VC in DC

Step away from the crack pipe, I mean business plan, step away

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The process to create a business plan, in any format, is an invaluable exercise.  But the tool created by the business plan process is largely useless.

Clearly, the thought process involved in sorting and planning and considering the business’ potential progression cannot be underestimated for preparing someone to meet the myriad of challenges ahead.  Yet, the typical, static plan created by this process, will be broken and outdated faster than an office March Madness bracket sheet after the first two major upsets of top seeds on the first day.  

So should we stop writing or reading business plans?   Yes, and no. I would argue that we should stop taking the traditional, narrative document form approach and no longer write them.  In their place, we need a next generation -- inter-relational and organic --plan or tool as I discuss below.  The business plan today isn't useful enough as a tool to qualify as a crutch in most usages.  The business plan of tomorrow is a tool, useful from its inception forward, and never a waste of the invested time.

For traditional business plans, it is inevitable that  the plan will not have anticipated major and usually immediate events that change the future contemplated in the document and which require major course corrections.   Most businesses, successful or otherwise, don’t resemble the founders’ original conception or plan with great fidelity.   But, a thoughtful, detailed strategy will better prepare the author to make those course corrections since they’ve already deliberated as many alternatives as time allowed.

So should we keep the business plan just because it prepares an entrepreneur for change?  No, we should change the business plan.  A next generation business plan will not be a static word processing document and it certainly won’t be a spreadsheet (best creative media since pallet and paint by the way).   The next generation business plan should look more like a GANTT chart or database application than a Word doc or an Excel spreadsheet, and it should be a collaborative, living document.   It should outline tasks as well as the relationship of tasks to each other.

In fact, as a venture capitalist, I ask start ups to give me a project/task oriented view of the first 100 days after funding.   This view is better than the prepared business plan for my purposes and infinitely more useful for the entrepreneurs as well.  Do they know what needs to be done?  Are they aware of the steps to accomplish that?   What things will cost on a stand alone basis and what are the inter-dependencies are critical insights.

What I need to know, is what management knows and doesn’t know what within its growth plans. And do they really know what they don't know. What are the key unknowns in their opinion, for example, or key operating metrics that drive economics?  If they plug in those insights as discovered along the way, they get new understanding of the current status and emerging challenges.  With the task view of the first 100 days,  I get insight into if they’re ready for the challenges ahead.   To find that out, I assess how thoughtful they are about immediate possibilities as well as potential responses.   For that matter, the listing of what is unknown and the estimate of the cost to know the unknown -- is the best summary of both the challenges and risks at hand.

It used to be that a business plan was the best way to reflect that thoughtfulness.  It isn’t the best way any longer.  Today, we need something that constants re-adjusts to new inputs and understandings about existing variables.  If a new, major customer wants specific product modifications and that new, major customer is materially important, the issue is how giving the customer what they want effects the enterprise's plan.  You can't get that insight from a traditional business plan.  You can get it more readily from a project plan.

And the one final coffin nail for business plans should be the penalty associated with wasting an entrepreneur's most valuable resource -- time.    Anything that an entrepreneur does with a start up must have cumulative value.  Meaning that every product improvement, marketing/sales effort or generic step forward must have immediate, stand alone value as well as be a stepping stone to the next improvement or effort or step forward.   Dead ends or too many dead ends are death to a start up.  Wasted or ineffective efforts lead to failure.  When you're building from scratch, you can't afford to cover the same ground twice.  And that limited time functionality of the narrative business plan may be the single best reason to discard it. 

A plan which is a tool that improves in usefulness and utility with the time invested in it is the only real choice.  And in the final analysis, it is about having a real plan -- regardless of the form the plan. 

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5 things to tell your first-time-in-a-start-up employees

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The differences between larger companies and smaller ones are many and varied.  In a large company, the fundamental truths are reasonably well known.  The established company knows things like who the customers are, where the customers are, how much they will pay for product, what they like about the product, what they dislike about the product, how much support they need with the product, etc.

In a start up company, not so much.  Discovery is key.  Communication is vital.

In a start up company, who the customers are and where they are and how much they will pay are all fundamental unanswered questions.  As are what the customers like and dislike or will like and dislike about the product.   More is simply unknown than known about the market and product.   And not only are things unknown, there is usually a limited time to determine the answers.  

