Articulating Your Value Proposition

I'm an engineer by training and so engineering discipline tells us to start with first principles and so the easiest thing to do is to start by defining what is value and what is a proposition right so if you turn to to merriam-webster right you know this is the the answer that you get I think it's a relatively simple explanation right that a value proposition at the end of the day really is some sort of offer it's a fair exchange for some good right and so now the question becomes how do you describe that good in a way that is appealing and enticing for a prospective customer and I'm going to build this hypothesis throughout the the talk today that the moral equivalent of the who what where when why and how are these five elements right so it's the articulation of the primary purpose of the product or service it's identifying the target audience it's capturing the significance to a prospective customer its identifying and specifying the category in which you compete and it explains the the uniqueness of the product or the service now the reality is all five of those statements sound quite obvious unfortunately it's deceptively simple right and so anyone who has gone through the exercise of actually trying to write out your value proposition has probably found that it's much easier to list these five properties that should apply than it is to actually figure out how to translate them into a real-life circumstance so what I wanted to do is I thought maybe I would just kind of double click on these five and spend a little bit of time talking about what are the the questions that you want to answer in thinking about each of those five elements so if we start with purpose um this one is probably the the easiest one to describe and for some reason entrepreneurs get it wrong most and at the core of it it's really the cry answering the question what does the product or service do right and the the place where I think entrepreneurs often go awry here is they spend lots of time particularly in the technology arena where most of them are engineers by training and I can say that as one end up describing the product right so they say well I've got this widget right and here are all the neat properties of the widget right and what they forget to do is then translate why those properties actually matter to anybody right it's sort of a well I've laid out the property and you know therefore you should be able to draw all the logical inferences of why you care right but if you think about it think about the last time you read an ad right my bet is you read five or six words of the ad and then you quickly turn the page in the magazine write it you had to capture your attention very very quickly and so when you talk about what does the purpose of the product you need to give a very succinct summary and statement that really captures the imagination of the audience that you're addressing so the second part to it is to identify the target audience right and this is sort of the question of who cares right who's going to go buy this product or service you can certainly chart to think about some of the quantifiable elements of this right the @am analysis some sort or or understanding kind of how many dollars are spent in that particular category or on that particular problem so there are ways to put some parameters around that audience but I will submit that you want to be able to define who is the audience you really care about servicing right that's going to have implications throughout the rest of the value proposition statement and then I'm going to argue that the value proposition effectively becomes the roadmap for building out the overall business plan right and so understanding who the customer is determines a whole lot of other elements to your business strategy yeah [Music] ya know I think it's a it's an important distinction and it's probably particularly pronounced when you talk in terms of enterprise software when you think about selling to an end consumer the ultimate decision-maker is probably the same individual that you are messaging to but in the enterprise context that's actually often very different and in fact it's complicated by the fact that the person that you initially message to is probably not the person who ultimately has budget Authority and so thinking about an understanding who each of the stakeholders are will play a role in how you craft the the ultimate value proposition and sort of the most effective value proposition statements I've seen when you're talking about a b2b sort of business ends up crafting the value proposition in such a way that some of the elements speak specifically to the initial hook into the organization and others speak to the person who's actually going to pay for it right and so being able to understand each of those stakeholders ends up being a pretty important distinction so as you get to the next level down okay so the third element then I think is significance so what are the key benefits this is the the enumeration right so when somebody said write the value proposition this is probably what you immediately thought of right it's the the list of the 25 things that this thing is going to do for you and implicit in this is a is a ranking right the reality is that you probably can come up with 25 great things that your new startup is going to go do but only two or three of those are really really important and so some of this exercise is making that list and then starting to figure out which ones are right in the priority order right and to the point of the earlier question sort of which ones do you then want to ultimately select to talk about whether you're talking in terms of your marketing message or your sales process or things like that what's useful size is described life before your surgeon arrived and then life after your salute your life particular audience to talk exactly so that's the the second bullet here is exactly that um one of the exercises that I often do remember I said that I get a lot of entrepreneurs who who are engineers and so they tell me what the product is and the easiest way to tease out the the answer for them of what is the value proposition ends up being exactly what you described right it's walk me through the day and the life before walk me through in a day and the life after and then understand kind of what those those deltas were the third sort of part to significance I think really kind of speaks to this question around why does somebody care but it really is the magnitude of the caring right and then the sort of analogy that people draw is this this question of is it a painkiller or is it a vitamin right so a vitamin is something you know you should take but you probably forgot every morning and a painkiller is something you absolutely need by five o'clock right so you want to make sure that whatever the product or services that you're delivering if you're a startup I'll submit it has to be in that second category it has to be a painkiller right there's just too much noise to kind of capture the imagination and attention of a customer if you don't have something that is so compelling they absolutely need to buy it and I think