Good overview of dilution by my friends at Foley.
When negotiating valuation for a financing, an investor may conduct detailed due diligence and then present you with a term sheet that reflects multiples, discounts, comparables, and so forth. In the end, you are negotiating for percentage — how much of the company will the investor get, and how much will you keep? Your investor is focused on maximizing return on investment. You are focused on keeping meaningful upside for your innovation and hard work.
For example, if you raise $5 million on a $10 million pre-money valuation, you will be giving the investor 33 percent of your company. You keep 66 percent. But that 66 percent may not be really be 66 percent even before you take into account any later dilution by subsequent rounds of investors. There are at least three reasons why.
If you want to see a CEO experience a deer-in-the-headlights moment, watch this video of Tumblr CEO David Karp get killed by a sharp reporter on Squawk Box.
It’s painful. (And his mention of the Bill of Rights, while using wording of the Declaration of Independence… eeesh.)
The fault lay in his prep work, which was shoddy. Going on a show like Squawk Box is no light thing. This is a show whose whole premise is the art of the argument.
In other words, when you’re going to show up at a gunfight, don’t bring a knife. Bring a gun.
Now, I empathize with him. Many years ago, I was one of a bunch of young VPs at a hot software company (Quarterdeck, now Symantec). Our PR exec was (understandably) very worried about our dealings with the press. One day, I remember her mentioning that we were going to get media coaching, but didn’t pay much attention to it.
A week later, I had just gotten into my office early in the morning, when the whole room exploded in light. There was a reporter with a cameraman barging into my office.
Now, if you haven’t experienced this kind of attack reporting, it’s very unnerving. So I was immediately on the defensive.
“Mr. Eckelberry,” the reporter said, aggressively. “What is your comment on the fact that your software is being used right now by the government of Bosnia to manage the ethinic killings of thousands of people?”
Totally taken by surprise, I gave some mumbled reply, something to the effect that “we can’t be responsible for how our software gets used.”
Then the PR exec walked in and told me I had failed the first part of media coaching. The reporter, who, it turned out, was actually one of the media coaches, was kind about it. But the rest of the day was spent getting drilled cold on handling the press. And I’ve been working with the press ever since, including stints on national television, radio and various print media. I’ve had varying degrees of success, but at least I know when I’ve made a mistake.
So I had my own “deer-in-the-headlights” moment.
But that doesn’t excuse what happened. His mistake was a) poor preparation and b) poor coaching (which would include heavy amounts of drilling for every type of question asked). In fact, I might look to his PR agency more than I’d blame him.
There are some pointers to remember to avoid getting caught like David Karp.
– Recognize that the normal rules of communication in a combative situation like this don’t apply. This is a fencing match, not a light dinner conversation with a group of friends in San Francisco.
– Always have an “island” you can retreat to. This is a safe place, that you know cold. It is a positive response crafted as a response to an uncomfortble situation or a negative attack. Reporter attacks, you don’t know what to do, retreat to the safe place. Great politicians are masters of this. You may disagree with the tactic, but when you’re under the hot lights and a camera, you’ll be grateful to have this advice.
Reporter: “Your product is used in destroying the internet!” Answer: “We condemn any practice that would affect the rights and freedoms of individuals…” and then pivot to the “island”: “Our software is used for productive purposes by millions of people all over the world to create online communities that foster a better life…”
– Use verbal pauses to give you time. When you’re under the spotlight, a second feels like an eternity. But a casual “umm” is not noticed by the viewer. It will give you time to craft your response. It will also make you feel a lot less nervous.
– Don’t get trapped in the reporter’s language. General Norman Schwarzkopf was brilliant with the press. When asked if he was a hawk or a dove, he answered “I am an owl”. Genius response, but then, he was a pro. It takes time to learn how to think on your feet like this.
– Nature abhors a vacuum, so you must have facts to fill the vacuum. This is one thing that is misunderstood by a lot of execs, but it’s incredibly important.
