DISQUS

EricFriedman · 1 month ago

Re #5: I think you DO need an excel spreadsheet. The calculation you gave at the end of your paragraph almost demands the flexibility to show the possibility of lead gen. blowing up or not at all. The psychology in modeling this out can be helpful for all parties - especially when you start playing with the numbers.

It does not have to be complex, but sometimes showing 3 scenarios side by side can mean all the difference before you start a campaign or initiative towards one of those goals.

Dan Lewis · 1 month ago

I think your disagreement w/Charlie is semantic. I doubt he's saying that you don't need some simple equations showing lead gen/consumer acq numbers and their related lifetime values, just that you don't need some really huge sheet with macros and movable parts.

ceonyc · 1 month ago

Im just saying for a quick pitch...just trying to lead the horse to
water...not dunk his head and baptize him.

High level is a *start*

Dan Lewis · 1 month ago

For consumer-facing tech startups, the magic equation -- CPA < LTV of a customer -- is often neglected by entrepreneurs. My first time around, I totally ignored it, and because of that, failed to realize that the LTV of a core user was huge ($100s) and assumed it wasn't worth a 25c click on a Google ad. I probably left $1000s in users on the table because I didn't do the blocking-and-tackling math. Now, I'm obsessed with it.

Satya Murthy · 1 month ago

awesome!

zacksteven · 1 month ago

Great post Charlie. Thanks.

Brian Longest · 1 month ago

Very well thought out article.

I would add a model that ties together the milestones to how they are reached. In other words $X gets us Y customers at Z cost, here is the growth on a monthly basis and it ties back to the marketing spend of course which is included with all expenses and flows into the hitting of the milestones.

I have made way too many business models in my time, to not see it all fit neatly together can be frustrating. Also having a couple variations on projections is not a bad idea (however some disagree), so at least have variables.

This way at a future board meeting the entrepreneur (now funded) can point to the model and explain why spend increased/decreased or revenue increased/decreased based on the variables, such as "we expected 2,000 free registrations in Jan at X conversion rate to get Y paid subscriptions, and we got 2,000 but got Z conversion rate yielding T conversions. "We are testing to increase the the conversion rate even more as well as the free registrations".

Knowing the levers and what variables impact the bottom line is critical. Models can be changed and they will, however let everyone know why and how, otherwise board meetings will get out of control and members will assume the entrepreneur is clueless if they walk into every meeting without a forecast vs. actual and explanations. Also knowing the key triggers of the business keeps the focus clear and everyone on track, particularly if you can keep 3 simple goals in front of everyone and assure their efforts impact at least one. Otherwise startups can easily go off track only to begin preparation for a board meeting and realize they spun their wheels for a month and did not make any true progress.

Personally I think you do need detail linking everything together, if for no other reason then to show you have thought it through. Does a potential investor want to see it, probably not, but they will want the highlights and unless the entrepreneur has a track record with the potential investor it does not hurt to show you have thought it out and can back up the assumptions with logical thought. Many times those calculations are passed down to an associate who goes through it. My two cents.

Healy_Jones · 1 month ago

A lot of east coast VCs need more than a "theory" for number 3. Customer acquisition is something that I saw missing all too often in many pitches. Sure, you can build a cool product but potential customers need to find out about it and be convinced to convert to actual customers.

ceonyc · 1 month ago

By theory, I just meant an understanding of how you're going to do it,
even if it hasn't been built out yet... and even better is a set of
results from an experiment, even if it's a small one, that proves your
theory.

Jonathan Karon · 1 month ago

All great points, Charlie. As a sort of bridge between your points about milestones and product strategy, the startup community has been talking more and more about customer-driven product evolutions. This is a really good thing -- it saves a ton of time, effort, and money and pushes for agility.

What I'd love to see from businesses are some well expressed milestones around product evolution. Something like "30% of customers in target market say the current product evolution meets 100% of their needs".

Mark I LaRosa · 1 month ago

I think whats missing from most pitches is the detailed SALES STRATEGY. Who is going to buy it, for how much, how do you reach them (direct sales? marketing?). What does sales cost you? How will you comp your sales staff? Will you do all the sales yourself? Can you realistically do all of this yourself without a sales staff? Why would anybody actually PAY for this thing you've built. Is it cool enough to actually spend money on - or is it just nice to have as long as its free. (and that's OK if your model includes someone else paying for it).

