The Industry Standard is back, and I wrote a post for it based on a panel I moderated last Friday. The topic of the panel angel investing, and a more qualified panel doesn't exist: Andy Bechtolsheim (the first investor in Google), Ron Conway, and Ian Sobieski. If you're interested in angel investors, you need to watch it. If nothing else, you'll learn why angel capital is like HotorNot and venture capital is like eHarmony.
Have you heard of the concept called “disrupt-then-reframe”? The theory is that you introduce a non-sequitur or unexpected element into your pitch and then immediately inject a call-to-action. The disruption theoretically neutralizes critical thinking and makes a person more susceptible to agree.
This concept is the result of a study by Barbara Davis and Prof. Eric Knowles in which they sold note cards door-to-door for a charity. When they told people that the cards were eight for $3.00, they had a 40% success rate. When they told people that the price was eight for three-hundred pennies and then said, “which is a bargain,” 80% of the people bought cards.
Give it a shot and let me know if the concept works for you. I suspect that venture capitalists will be very susceptible because they have attention deficits anyway. Here’s how it would work. Suppose that you’re negotiating an investment; just say: “Our pre-money valuation is 500,000,000 pennies which is a bargain for a Web 2.0 company.”
PS, did I tell you that you can read the Truemors web site for zero pennies which is a bargain? Just click here. :-)
At the Elite Retreat I gave an off-the-cuff answer to a question concerning getting the attention of venture capitalists. My buddy Wendy Piersall blogged about my answer, and it was a very popular. However, to truly help entrepreneurs, I’d like to provide a cogent list of the tips to get the attention of a venture capitalist.
Get an introduction by a partner-level lawyer. He should work at a firm that does a lot of venture capital financings like my buddies at Montgomery & Hansen. Best case email/voicemail: “This is the most interesting company I’ve seen in my twenty years of legal work for startups.” Venture capitalists dream about calls like this—it’s the equivalent of a scoring shot that knocks the goalie’s water bottle off the top shelf.
Incidentally, this part of the reason of why you should pay top dollar and use a well-known corporate finance attorney instead of Uncle Joe the divorce lawyer (even if he handles venture capitalists’ divorces). You’re paying for connections not only expertise.
Get an introduction by a professor of engineering. Best case email/voicemail: “These students are the smartest ones I’ve ever had in twenty years of teaching computer science. Larry and Sergei would have carried their backpacks for them.” Arguably this is even better than the lawyer’s call if the school has a history of receiving multi-million dollar donations from its alumni—if you know what I mean.
Get an introduction by the founder of a company in the venture capitalist’s portfolio. Best case email/voicemail: “My buddies are starting a new company, and I think it’s really cool.” For this to work, it would help if the person making the call is a successful company in the venture capitalist’s portfolio. Also, this would be a good time to tap your network in LinkedIn to find acquaintances in the portfolio.
Here’s a power tip regarding getting to venture capitalists using LinkedIn. Maybe it’s only me, but I hate when a connection of a connection of a connection wants me to take a look at deal. LinkedIn enables you to just go direct, and that’s my advice if you can show success (see below). If you can’t show success, the connection of a connection of a connection is useless anyway.
Show success. Suppose you can’t get any of the introductions mentioned above. Then the most compelling email/voicemail that you provide is this: “My buddy and I have been working in our garage, taking no pay, and with MySQL we built a site that is doubling in traffic every month. Right now, we’re at 250,000 page views a day after thirty days.” With this one sentence you’ve proven you can (a) make a little bit of money (“none”) go far, your architecture looks scalable so far (once in my career I’d like scalability to be a problem), and most importantly, the dogs are already eating the food.
Another way to show success is to hit it out of the park at Demo or the poor man’s Demo we call Launch: Silicon Valley, but this is a game that only a few dozen companies can play in every year. Finally, you can provide links to articles singing your praises, but this only means that you fooled the press, not that the dogs like what you’re serving.
Make sure your company is in the right space. No matter how you get to the venture capitalist, make sure that she is the right one for you. For example, if you have the cure for cancer, contacting a firm’s enterprise software guru isn’t the brightest idea, so get on the web and do your homework.
Use a short email. The ideal length of your email is three or fourth paragraphs:
What does your company do?
What problem are you solving?
What’s special about your technology/marketing/expertise/connections?
Who are you?