All this mystery can be quite confusing to employees new to the start up environment.  In a large company, there is less need to discover and frequently a great deal of time available to make these smaller discoveries.  These formerly large company employees can enter a small business ill-prepared to succeed even though they are fully capable of doing so.

To change that, here are 5 things you should tell them.

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1.    Pursue the truth

Tell your new employees to engage with people who know or should know the answers to the questions above.   Ask questions, don't be defensive, accept input, encourage open ended conversations, don't ask loaded questions or preempt responses.  Discover as much as possible about customers: their perceptions, their reactions and their thoughts.  Always, always, attempt to uncover knowledge, understanding and the truth.   This is a voyage of discovery.

2.    Communicate whatever you discover widely

Assure your employees that if they believe it to be well sourced, they should communicate whatever is discovered as broadly as possible.  For the time being, limit  analysis and conclusions.  Let the truth stand alone.  Find facts and share facts.  Let the group form the big picture from everybody's facts.  Don't spin or manipulate facts. 

3.    We are trying to effective, not efficient

Large companies wake up every morning and aim to drive cost out of known working processes through improved efficiency.  Small companies should get up everyday to create working processes especially ones that find, sell or service customers.   If small companies aren't effective, they don't ever get to try to be efficient.  What will work/sell/grow is paramount.  Doing it more efficiently comes after, and only after, one has a command of what is going to be most effective.

4.    This is a race against time

Tell your employees, "we are in a hurry here", that the small company and they personally need to move quickly.  Show me a small company that isn't using time to its advantage and I will show you failure in the making.  Smaller size should enable nimble response and agility.  Tell your new recruits that if things aren't happening fast enough, they should let you and everyone else know it.

5.    There is not them it is just us

The inherent size of large companies and human nature usually gives rise to a "tribal mentality".  This mentality conveys that one's first loyalty is to their department (accounting, sales, marketing) or "departmental tribe".   And from this, these employees can bring a worldview that departments are tribal or should be -- pitted against one another is the natural state from their point of view.   This tribal bias is unavoidable in many large companies.   It is ridiculous for a small company.  These first time employees need to understand that the tribe is the company, not its departments.  In a small company, it is us and us alone.  There is no "them" in a small company.   And, accordingly, there is no one to blame for our failures.   Marketing can't let us down or sales can't fail to deliver -- in a way that everyone in the company doesn't own.  It is only us, they must understand, and we -collectively- will succeed or fail.

Many people have told me through the years that they've always wanted to work in a start up.  A lot of them view it as much the same as larger company just without the larger company's bureaucracy.  And yes, there is or should little bureaucracy, but the differences run deeper and employees that are new to it can benefit from a little explanation. 

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Great Insights into Start Up Business Plans

Here is a really useful link -- Fox Business Video  on business plan creation with Mark Suster of GRP Ventures.

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Know thyself, know thy competition better

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The fastest and most direct way to start up success is an acute, deep understanding of your competition.   It is also the most powerful evidence that you can present to potential investors.

Consider the case of an entrepreneur who arrives with a complete understanding of competitors' products.  This conveys insight into market, opportunity, sales strategy and product superiority.     Alternatively, if the entrepreneur doesn't demonstrate that understanding it undermines everything and I mean, everything, within a business plan or proposal.  The management loses credibility as does do the financial projections.   Without that demonstrated understanding of competitor strengths and weaknesses,  assertions sound like wishes instead declarations of knowledgable intent.

I often advise young people that are striving to contribute and advance in an organization that nothing can differentiate oneself as powerfully as being an expert on the competition.   It is available to all but sought by few.   Being a known "expert" on the competition will bring people from across the organization to one's door step.  Which, if you're young and interested in moving up, is an unparalled platform for recognition.

On the other hand, you may be an entrepreneur and interest in raising VC (ie, you're reading this blog), and if you want to blow the doors off at venture capitalist presentation -- leave no one doubting your complete command of the competitive situation.  Doing so will build positive conviction about you and your deal.  For that matter, nothing will take your further in quest for start up success.  It also makes a lot easier to access investment.

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Being right but not right now

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"There is nothing more powerful than an idea whose time has come."
  --  Victor Hugo

I have wondered about the Hugo quote above from both sides.  Is there anything less powerful than an idea whose time hasn't arrived?