that plays a role in understanding which of these kind of list of value propositions are the ones you pick to focus on right because it's the ones that are so significant that it jumps off the page that in fact the customer probably knew they have the problem and actively went searching for the answer as opposed to you're having to evangelize why your product or service even mattered to them to begin with the last piece to it which is the by far the hardest to do it at kind of the very beginning but I think is something that you can add to the story over time is the quantification of all of this right and in the you know the enterprise context that I spend most of my time that's oftentimes termed around some sort of ROI analysis of how many dollars can be saved ultimately or how many dollars can be generated but in but it's some sort of quantitative metric right that allows you to validate that the significance actually is significant right put some anchors around it this is something that's really hard to do on day one so if you've got a neat idea for a company you want to go start you probably don't have an idea of how to quantify all the benefits yet but it's something that you can layer into the story as you start to build out real-life customers the fourth one is category and here that this sort of speaks to a belief that I have about how people think about the world I think a lot of people use categories as a simple heuristic to think about buckets of things right it gives you sort of a mental framework to say well that's sort of in this bucket right and I can think about this whole bucket in a particular way when you think about how to build a startup now and certainly that's true in the technology arena but I think it can be generalized as well you need to think about what category do you want to be a part of right and the two options here really are some existing category right hopefully one that has favorable attributes to it right there are lots of categories that have unfavorable attributes and you probably don't want to associate yourself with those but the other option is to create an entirely new category I think there's this natural temptation to say well mine is totally unique I have something that it no one has ever thought of before and it's so different on in my own category and I'll argue that that's actually the hardest route to take because now you have to convince people not only of your company in your product but you've now got to convince them this is a category as well and so you need to think through kind of what those trade-offs are but it's an important part to this value proposition because it anchors the discussion around some reference point that people already understand whether that's sort of the intersection of two things that's now this new category or it's something that is already existing that people know about and then the last element to the value proposition is the uniqueness right this is sort of the differentiation of what makes you different and there are a few dimensions to this that I think that are important obviously you want to kind of differentiate yourself relative to the status quo right so what are the substitutes that are available today that people are already perhaps using to solve this problem back to kind of the day in life example you know but you need to somehow sort of cheese out kind of what what is unique and different about this but I'll argue that what's important here is as much the the axes that you pick as the actual elements of differentiation and the reason is is this sets up sort of the long term vision of the company so over time right the goal is to build a sustainable company right it's not to sort of differentiate your product initially and so if you're going to build a company that's sustainable you need to think about what are the sustainable attributes over time right so in the world that I live in you know lots of people tell me well it's really hard technology to build right and the reality is is it you know that may be true but Microsoft can throw a thousand engineers at this problem right or Google can put two thousand engineers on the problem you know is it really so fundamentally different that that's that's really the secret sauce here was it you just worked at it for a while um so the same can be applied to a lot of different contexts to think about what are the long-term basis of competition in any given product market all right so where do you go with this right so once you've kind of answered these sets of questions around these five dimensions right other than sort of an interesting academic exercise what do we what do we now do with it right and I think the the first application of it ends up being around the elevator pitch you hear the elevator pitch discussion and vocabulary come up primarily in the context of investors but the exact same thing applies when you're talking to a customer right so if I grab you on the walk from here to my car and I want to sell you something I need to be able to explain pretty succinctly what it is that I'm offering you right back to value and proposition I got to be able to describe that for you in relatively short order and so you know I will use this mad libs exercise as sort of a way to to kind of force it into a sentence obviously it doesn't have to be a single sentence but I think it gives you a reasonable construct for how you might go about writing an elevator pitch right ABC corporation provides category solutions to target customer for purpose which allows them to benefit by leveraging unique technology right and that ends up being a really short sentence it's probably really hard to do because my bet is that you've got an answer that is two or three paragraphs long for every single blank right and the trick now is how do you get that down to two or three words to describe it right once you've done that and iterated on it a few times you now have your elevator pitch everything that follows right so floors one through five end up being this first sentence right six to the top ends up being all the supporting detail and force yourself to put all the rest of the information the validation of customers the partners you've talked to the additional reasons perhaps the ROI you know all of those other elements now become secondary and subordinate to this first sentence right this is the most important sentence so if the person you're talking to only remembers one thing about you hopefully they'll remember this one sentence all right so once you've crafted the value prop right mostly because I'm on the venture side I get the question all the time of well how do I convince an investor that they should invest in this right and I'm going to answer the question in the context of a VC in particular but I don't think VCS are all that different than any other investor that you might try to address so the first part of it is that the value proposition exercise that you've just gone through actually forms the cornerstone for the entire investor value proposition as well right it's the way it's the teaser that got you the initial meeting right it's the it's the fundamental aspect of the executive summary that you sent