Have facts at your fingertips, and counter negativity with actual information. “I hear you’re working with the NSA to create a backdoor for them to eavesdrop on citizens”. Answer: “That is incorrect. Our software has gone through a rigorous audit by 17 different security organizations. In fact, there’s a letter I can point you to…”. You can’t just say “no”. You must fill the vacuum.
– Crises: If you screw up, take full responsibility, apologize, explain the steps you are doing to make sure it never happens again (and then do those steps).
I’ve had a few crises in my life. I had a news story blow up massively in my face once when it was found that our security software was mis-labeling an innocent component installed on Samsung laptops as malware. This blew up all over the internet, with claims that “Samsung was shipping malware”. Except: They were innocent. I did the only thing I could do — we found out it was a false positive, and I immediately issued a complete mea culpa with a plan on how to fix it.
And in a crisis, don’t ever say “no comment”. Say things like “We are aggressively reviewing the situation and will have a statement as soon as we have all of the facts”. Anything “no comment”.
Realize the court of public opinion is critical, and delays in response are deadly. The lawyers may be advising one thing, but lawyers aren’t trained in PR. Act fast, act decisively, act right, and the crisis will blow over.
Anyway, there is much more to be said about dealing with the media. The key thing to remember is preparation.
Most of the time, dealing with the press can be quite pleasant (especially trade press) and one doesn’t need to be in a hyper-defensive posture. But for those cases when you’re going to be attacked, be ready. As we used to say in the Boy Scouts, “Prepare for the worst, hope for the best”.
David, are you listening?
The phrase “line extension trap” was coined many years ago by marketing gurus Al Ries and Jack Trout to describe the disaster that occurs when a company extends its brand into an unrelated field.
And now, reportedly, Apple plans on doing just that, which is… a terrible idea.
When Steve Jobs returned to Apple in the 90s, he spent an enormous amount of time just focusing the company back on its core products. It was a company with so many models, no one could figure out what was wwhat.
And now… it’s exploding outward again. Unfortunately, without a strong central guiding personality, these things typically happen.
One thing I can assure you: If this is true and Apple launches a car, it’s time to sell your Apple stock. It will not go well.
(And in case you’re hopeful, the photo in this blog is actually just a concept by Liviu Tudoran.)
If you’re a marketer, understanding design trends is vital. That’s why I like this post by on the online design trends for 2015, here.
One thing is clear: It’s all about the imagary.
Leads, leads, leads!
Ask a sales person what they want, and the answer is simple: Leads. And not just any leads – qualified leads.
And so we have the classic sales funnel or the “waterfall”. Raw leads come into the organization, and through a process of attrition, a smaller and smaller number of them become more and more qualified until a percentage of the leads close.
Nothing new here: This is a standard report available on every major CRM program. And much thought is given to the problem of how to get these leads into the funnel.
However, in my experience, the only way to guarantee a successful stream of leads is to develop what I call a fat funnel. A fat funnel is a massive group of people who aren’t even close to being buyers, but who, one day, may convert.
The fat funnel is way up on the “top” of the sales funnel.
You want a really, really fat funnel.
Think of a fat funnel as the top of a large “Y” shaped funnel. The top is really broad, and represents leads that have possibly very little understanding of your value proposition. As the leads flow further down, the understanding (and possible interest in your product) increases. By the time the lead gets far further down the funnel, they’ve moved from being suspects to prospects.
A funnel is a representation of both time, and knowledge. The higher up the funnel, the longer it will take the person to convert to a lead. And, as a corollary, the higher up in the funnel, the less that person knows about you.
The secret to great lead generation is understanding how to develop this fat funnel. If you’ve done your job well, selling becomes a process of picking up the phone with a qualified buyer. What more could a sales person want?
Therein lies the reason why some sales executives are terrible marketers. And why some marketers are terrible sales people.
