Saturday, January 31, 2015

Startups Without Business Plans Are Expensive Hobbies

business-idea-plan-action If you sold your last startup for $800 million, you probably already know how to build a business, and even conservative investors won’t worry about the quality of your next business plan. But, for the rest of us, don’t believe the Silicon Valley myth that all you have to do is sketch your million-dollar idea on the back of a napkin, and investors will line up to give you money.

Based on my experience as an investor and mentor to aspiring entrepreneurs in Silicon Valley and elsewhere, one of the quickest ways to kill your credibility and your startup is to offer a poorly written business plan, or none at all. There really is no excuse these days, with samples on the Internet, business-plan books in every bookstore, and dozens of apps to automate the process.

A great business plan doesn’t have to be a book in length, with extensive financial statements. Most good ones I see are in the range of 25 pages, which is more than enough to describe concisely all the business what, when, where, and how. The plan must simply answer every relevant business question that you could imagine from your team, partners, and investors.

In fact, the process of organizing and documenting these elements is the best way to make sure you understand the answers yourself. Would you be comfortable buying a house from a builder, or building one yourself, with no plan on timeframes, costs, and features? I hope not. Most investors tend to think of startups without a plan as expensive hobbies.

There is no magic formula for a formal business plan format or sequence, but I would recommend the following ten sections, in this sequence, with relevant content:

  • Executive summary
  • Problem and solution
  • Company description
  • Market opportunity
  • Business model
  • Competition analysis
  • Marketing and sales strategy
  • Management team
  • Financial projections
  • Exit strategy

A business plan that skips one or more of these topics is not complete, so don’t jeopardize your one chance to make a great first impression by offering a partial plan. It only takes a little extra work to make it a professional document, with a cover page, table of contents, headings, and page numbers. Don’t try to impress constituents with technical terms, jargon, and acronyms.

If you don’t have the time to write things down, or your writing skills leave something to be desired, don’t be afraid to get some help. No executive I know writes all his own contracts, but every smart one owns every one that is written for him, and understands every element. An entrepreneur who can’t manage a plan, probably won’t be able to manage the new business.

Of course, if you don’t yet understand all the elements, it’s time to learn. My advice here is to check your ego at the door, and find a mentor or a partner who has business experience and domain knowledge to help you plan a viable business. Your idea may be technically right, but without a business plan, it could be dead right, which is not the result anyone is looking for.

There are no guarantees, but various studies have found that entrepreneurs who create a good plan generally double their chances of securing funding and building a successful business. In any context, and especially in the high-risk world of startups where more than 50 percent fail, you need every advantage that you can get.

Marty Zwilling

** First published on Entrepreneur.com on 1/16/2015 ***

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Saturday, January 24, 2015

Non-Disclosures Can Protect Your Idea, Or Destroy It

non-disclosure-agreement Most entrepreneurs I meet are reluctant to disclose anything about their idea to investors before getting a signed confidential disclosure agreement (CDA). Professional investors and advisors, on the other hand, usually refuse to sign these agreements today due to the risk of litigation and administrative workload, and will walk away. How can you make this a win-win opportunity?

First of all, I will admit that there is some risk involved with talking to any potential investors, even with an agreement, just as there is risk in all the elements of your plan, product and market opportunity. Yet I can assure you that people who are paranoid, or want to avoid all risks, won’t be happy as entrepreneurs, so it’s all about balancing the risk-reward scale.

Thus, based on my experience as an entrepreneur as well as a startup investor, there are indeed situations where a non-disclosure is highly recommended, and others where the potential good far outweighs the risk. Here are the key considerations from my perspective:

  1. Dealing with known or trusted investors and advisors. If you are approaching a recognized venture capital group, or even an accredited angel investor, a non-disclosure agreement is counter-productive. These professionals value their integrity, like your therapist or financial advisor, and will not share your business details nor steal your idea.

  2. Unsolicited proposals or requests for information. If you receive an email requesting details on your plan from someone you don’t know, you should respond with a CDA, as well as begin a more serious cross-check with reliable sources. The same is true for people who may approach you at networking events or industry conferences. Build trust first.

