Venture Adventure

Chris Gill of SVASE gave an excellent workshop on creating an Executive Summary. Chris has synthesized his experience along with that of Garage Technology Ventures (who’ve reviewed over 20,000 Executive Summaries), into a roadmap for a summary.

Some thoughts:

• On average, angels will take approx. 30% equity, and VCs 50% equity.
• The dropout rate between financing rounds is typically greater 50% – over half the companies never get their next round!
• The purpose of the Executive Summary is to get the next meeting
• Need to sell & excite!
• The reader wants information that’s important to them. Just as in resume writing, you may have different versions of the ES targeted at different audiences.
• Key founders/employees will have management contracts
• ES should be no more than 2 pages. In fact, it will always be 2 pages, as there is more information required than can fit on one page, and 3 pages is too long.
• The VCs read so many executive summaries that they do pattern recognition during review, and can very quickly decide on their interest level.
• There are 9 important sections to the ES. For the outline, and other useful entrepreneur tools, see the SVASE download page.
• The Grab is really the executive summary of the executive summary
• Write The Grab in the form of a story. It’s more interesting to read. And, more importantly, it helps the first reader to sell the idea to others.
• There are 2 sets of competitors – your product/service/market competitors; and other companies competing with you for Investor attention and money.
• There are 2 schools of thought on teams. The first says that team is everything. The second says the market is everything. In the second case, the investors can (and will) bring in a replacement team.
• There are 3 key roles in the founding team: CEO, CMO, CTO. More than one of these roles may be filled by the same person. However, it is extremely rare that all 3 roles will be filled by one person.

At the end, Chris left a handout, The Ten Commandments of Fundrasing. This handout has lots of good, basic rules for the beginner to follow. I’m not, however, a fan of the 10 commandments style of writing – Thou Shalls are hard to read, and require significant parsing to get to the meat.

SVASE is turning out to have a lot of utility.

I also spoke to Chris about a feedback review of my executive summary. He, unfortunately, doesn’t have the time to do feedback reviews. As an alternative, he suggested showing the executive summary during an SVASE breakfast blub meeting with VCs. He said that it would be very quickly apparent if the ES was generating interest.

So that will be my next step.

Startup-U SFO: How First Time CEOs gain credibility in the investment community and beyond

I haven’t been to any events in the past 6 months or so, and thought, based on the topic, this one might be interesting.  It had two panelists, Ken Schroeder, a general manager to CEO type, and Stuart Coulson, a technologist to entrepreneur type (bios are on the SVASE event page).  The discussion was moderated by SVASE’s Lili Balfour.

Pre-panel networking was typical for a Startup-U event – mostly first-timers.  And mostly web 2.0 space.  There was only one other non-web company/person, and I never really got what they did.

Both Ken’s and Stuart’s advice boiled down to fairly conventional wisdom and common sense.  But it was worthwhile to hear it from people who have been there and done that.

• There’s no quick answer
• VCs will do their due diligence, and will find any skeletons in your closet
• You need your own business plan, even if it’s not the one you share with the VCs
• Honestly filling in your business plan will help you to find your gaps in credibility
• CEOs need to be generalists, not specialists
• CEO needs to find and focus on the key critical area at any given moment in time
• Practice before going to that critical meeting/pitch/sales call, etc.
• Decide in advance how to answer the awkward questions
• Startups are selling two things – their product (to their customers) and their stock (to the VCs)
• CEO must be high energy, high passion all the time – you are the engine that pumps up the company
• VC milestones are their “next point of safety”
• Domain knowledge is critical
• etc.

Ken is also a CEO coach.  Unfortunately for me, he coaches mostly established, 2nd round CEOs.  I did ask for a referral to a first-time CEO coach, but didn’t do a good job in selling myself, so I’m pretty sure that will go nowhere.

All in all, it was worth the time.

