I came across a link on Twitter the other day to a great article on writing an effective business plan.
80% of updates on Twitter are rubbish but every now and then you get a gold nugget like this which perhaps justifies being on Twitter in the first place.
The article and was first published in the Harvard Business Review in the late 90s (yes that is last century) but the content of the article is still relevant in today’s fast-paced digital world.
The author was William A. Sahlman. Will is the "Head Proff" of Business Administration at Harvard so he is a man worth listening to.
A sentence in the very first paragraph from Will’s article about writing a good business plan struck me:
Indeed, judging by all the hoopla surrounding business plans, you would think that the only things standing between a would-be entrepreneur and spectacular success are glossy five-color charts, a bundle of meticulous-looking spreadsheets, and a decade of month-by-month financial projections.
Will goes on to say that nothing could be further from the truth and in his experience with hundreds of entrepreneurial start-ups:
Business plans rank no higher than 2—on a scale from 1 to 10—as a predictor of a new venture’s success. And sometimes, in fact, the more elaborately crafted the document, the more likely the venture is to, well, flop, for lack of a more euphemistic word.
I couldn’t agree more and have actually written about this subject in a previous article. I also get clients asking me all the time if we prepare our documents using InDesign. The answer? No.
We have a preference for substance over style—provided your document doesn’t look like a complete dog’s breakfast in the first place.
If style and formatting isn’t the problem when it comes to crafting a good business plan, then what is the problem with business plans?
According to Will, the answer is relatively straightforward:
Most waste too much ink on numbers and devote too little to the information that really matters to intelligent investors. As every seasoned investor knows, financial projections for a new company—especially detailed, month-by-month projections that stretch out for more than a year—are an act of imagination.
That doesn’t mean your business plan shouldn’t include any numbers at all. It just means that it shouldn’t be the major focus of your business plan:
Numbers deserve a couple of pages in any business plan but somewhere near the back of the document. Not the front.
Instead of focusing on the numbers, Will teaches his MBA students to structure their business plan around the following ingredients:
Will concludes the article by making it clear that business plans are a necessity but definitely not the "be all and end all" when it comes to securing investment:
There is little doubt that crafting a business plan so that it thoroughly and candidly addresses the ingredients of success—people, opportunity, context, and the risk/reward picture—is vitally important. In the absence of a crystal ball, in fact, a business plan built of the right information and analysis can only be called indispensable.
In short, great businesses have the four parts of Will’s framework completely covered. If only reality was so complicit.
Something a little more visual this week. We've taken Dave McClure's original "How to Pitch a VC" deck on Slideshare and zazzed it up a little bit.
Dave is the founder of the venerable 500 Startups in San Francisco. He is also an entrepreneur and prominent angel investor.
Thanks also to Tomas Bay from Slides that Rock for his guidance on all things slide deck design.
Now the deck.
How to Pitch a VC in 10 Slides or Less (redesigned).
1. Elevator Pitch
2. The Problem
3. The Solution
4, Market Size
5. Business Model
6. Proprietary Tech
8. Marketing Plan
Pitching to a venture capital fund or angel investors can be a daunting task. Not knowing how to prepare a pitch or how to structure that pitch is hard enough without having to sweat on the presentation itself.
Hopefully this deck can help you prepare and present your pitch with more conviction.
If you’re looking to raise money for your startup then no doubt you have given thought to securing investment from a venture capital (VC) fund. But what are VC funds actually look for?
Consider the following items to see if your business might be a good fit for VC investment:
1. You can demonstrate strong proof-of-concept
If you are raising money so you can quit your job, pay the bills and put food on the table then you are off to a bad start. You are deluding yourself into thinking you’ll raise money in this situation. Why?
Professional investors aren’t interested in having a punt. They are interested in adding rocket fuel to a rocket that has already taken off. They don’t want to help you launch your rocket. That’s your job.
2. You have a publicly listed competitor
Are there listed companies doing roughly what you do? If so, you are a good chance of raising venture capital. Very few companies create a new kind of business. Most startups disrupt an existing business.
Think realestate.com.au and the disruption to classified advertising for real estate. Carsales.com.au is another good example in a different vertical.
