Evaluating a Business Idea

and I'm delighted to be here I hope you guys all had a good first day and good dinner it's hard to always talk after people eat but like Linda said I hope you drank some caffeine you're gonna eat the good chocolate maybe that'll keep you up um so about me and then I'm gonna ask you guys a few questions um so I did go to business school on East Coast they didn't let me in here or I would have come it's been a few years at Microsoft that was fun that I came here and I was a full-time general partner at Kleiner Perkins for over a decade and led on 20-some i deals there and then a few years ago i decided to sort of phase out of that so now i'm doing a variety of things i class here which some of these slides will be directly from the curriculum and i still on a few choir boards and do a lot of angel investing i've invested in 13 startups of my own money of the last few years on my own salts or a lot of you know about so that's me so obviously i don't i'm not going to get to know all of you at this level detail but at some level of evil I am I make sure you so show of hands how many people have been more than five years removed from from GSB okay and how many have either started a business before or after school how many ones go to business now I'm not not that surprised by that all right so I was asked to talk about this topic evaluating a business idea and having been both a general manager and vice president of Microsoft we thought about evaluate businesses in one way and then as an institutional that's capless another way and now as an angel investor yet another way although I've never been an entrepreneur per se and so I had to think twice before I really because I've never really done a presentation on this topic specifically so I had to think a couple of times about it and the question that came to mind is you know how do you judge a business idea and you know there's some sort of standard tricks of the trade and we'll talk about them but I got I wanted to get more fundamental I mean how do you how to decide on what metrics to judge a business and I thought you know a similar question in some regards is how do you know you're happy it's a very personal decision and everybody has a different set of what I call ways to measure what happiness or you know what a successful business idea so I want to start this by you know kind of going a little out of the box for second because I think a lot of you probably can do this thinking you know hey this guy's offense capitalist he's going to give us you know some like market sizing you know multiples how exciting the business opportunities and we'll get to that but I think I want to start by saying you know most businesses 99.9% of all business we got started in the world but certainly even the United States are not venture capital funded businesses so I think I want to sort of draw a little cast a wider net when we think about this topic so here's my high way of thinking about this and this is not this is no science you know bridges textbook but I put up a bunch of possible outcomes just to give you some food for thought when you think about if I immediate isn't and you know some people are very satisfied to run what I call lifestyle businesses you know they throw up a lot of cash some of them not all the some of them do they're never going to go public they're never going to get a great multiple than every a venture capitalist excited but they're perfectly good businesses you know it used to be maybe not lately but a long time we have the rich people in your town where the people owned the car dealerships those are great lifestyle businesses right they screw up cash you know you've had a franchise you're really not threatened now obviously it didn't last forever but but for many years that was a great business to um another kind of idea you know for some people is actually to go into the social service sector of a nonprofit sector and they're not going to be measured on profits they may not be measured on growth they might be measured on social movement you know and more and more like I actually was at this institution today as a gas in a case for a GSB class about a nonprofit that I'm the board chair up and one of the points I made to the class as a gas was the case was about should as a nonprofit grow or not and I said growth in nonprofits in certain sectors of the nonprofit world are you have to think about differently than businesses that their growth should not be measured by our revenues or people or profits or property is to be measured on can they grow their impact you know so again I don't know what your your measure is for success but I want you to think you know it's not just the lack you know in the Silicon Valley kind of real you everybody thinks that you know what you want to do when you start a company is you raise venture capital and shoot to the moon and you know what once in a while that happens most times so I found this cartoon that I think sort of speaks to this theme builders like my favorite cartoons by far so this is dauber in his usual consulting mode and he says you can remind the entrepreneurial spirit here by reminding people of the early years he points a picture he says your founders were two bums who began in a hardware box that he says one bum this style is boogie and accidentally bought Cisco stock at the IPO now not when you would consider a traditional success story but maybe for some people this might be a success story located by the way if you can do that actually good good for you most people can't do that but again the spirit of this is I think you have to measure your own success metrics and just because you're in the valley and like there's so many people who've left Stanford and started places like Google good for them but it's not for everybody and most times that's not the story that people are going to get edited by so now I'm kind of where I'll go for the next bunch of slides here is to talk about kind of some of the tricks of the trade as I mentioned earlier that people use to evaluate business opportunities now one that you probably learned if you're graduate of this place business idea Five Forces even I was Papa's it's go a long time ago this thing it's good you know people still use it I mean I think consultants to use it but to be honest with you when it comes to using this tool for evaluating entrepreneurial opportunities that's not very it's not very useful because you look at these things you know you're supposed to know like who the suppliers and how powerful they're going to be and what the substitutes are when you're when you're using when you're thinking about a startup opportunity since extension it's you know usually now there you know you could be a late entrant some of this might be present but the most part you know a frame like this a framework like this well it's great in evaluating businesses that operate in industry sectors but are well understood for most startups certainly the kind that I look at as an investor both institutionally and as an angel investor this doesn't really help