it's the story arc for the investor presentation overall right and it ends up becoming the cornerstone of the investment thesis so when I sit in a partner meeting and I try to convince my partners that I want to go invest in some company and I need to get their buy-in to make that happen I'm going to rely on that value proposition is the reason to do it right and I think the same thing can be generalized to any investor having said that though that same moral equivalent of the who what where when why and how can be applied in the investor context as well right you just change sort of the descriptors around each of those five elements so is the purpose worthy of assuming startup risk right remember that in the venture business call it seven out of ten investments fail right so it means that the three that succeed had better be really good to make up for the more towel on all of the others right so is the purpose worthy the second is is the target audience large enough right so or have you narrowly defined the audience that you're addressing to be so small that I don't plausibly believe that you can build a big company here so make sure that it's a large enough audience the third one is is the significance valuable enough to customers this goes back really to my painkiller discussion right is it a painkiller the fourth is in an attractive category for investment so the discussion we just had there are certainly some unfavorable categories that if I said it is in category X every one of my partners would shake their head and go no no no move on right so you need to understand that and then the fifth one is what is particularly unique about this startup right and as difficult as it is to hear I can assure you that for every business plan that I've seen and funded I've seen ten or fifteen others that were attacking the exact same problem right and as much as we'd all like to think that we're truly unique and have unique insights that no one else in the world has come up with the reality is that's not true and so what is it that is unique and special about this one project that is an investor commands your attention okay so let me just ground this in a in a real discussion of a real company which I think might make a make some of it come a little bit more alive so I picked a company called the kimby systems it's probably as unsexy to anybody outside the tech space as they come but it had a fantastic outcome so that's why I like to speak about it um this particular company at a high level is in the test and development automation space so if you've ever written software before you know that one of the processes that you go through is you do this quality analysis to figure out whether the product is functional or not on this particular product completely automates that entire process for you so there's a you can imagine all of the benefits that come from that around reduced labor improved product quality etc etc um so the way these guys came up with this idea is this guy Wilson at the time was running he was VP of engineering for an organization and he had built a series of tools that helped him run his engineering organization and automate some of the testing that he was doing and one of his friends came up and asked for a copy of it and so he gave it to him second friend came up and asked for coffee and they gave it to him and about the third time that he was asked for copy of his software the light bulb went off and he said ways that maybe there's actually an interesting business to be had here and so he gave it some thought and he went and found his partner James Phillips who co-founded the company with him and together they decided that they wanted to go start this company and so they started the company in 2004 I met them in late 2004 early 2005 I was introduced by a mutual friend and they decided that they wanted to go out and raise a series a financing now just to give you the spoiler I did not end up investing in the series a because of category it's in the test and development automation space which is about as I said it as unsexy as they come and so I wasn't sure that the financial returns were actually sufficient enough to make it worth proceeding and so I passed on the series a I ended up investing in the series B mostly because they had built enough of a product that they convinced me that there was some magic there that they could really go after the ultimate vision the interesting kind of footnote to it is we sold the company five and a half months after my series B investment to VMware and it now forms the basis of all of their automation suite so great outcome but I use it as an example because it probably is the best investor pitch I have ever seen this is the value proposition and if you read through it for just a second you'll see how they applied the madlibs exercise effectively right to each of the core elements and my bet is that even though you don't know a bunch of the jargon or may not know all of the jargon my bet is that you've got a reasonably good idea of at least why this is sort of an interesting business all right and you could at least map to does this apply to me or not so that's the elevator pitch that got my attention initially and this was the second slide in the slide deck it was the value proposition and so he was trying to articulate to me why it was a customer cared about this and I'll let you kind of in the backdrop read through sure to each of these bullet points and I think the thing that will hopefully stand out in your mind as you read through them is every one of this speaks to a business reason for somebody wanting to buy this product right now it's missing the quantification around this it was a series a company and so he didn't actually have any real customers of than the ones that he'd given it to so you know he didn't really know sort of how much it improved each of these elements but there was a good basis to believe that it did so this was slide number two and I think slide 17 was this one this was his last slide in the slide deck investment highlights and if you walk through it you'll notice that it actually addresses basically all five of my who what where when why questions right and sets it in a context of why does an investor care if we take that as sort of the backdrop what I thought I would do is kind of step back a little bit and just talk more generally about what to do venture folks look at and what are some of the properties of successful companies I think that colors how you think about the value proposition statement particularly to investors but but more generally as well so the first part of it I call my motherhood and apple pie spiel right which is what a VCS look for it is pretty simple right it comes down to people market and product I think you will find wild debates between the first two on the list in their sequence but to discussion we just had the third one is by far the third one and as much as that pains me I'm an engineer I love my discipline but we're we are now necessary but but far far from sufficient to build a real company and so the focus for venture guys ends up hinging primarily on the first two people in market and you'll find a lot of debate over the the