VentureBlog

The Value of Fundraising

In 2012 my partners and I raised our sixth fund, aptly named August VI.  August VI is a $550 Million fund, with $300 Million focused on early stage opportunities and $250 Million designated for what we call "Special Opportunities" (spinouts, take private transactions, later stage opportunities, etc.).  As we have done since 1995, we will continue to pursue companies in the information technology space broadly (software, hardware, communications, Web, etc.).  The fundraising behind us, we can now focus on finding great new companies in which to invest.  But as we start the new year, I want to take a minute to reflect on the fundraising process.

VCs don't like to talk about our own fundraising.  We like to pretend that the money magically appears in our bank accounts.  But that's not quite true.  Venture Capitalists are investors, and the vast majority of the money we invest is not our own.  Where does the money come from?  We go out and raise it -- from foundations and endowments and fund of funds (who raise it from other investors).

Our fundraising process is not so different from that of the entrepreneurs who pitch us.  We approach investors who can write big checks and we convince them that tens of millions of dollars invested today might turn into hundreds of millions of dollars tomorrow.  We convince them to invest in our funds despite the long odds.  We convince them to invest in our funds despite the innumerable alternatives they have.  We convince them to invest in us despite the countless other investors who are promising outsized returns on a daily basis.  And if we are successful in convincing these financiers to invest in our funds, we'll spend the next decade or more working hard to produce great returns.

I have always felt that the fundraising process is an important part of company building -- not just as a necessary evil, but as an intrinsically valuable exercise.  Having just raised my own "round of funding," I am more convinced than ever.  The fundraising process acts as a catalyst in a number of valuable ways that are worth exploring:

• The fundraising process forces you to better define and defend your business strategy.  While an executive summary may allow you to speak in generalities, face to face fundraising requires specificity.  A defensible strategy is not something you can fake.  Potential investors will dig into your assumptions in ways that you may or may not have considered.  No matter what the outcome, the conversation is a valuable one.

• The fundraising process allows you to hone your strategy and your pitch.  Great entrepreneurs (when they have the luxury of doing so) will often pitch second tier investors first, in order to practice their delivery.  The pitch will get better with time and practice, as will the strategy.  And it isn't just rhetoric.  You'll learn a great deal about your business defending it to a bunch of smart people.

• The fundraising process will disabuse you of your misconceptions.  Entrepreneurs and VCs are invariably optimists.  And, thus, they are prone to drinking their own kool-aid.  Potential investors do not share your malady.  They will work hard to determine if your kool-aid is in fact delicious, and if it is not, they will let you know.  Now not everyone's taste buds are the same.  Your kool-aid may not be delicious to everyone.  But if it is delicious to no one, it is time to reassess. 

• The fundraising process will provide you with valuable market intelligence.  Think what you may of investors (whether they are VCs or the folks investing in VCs), they hear a lot of pitches.  And all of those pitches can provide beneficial context for your own fundraising process (as well as your business in general).  It is an investors job to compare your business with all other opportunities that come before them and to determine the relative value of what you are selling.  If an investor has seen something better, it is invaluable for you to hear what it is and why (even if you ultimately think they're wrong).

• The fundraising process will help you determine if you have the right team.  For venture capitalists this is extremely important because, in many ways, a VC fund is nothing more than the aggregation of that fund's partners.  But the same holds true for startups.  Investors, by and large, are betting on teams, not ideas or markets.  If you don't have a credible team, potential investors will let you know.

I am grateful to have had the opportunity to pitch August Capital to some of the best Limited Partners in the country.  I am certain that their feedback has made us better, more thoughtful, investors.  And, in turn, we should be able to deliver even better returns for them.  The same is assuredly true of every company out pitching today.  Don't think of fundraising as a burden.  Think of it as an opportunity.  And, in return, you will get far more out of the process than just money.

Investing is About Passion

Entrepreneurship is about passion. Great entrepreneurs are not driven by a simple desire to make money. They are driven by a need to change the world. They may change the world by building a better operating system or a better search engine or a better social network. But whatever it is they are building, great entrepreneurs are driven by passion.

