise software company. Lilly recently explained how Reactivity generated ideas for new companies and why the approach they used would never work today. His team generated thirty ideas for new companies to pitch to venture capitalists in thirty days. Each of these “prototypes” was a PowerPoint deck.
The team picked the best one (a blend of email and a web browser), refined it, and eventually raised $90 million to start a defunct company called Zaplet. John is now vice-president of business development and Operations at the Mozilla Corporation. He explains that this approach won’t work now because venture capitalists only fund web-based companies that are already on the web and have already have a proven ability to attract customers.
So during the boom, the prototypes were PowerPoint decks and the associated pitch; now you need prototype products and services that are already bringing in real dollars and real customers. To me, this a move toward better evidence.
Question: How does a company break the hold of a reliance on mistaken beliefs?
Answer: Find people who disagree with you. If you get mad at them, it is a good sign you need to think. Fight as if you right; listen as if you are wrong
Question: What is more dangerous: fear or arrogance?
Answer: They both suck. What you prefer: a poke in the left or the right eye? If you prefer, I’ll take arrogance, at least arrogant people have the courage to act, and in the process, might get served humble pie.
Question: What are the qualities of an effective leader?
Answer: Some one who acts as if he or she is in control, but realizes that they only way to sustain some control is to listen, admit error, and keep learning. Here is a great quote that we have in book from Andy Grove, which demonstrates this attitude of wisdom, the ability to act on your knowledge, while doubting what you know, and on a related point, how pretending you are in control can help you gain control:
“I think it is very important for you to do two things: act on your temporary conviction as if it was a real conviction; and when you realize that you are wrong, correct course very quickly …. And try not to get too depressed in the part of the journey, because there’s a professional responsibility. If you are depressed, you can’t motivate your staff to extraordinary measures. So you have to keep your own spirits up even though you well understand that you don’t know what you’re doing.”
I can’t believe he said it, but it is consistent with the evidence!
Question: What should a person do if she works for a bozo who tries to implement the management fad du jour?
Answer: If you can’t talk them out of it, pretend to do it until the next fad comes along, then pretend to do that, but focus your real effort on what counts. Better yet, quit. Still better yet, start a movement to get him or her fired.
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This is an MP3 recording of Jim Whittaker speaking at a Garage event in 2005. Jim is the first American to climb Mount Everest and the former CEO of REI. His topics include leadership, perseverance, and risk taking.
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Just read this blog entry by Pam Slim. Pam was a consultant to management (as opposed to a management consultant). In this piece, she lets it rip about what she thinks management does wrong
.
Very entertaining. You'll love her spirit. It starts off like this:
I am writing to you as a newly minted rebel. My main purpose in life is to take your best, your brightest, most creative, hard-working and passionate employees and sneak them out the hallways of your large corporation so that they are free of the yoke of lethargy, oppression and resentment.
It hasn't always been this way. I tried for many years as a consultant to YOU to explain the importance of treating your employees with dignity and respect. I encouraged you to speak clearly and to the point, to avoid endless hours of PowerPoint, buzzwords and meaningless jargon like "our employees are our most valuable asset." I was sincere in my efforts as I coached your managers and explained the importance of providing objective, developmental feedback to employees that was based on observable behavior, not personal generalizations. I encouraged you to be open with your business strategy so that your employees could contribute ideas to grow your company.
After ten years, I give up. I was banging my head against the wall trying to find ethical, creative ways to train your employees on the merits of your forced ranking compensation plan. No amount of creativity could overcome the fact that it is a stupid idea and does nothing but create an environment of competition, politics and resentment. Whoever sold you on that idea was wrong.
So now I want to help your employees leave and start their own business. Regain control of their life. Feel blood pumping in their veins and excitement in their chest as they wake up each day. I honestly wish that it were possible for them to feel that inside your company. But things have gotten so convoluted that I honestly don't think it is possible unless you take some drastic steps:
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A few weeks ago I provided a site where you can see my Art of Innovation speech. My buddy, Mike Johnston, just showed me that my Art of the Start speech is online here.
The Art of Innovation is a speech for any stage of company that is trying to create and marketing innovative products and services. The Art of the Start is for the startup stage--but for anyone starting anything.
Here is a PDF of the presentation that I used:
Just in case you're interested, you can get the book by clicking here.
Big oops: I thought this was the entire speech. It's just two minutes and thirty-seven seconds--during which I explain the meaning of meaning. Sorry! There are several trackbacks, or I would delete this entry.
I'll try to find the entire speech online somewhere.
Two blog postings opened my eyes about marketing. The first deals with the new 4Ps by John Sviokla and Antony Paoni called "Marketing Remix."
The second is a very useful approach to marketing planning (what a great oxymoron) by Kelly Odell called "The World's Shortest Marketing Plan."
