Gerald Joseph's Blog On Startups, VCs, Web 2.0, and Everything Else

THE OUTLINE OF AN ANGEL AND VC PITCH

SESSION VIII

THE OUTLINE OF AN ANGEL AND VC PITCH

Complete the presentation in 6-8 main slides with an appendix section of no more than 20 slides:

Problem/Solution

Users/Value Proposition/Unfair Advantage(s)

Market/Sales Opportunity

Management/Advisors/Investors

Company Stage/Company Valuation, (Optional)

Milestones/Revenue Model

5 Yr. Financial Projections/1 Yr. Detailed Budget

VC/Startup Relationships, (Optional)

Appendix (An unabridged copy of the business plan + Noteworthy Company Validating Industry Press, Technology/IT, Technology/IP, Company Founders’ Blogs/Press/Interviews/ Detailed Resumes, Financial Assumptions, Market Assumptions, Company Financiers Detailed Profiles (Angels, VCs, Other Financial Institutions, if any))

HOW TO PITCH ANGELS AND VCS

SESSION VII

HOW TO PITCH ANGELS AND VCS

Dress the way your audience would expect you to dress-Business casual dress is universally acceptable. However, you must know the expectations of your prospective investors. I have a diverse dress code and am ready to wear jeans when meeting a business contact at a beach house or a suit when a meeting is taking place in a major metro area’s financial district. Venue, location, and geography should influence your decision greatly. What’s acceptable in South Beach may not fly in Seattle. So, it is essential to be flexible, be comfortable, and be sensible.

Be fully capable of completing your presentation with 2 or 3 slides-It is highly probable that you will not finish your pitch. Angels or VCs may stop you after 2 or 3 slides and engage in a detailed, protracted series of questions closely examining your value proposition and the functionality of your prototype. If this occurs, you will need to stop the ship from running ashore by responding truthfully and completely to all questions, stated and implied, while simultaneously steering the conversation towards tidbits of important value-prop validating details from the remainder of your pitch.

Beware of the über Geeks-Many Angels and VCs have, official or unofficial, technologists-in-residence or untitled advisors who will be in attendance during your presentation. Many of them are brilliant. However, quite a few of them are misdirected and wrongly motivated. Often, they are former Founders or Employees of recent exited or failed startups, somewhat disillusioned, incubating their next project. They think that they are in the room to actually discredit or defame the entrepreneurs. They often fail to add value to the experience. Their best-case contribution should be to identify potential risks within the venture that are correlated with the technology that the company has employed. Whether the risks are security or scalability issues, technologists-in-residence should quantify the risks then offer potential cost-effective solutions. They are there only to evaluate or troubleshoot the technology. Instead, they sometimes rant on about minutiae that should be fleshed out at a later date, not during a time-sensitive pitch with jaded been-there-done-that investors. Make sure that your own techie, expert on everything to do with your code and backend, responds to all tech inquiries with concise explanations and supporting slides from your business plan’s appendix.

Expect to lose control of the order and rhythmic flow of your slides-As I eluded to earlier, your prospective investors are in control of the pitch. They’ve set the time, place, and duration of your pitch. They’ve entered into the process with preconceived notions of what a good pitch consists of. And you must be flexible and well-organized to keep your composure during the experience. You simply must memorize your presentation and have the ability to recite it from memory without cues in multiple configurations.

Don’t Lie or Exaggerate-Avoid improvised answers. Either identify the appropriate team member who has the answer and have him/her address the question or ask the questioner to restate the question and instruct a team member to take note of the person’s name, title, and question and promise them an answer later that afternoon or the next day.

THE OUTLINE OF A BUSINESS PLAN

SESSION VI

THE OUTLINE OF A BUSINESS PLAN

Executive Summary

Problem

Solution

Users

Unfair Advantage(s)

Market/Sales Opportunity

Market Positioning

Value Proposition

Management

Company Stage

Company Valuation

Milestones

Revenue Model

Financing

5 Yr. Financial Projections

1 Yr. Detailed Budget

Risks/Contingencies

VC/Startup Relationships

Appendix  (Industry Assumptions, Noteworthy Company Validating Industry Press, Technology/IT, Technology/IP, Company Founders Blogs/Press/Interviews/Detailed Resumes, Financial Assumptions, Market Assumptions, Company Financiers Detailed Profiles (Angels, VCs, Other Financial Institutions, if any))

THE DIFFERENCE BETWEEN EARLY STAGE AND LATE STAGE BUSINESS PlANS

SESSION V

THE DIFFERENCE BETWEEN EARLY STAGE AND LATE STAGE BUSINESS PlANS

So, what is the difference between an early stage and later stage Business Plan. Well, the early stage business plan is a forecast or best case scenario document. It must address risks and contingencies, but much of the data required for protracted, serious scrutiny is non-existent.

