Steve Brotman interview: Why you need a plan.

Steve Brotman is a Managing Director of Greenhill & Co., and co-founder and co-head of Greenhill SAVP, a fund that invests in early-stage technology and information services companies. Steve currently sits on the board of four companies and the MIT Enterprise Forum’s New York chapter. Steve founded AdOne Classified Network, one of the nation’s leading classified ad Web sites, which was acquired by Hearst, Scripps, and Advance-Newhouse. Steve is a graduate of Duke University and has a joint JD/MBA from Washington University.

UpStart: “In what ways do you think it benefits a startup team to go through the process of developing a business plan?”

Steve Brotman: “A business without a plan is like a boat without a rudder. You’ve got to have a plan! Developing that plan is the critical first step of business creation. It commits you and your team to an explicit strategy and approach. It ensures that your founding team is aligned behind common goals. It defines both what you will do, and what you won’t do. And it establishes priorities, so startups focus time and resources on what’s most critical for their success. Finally, it allows founders to communicate their vision to investors, advisors, employees, vendors and partners. That doesn’t mean the plan can’t or won’t change. So be flexible, and when a major change needs to happen, circle the wagons, and put together a new plan.”

UpStart: “Would you ever invest in a company without a business plan?”

Steve Brotman: “It’s doubtful. In the earliest stages of a company, founders start with the equivalent of an idea on the back of a napkin. But every startup needs help, even if that’s just from the landlord and lawyer. Getting that help demands more than just what’s on the napkin—it requires a business plan. That said, some entrepreneurs go overboard on their plans and projections, and prefer to write about their plans versus doing something about them. That’s not what a plan is about. The goal is uniting your team behind some shared vision and objectives, and how you will likely meet those objectives, and having some document to show parties you’d like to bring on board that will increase the likelihood of your venture’s success.”

Chip Hazard Interview: Pitching your strategy

Chip Hazard has been in venture capital for over 15 years and has an impressive track record of success. He’s currently a general partner at Flybridge Capital Partners, a leading early-stage venture capital firm. He currently sits on the board of eight information technology companies. Previously, Chip served as general partner at Greylock Partners and was a consultant at Bain and Company. Chip is a graduate of Stanford University and The Harvard Business School—where we met—and where he graduated at the top of his class as a Baker Scholar and a Ford Scholar. You can read Chip’s blog at www.hazardlights.net.

UpStart: “What advice do you have for entrepreneurs pitching their strategy?”
Chip Hazard: “As an early-stage venture capital investor, I regularly meet with entrepreneurs that are just getting their businesses off the ground. During these meetings I am often struck by how much trouble the founders have articulating their strategies in a clear, concise, compelling way. I encourage entrepreneurs to focus on delivering a simple vision of what they are trying to do and why it is important, what markets are being targeted and how broad these markets are, and how the idea, customer value proposition and market translate into a compelling business opportunity. It is important to avoid in this introduction the deep technical details of how the product or service works, but rather focus on the connection between a large unmet need and your unique solution. The MadLibs exercise outlined in this chapter is a great tool to drive this exercise, resulting in a simple, short, clear message.”

UpStart:  “Please provide an example of a great strategy summary.”

Chip Hazard: “I always felt Skype did this well. Using your format, from the beginning their message was something like: For people who want to connect with friends and family around the world, Skype is a person-to-person Internet telephone service that is free, simple and easy to use.”

Bo Peabody interview: Business models

Bo Peabody is co-founder and Managing General Partner of Village Ventures, an early-stage venture capital firm. Previously, Bo founded / co-founded a string of startups, including: Tripod (one of the first social networks, later acquired by Lycos), Waterfront Media, VoodooVox, FullTurn Media, and UplayMe. He’s also an owner of Mezze, Inc, which consists of three award-winning restaurants. Bo wrote a book for entrepreneurs called Lucky or Smart? published by Random House. He is a graduate of Williams College.

UpStart:  What advice do you have for entrepreneurs pitching investors about their business models?

Bo Peabody:  “Entrepreneurs have the counterintuitive task of having to think big and act small. For any business that is going to attract venture investors, a big vision is important. But that’s the easy part. The much harder job is figuring out how to distill that vision into an actionable plan that has clear, incremental levels of success. Entrepreneurship is like a video game…you need to know what the levels are and then reach each one before going on to the next.”

UpStart:  Are there particular business models that you prefer to invest in?

