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The Art of the Start By Guy Kawasaki
My review: I haven't yet started a company so I can't tell you if this is good advice or not. But it sure seems like a great book! I wasn't looking forward to reading it due to the pretentious title, but it greatly exceeded my expectations and I highly recommend it. The density of useful, practical information is very high. It's a quick read. These notes aren't meant to substitute for reading the book. In fact, I read the book while borrowing it from the library, and not only did I take these notes, but I'm planning to acquire my own copy so that I can reread it later.
The five most important things you must accomplish:
" 1 MAKE MEANING. The best reason to start an organization is to make meaning—to create a product or service that makes the world a better place. So your first task is to decide how you can make meaning.
2 MAKE MANTRA. Forget mission statements; theyʼre long, boring, and irrelevant. No one can ever remember them—much less implement them. Instead, take your meaning and make a mantra out of it. This will set your entire team on the right course. [note: mantra is for employees; tag-line is for customers; mission statement is for all stakeholders, which means it must be written by committee and come out too long to be inspiring]
3 GET GOING. Start creating and delivering your product or service. Think soldering irons, compilers, hammers, saws, and AutoCAD—whatever tools you use to build products and services. Donʼt focus on pitching, writing, and planning. "Doing, not learning to do, is the essence of entreprenurship" "be selling, not strategizing about selling"
4 DEFINE YOUR BUSINESS MODEL. No matter what kind of organization youʼre starting, you have to figure out a way to make money. The greatest idea, technology, product, or service is short-lived without a sustainable business model.
5 WEAVE A MAT (MILESTONES, ASSUMPTIONS, AND TASKS). The final step is to compile three lists: (a) major milestones you need to meet; (b) assumptions that are built into your business model; and (c) tasks you need to accomplish to create an organization. This will enforce discipline and keep your organization on track when all hell breaks loose—and all hell will break loose."
" 1. Calculate your monthly costs to operate your organization. 2. Calculate the gross profit of each unit by your profit. 3. Divide the results of step 1 by the results of step 2. 4. Ask a few women if they think you have a chance of selling that many units. If they don’t you don’t have a business model. "
milestones:
" assumptions: * product or service performance metrics * market size * gross margin * sales calls per salesperson * conversion rate of prospects to customers * length of sales cycle * return on investment for the customer * technical support calls per unit shipped * payment cycle for receivables and payables * compensation requirements * prices of parts and supplies * customer return on investment "
" tasks: * renting office space * finding key vendors * setting up accounting and payroll systems * filing legal documents * purchasing insurance policies "
POSITIONING is stating clearly:
Answer the Q: "What do you do?"
positioning should be: * Inspiring and energizing. Do not get "mucked up in money, market share, and management egos" * Positive. E.g. not "defeat Microsoft" * Customer-centric (e.g. don't say we'll be "the leading company" -- that's egocentric, not customer-centric). * Empowering to your employees (makes the world a better place) * Self-explanatory. * Targets the intended customer. "if you're the intended customer, you immediately understand that. If not, you understand that, too." * Must show the core competencies of your organization. * Relevant to the core needs of your customers. * Long-lasting. * Different from your competitors. ("apply the opposite test" -- the opposite
Other Positioning Tips:
Exercise: "Review your positioning. Pick your reaction: a) Pride because you’ve achieved laserlike focus on what you stand for. b) Relief because you’ve mentioned every possible constituency and customer"
Exercise: (1) ask your receptionist what your organization does (2) Ask your latest hires why they joined the organization. Consider using their language in ur positioning
Name tips:
Also: find a niche market!
Also: you must: (a) provide a unique product and (b) offer a lot of value to the customer. If you do (a) but not (b), you have an innovative product that no one wants. (b) but not (a), and you're in an eternal price war with a zillion competitors. It's hard to assess if you have (a) and (b) b/c you'll try to deceive yourself by talking about other strengths that are neither (a) or (b).
Also: get biz cards and letterhead designed by a pro
Q: When to give up? A: When 3 close friends tell u to.
Q: Should I be paranoid and not share my idea? A: No, you should share it immediately (but with an NDA?)
Q: Should I not be scared? A: "You should be scared" ... But "no matter what, never admit that you're scared to other employees. A CEO can never have a bad day. But don't go overboard, either, and act as if you have no concerns, b/c then they will know you're scared stiff".
Q: I have an idea and can execute it, but I don't have a business background A: Get a mentor and/or a business partner.
Q: Use a PR firm for positioning? A: No! This fundamental task is too important to delegate.
Q: Consider domain names when picking a name? A: Yes
Q: Pretend to be larger and more established A: No, they'll find out (but you don't have to bring up your weaknesses, either)
Also: "take your best shot with a prototype, immediately get it to market, and iterate quickly"
PITCHING
"I pitch, therefore I am"
Explain yourself in the first minute -- What does your organization do?! (e.g. no autobiography in the first minute)
Exercise: "Set the timer to one minute. Give ur pitch... Ask the audience to write down one sentence that explains what your organization does. Collect the answers and compare them to what you think you said"
(when preparing pitch:) After everything you say, imagine someone asking, "so what?" Answer briefly, then give a real-world example or scenario of a feature of ur product.
examples:
" “ We use digital signal processing in our hearing aids.” “ So what?” “ Our product increases the clarity of sounds.” “ For instance, if you’re at a cocktail party with many conversations going on around you, you’ll be able to hear what people are saying to you.”
“ We provide 128-bit encryption in a portable device.” “ So what?” “ It’s harder than hell to break into our system.” “ For instance, if you’re in a hotel room and want to have a secure conversation with your headquarters.”
Ms. (big name celebrity) is on our advisory board" “ So what?” "What we're doing is interesting enough to attract top talent" "For instance, she has already opened doors for us in her industry"
“ We use Montessori methods in our new school.” “ So what?” “ Our school focuses on children as individuals and enables them to learn to manage their own study independently.” “ For instance, we enable children who are gifted in specific areas to proceed in advance of the rest of the students.” "
Newbies sometimes think the foundation of a great pitch is BS. It's not. It's researching your audience before the meeting starts. Ask your "sponsor" for the meeting:
"
Second, on the web, research:
Third, "brainstorm with your team to find connections...to make the pitch powerful and meaningful"
10/20/30 rule o Ten slides o Twenty minutes (why 20 mins? need time for discussion! btw it doesn't matter if discussion is at the end or in b/t ea. slide. Btw you're probably thinking, this 10 slides/20 mins doesn't apply to you b/c your tech is so much more awesome than most startups. "I am, in fact, referring to __you__") o Thirty-point font text
"You should be so lucky that your audience remembers one thing about your pitch: what your organization does. Right there, your pitch would be better than 90 percent of the competition's. Remember: You want to communicate "enough," not everything. "Enough" means enough to get you to the next step—whatever that next step may be. ... Understand this: The purpose of a pitch is to stimulate interest, not to close a deal."
note on liquidity: don't include a slide that says, ""There are two liquidity options: an IPO or an acquisition." Duh, that's really informative. If an investor asks about your exit strategy, it usually indicates he's clueless. If you answer with these two options, it shows that you have a lot in common with him. The only time you should include a slide about liquidity is when you can list at least five potential acquirers that the investor is unlikely to know about—this shows that you truly know the industry. By contrast, saying that Microsoft, or the Microsoft of your industry, will buy you will scare off all but the dumbest investors."
"A good rule of thumb for font size is to divide the oldest investor's age by two, and use that font size."
" -- Investor Pitch (for both profits and not-for-profits) --
TITLE Organization name; your name and title; and contact information.
The audience can read the slide—this is where you explain what your organization does. ("We sell software." "We sell hardware." "We are a school." "We are a church." "We protect the environment." Cut to the chase!
PROBLEM Describe the pain that you're alleviating.The goal is to get everyone nodding and "buying in."
Avoid looking like a solution searching for a problem. Minimize or eliminate citations of consulting studies about the future size of your market.
["Try to personalize the problem; [e.g.] “If you go to five travel sites, you will be presented with 5 completely different offers. Visiting each site and comparing trip packages is time-consuming and confusing.”"]
SOLUTION Explain how you alleviate this pain and the meaning that you make. Ensure that the audience clearly understands what you sell and your value proposition.
