On Investors-On Investors-MGT 709 New Venture CreationMGT 709 New Venture Creation

AgendaAgenda

AdamsAdams Thoughts on Business PlansThoughts on Business Plans Business Model AnalysisBusiness Model Analysis Room for DessertRoom for Dessert Walnut Venture AssociatesWalnut Venture Associates

Adams On InvestorsAdams On Investors The business plan is not the be-all and The business plan is not the be-all and

end-all for getting fundedend-all for getting funded Sometimes investors don’t even read plansSometimes investors don’t even read plans

Writing a business plan is not the problemWriting a business plan is not the problem Viewing the business plan as your primary Viewing the business plan as your primary

goal is the problemgoal is the problem More evidence of output rather than execution More evidence of output rather than execution

orientationorientation

Myth: Investors fund business plansMyth: Investors fund business plans

The WorkThe Work

Don’t focus on the plan…do the workDon’t focus on the plan…do the work Put together a great teamPut together a great team

Execution intelligenceExecution intelligence Great idea, poor team = noGreat idea, poor team = no Great team, so-so idea = maybeGreat team, so-so idea = maybe Great advisors and directors are crucial for Great advisors and directors are crucial for legitimacylegitimacy and and

guidanceguidance Validate the marketValidate the market Get to market fastGet to market fast Define value inflection pointsDefine value inflection points

Presentation and executive summary may be all Presentation and executive summary may be all you need (and “the pitch”)you need (and “the pitch”)

The PitchThe Pitch

Cater your message to the audience’s needsCater your message to the audience’s needs Clearly articulate features and benefitsClearly articulate features and benefits Relationships ruleRelationships rule

Who can influence the investors?Who can influence the investors? One or two good referrals cuts through the noiseOne or two good referrals cuts through the noise

Supplement the pitch with collateralSupplement the pitch with collateral Treat the plan as a brochure – it has about the same Treat the plan as a brochure – it has about the same

effect on investor decision makingeffect on investor decision making Ideal: twelve slide PowerPoint, an executive Ideal: twelve slide PowerPoint, an executive

summary, and team/advisor biossummary, and team/advisor bios

The PitchThe Pitch ContentsContents

Company OverviewCompany Overview Customer pain/problemCustomer pain/problem

What problem are you solving?What problem are you solving? Why is it a problem? How severe?Why is it a problem? How severe? How big is the market?How big is the market? What segments have the worst pain?What segments have the worst pain? How have you validated the needs?How have you validated the needs?

SolutionSolution CompetitionCompetition TeamTeam Business ModelBusiness Model

How will you make money?How will you make money? Revenue model, distribution model, milestonesRevenue model, distribution model, milestones

FinancialsFinancials When will you be profitable? How much capital?When will you be profitable? How much capital?

The PitchThe Pitch

ProcessProcess Have as many team members participate as Have as many team members participate as

you canyou can Investors want to assess your teamInvestors want to assess your team

Project energy, enthusiasm, confidenceProject energy, enthusiasm, confidence MalleabilityMalleability

You have to be comfortable not keeping your You have to be comfortable not keeping your sacred cowssacred cows

Do you want to be king or rich?Do you want to be king or rich? You don’t need to have all the answers but you You don’t need to have all the answers but you

must be able to respond thoughtfullymust be able to respond thoughtfully

Thoughts on Business PlansThoughts on Business Plans

On a scale from 1 to 10, business plans rank no On a scale from 1 to 10, business plans rank no higher than a 2higher than a 2

Four components that must “fit”Four components that must “fit” People, opportunity, external context, dealPeople, opportunity, external context, deal

Three questionsThree questions What can go wrong? What can go right?What can go wrong? What can go right? How can management make more go right than How can management make more go right than

wrong?wrong?

The role of management is to increase the fitThe role of management is to increase the fit

PeoplePeople AdagesAdages

Successful founders have two characteristics: they are “known” Successful founders have two characteristics: they are “known” and they “know”and they “know”

I’d rather back an “A” team with a “B” idea than a “B” team with I’d rather back an “A” team with a “B” idea than a “B” team with an “A” ideaan “A” idea

Citing the need to recruit experienced people is like wishing to Citing the need to recruit experienced people is like wishing to draw 4 cards to make a straight – a low prob. Event!draw 4 cards to make a straight – a low prob. Event!

Questions:Questions: Who are the founders? What have they accomplished in the Who are the founders? What have they accomplished in the

past? What directly relevant experience do they have? What past? What directly relevant experience do they have? What skills do they have? Whom do they know and who knows them? skills do they have? Whom do they know and who knows them? What is their reputation? How realistic are they? Can they What is their reputation? How realistic are they? Can they adapt? Who else needs to be on the team? Can they make hard adapt? Who else needs to be on the team? Can they make hard choices? How will they respond to adversity? What are their choices? How will they respond to adversity? What are their motivations? How committed?motivations? How committed?

OpportunityOpportunity AdagesAdages

Is the total market large and/or growing? Is the industry Is the total market large and/or growing? Is the industry attractive?attractive?