The same is true of Venture Capitalists. It is not enough to simply hope to make a buck. The best Venture Capitalists fund companies about which they are truly passionate. Building great companies takes a long time. And it is never a straight path. But a shared desire to create something great -- something important -- will carry entrepreneurs and VCs alike through the tough times. Anything shy of passion will fade away, leaving the entrepreneur or the Venture Investor vulnerable to fatigue. Passion, however, will transcend the challenges.

I'm often asked about my decision-making process. There are lots of factors that go into any investment decision -- team, market, product -- but in the end it is all about passion. Am I passionate about the company or not? Am I passionate about the team? Am I passionate about what they're building? Am I passionate about the problem they're trying to solve?

I tell entrepreneurs all the time that a first meeting isn't about convincing a VC to invest. The first meeting is just about getting a Venture Capitalist excited about what you are doing. Passion is infectious. My rule of thumb is that if I'm not more excited about what you're building at the end of the meeting than I was when the meeting started, I'm probably not going to fund your company.

The best test of my enthusiasm for you and your company comes when I go to bed the evening you pitched me. I have learned that the companies about which I'm the most passionate take over my subconscious. I'm serious about that. They literally occupy my brain. When I lie down to go to sleep that evening, I won't think about my schedule tomorrow or my daughter's soccer game or the latest episode of Girls, I will be preoccupied with your company. It doesn't happen often. But when it does, it is really exciting.

Falling in love with an entrepreneur and his or her company is a building process. The more excited I am, the more I think about you and your business. The more I think about you and your business, the more I dig in and learn about your product. The more I dig in and learn about your product, the more I focus on your market. The more I focus on your market, the more I contemplate your competition. The more I contemplate your competition, the more I reflect upon your opportunity. The more I reflect upon your opportunity, the more excited I get about you and your company. And, of course, the more excited I get about you and your company, the more I find myself lying in bed thinking about how you're going to change the world.

If I'm passionate enough about your business to roll around at night thinking about the opportunities and challenges that lie ahead of you, you can bet that I'll be advocating an investment in your company. That kind of zeal is rare, but it is unbelievably exciting. It is the very reason that I so love the venture business. And the very reason that I so love great entrepreneurs. I consider myself incredibly lucky to work in an industry that is, above all else, powered by passion.

Pitching a VC: Why Financials Matter

I was once being pitched by a very smart entrepreneur who, when he got to the slide about his companies financials, said "I made all of this up, but here you have it." On the one hand, it was an pretty flippant approach to a relatively crucial aspect of his business. On the other hand, he was saying what ever other early stage entrepreneur was thinking when describing to me the financial outlook for his or her extraordinarily risky and unpredictable business. So why bother with a slide on your financials when pitching a VC?

It is well understood by entrepreneurs and VCs alike that the specific numbers an entrepreneur pitches when describing her early stage business are completely made up. Most early stage CEOs are lucky to have visibility into the next 6 months, let alone the next 3 year that are reflected in their financials (and the 5 year forecast is mere fortune telling). Nonetheless, there is a huge amount of information about a business, and about an entrepreneur, that is reflected in those financials. The key is not to focus on the numbers themselves but, rather, to focus on the assumptions in those projections and the points of leverage for that business.

It is almost assuredly the case that a early stage company's projections are wrong. In the last decade I have only seen one company actually hit the numbers they pitched me on. The rest of the companies have missed by varying degrees of big time. But the real question when listening to a pitch isn't whether the company will actually hit the numbers they are projecting, but rather what those projections say about the entrepreneur and the business? Is the entrepreneur focusing on the right things? Do the financials make reasonable assumptions? If the assumptions are anywhere close to right, is there a big interesting business to be built? Smart investors will dig into your financials to get a better sense of how you are thinking about your business.

