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!

Founder Dilution - How Much Is "Normal"?

Fred Wilson has a post up urging entrepreneurs to record their dilution at exit in a survey being done by Simeon Simeonov. Please can I urge anyone reading this who has experience of exiting to take part. My experience of exits would suggest that Fred's experience is typical when he suggests that: "it will generally take three to four rounds of equity capital to finance the business and 20-25% of the company to recruit and retain a management team. That will typically leave the founder/founder team with 10-20% of the business when it's all said and done."

Silicon Valley Goes Dry? effects of the credit crunch on VC funding

Redherring trumpets that "Silicon Valley Goes Dry", in yet another report trying to figure out the impact of the current financial malaise on technology VC. So far, I've come across all sorts of tales of doom, and in the RedHerring report the lack of M&A exits and IPOs (in part due to the lack of bank leverage) is cited as hitting exits- which in the next few months must be inevitable. It then goes on to suggest that "...the collapse of IPO and M&A markets mean they [VC funds] won’t be repaid as quickly. That means VCs won’t have funding to finance new companies or to add follow-on rounds for current companies". Erm, not exactly. Whilst lack of exits may hit some fund returns, if their timing is unfortunate particularly, VCs are normally not allowed to re-invest the returns from their exits. That means that VCs who have raised funds should still have the committed monies to invest from for some time. However, the other side of this coin is that VC funds do usually rely on their investors providing the cash in drawdowns to the funds as required. Normally as the fund's investors are financially solid, and once committed they are contractually obliged to follow-through, there is no financial risk to the fund itself. However, if any of the fund's backers fall, then that backer would be unable to meet its obligations. Should that happen then the fund's constitution often allows the other investors to choose to hang-on to their cash. That MAY mean that a small proportion of financial institutions falling, could cause some funds to "shut up shop" entirely. It's too early to say if this will happen much, but Venture beat certainly cast some doubt on at least one fund. Fortunately, none of our backers appears in any way effected, but it does show how hard it will be for any of us to anticipate exactly how this crisis will play through to technology businesses. Perhaps venture-backed businesses should start asking some questions of their VCs! Thanks to Anders.B for the image.

Survey on Corporate Finance Advice

I was curious to see what the aggregated view of the portfolio companies was on Corporate Finance advice. So I asked our portfolio companies to give us some feedback which I've summarised below. Any comments would be very welcome!

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!

Startup 2.0

Manoj threw another great event tonight with interesting speakers and audience alike. Stuart Scott-Goldstone of Aaron and Partners gave a thorough introduction to the range of legal issues that startups face on raising their first round of venture capital. the long list or issues seemed seems like it must be scary to any startup listening! Doug Stellman of YFM Private Equity started his presentation with a disclaimer of small print lest any of us fancied investing. Interestingly the proportion of Software and IT deals had shrunk from around 35% in 2006 to 20% in 2007, apparently due to concerns about the ease with which software companies could be established. His presentation focused on the management team as a key driver for their investment decisions. He cited that he sees applicants with a management team with a prior record of success "more often than you'd think". Paul Barraclough of TecMentor praised the Crossing the Chasm approach to getting to early sales momentum in startups. For me, Pam Holland gave the star presentation- starting off with a video (link to follow if I can persuade Pam to let me upload it) portraying how rapidly Telecity had grown pre-dotcom crash. She explained how they'd managed the spectacular growth in staff numbers and the attendant HR issues. I loved the story about how she had to persuade the founder to go home for his meal in the evening to encourage the staff to go home at night- even if he returned later each night! She explained the "competency based" recruitment approach she used, biased towards the attitude and raw capabilities of the individual rather than solely their technical skill-set. She also related that it was a "little bit disappointing" when the share price slumped from £23.00 to 2.3p, and she had to handle a new set of challenges!

Connecting Yorkshire

I very much enjoyed spending most of yesterday at the Connect Yorkshire investment forum. Over the years I think I’ve been to nearly all these conferences; they’re a great way of seeing some of the companies that are around, and in bringing the technology community into one place too.

I suspect that Nick Butler and Glen Hopkinson who lead the team at Connect Yorkshire don’t have the easiest of tasks; but they do a great job of making it look easy! They have to screen lots of potential companies to select and coach/cajoale/coax those who present towards the best way of pitching their proposals. Today the companies represented ranged from a device to detect leaks, to a cancer drug targeting technology.

As usual you could rely on the Connect process to have helped the presenters make their proposals clear and reasonably thought out, whatever one thinks of their individual commercial prospects.