Early stage Startups live on islands. Early stage companies usually have little, if any, profit and relatively few users so their perspective on their own viability and the marketplace is speculative and circumstantial.

Late stage Startups know that the world is round. Later stage companies have been there and done that. They have empirical data to evaluate their position vis-à-vis their Users, strategic partners, investors, direct competitors, and similar publicly traded or acquired companies.

Later stage companies have the additional burdens of defending their previous forecasts and capital efficiency in their business plans.

They must also demonstrate clearly and credibility how they will substantially scale from their current position into a high growth behemoth capable of commanding market leadership.

SEVEN STEPS TOWARDS CREATING A BUSINESS PLAN AND PITCH

SESSION IV

SEVEN STEPS TOWARDS CREATING A BUSINESS PLAN AND PITCH

Consider Your Business Plan A Perpetual Collaborative Project-In the process of making your business plan a defensible, real-time document you will have to edit it frequently in response to criticisms from advisors and investors. Of course, you will have to quantify the quality of each critique. But after a period of analysis and reflection, move quickly to address any inconsistencies or incompleteness.

Write Your Business Plan With The Proper Motivation-It is a good idea to write a business plan after the successful completion of a prototype and significant feedback from a number of Users, usually family members, friends, coworkers, classmates, professors, alumni, and/or prospective angel investors. Using the prototype and User feedback as impetus, Founders write business plans to form business models, revenue models, marketing plans, and financial projections that will aid them in developing a viable company.

Business plans written only for financiers are often hastily produced, poorly organized, and strategically shortsighted. Few VCs read business plans in detail. They customarily rely on telephone correspondence and face-to-face meetings to ask questions that they feel are pertinent to their decision making process. Nevertheless, most VCs still feel that a written business plan is very professional, gives a good impression, and helps VCs quickly decide whether or not to schedule a meeting with the Startup in the near future. Even if a VC only glances at your business plan, it is still a good idea to write one because it provides impetus for strategic thought and momentum towards securing funding.

Founders who want to be taken seriously will write the business plan early, prior to seeking financing, and will update the plan repeatedly to reflect the changing status of the company, evolving market conditions, and the informative needs of prospective financiers (Angels, VCs).

Know Your Users Intimately-Angels and VCs are highly motivated to make affirmative investment decisions when Startup Founders are experts on the identities and predilections of their Users. Nearly all of your transgressions (lack of experience, faulty business model, etc.) will be forgiven once you approach Angels and VCs with a significant amount of Users and specialized knowledge of your Users and their communities.

Know What VCs Like-In a previously published essay called A Seed Stage Startups' Best Case Scenario For Funding , I discussed what many VCs like to see in a seed stage Startup. In addition to the points raised in the essay, VCs like clarity. The more clarity you offer them in the evaluation and due diligence processes, the higher the probability of receiving funding. First, have an idea that has durability, longevity, and defensibility. If you can’t picture your Startups’ solutions playing a pivotal role in the marketplace over the next decade, then you may have an unsustainable idea with a weak value proposition.

Second, launch wide-open alphas/betas and have plenty Users. VCs like Startups with solutions that are consistently garnering Users. An open beta targeting the consumer software market netting a significant number of Users {maybe 50,000+} in 3 months is significant and adds the greatest degree of clarity to VC decision making. VCs evaluate User behaviors and preferences to determine the degree of traction and sustainability of the Startups’ value proposition and unfair advantage.

Know Your Business Plan’s General Audience-As I stated in a previously published essay called Startups Must Choose Financing Models Wisely , I believe that the decision to go VC or Bootstrap must be made early in the lifecycle of the Startup, preferably prior to completion of a prototype.

Business Plans for Startups seeking different types of funding will have significant differences in their formality, organizational structure, and verbiage. If you are going to Bootstrap and/or rely on Angels as the sole source of your funding, then your Business Plan will have to emphasize the following: cost control, cash flow, viral marketing, word of mouth PR, financial projections, patentable technology, IP strategy, high impact sales strategies, and risks/contingencies. If you are going to secure VC financing, then your Business Plan will have to highlight the following: feasibility and high growth potential of value proposition, unfair advantage, user growth rate, solution usability, sustainable traction, and market growth potential.

Know Your Business Plan’s Specific Audience-Your Business Plan should focus on a specific audience. Consequently, the plan and pitch must be structured according to the needs of your audience. With an Angel or VC who has demonstrated expertise in mobile networking, it is unnecessary, redundant, and, potentially, condescending for Startup Founders launching a mobile networking service to go on a near hysterical upbeat rant about the history of mobile networking. Such histrionics are simply not necessary for persons familiar with the mobile space. However, if you are pitching an Angel or VC who is inexperienced in mobile networking than a certain degree of excited detailed analysis may be required. There are a number of reasons why it is ill-advised to pitch investors who are not experts or at least knowledgeable participants in your Startups’ area of concentration. Besides the fact that you want investors who can offer critical advice based on experience, you risk wasting valuable time and energy on an investor who lacks the informed perspective to make a timely affirmative decision.

