TimR Startup Investor

The Best Investor Deck Ever - Finalist: Sequoia Capital

2012-08-13T22:08:00.001-07:00

Whoa, check out this link. Now, if all investor pitches were this smooth....

Don't sugar-coat your investor pitch

2012-07-05T10:04:00.000-07:00

There's a natural tendency for entrepreneurs to make their investor pitch as attractive as possible, to make the potential investor get that "I can't miss this deal" feeling. In fact, I coach entrepreneurs how to do precisely that. However, it's equally important to be straight with your potential investors, and disclose any and all skeletons, risks, issues, concerns, etc. It's quite disappointing for an investor to discover these when reading the next update by the CEO after the investment was made. That ruins the credibility of the CEO in the eyes of the investment community, which could have long-range implications in future fund-raising efforts.

Do you have a start-up chicken-or-egg product?

2012-01-16T22:57:00.000-08:00

This is a tough one. You have a great new idea for a product or service, but no one will want it until others already have it, or a database has been created. But a database won't get created until you have customers...a classic chicken-and-egg problem. Examples of this include MMOGs (massive multiplayer online games), auction sites, or anything that requires a database or multiple players/participants. If you are considering starting such a company, it is imperative that you have a solid, proven go-to-market strategy that addresses this chicken-and-egg problem.

It's really tough to provide a general solution to this issue, since it will depend on your product or service offered. You might be able to "seed" the site with an initial list of products, or an initial list of participants. Or, you might be able to create an initial database of phantom players just from within your company. It will be important to make sure your customers get the feeling that you are up and running with a huge database of products/players/etc. The point here is, make sure you have thought through this issue and have a solid plan to get through this critical launch of your product before it is needed.

The spectrum of describing your business

2011-12-30T11:19:00.000-08:00

There are times when you will need to explain what your start-up does in full detail, and times when all you get to provide is what will fit on a bumper sticker. So, here's my shot at the entire spectrum of forms that explain your business, from longest, to shortest:

1) Full written business plan (some start-ups don't do this anymore)
2) Business plan presentation (your presentation slide deck...sometimes a proxy for a written business plan)
3) Executive summary (1-2 pages, typically the first section in your business plan)
4) Elevator pitch (explain your business in 3-5 minutes)
5) Mission statement (1-3 sentences that describe your company's purpose)
6) Bumper Sticker (up to five words that describe what your company does)

So, as you move forward with your start-up, have each of these ready for whenever you need them. Who knows, your next customer or next investor might be sharing an elevator ride with you tomorrow.

I have to write a business plan...where do I start?

2011-12-30T11:07:00.000-08:00

Comprehensive advice on writing a business plan requires much more space than a typical blog post can provide, and there are those who even question the necessity of a true, 70-page business plan. Today, many business plans just take the form of a slide deck (e.g., PowerPoint presentation). But, how does one even get started?

First, identify the Problem you're trying to solve. Don't provide your solution yet, but clearly state the problem, and the magnitude of it.

Next, provide the consequences of the Problem. What is the current outcome of the Problem? Again, make sure this is quantified.

Next, state your Solution. Make sure your Solution is disruptive and revolutionary. Just making something a little better isn't going to fly with investors. They are looking for home runs, and you need disruptive solutions to hit home runs.

Next, state the consequences of your Solution. And quantify this.

Once you've done the above steps, you have a great foundation for your business plan and executive summary. Then you can go on to address the other essential topics in the business plan (market, management, competition, financials, etc.).

Angel investing is changing...does your company still look attractive?

2011-12-03T17:28:00.000-08:00

A number of my fellow angel investors and I are finding that the "angel model" of investing just doesn't work in many cases. We come in at an early stage, and if the company needs multiple rounds of VC investment, we are vulnerable to getting squashed...diluted to nothing, or at least watered down to the point that the return just isn't nearly what it should have been once subsequent investment "preferences," etc., are honored. So, to make your company attractive, you either need to convince your angel-level investors that a) there really will be a significant step-up in valuation before the next round, b) there will be at most one more round of angel or VC investment after this one (this includes A-1, A-2, etc., rounds), and/or c) you really will reach profitability or cash flow break-even with the money you're raising. Are you still an attractive angel investment?