This is not the place for an in-depth technical explanation. Provide just the gist of how you fix the pain—for example, "We are a discount travel Web site. We have written software that searches all other travel sites and collates their price quotes into one report."
BUSINESS MODEL Explain how you make money: who pays you, your channels of distribution, and your gross margins.
Generally, a unique, untested business model is a scary proposition. If you truly have a revolutionary business model, explain it in terms of familiar ones. This is your opportunity to drop the names of the organizations that are already using your product or service.
["e.g. eBay: “We charge a listing fee plus a commission.” End of story."]
UNDERLYING MAGIC Describe the technology, secret sauce, or magic behind your product or service. ["Specifically, how does it create value for the customer."]
The less text and the more diagrams, schematics, and flowcharts on this slide, the better. White papers and objective proofs of concepts are helpful here.
[e.g. “The delivery of a wine’s ‘message,’ its bouquet and taste, depends on the shape of the glass. The secret to Reidel glasses is that there is a perfect shape for every beverage. Through ten generations of glassblowers, we have discovered the timeless forms of glass to convey the wine’s message in the best manner to the human senses.”]
MARKETING AND SALES Explain how you are going to reach your customer and your marketing leverage points.
Convince the audience that you have an effective go-to market strategy that won't break the bank.
[e.g. “We can reach the majority of the primary buyers of our educational software through two national trade shows and four primary regional shows.”]
COMPETITION Provide a complete view of the competitive landscape. Too much is better than too little.
Never dismiss your competition. Everyone—customers, investors, employees—wants to hear why you're good, not why the competition is bad.
MANAGEMENT TEAM Describe the key players of your management team, board of directors, and board of advisors, as well as your major investors.
["Discuss how your team completes the “management trinity”: production, marketing, and financial expertise."]
Don't be afraid to show up with less than a perfect team. All startups have holes in their team—what's truly important is whether you understand that there are holes and are willing to fix them.
FINANCIAL PROJECTIONS AND KEY METRICS Provide a five-year forecast containing not only dollars but also key metrics, such as number of customers and conversion rate.
Do a bottom-up forecast (more about this in Chapter 5, "The Art of Bootstrapping"). Take into account long sales cycles and seasonality. Making people understand the underlying assumptions of your forecast is as important as the numbers you've fabricated.
CURRENT STATUS, ACCOMPLISHMENTS TO DATE, TIMELINE/MILESTONES, AND USE OF FUNDS
Share the details of your positive momemtum and traction. Then use this slide to close with a bias toward action.
MB also POSITIONING
["Describe your position in the marketplace. Competitive Positioning: What stories are the prominent competitors selling? Creative Positioning: What story will you tell that customers will find either more important or different than the stories already being told in the market?
Example: “Wal-Mart is telling the story of low prices everyday. We telling a story of convenience.” "]
-- Sales Prospect Pitch --
TITLE Organization name; your name and title; and contact information.
The audience can read the slide—this is where you explain what your organization does. ("We sell software." "We sell hardware." "We are a school." "We are a church." "We protect the environment." Cut to the chase!
PROBLEM Describe the customer pain that you're alleviating.
Be sure that you are sure that you're describing pain the customer has.
SOLUTION Explain how you alleviate this pain.
This is not the place for an in-depth technical explanation. Provide just the gist of how you fix the pain.
SALES MODEL Ensure that the audience clearly understands what you sell and your value proposition.
This is your opportunity to drop the names of the organi zations that are already buying your product or service. If you have a strong story in this area, add a slide called "Current Customers" instead of talking about it here.
TECHNOLOGY Describe the technology, secret sauce, or magic behind your product or service.
The less text and the more diagrams, schematics, and flowcharts on this slide, the better. White papers and objective proofs of concepts are helpful here.
DEMO If possible, segue into a live demo of your product or service at this point.
A demo is worth a thousand slides if you can do a good one.
COMPETITIVE ANALYSIS Provide a complete view of the competitive landscape. Too much is better than too little.
Find out in advance what competitive product or service the prospect uses. Even better, try to find out what problems the prospect is having with it. However, never dismiss your competition. Customers want to hear why you're good, not why the competition is bad.
MANAGEMENT TEAM Describe the key players of your management team, board of directors, and board of advisors, as well as your major investors.
The purpose of doing this is to make the prospect feel comfortable with buying from a startup.
NEXT STEPS End your presentation with a call to action such as a trial period or a test installation.
-- Potential Partner Pitch --
TITLE Organization name; your name and title; and contact information.
The audience can read the slide—this is where you explain what your organization does. ("We sell software." "We sell hardware." "We are a school." "We are a church." "We protect the environment." Cut to the chase!
PROBLEM Describe the customer pain that you're alleviating.
Be sure that the potential partner currently sells, or wants to sell, to the same customer as you do.
SOLUTION Explain how you alleviate this pain for the customer, plus how you could do an even better job with a partnership.
The goal is to get the potential partner thinking how 2 + 2 can equal 5.
PARTNERSHIP MODEL Explain how the partnership would work: who does what, when, how, and why.
This slide should continue the positive effects of the previous slide—making the synergies more and more apparent and appealing.
UNDERLYING MAGIC Describe the technology, secret sauce, or magic behind your product or service.
The less text and the more diagrams, schematics, and flowcharts on this slide, the better. The purpose is to convince the potential partner that you have something special.
DEMO If possible, segue into a live demo of your product or service at this point.
...A demo is worth a thousand slides if you can do a good one.
COMPETITION This is an optional slide. The main reason to skip it is to avoid informing your potential partner of a better organization to work with than yours.
MANAGEMENT TEAM Describe the key players of your management team, board of directors, and board of advisors, as well as your major investors.
The purpose of doing this is to make the potential partner feel comfortable with buying from a startup.
NEXT STEPS End your presentation with a call to action such as a trial period or a test installation.
Get there early. If there's no projector, or it doesn't work with your laptop, it's your fault. Bring a projector, a laptop (2 laptops, just in case?), and a backup copy of the presentation, and even printouts of it just in case.
Before starting the presentation, ask the audience, "How much of your time may I have?", "What are the three most important things I can communicate to you?" (You should have gotten this in advance, but it doesn't hurt to clarify this again.), "May I quickly go through my PowerPoint? presentation and handle questions at the end? However, please feel free to interrupt me if you need to." (bayle: i'm skeptical of the third one, because it doesn't say anything, and somewhat skeptical of the second, because it could turn into a time-wasting free-for-all).
Let one person do the talking: "In a pitch, the CEO should do 80 percent of the talking. The rest of the team (and there should be no more than two others) can present the one or two slides pertaining to their specific area of expertise. They can also provide detailed answers if any questions arise. However, if the CEO can't handle most of the pitch by himself, he should practice until he can. Or, you should get a new CEO."
Team members should not "try to "rescue" the CEO when the audience pushes back on something he said. For example, suppose someone wants to debate a multiple-tier distribution system for selling products. A team member, with all good intentions, asserts, "I think you're right. I've thought for a long time that we should only sell directly to the customer." Bad move. This doesn't show flexible thinking, an open environment, or a broad-based set of expertise. It shows a lack of cohesion. The only right answer is for the CEO to say, "You raise a good point. Can we follow up with you on that?""
Catalyze fantasy: Everyone has a slide from Gartner or IDG saying that the size of their market is $50 billion. These are meaningless, don't use them. Instead, do one of two things. (a) Instead, present your Total Addressable Market (TAM) size. (b) Forget the market research and catalyze fantasy. E.g. ur product tests the security of Web sites that accept text input from visitors. Here's how the fantasy would go: • Almost every Web site has a place to enter text. • There are a lot of Web sites. • Every company is afraid of being hacked into. • Lots of companies will need to buy this product.
Don't be very abstract (words like "strategic, partnerships, alliances, first-mover advantage, and patented technology") or very specific (actual explanation of the technology like a geek would like). Be in the middle.
When your audience is speaking, shut up, take notes, summarize, regurgitate, and follow up (follow up ASAP).
Prepare ur pitch. Try it out on about ten occasions of friends, relatives, etc. Fix it. Start writing biz plan.
At some point rewrite your pitch from scratch.
