Do you call?

Do I call the potential customer/investor/partner?

If you have to ask, the answer is YES.
What's the worst that can happen?
Rejection? A "No"

Guess what,
It's not that bad.

Just "No"

Talk, ask, Find out what's going on. Even if it's an answer you don't like. It IS an answer.

Then, move on with the rest of your plan.

Never let your business live or die at the mercy of any one individual, supplier, customer, or investor.

"Not your fault" is cold comfort when closing out your business, and shutting the doors for the very last time.

When you're the best, everything is your fault.

Keep this customer, and the one you got last week, and the one you kept the week before that.
Find the next customer, and the next.
Find a second supplier, and a third.

Keep calling, keep asking. If everyone says no, something's wrong. If everyone says yes, something's wrong. Get enough yes answers and sales to keep the company around. Get enough no answers to know where you stand.

Pick up the phone.

Competition and competitors

You always have competition. Even if you admit it or not, your company has competition. Saying you have no competitors shows how little you understand the industry, market and customer.

Do nothing
This is always a competitor. The customer can always choose to keep doing things they way that they have. It's familiar, no switching costs, no educational costs, nothing has to change for them, internally or externally.

Real competition: Anything/everything that goes after the same money used to pay you. There are some dollars you'll never be able to compete for, unless you're in that business specifically: rent, utilities, raw materials, etc. You're not going to get the money spent on these resources, no matter how hard you try. But take a look at the customer's budget, which money can be transferred to your pockets? What else are they purchasing? Where are they spending their resources?

I had an entertainment company during school. It was eye opening when I realized was I wasn't just competing against other events. My competition was movies, homework, family picnics, vacation trips, holiday season, video games, etc. Anything that would take my customers away, anything they would want to do other than use the services I provided. After a while, I realized it wasn't a huge money maker, but it did teach me a valuable lesson.

If you can't figure out what your customer is doing instead of buying from you, ask. If the customer isn't buying from you, there's probably a good reason.
That's your competition.

Prepare for Success

An entrepreneur contacted me the other day. He had gone to a trade show hoping to find a partner for a pilot program. Instead him and his minimum size booth (don’t do this) ended up being one of the hottest companies at the show. Everyone seemed to be approaching him, and a lot of buzz and activity was happening.

Then he realized he didn’t know which step to take next. Big name companies, small companies, press, etc. they all wanted a piece of his time. And he only had 24 hours a day to spend.

So he asked what he should do.

First: Figure out what kind of company you want to have as a “Success”. Do you want an IPO? Do you want a quick M&A, do you want someone to license the technology, do you want to have a permanent job for you, your friends and family? This decision will influence the next steps you’ll want to take.

Who do you talk to? Who do you contact?
Figure out, for yourself what you want to do, and then who can make it happen. Recognize the motivation of the other players as well. Talking to a CEO/CTO can get your product/service implemented quickly. They can also pay quickly, and make things happen. What are their motivations/expectations from your company? Can you deliver them? How will you deliver them?

Big companies: You need to have the main players interested in you, otherwise you will get lost in the clutter. You have to get upper management to be your avatar. When someone’s career is tied to your success in the company, they’ll make sure you’re front and center in the meetings. When several peoples careers are tied to your success. You’ll be able to survive the departure of one or more people. The other key element is going after the #1 company in the industry. If you get them as a customer, #2 and #3 will follow, because the competitive environment has just changed. Getting the #10 player as your marquee customer might be nice, but there’s no incentive for the top 3 players to change their way of business. They’ll continue doing business as usual until they’re forced to stop.

Small companies: they’re flatter. They can implement things company wide faster. But they’re not the leaders. If you’re going to do a pilot program, it’s great working with smaller organizations, but recognize they’re putting themselves at risk with your company as well.
Smaller companies are also more willing to take a risk. Trying to leapfrog from the #4 position to a #2 slot.

Press: Reporters want to make their careers. They want a good story, and they want recognition. Sometimes their wants align with your needs/wants. Other times they’ll clash. Remember that peace of mind is a HUGE aspect for your customers. Seeing your name in a trade magazine, or major journal does wonderful things for you, as long as the story is good.


See all the contradictions that exist in general? Fortunately, when looking at specific industries, several of these conflicts go away. Not to say the contradictions don’t exist, rather, one force is so strong, that the battle has already been decided.

Now, go and figure out which forces dominate your industry. I can’t help you with the 24 hours per day situation.

Love it

Going over some of my more recent entries, there's a somber tone in some of them. If it sounds like I'm discouraging you from being an entrepreneur, it's only that way to the folks who aren't ready yet.

To someone who is an entrepreneur, nothing I write, nothing they read, nothing they see will stop them.