Company financials are rife with assumptions. Entrepreneurs can easily gain or lose credibility based upon the assumptions that are embedded in their financials, their understanding of those assumptions, and their ability to justify them. How long will it take to hire the people you need? How much will you pay them? How much will it cost to acquire a customer? How many engineers will it take to build your product? What is your margin (are you selling software, hardware, a cloud service)? What is the length of your typical sales cycle? How long will it take for you to collect earned revenue? How much are you spending on marketing? What is the expected return by channel? If you are pursuing a freemium business model, what percent of your user base do you expect to pay? How much will it cost you to support the free members? How much money will your company make, if any, and when? How much more money will it realistically take before you get the Company cash-flow positive? What will you achieve with the money you are raising now? These are all incredibly important questions for any startup and how you are thinking about them will have a huge impact on the success or failure of your business. No one will have perfect answers but an entrepreneur's ability to be directionally right will often be the difference between success and failure.

Not only will it be important to understand the assumptions built into your financial plan, it will also be crucial to appreciate the sensitivities of your model. There are often single variables that make the difference between a good business and a great business (or, more likely, between a viable business and a failed business). If the cost of acquisition is off by 50%, do you still have a viable business? If free customers only convert at 1%, can you support the 99% who will always be free? If the viral co-efficient of your service is 1.2 instead of 1.5, what does that do to growth? What if it takes 90 days to collect on billings rather than 30 days? These "what if" questions are critical to the understanding of your business. You should appreciate the places your business has leverage, and the places that your business has potential vulnerabilities, and be ready to engage in an honest conversation about those pivot points.

I will be the first person to acknowledge that early stage financials are a work of fiction. But some fiction has the ring of truth, while other fiction is so outlandish that it is impossible to suspend disbelief. It is an entrepreneur's job when pitching her business to convince an investor to suspend disbelief. The better you understand the underlying assumptions in your plan, the more effectively you'll be able to do just that. So embrace the opportunity to build credibility. As an investor, I'm happy to buy into your fiction, I just want to avoid unbridled fantasy.

"Currently we don't have time for due diligence"

I had an email exchange with a guy earlier today that seems worthy of a quick blog post. After receiving a 30 second description of this entrepreneur's business (literally 30 seconds), I reached out to him to let him know that I thought what he was doing was interesting and asked if he would like to get together to talk more about what he's working on. Here's the email I got back from him:

Would you be interested in investing? We aren't in funding raising mode at the moment, but would be interested in a 30 minute conversation if that would bring you to a decision if you are interested in putting in money as a convertible note…. Currently we don't have time for due diligence.

I'm not sure which is more disheartening, 1) the idea that an entrepreneur would think this is a reasonable response to a request to get together and talk about his business or 2) the fact that there are "investors" out there who would consider putting money into a company after receiving such an email (in fact, I'd be willing to bet that there are "investors" who have already put money into this company under the same circumstances).

Perhaps I'm old fashioned, but I still think investing involves more than a 30 second pitch. I've written about this before -- there is a big difference between moving quickly and abdicating all responsibility. Sure, there's lots of money out there today. But there are also lots of great investors who can be way more valuable to a company than simply acting like an ATM.

Wired Teaches us "How To" Get Funded By a VC (and Written Up on TechCrunch)

I just flew back from Europe and boy are my arms tired [insert rimshot here]. Actually, I just flew back from Europe and boy are my eyes tired. I have this bad habit of accumulating magazines until I have a long plane flight then powering through 30 pounds worth of reading.

My typical airplane reading starts out with a zillion of those alumni magazines we all get. If you can wade your way past the inevitable articles on anthropology, sociology and pop psychology, you can often get a first glimpse into some really interesting scientific and technical innovation in these magazines. I'm tempted to go get a masters degree in anything from Carnegie Mellon just so I can get their alumni magazine.