With both party's permission, I was "inspired" by their thoughts to create a version 2.0 of Kelly's marketing plan. I've seen a lot of marketing plans in my day--99.9% of them were way too long. This length is perfect for most products and services.
Click here to get the document. It's a Word document so that you can fill in the cells with your answers.
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Several people have asked me for a blog entry about executive summaries. My colleague at Garage, Bill Reichert, wrote this explanation, and it's as good as it gets.
Writing a Compelling Executive Summary
By now, you’ve probably already read several articles, web pages—even books—about writing the perfect executive summary. Most of them offer a wealth of well-intended suggestions about all the stuff you need to include in the executive summary. They provide a helpful list of the forty-two critical items you should cover—any entrepreneur worth his or her salt should be able to address these points in less than 100 pages—and then they tell you to be concise.
Most guides to writing an executive summary miss the key point: The job of the executive summary is to sell, not to describe.
The executive summary is often your initial face to a potential investor, so it is critically important that you create the right first impression. Contrary to the advice in articles on the topic, you do not need to explain the entire business plan in 250 words. You need to convey its essence, and its energy. You have about 30 seconds to grab an investor’s interest. You want to be clear and compelling.
Forget what everyone else has been telling you. Here are the key components that should be part of your executive summary:
1. The Grab: You should lead with the most compelling statement of why you have a really big idea. This sentence (or two) sets the tone for the rest of the executive summary. Usually, this is a concise statement of the unique solution you have developed to a big problem. It should be direct and specific, not abstract and conceptual. If you can drop some impressive names in the first paragraph you should—world-class advisors, companies you are already working with, a brand name founding investor. Don’t expect an investor to discover that you have two Nobel laureates on your advisory board six paragraphs later. He or she may never get that far.
2. The Problem: You need to make it clear that there is a big, important problem (current or emerging) that you are going to solve. In this context you are establishing your Value Proposition—there is enormous pain out there, and you are going to increase revenues, reduce costs, increase speed, expand reach, eliminate inefficiency, increase effectiveness, whatever. Don’t confuse your statement of the problem with the size of the opportunity (see below).
3. The Solution: What specifically are you offering to whom? Software, hardware, service, combination? Use commonly used terms to state concretely what you have, or what you do, that solves the problem you’ve identified. Avoid acronyms and don’t try to use this opportunity to create and trademark a bunch of terms that won’t mean anything to most people. You might need to clarify where you fit in the value chain or distribution channels—who do you work with in the ecosystem of your sector, and why will they be eager to work with you. If you have customers and revenues, make it clear. If not, tell the investor when you will.
4. The Opportunity: Spend a few more sentences providing the basic market segmentation, size, growth and dynamics—how many people or companies, how many dollars, how fast the growth, and what is driving the segment. You will be better off targeting a meaningful percentage of a well-defined, growing market than claiming a microscopic percentage of a huge, mature market. Don’t claim you are addressing the $24 billion widget market, when you are really addressing the $85 million market for specialized arc-widgets used in the emerging wocket sector.
5. Your Competitive Advantage: No matter what you might think, you have competition. At a minimum, you compete with the current way of doing business. Most likely, there is a near competitor, or a direct competitor that is about to emerge (are you sufficiently paranoid yet??). So, understand what your real, sustainable competitive advantage is, and state it clearly. Do not try to convince investors that your only competitive asset is your “first mover advantage.” Here is where you can articulate your unique benefits and advantages. Believe it or not, in most cases, you should be able to make this point in one or two sentences.
6. The Model: How specifically are you going to generate revenues, and from whom? Why is your model leverageable and scaleable? Why will it be capital efficient? What are the critical metrics on which you will be evaluated—customers, licenses, units, revenues, margin? Whatever it is, what impressive levels will you reach within three to five years?
7. The Team: Why is your team uniquely qualified to win? Don’t tell us you have 48 combined years of expertise in widget development; tell us your CTO was the lead widget developer for Intel, and she was on the original IEEE standards committee for arc-widgets. Don’t just regurgitate a shortened form of each founder’s resume; explain why the background of each team member fits. If you can, state the names of brand name companies your team has worked for. Don’t drop a name if it’s an unknown name, and don’t drop a name if you aren’t happy to give the contact as a reference at a later date.
8. The Promise ($$): When you are pitching to investors, your fundamental promise is that you are going to make them a boatload of money. The only way you can do that is if you can achieve a level of success that far exceeds the capital required to do that. Your Summary Financial Projections should clearly show that. But if they are not believable, then all of your work is for naught. You should show five years of revenues, expenses, losses/profits, cash and headcount. It might also make sense to show a key driver, such as number of customers or units shipped.
9. The Ask: This is the amount of funding you are asking for now. This should generally be the minimum amount of equity you need to reach the next major milestone. You can always take more if investors are willing to make more available, but it is hard to take less. If you expect to be raising another round of financing later, make that clear, and state the expected amount.
