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!

An 11th Reason why startups fail

Tim Draper the legendary (Rhino riding!) founder of DJF has an excellent blog post on the reasons startups fail. I'd like to suggest an 11th reason though, which we see frequently:
"The average cost of selling is too high."
In particular, we see many companies where the need to communicate complicated messages, over a succession of meetings, and maybe customer trials too, is itself expensive. This is then compounded because the proportion of those customers that convert is not too great, and they take a long time to decide to start paying. Finally when a proportion place orders it doesn't cover the cost of all that customer engagement.
It's a shame that 11 reasons isn't such a tidy number!

Why we don’t sign Confidentiality Agreements

As a rule we don’t sign confidentiality agreements (CDA’s). As it’s something that comes up regularly with new funding applicants, I wanted to make this reference post on why we don’t sign them:

1. We get asked to sign hundreds of them a year. It isn’t practical to be party to so very many contracts just in order to find out what a company has in mind.
2. Managing the commitments would be a due-diligence and compliance nightmare- imagine being asked to “check” the legal status of hundreds of CDA’s, never mind the time negotiating and signing them up.
3. We’re looking to back companies which can build protectable positions. In our view a business idea can’t be protected and expecting to do so is probably unwise. That protection could be patents, or could be customer relationships the company will build, it could be a database, or designs, knowhow or copyright. However, without any such protection we couldn’t expect to sell our interest in the investee at the end of the investment life. So if a CDA is needed to protect the idea, we probably wouldn’t back it anyway.
4. Our experience has been that, the more closed and nervous the management team is about their idea, the less unique and special that idea is in practice. When we did sign CDA’s at the start of the fund life we found that where the team was most insistent was exactly when there was least to be protected.
5. We commonly see the same idea repeated many times, despite the management’s insistence that they are uniquely pursuing the opportunity (after all if they are in “stealth mode” then it follows that their competitors may be too!). We don’t want to have to defend ourselves against an aggrieved founder who thinks we broke a CDA when in reality we just backed someone else with the same idea.
6. Although advisors will often suggest that you need a CDA to protect the patentability of a technology, on a first meeting we may well not need to know “how” the idea is achieved, merely to understand “what” it achieves. If the step from “what” to “how” is obvious then it is not, by definition, patentable. Even if a company chooses to disclose to us, I would be stunned if a direct private disclosure to a professional FSA Authorised fund manager could ever count as a “disclosure” for the purposes of prior-art.

We are therefore confident that, despite having the “no CDA” rule for more than four years, we haven’t missed anything significant because founders couldn’t get comfortable with our reasoning, after all I’m not sure any US VC’s now sign CDAs routinely. At the end of the day we DO sign a confidentiality clause as part of any term sheet we issue. We also sign a slight variant of the BVCA standard CDA “IF AND ONLY IF” we are looking at a more detailed technical disclosures around second meeting stage. However, this is always our BVCA type agreement which you can find here. Update Mark Peter Davies puts a related post on his blog that's worth reading.

An Investor view of Intellectual Property

An Investor's view of Intellectual Property

View SlideShare presentation or Upload your own. (tags: venturecapital licence)

A short presentation I gave last night to a business audience at Creative Lancashire.
Here is a list of relevant links I provided for the audience.

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.

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!

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!

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?

b.tween presentation on VC post web2.0

'nuff said:

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.

Beware the "Investor No-brainer CV"

I really like Marc Andreessen's recent post: How to hire the best people you've ever worked with- it should be essential reading for everyone involved in startups.
In particular Marc's comment: "beware in particular people who have been at highly successful companies", rings very true:
Our portfolio companies are always looking to raise new cash, and in the UK in particular, management with a track-record is a key attraction for much of this follow-on money. So we can be very tempted by someone who has a CV which shouts "prior blue-chip success" and helps drive a positive fundraising round.
But, we've learnt in practice that such candidates must be approached with caution:

• No-brainer CV's usually involve larger companies- and in some of these the main attribute for success can be the person's ability to manage "work politics"- something we'd hope to avoid in our tiny investee companies
• Attribution of success can be very unreliable- the number of people who claim responsibility for successes, strangely, seems to be somewhat larger than those who'll admit to the mistakes!
• Serendipity matters! It's dangerous to assume that someone who was lucky once will, NECESSARILY be lucky in the startup.

This doesn't even stratch the differences in terms of culture or working practices which may be rather alien to the first-time corporate drop-out!
Our biggest (avoidable!) hiring mistakes have been when we've been tempted to bring in management who had "no-brainer" CV's to help raise follow-on funding, but where we harboured doubts ourselves.

Investment in online and offline software

According to Elliot Noss, CEO of Tucows(c/o TalkCrunch) more than half of users now use webmail, I wouldn't be the least bit surprised to find out that many don't even know that they do. When you take into consideration the (non-caching, typically business) users of MS Outlook/Exchange, I would guess that having your email locally is likely to become the exception rather than the rule. So if web-based applications can gain user acceptance, then there are plenty of reasons to argue that most of our desktop applications could migrate to the web over time. But at the same time there is a contrary movement towards people chosing laptops instead of desktops, with "Two in three retail PCs being notebooks". Implicit is that, at least to some extent, users are now more likely to be working without fast access to web-based applications. Whilst some would see the gap between these two situations being bridged with technologies like HSDPA or WiMax, the other option is to "simply" cache the data between the offline and online data stores- as Outlook can. But this makes it MUCH harder to program the application, and more or less impossible (?) for a purely browser based application. I listened to the TalkCrunch podcast "Here Comes Adobe Apollo". Adobe are placing an interesting bet with their Apollo technology to allow a common "Ajaxy" application to work between the offline and online world, but it sounds from this podcast that quite a lot of the detail on database synchronisation is likely to be left to the developer. Taking a slightly different technical approach, today I spotted this "Dojo Offline Toolkit Kicks Off" on Ajaxian. Somehow this sounds cleaner to me, even if it is more restricted. This is clearly a hot area, and therefore I'm sure that there are others working on tools to bridge rich webbased applications with offline use (suggestions please?). My own view is that early-stage VC's and business angels are likely to favour such approaches to building product because:

• Lower development costs (potentially) esp. if cross-platform is important
• Lower support costs (probably)
• More choices on monetisation (ad supported, premium, subscription etc.)
• Improved lock-in; it's going to be hard to get your data out in some cases
• Alternative route(s) to market
• Different exit options

What do you think?

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.