Anti-wrinkle cream phenomenon...what?

2011-05-08T02:59:00.000-07:00

Well, you've found that your product really doesn't work that well. But you've found a customer who really needs your product for use in their product. They need it because they need an "edge" over their competition...something they can use to market a new version of their product and get more market share. In fact, your product doesn't even really have to work, but it has to be "perceived" as making a difference. I encountered this situation once, and coined it an "anti-wrinkle cream phenomenon" (because, well, do anti-wrinkle creams really work??). One can generalize this phenomenon to many "gimmicky" consumer products out there (just tune in to late-night infomercials for some examples). I'm writing about this today because, while your product might sell in such a situation, do you really want to be part of a company that fakes out its customers (or customer's customers)? Your company will be much more rewarding for you and all involved if you can build and sell a product that truly has value, and not just a placebo.

Crowdfunding...you need to know what this can offer!

2011-04-19T23:09:00.000-07:00

Crowdfunding (google it, and at least check out what wikipedia says about it) has been around for a while, more commonly known as a way to raise capital for musicians, disaster relief, and other charities. But crowdfunding can successfully be used to raise capital for a high-tech startup as well. A company I'm currently working with recently raised over $24k this way! And their goal was $20k. They did this through IndieGoGo. But wait, there's more to this. Not only did they get $24k and kept 100% of their equity, they now have hundreds of eager consumers, who contributed small amounts of money (for a T-shirt, or a mock-up prototype, etc.), just waiting for their product, and giving them early feedback on design features, etc. Pinch me...am I dreaming? No losers found here.

Here's an outline of the best 20-minute investor pitch you could make!

2011-04-02T00:58:00.000-07:00

The most important items to emphasize in a 20-minute investor pitch are:

1) Team – you guys have done this before, know the space well, and are confident (but not cocky) in your execution. There also are no holes in your team for the next 6 months or so.

2) Market – you have a solid understanding of the market potential and dynamics, and have a solid go-to-market strategy.

3) Product – you’re not in R&D, you’re way past prototype and over the “technology risk hump.” Also, you’re not just a hardware play…you’re a systems play: a complete solution for those wanting/needing a complete package for <whatever you do>. Don’t emphasize the hardware aspect (if you have one) too much…this will scare some investors away…focus on the complete, “shrink-wrapped” solution that you provide.

4) Sustainability – you’re not a one-trick pony…you have a product family. You also have IP, but you’re not resting on just that…your product roadmap is solid with products that go beyond just the first product, which will keep you ahead of anyone trying to do the same.

5) Customers/Partners – you’ve already got a list of companies wanting to buy the product. And, perhaps you have a partner interested in you…a possible early exit for investors.

6) Competition – who’s out there already in this space, and how are you so much better; how are you going to keep knock-offs from cutting into your share and/or margins.

7) Financial sustainability – ASPs, COGS, margins, realistic growth, cash flow, minimal need for and size of future rounds.

8) Use of funds – this round will take the company into initial production with revenue not far behind (right???).

9) Terms – make them attractive

Overall, you want to give the investors that “I can’t miss this deal” feeling substantiated by the content of the slides you make from the outline above.

When to fish, and when to cut bait...or wait, is there another option?

2011-03-29T22:57:00.000-07:00

So, you're in a high-tech start-up, and the technology doesn't seem to be performing as you expected or the product development is hopelessly behind schedule. What do you do? If you're part of the founding team, or at least one of the decision-makers, when do you decide that it isn't going to work and close up shop? When the money runs out? Key to this thought process is to do an assessment of just exactly what intellectual property the company does have, even if it turns out that the technology has no legs. I mention intellectual property not just in the patent sense, but also in a most general sense: just what does the company have that is of value? Does it have really sharp people that can recast the technology or its intellectual property into another market? Has the company developed expertise in its original market such that even though the technology doesn't work, it knows the market and customers so well, that it can use other technology to build a product that will sell into this market? Find out what your company has or does best, and build on that expertise to reinvent yourself.