you very much so you can think about it you can you know think about where you might end up if the company is successful but most of this doesn't really make any sense for start-up at the beginning so another important thing to think about you know I again a very typical kind of thing that people throw each people when they're thinking about evaluating this opportunities is the strength of the team me because you don't know about the future but you know what's here today is often the team starting team and one thing they teach a lot I think these days it wasn't as big a deal actually when when I went through business school is this idea entrepreneur authenticity what does that mean I put it in quotes because I'm not really sure everybody kind of views it the same way but I think I think the notion is that people who have who are starting these companies if they have real-world experience knowledge if they've internalized the problem in a weak way that's really authentic that's that's that's an interesting place to start an evaluation of a business opportunity in other words you know how does how does the problem come to manifest itself how does the opportunity to manifest itself it usually comes from the entrepreneur that's actually I can occur at dinner it doesn't mean you have to have lived in the industry that you want to start a company what it means is that you have internalized a problem you become an expert to the degree that you can credibly and authentically talk about the problem and the solution you're you're providing so I think that is a place to start but it it has to be augmented often by sort of the idea that who else can you recruit what other advisors or team members have been treated by the Platon team and then I think the last thing is probably equally important to me anyway one of the things I look at when I think about a violating a business idea is what motivates the team and I'll tell you we have this thing in kleiner and I think a lot of its capitals have this is that um you sometimes would have a team come in and they need not doing a presentation and within you know few slides you know the whole idea of selling the company and what the returns were going to be I mean look everybody knows that investors are in it for some kind of return but there's a certain kind of presentation a sort of kind of entrepreneur that really comes on with the sort of bum mentality that it's it's all about making money and that really turned me off and it really typically turns off like client or other a lot of other institutional councils because that kind of mentality it it doesn't speak to the staying power and the passion of the entrepreneurs what really sort of I think is the thing that when you're looking at a founding team you really really get excited about it's what motivates them is usually the mission their passion for the idea their passion for the you know the what the product or the service is going to do not necessarily what the out now everybody wants a good financial outcome but that's that's sort of a byproduct what really motivates and really what what a really great entrepreneurial opportunity looks like typically is a very passionate motivated so that's certainly in terms of evaluating opportunities that that's where one of the places I start now another thing a lot of people will have you think about when you think about evaluating opportunities for startups is you know what trends are coming along that you know you can run it's certainly a lot of businesses especially the technology area to get sort of successful or maybe sometimes not successful because they arrived these ways so I just listed a few of them I mean there there's some that are obvious that rise you know all boats or for singsong voice which is sort of a natural economic things you know recessions inflation but they're much more interesting ones to look at like technology disruption like like these platforms like iPhone that come along you know before you know it you have like 10 million people using a device it didn't use a few years ago that's an interesting thing as a start-up to think hard about how you parlay that into some advantage how do you take advantage of that I think the stuff is going on in healthcare reform right now there is gone throwing so many opportunities around that we've yet to understand and I know I'm sure the people in the health services area investors and entrepreneurs are already starting to stiff goes out so at any one time any of these trends could be you know really real and and important to start businesses but you have to be careful because some of them can be ephemeral they can come and go like you know aging for example aging surreal a real trend and a lot of people have been trying to build businesses around aging for a long time I first got decliner for 13 14 years ago I started seeing some of those plan here we are 14 years later I'm not sure that that was a trend that on 14 years ago maybe it is now but you know tightening is very relevant to start out and so these trends sometimes you know the timing of them is not always obvious so another sort of dimension when you think about evaluating these opportunities and evaluating any one is and again this is just kind of the landscape and it's hard to kind of pin down what innovation is but I sort of tried to sort of create a couple of buckets here one one that the kind of capitals that I was and still am some degree as an angel is is this first button which is build a better mousetrap you know a product innovation and they come in the venture world there's sort of two different kinds that people talk about one is brave new world and the other is better faster cheaper better faster cheaper it's kind of easy to understand it's basically there's a product already in the market team comes in and says hey I got a better way to build it either faster cheaper you know it's a different kind of investment typically you know it's not a home run but you can often make pretty good money doing that a lot of the the team's authenticity and knowledge comes to bear right because they sort of say I know exactly what the current product in the market is and how we're going to build something back so plenty of investments have done have been done on that sort of theme but the ones that most people like particularly big institutional venture capitalists are the brave new world ones and I think this is kind of the ones that I think a lot of young entrepreneurs that come out please like Stanford like to think about you know groundbreaking something you know way new product comes out of a lab at Stanford or comes out of some research that bet that the entrepreneur is working on can be very exciting they also have different risk reward trade-offs right I mean the brave new world ones often work a lot less than the better faster cheaper ones but sometimes the ones that the brave new world ones that do work have much more upside so different kinds of innovation then there's business model innovation and I think this is pretty interesting because you know Google is an