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visit MIT OpenCourseWare at ocw.mit.edu. JOE HADZIMA: OK, Good evening. Everybody nice and
warm from the snow? Thank you for coming to Nuts
and Bolts of New Ventures and Business Plans on a
snowy night in Cambridge. My name is Joe Hadzima. And this is the first
of six evenings we're going to have for the course. The course name is Nuts
and Bolts of New Ventures and Business Plans. First of all, it's not really
about the business plan itself. Think of it as we're going
to talk about how to plan and execute a new venture. And don't think
of a business plan as a fixed document
in this course. Really, it's a dynamic
process we're going through. It may be a document. It may be a few slides. But at the end of
the day, what it ends up being is a
shared vision between you and your team as to where
we are, where we're going, and how we plan to get there. So that's the goal of all this. And I should also
say, because I know some people in the audience are
not doing traditional business ventures, we're going to use
the business terms a lot, but this could equally apply
to social-developmental entrepreneurship, to nonprofits
even to governmental ventures. It's a way of thinking about
how to organize new ideas and get them going. Now a little bit
about the course. This is the 25th
year-- it's hard for me to believe it's been 25
years-- for the course. And the founding of the course
has an entrepreneurial lesson in it. So here's the backstory. I was teaching some things
here on legal stuff. And some students
came up and said-- I think we had one
entrepreneurship course at Sloan at
the time and they had taken that-- and they
said it's a great course, but it's not telling
us anything practical. So could you do a
course during IAP to tell us how to do
something practical, how to start a company? So this was back 25 years
ago before the internet. And the IAP courses were
in a fixed, printed catalog that you would get. Shows you how far we've come. So I said, well, I'll
think about doing a course and let me get back to you. Well, I got tied-up
with some other things. And then they came to me and
said, we put it in the catalog and we dare you not to show up. Interesting. So I thought about
it for a while and I thought, well,
I should be angry, but I think I have a customer. I think these people
want something. So the first attribute
was I had a customer. I'll right, I'll play
this game for a bit. Problem is I only had
two weeks to organize it. So that wasn't enough time
to really do anything formal. So I said-- I think it was
four nights-- all right, we'll do two hours, three
hours, we'll do eight topics and I'll go and find some
people who know about those. And how am I going to make
it easy at the last minute to get these people? I said just come into class
and whatever the field is that you're in speak maybe
10 minutes on the five things I wish somebody had told me
about whatever you're talking about before I got started. Then we'll do
questions and answers. And I said, I've got to
make it entertaining. So I called up people
and said, do you know somebody who
can do this talk? And if you do, you have to
have seen the person talk, they have to be entertaining,
you have to vouch for them. And so we did this in
a period of two weeks. And probably half
the speakers that showed up for that first
session I had never met before. So I'm thinking this is
going to be a disaster. It turned out to
be a great success. And I think the
lessons for this, in an entrepreneurial way were
I had a customer for a product, they wanted something, I
was able to clearly define the task-- because I didn't
have time to do anything more; if I had done it
myself, it probably would have taken
longer and not been as good-- I got great people,
and I was able to communicate to them what the task was, and
then I got out of their way and they did a great job. So there's an
entrepreneurial lesson in how to start a company. Make sure you have
customers, get great people. The whole business planning,
new venture-type thing is really trying to
find what the task is and then to be able to
communicate, and execute on it. So the course really is
an entrepreneur venture. That's how we started. And later Joost
basically figured out how we could get credit for it. And it's just
blossomed ever since. So that's the background. In the 25 years we've
seen all sorts of things. We've seen bubbles--
the internet bubble. I stood here thinking I
just read in the paper that Hotmail, back
in 1997 or so, had started up and been sold
in 18 months for $450 million, basically giving away email. And I'm thinking how
am I going to explain to people this isn't
the way it usually works in periods of time. More recently, Instagram. So there are some things that
happen at points in time that defy direct logic. And if you can
catch those waves, that becomes a good thing to do. We've also seen busts after
the internet collapsed, after the financial
markets collapsed. Actually, that is one of the
best times to start a company. And many of the really
enduring companies have been started
during down times. And the reason is resources
aren't available-- financing dries up-- you've got
to be really focused, you have to actually
deliver something of value. And there's a lot of history
about companies to get started during down times. But through all of
that, ups and downs, it all boils down to
really two basic thoughts, and we're going to touch
on it over and over again in the course. And that is whether it's
a business, whether it's a nonprofit, whether it's