Fancy titles, but no worker bees...a red flag to an investor

2011-03-13T22:52:00.000-07:00

Let's see, you have five persons in your start-up, and three of them are VPs. Yikes, I actually saw this once. So, who's doing the real work here? This looks really bad from the outside, especially to a prospective investor, and indicates naive management. In a start-up, one should only have a fancy title if (a) s/he has earned it from previous experience at that level, or (b) s/he needs it to convey decision-making authority when talking to customers, suppliers, and partners. Oh, and if someone will join your company only if he gets the title he wants, kindly show him the door. His priorities likely are not in making the company successful.

Step back and look into your company from a fresh perspective

2011-03-01T23:09:00.000-08:00

You grind along day after day, trying to make your start-up a success. You already know you're doing everything you can, because you're "heads-down" 24/7. But sometimes we get so caught up in the day-to-day tactical stuff, that we miss grand opportunities to step back and take a new perspective. Some of my best insights in whatever start-up I happened to be involved in at the time, were when I was stuck on a plane or somewhere with no email and minimal distractions, and I was forced to be idle. That's a golden opportunity to step back, and "re-view" how you've been approaching the challenges of the company, whether they are technical or business-related. That's when new insights into how to approach a technical problem, or new ideas of how to attract that first customer, etc., come about. (This, by the way, is effective in any job and any career, even flipping hamburgers.) Another way to accomplish this is to find a consultant who has domain knowledge in your space, and bring him in for a design review, or a business review. A well-respected person from the outside can bring new insights and ideas to your company.

What should a start-up CEO be doing?

2011-02-17T21:45:00.000-08:00

Well, one answer to this question could be: "Anything and everything." In some sense, this is true...a start-up CEO needs to be *able* to do just about anything and everything except perhaps some of the deep technical stuff. But I've seen CEOs get bogged down in the science way too much, and the business side or fund-raising side of the company then suffers. I've also seen CEOs being penny-wise and pound-foolish...spending too much time trying to save a few bucks, at the expense of losing much more in opportunity costs, or missing the market window. What are the most important jobs of a start-up CEO? Raising money. Refining the business strategy. Talking to potential customers and partners. Keeping his team motivated and the development plan moving forward. Keeping agile as the market evolves. Hiring the best talent. Keeping the company financially responsible. Wow, now that company has a good chance of succeeding.

You have to think and act like an entrepreneur.

2011-01-23T11:53:00.000-08:00

Starting a company is tough. It takes lots of hard thinking, lots of busy-work, and lots of time. It's not a 9-to-5 job, and it will be taxing on your marriage and family life, if you have one. You will be thinking about the job almost 24/7. And you will absolutely love it, which enables and justifies this commitment. Now, if this description doesn't fit you, then you probably aren't a 100% entrepreneur. Sure, you can put your toe in the water and be half-committed, and maybe you'll be successful (or ride on the coattails of others who are committed), but most companies these days don't succeed with a part-time effort, and if you're the only one who isn't committed, then your job is in jeopardy. No easy ride. Feel free to reply with any stories or insights you have on this topic.

But I don't know how to do that.

2011-01-14T18:02:00.000-08:00

Starting a company requires many disciplines, not only in the formation and administration of a real company, but also in solving some of the really hard issues that your company will encounter. Whether it's how to enter a certain expense into your finances, or even finding a bookkeeper who knows how to do this, or solving a technical hurdle that your technologist just encountered, or whether you're suppose to draft a term sheet first (or let your investors do it), don't think that you have to know all of the answers. Your first go-to place should be your co-founders and your own database of contacts, then your board, if you have one yet. These sources will probably have a vast database of contacts, several of which will have your answer, perhaps after one more level of reference to the right person. Don't hesitate, thinking that they might think you should already know the answer. Few CEOs and founders can run a company without support. Tap these resources for your answer and move on to the next challenge. Now!

Analysis Paralysis!