A VC’s job is to invest in companies that can return a significant multiple on their initial investment. Very few startups achieve this outcome but it needs to be a possibility, and that means you need to be disrupting a pretty big market in the first place.
3. You’re not building a feature of another product
Many startups think if they create one great feature for a big product, then naturally they would be a good acquisition target for a bigger fish. In reality, a big company will just build that feature themselves with no outside help.
Relying on acquisition as your only exit strategy is fraught with danger and kind of like high-stakes gambling.
4. Your traction is fast and rapid
VCs have to justify their appetite for high-risk, early-stage ventures. And to do that they need to invest in startups experiencing exponential growth, not steady-as-she goes linear growth.
Steady linear growth is a noble way to build a bootstrapped business, especially if you are doing it on the side. But if you want to get funding for your company, you need explosive growth.
Many startups think they need funding to get exponential growth. This is a myth. Funding almost never changes the growth trajectory of a company from linear to exponential. If you’re not experiencing exponential growth, your startup is probably not solving a problem that really needs to be solved.
5. You have a team of co-founders
Although many funded startups have one founder, the great majority have two or three. Why is it important to investors? For many reasons: What if you get hit by a bus? The investor wants to mitigate his or her risk.
Also, do other people believe in you? Having co-founders serves as a strong form of social proof. Nobody can do everything on their own and brilliant developers are usually terrible at sales.
6. You’re generating cash
There is a misconception among tech startups that if you are making too much money then you will get valued in terms of an earnings multiple. In some rare cases, this is true. Twitter and Facebook are two very rare exceptions.
Revenue and cash flow are the lifeblood of a company though. You can raise money without it, but typically it is a major factor in determining whether you will secure investment. Your ability to generate revenue demonstrates that you have some commercial acumen, not just an idea.
7. You’re solving a problem that people know they have
The most important part of understanding your customers is understanding their hopes, fears and desires. Often, a founder thinks their idea is the “bee’s knees” without any further evaluation.
If your startup idea doesn’t solve a real problem though, no matter how clever it is, it will almost surely fade into the abyss. Facebook solved the problem of knowing what your friends are up to. The more primal the need you are solving, the more investable your startup.
So will you get the attention of a VC fund?
Just because you want, or think you need, investment from a VC fund doesn’t mean you will get it. Not every company is investable and if you are unable to articulate your story and substantiate your story with solid metrics then you may find it difficult to secure investment from a venture capital fund.
There is no doubt that great presentations are like magic. They captivate and thrill their audiences. Think JFK, Martin Luther King, Winston Churchill, Barrack Obama (not Tony Abbot) and many others.
And great presenters are like magicians. In addition to doing an enormous of amount of preparation and rehearsal, both are reluctant to reveal the secrets behind their performance.
We can let you on a little secret today though with thanks to Tomas Bay from Hong Kong based design firm, Slides that Rock. Bay is dedicated to the design of powerful slide deck presentations for his Sillicon Valley client base.
Bay believes that you need to take into account three key elements before you begin drafting your next presentation. But first and foremost, he believes you should remember one thing: your audience is your hero.
A fatal mistake you can make when presenting to an audience is forgetting that your presentation is not about you. Who is it about then? It is about the people sitting or standing in front of you: your audience.
Without an engaged audience, you and your business, or idea, might fade into the abyss along with countless other game-changing ideas that failed to see the light of day.
With that in mind, Bay believes you then need to know three essential things about your audience, they include:
What is your audiences’ pain point? Or even better, what keeps them awake at night? This will depend on the type of audience that you are presenting to. Most external presentations in the corporate world are given to one of three audiences:
Now you need to consider what your audiences’ main goal is? What do they really want? To answer this you need to consider what their biggest dream is. People respond to emotions.
Don't sell products and services, sell dreams. Click here to see Martin Luther King’s “I have a dream speech” for some inspiration.
Our key focus at IEvoke Communications is entrepreneurs and start-ups in the midst of raising capital for their business.
This group typically has to front-up to private and institutional investors who want to invest in "the next big thing" and grow their capital base. Finding the next big thing is every investor’s dream.
