Lean startups 101

June 3, 2010

In venture capital and tech incubator circles, the concept of lean startups is all the rage. We’re fans of the idea, and think it has merit well-beyond Silicon Valley.

The basic idea behind the lean startup approach is to get a product into the hands of customers as quickly and inexpensively as possible, find out what customers think of your product, and then modify that product as needed.  The point is to find out if there’s a match between your product and what the market wants, with as little risk as possible. Here are a few lean startup tactics:

1. Design a minimum viable product.  Hold off on all the bells and whistles you’ve envisioned. Strip your design down to the bare essentials you’ll need to determine whether customers will like / use / buy your product.  By sticking with this minimum viable product, you can determine the fit between what you’ve got and what customers want faster and cheaper.

2. Develop quickly and inexpensively. Making lipsticks, t-shirts or beverages? Start with “stock “materials, like applicators or bottles, to avoid time consuming and costly production set-up. Customize later, once you’ve proven that customers want what you’ve got. Building an online community? Use a platform like Ning that’s free or at least cheap; if customers love it, you can build a custom site down the road.

3. Change on the run. It’s pretty rare for founders to dream up a winning product from the sidelines. More often, it’s necessary to make a series of modifications in reaction to the way customers react to initial offerings. That could mean changing or adding features, pricing, positioning, distribution, etc. One of the keys to doing this well is to set performance targets (we want to sell at least 1,000 units per week by the end of a three month test), measure actual results (we only reached 500 units; customer surveys showed we need to switch our pricing from subscription to a la carte) and then decide whether / how to proceed (change pricing policies).

Lean startups and bootstrapping work well together. For example, both tend to advocate getting a product to market first, and then raising capital for expansion—as opposed to raising a lot of money for design and development, which often takes longer and hampers flexibility.

Advertisements

4 reasons not write a 40+ page business plan

May 19, 2010

When I started helping entrepreneurs plan new companies, I discovered something curious—there was a lot of confusion about what, exactly, a business plan should look like. A business plan was once a lengthy, prose-based document written with word processing software like Microsoft Word, similar to a 40+ page college term paper. Sophisticated entrepreneurs and investors moved away from that format, but the typical entrepreneur on Main Street didn’t get the message.[1] That’s no surprise, since many books on business plans still recommended a term-paper-style business plan. Were the books simply out of date?

To make sure, I decided to ask the experts. I surveyed over 50 people, including venture capitalists (VCs) from leading firms like Kleiner, Perkins, Caufield & Byers, noted angel investors such as the backers of Method and serial entrepreneurs like John Osher, creator of the Crest SpinBrush. The results: 95 percent recommend that startups use a presentation format, not a term-paper-style plan.[2], Here’s why the pitch deck has taken the place of the text document:

  1. A term-paper-style business plan takes too long to read. In this age of rampant Attention Deficit Disorder and communications overload, asking someone to read a 40+ page paper is pushing it. Why burden someone whose help you are seeking? And why take the risk that your plan won’t be read at all?
  2. A term-paper-style plan takes too long to write and update. Writing 40+ pages of prose takes months. Plus, a business plan isn’t a static document—startups modify their plan continuously. Updating a page or chapter of text can take hours. Updating a bullet point or graphic in a slide presentation takes minutes.
  3. Pitching in person is far more persuasive than sending a document for people to read. A deck is made for presentations, while a term paper is about as useful in a pitch as a doorstop. When you deliver a presentation in person, you can see how people are reacting, modify your pitch on the fly, address concerns or confusion immediately, and get feedback.
  4. Presentations force startups to set priorities. If you are working with a 40-page  plan, you can drop in every great idea that comes to mind. But when it comes time to explaining your ideas—and to executing those ideas—you’ll have to focus. Culling your ideas down to those worthy of inclusion in a short presentation is a great way to start prioritizing.