It is best for Startup Founders seeking financing to specifically target Angels and VCs who have similar backgrounds and interests. For example, Angels and VCs who are Founders or Former Senior Executives of successful social media Startups would be highly motivated to fund and advise emergent social media Startups offering significant value propositions and unfair advantages.

Speak Like An ESPN Sportscaster To Sustain Interest During Your Pitch-I did a paper in college on the near trance-inducing hypnotic suggestions embedded in the commentaries of ESPN sportscasters.

I focused on the psychological and sociological affects on individuals and groups who were subjected to at least 60 minutes of ESPN sports news coverage per week. I studied the rhythmic tone, popular culture idioms, brand messaging, and hyper-masculinity of the sportscasters speech and found, among many things, that they were very, very effective in engaging people.

They commanded the attention and interest of persons who were often unfamiliar with the subject matter. You could take the most boring drivel and make it interesting using the ESPN sportscasters method of speech. I once gave a presentation on advancements in library science using the ESPN sportscasters’ speech style and was astonished when the talk ran an hour overtime to an eager, captivated audience on a Friday evening during the summer.

Be yourself. Remain authentic. But alter your speech and gesticulations to form a bond with Angels and VCs who urgently need to “get it” within the first 6-10 minutes of your pitch.

FOURTEEN OVERLOOKED QUESTIONS YOUR BUSINESS PLAN AND PITCH MUST ANSWER

SESSION III

FOURTEEN OVERLOOKED QUESTIONS YOUR BUSINESS PLAN AND PITCH MUST ANSWER

Are you focusing on a saturated mass market or a growing niche? And, Why?

What set of key indicators best represents your Startups’ strengths?

What are your Startups’ weaknesses?

How can you make your weaknesses strengths?

How much are you requesting in funding?, How will these funds be used?

What are the key drivers of your Startups’ target market(s)?

Are you a first-mover to market or a follower?

Can you scale from a secondary market position?

Are you one of the top three companies in your industry sector?

What key events need to occur for your company to become the market leader in your sector?

Do you envision your company becoming the market leader within the next three years?

How could your fiercest competitor prevent you from growing market share and becoming the market leader?

Is your solution a treatment, cure, sedative, or vaccine?

Is your Startup strategically or technologically independent, interdependent, or dependent?

EIGHT THINGS YOU NEED TO KNOW TO FUND YOUR STARTUP

SESSION II

EIGHT THINGS YOU NEED TO KNOW TO FUND YOUR STARTUP

VCs Are Not Bankers-Both investment bankers and merchant bank loan officers use a static financial template to make decisions. Investment bankers use raw data to reverse engineer into a static financial model that they scrutinize and use as their operative compass. Merchant bank loan officers simply pull out what amounts to a checklist of criteria a business must fulfill to qualify for funding. Unlike investment bankers, VCs can not make smart recommendations (and collect fees) without having to deal with issues of direct responsibility, execution, and sustainability. VCs are also dissimilar to merchant bankers, who’s loans are often insured and/or hedged, since they obviously can not just process your application, issue you a check, and leave you alone.

Venture capitalists are risk-defying bungee jumpers with much bravado and very thin cords. Seed stage and early stage VCs assess the intangibles of Startups who usually consists of little more than a small team of wide-eyed twenty and/or thirty-somethings and an idea. What this means is that VCs are directly responsible for their decisions due to the subjectivity of the investment selection process. Consequently, VCs have to manage and minimize the risks of their investments by being directly involved in the management of portfolio companies.

Average VC Fund Lasts Approximately Ten Years-VC investment vehicles are called Funds. These Funds provide financing to Startups, which are often referred to as portfolio companies. A grad student recently asked me Is there a time period when VCs are more motivated than usual in making investments? While she was referring to seasons in respect to Spring vs. Summer or Autumn vs. Winter, her question reminded me that the best time to approach a VC is when they have just raised a new Fund with an investment thesis that correlates in whole or in part with your Startup.

For example - If a leading VC Firm recently raised a Fund to make investments in Digital Media Startups, then unfunded Social Media Sites and Blog Networks with subscribers and ad revenue should convince someone familiar with the firm to refer them to the GP. To the contrary, the worst time to seek or even receive investment from a VC is within the last three years of a Fund because “technically” the Startup will not have much time to scale. The VCs’ implied investment expectation is that all Startups in a Fund should reach exit within the ten year lifespan of the Fund.