interesting example you know people don't actually know what the sort traditional wisdom is about by Google but we were investors in Google I helped do the diligence on Google alignments the first question board meetings and I don't know do people think that Google helps to show of hands if you think Google is an innovative company or not yet people think yes ok you think what was innovative was their technology their business the technologies innovated yeah yeah yeah I would argue otherwise I would argue otherwise and I'll tell you why because I think yeah they had a better algorithm for ranking technologies on the internet I'm not really sure that's why users UOP used certainly in the early days I think what they used it for was because it was more complete and it was faster and it was a simpler UI and those things were you know I don't know if that was huge innovation but where I think the big innovation was they and I'm not sure they understood this in the early days but what the reason Google is so super successful if you read all these cases about people have analyzed it is they got a network effect going but getting more users and therefore the advertisers became more effective and when that happened more users came and when that happened more our positive can and so forth that network effect was not obvious in the early days in fact there were no advertiser bohmian though it was zero revenue we invested just because on the traffic growth but in fact I would claim that Google's biggest innovation I'm sure somebody in the world might challenge me and have better data but I think their biggest innovation in a sense was creating this network effect around advertisers and search which there have been lots of search companies before then you know there was actually when we invested in Google that was like five or six but none of them had got that flywheel going of advertisers and users and that sort of tight loop that Google still even now Microsoft support hundreds of millions of dollars to try to you know it'll eat your way up egg Google's marcher and they still can because they still have that now poor fat going so I think one of the things that's sort of maybe a little bit appreciated finding opportunities out there that you know it had some innovation on the product or the technology side but a lot of interesting businesses get built around your abilities network effects eBay people don't realize Microsoft Windows is one of the really big network effect success stories the network effect there was once you've trained all your people to use Windows and Windows applications it's really hard to stretch them so they basically and even now I mean that what people corporations and they don't certainly go make the price but they keep buying because all their all their training manuals all their applications I mean they're all so stuck in that network with that so this is I think underappreciated and a lot of times people probably add institutions like this I see though they want to start a company the first thing they want to tell me about is what product and the technology that's interesting but I think a lot of times I look at sort of a business model innovation as well and then there's just business execution Dell figured out a way to sell computers without retailers that was cool and now they have retail but but you know and Walmart figured out a way to have a better distribution chain with lower costs and all that stuff so those are two jump some general themes now I'm going to kind of go more specifically into you have a specific idea you know what are some of the rules of thumb and and here's where this is a little bit more kind of where you would see venture capitalists or institutional investors sort of thinking along he's mine one of the things they look for a lot is this idea between product and market fit they teach that a lot now this is close I think there's a whole class here about this and the whole idea is you know there's lots of leaking market leads out there how do you build a product really you know feeds right into it and sort of drives that kind of you know excitement and fulfillment from the customer that's a big thing and understanding that fit and sort of how the entrepreneurs see that fit and what testing you can do early in your product lifecycle to sort of prove to yourself as an entrepreneur and to the investors that there is a tight linkage between the need and the product or service or offering that's more like the probably fundamental things that you have to look for when you're evaluating a start-up opportunity market size is obviously a big deal I put sort of the rule of thumb that venture capitalists look for you know they typically and again it's changed but you know I still rule of thumb they like sort of a company then gets 100 million dollar revenue and that end 20 percent market share that implies it kind of at least a 500 million dollar market and of course lots of growth typically you want to get in before there isn't a 500 million dollar market and you want to grow as it you know becomes a $509 multi-billion dollar market timing I mentioned it earlier but timing is one of the sort of underappreciated things both as an author and as an investor because I have seen so many interesting companies get started but before their time and then a few years later the same idea team comes along and it's successful we wonder why and it's because there's market dynamics that just come to play and sometimes you know great ideas just are not gonna hit hit the sweet spot sorry it's hard I mean you know I guess I would say I think you don't know until you're trying but what you don't want to do is you don't want to over commit spend a lot of money until you sort of see that you are you have the right time a lot of it is market risk you know that so a lot of investors will say there's four kinds of risk there's product risk is market risk just financial risk and there's a team risk though his initial less Kappas like kleiner would tell you don't worry about a financial mess we have enough money we help to raise money team risk we can help you you know mediate because we can help you hire people or whatever product risk we're willing to take product risk that's what we do the big question is market risk and so what you want to do is you want to shake that down shake that out as early in your process as possible and you know now that I work with angels I am with entrepreneurs and angel investing my whole my I preach them is look we don't know if this products going to work one off the time is right whatever but as long as we don't over invest both terms of sweat equity and in terms of money we will get a modicum of a return I'll be someone will buy it for something or will bow and we'll feel okay about so at any point of as where you go into it you kind of have to realize that you don't always know the answers but if you if you kind of scale your investment according to the data you get back you feel okay with competition obviously is it is low competition is one of the things that is attractive for a