But the magazine I probably spend my most time reading, en route to wherever, is Wired. It is such a great combination of entertainment, info-porn, and deep dives into things that really matter. This trip I had managed to accumulate 5 months worth of Wired's -- good thing I was flying to Europe, there's no way I would have gotten through them by Denver or Chicago. (The other great thing about reading your way through so many accumulated magazines is that it is a little bit like eating your provisions on a long hiking trip -- my load gets noticeably lighter with each magazine I've finished and discarded in the seat back pocket in front of me.) While I don't always act on it, I often times find myself reading something in Wired on which I want to blog. I'll rip out the pages and then forget about them or just never find the time to write. But not this time. This time I'm going to remedy that by writing this post on the plane flight back home. Right now (Jeesh, I'm three paragraphs into the post and I haven't really written about anything yet -- my apologies to those of you who are looking for pithy commentary on technology and the venture community -- I seem less and less capable of pithy these days).

How to score venture capital.

August's issue of Wired this year was the "How To" issue. How to stop a fight. How to crash a party. How to twitter an event you're not even at. . . . One of Wired's how to's was "How to score venture capital." Now there's a topic near and dear to my heart. So I read on with great anticipation and discovered that whoever wrote this did not, in fact, know how to score venture capital -- at least not from me. So here is Wired's advice with my commentary.

1. "HAVE AN IDEA. We'd say it has to be good, but many Web startups demonstrate otherwise."

Despite Wired's snark about Web startups, there is a reasonable point in here. It is true that you need to have an idea -- you've got to build something and, eventually, you even have to sell something. But "good" is in the eye of the beholder. I think you would be hard pressed to find a single startup that managed to get a term sheet from every VC they pitched. One VC's next Google is another's wasted hour. That doesn't mean one idea is good and the other is bad. It just means that venture capital is still more art than science. Trying to pick winners is what we do for a living and some of us are better at it than others.

2. "STICK WITH what you know. If you've spent the past few years building MySpace plug-ins, don't propose launching a chain of bowling alleys."

On the one hand, it is true that VCs love the idea of "domain expertise." On the other hand, it is silly to say that you need to stick to only what you know. What if there isn't a business to be built from MySpace Plug-Ins? Are you doomed to never create an interesting startup just because that's what you know? Look at Joshua Schacter. What did Joshua know before creating Delicious? He knew how to build huge scale, high performance, enterprise applications for the financial services sector. Does that mean the VCs were foolish to invest in Delicious? Should they have urged him to start an enterprise software company? VCs love passion and energy more than expertise. I probably wouldn't fund Joshua to create the next generation nuclear power plant. Then again, he's a really smart guy -- if he spent enough time getting himself familiar with the space and thinking differently about the problem, you never know.

3. "SPEND an inordinate amount of time crafting your business plan's executive summary. It's the first thing VCs read -- and the last if it's poorly written or long-winded."

The two things that I look at when first getting up to speed on a company are either an executive summary or a PowerPoint. So it is certainly the case that you would be well served by a concise and compelling executive summary. On the other hand, you may well want to stop there. A full blown business plan is rarely necessary to raise venture capital. VCs tend not to read business plans because a) they are too long and b) your business will likely have changed by the time anyone gets around to reading your business plan So focus on the things that matter -- understanding your competition, building great products, innovating on your business model, etc.

4. "SEARCH FOR VC firms that have recently funded startups similar to yours. Then hit those firms' Web sites, where they'll likely have instructions for submitting business plans. Don't worry -- the best do actually mine their slush pile."

If Wired's advice falls on a spectrum from "sort of right" to "way off the money," this one is deep in "way off the money" territory. It doesn't start off terribly wrong. You should definitely do a lot of research on the VCs that you will approach for funding. And the ones who have funded related businesses in the past are potentially good targets for your business as well. But not always. Imagine you are building a gaming startup. Some VCs who have invested in the gaming space may be signaling to you that they are excited about the gaming sector and would be happy to fund other gaming companies in the future. Other VCs may feel that they have made their bet in the gaming space and will be hard pressed to invest in another gaming company. So previous investment can be a double-edged sword.