a governmental project, the first thing you've
got to do is create value. So if you're not creating value,
You can't really do anything. And then having created
value, the question is how do you capture
some or all of that value to make what you're
doing sustainable. And sustainable in the concept
of the traditional companies is profit and in the context
of developmental stuff it can be we can do it
again, rinse and repeat. So when we look
at creating value, we're going to be
asking questions about who do we
create value for, how much value do we create,
and how do we create it. And then when we talk
about capturing value, the traditional way has been
for customers somebody who will pay you for your
goods, the product you do, or your services. And the trick, as we'll see,
in financial projections and the business
model parts that'll come in the next few days, is
that whole process something where you can make enough
money that you can continue it. So traditional capture of
value is through customers. There are other ways
to capture value in the area of the
advertising or monetization that we'll talk about also. And you think about things like
where third parties provide that payment. So think of the US
health care system where historically the patient,
the person who the value is delivered to-- as in you're
going to get treated-- isn't really paying
directly the cost of that. So sometimes figuring
out how that works can be the challenging part. So at the end of the day,
to make all this happy, we're going to need people--
that's the number one thing you're going to
need for a venture-- resources of some sort-- either
cash or partnerships-- skills-- some of them you'll learn
in this class, some of them you'll learn on the job--
and then that one that's the hardest one to figure
out, but if you can get it it's the best, and
that's called luck. I'll always, go with some luck. So our goal for the
course is basically to make sure you get infected
with the entrepreneurial thinking virus. And it really is a virus
that can be infectious. The good news is it's
not known to be fatal. It's highly contagious. It is a lifelong affliction, so
you'll have to get used to it. But at the end of the day,
I think if you catch it you'll be in best shape. This is what we're going
to be doing tonight. We're going to tell you a little
bit about who you are, we're going to introduce
the teaching team, we'll introduce the case
study and business plan basics tonight, and then
we'll take a small break, and then we'll get on
with Steve Pearse, who's come all the way from
Florida today to talk to us. He's thinking maybe that
wasn't such a good idea. So who is in the class? Some of you signed up-- many of
you signed up-- at the website. We had 160 signed up. And the organizations
that you're from are-- and I'll just read
them alphabetically-- Boston University, Broad
Institute, Columbia University, the Department of Defense,
Harvard College, Harvard Kennedy School, and
Harvard Business School, Mass General Hospital,
University of Massachusetts, University of Macedonia,
University of Michigan, Toronto, Wellesley College,
several private companies that I won't say your names to
protect you, and of course MIT. Now the areas that you
said you were interested in are all over the place. We have consumer devices,
foreign language learning, financial technology,
social enterprise related to health care,
educational technology, medical devices. One of the reasons
I'm going through this is that we hope that in
the period of this course you'll actually form some teams. So if you find some of
these topics interesting, or if you're some
of these people, then at least I'm
shouting you out a bit. We have nuclear energy--
for those of you into that-- specialty biotech
chemicals, a sleep product, oncology drug delivery,
biotechnology, 3D printing, eyeglasses in West Africa,
independent film industry, lab testing process and equipment,
big data, data privacy, B2B information technology,
energy technology, aerospace, crowd-funding, and e-commerce. So hopefully you'll find
a kindred spirit in those. Now what about the
background of the people? We have some people this is
the first course they've ever taken in entrepreneurship. We've had people that
have taken a bunch of other entrepreneurial
courses at MIT or at other universities. In fact, we have a
couple of people who have taken Nuts and Bolts before. They did pass before, but
they're back for more. Several start-ups, somebody who
has always been in government, and a couple people in 15 plus
years in large organizations. And some members of the
venture mentoring service are actually in the audience. So we have undergraduates,
grad students, post-docs, visiting faculty, and staff. So it's a pretty
diverse audience and we've got a lot to cover. So a little advice to the
people that are first timers. I would say soak it all in. And as you go
forward, try to think about the kind of things
we talk about when you approach entrepreneurial
things for the first time. More experienced people, now use
this to refine your thinking. I've been in this course
for, as I said, 25 years. And every single year I
come up with some refinement of my thinking listening
not only the speakers but to the questions that come. So I hope you enjoy the course. We do have to calibrate
before we get going, though. It is MIT, so we have
our first formula. And it is H equals
R divided by E. So I've got an audience with a
whole bunch of different people and we're trying to
solve this equation. And we're trying
to maximize H. So for those of you
that can't see, H equals R divided by E.