  3. Discussions with potential strategic partners. Most often, the best potential partners are already in a business complementary to yours. They could easily be your competitor, or copy your business, so a mutual non-disclosure is required here for protection in both directions. It pays to talk to competitors about the business, but not your business.

  4. Disclosures relative to patents. Entrepreneurs should never disclose the details of a planned or current patent application to any outsiders, even with a CDA in place. Potential investors don’t need this data, except perhaps as part of a final due diligence after agreement on terms. Product details in the public domain can never be patented.

  5. Sharing trade secrets. Some entrepreneurs avoid the patent process, since patent details become public once a patent is issued. Trade secrets, which may be recipes, formulas or processes, should only be disclosed on a need-to-know basis, even to employees, and then always accompanied by a CDA.

  6. Select a reasonable agreement duration. In today’s world of rapid innovation and new technologies, any individual or company should be hesitant to sign an agreement that limits their activities for 10 years or more. In most cases, a term of two to five years should be adequate. If required, all agreements can be renewed before they expire.

The content of a non-disclosure agreement should be kept simple and straightforward, with a minimum of legalese. There are many samples available from trusted sources, including this one from Entrepreneur. I would be suspicious of any similar agreement more than two pages long.

Professional investors often challenge early non-disclosure requests for an idea or concept, since it’s an implementation that makes a business, rather than an idea. They have probably heard the idea a dozen times already, and are waiting to back the right team on the implementation. The last thing they need is an agreement to constrain their actions.

In fact, if you have a good idea, you need smart investors to spread the word to other good investors, so you really want them to talk about you. Remember that without a CDA, you can still explain how your idea works in marketing terms, without revealing how it is implemented or manufactured. If that doesn’t get their attention, it probably won’t get any customer attention either, and that’s the best feedback you can get at that stage.

Marty Zwilling

*** First published on Entrepreneur.com on 1/16/2015 ***

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Saturday, January 17, 2015

How Smart Startups Survive Investor Due Diligence

investor-due-diligence For the elite startups and entrepreneurs who manage to attract the investor they dream of, and survive the term sheet negotiation, there is still one more hurdle before the money is in the bank. This is the mysterious and dreaded due diligence process, which can kill the whole deal. In reality, it is nothing more than a final integrity check on all aspects of the business and the team.

Some entrepreneurs do very little to prepare for due diligence, assuming all the talking has already been done, and the business plan and results to-date tell the right story. Others schedule exhaustive training sessions for everyone on the team, including showcase customers, to make sure that everyone paints a consistent picture. My best advice is to stick to the middle ground.

The Founder needs to remember that meetings up to this point have been primarily off-site, with staged demos, and managed personally by the CEO or a small team. Due diligence always involves on-site visits, informal discussions with any or all members of the team, vendors, and good customers as well as bad.

If there are conflicts within the team, or differing views of the strategy, or evidence of missing processes and tools, the investment process will likely be terminated. Even if the entrepreneur feels that all is well, it’s well worth the effort to prepare with the following actions:

  1. Make sure the whole team is up-to-date on the plan. That might start with the CEO giving the investor pitch to the whole organization, and distributing the current business plan document to everyone. Make sure all business processes are documented and integrated. If everyone has a different view of reality, you have no reality.

  2. Take time to review and resolve any personnel distractions. You need to brief the investor early if there are pending changes that have to be made, or conflicts that may become apparent during the due diligence process. Make sure everyone accurately posts their role with your startup on social media profiles, resumes, and references.

  3. Communicate what is happening and why to everyone. Don’t let the due diligence process be a surprise to the team. Make yourself available to answer any questions, show your enthusiasm, and explain both the positives and negatives of the external investment process.

  4. Visit reference customers, partners, and vendors. Use this opportunity to validate their satisfaction and support for your company and your solution. If you find open issues that can’t be immediately resolved, be sure to proactively communicate these to investors, with an action plan, rather than hope they won’t be found.

Based on the size of the investment, and the runway available, the due diligence process can take several weeks, or even a couple of months to complete. In any case, before the process starts on your startup, you should be doing your own reverse due diligence on the investor, as outlined in this recent article.