The reality is that marketing is a totally different skillset to selling; and selling is a totally different skill set to marketing.
Sales deals more in the now. Marketing deals more in a future now. And PR (typically viewed as a subset of marketing, but in reality, its own science) is way, way higher up strategically.
Marketers who are impatient, and want all of their sales right now, don’t make great marketers. Yes, they can be responsible for leads right now, but what I often see is marketers, under the hectic whip of sales, becoming simply demand generation specialists. In other words, focusing all of their day tweaking Google Adwords (I exaggerate… but only a little).
If marketers know their jobs, they know that their view is much broader, and a broader view means a longer cycle of time.
To rephrase my friend the great Al Ries, “PR lights the fire, marketing fans the flames… and sales people cook their daily bread on the flame”.
Again, sales people deal want prospects. Marketers deal with suspects, understanding that all prospects were once suspects. A great marketer is developing a plan to generate that future “now” today.
So what does this all mean in a practical sense?
Build really big lists of people to talk to. And talk to them.
That sounds utterly oversimplified, right? However, it’s a point that is missed in so many companies I work with, I’m often surprised.
I once worked with a company that had a bizarre policy of deleting leads after 90 days if they didn’t buy. And, in one instance of “list cleanup”, they arbitrarily deleted 200,000 names from their database, because the people in the database hadn’t purchased recently. This was a WTF! moment for me. It takes people sometimes years to come around to even thinking of your solution.
Another company I worked with would just get lead-sign ups and then blast the poor leads with weekly “hot deals”. No communication, just yelling in their face with bright red, boldface “50% off today only!”
Let’s get back to first principles: People out in the world are either in your target market, or they aren’t. Those who are in your target market need to be communicated to.
And if you’re not communicating to your target market, something terrible will happen: Nothing.
It starts with awareness of your product. This can be through PR, social media, adwords, SEO, advertising, direct mail, whatever. There’s a vast toolbox of “awareness builders” that is not the topic of this post. A good marketer understands that there is a precise tool needed for any task, and the toolbox also includes, even before awareness building, basics such as branding, positioning, customer research, and so on.
Through these awareness campaigns, accumulate names. Now, some of these names will buy right away, and that’s fine. It’s those that don’t buy that need to be placed into a mechanism for regular communication.
The regular communication is just that – communication. If you’re selling lawn mowers, give tips on how to have a greener lawn, interviews and videos with lawn care experts. Become an authority. Be authentic. Don’t be a spammy “buy now” type. Talk to the suspects, not at them. And talk to them regularly.
The conversation should be 90% real content, and 10% promotional. You have every right to ask someone to buy (and you should). But do it in the context of a relationship.
How do you communicate with your customers? It can newsletters (if you’re using newsletters, read “How to Write Good Newsletters that Don’t Suck.”). It can be inclusion on your own forum, or social media site (building communities is a fantastic tool). It can be a webinar, a free trial, or a freemium model. It can even be regular postcards. Whatever. The way in which you communicate to your suspects is largely a function of the style of your organization. In any event, you want to get that line in with the customer and then develop it patiently over time.
My friend Lincoln Murphy has a good webinar on the subject of long-term conversion, here.
Again, sometimes people will buy immediately or very soon after learning of your company. But looking at actual conversion rates of search engine marketing, it’s very low. However, you would still treat every lead that wanders over to your site like gold (assuming they are in your target market, of course). They may not buy today, but they may very well buy tomorrow.
The key is to realize that a suspect becomes a prospect by percolating over time.
Build big lists. Talk to them often. And the qualified leads will come.
(A guest post by Jill Chiappe, in my opinion, the best executive coach in the business.)
The most common question I get as an executive coach is, “Can you fix him?” (or her), usually pointing to some other executive. It’s an interesting question, as it tells me immediately that the person believes that something “over there” is causing his or her problem. Interestingly, the problem never is “over there.”