Now consider how can you help solve your audiences’ main problem? Diagnose their problem then suggest how you can make their life better. Making their life better is much more compelling than selling another everyday product or service.
Reinventing the phone
The king of the slide deck in the corporate world was arguably the late Steve Jobs. Jobs had an uncanny ability to make audience engagement appear simple and natural.
His presentations captured an audience’s undivided attention for an hour and a half or more—something that very few presenters are able to do.
Click here to see a video of Jobs’ launch of the iPhone in 2007 as a good example of a presentation that takes into account the elements outline above.
To sum up
In order to successfully connect with your audience you need to know three things about your audience:
Thank you to Tomas Bay and Slides the Rock for sharing their presentation philosophy.
There is a common belief among start-ups and even well meaning advisors that fact and figures alone are enough to secure funds from investors.
Nothing could be further from the truth. Numbers and supporting evidence are very important but they are not the be-all-and-end-all when it come securing seed or expansion funds for your business.
Facts and figures show proof-of-concept and give us some type of certainty. That could be one of the reasons for believing that they are enough to persuade investors to tip some cash into your business. But like most things in life, there is a little more to it than that.
Finding the Animal within
An important element to take into consideration is the art creating a powerful storyline and the impact that has on the human psyche. Take the following quote from the book Animal Instincts, by George A. Akerlof and Robert J. Shiller:
The human mind is built to think in terms of narratives, of sequences of events with an internal logic and dynamic that appears as a unified whole. In turn, much of human motivation comes from living through a story of our lives, a story that we tell ourselves and that creates a framework for motivation. Life could be just one damn thing after another if it weren’t for such stories. The same is true for confidence in a nation, a company, or an institution. Great leaders are first and foremost creators of stories.Effective storytelling, far from being some trick of persuasion, is hard-wired into the human mind. It is inescapable and ubiquitous across all of society and culture.
Another quote from the famed American author of children’s books, Ursula K. Le Guin, sums it up nicely:
The story—from Rumpelstiltskin to War and Peace—is one of the basic tools invented by the human mind for the purpose of understanding. There have been great societies that did not use the wheel, but there have been no societies that did not tell stories.Of course great business stories are never going to be works of pure fiction. You may entertain investors with a clever narrative but they will not invest in your business based on a story alone. Getting the initial story elements right though is critical.
An investor who is captivated by your story will often go out and find the research and the numbers that supports their itch to invest in you and your idea. This happens a lot in sales of big ticket items as well, not just start-up investment.
In the world of psychology this tendency to go fishing for supporting evidence actually has a name: selective exposure. After making a decision we tend to seek out information that supports our decision. But the decision is sometimes already made, in the heat of the moment, triggered by an investor’s intuition or animal instincts, which is moved by your creation of an ancient, compelling storyline.
In the Real World
More evidence of the power of stories is found directly at the home of tech and innovation. Nancy Duarte, the founder of the largest design firm in Silicon Valley, is a massive believer in the power of stories. She even wrote a book about it calledResonate. Her client base includes half of the world’s top 50 companies and its most innovative thinkers.
Duarte constantly makes reference in her book to the contrast between ‘the way thing are’—problem— and ‘the way things could be’—solution—and how bouncing between these dynamics can help affect change in an audience.
Duarte’s specialty is slide deck presentations, for example, Al Gore’s presentation on climate change that was used in his Academy Award winning documentary, An Inconvenient Truth. Duarte makes reference to the power of stories in the opening page of her book:
It all starts with becoming a better storyteller. Possessing the power to influence the beliefs of others and create acceptance of new ideas is timeless. The value of storytelling transcends language and culture. As we move rapidly toward a future of improved connections between people, cross-pollinated creativity, and digital effects, stories still represent the most compelling platform we have for managing our imaginations—and our infinite data. More than any other form of communication, the art of telling stories is an integral part of the human experience. Those who master it are often afforded great influence and enduring legacy. You can have piles of facts and still fail to make an impact on your audience. It’s not the information itself that’s important but the emotional impact of that information. This doesn’t mean that you should abandon facts entirely. Use plenty of facts, but accompany them with emotional appeal.
