Business Plans / Corporate Finance
THE START-UP VENTURE
Company founders are a special breed of entrepreneur. They have deep professional and emotional beliefs about the enterprise they are launching. It is, in fact, themselves in business clothing. They are passionate about the strength of their idea and in how they can execute that notion better than anyone else in the world. Their feelings are particularly strong when they first look to raise significant venture capital from previously unknown investors. For that reason it seems useful to know how I felt and reacted when I founded "my" first company some years ago. The principles haven't changed; neither has the investor's outlook or reaction.
There were three of us; I was the principal founder as it was my product concept, I was the promoter type and was to be president. When the product idea came to me, I had been thinking about the problem for at least 5 years. Then, suddenly, technology came on the market which enabled the product solution on which the business was based. The economy was in the last stage of a long expansion; the venture capital market was good to strong for computer type companies. Neither I nor my co-founders knew anything of that. We had our idea, an unshakable belief in its inevitability and nothing was going to hold back this company.
None of the founders had ever raised money before; none had ever run any business; two, including me, needed a paycheck for rent and food and we had little or no savings. I quit my job in February, sold my "good" car and netted about $2,500. I borrowed money in small chunks from every friend and neighbor, even enough so as to be able to lend $15,000 to the other "poor" co-founder. Among the three of us, we patched together $70,000 in a 60-20-20 ratio. That was our seed money with which we sub-leased three office rooms and began to develop our product, recruit prospective staff and get them to work for free and, on that, to go out and raise $750,000 from perfect strangers. We received no salaries until we were funded nearly a year later.
During this phase we spent a great deal of time explaining our business to others and re-defining it among ourselves. We thought about, argued about and agreed as to what we wanted to build. When this phase was over, we knew what we wanted to accomplish, in what order and rarely deviated; we stuck to our last.
It is critical to have a good business plan. It is necessary for venture capital firms as they always read the plan; it is useful for investors for some of them read the plan; it is critical for the founders and their senior staff as they must know, understand and agree to the plan.
Accordingly, the plan should be logical, literate, complete, good looking but not slick, severable so it may be read in part and have that be enough. It should be a strategic guide for the first few years, a detailed financial plan for the first 12 months and a good financial estimate for the second 12 months. More than that is unlikely to be accurate and, I believe, unnecessary.
Marketing the Business
It turned out my neighbor's son was a lawyer. Naturally, they referred us to him. He was a decent sort but he wasn't a corporate lawyer; he knew real estate but nothing about start-ups. It didn't matter, he said he would handle the incorporation for no cash; he'd take a 10% interest in the business for formation, stock issuance and the like. After that he'd give us a reduced legal rate. I had no idea of anything but this sounded too rich so I didn't do it. One of the founders had a stockbroker with Sutro & Co. We met with him and he directed us to a lawyer he knew; a fellow named Dick Riordan who, he said, was interested in new high tech companies. Riordan later became Mayor of Los Angeles.
From there it was not simple but it was professional. We met with people who had done deals before and who knew themselves the types of people they liked to back. They also had the resource contacts and their referral was worth something. We always were heard because our referrors were serious people. With them, we set investment objectives based in the general market at the time and presented "the deal" to the investors rather than saying we were open to discussion. We created our own deal but it was within parameters our advisors could live with.
We were trolling for investors everywhere. We went up and down Spring Street in Los Angeles, throughout Beverly Hills and around a few new buildings in a new place called Century City. We were never too tired. We talked with anyone and took all the feedback we could get. We created our own momentum but we didn't shop the deal all over town because only went where we were referred by our respected advisors.
We almost always went as a threesome even though one still worked and had to miss some sessions if he was out of town. That is the preferred approach as it gives a balanced impression of the new venture to the listener, offers the principal presenter a rest and each person lends his or her perspective to the overall presentation.
The basic presentation should always follow the same outline and make the same basic points. Nevertheless, you should be careful to be enthusiastic, not stagy. After awhile, you will note that the questions are the same from day to day and you will just love to hear them as you will have the answer ready. That's when you want to stay away from `slick' or from being too quick to shut the questioner off. You've heard this before but he has not and it's his money.
I think a chalk board or easel with marker make fine support aids to help illustrate your point and show spontaneity. On technical issues, a picture is worth a lot of words and being able to do it before their eyes is very convincing.
As to the plan itself, it is the LAST thing to give to investors at a presentation. If they've had it in advance and have questions about it, fine. But, if this is a group hearing of the deal for the first time, give them the plan last. If you don't, they'll ask about some point they see out of context and you'll waste a lot of time doubling back. Better they should call you a few days later.
We must have spoken to a hundred different people. Years ago I made some notes on this. As I don't remember the details now, here's what I wrote at the time:
- the guys who bring in a friend who's an expert never buy as the expert always says it's not a great idea;
- people who ask for 51% of the company, in so many words, are those you want to avoid;
- the retired investor who buys utility stocks never buys either;
- lawyers were easy to sell but hard to close;
- others in your field knock the idea as not invented in their house;
- some people just don't follow your style of presentation or don't like you personally; unavoidable;
- after a while the questions will be identical;
- everyone is interested in the financials which is usually different from the founders who are interested in the product and in building a company;
- remember; all you want is to sell so many units at so much per unit try not to take rebuffs personally.
Other Personal Conclusions
- we had a good team to start with;
- we always knew where we were going and not going;
- we wrote down the dream in detail; I never had to do it twice;
- we were lucky;
- we got discouraged;
- we never quit.
- It's a great experience. We met many solid people along the way.
There really are people out there who like to help you start and
- Sell when they're ready to buy - or the buyer cools off.
- Maximize growth, don't minimize dilution.
- Plan on getting the investor uninvested; give him a way out; only you
are in it for a lifetime.