Practice about 10-25 times (audiences of friends, relatives, etc).
ppt tips:
Imagine that your audience is at the end of a long day of boring meetings; everyone is barely awake, much less attentive; and people just want to go home. More often than not, this is what you'll walk into.
Don't hand out presentation at the beginning.
BIZ PLANS
Make the pitch first, then base the plan on it -- not the other way around. Mostly this is b/c no one reads the plan unless they like the pitch. But it's also b/c the pitch is shorter and so easier to change.
Same 10 items as the 10 slides of an investor pitch go into a biz plan.
Focus on the executive summary.
"A good executive summary is a concise and clear description of the problem you solve, how you solve it, your business model, and the underlying magic of your product or service. It should be approximately four paragraphs in length."
After you write the biz plan, pretend that you are only allowed to read the first two pages. Do they make you want to read the rest?
Tips:
More tips:
Financial projections: " Investors don't spread business plans across the table and pick the ones to fund based solely on financial projections. Most business plans submitted to venture capitalists are more similar than they are different. Specifically, they all project fourth- or fifth-year sales of $25 million to $50 million. Anyone who can boot Excel can achieve these theoretical results. However, financial projections, which investors require, are a significant part of a business plan. Generally, they want five years of projections to help them understand the scale of your business, determine how much capital you'll require, and consider the assumptions inherent in your business model.
Here is how four leading venture capitalists describe what they look for in financial projections.
HEIDI R0IZEN (M0BIUS VENTURE CAPITAL): "I like to see detailed monthly numbers for the whole use of the round of capital in question, then quarterly for the year after that, then annual through profitability, which I realize are fantasy but I want to understand the assumptions the entrepreneur is using to get to total market, total share they will get, and what it will cost to get there."
MIKE M0RITZ (SEQUOIA CAPITAL): "No projections ever come true, so entrepreneurs should forget about trying to assemble a compendious set of financials. An early-stage venture capital investor really just wants to gauge how much money is going to be required until the company can support itself from its own cash flow. We always focus on the first eighteen months to two years on the assumption that if we can weather this period we will be in far better shape to deal with what comes after. We like a few well-thought-out projections (by quarter for the first two years and annually for years 3, 4, and 5) that present a profit-and-loss statement, a balance sheet, and cash flow projections."
GARY SHAFFER (MORGENTHALER VENTURES): "Five years is typical, despite the typical lack of credibility of the further-out years. A shorter time frame, like three years, may be fine for raw startups. As a rule of thumb, investors are typically looking for a forecast that goes out to whatever year is necessary for the company to get to 'significant' revenues. And if that's more than five years, that might be appropriate. That helps bracket how much cash will be required to finance the company to profitability, which is something investors always want to have a rough idea about."
STEVE JURVETSON (DRAPER, FISHER, JURVETSON): "Every business plan has financial projections that start low and shoot up to absurdly high profit forecasts for the third year. We typically discount these projections, but the forecast is useful to show optimism and growth potential. What's more important than the projection, however, are the assumptions used to reach the conclusions: the business model, the market size, the pricing, channels and resulting gross margins, and the capital intensity needed to fund growth. Ultimately, we want to fund entrepreneurs who want to change the world, and to initiate those discussions, a half-page of five-year financial projections coupled with a thoughtful discussion of the key drivers should suffice." "
When you write a business plan, make it seem "deliberate", "conscious and analytical, featuring rigorous use of historical data, technology road maps, and competitive analysis ... write as if you know exactly what the future holds". But actually, you don't know anything, so in reality, react fast, "react opportunistically when you encounter reality", be "influenced by the day-to-day realities experienced by middle managers and workers on the front line. It is ad hoc and can react quickly to problems and opportunities", because "you don't know when your product or service will ship, who will buy it, how much they will pay, and if they'll ever reorder it," (but "you can't state this in a business plan").
" Q. How often should I review the business plan?
A. The usefulness of a business plan rapidly declines after the first six months or so. Initially, a business plan gets the team on the same page, helps get new employees up to speed, and raises money. However, from the second year on, you won't be writing emergent plans. At that point, your business plan will be deliberate: focusing on budgeting and forecasting with quick summarizations of goals (what) and strategies (how). "
BOOTSTRAPPING
Optimize cash flow, not profitability
" A bootstrappable business model has many of the following characteristics: • low up-front capital requirements * short (under a month) sales cycles * short (under a month) payment terms * recurring revenue * word-of-mouth advertising "
" On the revenue side, managing for cash flow means passing up sales that are profitable but take a long time to collect. On the expense side, it means stretching out payments for everything you buy. On paper, your organization will appear to be less profitable— primarily because of the foregone sales. "
These requirements point to products, services, and target markets with the following characteristics: • People already know, or it becomes immediately obvious, that they need your product or service. You don't have to educate your potential customers about their pain. • Your product or service is "auto-persuasive." (see Schrage, "Letting buyers sell themselves"). That is, once people recognize their pain and how you solve it, they can persuade themselves to take the next step and buy what you're offering.
" BUILD A BOTTOM-UP FORECAST No bootstrapper in his right mind would do a top-down forecast by calculating how much of a market one needs to be successful. This is the kind of model that typically starts with a large number and works down to extrapolate projected sales from that figure. For example, let's say you're starting a company to sell Internet access in China. Here's a typical top-down model: • There are 1.3 billion people. • 1 percent want Internet access. • We'll get 10 percent of that potential audience. • Each account will yield $240 per year. • 1.3 billion people X 1% addressable market X 10% success rate x $240/customer = $312 million. And—added bonus!—look at how conservative these percentages are!
...
Instead, ... build bottom-up models, starting with real-world variables such as • Each salesperson can make ten phone sales calls a day that get through to a prospect. • There are 240 working days per year. • Five percent of the sales calls will convert within six months. • Each successful sale will bring in $240 worth of business. • We can bring on board five salespeople. • Ten calls/day X 240 days/year x 5% success rate x $240/sale X 5 salespeople = $144,000 in sales in the first year.
You can argue as much as you like about the precise number of calls per day, success rate, average sale, etc.; the point here is that a bottom-up model yields a much more realistic forecast than even the most pessimistic market share estimates of a consultant's forecast about the total size of a market. The magnitude of your bottom-up forecast will establish the degree of bootstrapping you'll have to do. The only information that will point out the need for bootstrapping more accurately is looking at your bank account balance. "
Ship, then test (unless you are making something that could hurt people).
Questions to ask to determine when to stop developing and start shipping:
" • Does our product or service, at this stage of development, leapfrog the competition?
Another way: "Would I let my mother or father use the product or service in its current state? If the answer is yes, ship it. Another question you could pose is this: Are we running out of money? Nothing can focus an organization like the prospect of death."
Forget the "proven" team. "Focus, instead, on affordability—that is, inexperienced young people with bushels of raw talent and energy. This will initially reduce the prospects of raising venture capital", but that's improbable anyway.
Start as a service business (consulting).
In the long run, a service business is fundamentally different from a product business. The former is all about slave labor and billable hours or projects. The latter is all about research and development, shipping, and spreading costs over thousands of boxes going out the door.
Service providers: focus on function, not form. E.g. proper accounting does not mean retaining a big-name firm (form) and then assuming the job will get done (function).
Service providers are a big part of startup costs, so here are tips on making the right choice when assessing them: ° Select a firm that specializes in the type of work that you require. For example, to review venture capital finance work, you should not hire Uncle Joe the divorce lawyer because he's cheaper, or a Wall Street law firm simply because it has a big name. • Understand that at times the right decision will be to pay more. Investors, for example, may feel more comfortable dealing with companies that use the "usual" lawyers and accountants who do your type of work. 0 Check the references of the individuals who are handling your business—and not just "the firm's." The most powerful reference these providers can have is happy entrepreneurs. • Negotiate everything. Circa 2004, everything is negotiable: rates, payment schedules, and monthly fees. Even in good times, don't be afraid to negotiate—it's part of the game. Many firms, for example, will delay billing until you're funded if you have the chutzpah to ask. • If you can't stand the person you'll be working with, switch people or switch firms. Life is short, so work with vendors you like.
Pick your battles -- use commodity parts and outsourced processes when possible.
Sell direct.