actual order between those I personally put market first because I think you can find great teams who will figure it out over time as long as you're in a market that gives you enough degrees of freedom but there are an equal number of VCS who believe very strongly that you find great entrepreneurs and they'll change the market if they need to in order to get to a successful outcome but the three sort of you know at a high level it's exceptional entrepreneurs large rapidly growing market an innovative and differentiated product this part of it you know clearly applies to venture back tech companies but you know remember we think about a very small sliver of the universe right the vast majority of entrepreneurial activity in this country has absolutely no basis for venture investing and so you know the things that we look for right are probably some what you need but but I would argue that you know to some varying degree all three of these elements end up being pretty key for any entrepreneurial activity the fourth one which almost invariably gets left out of the discussion and oddly enough ends up being the one that company stubbed their toe on the most is the go-to-market elements right so it's how do you connect the dots if you have the first three and it's perfect but you have no idea how you're actually going to get it to a customer somehow and sell it to them right it doesn't really matter and so the fourth thing right this go to market strategy ends up being the one that everyone overlooks in the discussion but it's always the one that causes the company to fail right with the exception as sort of you know one of the the first three just being you know completely out there so if I spend a little bit of time kind of looking at each of these three sort of what are the the qualities that you know when I'm looking at an investment signal to me that it's a really interesting opportunity and for you as entrepreneurs the things that you want to get across in your your presentation right the first part of it starts a team and the the observation here is the team is built around a couple of key people and that that's universally true they're almost always or one or two people in the company that ultimately define the success of the company right in the context of the tech world it's usually the rock star engineer or to combine with the one or two people that really understand the business better than anyone else but it's always that core nucleus and somehow that doesn't change so you can go to almost any public company even in the tech landscape and my bet is that if you ask internally you'll find three or four people that are the root of the company right everyone else is still contributing it's not that they are useless by any means but there are a few people that really determine where that company goes and so identifying early on in thinking about funding a company who those people are is absolutely essential right because you're looking for those rock stars so what are some of the properties to those rock stars it's sort of one of these things that you know what when you see it but but let me try to sort of identify what some of the common qualities are the first one is that they're smart and passionate they generally have very unique insight they're driven to succeed and here there has to be a drive that is unwavering the reality is is that if you actually sat down and logically analyze the chance of success no one would be an entrepreneur right you'd have to be in sync like you would right I mean the chance of failure is so incredibly high and so in order to power through all of that you have to have an uncompromising drive to build a company the third one is that there's got to be a unique insight right and we spend a bunch of the time kind of hovering around this point in the discussion so far right and I think there's this general belief that well well you know in the tech world that's somehow has to do with product and technology and the reality is is that often doesn't right it could be around a deep understanding of customer and I think the akin be example is actually a really good example here it was their insight because they had been the customer right they built the product for themselves right they really knew what the customer needed and that was what set them apart right that's why no one else was able to build that product before the second part right could be technology could be process right so perhaps you have a unique process that might be semiconductor process that could be a business model process and then the last one is you might have a business model innovation right SAS used to be a business model differentiator fourth desire to recruit a world-class management team I have this theory about people they're a player's B players and C players a players love to hire other a players B players love to have somebody that they're above right so they go out and hire a lot of C players the problem is B players can hire C players way faster than a players can hire other a players right and so you end up in this death spiral pretty quickly you have to have a commitment to only hire eight players right so the general rule of thumb is I'd only want somebody that was better than me right I need to be the dumbest person in every room right and if you use that as sort of the bar you're constantly raising the average in the company next one is you need to know what's missing on the team I think there's this temptation to sort of put this front up to to investors and say we've got everything right it's sort of you know well let me let me take the list of titles and figure out who is going to cover each one of those so that we've got them all covered and the reality is we don't want that right we we'd actually much rather there be some candid discuss on hey you know we don't have this skill set we ought to go find that person right as long as that quart nucleus is there it doesn't it doesn't really matter beyond that um the other piece to it right that I think is related is this weird problem around titles people seem to get hung up on titles for for bizarre reasons I got to tell you I would much rather see a business plan that had everyone called a director and then sort of this discussion around maybe we'll need better people maybe we won't then to have everyone as VPS and knowing that several of them actually aren't right so think about kind of how those things influence how investors view you so the last thing that I'll note on team and this again is specific to the the venture context you know the VC is trying to size you up to figure out whether you're somebody they want to work with for the next three to five years right and the hope is that you are are doing the same the joke that I always make right is that it's sort of like marriage that you're marrying your VC the the rejoinder to that of course is you can't actually divorce your VC once you pick them so market so what's important about market it's all about the the size of the market and how fast it's growing I would argue that the bar that most venture folks apply is that it needs to be a billion dollar plus market that you're going after and the reason is simply