I know its cool these days to invest in start-ups that don't have a defined business model, but that's only going to work for a few. The vast majority should be thinking about sales from day one. This then ties directly into #4. Knowing your sales strategy will help you in knowing when you need your next round of funding (and also how big this round should be)

Elie · 1 month ago

I think many entrepreneurs also tend to have an inflated sense of self-value - I'd like $2mm for 10%, but that implies that my contributions are worth $8mm. Watching Dragon's Den or Shark Tank reveals that many entrepreneurs like to throw numbers around (and sometimes they can even explain how they reached those numbers), but when it comes down to it, the companies are rarely worth anything close to what the founders think it's worth.

Kevin Marshall · 1 month ago

Very helpful post Charlie...hope to see you do this type of post more often going forward. I think it helps both those seeking funding (to build better pitches) and those not seeking funding (to ask better questions to themselves about the businesses they are building).

Daniel Kivatinos · 1 month ago

This is the kind of insight and information anyone starting a business should understand, good stuff!

Desmond Pieri · 1 month ago

Charlie, your point about milestones is spot on. Anyone starting a company and thinking of VC funding should buy "Raising Venture Capital for the Serious Entrepreneur" by VC Dermot Berkery. Dermot's focus is "Stepping Stones" and he provides advice that allows an entrepreneur to not only build a company, but to build a company that is fundable by VCs. I'm sure you can find the book on Amazon.

Johann Blake · 1 month ago

I am an entrepreneur and would like to ask you VCs a question. Since most entrepreneurs seeking financing are bound to miss one or more of the points made by Charlie, would it not make sense for an entrepreneur to first have his business plan reviewed by professional VCs before he approaches the real investor? I am currently still in the process of developing a product and it will take about 6 more months before my prototype is completed. During this time I will be reading up on what VCs want in the business plan. I came across this blog via Twitter. After my initial draft of the business plan, I would like to approach a VC to review it. I am not interested in the VC considering it for a possible investment (although if they are, that's an extra bonus). I am only interested in them pointing out problems in the draft and to make recommendations on how to improve it. I then would like to take that updated draft and send it to another VC for further review. Finally, I would like to repeat this with a third VC. The way I figure it, if 3 VCs have looked at it in iterations and have made suggestions, then I have a much higher chance of success when I am ready to present it to a VC when I finally go for financing. If the document isn't convincing to any VC, then there really is no need for a meeting with one. Basically, the documentation on the business plan should say it all.

Of course, the VCs reviewing the business plan will be paid for their review. I suppose paying a VC $500 for an hour or two of their time to review and comment on a document isn't such a bad idea is it? Is $500 too little, too much or just right? (Starting to sound like Goldilocks and the 3 VCs).

Does this sound like a good approach? Would any of you VCs ever consider reviewing a business plan if someone approached you on it?

One other question. How many pages do you find acceptable in a business plan? I don't want to know the maximum number of pages but what you find acceptable. Realistically, 1 page is not going to cut it. Does 5 pages sound realistic?

Personally, I don't think it matters what branch a VC works in who reviews any business plan. The same concepts and good business practices apply to all branches. Maybe there is such a web site that offers such a service. I haven't looked into it. If it doesn't exist, well there you go, another great business opportunity. Start a web service that allows entrepreneurs to have their business plans reviewed by professional VCs! Ok, I'm getting off track. But if you really like that idea, let me know ;-)

Incidentally, for those of you VCs who might be curious as to what I am developing, all I can say is that it is a web service that is on par with eBay and Amazon (actually far surpasses them) but addresses the needs for mobile application developers and customers who purchase their apps. The web application will make Apple's iTunes look like a kindergarten once it is released. It's global in every aspect and I believe will be one of the hottest web apps to hit the net once released. If that is something you find interesting, just follow me on Twitter (johannblake) for snippets of info that I will release from time to time.

Thanks for any insights.

SharelOmer · 3 weeks ago

love this post, there is a lot of accumulated wisdom in this one.

when i meet you in NY last week i got to know in person some of the abode wisdom.

how do you see the "Team" value? and its ability to raise something in a bootstrap way?