Here are some things not to do:
Attach a PowerPoint presentation. I don’t care if it even adheres to the 10/20/30 rule. Save it for the face-to-face meeting.
Use the word “patented” more than once. All it takes to file a patent is $1,000. No good venture capitalist believes patents makes your company defensible. They just want to learn (once) that there might be something worth patenting.
Claim that you’re in a multi-billion dollar market. Isn’t every company in a multi-billion market according to some study? At least every company that’s ever pitched a venture capitalist.
Provide a lofty financial projection. Most projections that I see show how you’ll grow faster than Google. Frankly, I wouldn’t provide any projection at all. It will be either too low and make your deal uninteresting or too high and make you look delusional.
Brag about an MBA degree. Most venture capitalists want to invest in hardcore engineers at the start. The MBAs can come later, so focus on engineering or avoid the subject completely.
Try to create the illusion of scarcity. Many entrepreneurs claim that “Sequoia is interested.” If Sequoia is interested, you should take its money. If it isn’t, then the venture capitalist won’t be either. Either way, don’t even think of blowing this smoke.
This posting is merely about the process of getting across the moat. To learn more about what to do once you’re there, read how to fix your pitch by Bill Reichert of Garage.
This is a picture of my copy of Founders at Work: Stories of Startups’ Early Days
As you can see, it’s a gold mine for great stories about entrepreneurship. Here is a list of some of my favorites. The major lesson: Entrepreneurship is all about tactics, hootspah, not knowing that things are not done “this way,” and making do with not enough money. You’ll LOL at points and wonder if a better title would not have been Flounders at Work.
Sabeer Bhatia (Hotmail) on how he decided whether to tell venture capitalists the real idea he wanted to get funded. “If they passed the litmus test of not rejecting us for the wrong reasons and said, ‘OK, we don’t mind that you’re young, we don’t mind that you don’t have management experience, only when they would start poking holes in the actual idea would we share the Hotmail idea with them.”
Woz (Apple). “All the best things I did at Apple came from (a) not having money, and (b) not having done it before, ever.”
Mitch Kapor (Lotus Development) on how much money he asked for from Sevin-Rosen. “I think I said probably $2 to $3 million. We had nothing. We hand an early-stage under-development spreadsheet, and me and Jon Sachs. So that was the biggest number I felt I could ask for without being totally absurd.”
Evan Williams (Blogger.com) on how he raised money to buy more servers. “We posted it on our website, and it said, ‘Hey, we know Blogger is really slow. It’s because we need more hardware. We don’t have the money to buy it, so give us money, and we will buy more hardware and we’ll make Blogger faster.’”
Tim Brady (Yahoo!). “The funniest thing I can remember was when there was a huge storm in May of ‘95, and the power grid went down for a few days. We had to go rent a power generator and take turns filling it with diesel fuel for 4 days. 24/7. We were laughing, ‘How many pages to the gallon today?’”
Mike Lazaridis (Research in Motion) on the importance of recruiting students. “’…What’s important to me are the signs on the back of the building.’ Of course, everyone recoiled from that. I explained to them, ‘I don’t really care if anyone else knows where the building is. All I want is the students to know where the building is.’”
Mike Ramsay (Tivo): “I remember one weekend, we took the entire company, what was about 60 people at the time, and we divvied them up and went to all the Fry’s stores in the Bay Area, because they were selling at Fry’s. We set up demo stations and the employees were giving demos. It was great because almost everybody had no experience of what it’s really like to sell in a retail store.”
Paul Graham (Viaweb): “Neither of us knew how to write Windows software, and we didn’t want to learn. It seemed like this huge steaming turd that was best avoided. So the main thing we thought when we first had the idea of doing web-based applications was, ‘Thank God we don’t have to write software on Windows.’”
On raising money: “The advice I would give is to avoid it. I would say spend as little as you can because every dollar of the investors’ money you get will be taken out of your ass…”
Catarina Fake (Flickr): “So Flickr started off as a feature. It wasn’t really a product. It was kind of IM in which you could drag and drop photos onto people’s desktops and show them what you were looking at.”
Brewster Kahle (Thinking Machines): “The blessing of Thinking Machines and the curse of Thinking Machines was that it had a lot of money. If you have a lot of money, then you can be detached from people that are going to pay you in the future.”