The place where this advice goes far afield is the suggestion that you should go to a Web site, find instructions on how to submit a business plan, and "drop it in the mail." Wired claims that "the best" VCs actually look at unsolicited business plans. It may be true that many venture capital firms look at unsolicited business plans. But rest assured that it isn't Mike Moritz or Dave Marquardt or John Dooer reading these plans -- it is the most junior person at the firm. More importantly, the way to get your executive summary read is to have it passed on to a VC by someone he or she trusts. This is a referral business. Your credibility as an entrepreneur will be bolstered by the credibility of those individuals who vouch for you. So rather than spending time writing a business plan, go spend time pitching your business to technology influencers who can help you build a business and can introduce you to the right people to fund your business. My advice would be to never ever submit a business plan through a Web site -- if you can't get it directly to the person who you want to read it, don't bother.

5. "ONCE INVITED to present your plan, remember that brevity is a virtue: Use no more than 30 PowerPoint slides, and keep your presentation under 45 minutes."

Yikes. 30 slides. Unless you are Lawrence Lessig, I don't think the words "30 slides" and "brevity" can possibly be used in the same sentence. I completely agree that you should aim to keep your presentation to about 45 minutes. If a VC gets excited about what you're working on, they'll spend more time with you in future meetings. But, as with entertainment, you are way better off leaving them begging for more. Get in. Pitch. Get out. There is no way that should take anywhere near 30 slides. I've blogged here before about the 6 -- yes, 6 -- slides you need to pitch your business. Even if you feel that 6 slides is too spartan, don't confuse quantity for quality. The fewer the slides and the more discussion the better.

6. "KNOW EXACTLY how much cash you need."

They waited until the final piece of advice to nail it. I just wrote a whole post about this. Don't just ask for a specific amount of money, explain precisely what it is you intend to do with that money and why it is the right amount of money. This should be the last slide of your PowerPoint presentation and is your chance to summarize the strengths of your company: you're building something important; you understand the competitive pressures and how they impact how much money your are raising and how quickly you are spending it; you have the right team to build it (or know where to find the right people to add to the team); and you can make meaningful progress on the very reasonable amount of money you are seeking to raise.

Those of you who are still reading have incredible endurance and I appreciate that. My apologies for further testing that endurance. (But have no fear, there will be no pop quiz at the end.)

How to get a plug on TechCrunch.

In the very same issue of Wired, there is a blurb on "How to get a plug on TechCrunch." The thing that I think is interesting about Wired's advice for enticing Mike Arrington into writing about you, is that it is better advice on how to get funded by a VC than Wired's missive directly on that topic. It isn't perfect advice for either getting VC money or getting written up in TechCrunch, but it makes some reasonable points.

1. "Casually mention you hold the women's record for javelin in Tajikistan. People (especially women and minorities) with unusual backgrounds pique his interest -- maybe enough to propel him past paragraph one."

The simple fact is that both Mike and the typical VC get pitched on a lot of businesses in any given year. So anything you can do to stand out is helpful. Maybe I shouldn't say "anything." There are all sorts of ways that you can stand out in a bad way. But if there are things that you have done that are both interesting and demonstrate major commitment to achieving a crazy goal, they will help get you noticed and give you a certain amount of credibility as a go-getter (you'd be surprised how many successful entrepreneurs are triathletes or have climbed Mt. Everest).

2. "Cozy up to his friends. Comment on their blogs. Meet them at industry events. An introduction from someone he trusts wins you a few extra seconds."

This is the best advice by far. But it sounds far more cynical than it really is. Don't confuse Wired's advice about "cozying up" to mean that you should suck up to Mike and his friends. VCs and journalists alike hate suck ups. But, as I said above, getting to know the right people who can help you build your business is essential to your success. That isn't "cozying up" in some cynical sense. It is about convincing other smart people that what you are building is meaningful and that they want to be involved in that success. Those people will then sing your praises to Mike and the VC community -- not because they're your buddy, but because they believe in what you are building.