It doesn't make sense to most people, and it's not supposed to. But the successful entrepreneurs don't really create businesses. They put businesses in places where “something” should be. There's an empty niche, just waiting for someone to fill it. There are obvious needs that the entrepreneur sees. The customers are there, and ready to buy. The products are there, ready to be introduced. The market is there, from generation to distribution. All the entrepreneur does is put them together. And the entrepreneur doesn't have a choice. It “HAS” to be done.

Nothing will stop these folks.

How are they different from the “visionaries” and other folks who claim to see the next opportunity? Entrepreneurs get it done. They are familiar with all the players, and can see what has always been intrincic opportunities in the business.

Funding, contacts, customers, suppliers. Nothing stops a true entrepreneur.

This is why they're special.

This is why they're rare.

Do I know one when he's sitting at the table across from me? Not always. Not until after he's done what he's going to do.

Something within is driving him. Giving the energy, insight, joy, and fun in his efforts. There are setbacks, but they are overcome. You have to love what you do, otherwise the problems can weigh you down. When you're passionate about the business, nothing out there stops you.

Not rational

A friend likes to say, "No rational angel will invest in your company. No rational angel would invest in any company. The only angels that invest are irrational."
This is his way of asking what else the angels are searching for when they make an investment.

I'll phrased it as, "The benefits an angel is looking for when he invests is always more than just monetary."

What else are your investors getting?

Percentage Math

Math is fun.
Numbers aren't supposed to lie.
Except when they do.

Very simply: Do not use % to determine the amount of the market you'll capture.
It's naive, and short sighted to think you'll capture a small (3%) share of the market. If you do capture that amount, then you're either a bit player, or the market is too fragmented to be successful in. Either case, you're not attractive to an investor.

If you're making the argument that the market you're going after is HUGE, that's good. But why won't you be the one to make the majority market share? What's stopping you from getting 80% of the market? The thing that stops you from getting 80% of the market, is usually the SAME thing that stops you from getting 3% of the market.

The numbers are also misleading. Saying you'll get 3% of a Billion dollar market, meaning you'll get 30 million in sales, is just wrong. You won't get that amount, you won't compete, because the company that gets the first $970,000,000 will pick up the remaining $30,000,000.

If you can't give a good estimate as to the market size, and the amount you'll capture, how can you be credible on the execution of the business? Not knowing who's going to buy, how much they need your product, and what benefits they'll enjoy says a lot more about you and your team than it does about the market and the customers.

Worse than useless

In creating projections for a VC, don't bother going out more than 5 years. We know that all the numbers you have are made up. They're guesses based on assumptions with no direct relation to any known fact. So when I saw a bplan today with projections going out to 2030, it seemed less than honest. When years 2015 - 2030 looked EXACTLY THE SAME, this seemed laughable. If all those values are equal, doesn't it stop being a "projection" and start being a "copy"?
The numbers are supposed you represent your best estimate, not an exercise in spreadsheets. That having been said; there was one group I worked with that managed to hit their numbers, over and over again. How? Experience. This team had worked together for 5 years earlier. They were experts in the field, and knew all the key players. They knew the sales growth plan, the headcount growth, and who would buy and when.
Make the numbers rational. If you need to make wild guesses, perhaps a few more calls are necessary.

Choices and the unspoken implication

Choice is supposed to be good.
The idea is the more choices we have, the more we can evaluate, and then pick the
selection that 'best' matches our desires.

Except this ignores one part.
The cost of evaluating and making the choice.

Paralysis by analysis.
People freeze up when there are too many things to choose from. Too many
choices goes from being good, to being bad.

People use short-cuts to eliminate some of the choices, not because it's
right, but because it's faster and easier.

So don't presume that more features/choices make your product better for the customer. Doing a feature rich offering may not be as easily adopted as a straight forward product.

Thanks

Wanted to say thanks for the ego boost. The RSS Feedburner has broken double digits on this date. It's a small thing, but it is progress.

It's been fun stumbling through the world of VC. Still a bit for me to learn. But I'm climbing up the apprentice/journeyman/master ladder. I'm working to stay on the path, and having a lot of fun doing it.

Speaking out of both sides

Anyone who's paid attention to this blog will see that I've made contradictory statements many times. Truth is, I figure one of those statements has to be right, so I'll cover all bases.

Here's another example:

It's very easy to say "No" to an investment, as an investor. We really don't get punished for missing a Google, at least not as much as we get punished for putting money into a Pets.com, or less successful business.

However, it's in the businesses that other folks have said "No" to, that opportunity lies. In order to turn a "No" answer into a “Yes” well, that's pretty impossible.

In order to say "Yes" to something everyone else says "No" to, that takes experience, knowledge, courage, and dedication. This is a very different situation than the above, if you're not sure why, ask.