Anybody want to take a guess what these symbols are? Yeah, the snow has got to you. I'll give you a hint. H is happiness. OK, let's see. Yeah. AUDIENCE: Reality
over Expectations. JOE HADZIMA: Oh, he
jumped right to it. Reality over expectations. Last year somebody said
revenue divided by expenses, which is equally good I guess. [LAUGHTER] So this is a
generalizable formula. And for those of you who have
even slight idea of math, if I lower your
expectations to zero, I can make you infinitely happy. But I think I'm never going
to be able to do that. But the point is this works
both for teaching here and for everything you do. If you over-deliver
on what you promise, you'll have people happy--
your investors will be happy, your customers. So happiness is reality
divided by expectation, with the fact that you can never
quite get expectations to zero. So lower your expectations--
I want you to all be happy as we move through the course. So who are we? We have Joe Hadzima,
Joost, Gino, Yonald Chery, and some highly
paid volunteer speakers I'll introduce. A little bit about
my background. Senior lecturer at Sloan. Was a partner in a law firm
in Boston for many years. Was one of the founding
judges of what's now the 100K competition. Former global chairman of
the MIT Enterprise Forum. Managing director at Main
Street Partners, where we do technology commercialization. And co-founder and
president of IPVision that does intellectual
property analysis. I should say this is
the first course at MIT that we're aware of that brought
both sides of campus together, the engineering, science,
architecture side of campus to the Sloan side. You would think
they're miles away. Until this class, they
really weren't together. There have been a lot of
companies launched out of this class. Some have gone public. And it's been quite
a history over time. Then I'd like to introduce
our case study next. This is Virtual Ink, if you
can't read that logo up there. This is a case you
have in the materials. Is a computer
peripheral company. And let me see if I
can make this work. I'll give you a little bit
of an introduction here. Is that appearing up there? [AUDIO PLAYBACK] [MUSIC PLAYING] -For the times when you
don't need a projector and writing on the whiteboard
is the best teaching tool, there's the MimioCapture
ink recording system. Enabled by MimioStudio Software,
the MimioCapture system actually sees and
records everything you write on the board in
real time and multiple colors. It can even convert
handwriting into editable text. The system creates
digital files that you can send to your students so
now they can focus on the lesson rather than on taking notes. And you'll save time by
using the digital files in other classes. The MimioCapture
system works with you MimioTeach interactive
system and comes complete with a magnetic charging
tray, four rechargeable marker holders, and a digital eraser. The MimioCapture system,
bringing your white board notes into the 21st century. [END PLAYBACK] JOE HADZIMA: OK. So that is an overview of what
Virtual Ink eventually became. And in fact, today they have a
whole bunch of other products. Yonald, our entrepreneur, who's
going to come in at the end, was the founder of it. He's got a very
interesting story. The reason we use Virtual
Ink, even though it's a little bit dated-- it
was in the late 1990s-- is that it's an easy
concept to understand, although there is some
technology behind it, to be sure. It was entered in what was
then the 50K competition. It's an interesting story of
the times and the company. And most importantly,
Yonald himself comes in and he tells you stuff that
you're not going to find. It's so easy to get people
into a class like this who are successful. Oh, I came up with this
idea in my dorm room, and I did this, we raised
some money, went public, now I'm wealthy. Well, you don't really
learn anything from that. You learn if it's lucky
and everything works out. But Yonald comes in
and he'll tell you a very interesting story
of what he went through during the whole period. Now we'll mention it from time
to time during the course. You'll see reference to it
in some of the materials as you prepare. The entire plan is
in the course reader. Do not assume, however,
that it's a model plan. Every year we get people
handing in the executive summary and they follow exactly
the Virtual Ink thing. And I don't want you
to do that-- I want you to think on your own about it. But it's an interesting one. I tried to find another plan
to work on and a lot of people won't give up
their original plan or they never actually had one. So it's a unique
situation we have. Now we're going to go
into business plan basics. This is a introduction I'm
going to give about what's in a business plan, the kind of
things you need to think about. And then over the course of
the next five, six nights we'll be filling in each
of the components of it. So think of this as a
high-level overview. And it's going to be a little
bit like the MIT fire hose approach. For those of you who
aren't MIT students, they say that going
to MIT is like trying to drink water from a
fire house-- it's just so much coming at you. And we're going to
throw a lot at you over this period of time. Some of it's going to stick
right away and some of it you won't get for a while. And the reason I know
that is we get emails back constantly saying, oh, I
just encountered this situation and I finally
figured out what you were trying to explain to us. So we always want feedback. And as long as people find
what we're doing useful, we're going to continue
to do the course. So topics in my
overview is why write a plan, what should
be in it, and then talk a little bit about the
plan as a financing document. So does anyone know
who this character is? This is Dwight Eisenhower,
Supreme Commander allied forces
Europe, D-day, became president of the United States. Life magazine he's on the
cover and he says plans are worthless. So I guess we're
done with the course. This is a guy who planned and
executed this massive invasion. And if you've read any
of the history of it, it's just an amazing operation. So plans are worthless. But planning is everything. So we'll talk about
business plans and whether to write
one specifically. So for example, the
Wall Street Journal had a big article about
does a start-up really need a business plan. And what they're talking about
are written business plans. And there are academic
studies showing that people would
be better off just to go off and
launch the company. And I pretty much agree
with that at one level. I've been around the country
judging various business plan competitions or classes