2011-01-05T23:36:00.000-08:00

Okay, I can be nerdy and analytical, too, wanting to test, optimize, test, refine, test... all to make the product even better before I finally release it to customers. But it's easy for this process to continue with no end in sight. At what point do you say enough?! "But the customer would love to have this new bell/whistle that I just thought of." "But I need to try this slightly different formulation...I think it will work better." Enough already. Save something for a follow-on product. Get the product out-the-door, and get some feedback from your customers before you do any more analysis/optimization. That feedback is so much more valuable than continued optimization in a vacuum.

Too many markets...I want to go into all of them!

2010-12-26T13:33:00.000-08:00

Someone recently asked me the following:

"If what you're developing can go in many different products, but you need a product to select a market, do the market research, diligence, and even look for partners with experience in that specific product space...what's a good way to go about that, and still keep yourself open to pivoting in the future? For me, say you can go into the personal app space, or the healthcare transcription space, or the commercial IVR space, or license technology capabilities, or any number of others, the initial people I'd want to reach out to to bring on board or help are all different for each."

Good question. Unfortunately, there's no easy, quick solution. As soon as you have your core product somewhat defined, you (or someone from your team) should be doing a comprehensive market analysis, which looks at all possible markets. For each market, one needs to assess the market size, how difficult is it to penetrate, what are the margins, how much does your solution benefit them, etc, etc. Lots of work here! If you're lucky, you can get a team of business students to do this, maybe even for free, but the timing has to be right w.r.t. their course series. Or, you might be able to find a business student to do an independent study project, again, for free. Other options exist as well. But, before you do any of this, you must have a list of proposed product features to help you define potential markets.

Sometimes, an easy, low-hanging-fruit kind of market is obvious, and that's often a good starting point, even though it might not be a huge market or perhaps not a high-margin market, but it could potentially bring in some early revenue.

Which market to target first?

2010-12-13T22:52:00.000-08:00

My past posts have included discussions about the importance of a market niche and the importance of a product family (not a one-trick pony). So, you've picked a niche and are developing a product family. But how did you decide upon that niche? Was it the largest one? That would be a logical answer, but what if that niche requires much more money to develop and sell into? What if that niche has a much longer sales cycle? Be sure to consider all aspects of the niche you plan to target first. The best one just might be the one that will provide the quickest revenue for you. This is sometimes called the "low-hanging fruit." Now that you have some revenue coming in from this niche, you can fund some other niches that might require more money to develop and/or have longer sales cycles. Oh, and beware of niches that have seasonal sales cycles.

Compensate your advisors appropriately

2010-12-08T22:19:00.000-08:00

Good advisors can be the difference between success and failure of a start-up. Seek out advisors who have expert knowledge of your company's business and market (or some aspect of it). And when you find one, make sure you make it worth his/her time to give you dedicated time. If you're just starting up your business and know you still need to raise lots of money, don't offer your advisor 0.25% of the company vested over four years...there's just not enough upside for the advisor to justify spending any time with you, especially after one considers all of the dilution that is still to occur as subsequent financing rounds occur. Two percent vested over two years is more appropriate. Now, if you've already raised all the money you need to for a while and little or no dilution is foreseen, and you're close to revenue, then 0.25-0.50% over two years is more appropriate. There are other factors that play into this as well, like what is the total projected upside for the company, etc. Bottom line: If you find an advisor who can provide great value, work with him/her to achieve a reasonable compensation package.

But my company is worth more than that!

2010-11-29T14:14:00.000-08:00

How do you value a high-tech start-up? There are many ways, but very few, if any, result in a value with which both the founders and the potential investors are comfortable. I've seen methods like discounted cash-flow and net-present value, which isn't very accurate for a start-up with no revenue yet. I've seen outlandish methods like "$1 million per patent" or "$1 million per employee" but these can be highly inaccurate as well. Some kind of relationship between level of product development and potential revenue in the next one or two or five years is much more accurate, but still a guessing game.

If you're going for friends and family money, or even an angel round south of, say, $1M, the best general advice I can give is to avoid pricing the deal. In other words, attempt to do a CPN (convertible promissory note). This allows you to offer a discount to investors, and not having to commit to a valuation.