There has to be something the investor sees in the company that makes it worth while. Management, market, experience, contacts, etc. something has to exist that will make this company a success. If the investor can detect it before other folks, has the faster calculator, he wins. A good investment, in a good company.

Otherwise, the answer is still a “No”.

As an entrepreneur, pre-screen your potential investors, focus on the ones who understand your industry/market/business. Even if they say no to an investment, you can usually get something out of them, some free consulting, or an answer to a question someone who doesn't have any industry knowledge wouldn't be able to help with.

It's your time, you should get something out of it.

Questions to ask

As an entrepreneur, you're going to be jumping through a lot of hoops trying to get funding. Figure out if you really need the funding, why you want it, and who you're going to get it from.

Do you need the money?
Is it enough to make things happen? How are you going to be spending the money, where does it go? what does it buy?

Why do you want the money?
Is it to give you peace of mind that the company will still be around in the next year? Is it to achieve a goal and grow the company? Are you looking for validation that you're not on the wrong path, and you want someone else to invest cash into your idea?

Who are you getting the money from?
Do the investors know anything about your business? Business model? Industry?
Are they focused on companies like yours? Do they understand the size/stage of your company, can they help you find funding for the next stage?

Finding money is not an easy task. You should consider the price of that money.

Bad Relationships

If there are terms or conditions on a relationship that you don't like. Don't accept the relationship.
Some entrepreneurs will call me, and demand an NDA before they will tell me what they're doing. I inform these entrepreneurs that I do not sign NDA's, and if they have an executive summary that does not share their proprietary information, I'd be happy to take a look at it. The entrepreneur again demands an NDA before they'll share anything. I usually try to stop the conversation at this point, because the alternative is worse.
What happens if I let the conversation continue? Well the entrepreneur feels justified in asking for an NDA, and feels it as a personal affront that I'm willing to say "no" so quickly, especially since I haven't given him a "fair chance" to present his company. And the entrepreneur feels that because I won't sign an NDA, he can't trust me, and then I'm negotiating in bad faith.
All I want to do is end this conversation as quickly and cleanly as possible.
Here's what I'm hearing during our short conversation.
By not having an alternative plan ready, the entrepreneur hasn't considered both possibilities (NDA, w/o NDA). Or, if he's already decided that he won't bother with folks who do not sign NDA's, and then tries to push me from one group (don't sign) to the other (do sign), then it's unlikely he'll listen to his customers, when they tell him what they'll buy. Especially if what they're asking for isn't in his vision of the future.
If it becomes more antagonistic than this, then I've learned and decided something else. I don't want to work with this person. The well has been poisoned. Our first impression of each other is very poor, and when real issues come up during the life of the company, we don't have a foundation of trust to build upon.
So what to do?
Stop.
There's no peace of mind for either side.
Walk away, and do not invest.
Walk away and don't pursue the money from that group.

Answer First

In giving an elevator pitch, start with the answer. If the answer doesn’t interest the investor, then the background won't either. Don’t tell me who you are. If your answer isn’t interesting, then I don’t care. If it is, then I’ll investigate to see why you’re the one who got the right answer.

I’ve told you to label the graphs in your bplan and presentation with the Knowledge you want me to walk away with, not the data you’re presenting. In your slides, the header should be all I need to know. The rest supports it. Give me the answer in big bold letters, it's the only thing I'll remember. Hiding the answer to try and make the investor pay attention rarely works. The investor will probably ignore you, and instead go to the blackberry and check e-mail.

If the investor is interested he’ll ask for more, if not, then you’ll know where you stand.

Revenues or Sales?

In working with young startups, I have the opportunity to see very nascent companies. Revenue or Sales are important numbers, but they have to be meaningful as well.

Sales from the product is important, but how much is sold is also of value. Selling $200.00 (two hundred dollars and zero cents) a year is not a meaningful number in the United States. While having an extra $200 in your pocket today is nice, having real, meaningful sales is important.

Also, $200,000 in revenue, for consulting services when you “really are a product company” is also of less value. Consulting revenues are not meaningful in determining your business model as a product company. They may keep the lights on. But are only significant in determining your business as a consulting company.

No Co-CEO’s

When starting a business, make sure everything is fair, every founding member is valued, and the company is NOT split up evenly and run like a democracy.

While it’s good manners to sit down and debate each decision, come to a conclusion that satisfies everyone, and each member having an opportunity to put in their opinion. The business can’t run like that. Not a small business. Larger ones can, but they don’t really want to expend the “meeting tax” if they can avoid it.

Someone (ONE person) should be the CEO, with well defined roles/responsibilities for the strategy and direction of the company.

If you take on the CEO role, it’s YOUR company. You should have the most at risk, You should be the first to blame, YOU are the representation of the company.
Therefore, you should have a larger share of the company, in compensation for the additional risk.