that have business plans. It's pretty clear that
the people doing it have no intention of
actually starting a company. It's just an academic exercise. At MIT, that's not
what we're doing. And what Joost and the
people at the 100K did was say we're trying to build
tomorrow's leading companies. This is about trying to
actually get things going. So a business plan, or at least
thinking about a business plan, is really what you need
to do to launch a company. So why actually
write a real plan? Well, you have to, you
think, because nobody's going to finance you
without something written. You may need it to talk
to strategic partners, to explain what you're
doing to others, and to attract key people. But the real reason you
need to write a plan or think about it is you need
to understand your business. What is the scarcest resource
that you as an entrepreneur have out there? AUDIENCE: Money. JOE HADZIMA: Money? We have plenty of
money in the world. AUDIENCE: Time. JOE HADZIMA: Time. It's your time. The reason to
think it through is you want to spend the
next three to five years-- or whatever--
working on something. Is this the best idea you have? For an entrepreneur, it's
always, well, I need money. Well, the point is
money tends to flow to where opportunity is. So if you can create value and
opportunity, you can get money. It's harder in some parts
of the country than others. But the real scarce
thing is your time. So you really need to
understand and think about the process of planning. The famous expression
people don't plan to fail, they just fail to plan. And in the course
of this course, we're going to be asking
you to think about who are your customers or users. Who cares about what I do? Will they buy or use
what you're doing? What will they pay or how can
you otherwise make money or get resources, capture value? How are you going to
make and deliver it? Think about something as
simple as Netflix as a concept. Back when it wasn't
streaming it was a DVD in a packet shipped to you. It's not an amazing concept;
it's pretty straightforward. But their key was they
could actually deliver on it effectively and efficiently. Or Amazon selling books online--
that's how they got started. What's so hard? Well, there's a lot that
goes on in the background. And what are the resources,
people, and technology you'll need? And so whether it's a
Web 2.0, or biotech, or social-developmental, I want
to just reiterate that there are really two basic things. It's create value and then
figure out a capture or harvest the value. That's the key thing
we're trying to do. So how many of you have seen
the movie The Social Network? You may remember this scene. Let's see if this
works, if I can do that. So Eduardo says, it's
time to monetize the site. And Mark says, what's that mean? And Eduardo says, it means
it's time for the website to generate revenue. No, I know what that
means, but I'm asking you how you want to do it. And he says
advertising-- remember that famous advertising. And Mark's reaction is, no. And Eduardo says, well, we've
got 4,000 members-- this is Facebook, 4,000 members. And Mark says, because
Facebook is cool. If we start installing
pop-ups for Mountain Dew, it's not going to. And Eduardo says, well,
I wasn't really thinking about Mountain Dew. But maybe at some point. I'm talking about the business,
and the company, the site. And Mark says, we don't
even know what it is yet. We don't know what it is, we
don't know what it can be, we don't know what it will be. We know that it's cool,
it's a priceless asset. I'm not giving it up. Eduardo says, when
will it be finished? And the famous answer
is, it won't be finished. That's the point-- the way
fashion is never finished. So here they are, these guys
that have created something that they think has
value, and they're trying to figure out how
to harvest the value. So I went and I looked
at the 10-K for Facebook. 10-K is the annual report
you file with the Securities and Exchange Commission when
you're a public company. And in the first
part of it you have to say what your business is. And they say our mission
is to make the world more open and connected. And so I'm looking to try
to figure out what they say they're business is after that. And it was very curious. They had three major
headings in the 10-K. The first one was how we
create value for users. The second one was how we
create value for developers through the Facebook platform. And the third one was how do
we create value for marketers. So here they are a public
company with billions of users now and they're focused on
how do they create value, and they're still struggling
a bit with what their revenue model is on the other side. So my point is the
same things that you're going to think about
starting a company-- how do you create value and how
do you harvest value-- never goes away. It's constant through this. I thought I could go to the 10-K
and find some really nice story about how they harvest value
and they're still thinking about how to create value. Now one way to think about
what we're going to do here is to have a visualization. And I think of it as a pyramid. So at the top of
the pyramid you can think of as your
mission statement, similar to what Facebook said. And underneath that,
supporting that, is your elevator
pitch-- do people know what elevator pitches are? We did that in the 100K. It used to be all of the
venture capitalist offices were high buildings. So you'd have maybe 20 floors. The theory is you get
into the elevator, the person turns you
and say what do you do, and you have 20 floors to
explain it in maybe 30 seconds. A lot of the VCs have moved
to two story buildings, so you have to do this as you
run up the stairs with them. So you've got to be even
crisper today than before. Underneath that might be the
executive summary-- we'll go into that a little bit. Under that might be that
the PowerPoint presentation. Under that could
be the full plan, if you get to the
point of writing one. But underneath all of that
are a set of foundations of individual topics. We'll go through some of
these through the course. And the point is that
it takes a lot of effort to distill everything down
up to the tip of the pyramid. And what you're
looking for is you can describe that
top very clearly and have it supported all
the way down through it. The mission statement might
be a sentence or a paragraph, the elevator pitch
could be 30 seconds, the executive summary
two to five pages, PowerPoint 10/20/30. Do you know the 10/20/30 rule? I put a link in on the website
to the Guy Kawasaki clip about that. So PowerPoint-- I totally don't
do this in this presentation-- he says 10 slides, 20
