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.

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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.


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.


Mo Koyfman interview: Startup teams

May 19, 2010

Moshe “Mo” Koyfman is a principal at venture capital firm Spark Capital, where he leads investments in Web services such as www.aviary.com. Prior to joining Spark, Mo spent six years at IAC, most recently as Chief Operating Officer of Connected Ventures, parent of CollegeHumor.com, Vimeo.com and BustedTees.com. Mo is a graduate of The Wharton School and The College of Arts & Sciences at The University of Pennsylvania.

UpStart: What do you look for in a startup team?”

Mo Koyfman: “A great team is the first thing I look for in an investment opportunity. Successful businesses are built by extremely talented people and that’s where my investigation begins. I specifically like to see great co-founders, as there seems to be a unique chemistry that develops with the right mix of leadership at the helm. If technology is an integral part of the product, I also like to see at least one of the founders with a strong technical background. It’s certainly ideal if they’ve had prior success, but not a prerequisite. And it’s important that they’re still hungry, no matter how successful they’ve been previously. I also look for a balance between tenacity and passion on the one hand and a willingness to listen and learn on the other, as many mistakes will be made and the company will undoubtedly have to hear their users / customers and pivot over time.”

UpStart:  “What do you like to hear from a team when they present their business plan?”

Mo Koyfman: “First, I like a business plan to be clear, informative and brief. If your PowerPoint is more than 20 pages, you haven’t done a good enough job of crystallizing your plan. In the team section of the plan, I like to know how the team came up with the idea. I tend to prefer ideas hatched from real needs, as opposed to ideas developed in top-down brainstorm sessions. I also like to know how the team knows each other, to get a sense for their shared vision, and to understand how their skills are complementary. I also prefer when teams come with a built product rather than just a plan—particularly for Internet service companies, where it’s become easier and cheaper to build basic products right out of the gate. I like to see a team scrappy enough to have built a prototype themselves, with the least amount of money possible.”


How to create and use a one-page synopsis

May 7, 2010

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

May 7, 2010

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.


The 5 components of a (modern) business plan

May 7, 2010

Forget the 40+ page term-paper style business plan. Here’s what you’ll need instead:

1. Pitch deck. A Powerpoint presentation with about 15 slides, that takes about 20 minutes to pitch. The deck should be minimalist in nature—clean and simple. The slides in your deck will serve as a roadmap for your presentation, but the most important points will come from your mouth, not from words on slides.

2. Financial model. This is a set of financial projections built in Excel and used as a source of charts for your investor presentation. You’ll have time to provide only an overview of your projections in your pitch, but you may forward the entire model to interested investors. The financial projections will include a statement of profit and loss (P&L) projected for five years. You may or may not want to add a balance sheet and a cash flow projection,[1] but either way you’ll determine and demonstrate how much cash you’ll need and when you’ll need it.

3. Elevator Pitch. As you look for advice, investors, business partners, customers, etc., you’ll be networking a lot—both online and offline. You’ll reach out to your close contacts, of course. But you’ll also want them to reach out to their contacts on your behalf, so you’ll need to explain your story in a way that’s easy for them to grasp and pass along to others. The key to making this work is to have a great elevator pitch. To make it great, you must be able to communicate the essence of your venture in a way that’s clear, fast, and compelling.

4. One-page synopsis. Once you find a contact who has heard / read 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 pitch deck. It’s designed with one very specific purpose: to get someone interested in taking a meeting with you (see warning below—don’t send your pitch ahead of time). Don’t try to jam everything from the pitch deck onto one page. Instead, think of it as a teaser—a sales document to whet the appetite of your audience and leave them wanting more.

5. Due diligence documents. This is material that lets an investor learn more about you, your concept, and your progress to-date. There are no standards for what this contains or how it is presented, but it might include things like market research, customer lists, access to prototypes, profiles of your competitors, your financial model, resumes of team members, contracts with customers or suppliers, etc. Sophisticated investors will often provide a due diligence list for you to follow.


[1] If you your cash cycle is fairly neutral, such as if you get paid immediately upon closing a sale (e.g., by credit card), you may be able to get away with using just a P&L. If on the other hand, you have a gap between when you pay expenses and get paid by customers, you should build a balance sheet and statement of cash flow.