"For all these reasons, sell directly to customers. Once you've debugged your product or service and established sales, use resellers to accelerate, expand, or supplement your efforts. But do not think that resellers can establish your product or service for you or provide the quality feedback you'd get from selling to customers on your own. "
todo
Maybe position yourself against the market leader or against accepted ways of doing things.
" Rather than trying to establish your product or service from the ground up, you utilize the existing brand awareness of the competition. Consider these examples of how you can do it:
• Lexus: "As good as a Mercedes or BMW, but 30 percent cheaper" Southwest Airlines: "As cheap as driving"
Positioning against the leaders or standard ways of doing business can save lots of marketing, PR, promotion, and advertising dollars, so pick the "gold standard" in your industry and isolate an important point of differentiation in your own product, such as • cost • ease of use
By spending millions of dollars and years of effort to establish its brand, your competition has done you a terrific favor—all you have to do is positioned against it.
There is a catch, though, because successful positioning against a leader requires three conditions:
• The leader is, and remains, worth positioning against. Imagine, for example, if you had positioned your company against Enron when Enron was the darling of Wall Street. • The leader doesn't get its act together and erode your advantage— for example, if you position your computet as faster than IBM's and then IBM quickly responds with an announcement of a radically faster model. • Your product or service surpasses the competition's in truthful, perceptible, and meaningful ways. If not, no one will care about your hype. Worse, you'll lose your credibility, and credibility is hard to regain.
Still, for the near term, this can be a useful technique to enable you to explain what you do on a low budget. "
STAY IN TOUCH WITH REALITY The ten most important questions you can ask for the purpose of staying in touch with reality:
" 1. When is your product or service going to be ready for market? 2. What are your true, fully loaded costs of operations? 3. When will you run out of money? 4. How much of your sales pipeline is going to convert? 5. How much of your account receivables is collectible? 6. What can your competition's product or service do that yours can't? 7. Who are your nonperforming employees? 8. Are you doing all you can to maximize shareholder value? 9. What is your organization doing to change the world and make meaning? 10. How good are you as the leader of the organization? "
HAVE A WET BLANKET PERSON KEEPING YOU IN TOUCH WITH REALITY (Kawasaki calles this a "Morpheus", in analogy with "reality" in the movie The Matrix)
Typically a " chief financial officer, chief operations officer, controller, or accountant.
• The adult doesn't need to be a grump, but simply someone knowledgeable about the real-world operation of an organization. The person's role isn't "naysayer" but "realist."
• As such, this person is the yin to the CEO's yang. The CEO decides "what," while this person decides "how" and "why not." Their relationship is not an opposition but a counterbalance. • should have at least ten years of operating experience. A background primarily as a consultant, auditor, banker, journalist, or analyst is a bad idea because it's easy to "advise" but hard "to do." The single best question to determine if a person's background is adequate is "Have you ever fired or laid off someone?" If the answer is no, keep looking.
In actuality, they may not wind up being a single person. "
The role may shift around. Examples: • research-and-design: tell you that what you're creating is flawed * operations: tell you that your systems can't handle the business * finance: tell you that you're spending too much (or too little) money * ethics: tell you that you're inculcating the wrong values "
"Which is worse—to leave money on the table because you can't handle all the business, or to lay people off because you overestimated revenues? ... laying off people is worse... understaff and outsource". But "don't outsource strategic functions such as research and development,* marketing, and sales." Do outsource e.g. payroll (to e.g. PayChex? or ADP).
(why? if you lay off people, the following issues:
" • excess space locked in a long-term lease • excess furniture and computers • trauma in the organization as people are let go • trauma in the lives of the people who are let go • trying to hire different kinds of people (for your new reality) in the midst of letting others go • going through gyrations to convince the world that you're not imploding " )
Build a board of directors, even if you are not far along and have not raised boadloads of money.
Sweat the big stuff, not the small stuff. Do the small stuff quickly and cheaply. Small stuff includes "• office space, furniture, computers, office equipment, office supplies, business cards and letterhead. Big stuff includes • developing your product or service • selling your product or service • collecting the money for your product or service."
The real "enemy of bootstrapping isn't spending—it's failing to execute". Execution tips: "
" Q. With your emphasis on execution, what do I do if someone doesn't execute? Should I simply fire the person? A. It's not that simple. Find the real reason that a person failed to execute. There may be problems that were out of his control. Isolate those problems and fix what you can. A good rule of thumb is to give the person the same "due process" that you'd like your board of directors to give you. When due process is exhausted, make the cut, and make it quickly and decisively. "
RECOMMENDED READING Godin, Seth. The Bootstrapper's Bible: How to Start and Build a Business with a Great Idea and (Almost) No Money. Chicago: Upstart Publishing, 1998. Hess, Kenneth L. Bootstrapping: Lessons Learned Building a Successful Company from Scratch. Carmel, CA: S-Curve Press,2001.
RECRUITING
" It is essential to employ, trust, and reward those whose perspective, ability, and judgment are radically different from yours. It is also rare, for it requires uncommon humility, tolerance, and wisdom. —Dee W. Hock "
" Good recruiting starts at the top: CEOs must recruit the best people they can find. ... [look] beyond superficialities such as race, creed, color, education, and work experience. Instead, ... focus on three factors:
1. Can the candidate do what you need? 2. Does the candidate believe in the meaning you're going to make? 3. Does the candidate have the strengths you need (as opposed to lacking the weaknesses you're trying to avoid)?
If candidates pass these tests, then go get them, but in a smart way— by using all your weapons, negotiating at the right moment, and doublechecking your intuitions. After they're on board, you should define a honeymoon period during which both parties can analyze whether things are working out. Finally, as a philosophical framework, make the effort to "recruit" your employees every day—to make sure they want to come back the next day. "
"Hire 'A' players.
I start with the premise that the function of leadership is to produce more leaders, not more followers. —Ralph Nader
Steve Jobs has a saying that A players hire A players; B players hire C players; and C players hire D players. ... This trickle-down effect causes bozo explosions in companies. If there is one thing a CEO must do, it's hire a management team that is better than he is." S/he must have "the humility to admit that some people can perform a function better than they can" and "the self-confidence to recruit these people."
"Admittedly, urging managers to hire A players is hardly a revelation, and yet many organizations are filled with bozos. This happens because most people don't heed this principle and because it is so difficult to filter out bozos. I can't force you to take this advice, but I can provide five ways to avoid hiring the wrong people: "
Big company skills vs. startup skills:
" Sucking up to the boss Being the boss Generating paper profits Generating cash flow Beating charges of monopoly Establishing a beachhead Evolving products and services Creating products and services Market research Shipping Squeezing the distribution channel Establishing a distribution channel "
Hire people "infected" with your vision. (If the candidate isn't coming to you as a proven believer, then use these techniques to determine if he "gets it.": (a) ask them to demo your product, (b) do they talk about compensation a lot? (c) does the candidate already know the basics of your organization?)
Ignore the irrelevant:
Hire for strengths, not to avoid weaknesses. Everyone has weaknesses.
" EXERCISE Think back about your first few jobs. True or false? (a) I was perfectly qualified. (b) I am holding candidates up to standards higher than the person who hired me used. "
"Once you decide on a person, don't hold anything back and use all your tools to hire him":
Sell all the decision makers. The candidate's spouse, parents, etc.
Don't send an offer letter until the end of the hiring process. "It's like a marriage proposal: Make it when you know the answer will be yes."
Top ten lies candidates say:
" "I've got three other offers, so you'd better move quickly." I've had three other interviews, and no one has flat-out rejected me yet
"I was responsible for my company's strategic alliance with Microsoft," I picked up the fax after Bill Gates signed the document.
"I'm leaving my current organization after only a few months because the organization isn't what the CEO told me it was." I don't know how to do due diligence on an opportunity.
"I've never been with a company for more than a year because I get bored easily." It takes people about a year to figure out that I'm a bozo.
"I didn't really report to anyone at my old company." Any bozo can become a vice president at my company.
"Most of my references are personal friends because they know me best." No one I worked for is willing to give me a reference.
"You've never heard of my last three employers because they were in stealth mode." All the companies I worked for imploded.
"I'm no longer with the organization, but i maintain an excellent relationship with people there." I was forced to sign a nondisparagement agreement to get my severence package.
"I am a vice president, but no one reports to me." No one wanted me in his department.