3. "Get a pro to write your pitch. Arrington hearts good writing and catching intros. Sometimes all it takes is one great sentence."

Who doesn't like good writing? So much about building a startup is selling your vision. The better you are at doing that in person and on paper, the more likely you'll be successful. But don't trade your ability to articulate your vision for the ability of a professional scribe to do so. If you can't pitch your own business anywhere, any time, any how, you will not succeed.

4. "Minimize the chitchat. 'it's not like we're going to be BFF,' [Mike] says, 'Just get to the point.'"

This is where Mike and I may differ. Mike is going to talk with you long enough to understand what you're building so that he can write in an informed way about your business. But that's about it. He doesn't need to be your BFF. On the other hand, if a VC funds you, he or she could be working with you for the next decade and beyond (My partner Dave has been on the Microsoft board for 25 years -- after that much time, Gates is legitimately one of his BFFs). So the "chit chat" is important. We don't need to be your BFFs, but we do need to feel that we can have a great working relationship with you for many years to come.

5. "Then back off. If he doesn't respond, don't 'check in' again and again. He's just not that into you. Come back when you have a better idea."

This one is a delicate balance. I agree that Mike doesn't want to be bugged by an entrepreneur when he decides not to write about that business. The same is true to a point with the venture community. "No" really does mean "no" when a VC passes on investing in your company. And arguing the point will do you little good. On a number of occasions, I have passed on investing in a company only to get an angry response from the entrepreneur explaining to me why I was wrong to do so. Even if the entrepreneur is correct, that tactic will not likely get him or her funded. On the other hand, there are two sorts of "No's" in the VC community -- there is the "no, I am not interested in investing in your company" and there is the "no, I am not interested in investing in your company ." I will often say that I am not interested in investing in a company because of X, Y or Z, but if they make progress on any of those fronts, I'd love to hear the story again. When I hear back from those entrepreneurs it is very much welcomed. In fact, on more than one occasion, I have passed on the company in the first instance, only to give them a term sheet at a later date. So don't make a pest of yourself, but don't be sheepish about being persistent when the door is left open.

Well, I guess I've come to the end of this unruly post. Thanks for slogging through it. I hope it's useful. And I hope I haven't crossed the "fair use" line with Wired. I really have tried to use no more of their original article than necessary for my commentary (you worry about these things when you teach IP Law). Thanks to Wired for occupying my long plane flight and giving me such useful food for thought. I look forward to my next journey when I can again catch up on my magazine reading.

(Pop Quiz! Ok, I know I said there wouldn't be a quiz at the end of this post, but since you made it all the way through, don't you want to test your comprehension skills? Here's the question. Who is one of my partner Dave Maquardt's BFF's? :) Answer below in the comments.)

Raising Venture Capital: How Much Money Matters

After watching a bazillion venture pitches, I've come to the conclusion that every VC Pitch should end the same way -- with the ask. If you want to crescendo into it, feel free to summarize why it is your technology is life changing, but finish with the ask -- "we are looking to raise six million dollars." Don't beat around the bush. Come right out and ask for the money. After all, that's what you're there for.

There are a number of reasons VCs want to hear what you're raising. And it isn't just the obvious one. Yes, it is helpful to know how much money a company is hoping you will invest. But there are other more valuable pieces of information that come out of the ask.

First of all, the amount of money you are raising is a good general indicator of how much you think the company is worth. I was in a pitch once learning about pretty interesting but pretty early stage technology. From where I sat, it seemed to me that the company could use single digit millions to take the technology to the next step. Yet, when we got to the slide that stated how much the company was raising, I learned that they were hoping to raise more than $50M. By my assessment, $50M would buy the vast majority of the company. Clearly the company felt differently -- they were hoping to sell closer to 20% of the company. It certainly refocused the conversation on what the company felt was the justification for such a high valuation and led to a very interesting discussion of the underlying economics of the company's business.