As an investor, it can feel that way when you're backing a company that you believe to the core of your being is right about the opportunity/market/product but whose progression is slow.  For the entrepreneur, this can all be about the power of perseverance.   Which isn't to say that the entrepreneur's persistence is less admirable for its necessity.   It can be tough to hang in there as long as it can sometime to take to realize one's moment in the sun.

This highlights an investor internal dialogue that the adept entrepreneur should seek to engage within investment discussion.  The investor is pondering both whether something is a good idea AND whether this is the right time for this good idea.  Many an entrepreneur can leave a meeting with the correct conviction that the investor believes in their idea but remain confused as why the investor fails to act.

That reluctance to act is often related to doubts about timing.    In my case, I recall my entrepreneurial decision to create a site called myroom.com in 1997 aimed at teenagers.  The site allowed users to create private webpages online and was equipped with a variety of tools including music and page creation wizards.  The thought was this young audience would enjoy the social aspect of their own private space online that intersected with other private spaces.  The userbase, though small, loved it.  I thought then and now, that it was a good idea.   It might have been early.  It was certainly beyond the patience and associated financial support of my backers.

So, if you're going to make a case for something being right with investors, you would be served to make your case include support for why it is also "right now".

JMU COB 300 Business Plan Competition

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Some 8 years ago now, I joined with some other alumni to launch a business plan competition which is now in its eighth year.   By way of background, the College of Business at JMU requires business majors to complete a single, 12 credit hour course in which students are paired into cross functional teams (management, marketing, finance and accounting) to develop a business plan.  Each year over 140 plans are produced by the student teams across Spring, Summer and Fall sessions.   The competition invites the teams to enter their plans following the completion of the calendar year each January.  Typically, 30 to 40 teams submit entries and in late spring the Final 5 compete on a Saturday morning.  Parents, friends, faculty and alumni gather to watch the competition.  

Tension runs a little high for the students (and moreso for the parents) and the day concludes with trophies and scholarship prizes totaling $26,000.  Alumni present as judges as well other alumni provide the scholarship monies.

It is a challenge for the students to compete in front of a packed house in a pressurized moment for real money in scholarship prizes.    My suspicion is that they leave this competition an inch taller and they should.

Off all the things I do, few give me the satisfaction and pride of this event.  If you have an interest or opportunity to attend next year, please do so. 

Here's a link to an article about the competition:

JMU Business Plan Competition 2009

Here is a 2004 video on the competition.

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The bridges have been burned behind you, that's good news and bad news

For start ups in 2009, there is a high likelihood that no new competitors will be funded in this stressed environment.  So, for those already funded, the challenge is to take advantage of this absence of new entrants.    Competition exerts a variety of pressures on resource constrained startups.  Most of which serves to drive development, marketing, sales or management in unintended and frequently inefficient directions. 

Yes, it is tough to gain attention and interest for new solutions in an atmosphere of reduced budgets but it is arguably more manageable than facing an army (small or large) of emerging competitors.  My continual advice to CEO's is to continually assess and focus upon items "within their personal control" and the absence of competitors makes that much easier.

The downside is that funding will be tough if you need and really tough if one tries to "fall back" over those burned bridges.   This is arguably the worst year in memory for first time funding.  And on the flip side, perhaps one of the best years to put it to work growing a business.

On to Plan B?!?

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Amongst investors in start ups, one often hears the sardonic remark that the only assurance one has about the future is that it won't be what is described in the business plan.    By the same token, investors will readily acknowledge that their successful investments often occur on something other than the original investment thesis.  In those instances, the management team and investors make a decision to depart from the original plan.

Ah yes, Plan B. 

How one gets to Plan B is important.  That path needs to be fast and factual in my experience.  Companies that are slow to adapt and evolve lose the faith of investors, employees and frequently, customers.   Being fast goes hand-in-hand with being factual, GE's Jack Welch refers to great management as "seeing things as they are instead of how they are wished to be".   Sometimes it just isn't working and the company isn't progressing at the proper rate, the management that is reluctant to see things as they are isn't being factually driven.    The facts say the customers aren't buying and/or the salespeople aren't selling -- so maybe it isn't about different customers or salespeople -- maybe it is about the product or market and not the people.  Being open minded and facing facts is a powerful combination for keeping investor confidence.