You should be able to do all this in six to eight paragraphs, possibly a few more if there is a particular point that needs emphasis. You should be able to make each point in just two or three simple, clear, specific sentences.
This means your executive summary should be about two pages, maybe three. Some people say it should be one page. They’re wrong. (The only reason investors ask for one page summaries is that they are usually so bad the investors just want the suffering to be over sooner.) Most investors find that there is not enough information in one page to understand and evaluate a company.
Please remember that the outline above should not be applied rigidly or religiously. There is no template that fits all companies, but make sure you touch in each key issue. You need to think through what points are most important in your particular case, what points are irrelevant, what points need emphasis, and what points require no elaboration.
Some other general points:
Finally, one of the most important sentences you write will not even be in the executive summary—it is the sentence that introduces your company in the email that you or a friend uses to send the executive summary. Your summary might not even get read if this sentence is not well-crafted. Again, it should be specific and compelling. It should sell your company, not just describe it.
Technorati Tags: entrepreneurship
Most of the information that you can find about recruiting is for the employer, not the employee. (I'm as guilty as this as anyone: for example, The Art of Recruiting, I and II.)
Let's turn the tables, switch modes, and balance the scales by discussing what a hot candidate should ask a private, venture-backed startup before making the leap to “infinity and beyond” as Buzz Lightyear would say. Nota bene: there is a definite order in how to do this: First, get the job offer, then ask these questions!
1. How many outstanding shares of stock are there?
Most companies make offers of dazzlingly large amounts of stock options. After all, 100,000 shares sure sounds like a big number--especially if the company goes public at, say, $20/share and then googles on up to $400/share like you're being led to believe. That's $40,000,000--you could buy Larry Ellison's house with that kind of money!
The number of options that you're offered is a meaningless number unless you know the total number of outstanding shares of stock. With these two pieces of information, you can calculate the percentage of the company that your options represent--and that's what counts. For example, 100,000 shares of 1,000,000 total shares is a lot better than 250,000 shares of 10,000,000 total shares.
You could simply ask what percentage you're getting, but that's a little crass, and some people may misinterpret crassness for a lack of good judgment. :-) However, just because you know what percentage of the company you're getting, don't make yourself crazy with delusional thoughts of how much you're worth.
Here are some “Guyed”lines for a startup that has already raised its first round of venture capital of $1-3 million with no more than fifteen employees. Don't just latch onto the top end of the range because there are many variables to consider including salary, cash bonuses, geographic location, and most important of all, your perceived value.
(I know I'm going to regret providing these guidelines...those of you who read this blog in an RSS feed will be amused by how these numbers will change.) :-)
One more thing about these percentages: as the company becomes successful and grows--and perhaps raises more capital to fuel the growth--your percentages will go down. It's better to own a small percentage of a large company than a large percentage of a small company.
2. What is the monthly burn rate?
“Burn rate,” as commonly understood, is net cash flow. (In most cases, “net” isn't even necessary to mention because there are no revenues.) You want the answer to this question in terms of cash--not some bull-shitake, pro-forma paper-profits calculation unless you can pay for your rent with paper profits.
3. How much cash is in the bank?
This is a straightforward question. Now take this answer and divide it by the monthly burn rate. This will tell you how long before the company runs out of money. If the answer is less than six months, be cautious unless the company already has signed term sheets for the next round of financing. If it doesn't, assume it will take at least six months before another round of financing closes.
4. When will the company achieve positive cash flow?
You should ask this question because you'll probably be told that there are months and months of cash or that another round of financing is “looking good.” If the answer is years away, then you're signing up for more risk because venture capitalists aren't the most patient, loyal people. More risk is okay-it takes years to build a great company--but you should know what you're getting into.
5. When will the product ship?
This is just another way of asking about positive cash flow. Obviously, positive cash flow before shipping is improbable, but if the company is saying that positive cash flow will occur shortly after shipping, something is fishy, or the management is clueless. My advice is that you add six months to the “worst case” date that because nobody ever ships on time.
6. May I talk to any of the outside investors on the board of directors?
If the outside investors are as positive about the company as you're being told they are (and assuming you're truly a superstar applicant for a senior-level position), then the company should agree to this. If it doesn't, then either the investors are getting “tired,” or you're not that important. Indeed, if you are a superstar, you won't have to ask because the management will ask a big-name board member to call you.
7. May I talk to several beta sites?
This question is another reality check: the company is probably spinning a tale about how all the beta sites love the product. (In my career, every company has always told me that beta sites “love the product.”) If you're told you can't make contact, then either the company doesn't want to bother future customers (which is reasonable) or you're not important (which is possible). Of course, it could even be that the product sucks, so the company is afraid of you talking to beta sites. It would be nice to know if it's the last reason.