new business but and sort of this kind of goes with my comments about the Five Forces there usually is no competition at the beginning so it really you know the question about competition more has to do with barriers that we're going to talk about also and then here's the last thing that I don't know you know I'm sure this is sort of traditional or you know accepted wisdom but as an investor one of the things I really appreciate the what I call contrarian that's because to me you know risk how the reward goes with rest and if it's obvious if it's if it's obvious what to do if the business ideas are obvious a products idea then all as obviously customer needs like is obvious there's only not a lot of upside of that I mean even if you come across it first I'm going to come across with soon thereafter or probably at the same time so to me I think sometimes the best bets not await the time the best bets or the ones that don't seem obvious in fact later on kaalia that's obvious thinking were not obvious but sometimes you'll get to remember if it was that obviously would have been done before so I think I think the idea that that you know things that don't seem obvious and might seem really out of left field don't ignore them now I'm not saying they're all right but but there's I think a way as an entrepreneur and as an investor to think about those in a way that I think potentially gets the good good good outcomes so here's a question for you guys this 65-64 estimate now support million or billion dollar question which wins a poor market the great team we're a great market with the poor team so who wants to vote for a poor market with a great team wins you know for market beats a great team yep well hands in the air let's see who wants to choose the first object okay okay so now you want to want to choose the latter maybe maybe it's not it's a divided crowd so I don't know what they again it would be accepted wisdom is for this I think a lot of people in the investing business in Silicon Valley you tell you great team I'm here to tell you not true I have seen unbelievable teams great team go after a bad market you cannot overcome a bad mark I'm not saying you will fail every time but you will not get a you know you will not get the best you know the kind of outcome you're looking for you you'll fill around you'll maybe get something at it but you know but I've also seen a very weak teams participate in just astounding market growth and have great success so I would argue you know you want to have great team there's and there's no reason not to everything but make sure you're participating in the great market opportunity yeah growing fast starting small and we're going to go back yeah yeah yeah that's that's well I mean then there's bill business month question can you expect even these five forces next can you straighten up March in is there competition other substitutes but again at the beginning those things almost you don't really happen very very often so but you know something that you can make reasonable Martin's on that's going to grow fast that you can be the leader in you almost always commit money I have to say that I mean you can screw up a traditionally but I haven't seen poor execution and still make unbelievable amounts of money because they will just fit at the right time in a really high growth growth market so here here's my view and I actually I did this particularly this way because I want to point out to you that my view as an institutional venture capitalist is quite different than it was somewhat different needle and would be different if I was an entrepreneur and I think this is you should be really mindful of it so when I was in BC part of what you have to do there is you know you have a certain number of investments you have to make to fill out your fun and you have a you know you can only seven somebody board so you have some economic constraints but the law the bottom line is that you know you have to find the market that's going to be grow grow and be very good and you you almost always have to bet on something that's clever and big at the same time that's kind of just the nature of the game so that's kind of what you look for and you watch out that you're not investing too early this this idea of you know you kind of you want to shake out the market risk before you do more lots of money but you know as an angel investor I have different strengths I can put less money in the board and have to answer a limited partners and so forth so I have slightly different you know the you of opportunities I still want something clever but it could be medium sized doesn't have to be I really want something Capital Fisher because I don't have a fund of you know 600 million or a billion dollars with that I actually like things that are contrarian ideas and I this is going to sound blackness and I don't want to be sounding negative of institutional venture capitalist like my firm because I think they're great miners great they're all great but I think they often bet blast on contrarian ideas I think it's hard at the certainly until there's evidence those institutional investors remember there's a whole bunch of tape of people around the table they all have to sort of agree in an escrow and the nature that is it's very hard to get them to all agree on and try on dia if I see something that I like I don't need to ask him I even if it's the most contrarian thing I say I'm in so I actually like the Trinity is and I think a lot of times institutional investor to actually leave contrarian ideas to people like me until they're proven and then they invest in them they're not so contrarian but that means I get great returns yeah can you give a couple examples sure let's see what would be a good one um let me give out that I'll give you some that you know I mean I know this is my mind but you might not know them but I'll I'll come up with a couple that you'll know and then the last thing I care about a lot is a scrappy coachable team because when I get in I don't you know I don't have the luxury of saying you know I'm going to write you a 3 or 5 million darts at and we'll be able to go higher like a name-brand CEO I need entrepreneurs that are going to be on the job and they're going to be affected and to I want them to be really scrappy because we don't have a lot of money so again you know my view has changed a little bit when I think about opportunities based on what my lens is and I think again is not this is how you should think about it - I mean and this sort of sort of cycles back to what we said at the very beginning you know what what outcome are you looking for if you want to shoot to the moon and you know you know you probably need something that have like unbelievable innovation or maybe a wildly contrarian idea but maybe that's not maybe you want something that you can sell for a reasonable amount of money I was one of my choices on my possible outcomes and you know what for that you probably don't need to have a wildly contrarian idea and in fact you probably don't want a wild contrarian idea you know you know