A business plan checklist for VC funding

This post will doubtless expand as people make suggestions, but I have meant for some time to get round to posting a checklist I can refer people to look over.

Checked	Item
	Have you removed as many superlatives as possible and replaced them with numbers/facts (e.g. changing "Joe has been a leader in user-interaction design for many years" with "Joe has lead user-interaction design projects for BigCorp, and SmallHouse for 10 years and produced the interaction for the WebThingy service used by 200,000 people a month.")
	How would your customer describe the problem that your service/product solves?
	How do your customers solve that problem now, and how will they solve it in the future without you?
	What do your customers pay to solve that problem today, what will they pay for your solution?
	How will you to teach each of your customers about your solution to the point they will buy and how much will that cost (don't forget to allow for those that never get round to ordering/paying)?
	How will your competitors react to your early success? How much will it cost them and how long will it take them to catch up?
	How long has it taken other companies entering this space to build up customers?
	Have you identified a clear route to market, is there a beachhead market segment you have in mind, in what way is this different from the mainstream?
	What more must be done, what will it cost, and how long will it take before the product/service is ready to generate revenue?
	What have the team done before (illustrated with numbers where possible)?
	What other businesses have made good money and/or exits working in the same problem space? What steps have you taken to learn from the people who did that?

Please suggest some more!

The Boomerang Founder: read this before founding a company

David Cohen, and entrepreneur investor and technologist from Colorado has a post on his blog about the perils of co-founder relationships. I would recommend that anyone contemplating forming a company takes a look not just at the article, but equally at the comments of the people on his blog. It describes a problem very well that we see in a significant proportion of the companies that come to us for funding.

How "recession-proof" is your business?

The most popular boast now from entrepreneurs seeking funding is that their business is, to some degree, "recession proof". Whilst it will be some time before we know the magnitude and implications of the economic situation, we can attempt to help our portfolio companies understand how vulnerable they may be. Fred Wilson had an excellent post on the strength of his portfolio using something he dubbed The Survival Matrix. I thought I'd extend this a little by putting together a kind of recession-proofness-test that draws in some of the other issues. Please take the precise numbers with a big "pinch of salt": I am not planning on defending any of the weightings or rankings. I'd welcome any debate about what's included, but my purpose is to highlight issues and help give people a feel for where they stand. When I tried this test on a few portfolio companies it certainly showed a wide disparity. At the lowest 45 points and the highest 109 points out of a theoretical maximum of around 220. My view is that companies upto perhaps 50/60 points really need to think hard and urgently about making what might be quite big departures from plan. Whereas around "100 points" perhaps a slightly more considered view makes more sense even if the actions taken are still pretty firm. I can't imagine many VC-backed companies will get anywhere close to 200! I hope this test helps a little for companies to focus on just how much and how urgently their plans need to adapt. I'm doing a presentation around this stuff at our portfolio seminar this morning which I'll post up too. You can find the calculator here.

Choosing an Entry Market Sector

A common issue I see with early-stage companies is over their selection of entry market sector. Obviously, all investors love their portfolio companies to have a huge vision to change large markets in a big way, and on occasion the best way to plan to reach that is to go straight to the big opportunity head-on. However, often that's going to be slow and hard, perhaps credibility is crucial, in which case it's really helpful to find a launch "beach-head" in the lines advocated by "Crossing The Chasm".
So where companies have chosen to use a beach-head, the next question is which one? If you just pick the "largest sector", or the one you're "most familiar with, you face a danger- the best entry sector is not always the obvious one. I think there's a different set of thinking about launch markets, where you highlight a slightly different set of factors as important.

Criterion	Ultimate market	Launch market
Scale	Ideally as large as possible	Manageable, but low priority in selection process
Differentiation of offering against competition	Important	Critical
Focus on customer problems	Can be more general- boxed product is easier to scale	May be helpful to have solution type sales initially
Unit sale	Very large or small is good- scalability is crucial	Ideally ~1 months burn- large enough to be useful, but small enough to avoid lengthy approvals
Mission criticality	Mission critical to the customer provides extra value	Ideally not too critical- hard to buy from a startup
Length of buy cycle	May be long	Short is incredibly helpful
Easy customer identification	Useful	Vital

I bet there are some great suggestions for improvements to this table- please let me know!