8. How much of a “liquidation preference” do the investors have before common shareholders get anything?
Suppose the company has raised $25 million and the liquidation preference is only $25 million (it could be multiples of $25 million depending on how the investors negotiated the terms of investment). This means that the investors get their $25 million back before the employees get anything. If the company is acquired for $25 million or less, then the employees get nothing. If there's a massive liquidation preference, your options may never be worth anything.
9. Are there any intellectual property issues or lawsuits pending?
This is a housekeeping question. To put it mildly, it'd be nice to know that the company's intellectual property is free and clear, and that there aren't any lawsuits that could tank the company. If you don't ask, don't expect the company to volunteer such information during the recruitment process.
Finally, a word of caution: the management may interpret these questions as evidence of a lack of “believing” or a failure to understand “the big picture.” (It merits repeating: Get the job offer first and then ask these questions.) On the other hand, you might impress the management with your knowledge of how startups and finance really works. Welcome to the complex and contradictory world of startups...
Technorati Tags: entrepreneurship, evangelism, guy kawasaki, recruiting
I've been on both sides of board meetings: as the entrepreneur (a.k.a., the “victim”) and as the board member (a.k.a., the “heavy”). I can't tell you that I've run perfect board meetings nor that I am the world's greatest board member, but I can provide some tips on the art of the board meeting. These tips apply to startups, established companies, and--with very little modification--to school boards, church elders, and not-for-profits.
Before we discuss board meetings, we need to discuss board composition. A board should contain five to seven members. Clueless entrepreneurs want rubber stampers with deep pockets, but in a perfect world, your board members would represent these archetypes:
Collectively, your board should provide guidance, support, and connections. If it doesn't, frankly, it's your fault.
Start in the morning. I've been on boards that start in the morning, midday, and in the afternoon. Without question, the most effective board meetings start at 8:00 am or earlier. This is because people are fresh in the morning and not burdened by all the crises that pile up by the middle of the day. Plus, it makes you look better because you're an early bird that gets a jump on the day as opposed to the slug that gets in at noon.
Get the easy crap out of the way. Most board meetings require the routine approval of administrative things like the minutes of the previous meeting and legal formalities. There are two reasons to get these done at the onset of the meeting: first, you might run out of time and if some members have left early, you may not have a quorum; second, you want to set a tone for approving stuff before you start dropping any controversial bombshells. I could also make a case to do these administrative things last--so that you don't waste any time and get right to the important issues. (Somehow administrative things always get done.) Either philosophy can work as long as you know which one you're using. :-)
Don't bull shitake your board. The three most powerful words you can utter at a board meeting are, “We beat projections.” The second most powerful three words are, “I don't know.” When you don't know, admit it, and then follow up no later than the next board meeting. (A good board member will hate it when she asks for something, and you ignore her and do not address the issue.) If you admit that you don't know the answer to a question, then when you say that you do know the answer to another question, board members will believe you.
Let the CEO run the show. Maybe it's an American thing, but many teams want to show the board that the entire executive team is deeply involved and effective. However, a board meeting is not “share and tell” like in elementary school where participation counts as much as results. The CEO should handle seventy percent of the meeting. The CFO should handle twenty percent, and other employees (if any other employees are present at all) the last ten percent.
Observe the 10/20/30 rule. The entrepreneur that pitches his company with sixty slides usually prepares sixty slides for a two hour board meeting too. The 10/20/30 rule applies to board meetings too. You should be so lucky as to get ten topics covered in a board meeting. I guarantee you that you'll never get beyond the twenty-fifth in most board meetings. You may want to provide a “360 view” of your company, but most boards want only a thirty degree view:
This justifies the amendment of the 10/20/30 rule to the 3/20/30 Rule of Board Meetings. If pressed, I could further boil these three issues into one: What is the level of revenues and how can we increase it? Truth be told, this is mostly what board members care about because, as I've said before in this blog, “Sales fixes everything.”
Don't surprise your board. This is the most important rule of board management. You should never, ever surprise your board. (Perhaps there is one exception: when sales are higher than expected.) If you have bad news, speak to each member before the meeting. Ideally, by the time the board meeting happens, (1) your board members will have calmed down; (2) you are on to the solution to the problem, and (3) they have thought of ways to help you with the problem too.
Nota bene: Emailing a five-tab Excel spreadsheet and sixty-page PDF the night before the board meeting doe not qualify as warning your board in advance. Most board members don't read these attachments before the meeting, so you'll walk into the meeting thinking that they've already heard the bad news and calmed down when they haven't. And you will deservedly get blasted.
Pre-sell as much as you can. Along the lines of “no surprises,” don't try to do any “hard selling” in a board meeting. For example, if you want to change your business model, hire that proven entrepreneurial superstar from Microsoft (this is a joke, guys), or buy a Super Bowl commercial, you should discuss your idea before the meeting. In this way, you'll learn what kind of support you'll have and what the issues are; you may decide not to try getting board approval for something that won't fly anyway.