a pattern recognition of how what percentage of the market are you likely to be able to get and so venture folks sort of apply this heuristic of you might be able to get 10% or so of the market over time and so it needs to be a billion dollar plus opportunity to justify it um second element we've spent a lot of time already talking about the the pain and the fact that it needs to be an acute pain we talked a little bit about the fact that it could be quantifiable and some of the ways that you could go about describing it I think the the last point was one that we did not talk about before and that's the the observation that it actually matters where the market is going as opposed to where it is today and so part of the story needs to be how does this unfold across the dimension of time right so you may have a story right now but what does that look like two years from now or three years from now or five years from now so what are some of the elements here of the the go to market plan the first part is the the marketing strategy right so you get the message to your customers and obviously this varies pretty widely by category in which you compete but there there are a whole lot of sort of constituent elements here one that I think you ought to make sure to think about in this context is partners right so how do you get partner leverage somehow in your business model it is relatively rare that a small start-up goes at it alone and succeeds without some giant befriended them along the way so in my kimby example they were befriended by both VMware and Microsoft that was the unfair competitive advantage that they got very early in in their life second part is the sales model and distribution and so consumer perhaps there's less to be discussed here if you're talking about enterprise software there's a whole richness of options to choose from but these are you know having them well thought out and making sure that it's a coherent plan makes a lot of sense or is necessary and in the last piece is sort of the pricing right asura how do you monetize it again the range of options is large what venture folks are looking for here is not that you have the answer but that you've got several hypotheses of what the answer might be and a systematic way to go prove them out right so in the consumer context you might say I think there are four different revenue streams and here's how I'm going to be able to turn each one of them on and here's sort of the key metrics to know whether it's working or not right and that's a sufficient answer for an early-stage company the next part on the how do you deliver it to market is the the financial operating plan and the test here is not you actually have all the answers it's simply a reasonableness test right does does the story hold together in a way that it actually makes sense right or if you busy you know crafted this whole thing and now when you put it on paper you realize that your customer acquisition cost is $500 and you think you can get $100 out of them right and suddenly the model no longer works right so it's really a reasonableness test to see whether you can put something together that holds together it's consistent with the rest of the story the reality is we don't we neck recognize that no company will actually successfully hit the model that that you give to us on day one if you do that would be awesome and congratulations you're one of the first alright so so product um so the first observation here we kind of already talked about and that's that positional advantages are rarely sufficient I can't tell you the number of times that I've seen a pitch that says we have a first mover advantage and I always challenge the entrepreneur to cite me an example in technology where first mover one you may be able to come up with one I'm yet to find an entrepreneur that's fast enough on their feet to come up with one for me but but you might but it's pretty rare so rather than relying on that instead focus on some sort of capability based and we've already talked through sort of what some of the the range of options there might might be technical differentiation seems to be the one where people have traditionally having their hat the most I think that's moving towards some sort of innovators dilemma where there is a belief that the incumbents are unable to reach a particular market perhaps the business model shift perhaps it's something else that that keeps them from following you clear and succinct value proposition we've spent a lot of time kind of already talking about that so the ones are a caveat that I will apply to it is its applies specifically to product is the 1.0 release right so the other problem that you can run into is I call it the Cadillac problem of you come in and you say well here all the things that's going to do and we should have it ready for you in eight years right and you know that's just not acceptable right what you want to get out there you want to start getting feedback earlier to figure out whether or not you're heading in the right direction it's entirely possible that you picked all the right features and in eight years you'll be spot on but I'd much rather deliver something in six months and then iterate and then deliver something else in another six months and continuing that refinement process so the test for for venture guys is what's the minimum set in the 1.0 release and the test that I always ask people is to go through the exercise of pose to yourself what is the fewest number of features that I need to provide to get money in exchange right and and and as long as that's the smallest unit the smallest quantum of value you need you can deliver right that's what should be scoped to the one not oh release the they're sort of point here around leveraging trends and standards you know it's much easier as a start-up to write of tidal wave right so find something that's wildly successful and figure out how to latched yourself on to it if I go back to the akin be example they route the virtualization wave right you had to be hiding under a rock someplace in it2 not to know why virtualization was important over the last three years and they were able to sort of attach themselves to that and it really didn't matter sort of whether they did anything wrong right they still enjoyed all the benefits of that category and writing that standard in wave the key to thinking about your operating plan is how to schedule removal of risk from the business and what you want to do is you want to link that to financing events right so each individual round of financing should be predominantly around removing one key element of risk in the business right so if you are a consumer business the first risk I would submit to you that matters is customer acquisition can you get anyone to come to the site right the second one might be engagement can I once I've got them there can I get them to do something on that site and then the third one might be once I got them there and doing something can I figure out some way of extracting money either from them or some third party because they're there right um so that would be an example of a progression of risk reduction and I think you want to go through that