Plan B for Fundraising

Guy Kawasaki has an interesting post comparing the merits of bootstrapping vs. early VC backing which is well worth reading. He nicely positions bootstrapping as a Plan B, and certainly makes it appear quite an attractive option. My own take would be:

	Outcome
	Product Sells	Product Doesn't Sell
Venture Backed	You exit and have to share some of the rewards* with the VCs	The company fails and everyone is unhappy.
Bootstrapped	You exit, but probably only after raising some money to give yourself strategic options and thereby boost the price.	The company fails and everyone is unhappy.

(* in our experience ventures that have insufficient capital to have other strategic options get sold for a lower price, so maybe the rewards would not be so different too.) So my advice would be to understand the future for your business and really decide if VC money changes the potential outcome in a good way. If it doesn't then don't take the money just to give yourself a salary along the way!

Technology Recruitment in an Early Startup

Daniel Tenner has a great post that is good reading for people looking to build early tech startups. I would just caveat his comments by suggesting that care is needed in understanding how you provide equity to those who help you out in those early steps. Daniel is completely right to suggest:

"You want them to feel that it’s their company, and to do that, you have to give them equity - not options, not promises of options, but actual founder’s equity. Don’t feel like you’re giving stuff away here. If you’ve got the right person for the job, ensuring that they feel ownership of the company will ensure that your share is worth something. It’s better to own 70 or 80 or even 51% of something than 100% of nothing."

However, bear in mind that there are two categories of people you might want to help out with a startup- and both can contribute a great deal

• Ideal hires- people who you would've hired to do the job at the full commercial rate if only you had the cash, and who you'd expect to continue to be perfect for the job in 3-12 months time.
• Opportunistic hires- people who are prepared to get involved early, before an ideal candidate would join, but who are probably not long-term management or key staff.

I would suggest that it is wise to think this through, and to talk it through openly with those involved, and make sure that the equity is allocated appropriately. I have seen many many founders who regretted having shared the company, often 50:50, with someone who ceased to be involved pretty quickly. I've seen founders who've been sweating to make the business work five years from the start, whilst their co-founder holds similar equity and has long since departed. Needless to say these founders tend to regret their decisions!

Rahns law of investment propositions

Mark Rahn, the newest member of our technology team, is doing a great job and took to the job like a "duck to water". He came up with a real gem of an observation the other day, which I've taken the liberty of christening, "Rahn's Law".

"The quality of a proposition is inversely proportional to the amount of time the plan or team spends extoling its virtues."

In other words, propositions that tell you repeatedly how exciting the sector is, how transforming their stuff will be, that wax lyrical about the great qualities of the people are often compensating for the weakness of the product, opportunity or team. The very best plans are short, factual, and rely on evidence rather than weight of self-praise.
This links nicely to four tests for any business plan which I've always urged our investees employ:

Four tests for business plans

1. The superlative test

Have you obliterated all superlatives? Leave it to the judgement of the reader if something is really "exciting","superb", let alone is someone's track record is one of "success".

2. Have you used facts/numbers wherever you can?

It's a good discipline to try and replace each superlative with a number or fact instead: it makes writing much punchier! Don't say there's a "multi-billion dollar market for mobile software", try and say something like "there's a £n million market for GPS software on mobile devices". It's a great deal harder to write this stuff, but it helps convey real market knowledge and understanding.

3. Check that jargon is appropriate/necessary

If I was writing a plan associated with "WiMax", the I probably need to refer to "WiMax"; that's appropriate use of jargon. However, it doesn would a proposition really benefit from using "ARPU" when you're not talking about anything that's not encapsulated by the word "revenue".

4. Can a non-specialist reader tell what the company provides?

Include a laymans explanation of what your product or service is/does. A good case-in-point is a company I've been reading about tonight: they provided three documents in total describing the business, but after reading them, I have only the vaguest idea what the business does. Without this information all the stuff about the team, route to market and competitors is really hard to understand, relate or assess.
I'm sure there are some other great suggestions out there...?

Later ammendment

5. Did you really describe your competitors and their comparative attributes?

This is often one of the most revealing sections of a plan- it's amazing how often it's missing!

Updated: Role of Chairman in Pre-Revenue Tech companies

The role of the chairman in RisingStars companies is a little different from the standard in a small company due to the emphasis on growth and support of a growing team.