For reference, here is a quick summary of key elements which most investors include in their due diligence process:

  • Key personnel review. In all cases, an investor will ask to talk to all key players, and will likely follow-up by calling references and prior associates to verify background, commitment, and experience. Since investors tend to invest in people, more than the idea, the personnel review is normally the highest priority item.

  • Status of the solution. Here investors are looking for feature problems or quality issues on the current product. A hard look will be taken at the technology maturity, the current development progress, and customer satisfaction with early product shipments. In addition, manufacturing and inventory levels will be reviewed.

  • Review of opportunity and segmentation. A key criteria for a good investment is a large opportunity with double-digit growth. This should be a validation of prior assessments, based on any recent changes in trends, economic conditions and customer feedback data.

  • Traction in the marketplace. A smart investor will take an independent final reading in the market on barriers to entry, active competition, demographics, and price sensitivity. Sales and distribution channel activity will be analyzed, as well as cost of customer acquisition, to make an independent assessment of your financial projections.

The key theme for a successful due diligence is full disclosure and no surprises before or after the commitment. If more marriages were subjected to the same rigor, the divorce rate would likely not be in the current 50 percent range. In business as in other relationships, people on the team that have to be above reproach, committed, and working on the same page.

Startup equity investments imply a long-term business relationship, lasting an average of five years. During that period, it is very difficult for either party to get out of the deal, since there is no public market for the stock, and business divorces normally mean bankruptcy. It’s worth your time to do a little extra work here, and make the honeymoon phase a win-win one for both sides.

Marty Zwilling

*** First published on Entrepreneur.com on 1/9/2015 ***

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Saturday, January 10, 2015

10 Ways An Entrepreneur Can Make No Feel Like Yes

just-say-no Every entrepreneur I know can’t find enough hours in a day to do the good things they want, and yet they often find themselves saying yes to new requests. Perhaps because they are optimists by nature, or they just hate to disappoint others, they end up hurting their health, credibility, and effectiveness by not being able to deliver on everything they promise.

In addition to saying yes too often, some entrepreneurs under pressure say no poorly, by attacking the requestor or by avoiding any definitive response. Either of these approaches always make a difficult situation worse, often leading to guilt or a later accommodation.

A successful entrepreneur must be accountable for all commitments, and manage expectations to make this possible. So here are some tips I have learned over the years from strong leaders that can help you say no without damaging current business relationships or future opportunities:

  1. Establish boundaries and honor them for all to see. Let your constituents know your priorities and limits. Don’t continually break your own rules about when you are available or what requests are acceptable. Your actions must match your words, so don’t say yes when you mean no, or hope to squeeze out later.

  2. Ask for time to check your calendar. It’s acceptable business practice to review your schedule, or converse with other principals, before committing to an answer. Don’t respond with a quick yes that you can’t deliver, or a quick no that will ruin a relationship. In all cases, it’s important to commit to a date or time for a final yes or no.

  3. Give credence to your initial instinct. Recognize that your brain and your body often register information that is more accurate than an optimistic emotional reaction, or a negative reaction after a long hard day. Take a deep breath, clear your mind of any external distractions, and analyze your gut reaction before providing any answer.

  4. Voice both the pros and cons to a trusted cohort. Speaking the considerations out loud will help you make sure you understand the full implications of either a yes or a no answer. Every yes answer increases your workload, and every no answer may cut off an opportunity you need down the road. Talking it out also buys you time.

  5. Explore the possibility of a reciprocal favor. This will help the requester understand the impact of the request, and potentially reconsider. In other cases, you may actually get back more than you give up. Every yes should be a win-win proposition, just like strategic partnerships can bring huge growth to both businesses, despite the work.

  6. Explain your constraints before saying no. Rejection without giving a context implies an unreasonable request or a problem with the requestor. People making a request may not understand your budget limitations, current workload, or competitive pressures. In this context, you can also make an encouraging statement about future requests.

  7. Say yes to the person and no to the task. Make sure the requestor understands first how positively you feel about them, despite the fact that the requested task cannot be accommodated in your current workload, strategy, or other boundary. Requestors are then less likely to be left with the impression that your rejection is a personal affront.