same exercise irrespective of the the product category so the classic example of innovators dilemma would be a condition where a business model shift is required and the usual example that people cite is that there is some giant in the sector in order to change their business model actually has to effectively get rid of the existing business so an example right that was cited earlier was sort of this move to SAS so if I have a legacy business right where I'm out elephant hunting for multi-million dollar enterprise deals and I probably have a 20% annuity stream on maintenance from my existing customers to suddenly shift all of that and go sell SAS software right as a subscription business so I don't get paid up front I get paid in this annuity stream overtime right is going to really disrupt my existing business because I've got a sales force that's comped this way I've got a marketing machine that set an engineered to handle it right I can't change my business overnight and to do it is going to erode my revenue right and so if I'm a public company how do I go to the street and tell them that next year I'm actually going to do half the revenue but not to worry it's subscription so I'll get it back in two years right you know you try to have that discussion with an institutional investor so it's those sorts of things right that pose and innovators dilemma and you'll find them in selective markets you oftentimes in the consumer context hear it around things that Google might face right or problems that Yahoo might face in shifting their business model right that's would be another example but you got to think about kind of where it is that the incumbent can't follow you because of some structural reason all right so what I thought I'd do next is just spend a little bit of time talking about the venture kind of financing process a little bit so once we've gone through this exercise of what is the value proposition I've now sort of built out the business plan based on that right how do I turn that into something that I can go talk to investors about and the first step of that I think is to write the investor pitch the investor presentation has roughly these eight sections to it if you think about it it should map pretty well to what you put into a business plan if anyone actually wrote a business plan any more right instead everyone puts it into PowerPoint and it becomes this document um these are sort of the eight key elements um it needs to be roughly 15 to 20 slides and the trick here is sort of hold yourself to that right resist the temptation to double that or triple that I can't tell you the number of pitches that have come in that have you know 80 slides and when you actually go through it 78 of them talk about the great technology and 2 of them tell me about all the rest right so these are the eight make sure that they're all in there it means that you get roughly one to two slides per topic area make sure to use them wisely the key to this right is that it's all about the fundamentals right it's the core element to each of these eight parts of the story if you manage to entice an investor they're going to want to know more right and that's okay remember that the investor pitch and I'm going to make this point over and over again it's a sales document right with the exception of consumers right and you're some sort of you know spontaneous purchase at point of sale or something you know it's a long courting process right and the same thing holds true here you're not expecting to get a check on the first meeting right and if you are you you ought to you know reset expectations it's going to take a series of successive meetings and so like any great sales process you want to tease the customer a little bit right tell them all the great things and get them to ask questions to get to the next level of detail so it's fine to have more detail than these eight slides put them in the appendix right so that when somebody asks what about this you can say oh I got that answer over here right but keep the body of the document to the core core parts of the business so from there you know I think there seems to be this desire to write executive summaries personally I wouldn't bother I think it's a compiled waste of time I try to read them as fast as I possibly can not because I am NOT actually interested in the content but I'd much rather get the investor deck that wants me through it more methodically all the elements of the business to the degree that you choose to write an executive summary please make sure to limit it to one page maybe to the executive summaries that run 15 pages of prose take way longer to get through and I'm Way more tired by the time I get to page 15 then if I just walk through the deck and was able to focus on the key elements that I care about understanding um so if you're going to do the executive summary keep it short keep it succinct address sort of each of the the major elements but bear in mind that again it's a sales document right so you want to tease people about what is really exciting and interesting about this to get them to want to ask more questions I won't bother going through this this is an incredibly dense list but this is sort of the set of questions that you would want to ask about each of the elements of the story and make sure then that your slide deck addresses them because these are the questions whether the investor actually asks them or not these are the questions that are running through their mind and they're mentally kind of checking them off and going okay well that's not a problem that one's one I need to understand that's one that you know they got completely wrong you know from my perspective right you know they're going to try to average out and weigh sort of all of these questions and in this is sort of my checklist so if you answer all of these questions right you're probably about an investor who's really interested now you're going to kiss a lot of frogs along that process because someone's going to disagree with some elements of the story but this is the set of things that they are mentally going through right it's the questions on the previous slide but sort of you know enumerated one at a time so I'll leave it here for just a second so you can kind of skim through it certainly so the last thing I just wanted to talk about on the venture process was the process itself right so how do you how do you actually raise venture financing and so this is kind of the the rough timeline and I'll just kind of walk quickly through each of the steps the the first step is to somehow contact the venture firm and and here you want to make sure to get a personal introduction if you can write the just to give you sort of a sense of the numbers as a partnership we look at about 6,000 investment opportunities a year I personally look at between 800 and 900 investments a year so now you start to do the math that means that I'm looking at roughly three to four investment opportunities per day right of those I'm going to take meetings with about a hundred and twenty companies right so about one every other day and of those 120 I'm gonna take second meetings with 40 and of those second meetings I will