Updated version, also I've added the highlights to emphasise particular areas that are unusually important in a pre-revenue technology company.

Team Building	Contributing to the management development plan Mentoring and support for the CEO- acting as their private sounding-board Leading the process of recognising when there is a need to change CEO and to lead the search for the new CEO. Making sure that team changes get recognised early and supporting the CEO in taking quick and early action Monitoring the executive team's relationships and bringing action if conflicts arise Monitoring the performance of the executive team and actioning required change Providing discreet feedback and guidance for the CEO Conducts formal CEO appraisal/performance review Assists CEO in selection of exec board members
Financial Governance	Ensuring financial reporting is regular, clear and appropriate Taking a lead role in negotiating remuneration In the absence of a dedicated FD, having oversight of the accounting process Recognising future cash requirements and ensuring the board deals with cashflow planning well in advance
Strategy	Leading on the development of the company strategy Ensuring that investors interests are properly represented by the strategic options presented to the board Mentoring the CEO on the strategic development Being the first to spot a dead-end market entry strategy and to call time on it.
Fundraising	Spotting well in advance when fundraising is likely to be required; making sure there's always 3 months cash in the bank and that fundraising starts as soon as there's less than 12 months of visibility Attending many/most/all fundraising meetings and helping prevent it taking over the CEO's time and to improve the level of feedback. Providing a second voice in fundraising discussions Opening contacts for fundraising and corporate events Providing independent feedback to investors on fundraising comments Gathering feedback from investors on their view of the exec team
Representing Shareholders Interests	At all times to remain clearly focused on the interests of shareholders over management Providing independent feedback to investors on the state of company and management Ensuring transparency of information flow between management and shareholders
Proceedings at Board Meetings	Collects input from all directors and management on the board agenda - this facilitates surfacing difficult issues. Creates the board meeting agenda with the CEO. Ensures report(s) have been issued well in advance of the meeting Runs the agenda of the board meeting, holding items to schedule or extending the time spent on them if the consensus is to spend more then the appointed time on an item. This frees the CEO to focus on content and allows the Chairman to keep the meeting on track. Gathering input from, and providing feedback to, shareholders from the board meetings.

The "Lucky 13"- Managing cash gaps in technology companies

Back from hols :-)
Over the years a number of useful tips about how to manage cash in early stage tech companies. It's really commonplace for such companies to have sticky moments waiting for cash to come in from customers, investors etc. and it can be very handy to know some of these hints....

CAVEAT!! If you're this close to being out-of-cash then knowing the solvency situation of the company at any time becomes important, and as a board it should be considered carefully and frequently. I can't endorse the use of any or all of these in any situation on a blanket basis- it's more complicated than that!

Please let me know any improvements or changes to this list via the comments- I'll update it accordingly. Thanks.

Area	Tool	Comments
Managing Ordinary Creditors	Paying late	Careful, you mustn't favour some creditors over others, but generally you should look to the timing of each creditor payment to see what really needs to be paid when. (OK that one was obvious!)
	Paying erratically	One FD I know favours paying erratically from the outset, but paying reliably. So, if sometimes you pay at 10 days, sometimes at 30, other times at 50, then your creditor may get used to the fact that you're inconsistent but reliable. this could give you a bit more slack when you need it most. Contrast this with the company who always pays bang on 30 days. If you don't pay by 31 the credit controller will be on the phone!
	Early payment terms	I've found that many start ups are so keen to impress their customers, and so keen not to draw attention to their small size that their reluctant to go for strong payment discounts. Likewise they tend to favour rental models over upfront models in the face of the economics (see below and here.)
Salaries etc.	Transferring cash	If the new cash is very close, but is going to miss the BACS payment deadline for the salary, it's handy to know that you can usually pay your staff using a same-day payment mechanism from the bank (for a fee). The extra few days saved can occasionally be a lifesaver.
	Staff late payments	If some of your staff are willing to work on the promise that they'll be paid shortly after the transaction that can be great. Watch out though, because there's a chance that you'll still have to pay the PAYE and NI. It can be helpful to get a formal waiver from the staff of some kind- so the company accrues the cost but doesn't necessarily trigger the tax.
	Payment date	During the early optimistic days companies often like to offer their staff a relatively early payment date in the month. Pushing that back as a matter of routine early can make sense and saves you having to ask the staff for the concession at a key time.
	Cost of directors	If things are tight the directors may be willing to work for nothing- make sure you keep accruing the costs otherwise the next round investor may get shirty if you want to pay them the back fees post transaction.
Banks and investors etc.	Bank	Banks need attention well in advance of the cash demand if you expect them to be sympathetic. Especially important if you've a loan already as bad news can give them the jitters.
	Investor bridge	Keeping your investors fully up-to-speed and informed is the key to this one, but if there's real evidence of close cash from either customers or investors it's useful, if unlikely to be cheap!
	Director's loan	Not really where anyone wants to be!
Other etc.	R&D Tax Credit	I'm no expert on R&D tax credit, but it's proved a godsend to companies on tight cash on several occasions (thanks Gordon!). Two caveats- you can only claim as cash up to the limit of the previous years PAYE+NI, so if you've been mean and lean and had no full-timers then it's not going to help much. Second, you CAN do a short financial year to claim early, but remember that you can't keep doing short years from a Companies House PoV- hence never change year end for convenience reasons, keep it up your sleeve for rainy days. It takes a couple of months minimum to go through the process of closing your year and making the claim, but handy none-the-less.
	Grants	Frankly, unless you saw it coming months earlier this is only likely to help around the edges.
	Customers (my favourite!)	The ingenious amongst you will probably have a whole set of crafty ways to extract cash from your customers wallets. One particularly appealing idea is to offer to convert existing rental customers to perpetual licenses for a tempting once-off price.(see this post.