All of which goes to the fundamental point, the Plan A that is held too long is the one that most undermines the chances for and support of Plan B.   It is the management team that is honest and forthcoming in its assessments of progress and prospects that is more likely to garner strong Plan B support.  The team that clings to Plan A is the team that frequently doesn't get a shot with Plan B.

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Excellent Blog Entry on Business Plans for raising VC

Pete Kennedy's entry on the GrowThink blog is another excellent contribution to a valuable and insightful site.   

http://www.growthink.com/content/how-write-business-plan-raising-venture-capital

The Fast Path to Credibility

The first step on the fast path to venture capital is the entrepreneur credibility.   The best way to establish credibility is for the entrepreneur to discuss 3 things:

1. What the entrepreneur knows

2. What the entrepreneur believes

3. What the entrepreneur doesn't know

The first point, what the entrepreneur knows is the body of their work experience and knowledge.  Someone who has spent 17 years in database technologies clearly establishes credibility in the subject area.  If the entrepreneur fails to establish credibility within the subject matter of the investment, it is likely to be a short dialogue.    A casual observer would likely be surprised at the high frequency of business plans by people without knowledge of the technology, industry or marketspace.

The second point, what the entrepreneur believes about the future should clearly relate to their aforementioned knowledge of a marketspace or technology.   This is the opportunity at hand.  For the VC, the question is related to both the first two points and their interaction.  Is this a credible person?  And, if yes, would this person being in a position to see an opportunity in this market?   The first yes does a lot to provide foundation for the second yes.

The third point, what the entrepreneur doesn't know speaks to a number of fundamental concerns.  Foremost of which is the self awareness of the entrepreneur.  A self aware entrepreneur who offers that they haven't ever sold, marketed or run a company gives an investor comfort that the individual entrepreneur will seek and accept assistance.  For the investor, the response can be "ok, we can get you folks to do that".  It also begins to highlight the funds needed and the use of funds.  Even more importantly, if an entrepreneur describes uncertainty to market acceptance, pricing or other items that will only be known with investment of resource and the passage of time -- those uncertainties describe the inherent risk framework that an investor needs to surmount to move forward.  When an investor isn't comfortable with the source or amount of risk, they won't invest.   Now, the may know the risk fully and still invest or not, but it is a rare investor that will proceed with a handle on the risks.

Communication of what one knows, believes and doesn't know is a clear way to establish credibility, trust and rapport between entrepreneur and investor. 

 

The Effective VC Pitch and the Magic of 3

I coach CEO's who are seeking venture capital to deliver their pitch in the following way.

Tell the complete story in 3 minutes.

Tell it again, with the next layer of detail, in 10 minutes.

Repeat the story a third time, with greater detail, in 35 minutes.

Having told the story three times with increasing levels of detail, stop talking.  Ask for questions, comments and insights.   This approach provides assurance that the small audience understands the pitch and company story.   It also provides an expeditious and efficient starting point for the group to consider and discuss an opportunity. 

It shouldn't be surprising to entrepreneurs that the discussions about an opportunity by venture capitalists after a pitch often revolve around what was said and what was meant in the preceeding meeting.   "I thought he meant that they would rely more on OEM sales than direct", for example, while someone else argues the opposite impression.   

The 3X approach described here eliminates a lot of those misunderstandings.  It also provides the CEO with the assurance that a turn down by the VC, if one occurs, is because of a honest disagreement rather than a simple mis-understanding.

Seed Round or A Round: What's the difference?

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The conventional wisdom differentiates a seed or A round based upon the amount of money raised by the startup.  The crossover amount is typically around $500k.   This is only half the story, however, as the distinction between a Seed Round and a Series A round goes deeper......

I think the better definition would point to how much has been accomplished by the company.    For both Seed and A Rounds, the company  often may have an unfinished product in an unproven market.   But how unfinished is the product?  And how unproven is the market?  These levels of distinction are far better indicators of the necessary corresponding investment.  And almost more importantly, how defined is the entrepreneur vision?  The incomplete product is ok, we expect that.  Unknowns about the product and market are expected as well.   