Bo Peabody: “At Village Ventures, we prefer to invest in business models that are tackling mature markets. We’d rather bet on our ability to back the right team that can knock off existing competition than bet on our ability to see around corners. For instance, this is why we invest in vertical publishers in the interactive media space, rather than social media companies.

How to create and use a one-page synopsis

Once you find a contact  (e.g. a potential investor) who has heard your elevator pitch and expressed interest in learning more about your new business, it’s time to introduce the one-pager. The one-pager is a brief synopsis of your business plan, used for a very specific purpose:  To get someone to meet with you, so you can present to them in-person.

And yes, it really does need to be on just ONE PAGE!! That’s the whole point. Don’t try to jam everything from your business plan into this document. It’s not supposed to be comprehensive. Instead, think of it as a teaser—a sales document used to whet the appetite of your audience and leave them wanting more. Write in short, simple sentences. Make sure it’s easy to read and understand. Use headlines, so readers can scan it in seconds. Take out any unnecessary words, or empty descriptors (e.g. “the leading…”, “the best”…. “amazing…”). Here’s what to include:

1.) Team. Name the founders and their titles and primary roles. List just the experiences they’ve had that say to the reader “this person is a great fit for this role, at this startup, given where they are right now”. If you’ve got room, and impressive advisory board members, list them and the primary roles they’ll play. Here’s an example:

TEAM

XYZ’s founders are JOHN DOE (CEO, “mr outside”, sales and marketing) and JANE DO (COO, “mrs inside”, product development and operations). They developed XYZ in after working together at ABC startup, where John served as President and VP Marketing, and Jane as VP Operations. Together they helped launch ABC and grew it to $10 million in revenue within five years. Previously, John ran marketing at BlahBlah. He’s a graduate of IO University. Jane’s previously founded DIY Software. She has an MBA and a BA from AAA University. Advisory board members include Mary Smith (sales) and Sam Jones (design).

2.) Opportunity. First explain the context – including the market size, growth, and critical trends. Then describe the customers you’ll serve, and their needs. Finally explain why the needs of those customers are not being satisfied today. Here’s an example:

OPPORTUNITY

There are over X00,000 self-published authors in the US and the UK, and their numbers are growing at over Y% per year. Services such as Lulu and CreateSpace make it easier for authors to self-publish, but only allow them to generate Z% margins. By working with LightningSource, self-published authors can generate margins three times higher. However, the process of shepherding a book through the LightningSource requires technical skills most authors lack.

3.) Elevator pitch. Explain how you intend to give customers what they need, and how you’ll make money.

XYZ Corp

XYZ sells online tools that let authors self-publish via LightningSource quickly and easily.  XYZ runs a blog and newsletter with self-publishing advice, and generates revenue by selling online software packages that range from $150 to $500.

4.) Progress. Explain what you’ve done to date. Focus on the metrics that investors care about, not the pain you’ve endured. Spent a year and half your savings on this project? That’s your problem, not theirs. Instead, tell them you built your team, designed your prototype, and have paying customers. Quantify your results wherever possible. Here’s an example:

PROGRESS

XYX launched in January of 201X. Within 9 months, we attracted 15,000 free subscribers. In July of 201x, we conducted a test of our paid services. We got a 4.5% response rate, which exceeded our expectations.

5.) The ask. Describe what you are looking for now, why, and how to proceed. For example:

FUNDING

XYX is seeking $350,000 to fund the next 12 months of operations. During that time, we’ll test and roll out our marketing campaigns, and reach a revenue run-rate of at least $50,000 per month. At that point we plan to raise our next and final round of $3-5 million. To learn more, please contact John  Doe at john@xyzcorp.com or 222-333-4444.

When you are finished, save the one-pager as a PDF. That way, when you send it via email your recipients will see it the way you created it, no matter what kind of software they are using.

Slide zero

You’ve secured a meeting with your audience—let’s say a potential investor. Before you pull out your business plan pitch, you’ll have a window of time from when you shake hands with your audience to when you present the first slide in your business plan presentation. I call this window of time “slide zero.” Slide zero is something most people forget about, but it can have a significant impact on the outcome of your pitch. Here are two examples from the real world:

• Allison. It was one of those mornings for Allison. At 9:00 a.m. she had a pitch in the mid-town office of a leading venture capital firm. At 8:50 a.m.  she was still stuck in downtown traffic, thanks to an intense thunderstorm. She arrived late, soaked and frazzled. When the investor came out to meet her, she started a conversation about weather. That conversation continued as they walked down the hall and took their seats in the conference room. Knowing they were behind schedule, Allison jumped right into her pitch. The pitch came off a bit stiff and impersonal, and a day later Allison got an email telling her it was a great idea, but they’d like to see her make more progress on it.[1]
• Vincent. Before his meeting with a potential investor, Vincent did his homework. He learned that the investor had made a previous investment in a company—similar to his—that had failed. He also discovered that he and the potential investor had a mutual friend—a well-respected entrepreneur in a related industry. Vincent arrived early enough to camp out for a coffee nearby and gather his thoughts. When he met his investor in the lobby, he mentioned their mutual contact. The man lit up and told Vincent about a time he had sat on a panel with their mutual friend. Then Vincent mentioned the previous investment and asked what had gone wrong. The investor told him that when the company’s customer needs changed, the company’s technology took too long and cost too much to modify. Vincent made a mental note to demonstrate the flexibility of his software. He nailed the pitch and landed the investment.

So, what should you cover on slide zero?

• Establish rapport. If you have a mutual contact that will serve as a confidence-building bridge between you and your audience, mention it. Demonstrate your social skills. Ask an insightful question with a follow-up to show you were listening. See the recommended reading list at the end of this chapter for good tips on how to act, talk, and think when you are in the spotlight.
• Apply your super-sleuthing skills. During the banter, try to ferret out a little information that could be helpful to your pitch. Try to find out about experiences or perspectives that could shape the way your audience will react to your material. Are there land mines you should avoid? Hot buttons they’ll want you to cover?

---

[1] That means “no” in venture capital-speak.

5 business plan pitch tips that may surprise you

When it comes to pitching business plans to potential investors, a lot of so-called conventional wisdom is simply dead wrong. Here are a few pitch pointers you might find counterintuitive, but you’ll definitely find helpful:

1.) Aim low. If you make outlandish claims, such as touting yourself as the next Google, investors will be more inclined to poke holes in your arguments. And trust me, they will find holes. Instead, sell just hard enough to get investors to nod their heads and think “yes, that seems reasonable.” Be confident, but not cocky.

2.) Be picky. Getting in front of the right investors is at least half the battle. That means people who invest the amount you are asking for, in the industry you’re in, and they invest in companies at your stage of development. Do your homework, and make sure there’s a fit, to avoid wasting everybody’s time.

3.) Less is more. Emphasize one or two points on each slide. No more. These are your friends: White space, photos and charts that make complex ideas simple, bullet points with less than ten words. These are your enemies: Small fonts, confusing graphics, too many words, your company logo repeated 15 times, and consultant speak (e.g. “leverage”, “value-added” and “synergy”). Pitch the headlines, with about 15 slides, in less than 20 minutes. If investors want more detail, they’ll ask for it.

4.) Your deck shouldn’t make sense without you. A good pitch deck is an outline. It reminds you what to say at each step of your presentation, but doesn’t compete with the words you speak. In a great pitch, your eyes should connect with the eyes of your audience about 90% of the time. If all eyes are glued to the slides, you are probably not generating much excitement.

5.) Let investors help you pitch. Great sales people get customers talking, thinking, and wanting more.  The same is true for pitching to investors. Encourage investors to discuss their perspectives and their experiences with related businesses. You’ll learn more, and raise more.

Sell, don’t tell: 5 ways to improve your business plan pitch.

1.) Understand your audience. One of the first rules of selling is that you’ve got to know where your customers are coming from. If pitching to investors, find out how much they typically invest, what they’ve invested in before (e.g. stage, industry) and how those investments have worked out. Probe to determine their turn-ons and turn-offs, and tailor your pitch accordingly.

2.) Share your story. Explain how you came up with the idea. Take your audience through the process that led you to your “aha” moment, and you’ll increase the chance they’ll catch the fever.

3.) Appeal to both reason and emotion. In the early part of your pitch, focus on tight logic. Explain why the environment is attractive (e.g. big, growing market, trends in your favor), who the customers are, what they need but can’t get today, and why your product or service will satisfy those customer needs. Then, switch gears for a moment. Step away from your slides, and bring your product to life. Ramp up the energy level in the room. Show your audience a quick demo, profile a customer before and after they use your product, or share a short video with music.