if you want some medium size in terms of an outcome there you go any questions is next so what is the other side pulls out that what is medium-sized well and I guess yeah what I'm talking here is again a little bit of of what the what the lenses of an institutional investor in first thing and then the second one for me but you know generally speaking if you sell a company from anything over 100 million dollars off that's a common believable outcome in most circles but frankly as much capless that's too small you know it is in especially capitals in the valley or anywhere they want multi hundred moidores so you know use of but you know what I tell my entrepreneurs when I invest in now is paint he'll say hey look if we we measure our our capital in you know it's measured in the hundreds of thousands or maybe even one single digit millions or maybe two two-digit millions over multiple years we get so the company for 25 or 50 or even 15 happy that's a hormone way that's the kind of mentality when I tell you about medium-sized now now again it will ya all right so I've got other slides talk about sort of um kind of other aspects of this but I thought I would just take a break here covered a lot of stuff about you know thinking about evaluating these opportunities entrepreneurial opportunities so questions at this point is none we can keep going for tada PC Xone tend to evaluate companies whose main motivation isn't they don't smell on their screen so the social and these so now they're always versus at Apple with that there's increasingly Family Foundation's there are some specific venture funds that have been set up for that like I know what one frankly but 99% of the venture capitals and all of you probably have heard of not we're not happening yeah how do you evaluate the market growth and how many currently you hear about the renewable energy healthcare and so on but sometimes you just want to make a list of you can think of how do you go about together its potential growth in the next yeah so one of the very next things we're going to talk about here is uh become an expert and developing the idea and that's where this comes out because you know there's like big trends that anybody can cite like you know health care reform but what does that mean you if you want to really look at a specific option you have to become a super expert on everything about it who the customer is what the potential alternatives are what you're going to bring the market and that's what we do in this class that I teach here is that the whole first semester where we do viability research that's what we're going to talk about that after developing that is you know I don't nobody knows for sure what the outcome of any given market gross was going to look like but I know there's a set of questions I can ask for you as an entrepreneur you need to have credible answers if you don't then you've not passed my screen as being an expert in the area that you're trying to go to visit so there's no there's an end there's no substitute for fieldwork there's no substitute for talking to people again s what we teaches some that first semester of the class that I teach here you got to go out you've got to talk to expert to get tough you've tried it and fail you know talk to people who you know are the customers or potential customers that's that's where the rubber hits the road yeah and that's a great question so my answer is some what what I do and I said this earlier what I the conversation I have with my entrepreneurs is not that a you know I'm only investing if we sell the company for a 50 million dollars because you know frankly we don't know in fact you know my attitude is like I'm my attitude about investing is every startup is a novel and when you first write that first check or the entrepreneur puts their first sweat equity in it so it's not even the prologue like it's like the it's like the first letter on the cover of the book I mean the book has so long to get written so I don't want to prejudge the outcomes I don't even want to limit count I was at a like this big angel meeting recently and there's a guy who's of the angel investor from Canada basil Peters interesting guy smart and this whole thing is angels are making mistake they should talk to the entrepreneurs before they put a dime in they use companies and set exactly you know how many years it's going to be to exit and sort of what the timeframe is and how we're going to get to an exit and even a little bit what the range of valuations come to I love the guy and I give him a lot of credit what I want to thrusight that was nonsense how would you know I mean if I knew right now that becoming only worth acts in two years I probably wouldn't invest I mean you're looking for the upside I mean at least that's mine and the entrepreneur to so I don't like to try to bridge prejudge the outcomes but the conversation I do want to have is that we're going to stepwise mitigate risk and take capital only to the extent that we see the opportunity and this is where I think experience comes in I think this is where the clear view of day judgment comes in I mean I don't I'll be honest me I don't like entrepreneurs they get all rosy colored eyes I think that's a mistake I think it's too easy to be you know judge the eventual outcome by my first 10 customer or you know good my first two months I've got like five thousand registered users I mean you know we invested in frustrated they had you know four million users and a hundred thousand registrations like a week but we did not make any money you know and Twitter's got whatever you know 100 million people using it out I'm not sure those invest okay so I think you got it I mean who knows those are two extreme cases but I thought I'm saying is that I'm unweighted I'm happy to go along with the ride but before we commit ourselves on the big commitment for these companies is taking lots of capital that's the big fork in the road once you take you can't go back so before you make those decisions in the light color of day with with sunshine and all the data we're going to sit down and really make sure we want to kind of commit ourselves to the next week and as long as the entrepreneur says yeah I get I'll be happy to sell it for twenty million I'll be happy to sell it for 300 million and take the extra risk to make it if we agree that that's what we should do I'm good with that somebody's been I would particularly go to capital investors Apple and oh yeah will so for example this whole idea of you know experience file judgment about the size of the opportunity the opportunity not I mean I have seen a lot of scars I have invested a lot but I've actually seen my partners invest ninety nine them I've been a active participant in the venture industry now for fifteen years and you do get a good sense of a lot so I think there's just a lot of company building experience and how these market evolves and market market dynamics as well that I think is viable Network and the very network of people will recruiters potential people you can hire advisers board members investors I mean