Present solutions, not questions. The reason why you're running the show is theoretically that you're the best person for the job. Therefore, you should present “solutions.” For example, take your best shot for the company logo, company mantra, product design, and introduction plan. Then, solicit feedback and make the appropriate changes. This is very different from opening up cans of worms by asking, “How do you think we should introduce the product?” This question doesn't show flexibility and openness--it shows that the wrong person is running the company.
Use them. This doesn't pertain strictly to board meetings but board utilization in general. Most boards are under-utilized, not over-utilized. If there's anything worse than asking for too much help from a board member, it's asking for less than she's willing to give. That's a crime. Once a board member makes the psychological (and legal) commitment to serving on your board, get as much as you can out of her. Trust me, she'll push back if you ask for too much.
Written at: Atherton, California. (Special thanks to Glenn Kelman for his comments.)
Here's a quiz to determine your “entrepreneurial quotient.” My intent is to test a person's knowledge of entrepreneurship. However, scoring high doesn't mean you're the next Steve Jobs, and scoring low doesn't mean you're not. Some answers are debatable, so there will be many comments. #10, in particular, is tricky so read it very carefully.
If you'd like to take an online version, go here on the Tickle site:
http://snipurl.com/eqtest
1. Your company is creating a new software product. The lead programmer has just shown you a working prototype and has promised that it will be done in six months. You should assume that it will really be completed in:
a. 3 months
b. 6 months
c. 12 months
d. 18 months
e. Shortly after money runs out
2. When you’re starting a new company, you shouldn’t be afraid of polarizing people with a new product or service that flies in the face of convention.
a. True
b. False
3. Patents are the main way to make your company defensible and able to withstand the challenges of competitors.
a. True
b. False
4. The foundation of a successful brand is:
a. Effective marketing
b. Evangelistic customers
c. Extensive advertising
d. Attractive packaging
e. An excellent product or service
5. Ultimately, who positions a product or service—establishing how customers will come to view it?
a. The company that makes it.
b. The company’s advertising agency
c. The company’s PR firm
d. The customers themselves
e. The press, and industry analysts
6. If you want your company to be successful, it’s most important to strive for which objective?
a. To be the lowest cost producer
b. To be the best known brand
c. To be the most profitable company
d. To be the sole provider of something people really want
e. To have the largest customer base
7. When pitching potential investors, you should keep your presentation to how many slides?
a. 0-5
b. 10-15
c. 30-40
d. 1
e. 60
8. As long as the founders own more than half of the company, they control the company.
a. True
b. False
9. Pick the statement that means a venture capitalist isn’t interested in your business.
a. “You’re too early right now.”
b. “We don’t have expertise in that area.”
c. “If you find other investors, come back to us.”
d. “Come back to us after you’re shipped.”
e. All of the above.
10. Which part of a business plan is the most important?
a. The financial projections
b. The management biographies
c. The competitive analysis
d. The executive summary
e. The product description
11. More than anything, you don’t want your business model to be:
a. Specific
b. Simple
c. Unique
d. Scalable
e. Proven
12. Which of the following key assumptions do you have to test when starting a company?
a. Number of sales calls a salesperson can make
b. Conversion rate of prospects to customers
c. Length of sales cycle
d. Amount of technical support needed per unit sold
e. All of the above
13. A company that is bootstrapping should avoid which management practice?
a. Managing for cash flow, not profitability
b. Trying to recruit a “dream” management team of proven executives
c. Positioning against the industry leader
d. Building a bottom-up forecast
e. Collecting fast and paying slow
14. Many behemoth companies like Microsoft, General Electric, and 3M have broad and disparate product lines, but ironically started out with singular focus on one specific product.
a. True
b. False
15. You’ve just met with a key potential account. It could be a large sale and also bolster your company’s credibility in the industry. However, the account is afraid to do business with a “startup.” The best way to win them over is to:
a. Ask your world-famous venture capitalist investor to call the customer.
b. Arrange for the CEO of your company to meet with the buyer.
c. Offer to do a pilot implementation at a deep discount.
d. Tell the customer that you will contact them once your company is “proven” in the marketplace.
e. Have your mom provide a character reference for you.