minutes, 30 point font, that's what you're aiming for. And then the full business plan
could be anywhere from 25 to 30 pages, if you end up doing that. The slides, by the way, for
most of the presentations will be posted on the
website afterwards. So that will help you out. So now the question is, all
right, I sort of get it, it's this image that I
have to do and figure out. Question is who
actually writes this. Is it the founder
alone, the team, or even a professional
hired writer consultant? Charlie Tillett-- who will
be here on Thursday-- and I stood outside this room at
an MIT Enterprise forum event during the break, and I asked
Charlie who had entered the 10K competition back in the day. What are you doing
this summer, Charlie? He says, well, I'm
graduating from Sloan, I'm trying to think what to do. I said, well, I'm working
with some entrepreneurs. I've been working with
them for a couple years and they really could use
someone to help write a plan. They need to get some funding. And Charlie was game. We hopped in his truck,
drove up to a strip mall up in Tewksbury, I think it
was, a room with 10 engineers. And ended up joining the
company to write the plan and stayed with them through
when they went public. But at the end of the day,
it was the entrepreneurs that needed to own the plan. These guys were great
engineers, but they couldn't write a plan if you
paid them a million dollars. They just couldn't
articulate it well. So that's one of the reasons
we try to put teams together. Because if you have a great idea
but you're missing some skills, you've got to figure out a way
of getting people with skills together. And those entrepreneurs
would never have gotten anywhere
near where they are today if Charlie hadn't joined them. And Charlie wouldn't have been
able to take a company public if he hadn't hooked
up with the idea. So the point is
whoever writes it, the team has to own the plan,
by which I mean they really have to be able to defend it. Sometimes the issue is,
well what do they look like. Don't put it in a big binder. It doesn't really matter
how you put it together. It should just look somewhat
professional, but not overly slick. You're an unknown character. If Bill Gates came up
to me and threw a napkin on the table with some ideas
on it, he'd have my attention. But if you do the same thing,
you're not quite there yet. So it's the first
step towards it. You've got to have
something that says this is a serious team
or person that are going to do some serious things. Now the thing to
remember is the plan is really a selling document
at the end of the day. If you're going to
be an entrepreneur, you better get
comfortable with selling, because you're always selling. You're selling customers,
you're selling financing people trying to convince them. By selling I mean you're
trying to convince somebody that's what
you want them to do is something they should do. Convincing people to do
something is quite a skill and you should get good at it. You really should work at it. It's selling customers,
financing sources, partners, recruiting people. So you're always selling as
an entrepreneur at some level. You may not be the best, but
you should really practice that. So this plan, the first part
it's a selling document. And whatever it is, it's
not a hype document. At the end of the day,
it's got to be defensible. The elements of a full plan--
these are the topic areas, whether or not you put them
in a written document or not, you need to start
to think about. And during the course we'll
touch on a number of these. There's executive summary in
a traditional plan, something it says what's the
opportunity you're looking at, what's the market
you're going after, what are the economics
of the business, all of these things we'll go
into a little more detail. For the technologists
in the audience, note then there's no
particular section here that says technology. And the reason is people by
and large don't buy technology. Technology is something we
use to accomplish things. And so the plan really
isn't fundamentally about the technology, it's
what the technology enables. And when Bob Jones
comes in tomorrow, he'll talk a little
bit more about that from a "what people
actually buy" viewpoint. Now a little bit more into
the nuts and bolts here. Cover page-- you should
have one in a plan. It should have some information
that you can figure out who this plan is. How to reach people,
confidentiality legend, and the securities
law legend, we're going to cover that
in detail on the night we do the legal stuff. Here is the Virtual Ink
cover page as an example. They've got some
contact info there. It always frustrated me, when
I actually got a written plan if I liked it, often I
wouldn't be able to figure out how to contact the people. So put the address on it. And they at they put a
little confidentiality legend on it-- it looks something
like that, initially. And, as we'll see
in the night when we do the legal stuff, when
the lawyers get ahold of this, the legend changes a little bit. [LAUGHTER] So I'm not saying don't
get the lawyers early on, but realize that you've got
to manage them a little bit. But we'll go into
that in more detail. Now if you actually
have a written document, it should have a
table of contents so people can figure
out what's in it. And it should have page numbers
and all that sort of thing. So my question to you is what
do you think people read first in a business plan? What's the first
thing you would read if someone gave you a plan? AUDIENCE: Executive summary. JOE HADZIMA: Executive summary,
because, as you'll see here, that explains what's going on. What's the second
thing people look at? Probably most important
beyond when they figure out what the heck this is about. It's the people. Who are these people? So if you've got actual
document and they're trying to figure it
out, they're going to get a little frustrated
if they can't figure out where the information is. So not to overdo it, but
have a table of contents. So if the first thing they
read is an executive summary, what is it really? Well, it's the first thing
investors read, as I said. Think of it as a resume
for your full plan. So the goal is to
get the interview. When you have a resume,
it goes out there, you want to get the interview
so you can explain yourself and hopefully get the job. In the case of a business
plan, the executive summary or the elevator pitch is
really to get a chance to explain more fully
what it is you're doing. And then when they look
at the executive summary, I like to think about what
investors are looking for. And they're the three Ws. First one is why this. Why is what these people