Chuck Geshke (Adobe) on the reaction of the spouses of Xerox execs to a demonstration of PARC technology in 1977: “They loved this stuff. They sat down and played with the mouse, they changed a few things on the screen, they hit the print button and it looked the same on paper as it did on the screen. They said, ‘Wow, this is really cool. This would really change an office if it had this technology.’”
[This is why you should always listen to your wife. And if you’re a woman, you should never listen to your husband.]
Ann Winblad (Open Systems). “So I get in front of these 60 or 70 guys and these guys are probably all in their 50s and I’m in my 20s, and we had a ‘blue light special,’ where we said, ‘If you give me a check today for $10,000, you can have unlimited rights to one of our modules.’ …I went home with, I think, like 12 or 15 of these $10,000 checks in my purse.”
James Hong (Hot or Not) on his first beta site. “My dad was the first person that ever saw Hot or Not besides Jim and me, and he got addicted to it! Here’s my dad, a 60-year-old retired Chinese guy who, as my father, is supposed to be asexual, and he’s saying, ‘She’s hot. This one’s not hot at all.’”
On using his parents to moderate the pictures: “I originally had my parents moderating since they were retired, and after a few days I asked my dad how it was going. He said, ‘Oh, it’s really interesting. Mom saw a picture of a guy and a girl and another girl and they were doing…’ So I told Jim, ‘Dude, my parents can’t do this any more. They’re looking at porn all day.’”
On his newfound dating success with hot women: “All of a sudden Hot or Not happened, and I was starting to date all these attractive women. I got a taste of it, and I realized that looks don’t make up for a good personality. Many of these girls were annoying. They were fun to hang out with, but I couldn’t have a conversation with them.”
[IMHO, James is the funniest person in the book.]
James Currier (Tickle). “When we started the company, we wanted to change the world, and we had all these tests on the site to help people with their lives. We had the anxiety test, the parenting, relationship, and communications tests. And no one came. …’Let’s do a test for what kind of breed of dog you are.’ …We put it online and 8 days later we had a million people trying to enter our site.”
Mena Trott (Six Apart) on early meetings with the current CEO of the company, Barak Berkowitz. “Barak said, ‘That’s great for a niche or personal lifestyle business, but we’re not interested in investing in that.’ At first we thought, ‘Who is this asshole? Why is he saying that to us?’”
These are just a few nuggets. The whole mine
Check out this great article in the San Jose Mercury News entitled “Venture Capitalists Switch to Startups—Many Are Surprised By Type of Work.”
My two favorite lines from the story are:
“I had no idea of the number of details that I’d have to deal with every day...”
“I used to sit and nod and think I could fake my way through another meeting with someone...”
The VCAT would prevent such surprises.
A blog called “This is going to be BIG!” contains a provocative counterpoint to my VCAT. Basically, the person scored Mike Moritz of Sequoia (ie, the guy who invested in Google) within the framework of my test.
This proves that you can always find an example to prove or disprove anything. But as mother used to say, “Guy, it doesn’t matter what people say about you as long as they link to your blog.” :-)
If you want additional proof that we’re in a bubble, here it is: young people are trying to get into the venture capital business again. I get several emails a week along these lines:
I’m about to graduate from college where I majored in economics. I’ve always been interested [what does “always” mean for a twenty-something year old, but I digress...] in business and entrepreneurship and ran my school’s entrepreneurship club. I’ve been working as an analyst for Goldman, Sachs, and now I’d like to get into the venture capital business to further my understanding of entrepreneurship and to help startups achieve success by tapping into my knowledge base. I am adept with PowerPoint, Excel, and PhotoShop.
They see a wonderful job: going to cocktail parties and networking events, flying in private jets, and getting sucked up to by entrepreneurs while pulling down a base salary of $500,000/year plus a piece of the upside of selling a YouTube for $1.6 billion. Who wouldn’t want such a job? (Frankly, I would too.)
First, a rare moment of Guy-Kawasaki humility: I am by no means “proven” as a venture capitalist. I’ve been in this game for about ten years, but I don’t have the mega-hit that “makes” a fund. Thus, I may not be a source of good advice about getting into this business, but when has the lack of knowledge stopped a blogger?
Regardless, here’s my advice to all the Biffs, Sebastians, Brooks, and Tiffanys who want to be kingmakers:
Venture capital is something to do at the end of your career, not the beginning. It should be your last job, not your first.