The thing I find most interesting about how much money a company is raising is not the actual number itself, but rather the conversation about how the company arrived at that number. What is interesting to me is what the company plans on doing with that money? What are the milestones the company can reach with that much money? Could they do it for less? What would they do if they had more money?

For me, the right question isn't "how much money do you want to raise?" The right question is "how much money should you raise?" Ask some entrepreneurs and they will tell you, the right amount of money to raise is as much as they possibly can (some recent monster financings suggest that strategy). That makes no sense to me. The right amount of money to bring into the company is enough to reach sufficient milestones to raise more money at a higher price at a future date (or, in some rare cases, enough to get to cash flow positive). If all goes well, the money I invest will be used to drive all sorts of risk out of the business, enabling the Company to raise the next round at a much higher valuation.

Figuring out the right amount to raise is more art than science but can have a big impact on the Company. If you raise too little money, you may run out before you have proven the business sufficiently to raise additional capital. In other words, raising too little money can be fatal. On the other hand, if you raise too much money early on, you could well be selling off too much of the company for too little capital. Companies should leverage early stage venture money to drive up the value of the company (by proving out as much of the business as quickly as possible), so that the next time the company fundraises, they will be able to bring in larger amounts of money while suffering smaller amounts of dilution.

Unfortunately, the perfect amount of money to raise is not always obvious. So the question isn't whether a company is raising the "right" amount of money. The question is, "why is the company raising the amount of money it is raising?" A great deal can be learned about a company from their answer to that question. So when you go out to raise money, be prepared to not only answer how much you are hoping to raise, but also why?

Know Your Competition

I was recently being pitched by a smart team of guys who are building an interesting business in the digital music space. The team has great domain expertise and plenty of credibility as entrepreneurs who have built a number of related businesses in the past. They were doing a nice job of selling the opportunity . . . until they got to the competition slide.

I have noticed that often times when I am pitched on a business, the competition slide is treated as, at best, a necessary evil. It's in there because it is "supposed" to be, but not much more. Sure, I've seen some really creative ways entrepreneurs have found to place themselves alone in the upper right corner of a 4X4 matrix. And I've heard -- perhaps more often than is merited by reality -- that there isn't any competition. But I rarely get a thorough assessment of how others are approaching the opportunity and how the pitching team is meaningfully differentiated.

So why should you focus on the competition? Isn't that just unnecessarily opening yourself up to questions about your business that may not otherwise be raised? Shouldn't you focus on your own business and its powerful attributes and not on the competition? Sure, the glories of your own product and strategy should be the centerpiece of your presentation, but the competition slide gives you a unique opportunity to show how smart you really are about the market you are attacking. Great entrepreneurs eat and breath the space in which they are building their business. And they don't just internalize their own market strategy, they watch every move the competition makes.

How do you know a great entrepreneur when you meet one? Great entrepreneurs would do a better job running the competition than their competitors are doing. They can tell you not only the ways in which their strategy is better than their competitors', but also the ways in which their competitors have created the very opportunity that they are exploiting. There is nothing more credibility building during a presentation than doing a great job of answering questions about the competition, and nothing more damning than doing a bad job.

My advice to any entrepreneur -- learn as much as possible about the competition. Not just because you'll do a better job of pitching your company, but because you'll do a better job of running your company. And, in the end, that is what ultimately matters the most.

No Adjectives Please!

I was having breakfast this morning with Salil Deshpande from Bay Partners (now at Bain Capital Ventures). Salil and I were talking about assessing company progress and how best to measure that progress. Salil invests in super early-stage deals and has his companies report to him on their progress on a frequent basis. He said that he had one CEO who would report on his progress in such florid language that eventually Salil had to forbid his use of adjectives in his progress reports. Salil said that he didn't want to hear that things were going great. He wanted to hear precisely how things were going.

I nearly jumped out of my seat. Salil had articulated one of my biggest pet peeves when it comes to company pitches (and board meetings for that matter). I hate adjectives. I don't want to hear that one of the company founders is a "fantastic sales exec." I want to hear that she was Presidents Club the last twelve years running. I don't want to hear that the product is "revolutionary and paradigm-shifting." I want to hear about the specific features of the product that are differentiated and how. I don't want to hear that the company has "massive market traction." I want to see a graph of progressive quarterly sales and a giant sales pipeline.