you do all that um you know everything from reviewing operating plans when I do all that with my team there's no answer to that every individual is different you know and what I tell people who just just blow through one of the things that you know they tell we we tell entrepreneurs and and you know it's probably sort of standard operating behavior that you check out entrepreneurs like you call references you know they know they're going to do that they give you the reference tones the first time you meet them how often do they write back to you I say when I'm scared like you should not take a dime from me unless you have to check here's here's my rest but it just blows me away that so if you want perfectly so you definitely want to know who your investors are and they're not on some you know pedestal that you you know can't reach up with by the who they are I mean you should and but so few people did you guys ever go in both for opportunities with the company or is it always that you're approached by companies and how how good what the organizational setup that allows you knows a rock star people yeah it's all over the map so most is to cement capitals spend a lot of time in County some of them actively look at certain sectors they you know fire we had these some off sites every year where we sort of said Amy one of the best in this sector in the sector and somehow we have associates go out find everyone other venture firms do that differently but yeah they do a lot of outreach that said some of the best deals are just inbound deals that we didn't know anything about our industry we didn't know anything about as angels is different I don't I mean paid employees I don't have to invest in their deals so I sort of pick and choose and I decide what I want so but you know and some firms do some VC firms do a lot more outreach than others and some angels do I mean I know like a some of my friends who are full-time angels and they have reason funds in angel funding they actually go to conferences they put a good shingle out saying I'm here for seed money do that but some people do and every firm has a different process and those suppose most firms these days have a process by which you can submit something electronically and when I first got into business very often the case but they all have follow the questions that say you did submit something electronically and it was just an idea and it was kind of like you know at first it didn't seem like maybe like brilliant your concurring idea where the person seemed very obviously then all set a very obvious and then there have the VC you say you have your network you have your ability of bringing the team why don't we take this idea and build a team around it why do we have to go with this person well so couple things about that what is battles never happens lets us not mess up the business account we investment people and their ideas not like hey I want to steal a knight what's the benefit of that it was really actually a lot of disadvantages and disadvantages of no advantages I could think of but I think probably more importantly one of the things we sort of teach students in my class is great in a compelling executive summary that piques the interest of a venture capital sort of that's her so they he or she takes a meeting that's that's the goal here so we're not to explain everything that gets the second rule but eventually you do want to explain everything is I okay and my attitude is people typically way to overvalue their idea I mean there's somebody is that are better than others but even then I mean communicating it to an investor is typically not the end of the world I mean you can keep something in reserve this can be some secret sauce there's still some lot of executional stuff you have to do so I guess my point is mine I I would tend to favor over communication not to everybody that's that's by the way don't miss characters I don't like eels they get shop everywhere there's no one if somebody wants to talk to everybody like me every investor on Sand Hill I think that's a mistake there's no benefit to that I think what you should do is have a rifle approach where you you target the top five investors something about what you're doing you somehow get into them either by saying and really compelling exact summaries for getting sort of sake introductions with somebody can they know that you know you get in front of them and you compel them to advance that's the waverers I mean that's what that's the best way we're spending a lot of time scarifying about funding I want to make sure gets through the evaluating part pretty much all day tomorrow morning tomorrow stuff coming up well I'll go through this quickly in the next five minutes and we'll have another ten minutes of questions okay so I already talked to us on this but you know the idea can come from lots of places it can come from you know your business experience your personal experience research you knew it could be even I've even heard of projects that you know I heard a colleague say X and then I checked it out so it can come from Bob or it can come from something I even mentioned here but the point of it is when you're done you're an X I mean up when you're done even before you present it to somebody you're an expert you do field research you challenge yourself and let advisers and you know people who you let in on the idea so does it really make sense anymore for the change that is necessary but you know I wanna I can't emphasize enough from half of the attacks I think people underestimate that being an entrepreneur is being you know in complete command every aspect of starting here today every time they're really good entrepreneurs they can talk to you all day long but any aspect of your business getting yes now I'm not saying you have to be write code and be a big marketing wizard but anything that's about a business that is relevant to an investor you were going to have a good answer on one of the things you do is you and this is again the first semester of the class we teach here they have to know is you become an expert by going out and actually doing research you get evaluate and home the business concept and test key assumptions you go out in the field you can do this Deana said earlier like talking to experts doing customer research you know all the things you can do to kind of identify characterized and come up with mitigation strategies for all the key risks you know a lot of what you need to do is basically field research and it comes to all kinds of you know ways but basically you have to get data the data you always sort of start with with the premise and then the data that you get adds credibility and evidence that's the thing that I think separates the really good plans and the really good entrepreneurs a lot of developers have an idea interesting idea but the ones that are really compelling they have so much evidence that they've brought to the table either by pocketed customers or talking to experts or you know there's so many ways to kind of create the credibility around your idea and that's