My theory is that when you’re young, you should work eighty hours a week to create a product or service that changes the world. You should not sit in board meetings listening to an entrepreneur explaining why she missed her numbers while you read email on a Blackberry and intermittently spew forth gems like, “You should partner with MySpace; I can also introduce you to a few of the losers in our portfolio.”
Furthermore, entrepreneurs should view any young person who opted for venture capital over “real world” experience with contempt. Why would you want advice from someone whose background consists of working in a college bookstore or cranking spreadsheets at an investment bank? Financial models are almost totally irrelevant because there’s no financial wizardry involved in making a good product and selling the heck out of it.
I’ve concocted the Venture Capital Aptitude Test (VCAT) to help people decide whether they are right for the venture capital business. If you’d like to take this test online, click here. My buddies at an interactive agency called Electric Pulp created the test for me. Knock yourself out!
Part I: Work Background
What is your background?
The ideal venture capitalist has an engineering or a sales background. Engineering is useful because it helps you understand the technology that you’re investing in—for example, is the entrepreneur trying to defy the laws of physics? Sales is useful because every entrepreneur has to introduce a product and sell it. For the third time in this blog, let me say, “Sales fixes everything.”
The three worst backgrounds for a venture capitalist are management consulting, investment banking, and accounting. Management consulting is bad because it leads you to believe that implementation is easy and insights are hard when the opposite is true in startups. Investment banking is bad because it leads you to believe that everything can be reduced to cells on a spreadsheet and that companies should be built for Wall Street, not customers. Moreover, investment bankers are oriented towards doing deals, not building companies. Accounting is bad because it leads you to believe that history not only repeats itself, it predicts the future.
Finally, there is the issue of the pertinence of an MBA to venture capital. The upside is that such a degree can provide additional tools and knowledge (such as calculating that 25% of $1.6 billion is $400 million) to help you make investment decisions and to assist entrepreneurs. The downside is that earning this degree (and I have one) causes most people to develop the hollow arrogance of someone who’s never been tested. All told, the downside of an MBA outweighs the upside.
Part II: First-Hand Experiences
You may have been in the right places, but you also need the right experiences in those places. Specifically, have you gone through these?
Part III: Necessary Knowledge
Finally, can you answer these questions for entrepreneurs? Because this is the kind of advice that entrepreneurs need. (Don’t worry: many current venture capitalists would fail this part.)
Results
Here’s how to assess your readiness to become a venture capitalist:
Here’s the bottom line: You should become a venture capitalist after you’ve had the shiitake kicked out of you. This will yield at least two positive results: First, you’ll stand out from the full-of-shiitake artists who entered the business when they were young. Second, you’ll really be able to help your portfolio companies—which is what venture capital should be all about. See you in ten or twenty years.
This is the video recording of the “Funding Your Dream” panel at Garage’s recent “Art of the Start Conference.”
The moderator is Mohanjit Jolly, Managing Director - Garage Technology Ventures. The speakers are:
This video has been tagged by Veotag. (The Veotag process continues to impress me as a way to make watching video much more efficient.) The topics include:
The world is running amok with entrepreneurs pitching every sort of Web 2.0, social networking, user-generated-content startup. It’s the attack of the bull-shiitake startup projections, so I’m losing my hearing; there’s a ringing in my head, and I get dizzy every once in a while. Before the world implodes (again), here is a top-tenish list of ways to create realistic projections in this Dotcom 2.0 world.
Under-promise and over-deliver. I have never seen a company meet or exceed its initial forecast. Entrepreneurs come up with numbers that they guess investors want to hear, and everything goes down hill from there. As a rule of thumb, dividing sales forecasts by one hundred and adding one year to the projected shipping date is about right for startups without a prototype. For startup with a prototype, dividing by ten and adding six months is about right.
Forecast from the bottom up. Figure out how many business development and sales meetings you can get per week--that is, four or five. Then multiply this number by the percentage that will be successful. Then add six months to close the deal. This forecasting method yields a much smaller number than the “conservative” method of assuming that you can get at least one percent market share.
Once you’re done with the plan, show it to the rest of the management team and demand honest feedback. This is the only way to make a bottom-up plan truly bottom up. Don’t let anyone--for example an ego-maniac chairman--make the company sign up for a plan that isn’t achievable with at least eighty percent certainty.