Still don’t believe me?  Sequoia Capital is the venture capital firm that backed Google, Yahoo, YouTube, eHarmony, LinkedIn, and PayPal, among many other winners. On their Web site (http://www.sequoiacap.com/ideas), they offer the following advice:  “We like business plans that present a lot of information in as few words as possible …  15-20 slides … is all that’s needed.”  And finally, New York Angels is one of the leading groups of angel investors in the U.S. They’ve invested over $20 million in 65 early-stage, New York-area technology and new media companies. At www.newyorkangels.com you’ll see the following suggestions about the format of business plans:  “Slideshows with under 20 slides are generally most effective … Use the limited time you have for your presentation to emphasize the compelling factors about your investment opportunity and save unnecessary technology details for future meetings…”


[1] There are exceptions, such as requirements from some lending organizations like banks or the SBA, but they typically lend to companies with at least three years of operating history, not to startups.

[2] Most of the others said they like to see a two- to four-page executive summary.


Steve Brotman interview: Why you need a plan.

May 19, 2010

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.”


Frances Cole Jones interview: Making persuasive pitches

May 19, 2010

Frances Cole Jones is the founder of Cole Media Management, a consultancy that prepares clients for television and print interviews, IPO road shows, and investor pitches. She’s also the author of How to Wow: Proven Strategies for Selling Your (Brilliant) Self in Any Situation, and The Wow Factor: The 33 Things You Must (and Must Not) Do to Guarantee Your Edge in Today’s Business World. Jones has prepared clients for appearances on Oprah, Good Morning America, The Today Show, ESPN, Larry King Live, The Discovery Channel, Access Hollywood, E! Entertainment, CNN, and BBC News.

UpStart:  “You’ve advised hundreds of clients on how to make effective presentations. What’s the most common mistake you see?”

Frances Cole Jones:  “Reading off of their slides. In my dream world I don’t want anything on a client’s slide coming out of their mouth. We’ve all been reading since we were about six years old—being read to drives us mad. Slides are meant to enhance talking points, not replace them.”

UpStart: “Are there any quick fixes you recommend that can have a big impact?”

Frances Cole Jones:  “55 percent of your impact comes from what your body is doing while you are speaking. Only seven percent comes from the words we say. So body language is critical. Keep your hands where people can see them. We trust you when we can see your hands; we don’t trust you when we can’t. Also, remember the power of storytelling. When you tell a story, filler words like ‘um’ and ‘uh’ magically disappear. Speak from your own experience, and ask yourself why your audience should care.”


Chip Hazard Interview: Pitching your strategy

May 19, 2010

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.”


Dany Levy interview: A business plan should evolve.

May 19, 2010

Dany Levy is the founder and Editorial Director of DailyCandy, a daily newsletter with insider advice about style, food, fashion, and fun. Dany started DailyCandy in 2000 with a simple vision: one thing in your inbox telling you what to do that day. In 2008, Comcast acquired DailyCandy for a reported $125 million. Today DailyCandy has over three million subscriptions. Prior to founding DailyCandy, Dany worked for New York Magazine and Lucky, and wrote for The New York Times, Martha Stewart, and Vanity Fair. Dany is a graduate of Brown University.

UpStart:  How did you make use of a business plan at DailyCandy?

Dany Levy: “A business plan should evolve depending on the stage of a business and on the audience it’s written for. I started DailyCandy myself, at my kitchen table, with no employees. At that point, my business plan was just for me. It was a two page document describing what DailyCandy was, to help me clarify and narrow down what the product should be. That plan helped me stay focused, but it also left room for flexibility. I just concentrated on writing great editorial, and spreading the word. A year later, I developed a more comprehensive business plan, as I began to sell advertising and court suitors. Still, I kept it short. I figured investors needed to “get it” after the first few minutes. As the business grew, and I took on institutional investors, I needed more detail, like financial projections and strategies for marketing and sales.”

UpStart:  Did developing a business plan provide any other benefits for you?

Dany Levy: “Yes. Most of all, it helped me learn. That was one of the greatest things about building a business – the steep learning curve. And the business plan made that learning explicit. I got a lot of help with my plan from my CEO, Pete Sheinbaum. At the time, I handled editorial, and he handled business matters. I remember learning to measure the cost of acquiring customers, and the value of those customers. I think at the time one customer was worth somewhere around $10.37. The next time I attended a DailyCandy event, I looked around the room and imagined a price tag on every girl’s head reading ‘$10.37’. Understanding the economics of the DailyCandy business gave me a much broader and deeper sense for what we were doing, and that ultimately paid off far beyond my wildest expectations.”


Bo Peabody interview: Business models

May 19, 2010

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.