where the research comes in lots of stuff but I guess and I think this comes a little bit from from from what I see in the class I think it's true food a failure mode is to say I need some money to test it out or I need you know I need six months to test it out and that's the value in weight gasps hope you know the real entrepreneur they figure out the cheapest simplest way kind of get something out and they start getting data and then morph it specifically there's a concept you may have heard in sort of that that's in the internet store space called the Minimum Viable Product the so-called MVP and it's so different than when I got the venture fund the venture business the team would come in and they would say I need five million dollars or I need three million dollars and what we're going to do is then a higher seat engineer or 20 engineers it's going to take this year and a half we're going to have this beta product and then after that we have six months of beta testing then we're going to launch it it's going to have all these features and they draw up on the whiteboard this day and age nobody gets a shepherd like what I had when I see now what I do as an angel investor is I want to know just the very few minimal features that you need to excite some customer response it may have nothing to do with revenue and they have nothing to do with final product I mean nothing severe we have a very small subset of functionality of the final product but what I want to see is ours the dog eat the dog food the smallest amount of money going in and you as an entrepreneurship sort of want to do that with the least amount of sweat equity going it kind of gets to the topic we talked earlier which is you want to mitigate the risk you want to see that you can actually get something before you make a lot a big commitment and so that's where I saw say to me and that's that's easy to think about maybe sort of in the internet world but I think this lesson sort of applies to those businesses trying to get something out to see that and mitigate the market risk see that there is market reception that's the success mode the failure mode is the thing that by doing lots of preparation and lots of work and lots of formulation that you know someday in the future will mitigate the market now I'll to be clear know not every company and not every product can go with only $100,000 to see if it works you know for sure you know a lot of companies require a lot more money to develop their products before they can get anything back but even what if I guys the scale whatever the scale is the Minimum Viable Product is so it might be 100,000 it can be a million you can be ten million it could be a hundred whiners invest in some energy products where they have to go 100 million dollar plant before they know that it works I like that kind of but you know but whatever that minimum is don't spend a dying more than the network so then you've got this refinement you do your early assessment of the customer need and the market side you build this Minimum Viable Product or prototype you assess what the hidden factors are then you go out any test you do primary research you see if if the dogs are eating it up to you kind of success all that and as necessary your revised and morph again and again some of the best entrepreneurs you know they're the final product or service is so different where you focus on all is so different than what they came in and that's just their natural process of evolution and again I think this this loop idea however fine is really sort of the seminal thing that entrepreneurs do well they are constantly assessing where they are what data they need and sort of feeding that back in to improve the the opportunity set and also specifically the out so questions about anything we talk about but do you actually those focus groups or actual market research that you think you phase it in according to the data yet so initially it could be dirty and cheap that's what we sort of tell people in my class and in the real world but if that looks good and you get some useful funding to get it going and you build an MVP or some prototype then you can do more formal work so I guess the more rigorous and the broader the better but don't think that you have to wait around to start getting data I don't think you have to raise money like that's my last my last preaching I don't like people to come and say I don't know anything about this but if you give me $100,000 I'll run this task no thank you you know do whatever tasks you can with whatever money that's what equity you can put it just show me some indication that it makes sense then we can talk about how much money I can give you did around the next class but don't start by saying you know I need something to do some tasks I think entrepreneurs again you know I like scrappy owners but all good entrepreneurs have to start with nothing and the good ones go a long way even from some market research but I'm not afraid of non formal market research now all right customer feedback session MVP but one of my fears is that because we hear a lot of positive feedback I have this fear that everyone's just too kind to say so you're right to be in fear that what just thought about the right way yeah so that's like a Tundra met a lot of entrepreneurs are faced with and it's really hard to answer across the board but I'll give you some rules of thought about four guidelines particularly sort of in this sort of world that I work on internet stuff you can't gauge your people's responses verbal responses you can get some sense but until you got put something out there and they actually start playing with it you really don't know so again the only way in my view to do that for Internet companies is you have some MVP out there at CN and but here's where I think there again there's a failure mode people put it out there but they under invest in the tracking so they don't really know what happened so like I tell - BRR is like like if you're going to spend a dollar one product you're gonna spend 50 cents putting in some tracking because I don't know what the answer is so I think I think in some cases you probably don't know if Leah tribe but there are other tricks I mean there's more formal survey approaches you can do and conjoint analysis to see you know what different leighton market needs there might be is or triangulate then you can do you know there's a whole slew of research things I don't really delve into them too much but very sophisticated companies do so if you want to look up that stuff you know there are techniques for doing it does require money and time the doctors read what I've asked you well you know it's such things it's not it's not general it's very specific to the business I on what I really I want to sort of hear free things I want to hear that you you've done your homework in it you're next and so I might ask you a lot of not even arcane questions but you know very detailed questions like okay because I want to know that you really think this through the second thing I do is I actually do look at a financial set