Use analogies to describe what the venture will look like if it is Use analogies to describe what the venture will look like if it is successful – the next Walmartsuccessful – the next Walmart

““Invest in industries where growth can overcome the Invest in industries where growth can overcome the shortcomings of management”shortcomings of management”

Buy low, sell high, collect early, pay late, have growth optionsBuy low, sell high, collect early, pay late, have growth options

QuestionsQuestions Who is the customer and how do they make decisions? is the Who is the customer and how do they make decisions? is the

product a compelling purchase for them? how will you reach the product a compelling purchase for them? how will you reach the customer? at what price? How much does it cost to acquire a customer? at what price? How much does it cost to acquire a customer? How much does it cost to deliver the product? How customer? How much does it cost to deliver the product? How much does it cost to support a customer? How easy is it to retain much does it cost to support a customer? How easy is it to retain a customer? Who are your competitors? How will they respond? a customer? Who are your competitors? How will they respond? Abnormal profits will go away.Abnormal profits will go away.

Context & DealsContext & Deals ContextContext

A shift in context can turn an unattractive business into an attractive oneA shift in context can turn an unattractive business into an attractive one DealsDeals

From whom you raise capital Is often more important than the dealsFrom whom you raise capital Is often more important than the deals How much money to raise and in what stages? How much money to raise and in what stages? Money is time Money is time

time to discover the right team, opportunity, and contexttime to discover the right team, opportunity, and context Investors have to decide whether to give you more timeInvestors have to decide whether to give you more time

Deals are fair, simple, robust, reflect trust rather than legaleseDeals are fair, simple, robust, reflect trust rather than legalese QuestionsQuestions

What new information would change the likelihood of success? How What new information would change the likelihood of success? How much time and money are required to “buy” that information? To what much time and money are required to “buy” that information? To what degree would more money increase the rate of growth? Without extra degree would more money increase the rate of growth? Without extra money will you lose a winner takes all market?money will you lose a winner takes all market?

From whom should the money be raised? How much is needed? What From whom should the money be raised? How much is needed? What deal terms are fair?deal terms are fair?

Risk/Reward ManagementRisk/Reward Management

Myth of entrepreneur as risk seekerMyth of entrepreneur as risk seeker All sane people want to avoid riskAll sane people want to avoid risk True entrepreneurs want to capture all of the True entrepreneurs want to capture all of the

reward and give the risk to othersreward and give the risk to others I hardly ever look at the numbers any moreI hardly ever look at the numbers any more

They are most likely wrongThey are most likely wrong

I like to see the team has thought through the I like to see the team has thought through the key business driverskey business drivers

Due diligence is important for investorsDue diligence is important for investors

Business Model AnalysisBusiness Model Analysis

A business model is a “profit engine” or A business model is a “profit engine” or cash generating machinecash generating machine Revenue driversRevenue drivers Cost driversCost drivers Investment sizeInvestment size Critical success factorsCritical success factors

RevenueRevenue

TypesTypes Single stream, multiple streams, Single stream, multiple streams,

interdependent, loss leaderinterdependent, loss leader

ModelsModels Subscription, volume or unit-based, Subscription, volume or unit-based,

advertising-based, licensing/syndication, advertising-based, licensing/syndication, transaction feetransaction fee

Fishbone modelFishbone model

Fishbone Revenue ModelFishbone Revenue Model

COBRevenue

Tuition

Endowments

Grants

Rate of return

Size of endowments

Avg. tuition rate

# of students

Student mix

Executive education

Curriculum

Reputation

Grant applications

Quality of faculty

CostsCosts

TypesTypes Fixed, variable, semi-variable, non-recurringFixed, variable, semi-variable, non-recurring

StructuresStructures Payroll-centered (direct)Payroll-centered (direct) Payroll-centered (support)Payroll-centered (support) InventoryInventory Space/rentSpace/rent Marketing/advertisingMarketing/advertising

Fishbone Cost ModelFishbone Cost Model

COBExpenses

Faculty Salaries (80%)

Support Salaries (10%)

Operating Expenses

(10%)

# of faculty Productivity

# of staff

Salary rates

Teaching resources

Research resources

Market rates

Support ratio

Investment SizeInvestment Size

Maximum financing needs (lowest point)Maximum financing needs (lowest point) Positive cash flowPositive cash flow Cash breakevenCash breakeven Cash flow diagram is useful Cash flow diagram is useful

cash balance over timecash balance over time

Cash is needed for infrastructure, salary, Cash is needed for infrastructure, salary, inventories etc.inventories etc.

Critical success factorsCritical success factors

Which factors have the greatest impact on Which factors have the greatest impact on profitability?profitability?

Sensitivity analysisSensitivity analysis

Room for DessertRoom for Dessert

How well do you rate the plan? The idea?How well do you rate the plan? The idea? Does the plan address its audience’s Does the plan address its audience’s

needs?needs? What are the strengths and weaknesses of What are the strengths and weaknesses of

the idea? What are the economic drivers?the idea? What are the economic drivers? What would you like to see before What would you like to see before

committing funds to this venture?committing funds to this venture?

Walnut Venture AssociatesWalnut Venture Associates

Who are angel investors? Why are they Who are angel investors? Why are they investing in startups? Why would you seek an investing in startups? Why would you seek an angel investor?angel investor?

Evaluate the potential investment from Walnut’s Evaluate the potential investment from Walnut’s point of viewpoint of view What issues require more investigation? What needs What issues require more investigation? What needs

to be resolved before you write a check?to be resolved before you write a check?

What issues does Bob O’Connor have with What issues does Bob O’Connor have with Walnut? How should they be resolved?Walnut? How should they be resolved?