Everyone is equal, everyone gets a portion proportional to the risk/value/talent they bring. But ONE person has to be able to finalize the decision, make a decision in absence of any consultation, and it is his neck on the line.
Play nice, be friends, but understand that making crucial decisions for the business is not something to be done by comittee.

Bad examples

Reading these plans wasn't a complete waste of time. Some of them can be used as a bad example.

Perpetual Motion Machine
Zero Point Energy systems
Raise range from 1 Million to 1 Billion
Requesting $50 Million for 25% of the company, when it's only 2 guys a dog and a bplan
Anything that's written like a Nigerian scam letter
Request money to do something that's illegal
Ideas that will never generate a profit, and are better of as charities
"Job creation" vehicles that create jobs for only the entrepreneur and his family

Believe it or not, I actually read every plan that hits my desk. Even the ones that are listed above (Ok, the perpetual motion machine one tricked me, they didn't mention what it was until page 50). Sometimes there's a gem of an idea or concept behind these plans. Even if the particular team isn't the one to pull it off.

One particularly bad idea is sending a redacted business plan. If I can't tell what you do, talk with an expert about your approach or even evaluate if the idea is "intersting" or not. What response am I supposed to give you? Even if it is a good business, it may not be a good investment. And given the demands on my time, especially with current portfolio company demands, how much effort can I really affort to give a bplan other than the first read?

A good executive summary gets an ANSWER. Yes or No, as long as you get a response from the investor, you can move forward. Under this criteria, the above were successful. They got a response in a timely manner.

Lifestyle company vs. Investment

I had the opportunity to talk with an entrepreneur in a smaller market. The size of the locality provides the company with a ready made niche. The Company will probably never be one that will make investors wealthy, or change the world. However, it does provide the entrepreneur, employees, and local businesses with a stable source of income. Lifestyle companies, while being bad vehicles for professional investors, are fundamental to the economy and well being of many families. It’s not just the entrepreneur’s job at stake, all the employees, and their families, as well as the restaurants, service companies, etc. in the neighborhood that benefit from the success of the company.

A lifestyle company works very well for the entrepreneur and the founding team. Just don't confuse this type of company from an investment vehicle. The demands, requirements, and exits are very different.
Besides, if you're clearing $800K a year, do you really want an investor to mess up the cap-table?

Don't play in Traffic

Key-man risk is something most start-ups have.
Each person with experience tends to be valuable. But don't let any one person put the entire company at risk.
Jim Henson's group was supposed to merge with Disney before his untimely death. After he passed away, Disney decided to cancel the merger, because the value of the team was dimminished, and the deal fundamentally changed. In 2004, the merger was finally completed, Disney bought the Muppets, and the rest of the talent.

Granted, in the intervening 15 years, a lot happened with the Henson team, and the company. But in the end, the merger could have been done faster, if the initial value was not so dependent upon Jim's talent.

In your company, make sure there's value left in the company, if something unfortunate should happen to you, or any of the other founding members

Justification

Pre-money valuation = what your company is worth 1 moment before the investor give you the check.
Investment = Amount of money on the check
Post-Money Valuation = Pre money valuation + Investment

New investor ownership % = 1- old investor ownership %.

Understand how all these numbers relate.

If you're going to ask for $5 million, and are selling 20% of the company to the investor, you are stating that after the investment is complete, the investor will own 20% of the company for $5 mil. Or that the company is worth $25 million after the investment.
This is also saying that the company is worth $20 million BEFORE the investor puts any money into the company.

Now, if you're going to ask someone to invest under the above conditions, WHY are you worth $20 mil right now? If you can justify it, then it's not unreasonable. Otherwise, the final number is always up to negotiation.

One skill

Give him a sword and he's unstoppable. But give him a bale of grain, and he's an ordinary man.

Don't give credence to the halo effect. It's tempting to believe someone who's been successful in one area will be successful in every other. Or that an entrepreneur can do it again. There are many one-shot-wonders out there. Look at the 80's for a good example in the music world.
Repeating their actions won't make them successful again. Being innovative and new all over again will, but they can't constantly be trying to do the same thing.
It's dangerous to put to much faith in past performance or skills.

Being able to wield a sword, means nothing more than handling a blade. The mentality/training/effort and process of training can be used again in other areas. But I have yet to see someone successfully parry a bale.

If you're ever in doubt

There was something we called the “60 minutes test.”

Consider what would happen if Mike Wallace interviewed you on 60 minutes.

MW: but you KNEW when you invested, that the CEO had a history of fraud.

Us: …..

MW: How could you go to your investors, and with their money, invest into this company?

Us: err.

Today, you can replace the person in Wallace’s chair with Spitzer, or Russert, or anyone else.

The point remains the same, if you're not able to give a good answer for your actions, you're better off not doing them.