ultimately invest in one so I had to go from 800 to one is a very steep winnowing process that doesn't mean that the other 799 are bad businesses right it's for whatever reason it didn't capture my attention in my interest right along one of these dimensions because I have to go through this process of figuring out what one do I care about and so now if you map that into this timeline well how do you maximize your chance of success well at the first step you just need to get to a meeting right it's you want to get from the introduction to a meeting and how do you maximize your chance of that well you make sure that it's the strongest relationship you possibly can get is the original introduction right so as an example if a CEO who I backed multiple times and has been successful for me writes to me and says here's this company you have we need to take a look at it's the greatest thing since sliced bread right I'll guarantee you that I'm going to clear my schedule the next day and we're going to have time for coffee right to the other end of the extreme over the transom haven't had a chance to meet you before I absolutely will read your presentation III make sure that I get through every single presentation never gets sent to me but it means that I may not give it as much attention right and it means that the bar to get over is just higher so my recommendation entrepreneur is is find a personal relationship that gets you the original introduction and try to reach the person at the venture firm who knows that domain right so if you show up and say Tom I want to talk to you about a clean tech deal right that's not my area I just you know it's an interesting space I think it's awesome but I have partners that know the clean tech space that's not my thing and the same thing holds true across most firms so you want to identify the person that is relevant to the type of business that you are looking to start second step is the initial presentation so the way these work is you come in and you pitch for an hour we tell you it's an hour the little secret is we almost always hold 90 minutes on our calendar the 60 minute pitch needs to walk through those 20 slides you want to expect that half the time will be spent with questions half of our questions will be things that you've actually answered in the slide deck but you just answered them in a different order and we asked you when we thought of them the other half are just completely ludicrous questions that are either because we know the domain and we want to just skip through 15 of the slides because we already know the answers on the 15 and we want to get back to that part that really makes you different versus the other 10 or I'm just out to lunch and I have you know I don't understand your business yet and so I ask some silly question the result is you end up needing that full 60 minutes to get through your 20 slides about half of it will be spent on the slides about half of it will be sent answering questions remember though the key to that first meeting right is not to get a term sheet right it's simply to get a second meeting so what happens from there well they're a series of successive meetings partnerships venture firms or structures partnerships which means everyone in the firm sort of somehow needs to agree on an investment different firms have different kind of balancing acts of how many people need to agree to make a deal happen but generally speaking it's some sort of consensus and so the the process means that you need to meet with a number of different partners in the firm to start building consensus this is a prospective investment that you want to pursue so hopefully if things go well you'll get invited back to a series of successive meetings that could be a couple of meetings that could be five or six meetings generally as those meetings progress they'll start to invite some of their experts in right so I have this network of people that I know in various domains that I've really trust and so I'm likely to ask them to join some of these meetings or I might ask you to go with them directly or I might introduce you to some customer prospects that I know right it's a bunch of different ways to start triangulating is this a project right that I'm really excited about and if you guys use the process well as entrepreneurs it's actually to your advantage right because you've gotten a whole lot of free networking you've met a whole bunch of potential people that you can recruit to your company you might have picked up some interesting customer prospects you might have picked up some interesting partner prospects so the process is painful don't get me wrong right I raised financing before getting on this side of the table it's a painful process but there's actually a lot of good learning that happens a long way that eventually leads to the last stage of the of the due diligence process or the kind of front-end process that culminates in a partner presentation all right and that's sort of the final blessing you come in you pitch to the entire firm everyone in the partnership regardless of their domain sector generally is in attendance and they make a thumbs-up thumbs-down decision effectively at the end of the meeting if things go well it's thumbs up you usually then get a term sheet within a couple of days the term sheet is sort of the first pass at the negotiated structure of the investment you'll have a few kind of cranks of that until you kind of agree to what the terms are and then you enter kind of legal due diligence right and that part generally takes anywhere from 30 to 45 days and at the end of that the money is wired to you and it's in the bank and we go from there so that's the the basic process yeah yeah so our expectation is that you will our preference is that you don't if I remove sort of my venture hat for a second and I put back on my entrepreneur hat the guidance that I usually get is that you want to approach somewhere around half a dozen venture firms at a time any more than that and you're going to be swamped with first meetings and diligence requests any fewer than that and you run the risk that they fall out right and you sort of rinse and repeat so you do that for the first half a dozen if none of those germinate you go to the next half-dozen right and you sort of just systematically start working your way through the list do you consider the I mean at some point just before you write yeah certainly at the time that you sign the the term sheet you would tell the other prospective investors that you're not moving forward with them up to that point the expectation generally is that you know everyone knows that you're likely talking to other firms the place where the discussion starts to change tenor a little bit is when one firm says hey look you know this is something we're pretty clear we want to move forward with we've got some process ahead of us but this is the direction we're heading and we're interested in syndicating risk so most venture deals that get done today are done with at least two investors in the initial round and some of that is a risk reduction strategy right if I can mitigate risk by sharing it with others but the the reality the real reason to