16. In the first sixty seconds of a presentation, you should:
a. Furnish your biographical background
b. Establish the size of the market you are addressing
c. Provide a summary of your financial projections
d. Summarize the technical foundation of your product or service
e. Explain what your company does
17. What’s the most important factor to consider when selecting the first employees at a startup?
a. The candidate’s academic background
b. The candidate’s work experience
c. The candidate’s love of your product or service
d. The candidate’s willingness to work for stock options in lieu of salary
e. The candidate’s prior personal relationship with you
18. Why should you never offer stock to an employee in lieu of salary?
a. Doing so sets an implicit price for your stock.
b. It could take a long time to raise venture capital, so the employee might amass a large amount of stock.
c. This practice is prohibited by law.
d. A and B
e. A, B, and C
19. The purpose of providing an offer letter to a job candidate is to:
a. Establish a starting point for negotiation
b. Demonstrate that the company is serious about an offer
c. Confirm what both parties have already verbally agreed to
d. Create an audit trail for the human resource department
e. All of the above
20. The best reason to form a partnership is to:
a. Increase revenues or decrease costs
b. Get the attention of analysts
c. Garnering press coverage
d. Scare your competitors
e. Impress potential investors
21. The reason to put an “out clause” in a partnership agreement is
a. To enable you to get out of a bad deal
b. To make your lawyers happy
c. To enable both parties to work comfortably with each other
d. Because all agreements have “out clauses”
e. None of the above.
22. The CEO of your company just told you that he and the CEO of another company have agreed to a partnership. Your first task, as vp of strategic alliances, is to
a. Contact the PR firms of both organizations to coordinate the announcement
b. Contact the vp of marketing of both organizations to coordinate the announcement
c. Meet with the middle managers and individual contributors in your company who are going to have to make this partnership work
d. Thoroughly research the other company to determine how best to work with it
e. Begin drafting a rollout plan for the partnership
Answers
1. c; 2. a; 3. b; 4. e; 5. d; 6. d; 7. b; 8. b; 9. e; 10. d; 11. c; 12. e; 13. b; 14. a; 15. c; 16. e; 17. c; 18. d; 19. c; 20. a; 21. c; 22. c
Make no mistake about it: There is an art to raising angel capital. Raising angel capital is not harder or easier than raising institutional venture capital--it's simply different. Here's how to do it.
Written at: Atherton, California.
If my memory isn't failing me, after the Robert Redford character gets elected in The Candidate, he whispers to one of his supporters, “Now what?” Raising money ls like running for office: it's very exciting and even fun if you get the money. But after you raise the money, now what?
The good news is that you got the money. The bad news is you got the money. At the end of the process, every entrepreneur has to answer the same question as the candidate: “Now what?” The answer to this question is, “Now you execute.” And the next question is, “How do we execute?” This is the topic of this blog.
Create something worth executing.You're going to get tired of my obsession with great products but pitching, demoing, bootstrapping, and executing are a lot easier if you've created something meaning-full. It's hard to stay motivated and excited about executing crap. It's easy if you're changing the world. So if you and your team are having a hard time executing, maybe you're working on the wrong thing.
Set goals. The next step is to set goals. Not just any kind of goals, but the right goals, and the right goals embody these four qualities:
Measureable. If a goal isn't measureable, it's unlikely you'll achieve it. For a startup, quantifiable goals are things like shipping deadlines, downloads, sales volume, whatever. The old yarn, “What gets measure gets done” is true. This also has ramifications on the number of goals because you can't (and shouldn't) measure everything. Three to five goals are plenty.
Achievable. Take your “conservative” forecast for these goals and multiply them by .1; then use that as your goal. For example, if you think you'll easily sell one million units in the first year, then set your goal at 100,000 units. There is nothing more demoralizing than setting a “conservative” goal and falling short; instead take 10% of your forecast, make this your goal, and blow it away. You might think that such a practice will lead to under-achieving organizations because they aren't being challenged--yeah, well, check back with me after you don't sell a million widgets like you conservatively thought you would.
Relevant. A good goal is relevant. If you're a software company, it's the number of downloads of your demo version. It's not your ranking in Alexa, so telling the company to focus on getting into the top 50,000 sites in world in terms of traffic is not nearly as relevant as 10,000 downloads per month.
Rathole-resistant. A goal can be measureable, achievable, and relevant and still send you down a rathole. Let's say you've created a content web site. Your measureable, achievable, and relevant goal is to sign up 100,000 registered users in the first ninety days. So far, so good. But what if you focus on this body count without regard to the stickiness of the site? So now you've gotten 100,000 people to register, but they visit once and never return. That's a rathole. Ensure that your goal encompasses all the factors that will make your organization viable.
Postpone, or at least de-emphasize, touchy feely goals. I'll get lots of negative feedback about this, but touchy feel goals like “create a great work environment” are bull shitake. They may make the founders feel good. They may even make the employees feel good. But companies that execute on measurable goals are happy. Those that don't, aren't. As soon as you start missing the measurable goals, all the touchy feely stuff goes out the window. As my mother used to tell me, “Son, sales fixes everything.”
Communicate the goals. Many executive teams set goals, but they don't communicate these goals to the organization. For goals to be effective, they have to be communicated to every employees in the organization. Employees should wake up in the morning thinking about how they're going to help achieve these goals.