I tried to talk to as many of the presenting companies as I could; whether or not I was interested in them as a potential investee. This is really important to me; I find I can learn so much from these people and their intimate knowledge of either technology or market niche, and I think that in return I owe it to them to be as frank as possible about what I think lies ahead for them. As usual, the reaction to the feedback varied from the heatedly defensive, to the open and constructive, which tells you something else about how that team would be post-investment!

The format of all these kinds of events still doesn’t seem quite right to me; somehow the idea that someone stands at the front for half and hour and tells you about their business and its plans is a very one-way process, and there is a tendency for the candidates to want to talk far more about their plans, which after all are pretty fluid, than they do about their product and market opportunity/competition. I’ve suggested to Glen that something like a IRC backchannel might be the way to go, but you might need some house rules about only asking questions. Given the UK hasn’t adopted the laptops-in-sessions culture to the extent that the US has, you might need some kind of SMS based thing…?

P.S. I found this interesting commentary about backchannels on Techcrunch

Nick and Glen were also busy promoting www.mydealmaker.co.uk: their initiative to bring the community together between their events. Those involved in forming, managing and funding technology companies always benefit from becoming more of a community and learning from each other. Bringing people together on the internet has proved to be an amazingly powerful way of breathing life into specialist communities elsewhere and I really hope that Glen’s initiative can do the same for this group.

Over the years I suspect we’ve backed more teams that we first met at Connect than anyone. On this occasion I had the opportunity to meet again a company I was introduced to a little while ago, which I think has some of the characteristics to develop really well. Hopefully I’ll learn over the next few weeks if we can work with the team to develop a really exciting business with them.

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.

When VC's Say No- Management Issues

There's a great post over at Marc Andreesson's blog. It tries to help entrepreneurs understand why VC's say no, and how to interpret their responses. Marc points out that it's not uncommon to be being turned down due to the investor's view of the management team- but pretty exceptional, if they ever, that they tell you!

Why VC's wont tell you about a management "issue"

The analogy used by Marc and others is that telling someone their startup is no good is like telling the founder that their "baby is ugly". I'm not quite sure what the analogy is for when we have to let them know that we don't think they themselves are not right for their role! I've certainly always tried to find ways to be as honest as possible, but frankly it's tough, in particular because when you do tell them:

• They just put it down to the the VC being an idiot anyway and carry on regardless.
• After the first few words, no matter how you dress it up, they stop listening and you never get a second chance to explain.
• It gets translated into all sorts of random reasons when the entrepreneur relays the story to others- when I gave the bad news to one entrepreneur he relayed it to everyone as we "weren't interested in high risk ventures"- I've no idea where that had come from!

An anecdote about giving honest feedback

I remember early in my investing meeting an interesting firm run by a very bright and young software guy and his mate. The team was supplemented by a the father of one of the founders who had a successful track record in an early stage company. We visited and explored the possibilities with them, but somewhat awkwardly we rated the two young founders highly, but had lots of issues with the dad! Being a somewhat blunt northern type, I had the cheek to suggest that maybe the company would be better off without the dad, but with a new CEO instead (the dad was pushing his son to be CEO when the body language suggested he was much happier as CTO). We heard from them again about 4 years later, looking again to raise money!

How to tell what the VC really thinks...

Here's a few tips (please add any more in the comments)

• Benchmark first
  Ask around to find out what experience/track record other management who did raise funding had already. If it's your first time in a startup, or first time in a C-level post then it'll need checking especially hard.
• Aim low
  This is the hardest perhaps, but if you're in any doubt put the person in as interim CEO for instance, if the VC's happy they might still suggest there's no need for a change.
• Look for indirect feedback
  Perhaps your chairman, non-exec, existing investor etc. could make a phone call, maybe a few days later. We're only human and it's a lot easier to give honest feedback indirectly!
• Look for consistency
  If you get inconsistent responses from the VC then maybe there's something else behind their decision.
• Ask!
  Something about human nature perhaps, but a question is a great way to find out!

Any other suggestions?

CEOs never stop fundraising

A former CEO of one of our portfolio companies complained to me recently that "we spent 60% of our time in the company marking time whilst we raised more funds", and he expressed great enthusiasm to raise a large round and then spend all his time on the business next time round. Certainly the founders at Me.dium will be glad that they've got $15m in the bank, but back in the real world I'd suggest that a CEO of an early stage company is always raising new money. My view is that the right time to put together the business plan for the next round is the Monday morning after you closed the last lot! Recently we've suffered a couple of follow-on rounds taking more than 12 months to complete- so to have a little headroom you need to plan a long way ahead.