Adjectives are not convincing. Facts are convincing. I may not agree with the conclusions a company draws from those facts. But I will at least be in a position to appropriately assess those conclusions. Whereas adjectives are all about conclusions without the underlying facts. As an entrepreneur, you are far better off having me determine that your market is "massive," your founders are "brilliant," and your product is "elegant," than to tell me that your company has "an elegant solution serving a massive market designed by brilliant founders." So reread your pitch and remove all of the adjectives. It will go massively, monumentally, gargantuanly. colossally better that way.

Pitching a VC -- The Basics Revisited

When I first started writing VentureBlog, I used to talk a lot about entrepreneurship. At the time, not a lot had been written about pitching VCs or the Venture Capital process, so there was lots of virgin territory. Since that time, dozens of VCs have started blogging and much has been said about what it takes to get a VC down the isle. Bits and pieces here and there -- a good Google archeologist can pull it all together. But having spent the week pontificating about PowerPoint and the likes, I've decided to take one more swing through the basics of pitching a VC.

As I thought about the process of pitching a business, it struck me that no matter what the stage, the information was essentially the same. A good elevator pitch contains the same content as a good executive summary contains the same content as a good PowerPoint contains the same content as a good business plan. The distinction among these business descriptions is not the substance, it is the degree to which the essential elements are fleshed out. Each document contains slightly more detail than the preceding.

Elevator Pitch --> Executive Summary --> PowerPoint --> Business Plan

This makes good intuitive sense. There is no reason that the things that are most compelling about your business would change based upon the nature of the business description. Nor would an investor be interested in different things by virtue of the form that description takes.

What, then, are the essential elements that make up a good PowerPoint, a persuasive elevator pitch, a compelling executive summary? I have no doubt that VCs will differ somewhat on the precise list, as well as the order and the emphasis. But at its core, I believe that a successful business description should include the following elements:

1. Introduction
2. Team
3. Product
4. Market
5. Business Model
6. Competition
7. Financials
8. Conclusion

If you are pitching a VC, start with these 8 slides. If you are writing an executive summary, start with these 8 headings.

Obviously some businesses will require additional information that is outside the scope of these basics. I am not suggesting for a second that you should always pigeonhole your business into these categories alone. But they are a great starting point from which to build a persuasive description of your business.

Entrepreneurship for Lawyers

I was recently reading some old posts on Venture Blog and couldn't believe how short they were. One might call them pithy. Or one might also call them lazy. Either way, they were short. I should really try that again.

I have been teaching a class at Harvard Law School this winter semester called Venture Capital and the Technology Start-up with John Palfrey, the Executive Director of the Berkman Center. It is really fun to be back at the law school and working with John. I have been blown away by the energy that the law students are bringing to the topic of Entrepreneurship and Venture Capital. Sadly, I never had a VC or Entrepreneurship class in law school. Lets see, I had torts, contracts, criminal law, federal courts, administrative law, property, intellectual property, corporations, securities regulation, constitutional law . . . but no entrepreneurship. Then again, I don't know that I would have had the sense to actually take a VC or Entrepreneurship class back then. So its presence would have been wasted on me.

Today my students had to actually pitch business ideas to real live VCs from the Boston area. And they did a great job. As I was discussing with them how to think about company building and pitching, it struck me that much like the law, building great companies is all about applying precedent. Only, instead of the applicable precedent being case law in this instance, the applicable precedent is a business case. Pitching your business is all about finding the right business analogs and describing how they apply to the company you're building (e.g., "we're the Amazon.com of funeral supplies."). That isn't so different from finding the right case analogs and describing how they apply to the lawsuit you're defending. So there may be hope that we lawyers are able to figure out this entrepreneurship stuff yet.