do it is you double the rolodex right so if you get to very VCS from two different firms you've doubled sort of the ability to help with recruiting with partners with other introductions etc and so most firms have a strong bias towards syndicating with one other firm and so somewhere in that process there will be a discussion around hey who else do you think is kind of moving to the top of your list because we'd like to start to form a syndicate with them right and so that's kind of the juggling act that you have to figure out when do you start to disclose some of those other names yeah so it varies widely by by firm and sort of how you define success obviously colors that discussion for most venture firms they find somewhere around a 30% flat out mortality rate ie zero or asset value of some sort they'll find another sort of 30 to 40 percent that returns call it 1 X 2 maybe 3 X their money which 3 times your money and the public markets today sounds fantastic but you know for venture guys is not considered a successful outcome particularly it's not a bad outcome but it's not a good one either and then the remaining ones are the 10 X plus sort of returns right and so your hope in structuring a fund is that you will get a few of sort of the outsized returns you get a bunch that are sort of ok returns and then you try to get you know the fewest number possible that are just flat-out zeros good question so what does the cap table look like effectively so the series a cap tables actually don't deviate a whole lot you know as much consternation as there seems to be on both sides of the table around what is valuation need to look like the reality is the cap table almost always looks the same it's 30% to the founders 20% option pool for new employees 25% for venture investor number-one 25% for venture investor number two now you will see some skewing of that in both directions depending largely on the quality of the the project right and this goes back to kind of your earlier question around how far do you have to get it to get venture financing the further along you are the more favorably that those numbers will skew toward you and toward the rest of the employee base the earlier you are the more it will skew toward the the favor of the investors but as a rough order that's kind of the stereotypical kind of series a structure yeah so anywhere from three is six million yes 30% founders 20% management team 25% venture investor 125 percent venture investor yes a venture firms will look at anything their pros and cons to raising angel financing the advantage obviously is that you get capital into the company sooner perhaps before it is mature enough that it would attract an institutional venture investor you also will sometimes get some of the fame and notoriety associated with that angel investor particularly if they're going to be actively involved in the company somehow the the downside is that you know generally they're paid pretty well for that right so you know if the call it thirty to sixty percent mortality rate for venture guys sounds high you know it is significantly higher for angel investors and so they oftentimes will extract greater value for that early investment so that's the that's the trade-off that you have to worry about as a as an entrepreneur personal introductions yeah so we're generally pretty approachable people so you I mean you you can you can find us at all sorts of conferences and events right remember our job at the end of the day is to find great companies and the dirty little secret to the venture business is there much fewer you know great companies and there are VCS hunting for them and so while our job sounds quite glamorous the reality is it's not well so that may be one the third party is by far the strongest but those are to your point right are the hardest to come by in some cases it's serial entrepreneurs who have built relationships in the past and so you can obviously leverage those the other way to do it is by proxy by finding advisers that are interesting advisers to your companies and odds are good that good advisors in the valley are pretty well connected to venture folks I think the decks change over time but it changes mostly because the maturity of the business changes and you start to fill out more of the detail around what are you going to actually go do right so a seed deck is probably pretty light on content beyond sort of the vision of here's what I want to go pull off whereas a series a deck may have more detail about what have you actually built and what are some of the customer conversations look like write a Series B deck you now probably have some customers and a product and a Series C deck you now actually have a lot of product and a lot of customers and you know are starting to talk more about how is the model scalable right so the the maturity of the business dictates where the focus of the content is but the same eight section still apply one final question one thing that search that I'm going to start up once they get pressed is that they start getting lots of calls from associates at VC firms asking for information how realistically how should those people be handled because from what I've heard very few deals are funded that come in to a venture capital firm via that route yeah so that they're they're different kind of categories of that there are a series of firms that are and I would put you know summit and TA and others like that into the category they're really kind of private equity firms right and so they are generally calling actively to find generally cashflow profitable businesses that they can then invest in that's pretty different than sort of the the seed that they you know heard about you in a cocktail party and know that you are you know going to the GSB event and you know they want to come find you there so the first set is kind of the bifurcation between those two camps the second piece to it right is is sort of what is the timing that you actually want to raise financing so don't let venture interest preempt your process if you don't think that you're ready yet then you know don't don't go engage with them so you know some of that you need to control you know in terms of should you actually respond to them or not if you are ready to start talking to venture folks and that's the strongest introduction you have to the firm then by all means right that's better than sort of the the blind email to them you know but on sort of the the hierarchy of categories if if you know your next-door neighbor and best friend is a GP at that firm right then that's probably the person you ought to reach out to so it's I think kind of timing and strength of relationship would dictate whether you should actually take it if you're in that second category if you're in the first category it's a profitable business I don't think it actually matters one iota how you get in the door they're just simply interested in whether it's a real company and whether they can make money at it

Channel: Stanford Graduate School of Business

Views: 81,877

Rating: 4.8737998 out of 5

Keywords: venture capital, value, funding

Id: PyG5k0QtKOQ

Length: 53min 57sec (3237 seconds)

Published: Mon Jul 27 2009