Don’t go too far out: twelve to eighteen months is the maximum. Anything beyond that is a waste of everyone’s time because you really don’t know when you’ll ship, and you can only fantasize about customer adoption. If you’re into five-year forecasts, go to work for a nice consumer packaged-goods company that’s been around for fifty years.
Plan to re-forecast every three months. Otherwise, forecasting is a joke: You get approval for an annual budget and then re-forecast it in the following board meeting. It’s better to know that re-forecasting is necessary once a quarter than to pretend that “this time we got it right.”
However, there is a danger in the rolling three-month forecast: Employees will start to believe that “investors don’t mind” constant shortfall (I hope you’re not this clueless). In a startup, everything is “near term.” The long term for a startup is a year--get used to this mentality.
Don’t let costs get in front of revenue. I know, I know: Your startup is going to be the fastest growing company in history, so you need to build an infrastructure to support the onslaught of customers. Dream on. Always run leaner than you think is necessary because your challenge will be creating demand, not fulfilling it.
Specifically, keep your net burn under $250,000 per month. How can I pick a number like this out of the air? On the other hand, what good does a vague answer do? You don’t have to believe me, but $250,000/month is the magic number for a “typical” venture-capitalist deal. Anything above this, and you’re probably throwing money away building infrastructure for non-existent customers. Just once in my career, I would like to hear, “We ran too lean and sacrificed growth” instead of what I hear all the time: “Costs got ahead of revenue, so we need to cut back but we’d prefer you tell us we don’t have to because it will harm morale.”
If the $250,000 guideline isn’t appropriate, then at least do a sanity check. Look for insane assumptions like achieving the fastest growth of any company in history and doubling your salesforce in a month. It’s tactical and practical to think like the salesperson on the street trying to make quota and an HR manager trying to fill positions because these functions are easy in Excel but hell in reality.
Collaborate with your investors. It’s just plain dumb to show your Holy Grail of a forecast to investors for the first time at a board meeting. You should feel them out in advance, and never be in the position of guessing what you think they want to see. Collaboration is especially important if you have bad news. Surprising venture capitalists with good news is never a problem.
Think in terms of per-unit profitability. It may be acceptable to lose money on every unit for a time, but at some point you have to make money on every unit. And don’t count on Google to buy you out because “getting lucky” is not a viable strategy. Also, you need to know exactly how much you’re losing on every unit so that you can measure progress towards profitability.
Plan for marketing costs. Don’t depend on wishful-thinking marketing based on virality, buzz, TechCrunch, and a demo at Demo. It’s true that some companies do achieve success this way, but we’ve heard of them because they are few and far between. To use a sports analogy, we all know who Michael Jordan and Wayne Gretzky are because they are rare examples, not because their story is common.
You need to explain your demand-creation process in a mechanical, not magical, way: ad rates, click through rates, unique visitors per month, conversion rates, revenue per customer, etc. Ultimately, the underlying assumptions in your marketing model is the key to the fundability and viability of your startup. “We’ll get it on TechCrunch and then viral marketing will be easy because we have such a compelling product” doesn’t cut it.
Create a one-page report and stick to it. It seems like thirty minutes of every board meeting is spent explaining a new way to report revenues, costs, and metrics. You would think that you could pick a few numbers that indicate what’s happening at the startup and see the historical trends--but not if you change reporting methods every month. One innovative way to fix this might be to reduce the CEO’s and CFO’s stock options by ten percent every time they change the report.
You’ll impress investors if you present your projections and your results in the same format. For example, if you use QuickBooks categories for your general ledger, then use these same categories for your projections. The good news is that your numbers will be much easier to understand; the bad news is that you’ll be a lot more accountable. :-)
Finally, you’ll astound investors if you show up with what’s called a “Waterfall Forecast,” a report that shows how your forecast has changed over time. (Full credit to Josh Kopelman for blogging about this.) I would add one more calculation to Josh’s model: showing the variance between actuals and projections so that the depth of your fantasies (or achievements) is more noticeable.
Never miss a cost projection. It’s relatively okay to miss a revenue projection because forecasting for a startup is truly a crapshoot. If you miss a cost projection, however, then you’re entering the realm of cluelessness. There is no excuse for it, barring an act of God like a factory burning down that produces the raw material that you need. Even then, you should have had a backup source. You should be able to come up with numbers like twenty percent for payroll taxes; $500/month for employee benefits; $3000/employee for equipment costs; and $25/square foot per year for rent.