Economics of Software-as-a-Service

Talking to a former exec from an IM supplier to SMEs I gleaned some useful insight today. His company had sold a fairly standard type of secure IM to SMEs. To start off with they'd sold the software, installed on the customer's servers, on a rental model, mimicking the "Software-as-a-Service" approach which is now so popular with startups. However, he explained that the company had gained much more sales traction with customer when, after some time, they reverted to a classic upfront software licence and downstream support payment model. Whilst I could understand one or two customers feeling this way I was initially surprised that it was such a transformational change. I was surprised that customers weren't fairly uniformly delighted with being able to link the timing of the cost to the timing of their benefit.
Without knowing the details I can only speculate, but it did strike me that the USP for this provider's product was really about helping them feel secure in an application, IM, where their particular customers were less comfortable (otherwise I'd argue that there are loads of similar alternatives). So to some degree they were selling to maybe the "late majority" rather than "early adopters". Maybe these people in particular could be said to be rather slower to adapt to new models for buying software, but also perhaps to be characterised by a different cost of capital.

Cost of Capital

In economic terms most SME's, but especially early-stage technology companies, have a VERY highcost of capital (I've seen it figured out to be around 80%), whereas the customer's cost of capital- particularly if it is itself stable/mature (i.e. late majority), maybe more like 12-20%. It therefore makes little sense from a purely economic standpoint for an early stage company to use a "rental" type payment model for software provided to a customer who's an established business. Perhaps more simply put, an early-stage company may have to pay precious early-stage venture equity rates for money to fund the working capital element of providing a "rental model".

Summary of differences

I've attempted to put together what I could think were the key selection differences between a "rental" model and an "upfront" model.

"up-front" model	"rental" model
Favourable where vendor has higher cost-of-capital	Favourable where the vendor has lower cost-of-capital
Suits better laggard customers	Suits better early-adopter customers
High investment can make for reluctance to change out	Contractual commitments can keep customers "locked-in"
"Capital" budget can be harder for vendor to access	Contractual details on termination, rate increases etc can be harder to negotiate through purchasing
Upfront revenue particularly helpful where costs of acquiring customers are high	Rental revenues helpful where costs of supporting customers are high

(Please use the comments section below- I'm sure this is far from exhaustive- and I'll add your contributions into this table as best I can.)
You may be surprised to realise how strong the Cost-of-capital effect is in practice. Take the following example:

• Company A sells their system on a rental model for £10,000
• Company B sells the same thing on an upfront plus support basis for £15,000 upfront and £2,500 annual support charge.

The Net Present Value of both of these revenue streams for a early-start company with a 50% cost of capital is actually about the same (my workings are here), whereas I suspect that most of their customers would very much prefer to pay that little bit more for a perpetual licence!
As always your comments are very welcome.