Take it from another master communicator, Seth Godin, founder of Squidoo and a prolific author and speaker to boot. Godin wrote an article on his blog in 2010 titled “Too much Data leads to not enough belief”. Following is a small extract from his blog article:
"The problem is this: No spreadsheet, no bibliography and no list of resources is sufficient proof to someone who chooses not to believe. The skeptic will always find a reason, even if it’s one the rest of us don’t think is a good one. Relying too much on proof distracts you from the real mission—which is emotional connection."
Telling a powerful story, substantiating your story, and making your story memorable will provide you with the ammunition that you need to raise capital from investors. Facts, numbers alone, do not persuade. Stories get results. Just remember that your story can’t be a work of pure fiction.
There is a lot of discourse in the financial media these days about how to go about raising capital for your business, investor expectations, getting pitch-ready, etc. But there is little if any chatter on what to expect in the event that you actually become one of the golden eggs who manages to secure funding from investors.
T.S Eliot once wrote that “the end is where we start from”, and this is definitely the case for start-ups post the end of a successful capital raising program.The capital raising process is exhaustive to say the least. About 300-500 conversations are required in order to get the right introductions to the right people. Another 100-200 conversations are required with investors in order to secure funding.
It is no surprise then that a new lick of funding can have you popping the cork on the champagne bottle. But this moment in time really is just the beginning.
The headaches for an entrepreneur typically ferment when they jump at the first offer of equity from an investor, without giving proper consideration to the terms that are negotiated with that investor.
Show me the money!
Rushing through the negotiation process—in an effort get much needed funding down the wire and into your bank account—can mean giving up important economic and control rights without you even knowing.
If this is the case then you might be in the gun for a few headaches down the track, or worse, watch your start-up ambitions fade like a ghost in the night.
But it’s not all bad if you take into consideration some key terms before you sign a marriage certificate with your new investor. Your business is your baby after all so losing control is akin to giving your child up for adoption in some cases.
Don’t be a victim. By taking a breath and pausing for a moment, it is possible to build a happy marriage with your new investor(s).
When you do finally get a seat at the negotiating table with an investor, then you're at a distinct disadvantage right from the get-go. Why? They have likely done this a lot more times than you have.
But in general, an investor’s needs aren't that scary and can usually be broken down into two broad categories: economic needs and control needs.
An investor needs some type of certainty in order to be fairly rewarded for their investment in an early-stage business like yours. This means whey will need some type of secured interest if your business fails. This fulfills their economic need.
Second, they will want a say in major decisions about how your company spends money. This fulfills their need for control.
Deal terms have become ever more complex in the past decade, but the bulk of terms spawn from the two basic needs mentioned above. And this is where a commercial lawyer really starts to earn their keep—a good one is worth their weight in gold.
Economic needs that you need to discuss with your lawyer include:
No other point of your agreement will be more fiercely negotiated, and no other point will have such a profound and pervasive impact on the future of your business, and you personally.
Your initial valuation establishes a one hundred ton anchor in the ocean that will exert influence on what the market thinks your company is worth long after your first round of funding.
A fine balancing act
You have to remember that investors have their own self-interests in mind, not yours, when negotiating terms with you. Your goal as an entrepreneur is to give the investor everything they need—not what they want—in order to alleviate this.
The investor also has an incentive to focus on risk, and in general, you as the entrepreneur have the incentive to focus on opportunity.
Further, an investor will be inclined to believe that they are worthy of special treatment. But in general, you as the entrepreneur have the right to argue that you are the leader of a business, building a team, and teamwork requires fair play. This is one negotiating position that the investor doesn’t have.
How you use this negotiating position to reach an agreement on investment terms can determine the success or failure of your business, and even your own economic future.
Getting it right, or being aware of it at the very least, can hopefully create a few less headaches down the track. As if building a business isn’t hard enough. Don’t let your start-up ambitions die with the ink of a pen.
This article is general in nature and some of its content cannot be regarded as legal advice. It is general commentary only. You should not rely on the contents of this article without consulting professional advice from a commercial lawyer or corporate advisor.