Think big. Build on small successes at first, but if you go five years out, find a way to get to $100 million in sales. If you can’t imagine this level of sales without being high on crack, then you should face the facts: your company probably isn’t a “VC deal.” It may be a perfectly viable business, but it probably isn’t one for venture capital. The only way you’ll get to this five-year point is hand-to-hand combat with a ninety-day outlook at the start, but it’s important for everyone that a pot of gold can be at the end of the rainbow.
, which helped me considerably.
Blog reader Curtis Thompson asked me a very good question a few days ago: What should an entrepreneur say when she’s asked what makes her company defensible? This question is more and more common as more and more entrepreneurs start “Web 2.0 companies,” and investors torture themselves by wondering why they didn’t fund YouTube.
“Defensible Web 2.0 company” is an oxymoron in the sense of a quick, irrefutable response to the question. First, do yourself a favor and examine the source of the question. If it’s a pencil-necked rookie investor or associate with an MBA, it means that you’re dealing with someone who wants to make himself look smart. If it’s an experienced investor, then understand that he’s not expecting a bullet-proof answer but wants to see if you’re street wise, clueful, and cool under pressure (or a reader of my blog).
Thus, this seemingly simple question is one of the hardest for an entrepreneur to answer. A good response requires a combination of clairvoyance, street wisdom, humility, honesty, and cockiness. More than anything else, it’s a trick question to see what you’re made of. First, let’s discuss the three worst possible answers so that you don’t show that you’re made of stupidity:
“Patents make our business defensible.” Go ahead and file them because you may someday achieve huge success and therefore have the time and resources to go to court. However, the most valuable outcomes of a patent are often impressing your parents and filling up space in your MySpace profile. (The exception to this rule is biotech, chip design, and medical devices where a patent really means something.)
As a startup, it’s highly unlikely that patents will make your company defensible because you won’t have the time or money to do battle with a Microsoft-esque competitor. Sure, every few years you hear that Microsoft has to pay a company tens of millions of dollars, but “suing Microsoft” isn’t a viable (or attractive) business strategy.
“We’re the only guys who can do this.” This is a signal to investors that you’re clueless and don’t even know how to use Google. There are very few teams that have a monopoly on knowledge or implementation skills. This is like Terrell Owens claiming that he is the only wide receiver that can help a football team win the Super Bowl, so skip the grand delusions.
“[Big-name potential competitor] won’t compete with us; they’ll simply have to buy us out.” Speaking of grand delusions, this is even worse than TO’s. Espousing the theory that what makes your company defensible is that potential competitors will buy you out will put you in the main display of the Bozo Hall of Fame.
Now that you know what not to say, here’s a top-ten list of what to say. However, as my mother used to tell me, “Don’t be a khazer“ (Yiddish for “pig”) by using them all because your answer won’t ring true if you do.
“We know that there are no ‘magic bullets’ that provide defensibility.” This is a great way to start your answer. It shows that you’ve been around the block and understand how the world works. An experienced investor will breath a sigh of relief; an inexperienced one will want to call his professor.
“We have filed for patents, but we know that we cannot depend on patents as a major component of defensibility.” This is the perfect treatment of patents: You filed for them just in case you can someday use them as a legal tool, however you realize that until those halcyon days, you will have to fight with different weapons on the battleground called the market, not the legal system.
“We have an x month head start (mention “x month head start” only if x exceeds nine), and what we’re doing is hard. We know we have, at best, a temporary lead. It’s so hard that few established companies would defocus themselves by trying to do what we’re doing.” This shows that you’re both ahead of the market but clueful enough that leads don’t last. Plus, investors want to believe they’re ahead of the pack.
“We’ve built similar businesses before.” This makes the case that you have an advantage on your side: you’ve done this before, so that even if others are doing it, you can do it better and faster.
“We used to work at [insert big-name company], so we know it won’t be a competitor. In fact, we quit the company to start this because our management refused to address this lucrative market.” This is a twofer: believable inside info about a worrisome potential competitor and another way to claim domain expertise.
“We don’t know if we’re the only people who can or are doing this, but we’ve already signed up key customers like [insert the biggest names that you truthfully can] to use our product. You’d think they’d know of better solutions if they existed.” The point of this is use external, third-party confirmation of what you’re doing.