"I'm expecting to at least double my prior compensation package." I was overpaid and understand that that I may have to take a cash hit for a good opportunity "
Tips for double checking your intuition: " PREPARE A STRUCTURE FOR THE INTERVIEW BEFOREHAND. You and your team should decide on exactly the attitude, knowledge, personality, and experience that are necessary for the position before you conduct interviews.
ASK QUESTIONS ABOUT SPECIFIC JOB SITUATIONS For example, ask the following kinds of questions for a vice president of marketing position:
How did you manage a product introduction? How did you determine the feature set of a new product? How did you convince engineering to implement these features? How did you select your PR firm? How did you select your advertising firm? How did you handle a crisis such as a faulty product?
STICK TO THE SCRIPT. Minimize spontaneous follow-up questions and making up new questions in real time. ...
DON'T OVERDO OPEN-ENDED, TOUCHY-FEELY QUESTIONS. For example, any half-decent candidate can bluff through questions such as "Why do you want to work for this organization?" More pointed questions are better: "What are the accomplishments you're most proud of?" "What were your biggest failures?" "What was your most gratifying learning experience?" "
TAKE NOTES. Don't rely on your memory.
CHECK REFERENCES EARLY. Before you've made up your mind, while they still have a chance to influence you.
"
After this process, if your intuition is telling you one thing and "the facts" are telling you another, answer these questions: • Should you like the candidate (because he is well qualified), but you don't? Should you not like the candidate (because he is not well qualified), but you do? ° Is there a factual and objective basis for your intuition? ° Would the interview have gone differently if you had conducted it over the phone? Let's not deny that the physical appearance of a person can influence your decision.
After taking all these precautions, follow your intuition "
Apply the following test: imagine you are at a store and you see a candidate (or employee or partner or service provider) before s/he notices you. You can: (a) say hi, (b) figure that if you bump into hir, fine, if not, that's fine too, (c) try to avoid hir. Only hire (a)s.
Define an initial review period. About 90 days; "longer than the hiring afterglow, but shorter than the time it takes for the predominant feeling to become Why did we hire this person?". "Establish an understanding that after ninety days, there will be a joint review in which both sides discuss what's going right, what's going wrong, and how to improve performance. Some issues will be your fault! "
Don't assume you're done. Recruiting never stops, even your employees need to be recruited; each day is a new day.
How to check references: "The goal of referencing is not to disqualify a candidate, but to look for consistency in how the candidate represented himself. You are also looking for clues about whether the candidate can be effective at your organization. In order to paint a complete picture of a candidate, you should speak with at least two subordinates, two peers, two superiors, and two customers." Some suggested questions:
" How do you know this person? How long have you known him? What are your general impressions of him? How would you rank him against others in similar positions? What contributions has he made to the organization? How do others in the organization view him? What are his specific skills? What is he best/worst at? What are his communication and management styles? In what areas does he need improvement? Is he capable of functioning effectively in a small organization? How would you comment on his work ethic? Would you hire/work for/work with him again? Should I speak with anyone else about him? "
Also, "...you should get unsolicited references from people the candidate did not provide, too. Find someone who knows someone at the company and check out the candidate. You can also cold call into the company and simply ask the operator to connect you to someone who worked with the candidate. "
Q. When interviewing candidates, should I be honest about our organization's weaknesses as well as our strengths? A: Yes, definitely.
" You'll encounter three types of responses to your candor.
Some candidates simply need an explanation of the problems. Go down the list of problems and explain them. Chances are, they just want to know what they're getting into, and you won't scare them off.
Other candidates want the challenge. For them, problems are opportunities. You should consider telling this type, "You're the guy we need to save us. Can you step up and be a hero?"
You will scare off the third kind of candidate. This person probably wasn't well suited to a startup anyway. "
" Q. When is the right time to recruit CXO-level people: before or after funding the organization?
A. Many people think that the process of starting an organization is serial: A followed by B, followed by C, etc. It's not that simple. Starting an organization is a parallel process: You do A, B, and C at the same time. The answer to your question is that you're recruiting before, during, and after the funding process. I caution you, however, against falling into this trap: An investor tells you that he would invest if you had a "world-class" CXO. You take this as a yes, recruit the person, and go back to the investor. Then the investor comes up with a different reason: "Good job. Now show us some customers actually paying for your product." The lesson is this: Don't recruit to make an investor happy. Recruit to build a great organization.
Q. Should I spend money on retainer-based searches or rely on my own capability to attract the best talent? A. Prior to funding, your job is to use your passion to tap your network to find the right person without paying fees. After funding, use whatever you have to—including retainer-based searches.
Q. If asked, should I provide a salary range? A. No. If you're asked directly, respond by saying something such as, "We will pay what it takes to get a great candidate." Then ask, "What is your current salary level?" This will teach them to ask tough questions. The beginning of the interview process is too early to start mentioning numbers. Candidates will remember what you said—especially the top end of the range. And whatever number you throw out could affect the candidates' answers in the interviews.
Q. If my goal is to recruit "people more talented than myself," how do I retain control of the venture and avoid getting ousted from my own business? A. This question says more about you than you probably intended. Your goal shouldn't be to "retain control" and "avoid getting ousted." Your goal should be to build a great organization. There may come a time when you should be ousted. Deal with it. Would you rather have an inferior organization that failed, but that you were in control of until the bitter end?
Q. I'm working with my best friend. Do I really need a legal agreement? A. Yes, absolutely. Times change, people change, and organizations change. Difficult and inappropriate as it may seem, you must do this. Such a legal agreement may turn out to be the best thing for your friendship and your organization.
Q. What is a reasonable enticement and compensation for a member of my board of directors? A. The range is usually .25 to .5 percent, but for an absolute superstar, I'd go as high as 1 to 2 percent of the company. If it takes more than this to get the candidate, move on. The person is more interested in making money than in making meaning. Q. What do you do when you have to fire the partner who conceived the business, brought you in to help run it, trusts you, and is now clearly in over his head? A. You take him aside and have a private conversation explaining the situation. You offer the person some choices about how to take a smaller role, but you are clear that such a move is necessary. A smaller role can mean taking a different position or serving only on the board of directors or board of advisors. Try to preserve the person's dignity. In most cases, there will be a blowup. Expect that. It might take years to heal your relationship, but that's how it goes. "
RAISING CAPITAL
[i didn't take so much notes here yet]
Focus on building a business, not on raising a capital. Having an attractive business is the best thing you can do to raise capital.
Get a personal introduction to the investor. Some ppl who might be able to introduce you:
Show traction: "Generally, investors are looking for a proven team, proven technology, and proven sales. Investors rank these factors in different order, but the one factor that cuts through all the hyperbole is racking up sales. (In Silicon Valley we call this "traction" ...)".
If you don't have the money to start the company, bootstrap. If your product isn't finished yet, you may have a shot at getting money anywhow. The hierarchy of traction is:
1. Sales 2. Field testing and pilot sites 3. Agreement to field test, pilot, or use prior to shipment 4. Establishing a contact to pursue a field test
You need (4) at the very least to have a chance to get investment, but higher is better.
Issues that will keep ppl from investing:
" INTELLECTUAL PROPERTY: Lawsuits, or the risk of lawsuits, by former employers claiming that your technology belongs to them; core technology belonging to a founder, not the company; infringement on someone else's patents.
• CAPITAL STRUCTURE: Ownership of the vast majority of the organization by a few founders who are not willing to spread it out; dominant control by an inflexible investor who doesn't want any dilution; substantially overpriced or underpriced previous rounds.
• MANAGEMENT TEAM: Married or related co-founders; unqualified friends or roommates in CXO-level positions; lack of relevant industry experience; criminal convictions.
• REGULATORY COMPLIANCE: Noncompliance with state or federal laws and regulations; nonpayment of payroll taxes. lems, but never hide your problems. "
Disclose everything. "If there's crud that hasn't been—or cannot be—cleaned up immediately, then disclose it to investors. And do it early in the process. The later you reveal it, the harder it will get to do so and the more it will harm your credibility."