are proposing to do, why is it something I
should be interested in? Why are they interested in it? Is it a big problem? It could be a big
market opportunity or a big problem in the world. Amy Smith, who was
a MacArthur fellow, teaches over at the Edgerton
Center, was in the 100K. And I remember quite
distinctly when she got up to give her pitch
at the judging competition. She said something
that went like this. She said 1.9 billion
people in the world don't have access
to clean water. Well, I didn't know that. In order to test
whether water is clean, the traditional
way of doing it is to incubate the water to see if
anything bad is growing in it-- she said it a little more
articulately than I did. And she said all the
existing incubators are powered by electricity. If you look where the
1.9 billion people without clean water live and you
look where the electricity is, they're not in the same place. Our invention is a
way to test water without using electricity. Let me explain how you did it. So from an initial viewpoint,
well this is a big problem. So why this? Big problem. So that's the first
thing-- why is what you're proposing something important? Why are you spending
your time on it? The second is why now. Why it is now the
right time to do it? I've been on the bleeding edge
of technology for many years. I had somebody come up to me
at an investment conference last year and he
said, you're at MIT, and he said, well, tell me about
this new 3D printing thing, it's really hot. And I said that's been
around for 20 plus years. Now it's getting interesting
for a variety of reasons, but I can show
you '20 years ago. So sometimes right
now is the right time. And I'll give you some
examples down the road. The third is why this team. Big problem,
something important, there's a good
reason why it's now-- why are these people
right people to do it? Those are the things
people are really trying to glean when they read
your plan or hear your pitch. To which I asked, if
they get the first three, there's a fourth
one they get, which is-- want to guess
what the fourth one is? Why won't this work? So in a selling
process when they get the potential customer
pushes back and is starting to ask questions about will it
work for this or work for that, you've sort of got them hooked. And Steve will
probably talk to you about how to set the hook
a little bit later tonight. So the three whys-- why
this, why now, why this team. That's what should come up. And the why won't this
work, part of the task is to figure out
how to lead people to the right conclusion on that. And I'll talk about it in
a little moment on that. So the executive summary,
two to five pages max. It's got to be clear. It's like a resume. And the object is at
the end of the day someone could really articulate
what you're going to do. The elevator speech is to
the executive summary-- the elevator speech
might get you an invite to submit an executive summary,
which might give you an invite to do the whole plan or a pitch. It's going to try in two to
five pages to say who you are, what are you doing, what is
a market, how many dollars do you need, what resources,
what is your sustainable advantage if you do this,
why you're going to succeed. You've got to pull
all of that together in a very short period of time. It's a difficult
document to write. And you may end up writing
it over and over again, because you've got to distill
that whole thing down to it. Let me give you an example
of two executive summaries. And since the font is so
small, I'll read it from here. The first one is called
electronic components. And let me read it to you, if
you can't see it on the screen. Electronic Components
Inc is a start-up company that will make a variety
of electronic components beginning with a new type
of aluminum base capacitor. The unique product, coupled
with an excessive demand for capacitor devices,
will provide us with an ample share of
the capacitor market and numerous opportunities
for expansion into related
electronic components. Everybody on board? This is a real one. The founders are
dedicated and determined to make the venture a successful
and profitable entity. That's good to know. [LAUGHTER] I thought they were
just doing this for fun. Technical expertise
is provided by James F Lynch, who's been involved
in designing capacitors for 11 years. He attained a
bachelor of science in electronic engineering
from Massachusetts Institute of Technology. That alone is
probably going to get him-- the experience
and the fact that he's MIT-- will overcome
all the other deficiencies here, which is I don't think
most people would understand what it is he's proposing to do. Do you know what
they propose to do? What its excessive
demand for capacitors? Why is there excessive demand? How big is the market? And if you read the
rest of it, which I suggest you do when
you get the slides, it reads a bit like
a grant proposal. There is a good
thing in here that says that they've actually
put their own money in, so the guy is committed. Now this is an
example of something where, given the nature
of the person involved, there's probably a lot
of substance underneath. But it's not doing a very good
service in trying to convey it. So that's a shame,
because there's so many plans you read which don't
have any substance behind them and yet they read a lot better. So we've got to figure out
how to make things better. Now the other one, by way of
contrast, is People Express. Well, let me read it. The eastern seaboard
of the United States is ripe for the entry of a new,
super-efficient, low cost air carrier to provide quick,
reliable, intercity air transportation. Such an entity would
bring to the Northeast the same benefits
that have accrued to other areas of
the United States. Chief among these are
frequent jet commuter service between major cities,
prices competitive with private
automobiles, fulfillment of the congressional goals
in enacting the Airline Deregulation Act. The new company will
be able to achieve these goals for the following
reasons-- aggressive innovative management that's
been tested in the field; equipment and facilities
designed specifically for low cost production
of air transportation; manpower selected,
trained, and motivated to be efficient and
profit-oriented-- read between the lines,
non-union, probably; and new systems to be applied
to the entire business. Now if you look at those
two executive summaries, I think most people think
that the People Express, which was the early version of
what we now call JetBlue, is a lot clearer to
understand what it is. You could pretty much
see what they're doing. They're experienced guys, they