Measure progress on a weekly basis. The goals that people achieve are the goals that are measured. If you don't measure progress towards a goal, you might as well not set it. This is also another reason for setting only three to five goals: people can't focus on more than five, and measuring many more that five is difficult too. The optimal time period to review progress is weekly: monthly is too little pressure; daily is too anal.
Establish a single point of responsibility. If you ask your employees who is responsible for a goal, and no one can answer you in ten seconds, then it means that there's not enough accountability. If more than one person is responsible for the achievement of a goal, then no one is responsible. Good employees accept responsibility. Great employees seek responsibility. Lousy employees avoid responsibility.
Follow thru on an issue until it is done or irrelevant. Many organizations set goals and even measure progress towards them. However, after a short period of time, some goals are no longer on the radar because people start focusing on the coolest and most interesting stuff. For example, fixing bugs in the current version of a software application may not be as interesting as designing a new, breakthrough product, but your current customers think so.
Reward the achievers. Rewarding the people who achieve their goals has two positive effects. First, the achievers feel rewarded and become even more excited about doing their job. Second, the under- and non-achievers know that the company takes execution very seriously. The form of the reward can be money, stock options, time off--whatever works to serve notice to everyone that “this person delivered.”
Establish a culture of execution. Execution is not an event--a onetime push towards achieving goals. Rather it is a way of life, and this way of life (execution versus non-execution) is set in the early days of the organization. The best way to establish this culture is for the founders, particularly the CEO, to set an example of filling goals, responding to customers, and heeding and measuring employees. This obsession should go right down to the level of the CEO answering emails and responding to phone calls.
Heed your “Morpheus.” Morpheus is the character in The Matrix who gave Neo the choice between the blue pill and the red pill. He was, essentially, the adult supervision. Cold, brutal reality is the ally of execution, so find a Morpheus who distributes the red pills and enables employees to see things as they really are.
Written at: Backseat of a car going to and from Stockton, California.
Someone once told me that the probability of an entrepreneur getting venture capital is the same as getting struck by lightning while standing at the bottom of a swimming pool on a sunny day. This may be too optimistic.
Let's say that you can't raise money for whatever reason: You're not a “proven” team with “proven” technology in a “proven” market. Or, your company may simply not be a “VC deal”--that is, something that will go public or be acquired for a zillion dollars. Finally, your organization may be a not-for-product with a cause like the ministry or the environment. Does this mean you should give up? Not at all.
I could build a case that too much money is worse too little for most organizations--not that I wouldn't like to run a Super Bowl commercial someday. Until that day comes, the key to success is bootstrapping. The term comes from the German legend of Baron Münchhausen pulling himself out of the sea by pulling on his own bootstraps. Here is the art of bootstrapping.
Written at: Atherton, California.
In my day job, I not only hear a lot of PowerPoint pitches, but I also read a lot of business plans. The PowerPoint pitches explain my Ménière's disease, but the business plans explain my recent need for reading glasses. One of my goals for blogging is to reduce the external factors that are causing the degradation of my body, so this entry's topic is the zen of business plans.
Written at: Atherton, California.
* Note: the question is what is the most important part of the business plan, not what is the most important part of the business itself. The management team is more important than the executive summary to the business, but the discussion of the management team is not the most important part of the business plan because if the executive summary sucks, people won't get to the management team section.
By popular demand (okay, two people asked me to do it), here are the top ten ways to attract the interest of venture capitalists. There's no guarantee that if you do these ten things that you'll raise millions of dollars, but this wishlist will get you in the game.
Before you even start addressing the hard stuff, never ask a venture capitalist to sign a non-disclosure agreement (NDA). They never do. This is because at any given moment, they are looking at three or four similar deals. They're not about to create legal issues because they sign a NDA and then fund another, similar company--thereby making the paranoid entrepreneur believe the venture capitalist stole his idea. If you even ask them to sign one, you might as well tattoo “I'm clueless!” on your forehead.
Written at: Back seat of a car going to San Francisco.
I'm getting tired of writing about lies, so today I'm covering truths. Specifically, the truths of innovation. I hold these truths to not be self-evident; hence we see so little innovation.
Written at: Marriott Hotel, San Francisco, California
One of the great ironies of startups is the envy entrepreneurs express for innovators in large companies—let’s use the Gifford Pinchot term: “intrapreneurs.” From the outside looking in, entrepreneurs think intrapreneurs have it made: ample capital, infrastructure (desks, chairs, Internet access, secretaries, lines of credit, etc), salespeople, support people, and an umbrella brand.
Guess again. Intrapreneurs don’t have it better—at best, they simply have it different. Indeed, they probably have it worse because they are fighting against ingrained, inbred, and inept management. There are lots of guys/gals inside established companies who are as innovative and revolutionary as their bootstrapping, soy-sauce-and-rice-subsisting counterparts. This blog is for these brave souls who must practice the art of intrapreneuring.
Knock yourself out!