" What if you started, or worked for, an organization that failed? There's no use in trying to hide this fact, because investors will uncover it. It's also poor form to blame anyone or anything else: the market, other employees, customers, or, in particular, the investors (no matter what the truth is). My recommendation is that you do a mea culpa. That is, you accept as much blame for the failure as is justified and "confess" your sins. Sophisticated investors find this admirable, and many an investor has made boatloads of money betting on entrepreneurs who failed in earlier efforts. What's important is not that you failed—it's that you learned from your failures and are eager to try again. The lesson is this: Clean up your problems or disclose your problems. "
" ACKNOWLEDGE, OR CREATE, AN ENEMY Many entrepreneurs believe that investors want to hear that the organization has no competition. Unfortunately, sophisticated investors reach one or both of the following conclusions if entrepreneurs make such claims: • There's no competition because there's no market. If there were a market, there would be others trying to win it. • The founders are so clueless that they can't even use Google to figure out that ten other companies are doing the same thing. "
" It's your job to show how you are superior to the competition, not that it doesn't exist. A chart that explains what you and your competition can and cannot do is useful to accomplish this.
COMPANY WE CAN DO, THEY CAN'T WE CAN'T DO, THEY CAN X Y Z "
"
Right-handed CEO Drive hybrid cars Vegan employees COMPANY Use Open Source code
" Unfortunately, no one ever does it this way. Instead, they contrive a matrix that makes them look good—frequently with irrelevant, if not downright silly, parameters. Something like this:
Right-handed CEO US COMPANY X COMPANY Y Drive hybrid cars Vegan employees Use Open Source code
If you truly don't have competition, then zoom out until you can define some. Competition can be as simple as the reliance on the status quo, Microsoft (since at some point Microsoft will compete with everyone for everything), or researchers in universities. Pick something, because saying you have no competition at all is a nonstarter. "
" In a typical day, an investor meets with two or three companies and sees another four or five executive summaries. Each company claims to represent a unique and earth-shattering opportunity with a proven team, proven technology, and proven market. No company claims to be a bunch of losers who don't know what they're doing. Also, while you might think that you and your meeting are the center of the universe, in fact you're just the 10:00 A.M. meeting, when there was already one at 9:00 A.M. and two more follow you at 1 : 0 0 P . M . and 3:00 P.M. "
Top ten lies that entreprenurs tell investors:
" Lie #1: "Our projection is conservative." ...
Lie #2: "Gartner (Forrester, Jupiter, or Yankee Group) says our market will be $50 billion in five years." ...
Lie #3: "Boeing is signing our contract next week." As I said, traction is good. It really makes you fundable. But until a contract is signed, it's not signed. When the investor checks in a week, and the contract isn't signed, you've got a real problem. In five years, I've never seen a contract signed on time. Talk about Boeing and your big deals after they're done. In general, make sure that all surprises to investors are upside surprises.
Lie #4: "Key employees will join us as soon as we get funded." Let me get this straight: You're two guys in a garage, you're trying to raise a few hundred thousand dollars, your product is twelve months from completion, and you're telling me that these well-known people are going to resign their $250,000 per year, plus bonus, plus stock option jobs to join your company? When we've checked with these key employees about whether they're in fact all set to join the company, the response, more often than not, is, "I vaguely remember meeting the CEO at a cocktail party." If you're going to tell this lie, make sure that these potential employees are locked and loaded and ready to quit.
Lie #5: "Several investors are already in due diligence." ... They can easily call up their buddies and find out how interested another firm is in your deal.
Lie #6: "Procter & Gamble is too old, big, dumb, and slow to be a threat." ... It's scary enough to investors that you are competing with an established company. Don't seal your coffin by showing how clueless you are.
Lie #7: "Patents make our business defensible." ...
Lie #8: "All we have to do is get 1 percent of the market." This is what venture capitalists call the Chinese Soda Lie. That is, "If just 1 percent of the people in China drink our soda, we will be more successful than any company in the history of mankind." There are four problems with this line of reasoning:
• It's not that easy to get 1 percent of the people in China to drink your soda. • Very few entrepreneurs are truly going after a market as large as all the people in China. • The company that came in before you said something similar about another market. So will the company after you. • A company that is shooting for only 1 percent market share isn't interesting.
The right thing to do, as I discussed earlier, is to either come up with a believable total addressable market figure or catalyze fantasy so the investor can come up with a number himself. But saying that all you have to do is get 1 percent of a big market labels you a bozo.
Lie #9: "We have first-mover advantage." There are at least two problems with this lie. First, it may not actually be true. How can you possibly know that no one else is doing what you're doing? As a rule of thumb, if you're doing something good, five other organizations are doing the same thing. If you're doing something great, ten are. Second, first-mover advantage isn't all that it's cracked up to be. Being a "fast second" might be better—let someone else pioneer the concept, learn from their mistakes, and leapfrog them.
Lie #10: "We have a world-class, proven team." The acceptable definition of world-class and proven in this context is that the founders created enormous wealth for investors in a previous company, or they held positions in highly respected, publicly traded companies. Riding the tornado of a successful company in a minor role, working for McKinsey? as a consultant, or putting in a couple of years at Morgan Stanley doesn't count as a proven background.
EXERCISE Give the list of lies to a friend and ask him to listen to your pitch. How many of these lies do you tell? You fail the exercise if you tell more than two "
TRICK QUESTIONS " In addition to telling new lies [he means as opposed to the same old top ten lies, listed above], you also need to correctly answer trick questions. Investors pose these questions to see if you're inexperienced or dumb enough to utter the wrong answers. Use the following table as a guideline.
INVESTOR TRICK QUESTION / WHAT YOU WANT TO SAY / WHAT YOU SHOULD SAY
"What makes you think you're qualified to run this organization?" "What makes you think you're qualified to run this venture capital firm?" "I've done OK so far, getting us to this point. But if it ever becomes necessary, I'll step aside."
"Do you see yourself as the long-term CEO of the organization?" "What did your limited partners see in you? " "I've been focused on getting our stuff to market. I will do whatever is necessary to make this successful—including stepping aside if needed. Here are the logical milestones at which we can make this transition . . ."
"Is ownership control of the organization a big issue for you?" "I'm going to be putting in eighty hours a week to make this successful, and you're asking me if I care how much of it I own?" "No, it's not. I realize that to make this successful, we need great employees and great investors. They all need to have a significant stake. I will focus on making the pie bigger, not on getting or keeping a big part of the pie."
"What do you see as the liquidity path for the organization?" "An IPO that sets a new record for valuation for NASDAQ." "We know that we have a lot of hard work to do before we can even dream of liquidity. We're designing this company to be a large, successful, and independent entity, Right now, our heads are down, and we're working as hard as we can to to do this. An IPO would be a dream outcome—plus these five companies are possible acquirers in the future . . ."
...
There may be fifty ways to leave your lover, but there are even more ways for investors to tell you no. Unfortunately, entrepreneurs can't take no for an answer (this is part of being an entrepreneur). Simultaneously, investors don't like to provide clear and unequivocal rejections; they prefer the SHITS technique: (Show High Interest, Then Stall). Here are the common responses (using the term loosely) that entrepreneurs receive: "You're too early for us. Show us some traction, and we'll invest." "You're too late for us. I wish you had come to us earlier." "If you get a lead investor, we'll be part of the syndicate." "We don't have expertise in your sector." "We have a conflict of interest with one of our existing companies." (Trust me, if they thought they could make money with your company, they'd resolve this conflict.) "I liked your deal, but my partners didn't." "You need to prove that your technology can scale."
Most of the time what the investor is really telling you is "When hell freezes over." But there are some cases in which investors are genuinely interested but not yet committed. You may get an investment from them, but it will be as hard as herding cats. The key to herding the cats successfully is (to mix metaphors) to get one in the bag rather than several close to the finish line. It's helpful if this cat is a big, beautiful, and well-known one, but any cat that isn't your relative will do. Investors—like misery—love company. Winning over an investor is not only about providing objective, quantifiable, and compelling information through your pitch, business plan, and references. It's as much a dating process as it is an analytic process. The investor who "might" have said no is still watching what you do: • Did you try to establish contact after the pitch? • Did you answer questions that came up in the pitch? • Did you provide supplemental information that supports your case? • Have you surprised the investor by closing big customers or meeting milestones early? • Have other high-quality investors written you a check?