But that said, it is striking how many entrepreneurs arrive with the conception that a seed round should allow them to receive investment for a unfinished product (it does) for which they don't yet have a clear, crisp vision (it does not).  Simply put, a Seed Round investor can be made comfortable with an unfinished product in an unproven market so long as the entrepreneur has the clearest of ideas about product and market.    Frequently, people arrive with a request to fund a hunch as this is their perceived view of seed rounds' purpose.   And I'm sure there are investors ready to fund hunches, though they are likely the product of pre-existing relationships and previously profitable demonstrations of intuition. 

For the entrepreneur that lacks those relationships and intution track record, clarity is key.

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Business plans that write themselves

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I spoke with a George Mason University MBA class Saturday morning as a kick off to a Capstone class that requires them to break out into teams to prepare a business plan.  I don’t envy them.   It is hard work even when you know what you’re doing and harder still for a first timer.  In my talk, I shared my thoughts on making the business plan creation process easy.

The best method advice for business plan preparation that I’ve gotten came when someone refused to read the one that I had written. 

I related to the students my experience pitching to Ann Winblad of Hummer and Winblad almost 20 years ago for a fledgling electronic mail software company.    Ann wouldn’t let me deliver the standard power point pitch or otherwise rely upon my prepared business plan materials. 

Instead, she asked me to tell her what my assumptions were about the future.   

So, the correct answer would have been:

1.                  We believe there will be a market for electronic mail software on personal computers.

2.                  We believe that we will be able to build a competitive product for this emerging market.

3.                  We believe that we will be able to sell this competitive product profitably and grow our company.

4.                  We believe that having accomplished the first three, we will be able to sell our company for a sufficient amount to deliver a good return for investors.

I wasn’t skilled enough to give Ann that answer twenty years ago. And, she didn’t invest.  But I have used the assumption definition approach to create and evaluate many business plans over the years.

To be clear, any business plan is predicated upon assumptions about the future.  Some in the control of the management team and many outside it, a business plan describes those future assumptions, identifies the opportunities created and describes the actions to realize those opportunities. 

No investor will support a company without agreeing to the assumptions.  The easier and fastest way to qualify an investor is do so with the underlying assumptions.  If an investor, for example, doesn’t agree that there’s a market or that you’ll be able to build a competitive product – well you can save each other some time.

I tell entrepreneurs that identifying and understanding their assumptions is the backbone of any business plan outline.   In fact, one could argue that the business plan is well on its way to completion when the entrepreneur is confident that the assumption list is thorough.

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Smart Fly, Dumb Fly

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The great entrepreneurs and the people that back them have long acknowledged the power of believing what you believe intensely, at least and until you don't believe that anymore.

Sometimes called the dumb fly, smart fly approach.  The dumb fly keeps banging away on the same spot on the window trying to pass through.  The smart fly keeps hitting different spots to find the opening from the willingness to experiment on the point of attack. 

For most start up entrepreneurs, the unwillingness to try and fail while continuing iterating an approach is the seed of failure.  Experimentation and innovation are the pathways to success.   My dialogue with CEO's usually involves a lot of conversation about it being ok to progress with failed experiments.  In my experience, the start up CEO that doesn't iterate, adapt and grow is the one left behind by the company's success.

As VC's, we are perfectly happy to see it all work out perfectly on the first attempt.  Then again, we don't always expect it to and the CEO needs to be comfortable with that.

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JMU Business Plan Competition

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The James Madison University College of Business is now in the top 5% of undergraduate business schools according to BusinessWeek.   A good part of this ranking is the quality and dedication of the staff.  Another component is the innovative COB 300 class. 

COB 300 is a 12-credit, team-taught integrated academic experience, which has been required of all COB Bachelor of Business Administration degree students since the late 90s. For the past five years, the College of Business and alumni have sponsored a business plan competition for the top five plans produced by the students.   I have been involved with this competition since the beginning and it is one of the most rewarding things that I do.

Student teams from COB 300 are invited to submit business plans. The COB 300 faculty select semi-finalists from more than 150 business plans which are developed and presented annually by COB 300 students. These business plans are then reviewed by an external judge's panel. From the semi-finalists group, 5 student teams are selected as finalists. More than $17,000 in scholarships and awards are presented to those teams that participate in the Business Plan Competition finals each April.

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