Managed to make a different organization’s event this week. The VC Task Force sponsored the VC Connect – Small Fund SIG. From the website: VC Connect: A Q&A roundtable between entrepreneurs and investors from smaller or newer VC funds.  Speaking at the round table were Mark Platshon, Xseed Capital; John Steuart, Claremont Creek Ventures; Carl Showalter (substituting for the schedule Dan Avida), Opus Capital; and Larry Kubal, Labrador Ventures.  Moderating the panel was Bill Reichart, of Garage Technology Ventures.

The event took place at the offices of Wilson Sonsini Goodrich and Rosati, in Palo Alto.  The networking before the event featured some of the best hors d’oeuvres at any event.  They weren’t what I’d call excellent food, but a far cry from the stale munchies I’ve had elsewhere.  I had an interesting introduction conversation with a number of folks.  When I described my project as creating a replacement for Microsoft Exchange (I know – I haven’t talked about that before…), I got a resounding “yes, about time” response from all of the folks.

Unfortunately, one of the people was a little to enthusiastic, and engaged me in a conversation.  At first it was interesting, but then turned into the classic Valley Anti-Microsoft pitch – why wasn’t I going to do open source? What about iPhone?  What about Google?  No offense to this person, but you didn’t allow me to meet other folks, and it was hard to extract myself from your persistent questioning, which bordered on pestering.   I guess it’s something I’m going to have to learn how to handle better.

During the actual round table discussion, there were some useful nuggets that emerged.

• Quantifying the pain point is not worthwhile, as long as it’s big
• Look for signposts that predict rapid growth while being below the radar
• Don’t buy market research reports – it’s just not worth it
• Packaging your pitch – nothing substitutes for research, analysis, carefully selecting users and customers for reference.
• Find a market sub-segment where you can dominate with greater than 40% of the market share
• First mover advantage doesn’t exists
• Good founders do due-dilligence on their VCs
• Team coachability, domain expertise, chemistry, self awareness, why does the team see things that others can’t, are all factors

In general, it was another good introductory session, that allowed me to meet a few more VCs.  However, this was a little more costly than the SVASE events – $72 for non-members.  I’m still debating internally whether or not to join VC Task Force.  On the positive side, it does provide another networking point with the VCs.  On the negative side, entrepreneur membership does run $300/year.  Is this a good way to spend our company funds?

After a long hiatus of, well, everything, I’m back. Thursday, I went to the SVASE StartupU event in San Francisco. This month’s round table was to discuss Executive Summaries. The panel was Will Price of Hummer Winblad and Jim Long of Gabriel Ventures. Both Jim and Will have been on the entrepreneurs side as well as the investors side of the fund raising process.

Like most of the other StartupU events, this one was very much a round table rather than a lecture or question and answer session. This event, however, was far and away the most useful so far. Both Jim and Will basically did a brain dump of what to do for executive summaries, financial models, etc. Jim recommended two books – the first, the classic by Porter about researching competition, the second, Presenting to Win: The Art of Telling Your Story, by Jerry Weissman.

Takeaways include:

• 6 months. Six months
  is
  the minimum
  amount of time
  required to
  fully bake your proposalSix months is the minimum amount of time required to fully bake your proposal – pitch, summary, business plan, etc. It takes that long to make sure that the story is crisp, and to get enough feedback and time to ensure that pitch delivery is rock-solid.
• The top goal of talking to VCs is getting to a quick no. [This led to an quick side discussion - VCs are usually bad about saying no (covered by Brad Feld, among others). Will and Jim maintain that this is because they don't want to burn a bridge on what may be a killer deal. The other issue is, as Will put it, they don't want to get into a point-counterpoint discussion of the reasons for the no.] The idea for the quick no is to ensure that, if it’s a no, you don’t waste either party’s time, and you move on to more worthwhile prospects.
• The executive summary is a sales pitch. In fact, everything is a sales pitch.
• The executive summary is an invitation fora conversation – a teaser. The sole goal is to get to the next stage.
• A corollary is that handling rejection is important. You have to learn without being defensive.
• Will’s preferred Executive Summary format includes a left side panel with key facts (team, technology, financial snapshot/summary, amount of investment required). Right side is text of executive summary, including business & product description, technology, market, distribution, competition, cap table summary, etc. Emphasis on problem you’re solving. Frame the deal for investors, and help to get to a quick no. Show how you get to profitability.
• Mine fields of the executive summary:bad financial projections, and not using the right semantics for market segments, etc. (ex: SaaS today, vs. ASP yesterday). You should assume most investors are current on the market, trends, etc.
• Competition is a good thing – it validates the market, product, idea, etc.
• Understanding competition (e.g., Porter’s Analysis) is critical. Also understanding the value chain and ecosystem.
• Financial model should be a 3 year model, with a bottom-up approach to revenue (see Will’s posts on the subject).
• You need to understand your revenue model – direct sales, channel, etc. Tom says he might even ask for the financial model spreadsheet.
• You can no longer be a Veritas with a 9-month sales cycle. Need to be able to explain why you will have an effective sales cycle.
• Gabriel Ventures looks for Capital Efficiency – if you can get to positive cash flow with less than $10M financing, that’s efficient.
• Absurdly high profit margins allow you to weather issues – non-materializing revenue, markets, etc.
• To develop your revenue projections look at the first few years of 20-30 comparable public companies.
• Develop your key assumptions – especially for what it takes you to reach $1M in revenue – average order size/ASP, time to close sale, %probability of closing random prospect… Build this in to data tables in excel for sensitivity analysis.
• One way to model a market is that the market size is essentially fixed, but you’re moving the dollars from an old technology to a new technology – TV to Video over the net. Advertising from print/tv/radio to the net.
• Demos and/or links to URLs in the executive summary are good (and allow you to track, etc.) You can put in links to your product, or press about the market, competition, etc.
• Demos are not a requirement – the potential investors can visualize the product.
• Don’t go to investors too early. You only get a few chances at that first impression.
• Raising money is a numbers game – Will visited over 60 VCs; Cisco, Intuit 50+, etc.
• Keep the investment pitch process going, even after you’ve signed a term sheet – until the money’s in the bank, it’s not a done deal.
• Lawyers make mistakes (as well as everyone else) – check the cap tables, term sheets, etc.
• Argue over what matters – $/share and # shares. Pre/post valuation, etc. are not as important.
• Series A valuation is a function of the target ownership and the amount of funds being raised. Typically $4 – $6M pre.
• In a syndicated deal, target 40 – 60% ownership after 1st round. E. g., 20% employee pool, 40% investors, 40% founders (high side). Typical employee option pool is 20%, and comes out of founders’ shares. So, founders will have 0.80 ^ (#rounds) when all is said and done.
• Forecast out your cap table in addition to your financials. Should probably include options for advisers.
• A round is to get to a B round. What are your key measurable milestones? A round typically lasts 18 – 24 months. Be concrete and focus on first 6 months.
• Adding value is about knocking down risk. Don’t become a ‘tweener’ company – where you’ve burned through your A money, but haven’t reduced your risk, so can’t raise B money.
• Don’t do the exit math. Stock (flippant) answer to exit strategy is ‘we’re building value here, and the exit will take care of itself. (Although Will did note that the IPO window has opened up a little bit recently.)

Wow! That’s a lot of stuff we covered in a little over an hour. Like I said – a brain dump – it felt like the first day back at school after a very long vacation. In a way, that’s what it really was.

I bopped on over to Palo Alto a couple of days ago, joining up with the folks at the Open Coffee at Deuce France in Palo Alto.  Other than the fact that I’m a Peets snob, and don’t particularly like the Deuce France Coffee, it was great.  (Luckily, there’s a Peets in the same mall.)  Emily and Mike, both of Fatdoor, came, and we discussed fatdoor and its position in the social networking ecosystem.  This led, of course, to a discussion about facebook vs. myspace.  The consensus was that people are started to use facebook as part of their business profile and tools.

I’ve posted some photos to flickr.  Unfortunately, I was facing the morning sun, and all the shots were extremely backlit.  Even with +3 overexposure, they’re too dark in the facial areas.  Next time, we’ll get it right (or closer to right)!