thought about how to design it. And you could start having
a discussion around this in a lot more detail
than you would with the electronic components. So the trick is to end up having
an executive summary looks more like the People Express than one
that just wastes a lot of words and doesn't get to what
they're supposed to be doing. This is the Virtual
Ink executive summary, which you'll see. And again, it's not exactly
the model, but look at it. It was put this way into
the 50K at the time. And you decide
yourself whether you think it's a good
executive summary as part of your assignment. So let's move into
the body of the plan. And when I say the plan, I mean
in your planning process also. So the question is, what is the
opportunity you're going after; what is the problem
you're trying to solve? How big is it, what's
the opportunity now, what's going to
happen over time, and why is this the right time
for the product or service? This reminds me in the 100K--
when it was the 50K back one year we had a
semifinal award saying here are the semifinal teams. And one team came
up and said, I guess you guys didn't like our plan. Now back in those days,
we didn't actually know who the people were. That was part of it--
they were all no names, we just looked at the ideas. And I said, well, I don't
actually know what yours was. And they said, well, we were
the guys with the air traffic control system improvement. And it was a fascinating plan. They had figured out how
to make it more efficient. And I learned a lot of things
about air traffic control systems. And I said, the
problem is none of us could see how that
could be a business. You would have to change the
entire air traffic control system it appeared
in the United States. It looked like a great
solution, but is it a business? And they said,
well, did you know that the Federal
Aeronautics Administration-- FAA-- has put out a
request for proposal for changing the air traffic
control system in the United States? No. Why would I know that? They had assumed
everyone knew that. That would have changed
at the whole complexion. That meant at that
time the convergence of a driver for the
business was there and they didn't tell us that. So they didn't get
another opportunity. In the health care
area for many years we'd see really interesting
technologies that could improve outcomes for patients. And the question was, well,
who was going to pay for it. And a couple years
ago Medicare put in some rules that said
that hospitals get penalized if patients get readmitted. That's opened up
a huge opportunity for things like home monitoring
or other kinds of things that before it'd be very hard to
see how that was going to work. So there are a lot of new
companies trying to figure out how they can do
things to finally help patients for better outcomes. There wouldn't be a market
for that five years ago-- it'd be a long, hard, uphill climb. So why is this the right time? As I said, I've
been on the bleeding edge of some of the stuff. The body of the
plan, it should talk about the market, who's there. We'll go into more
detail with Bob about talking about customers. Investors have these different
ways of thinking of things. And one of the questions
that surprised me early on in my career was a
VC that's said, OK, I get it, you've got a great idea. But let's say you do everything
that you said and you win. Who loses and what are
they going to do about it? And we hadn't
thought about that. So you've got to think about
you're disrupting a market, for example-- what's the
response going to be? The incumbents are just
going to sit there. So what's your plan for
thinking it through? That's an example of
the planning process. These are the kind
of questions-- again, with Bob
Jones tomorrow night we'll go into pricing,
and distribution, and sales tactics. And another VC expression is
will the dogs eat the dog food. So it sounds like a great
thing, you convinced me it's a great thing,
but what evidence do you have that anyone wants it? That's customers-- will
the dogs eat the dog food? Now the development
plan is how do you piece the different
components together in order to make something
that can work within the time constraint you
have as a start-up. You don't want nuclear fusion. Nuclear fusion we've
been working on for 50, 70 years now. And the problem is, if
you've got a nuclear fusion kind of project, is until
it completely works, nothing works. So there's really
not a business. Is there a way you can take a
portion of it and make it work? I looked at Zipcar early on. Everyone's familiar with Zipcar? Fascinating concept-- it's
revolutionized a whole bunch of transportation things. But there were so
many moving parts that you had to put together
in order to make that work. At a place like
MIT, where the joke is-- if you're recruiting
a faculty member, you can have one
of three things, you can have tenure, the
Nobel Prize, or parking. So parking is what
everyone picks. So here's a company
Zipcar that's got to figure out how
to get parking places. There are a lot of things that
were out of their control. And at the end of
the day, it may not have been a good investment. It may have changed
things, but I don't think a lot of people
made a lot of money in Zipcar. So you want to try
to think through do you have to change the
world totally in order to make a dent in the world. Because again, limited time. The action plan--
this is part of what I like to think of as the
identification of credibility testers. As engineers, if
you said I've got to build a bridge
across the Golden Gate, there's a lot of things you
have to do to make that work. And engineering is very
much a think everything through kind of thing and
often is very sequential in its process. The credibility testers, a
different way of thinking of it is are there some things
that will make this project extremely difficult
that if I can show I can solve I can
de-risk the situation. So thinking about
a project from how do I convince somebody
this is doable is an important part of it. Maybe in the case of
the Golden Gate Bridge, it would be securing
access right to an on-ramp. Or if you think the issue
is a technical issue, doing are sounding to figure out
how deep the bedrock was. I was sitting out
on Cape Cod beach one weekend with
some house-guests. And one guys told me he's
working on this project. It was very windy out there and
he said it's really windy here. I said, yeah, it's
always windy here. And he says we're working
on something involving that. And it turned out he was one
of the guys from Cape Wind. And what they were doing
was securing access rights to land the cables on it. Because if they