If, however, your investors are requiring preferred stock, and therefore most likely an equity round, then you will have to price the stock. What should your valuation be? Whether you try to use and justify any other methods, the bottom-line answer is "what the market will bear." In other words, you and your investors should try to find "comps"...similar deals that have recently closed, then use that valuation, possibly adjusting for any differences between your company and theirs.

Design your next product like a competitor would

2010-11-22T22:16:00.000-08:00

In one of my previous posts, I emphasized that you need to get your product out-the-door. It's also important to have a product roadmap, as stated in this previous post. So after you get that first product out, what should your next product look like? Here's one answer, or at least an exercise you should do. Pretend you are your competitor, looking at that first product. What features would you add or change to make a compelling competing product? Now, consider that product to be our next one.

Determining product pricing...bottom-up or top-down?

2010-11-15T15:38:00.000-08:00

You have your first product done, and you're going to sell it for $15. How did you determine this price? Bottom-up method: Simply put, determine how much it cost you to make it, add to this how much margin you need to make on it so that your company is profitable, and you get your ASP (average selling price). This isn't as simple as it seems, since you have to factor in not only COGS, but shrinkage, returns, sales costs, and then going beyond just gross margin, you have to fold this into your overall financials that account for operating costs, etc.

Top-down method: How much are competing products selling for? Do a market survey of how much customers are willing to pay for the product. Do a sensitivity analysis of how much product you'll sell at $X versus how much you expect to sell at $Y.

Which method is correct? You need to do both to see if you have any overlap or not. If the price you need to sell it at to make your financials come out is above what the market will bear, then you have a problem and you'll have to go back to see what can be adjusted. But if it's the other way around, then you have some freedom to make extra margin, or to keep your price low and go for increasing market share to make that extra profit.

Above all, be brutally honest with yourself. Be ultra-conservative in your numbers, and don't talk yourself into unreachable numbers just to make the financials look good.

Focus on your core competencies

2010-11-11T16:21:00.000-08:00

There are many "layers" of product development, from core IP to a complete system. To get a new, disruptive product out the door, sometimes you need to develop layers that are beyond your core competencies. But be sure to do this for the right reason: because it's necessary to gain market acceptance. Then, once the market has accepted your disruptive product, shed the layers that aren't part of your core competencies and don't have high gross margins. After all, it's your core competencies that help give you that unfair advantage over the competition. Here's an example: Qualcomm developed CDMA back in the late 80's and early 90's. But to get this new, disruptive technology accepted in the market, it had to make handsets and infrastructure equipment (not part of its core competencies, and becoming commoditized). Once CDMA became a popular standard, it shed its handset and infrastructure divisions, and focused on its core competencies: IP licensing and ICs.

Get the product out the door and optimize later

2010-11-09T21:07:00.000-08:00

This is a follow-on to my previous post on validating your market. Entrepreneurs, especially engineer entrepreneurs, like to make that first product perfect. It's nice to be a perfectionist and strive to make the best product, the most reliable product, with the right colors, or the right bells and whistles, etc. But this will most likely come at the expense of time and money, and you might guess wrong on some of the features. Build your first product (or service) and get it out the door. Early feedback from customers is very critical, as it will tell you what you need to focus on for the next version.

No more boring presentations, please!

2010-11-05T10:48:00.000-07:00

If I see another PowerPoint presentation that is "bullet, sub-bullet, bullet, sub-bullet, sub-bullet, bullet...." I'm going to puke. Get creative. Make some sizzle. Stand out from the crowd by making a presentation that engages the audience, not puts them to sleep. I don't mean throwing a bunch of animation up there either...that has become a bit cheezy. Keep the message on each slide simple and powerful. This might mean lots more slides, but that's okay...you'll roll through each one faster and keep your audience engaged. And for heaven's sake, don't read your slides to your audience. Your audience is capable of reading as well as you are. Supplement each slide with expanded comment and not dictation. And if you keep the message on each slide simple, your audience won't have to compete by either reading it or listening to you.

I realize there are different kinds of presentations, but in general the above advice should fit most types. However, if you are giving a copy of your presentation (hard copy, or through email, etc.), then you might have to format it differently, since the slide deck for a powerful live presentation might not come across the right way in a non-live setting. I'll probably expand upon this in a future blog.