“We came to you because we believe that the backing of a firm like yours will dissuade other firms from investing in competitive companies. We also know that you have a world-class Rolodex as well as access to the best talent.” The key to this response is to say it with a straight face because it is a suck up, but investors loved to be sucked up to. This is a lot easier to say at a Sequoia Capital; Draper, Fisher, Jurvetson; or Kleiner, Perkins than at, say, Chaim, Yankel, and Pippel, LLP.
“It’s a race, and we’re going to work like hell to reach escape velocity. That’s the bottom line.” Whether you realize it yet or not, this is as good as it gets. What makes a company defensible is that it has scaled to the point where it’s achieved critical mass and has become synonymous with a market (online video: YouTube), sector (rental DVDs: NetFlix), or task (search: Google). And this achievement renders all the other bull shiitake you can fabricate essentially impotent if not downright laughable
When all the dust settles, the goal is to paint this picture:
You’re street wise, so you know that you can’t depend on patents.
You understand that very few companies are truly defensible for reasons other than because they either achieved critical mass or had a nine-month head start.
You have domain expertise, connections, and what you’re doing is hard.
You’re not the only team that can do this, but you’re in a better position than most.
You believe that you can build a business better than anyone (a little cockiness is necessary for an entrepreneur to survive).
One last power point: These explanations will only work on an investor that already fundamentally believes in what you’re doing. If the investor doesn’t believe, then there’s probably nothing that you can say that will convince him of your defensibility. Nor, frankly, is defensibility the sole reason why he’s not interested. Then you should just move on to the next investor with the full understanding that achieving success is the sweetest revenge.
I came across a product called LinkSViewer from a company called GroupScope. It is a visual network analysis tool that explores relationships between management teams, outside board members, investors, and companies. It is the first application of the GroupScope network analysis engine (the result of research at Cornell University and the current work of the company).
LinkSViewer is made possible thanks to Link Silicon Valley, who developed the database used for the network engine. LinkSViewer turns data into network maps that are easy to read and learn from. What you will discover are indirect relationships that may not be readily apparent without a network perspective. Using LinkSViewer, people can search, filter, summarize, email, and navigate any map to suit their needs.
These examples assume a case study format that explores the networks in depth based upon on the results of initial map views. A specific format is followed: (1) Map Title; (2) Map Specs (for replication purposes); (3) Initial Observations (at-a-glance key points); (4) map presentation (plus the appropriate map legend); and (4) discussion highlighting main points/conclusions and next steps. In the end the company offers a summary that highlights the main points from the analysis.
Disclaimer: GroupScope does not claim to know much about venture capital and the Silicon Valley. They are network analysts who try to ascertain key network structures from bipartite and tripartite maps. There is a science behind all of this, but they are more interested in enlightening the world about the power of networks. The goal is to simplify the analysis process visually and ultimately to help people understand their networks and hopefully network more effectively.
Here are three examples of the company’s work:
Apple and Google. What happens when Eric Schmidt joins the board of Apple? Apple and Google.doc
Kleiner Perkins, Sequoia, and Intel. What are the links between these three kingmakers? Kleiner Perkins, Sequoia, and Intel.doc
“Gods of venture capital” and “Church of Guy”. (I didn’t name this!) How does my network compare to the gods’? Gods of venture capitalist & Church of Guy.doc
I’ll be the first to admit I don’t quite know what to make of this, but it is cool. One more cool thing: I posted this blog entry while in a Lufthansa plane flying from Frankfurt to Mumbai. I have never had Internet access while flying before.
![iStock_000000557735Small[1].jpg](http://blog.guykawasaki.com//iStock_000000557735Small[1].jpg)
This is Google Video week on my blog...here’s another one. This is Nolan Bushnell, the founder of Atari and Chuck E. Cheese, at Garage’s “Bootcamp for Startups” in London on September 5, 2000.
It‘s fair to consider Nolan the father of arcade video games; more info about Nolan is here at Wikipedia and via the Tech Museum.
In this video, Nolan discusses the following topics in his own unique way:
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:
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.
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
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.
Here's another MP3 recording. It is my reading of Chapter 7: The Art of Raising Capital from The Art of the Start. It covers some of the same material as my blog entries, but sometimes hearing is believing.
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 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 your 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
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