didn't do that, they couldn't get to the next level. So that first thing is can you
identify credibility testers to reduce the risk. And if you reduce the risk,
both for you and for investors, you have a higher
probability of success. The other thing is to
think about-- whatever you're doing-- about
how to sequence that relative to your resources. So the ideal scenario
again, remembering H equals R divided
by E, is you want to be able to ideally say I'm
going to do X and actually achieve it. And then you can ask
for additional resources to do the next step. If you don't plan
that out well and you get stuck between
tasks, then you might be able to get
away with that once. But if you do it a second
time, people are going to say, well, I'm not sure these
guys can actually execute. So thinking about what are
the steps I can do versus the resources in order
to achieve something that I can say, look,
I've added value so you should give
me an opportunity to add even more value. And I always like to try
to avoid dependencies on others if I can. That's a big thing. When you deal with a large
company as a start-up, you're moving fast. And what they think is fast
is an eternity for a start-up, because they just have
cumbersome processes. So if you can figure out how
to avoid dependency on them. We won't cover the lean start-up
concept in the class here, but I do recommend the book
for you to think about. How do you test out concepts
with a minimum viable product? It's a valuable read. And it applies beyond
the Web 2.0 area. And then often there's some
things you need in a plan. But this doesn't go in the
plan, it goes in the appendices. All of these things
about resumes, getting a business plan
that has the founder with 15 pages of publications
and stuff is just overkill. Put it in the appendices. If you have any of
these other things, don't put it in the main
plan, have it available. So now we'll talk
about the business plan as a financing document. And think of this about three
different levels of reading. The first reading
is like a resume. If you make the cut, you
get the second reading, which is to figure out
if this going to justify the investment. And the third reading
is to say, OK, is this a plan that
I as an investor and you as an entrepreneurial
team can commit to. And the point is if you
don't make the first cut, you don't get the
second two cuts. So the question is what helps
people make the first cut. And these are some of the
things that occur to people. Here's an idea there's just
too good to ignore; god, what a brilliant idea. Or a financial promise
that's too good to turn down, if you have that. A team that's good enough to
believe in-- most investors will tell you
they'd rather invest in a top team, an A
team, with a B idea than an A idea with a B team. Because things are
going to change. You want to make sure you've got
a team that can deliver on it when things happen. An action plan that's
credible and focused. Details to give assurance
of insight, commitment, and follow through. And actually a format and
style that says these guys are serious about achieving
what they want to do. Some reasons plans fail
to make that first cut? One is just an
insignificant market. I've seen plans that
say our market is going to be $100 million. And you look at the
financing requirements and they say we're going
to need $20 million. Well, that's just too much
money for that size market. So that's an example
of either they have to redefine the
market or figure out how to do it cheaper. Non-credible technology-- this
is usually not an MIT problem, although the issue can
be at MIT that you're much too early along. That is, if it's working
on the lab bench, there's a lot of steps until it
actually gets into the market. And then a failure to understand
the market can be an example. For example, I was reading a
plan that the device clearly required an FDA approval. I mean, I just couldn't
believe it didn't. And yet, they never
said anything about it. And the question was, well,
they should've addressed that. And if I have to
pull it out of them, then it gives you a negative
feeling about the team. And then other reasons. The plans is too
optimistic or naive. Or maybe sometimes
not ambitious enough-- I have a semiconductor
device that I'm going to double the
speed in five years. Well, that's probably not
a big enough improvement. So these are all reasons
why things may not get the second read. There are cosmetic reasons. And I hate to say it,
but it's so aggravating to see a team with really good
ideas screw up on the basics like misspellings, sloppy stuff. Again, it's like a resume. If you can't get the resume
looking professional, why would I even want
to talk you or hire you? So that's see the
overview of things tonight for the business plan. Why write a plan or
have a planning process, what should be in the plan. Again, at a high
level we're going to go into each of the sections
over the next six days. And then a little bit of
thinking about the plan as a financing document. And I'd like to leave you at
this point with this triangle that we're going to
come back to probably each night just to drill it in
of what you're trying to do. At the end you're trying to come
to a very clear idea of what you want to do, what
it takes to do it, and have all the
support underneath. And it's an iterative process. Some people think this is all
linear-- I think about this, I test that, it moves on. It's very much like science
can be-- we try something, it fails, we figure out
why it fails, we go back and try it again. But the goal is to find
that sweet spot where you can actually make a difference. So with that, I'll ask if
there are any questions. Again, this is a high
level, but if there's some things that
need clarification, I'll do the questions now. Otherwise, we'll take a break. We usually say take
10 or 15 minutes and meet the people next to you. Because one of the
requirements for the course, if you're doing
it for credit, is you've got to put together
a written requirement, the executive summary
or a pitch deck. We want to try to get
teams formed to help you if you're somebody with an
idea and you need some people to help, vice versa. Given that it's probably a
blizzard out there tonight, I think we'll defer that initial
meeting until tomorrow night, take like a five
minute break or so. And we'll get
Steve to get stuff, who's going to tell you
how to make a pitch. So at the end of the day,
after everything you've done, you've got to come
and make that pitch. And Steve is going to give
you the precursors of that. So we'll come back at about
7:15, give you eight minutes.