4.) Be humble. It’s great to be confident about your idea. But don’t forget humility. Be honest about the risks involved, the theories yet to be proven, and the hurdles to be overcome. Show that you are aware of what lies ahead, including a degree of uncertainty. More “here’s a key challenge, and how we’ll approach it”, and less “we’ve got all the answers”. You’ll be more likely to have audience members pulling for you to succeed, instead of trying to find fault.

5.) Ask for the sale. If you are raising capital, avoid ending your pitch with a fizzle. Don’t just say thanks for your time. Ask if they’d like to invest. Request introductions for advice, capital, or customers. Remember your ABCs – always be closing.

Got other advice on how to make sure you’re selling, not just telling?

4 things to consider before you ride on the wings of angels

Before you seek financing from angel investors or angel networks, make sure the fit is right. If you or one of your co-founders has built a business before, sold it, and made profits for your investors, you can probably break the rules. Otherwise, take note of the following guidelines:

1.) What stage are you at? In general, your chances of raising angel funding are much greater if you’ve already got a product developed. It doesn’t have to be full-blown, but the most critical features should be operational. Get that product created any way you can – with financing from your savings, your credit cards, or from friends and family, by giving away equity to partners, by bartering for services – whatever it takes. Just have it up and running.

2.) What’s the money for? As per the paragraph above, many angels are reluctant to spend money to help you build your site. They’d rather see you put their money towards proving customers want your product. Use angel money to find out what percentage of people who see your product use it, pay for it, stick with it, and tell friends about it. Have quantifiable targets in mind, and measure your results.

3.) How much do you need?  An angel round is typically between $100,000 and $750,000, and individual angels tend to write checks for $25,000 to $100,000 each. Looking for less? Go back to friends, family, savings, etc. Looking for more? Either find a way to make do with less, or take a shot at raising venture capital.

4.) What’s your exit strategy? Your rich Uncle may invest because he loves you, but angels have other goals in mind. Yes, many angels get off on helping to create new business, but for the most part they are economic animals. They want a return on their investments. How and when will you turn their $25,000 into a much bigger amount of cash? You can’t know for sure, but have a reasonable hypothesis in mind before you pitch.

Sequoia Capital’s business plan advice

Sequoia Capital is the venture capital firm that backed Google, Yahoo, YouTube, eHarmony, LinkedIn, and PayPal, among many other winners. Here’s some of their advice about business plans. As you’ll see, the format and content they recommend is very similar to what I’ve suggested in previous posts. For example, forget the 30+ page word document, and stick to a short slide presentation that’s simple, clear and concise (easy on the text!). The content elements they recommend are also in-line with what I’ve suggested, though in a slightly different order. They don’t put the team up front, for example. One reason for that is the people who land a meeting with Sequoia tend to be well-connected entrepreneurs with proven track records, so they are already “known” to a large extent. I like their section called “Why Now”. I may borrow that one…

We like business plans that present a lot of information in as few words as possible. The following business plan format, within 15-20 slides, is all that’s needed:

Company Purpose

• Define the company/business in a single declarative sentence.

Problem

• Describe the pain of the customer (or the customer’s customer).
• Outline how the customer addresses the issue today.

Solution

• Demonstrate your company’s value proposition to make the customer’s life better.
• Show where your product physically sits.
• Provide use cases.

Why Now

• Set-up the historical evolution of your category.
• Define recent trends that make your solution possible.

Market Size

• Identify/profile the customer you cater to.
• Calculate the TAM (top down), SAM (bottoms up) and SOM.

Competition

• List competitors
• List competitive advantages

Product

• Product line-up (form factor, functionality, features, architecture, intellectual property).
• Development roadmap.

Business Model

• Revenue model
• Pricing
• Average account size and/or lifetime value
• Sales & distribution model
• Customer/pipeline list

Team

• Founders & Management
• Board of Directors/Board of Advisors

Financials

• P&L
• Balance sheet
• Cash flow
• Cap table
• The deal

Lottery vs. venture capital

I was just reading in Crain’s that only 19 companies in the NY-metro area closed early-stage venture capital funding last quarter. 19!!!

That got me thinking, are you better off playing the lottery? The numbers aren’t apples to apples, but just for fun, consider this:

• 1,600 people per year in the U.S. win at least $1 million in the lottery.
• 483 companies raised seed stage VC funding in 2008, and another 1,072 got early stage funding.

Not far off!! So, unless you’re sure you’ve got the right stuff (e.g. team with previous startup wins, chance to generate $100 million+, significant traction to date, a network of vc contacts, etc.) – stick to bootstrapping or angel funding through your early stages.