Persistence along these lines can pay off, and you can provide this sort of update weeks and months after your initial pitch to herd the cats. However, continuing to make contact without demonstrable, significant improvements in your story will change your status from "persistent" to "pest." And nobody funds a pest. "
More notes on VCs:
" • They don't know any more than you do about your sector. Still, how could you not think that they do when they are managing hundreds of millions of dollars? • Getting a top-tier investor doesn't guarantee that you'll succeed. These firms make many bets, and they assume that most won't pan out. Raising money, particularly from venture capitalists, is a difficult and long process—and this is if it goes well. May the go-go days of the 1990s return, but they may not, and only a bozo would depend on timing the market. • The moment you take a dollar of outside money, you lose "control." Control has nothing to do with the math of voting shares. When you take outside money, you're obligated to all shareholders even if they own a minority position. • Lower your expectations of what they can do for you, and you won't be as disappointed. Outside investors can open doors for you to kick-start sales and partnerships. They can help you find future investors. They can prevent you from making mistakes if they've seen other companies make similar mistakes. They can make the world take you slightly more seriously because "they invested in you." But this is about it. "
Raising angel capital tips:
" • DON'T UNDERESTIMATE THEM. They may care less about financial returns than professional investors, but this doesn't mean they are suckers. Approach them with the same level of professionalism as if you were pitching a top-tier venture capitalist...
Tips on choosing a board: ... you need people with two kinds of expertise: companybuilding and deep market knowledge. Here are the typical roles that need to be filled:
Tips on managing a board:
" Q. I've got a venture capitalist who wants to invest $5 million in my company! What should I expect in terms of how he will want to interact with the company? A. As long as things are going well, a venture capitalist will leave you alone. Understand a venture capitalist's life: He's on as many as ten boards that meet at least quarterly and sometimes monthly; he has to raise money to invest and keep about twenty-five investors informed and happy; he's looking at several deals a day; and he's dealing with five other partners. He doesn't have the time to micromanage you— and if he thought he'd have to, he probably wouldn't have invested in you in the first place. The more important question is "What can I expect from a good venture capitalist?" Here is the answer: five hours a month of mindshare during which he opens doors for you with prospective customers and partners and interviews candidates for high-level positions at your company. "
Q. How can f identify the venture capital firms that have new funds with a maturity sufficiently far out so they align with my liquidity timeframe? A. You can't, and your liquidity timeframe is unpredictable anyway.
Q. What is the order of approaching the tiers of venture capitalists: tier one, then two, then three, or the other way around? A. "Pitch almost any firm you can get into."
" Q. Should I admit that our sales to date are lackluster (or even nonexistent)? A. Yes, but I would spin it: Your sales aren't lackluster—you're simply "early in the sales cycle with an extremely innovative product." Also, this is why the longer you can bootstrap and get to revenue, the better.
Q. Should I admit to the venture capitalist that I am new to all of this? A. You won't have to because it will be obvious. Thus, you might as well tell the truth. However, to ameliorate this situation, surround yourself with directors and advisors who are experienced. Also, express clearly that you'll "do what's right for the organization and step aside if this is the right thing to do."
Q. How much do venture capitalists talk among themselves? Will my faux pas in front of one be the talk of the watering hole and poison the well for me with the others? A. It's unlikely that venture capitalists will talk about you because there isn't enough time in the day to discuss all the lousy meetings and clueless entrepreneurs. You'd have to do something astoundingly stupid to be a topic of conversation.
Q. Is it necessary to have hired a law firm and accounting firm prior to fundraising? A: First, assuming you pick a law firm that's recognized for its corporate finance/venture capital work, it shows that you know what you're doing. Second, you need an experienced corporate finance lawyer to work through the paperwork of a financing. An accounting firm is less important because there's probably not much to account for yet.
Q. Is it better to ask for the cash to support the whole project up to a liquidity event or just what is needed for the first one or two years? A. You can't possibly know if there will be a liquidity event, when it will occur, and how much money you'll need to get there. However, what you want to get, and what investors want to give, is enough capital to get to the next big milestone, plus six months of cushion for when you're late.
Q. Does my business need to be fully functioning and profitable in order to attract investment capital? A. The venture capital business is cyclic—some would say bulimic. During times of feast, venture capitalists will fund anyone who can boot PowerPoint?. During times of purging, most venture capitalists turn cautious and want "fully functioning and profitable" companies. Your job is to find venture capitalists who make early bets on "unproven" companies. When venture capitalists tell you that they only invest in "proven" companies, they're lying. What they are saying is, "We don't get it, so we're blowing you off by telling you this. If we really got it and believed, we'd take the chance with you." "
" Q. Is it better to have fewer, bigger investors or numerous, smaller investments?
A, You should be so lucky to have the choice. Fewer investors means that there are fewer relationships to manage. Also, if bringing in more investors means you're also getting less sophisticated ones, forget it. However, there are several compelling reasons to get additional investors: (1) More investors means that there are more people helping you by opening doors, recruiting, and generating buzz. (2) When you need additional capital, it's nice to have several sources already in the deal. (3) It's dangerous to have only one investor calling the shots in case you have a disagreement.
Q. When should an entrepreneur give up on getting capital from an investor? A. I've never seen an entrepreneur reverse a negative decision by arguing. When an investor says no (in so many words, as discussed earlier), accept the decision gracefully. Do go back, however, when you can produce "proof." You get proof by finishing your product or service, opening prestigious accounts, raising money from other sources, and building a great team. Persistence, with proof, works.
Q. When accepting angel money, is it reasonable and customary to have a buy-out clause, to allow me to retain my stock if I am able to pay back the angel's loan with interest? A. Absolutely not. Angels are putting money into your company at the riskiest time, so they should benefit as much as anyone. If you do pull off a buy-out clause, you'll rack up bad karma points—and a startup needs all the good karma it can get.
Q. Should current investors attend company pitches to prospective investors? A. If it's OK with the prospective investor, this is usually positively viewed: "The current investors care enough to come with the company to our meeting." If the current investor is a famous person, by all means bring him or her.
Q. Which would appeal more to investors: a product concept that has a proven billion-dollar market in which there are already some big players, or a product idea that will create a new, potentially billion-dollar market that has no competitors in the short run? A. This depends on the investor. There are a handful of investors who like "brave new world" investment, but the vast majority are similar to buffalo: running with their heads down toward a cliff because the rest of the herd is, too. At some level, raising money is a numbers game: You've got to make a lot of pitches to find one investor to write a check.
Q. Which should we have more focus on: pitch how the product solves pain and competitive analysis, or pitch how the investors can get x percent return? A. The former, never the latter. No one can predict when and how liquidity will occur. Attempting to do so will make you look silly.
Q. What is a reasonable salary that a CEO should set himself up with that will not scare an investor away? A. This is hard to answer in absolute numbers. Circa 2004, for technology startups, the answer is probably $125,000 per year. An answer that can better stand the test of time is this: The CEO should not be paid more than four times the lowest-paid full-time employee.
Q. What do I wear to meetings with venture capitalists? A. It depends on what part of the country you're in. On the East Coast, you should wear a jacket and tie. On the West Coast, you can be much more casual—Dockers and a polo shirt will do. No matter where you are, if you're the geek genius, you can probably get away with a clean T-shirt and jeans.
Q. if I do not have an IPO or acquisition as my exit strategy, will I ever be able to attract investors? Would investors ever be interested in making their return through profit sharing or a buy-out from the founders of the company in five to ten years? A. Only if the investor is your mother. If the investors are professional investors, you can forget about raising money without a shot at an IPO or acquisition. If they're angels, investing in your organization might represent a flight of fancy or sympathy—then liquidity doesn't matter as much. But profit sharing or buying out investors is attractive to few investors.
Q. Do entrepreneurs have to accept the valuation proposed by the venture capitalist who wants to invest into their business? A. Whatever the first offer, ask for a 25 percent higher valuation because you're expected to push back—in fact, if you don't push back, you may scare the venture capitalist if he thinks you're not a good negotiator. It would be nice to have some arguments to show why you believe your valuation should be higher—saying that this book told you to push back isn't sufficient. At the end of the day, though, if the valuation is reasonable, take the money and get going. You'll see that either you will make more money than you ever thought possible or your organization will die. In either case, valuation and owning a few more percentage points seldom make a difference. For a rough approximation of your valuation, circa 2004, you can also use Kawasaki's Law of Premoney Valuation: For every full-time engineer, add $500,000. For every full-time MBA, subtract $250,000. If this is too unscientific for you, then use services such as VentureOne? (www.ventureone.com) or Venture Wire (www.venturewire.com) for information about current financings.