  8. Sandwich your no between two positives. Make your answer more palatable with a positive explanation. For example, if your partner asks you to cover a conference, but you have development deadlines at risk, explain these commitments (first yes), how they lock you in town (no), and finish by confirming your focus to an on-time product (second yes).

  9. Defer the decision to a better environment. Ask for the opportunity to discuss the request when you can give the requestor your full attention. When you are in the normal chaos of the startup day, both parties can be easily misinterpreted. Pay attention to body language and tone that often make the negative response more difficult to receive.

  10. Make sure your words are non-defensive but clearly stated. No one wins when a requestor reads your softly spoken no as a yes or a maybe. Long detailed explanations are usually read as defensive or confrontational. The answer should be strong and non-emotional. Just say no clearly, and smile as you say it.

You don’t have to be viewed as a yes person to be viewed as a leader. In fact, if you look at the leaders around you, they are not afraid to say no to the conventional wisdom, and they gain respect for doing it. They have learned the art of saying no with the same conviction and passion they use in saying yes. That’s the best way to change the world and save yourself, so start today.

Marty Zwilling

*** First published on Entrepreneur.com on 1/2/2015 ***

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Friday, January 9, 2015

Don’t Let Your Business Be A Dead Startup Walking

scott-fearon As an entrepreneur mentor and startup investor, I see with sadness the 50 to 90 percent that fail. If you ask them for a reason, most will insist that they couldn’t get funding, or they ran out of money too early. But I’m not convinced that it’s as simple as that. Many are just not facing the reality that their passion had a critical business flaw.

As I was reading a new book “Dead Companies Walking,” by Scott Fearon, who runs a hedge fund that profits from businesses headed toward bankruptcy, I realized that his insights on the common ways that mature companies often doom themselves apply equally well to startups. Every business, young or old, needs to avoid the following six mistakes that he outlines:

  1. Anticipating success based on the recent past. This fallacy, often called historical myopia, essentially involves extrapolating only from recent positive events, and ignoring the reality that markets saturate or evaporate. With the success of Facebook and Twitter, I still see new social media startups almost every day, with most destined to fail.

  2. Relying on an old formula for success. The fallacy of formulas that “can’t fail,” and holding on to troubled ventures, is alive and well in startups. It’s tempting to believe that one more new platform will win for crowd funding or video games, like Indiegogo and Wii. Actually, great new customer solutions lead to great platforms, not the other way around.

  3. Extrapolating you as the target customer. Never mix up what you like with what your customers will buy. Just because you would have loved to have your groceries picked out and delivered, doesn’t mean the mainstream customer was ready for Webvan in 1999. Or ask PlanetRx, an online service for prescriptions, before the Internet was pervasive.

  4. Falling victim to a magical mania or bubble. Perhaps the most famous bubble for startups was the dot.com craze that crashed 15 years ago, where the highest valuations were given to companies with massive user growth, but minimal revenue or profit. This one may be back, and due for another crash. See point #1 or watch history repeat.

  5. Failing to adapt to tectonic shifts in the market. Blockbuster failed to recognize that their industry had fundamentally and permanently changed, and even NetFlix has suffered from the same issue, as video streaming takes over. Things happen fast these days, so don’t get caught re-arranging deck chairs on the Titanic. Fail fast and pivot.

  6. Physically or emotionally moving yourself above the business. More than one smart entrepreneur has been caught in the lofty lifestyle of big money investors, viral growth, and movie star status. Startups can go down many times faster than they go up. Just ask MySpace, eToys, and Pets.com. Never take your eye off the ball in business.

Of course, there are many other common reasons for startup failure, including inexperienced teams, inadequate marketing, no intellectual property, business model doesn’t work, or just giving up too early. Every startup is a step into the unknown, making it a higher risk of failure, so there is no room for complacency or assumption.

In reality, failure is not a bad thing. In a healthy economy, capital markets and discriminating customers fuel growth and new ventures by handsomely rewarding well-executed ideas, and ruthlessly starving out even long-running ventures that refuse to adapt and innovate. A smart entrepreneur learns to embrace failure as a badge of learning that provides a competitive edge.