Technology, Component or System: Plastic Logic raises $100m

Alarm:Clock is reporting that Plastic Logic have raised a $100m round. They've taken the ambitious switch up from providing just the backplane (a few $10 in value) to the whole display (maybe $100) and are setting up a production line. This raises a general issue that crops up again and again with technology companies, do you license a pure technology, do you develop a component, or do you develop the whole system. Cynically, I think the answer is often that you start off doing whichever you can get backing from investors to pursue- and that can be as much fashion as anything else, but the key is to keep the other routes open until you're sufficiently far down the line as you can choose- hopefully that's where Plastic Logic are now! Good luck to them.

What is the relevance of fund life?

Over at AskTheVC there's a useful post on "What Is The Relevance of Life Terms of VC Funds?". This reflects on a comment made to me by a one of the largest European Tech specialist VC's the other day. I was told that although his fund had closed only recently they had already lined up the fundamental materials/basic technology investments for that new fund and they would make up their first year or two's activity on the 10 year fund due to the long "time to realisation" of this kind of work. They were looking then to move on to investments that were more software orientated for years 3-5 of the fund as these are "further up the stack", and therefore had a shorter exit timeframe. This is a rather stark position, but I suspect it's not too different from most funds, and well worth bearing this in mind if you're approaching investors.

Some pitfalls of chosing a company name

In setting up this blog I was reminded of a regular issue for our investees: choosing a suitable company name (and no I don't think that TechGain is a great name!). Over the years I've helped quite a few companies with this process, and it usually starts being fun, then gets increasingly frustrating. As an aide memoir as much as anything else, I thought I'd tabulate some of the issues that need checking, but more importantly the order that I think eliminates them most quickly:

1. Won't degenerate into a TLA*
   In the UK we have a particularly insidious problem that results from the way we stick "Limited" on the end of (most) of our company names. If you decided to call yourself, for the sake of argument "Blue Prism" you're very likely to find it degenerates into becoming "BPL" in lieu of "Blue Prism Limited" unless you work hard to avoid it (as this company has!). Not only does that kind of invalidate your careful efforts to select those two names, but it also tends to mean that you can't register a meaningful domain name. *TLA is an ironic term for a Three Letter Acronym
2. It's Google-able
   Doing a web-search on the name is vital, if you've chosen something with loads of existing close company names, brand names, websites, blogs etc. it'll be a real struggle for anyone who remembers your company name but not the URL to find your site. A good example of this is the great guys at First Capital, I really struggled to "Google" their website- I should've just guessed (www.firstcapital.co.uk)
3. You can get the domain name
   Goes without saying that it's much better to be able to get the obvious domain name, less obvious are that names such as aardvarkuk.com are potentially a big problem if the "aardvark" bit is not easily google-able (see 2 above). I've heard stories that some less domain name registrars look through the queries people make of potential domain names and bag the good ones first, maybe I've just never come up with a good name but it hasn't happened to me yet, does anyone know if this is just an urban myth? I've used uk2.net to search for availability, and recently used GoDaddy.com as they seemed a bit cheaper.
4. It doesn't catch the zeitgeist
   Poking a little fun at the great guys at GP Bullhound, the original name of the UK incubator from which it in part sprung was Gorilla Park, 'nuf said! More recently I suspect that companies that have copied flickr.com's style of domain name might look a little dated before long.
5. Not someone else's
   If you've got this far the chances are you're not going to bump up against any really meaty issues with someone else having rights over the name- after all it makes no sense at all to register or claim a trademark and to fail to register the equivalent domain name.However you should check:
   
   • UK Trademark here
   • US Trademark here
   • UK Company Name here
6. No bad history
   One of our investees considered a company name, which I shall not mention for now, which turned out to have been previously used by a company which met an "unfortunate" end. Again google searches should help show this up.
7. Unambiguous Spelling
   Some great names you could choose don't work so well when spoken, or have multiple possible spellings. nCapsa suffers from this problem, with enCapsa being a different company entirely, and there are plenty of worse examples!
8. Not too Anglo-saxon!
   It was pointed out to me recently that English words that have their roots in Anglo-Saxon/Germanic can be more problematic, than latin-based words which are much more likely to travel well.

From our portfolio, personally I like best: Provexis and Femeda. I wont tell you the ones I really don't like, but I'd be interested in your views via the comments!