Q. How can one protect an idea, given that few investors will sign an NDA (nondisclosure agreement)? A. You're right. Few investors will sign one, and even if they did, simply hearing your idea had better not make it copyable. I've never seen a A. It's a good idea to stop looking and negotiating if you can't meet paytoll. If the deal that you're offered is within 20 percent of what you wanted, take it. Focus on building your business, not finding the best deal. In the long run, the quality of your business determines how much money you'll make, not the deal you cut years before with an investor.
Q. Should I worry more about dilution, the real needs of my business, or the amount the investor wants to put in? A. Here's the priority: the real needs of your business, the amount the investor wants to put in, and, last and least, dilution.
Q. How do I get more value out of my board of directors? A. The first and most important step is to take away their Blackberrys during board meetings. Then, generally, you ask. Surprisingly, many entrepreneurs are too intimidated by their board to actively manage them. Give them assignments and hold them accountable. They're holding you accountable, too.
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PARTNERING
"good partnering ... should accelerate cash flow, increase revenue, and reduce costs. "
"Once you understand [that], a partnership is simply a matter of implementation: making sure the people who do the real work buy into it, finding internal champions, focusing on strengths, cutting win-win deals, waiting for the right moment to bring m lawyers and legal documents, and establishing ways to end the relationship."
" PARTNER FOR "SPREADSHEET" REASONS An effective partnership can produce attractive results for a startup. It can speed entry into a new geographic area or market segment, open additional channels of distribution, accelerate new product development, and reduce costs. I call these "spreadsheet" reasons because they change your financial forecast. Unfortunately, many organizations form partnerships for reasons that don't affect spreadsheets. Instead, they enter into them for a halo effect, to silence critics, because everyone else is doing them, or for the thrill of the chase. ... Never form a partnership to make the press happy. " " EXERCISE Go back to the bottom-up revenue forecast that you made in Chapter 5, "The Art of Bootstrapping." Does the partnership you're thinking about cause you to change any numbers? "
" DEFINE DELIVERABLES AND OBJECTIVES If you accept the theory that the foundation of a good partnership is spreadsheet reasons, you'll understand why the next step is to define deliverables and objectives such as • additional revenues • reduced costs • new products and services • new customers
There are two reasons why very few companies ever define deliverables and objectives. First, the partnership is built on sand, so it's difficult even to come up with deliverables and objectives. This is a bad omen. Second, and less depressing, is that people don't have the discipline to establish these deliverables and objectives because they are too busy, disorganized, or lazy—or they are simply afraid of measuring results. Here is a checklist of areas that should be covered:
" ENSURE THAT THE MIDDLES AND BOTTOMS LIKE THE DEAL .... don't focus on getting CEOs and upper management to agree and show up at the press conference. Ensure, instead, that the middles and bottoms understand the partnership, want to make it work, and value each other's contributions. This cooperation starts when there is a true win-win solution, and both sides need each other. An announcement, if any, should come after the partnership is working well. Indeed, the best partnerships form when the upper management of each company is barely involved. "
" To form a successful partnership, both organizations need an internal champion to keep the partnership going. CEOs are seldom effective in this role because most CEOs have attention-deficit disorder. It's got to be a person or a small group who truly believes in the relationship and will live or die by it. "
So, get internal champions: " • IDENTIFY A SINGLE POINT PERSON IN EACH ORGANIZATION. The partnership's success can't be built on a matrix where multiple organizations each contribute a slice of their time. • MAKE SUCCESS OF THE PARTNERSHIP THE SOLE GOAL OF THE CHAMPION. For the point person, nothing but the partnership counts. Thus, the champion can seldom be an executive because executives always have something else to do. • EMPOWER THE CHAMPION. Making a partnership work involves cutting across internal departments, priorities, and turfs. It can require stepping on people's toes and getting them to do things they don't want to do. For all these reasons, the champion must be empowered, and people have to know he's empowered. "
Only engage in win-win partnerships: "The lopsidedness of many partnerships is not born of necessity. It usually occurs "just because" the larger entity can muscle the smaller one into a poor deal. This is a bad idea for both partners: • Win-lose deals won't last. Oppression has seldom proven to be a sustainable system. • If you want the middles and bottoms to support the partnership, both sides have to see the union as a win. • It's bad karma, and karma counts for everything in a partnership. If you're in a startup, be wary of entering into a win-lose partnership no matter how attractive the terms. They seldom work out. If you're in a big company, rein in your hormones and cut win-win partnerships. They are the only sustainable kind."
DON'T DRAFT A LEGAL DOCUMENT EARLY
" Which comes first: a Kumbaya meeting of the minds or a draft of a legal document detailing the partnership? You can guess my bias. Many entrepreneurs send a draft of the document as a straw man to get the discussion rolling. The thinking is that your organization is more nimble than the behemoth you're trying to partner with. You can move faster, so you'll do the drafting. Also, if you draft the document, then the other party has to start negotiating from your starting point, not theirs. In fact, this is a high-risk approach because a document takes on a life of its own. It may, for example, be forwarded straight to an executive—or worse, a lawyer (see next section)—who wasn't informed that it was "just a starting point for our thinking." A document that's floating around can raise premature red flags that can derail the process.
Here's a better approach: 1. Get together face to face. Discuss the deal points. 2. When you start agreeing, go to a whiteboard and write them down. 3. Follow up with a one- to two-page e-mail outlining the "framework" for a partnership. 4. Reach closure on all details via e-mails, phone calls, and follow-up meetings. 5. Draft a legal document.
Many people try to go from Step 1 directly to Step 5—not a good idea. A document should always follow a discussion, never lead it. "
DONT GET LEGAL ADVICE TOO EARLY " If there's one way to ensure that a partnership won't go through, it's asking for legal advice too early. If you do this, you'll learn that the number of reasons not to do a deal always exceeds the number of reasons to do it. The point is to agree on business terms before you bring in the lawyers. Then find a lawyer who genuinely wants to do deals, not prevent them, and set the right legal framework. Many lawyers view their role as the "adult supervision" that will prevent stupid deals from taking place. However, their bias is often that a deal is bad until proven good. Avoid this kind of lawyer. Instead, find one who views his role as a problem solver and service function for you, the customer. Having found the right lawyer, you need to establish this perspective: "Here is what I want to do. Now keep me out of jail." This is different from asking, "Can I do this?" "
Put "an out clause in the deal, something along the lines of "Either party can end this agreement upon thirty days' notice." This "promotes the longevity of a deal". "Don't misunderstand me: I am not advocating partnerships that are easy to get out of. On the contrary, a good partnership involves the commitment of serious resources by both sides. However, it should be hard to get out of because of the importance of the partnership to both parties, not merely because of a contract."
Top ten big organization lies of partnering: BIG ORGANIZATION SAYS / YOU HEAR
1. "We want to do this for strategic reasons." They can't figure out how or why this partnership is important.
2. "Our management really wants to do this." A vice president heard about the proposal for thirty seconds and didn't have time to say no yet.
3. "We can move fast." No one has talked to the legal department yet.
4. "Our legal department won't be a problem." The legal department will be a huge problem.
5. "We want to time the announcement of our partnership with the release of a new version of our product." The release will be late, and there's not a thing we can do about its delaying our partnership.
6. "The engineering team really likes it" The marketing team is going to kill it.
7. "The marketing team really likes it." The engineering team is going to kill it.
8. "The engineering and marketing teams really like it." The lawyers are going to kill it.
9. "The engineering, marketing, and legal teams really like it." Pinch yourself—you're asleep and dreaming.
10. "We're forming a cross-functional team to ensure the success of this project." No one is accountable for the success of this project.
SCHMOOZING "If you're reticent about schmoozing—because you are shy or you consider it offensive or manipulative—you shouldn't be. In ... The Frog and the Frince, Darcy Rezac defines networking (which is "schmoozing" for goyim) as "discovering what you can do for someone else.". World-class schmoozers adopt Rezac's outward, what-can-I-do-for-you attitude.
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