The lesson here is that even the most promising startups and experienced teams can be misled by sticking with business models that worked in the past, and market opportunities that may no longer exist. While there should be no stigma for failure, there is no joy in being a dead business walking. The quicker you heed these messages, the sooner you will be able to enjoy and celebrate the entrepreneur lifestyle.

Marty Zwilling

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Sunday, January 4, 2015

Entrepreneur Business Forecasts Are Not Black Magic

topper-black-magic Most aspiring entrepreneurs understand that you can’t build a business if you won’t commit to delivering a product or service, but many are hesitant or refuse to commit to any financial forecasts. Yet every business requires revenue and volumes, as certainly as it requires a product to sell. Thus, financial projections for up to five years are a necessary element in every business plan.

External investors will demand a financial forecast, but it’s equally valuable to you, even if bootstrapping. How else will you be able to convince yourself and your team that your business is viable? You need these projections to set internal goals and milestones, and to measure your progress toward reasonable success objectives.

For investors, and even for yourself, it’s also a bit of an intelligence test. Per the words of an old country song, “if you don’t know where you’re going, you will probably end up somewhere else.” If you don’t have a destination, don’t waste your money trying to get there, and don’t expect anyone to support you along the way

Projecting financials is a natural extension of the homework every entrepreneur needs to do on customer opportunity size, product costs, pricing, competition and customer value. There is no black magic involved in predicting the future, if you use these four simple steps, with my basic rules of thumb to keep you on the right track:

  1. Determine your margin on sales. Per-unit cost less cost of goods sold is your gross profit or margin. If you are losing money on every unit, it’s hard to make it up in volume. As a rule of thumb, most viable businesses need a gross margin above 50 percent, even on wholesale prices, to cover operational expenses and survive as a business.

  2. Forecast sales-volume expectations. Project based on your market size how many widgets you will sell in every channel. This should always be a “bottoms-up” commitment from your sales team, not your own optimistic guess. Don’t assume penetration numbers greater than 5 percent in early periods. Doubling revenue each year is a good target.

  3. Quantify overhead costs. It’s amazing how fasts costs escalate as you grow. You need 5 percent or more of revenue for marketing, maybe more for ongoing development, and people costs will double as you add benefits, insurance, training, IT and new processes. Check competitor numbers and industry average statistics to get you in the right range.

  4. Calculate investment amounts and timing. Initial sales success means more cash will be needed for inventory, receivables, facilities and people. Project your cash burn rate to keep at least 18 months between venture capital or angel investments. Controlling cash flow is critical as founders move from working “in” the business to working “on” the business.

From a planning and strategy standpoint, I offer these additional recommendations to maintain your credibility with outside investors, and to balance your risk due to market uncertainty:

  • Always buffer your investment requests. Investment requirements should always be based on financial projections and cash-flow calculations, not on what you think you can negotiate. If your cash flow shows a shortfall of $750,000, add a 33 percent buffer, and ask for a million. Be willing to give up 20 to 33 percent of your equity to support this.
  • Update your financial projections every quarter. Financial forecasts for startups are assumed to be estimates that will be updated as real data comes in. Plan to re-forecast revenues quarterly or even monthly, and replace forecasts with actuals as soon as a period ends. A business plan with old projections instead of actuals has no credibility.
  • Avoid conservative projections, as well as irrational ones. Investors want entrepreneurs to be aggressive, but don’t make projections that make you look like the next Google. Entrepreneurs tend to be driven by their own targets, so pick an aggressive one, and you will likely do better that starting with a conservative one.

I always recommend that entrepreneurs do their own financial projections, rather than rely on an outsider, because it’s the process that adds the value, more than the numbers. For additional value, I suggest the use of a spreadsheet such as Excel as a financial model, with a few variables, like price and volume. This allows a quick analysis of price change and revenue impacts.

You don’t need an MBA to do financial projections for a startup business plan. On the other hand, without financial projections, you don’t have a business plan. When you start a business, as in most other venture, having no plan is a plan to fail. That’s no fun for you, your investors or your customers.

Marty Zwilling

*** First published on Entrepreneur.com on 12/26/2014 ***

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