Written at Ilikai Hotel, Honolulu, Hawaii
Who among us has not had the horrible experience of an corporate offsite to build teamwork and to craft a mission statement? The offsite usually went like this:
Day 1: Teambuilding. Selection of cross-functional teams so that, God help us, engineering has to work with sales. A day of exercises such as, “Each of you will come up to the front of the group, turn your back to the group, close your eyes, and fall backwards into the arms of your colleagues. This will teach you to trust your fellow employees.”
Day 2: Crafting the mission statement. A hot, crowded room with easels of white paper and a facilitator who knows nothing about your business. Everyone who is a director level and above in the company is there—that’s sixty people. You each figure you get one word, so at the end of the day, you have a sixty word mission statement like this:
“The mission of Wendy’s is to deliver superior quality products and services for our customers and communities through leadership, innovation, and partnerships.”
Don’t get me wrong. I love Wendy’s, but I’ve never thought I was participating in “leadership, innovation, and partnerships” when I ordered a hamburger there. The root cause of mission statement-itis is that most organizations are run by people who have either gotten an MBA or worked for McKinsey—or both.
I give up trying to get people to create short, different, and meaningful mission statements, so go ahead and spend the $25,000 for the offsite, facilitator, and consultants to create one. However, you should also create a mantra for your organization. A mantra is three or four words long. Tops. Its purpose is to help employees truly understand why the organization exists.
If I were the CEO of Wendy’s, I would establish a corporate mantra of “healthy fast food.” End of story. Here are more examples of corporate mantras to inspire you:
Federal Express: “Peace of mind”
Nike: “Authentic athletic performance”
Target: “Democratize design”
Mary Kay “Enriching women’s lives”
The ultimate test for a mantra (or mission statement) is if your telephone operators (Trixie and Biff) can tell you what it is. If they can, then you’re onto something meaningful and memorable. If they can't, then, well, it sucks.
If you still insist on doing a mission statement, then at least let me help you save a lot of time and money. Just go to the Dilbert Mission Statement Generator. There, without a consultant, facilitator, and offsite, you can get the mission statement of your dreams.
Written at United Airlines, seat 4E, SFO to HNL
I suffer from something called Ménière’s disease—don’t worry, you cannot get it from reading my blog. The symptoms of Ménière’s include hearing loss, tinnitus (a constant ringing sound), and vertigo. There are many medical theories about its cause: too much salt, caffeine, or alcohol in one’s diet, too much stress, and allergies. Thus, I’ve worked to limit control all these factors.
However, I have another theory. As a venture capitalist, I have to listen to hundreds of entrepreneurs pitch their companies. Most of these pitches are crap: sixty slides about a “patent pending,” “first mover advantage,” “all we have to do is get 1% of the people in China to buy our product” startup. These pitches are so lousy that I’m losing my hearing, there’s a constant ringing in my ear, and every once in while the world starts spinning.
Before there is an epidemic of Ménière’s in the venture capital community, I am trying to evangelize the 10/20/30 Rule of PowerPoint. It’s quite simple: a PowerPoint presentation should have ten slides, last no more than twenty minutes, and contain no font smaller than thirty points. While I’m in the venture capital business, this rule is applicable for any presentation to reach agreement: for example, raising capital, making a sale, forming a partnership, etc.
Ten is the optimal number of slides in a PowerPoint presentation because a normal human being cannot comprehend more than ten concepts in a meeting—and venture capitalists are very normal. (The only difference between you and venture capitalist is that he is getting paid to gamble with someone else’s money). If you must use more than ten slides to explain your business, you probably don’t have a business. The ten topics that a venture capitalist cares about are:
You should give your ten slides in twenty minutes. Sure, you have an hour time slot, but you’re using a Windows laptop, so it will take forty minutes to make it work with the projector. Even if setup goes perfectly, people will arrive late and have to leave early. In a perfect world, you give your pitch in twenty minutes, and you have forty minutes left for discussion.
The majority of the presentations that I see have text in a ten point font. As much text as possible is jammed into the slide, and then the presenter reads it. However, as soon as the audience figures out that you’re reading the text, it reads ahead of you because it can read faster than you can speak. The result is that you and the audience are out of synch.
The reason people use a small font is twofold: first, that they don’t know their material well enough; second, they think that more text is more convincing. Total bozosity. Force yourself to use no font smaller than thirty points. I guarantee it will make your presentations better because it requires you to find the most salient points and to know how to explain them well. If “thirty points,” is too dogmatic, the I offer you an algorithm: find out the age of the oldest person in your audience and divide it by two. That’s you’re optimal font size.
So please observe the 10/20/30 Rule of PowerPoint. If nothing else, the next time someone in your audience complains of hearing loss, ringing, or vertigo, you’ll know what caused the problem. One last thing: to learn more about the zen of great presentations, check out a site called Presentation Zen by my buddy Garr Reynolds.
Written at Atherton, California