A perfect example: A CEO of a mid-sized SaaS company hired me to review his executive team and give an assessment of strengths and weaknesses of each person and the whole team. He was interested in growing the company by 25% in the upcoming year to prepare it for sale and wanted to make sure he had the right team in place. I asked if he would also be getting a review himself and he looked surprised. I explained that any direction-setting or leadership initiatives would begin with him. He agreed. I asked him if he felt he had any blind spots in achieving his goals. He answered, wisely, ‘If I knew about them, they wouldn’t be blind spots.’ Exactly. He ended up getting a review, and he also sold the company a year and a half later for his expected price.
That’s the problem with blind spots—by definition we can’t see them. And in leadership, they can be fatal. At times, it is just those things we don’t want to see that we stumble over later. It’s why executive coaching and external reviews have become so popular over the years. (According to the Center for Creative Leadership, the number of companies using executive coaches has grown by 2000% since 1996.) Sometimes you need an outside look to uncover the most important issues, obstacles or opportunities. It used to be that coaching was viewed as a way to improve “problem” people. Today, coaching is a perk for senior executives. 94% of Fortune 500 companies provide some kind of executive coaching at their highest levels*.
But what about that “problem person” on the executive team? Can coaching “fix” him or her? In about 80% of cases, the answer is yes. In the other 20%, the person is simply not coachable. That is a determination that a good executive coach can give you. I have had to deliver the news of an “uncoachable” executive more than a few times. But it’s better to know up front rather than wonder and wander. For a longer answer about whether someone is coachable, I’ve devoted an entire chapter (Chapter 4) to it in my book Be Coachable which is available here.
In short, about the best advice I can give any executive is to first get a good assessment of himself and his team. I recommend a 360° assessment as the best way to uncover blind spots. Read more about that here. A good assessment will so accurately target blind spots that the road to improvement becomes plain as day. That’s the beauty of uncovering a blind spot—no more tripping over the things you can’t see.
Still one of the best overviews of the startup sales curve is Mark Leslie’s piece in the Harvard Business Review. Leslie founded Veritas and so he’s got the chops to prove his points.
When a company launches a new product, the temptation is to immediately ramp up sales force capacity to acquire customers as quickly as possible. Yet in our 25 years of experience with start-ups and new-product introductions, we’ve found that hiring a full sales force too fast just leads the company to burn through cash and fail to meet revenue expectations. Before it can sell the product efficiently, the entire organization needs to learn how customers will acquire and use it, a process we call the sales learning curve.
Worth a read, here.
Jobs visited the design studio and, as Ive recalled it, said, “Fuck, you’ve not been very effective, have you?” This was a partial compliment. Jobs could see that the studio’s work had value, even if Ive could be faulted for not communicating its worth to the company. During the visit, Ive said, Jobs “became more and more confident, and got really excited about our ability to work together.” That day, according to Ive, they started collaborating on what became the iMac. Soon afterward, Apple launched its “Think Different” campaign, and Ive took it as a reminder of the importance of “not being apologetic, not defining a way of being in response to what Dell just did.” He went on, “My intuition’s good, but my ability to articulate what I feel was not very good—and remains not very good, frustratingly. And that’s what’s hard, with Steve not being here now.” (At Jobs’s memorial, Ive called him “my closest and my most loyal friend.”)
Worth a read, here.
Jeb Bush, in an effort to be transparent, has released all of his emails from his governership of Florida.
Really, all of his emails. That includes detailed information, including the sender’s email address.
I remember a few times emailing him, and getting a personal response. Impressive (I’m sure I’m in there somewhere in this huge warehouse of data, but I’m still trying to download all of it).
And it’s clear now that putting “Confidentiality notice” on your email won’t do much, at least when you’re emailing a politician…
On that harrowing night, on the eve of St. Crispin’s day, I was in a helicopter caught in RPG and AK-47 fire. We crashed, fled the scene, bullets flying and death amongst us. Then I gathered the trusty souls that I had fought so gallantly with, and and turned, crying Havoc! and we proceeded to smite the Dreaded Infidel with our trusty swords, beseeching the name of Our Maker as we spilled their blood, scattering it in a fine atomized dust on the ever-drifting sands of the Land of the Saracen.