VCs Expect Startup Founders To Be Committed To Their Startup For At Least An 6-8 Year Period-Launching a Startup can be a seemingly unmanageable lifestyle adjustment. Despite the risks and uncertainties, there are lasting rewards for Startup Founders who persevere. Obviously, if Founders stay with the companies up until the point of exit then they are rewarded fiscally and professionally. Fiscally, they’ve received compensation in the form of vested equity for their hard work and assumption of risks. Professionally, they’ve demonstrated to the entire tech industry that they have the skill set and discipline to successfully manage the processes involved in developing a nascent idea into a viable enterprise.

The average successful Startup reaches exit within a 4-6 year period. The normal conditions within employment contracts and Founder agreements concerning IPOs and M&As usually require or entice Startup Founders to stay on with a firm an additional 2 or more years post-exit. Where the legal docs are mute on this subject, the industry norm is to expect Founders and Senior Execs to maintain their company affiliations for a reasonable time period post-exit. Any departure by a Founder or Senior Executive deemed early by the IPO market or an acquirer may adversely affect both the company’s valuation and investor relations credibility.

VCs ROI Target Is 6x-10x Investment-Before presenting to VCs Startup Founders must be certain that they are confident of the growth potential of their value proposition. Let’s do some oversimplified guess estimating. For the sake of simplicity, let’s say you received $1 million financing in exchange for 25% of your company at $4 million pre money. The VC has a 25% stake and expects a return of 1000% at exit. Well, How much does your company have to grow in value to allow the VC to walk away at exit with $10 million? The answer is growth of over 2500%. While this is a very rough guess estimate, the numbers are fundamentally realistic since we must take mental note of the affects of multiple rounds of financing and dilution. The principal questions that lingers in the mind of VCs while reading business plans and listening to pitches are - Does this Startup have a value proposition that can scale to allow a 10x return on investment post-dilution in a three to five year period? And How much funds and non-cash VC resources are necessary to viably accelerate the Startups’ growth processes?

VCs Customarily Limit Funding To One Year Of Operational Expenditures-Many seed stage or early stage Startups funded by a VC will have funding to pay for no more than one full year of operations. Startup founders must have clearly defined growth-oriented milestones that are attainable within one year. Subscriptions, User growth rates, Monthly Unique Visitors, and the like are appropriate indicators for measuring the feasibility of a Startup. Verifiable progress towards the attainment of these milestones will further substantiate the value of the company and generate interest among VCs who may participate in the next financing round.

Many VCs Distribute Funding To Startups In Tranches Based On Milestones Or Key Metrics Such As Subscriber Growth Rate or Cash Flow-VCs relationships with LPs have multiple impacts on VC-Startup interactions. VCs solicit investments from LPs, comprised of Institutional Investors (pension funds, insurers, government agencies) and adventuresome Billionaires. LPs rarely provide VCs with a check for the full amount of their “pledged” investments. LPs usually provide funds fractionally over a period of time. Only successful serial entrepreneurs can expect access to the total amount of financing from a VC . Inexperienced management teams receive funding in segments based on any key metric(s) that demonstrate a reasonable measure of traction and user adoption. Moreover, these funds are dispersed from VCs as per a mutually agreed upon line item budget with few , if any, contingencies. So, inexperienced Startup Founders can expect very little financial management flexibility after receiving funds from a VC.

Average Successful Startup In VC Portfolio Reaches Exit Within A 4-6 Year Period-This is the ballpark average touted by the National Venture Capital Association, many leading Academicians, and individual VCs. The implications of this fact are innumerable, for example, it debunks the quick IPO or even quicker M&A myths. It should bring Startups, Angel investors, and aspiring VCs to the conclusion that the path from launch to exit is incredibly arduous, long, and rarely results in billion dollar IPOs or M&As.

A VCs’ Decision To Fund Your Startup Has Very Little To Do With Money-The vast majority of affirmative financing decisions involving seed stage Startups are based on the perceived quality, authenticity, and believability of the Startup Founders and their Management Team. Most people, including VCs, become attracted to persons and groups that invoke curiosity. If you are sufficiently complex, personable, and intelligent possessing a diverse skill set and compelling ideas then you may be well suited for Founding and Managing a successful VC-backed Startup.

BLOGCAMP FOR STARTUPS INTRO

SESSION I

WELCOME TO BLOGCAMP FOR STARTUPS!

BLOGCAMP FOR STARTUPS INTRO

I put together a number of posts on business plans and pitches under the title BlogCamp For Startups to pass along some of the knowledge I’ve gained working with entrepreneurs and investors in various capacities. I have experience preparing a broad range of strategic planning and research documents. This text-based simulation of the workshop experience on my Blog will prove useful to Startups looking for ways to improve their business plans and pitches. Startups or any parties with questions or comments may email me directly mailto:[email protected]. To everyone that reads this Blog on a regular basis, I thank you for your readership and look forward to posting regularly in the future. New readers and visitors, please enjoy and I look forward to you stopping by again.