a financial slide or set of slide and people say why do you that is like it's never going to be right and it's true it's never going to be correct but the reason I do that is because it under it uncovers a set of assumptions that you have decided on or what if you have it and I want to know what they are I want to see how you thought about it and the third thing is I want to talk to some experts and this is you know the diligence part of it I mean I want you to tell me who should I talk to that this is real and this is going to work the way you think because if I find someone who knows better than you haven't talked that person shame on you you need to know everything about this and that means every acts professional about it so those are the kind of things I trying too late on but it really very is specific to the idea um well I think I would disagree with you I think Julie in the Internet Cerreta as I was a struggling where I don't think talking to customers is variable and I think talking to experts is very viable but for example there's a team in my class right now that are trying is trying to do something it's not identical at all but has some similarities with mint and they went pop the entrepreneur from MIT and it got a slew of information about how they launched it had they got free PR what their business modeling US was and not only what the model was but what of the model was right and wrong that's invaluable so when I say experts I don't mean like like some research person I mean someone who's actually tried to do something similar last year I had a team that was trying to do a photo consumer photo thing I said you know I know this has been tried before go find one or two of the people who tried it and fail because I mean they fail and they did and it was unbelievable how much spent on it it didn't stop them I mean by the way again I don't think you should be dissuaded because people fail they could have found because of that execution they could have been found this is the wrong time you know so you need but you need to understand why they found I mean you can't just say yeah quite sure was hell but we'll succeed this time yeah but but I think that when I say that so I say experts are close but those kind of interviews are worth a week old not much right because if it's the market that an analyst has our study is probably already well understood and not like real real startup market I'm your real starter market there's no analyst in story study in fact nobody at the reason I know that is because no one would have paid for it and the analyst would not studied it I'm exaggerating a little bit well yeah but the question is you know how how does the general so like so that's established industry and their new book cover but how relevant are the the statistics for the the work that they've done to your product I don't know you know so that that's the question I mean like I remember um I've been a internet taking minutes and around the time that I invested I looked for a report on internet shaking looks like five six years ago and there was none and I called a Forrester that typically doesn't smell like well you know it's all done on eBay and it's not a real market yet so we're not planning a market yet that's interesting they see it's happening out there but they don't think it's organized enough for them to invest and I said okay I want to find one to investment so I did but you know so I guess what I would say is my views typically if it's I mean I don't I don't I don't invalidate the research but typically if it's really well laid out like what analysts do then it's like what am i investing in you know I typically want to invest before there's a market that you can Allies now I get in your groups a project might be a little different but most of the times when I invest there's no good analyst report as an investor what is that well you know hard to say but you know there are still a lot of people in the adventure it is free or excited about sort of a clean tech stuff there's still a lot of stuff going on there there's a fair amount in you know what I would call internet stuff but mostly around social media you know social gaming Facebook I mean these companies have explosive growth a lot of interest on that now I don't know if anybody can make more money in that that Facebook's already made or will make or Zynga already made but you know there's a lot of people fishing around that pot and then I you know I think there's a fair amount of stuff in the medical device and medical health services stuff as well but that's not an area I I look at but I'd hear from my friends that there's still a lot of stuff that's a great question because I'm like for example most people would have said don't invest in Google it's already five first companies and this is where it kind of comes to the cleverness of the idea and where the innovation comes from or maybe how contrarian it is in other words the contrarian idea I mean though a lot of contrarian ideas that one of the contrarian ideas was we're not going to clutter up our homepage we're not going to put ads which was the primary revenue source of all of these existing was putting big you know hex mini pixel ads on the front page and the Google product like whenever that screws up the user experience that's a contrarian idea it sounds subtle but it wasn't obvious ounds obvious respect but it was very subtle at the time so I don't think there's anything wrong with being like a follower but you really have to have the conviction of your contrarian or innovation you know contrarian idea or your innovation and sometimes it's hard to get funding for those but sometimes it can be fat as a successful and the warmer you want equipment yeah if you you're going to recommend one book what would be rich a favorite book that an entrepreneur huh should be reading thanks for all your years and I take a trip up a book about entrepreneurship percent or angel investing if that's their perspective from the lens you know I don't have to think about that but I will I will let you know and you can send them an email yeah I've never been asked that question to be honest Lee I don't think there's many good books I've ever read about Asperger Mary and they're probably one I could think of if I think hard about that and I owe you an answer to like give you so what would be a contrarian that well so there was one right there Google saying we're not going to run ads on our homepage that was a contrarian idea that frankly a lot of people thought were crazy I'm not going to name who is on that first board meeting when the founders told the investors but that's not what they we're going to do but some very experienced center capitals spot that's crazy so [Applause] normally we're backing or at nine o'clock there are going to be breakfast so here

Channel: Stanford Graduate School of Business

Views: 117,034

Rating: 4.8721461 out of 5

Keywords: Entrepreneurship, alumni, family business, small business, start-ups Russ Siegelman

Id: y9ClKzMq3n0

Length: 62min 10sec (3730 seconds)

Published: Wed May 12 2010