So, what do you think, do I have what it takes to be a news anchor?
To have a great business does not mean you have to have outside venture capital. I have run businesses backed by VCs, and those without. These days, you don’t actually need a tremendous capital base to get started. You can start a company for very, very little.
It’s worth reading The Ultimate Cheat Sheet for Starting and Running Your Business. There’s also a great list of free things on the web to help you bootstrap your business.
However, inevitably, most entrepreneurs want to try to pitch their business to someone. The pitch may only be to family and friends (always the best place to start), or to a big Sand Hill VC. And they also want to know how to write a business plan (the two are not the same).
Pitch decks are those spiffy, slick and often meaningless presentations that are supposed to get you the millions your company deserves.
The problem is, like everything in the Valley these days, it’s all the same. Going to this site [or this one] will dazzle you with the sexiest pitch decks (dare I say the “bubble in the making” here?). However, it’s an orgy of homogeneity, a grand sameness that’s a testament to a startup culture that’s trying to be different, by being the same.
Where’s the risk in putting together a presentation that looks the same as everyone else’s? Not much. What’s riskier is not having a great idea and a great team.And therein lies the essential question: What do investors really care about?
Just two things stand out: a big idea and a great team.
A big idea has the following characteristics:
– It addresses a big, big market. Like – billions and billions being spent. Going after a $20 million market,meh. Going after a $300 billion market,hmmm…
– There’s a big, fat opportunity. There’s something missing in the market, or something that’s going to be happening, that opens the door to your product or service being a massive success. Your technology needs to be different, disruptive and interesting. And if you can’t reasonably forecast your company getting to several hundred million in revenue, then rethink the VC route.
– It’s different. Being the 10th also-ran player in a market is not interesting. That doesn’t, however, mean you have to be obsessed with being different. It’s just you need something that sets you apart from all the rest. (A good start is to read the 3 most powerful words every brand needs.)
But let’s dig a little further. Venture investors (as opposed to private equity investors) aren’t investing in startups just to get 2-3x return on their money. The venture model is fairly simple: each investment has to have the potential to generate outsized returns –10x return – a “ten bagger”.
So, you need an idea that will generate outsized returns.The classic pitch deck, as outlined by a colleague (Mark Wright at BCVC) has the following elements:
1. Investment highlights
2. Platform/Business Description
3. What compelling problem does it solve
4. Target Customers
5. Competitive dynamics/ current customers – if any
6. Barriers to entry
7. Management team
8. Holes in team
9. Financial model
10. Amount being raised/Use of proceeds
11. Operational and financial milestones/How is our performance to be judged
12. Three year quarterly projections that includes the quarterly can burn rate
13. Client references
14. Repeat investment highlights.
Good. That’s a start, and a good checklist to keep in mind.
Basic rules for the pitch itself are to accept questions and interruptions during the pitch. Give it 45 minutes max. Do not send out the pitch in advance. And don’t ask a VC to sign an NDA. Most won’t.
Business plans, on the other hand, are largely meaningless for raising capital (I’m excepting, of course, where it’s a prerequisite, such as an SBA loan). A good Powerpoint deck is often enough to get the discussion going from institutional investors.
However, you should write a business plan for your own use. Writing a great business plan means that you write something that will be a living, breathing document that gives an insightful analysis into the business objectives, priorities, plans, and methods of measurement. It is for use, not necessarily for investors. If you’re just going to print one up for investors and then forget about it, it’s a waste of time.
And if you’re looking for a template for a business plan, the reality is that there is no really good template for a business plan. Great business plans are real documents that reflect the mission, objectives, and plans that you expect to actually implement.
In other words, there is no template for common sense.