Author: Tom Koor

Tom Koor

Focus your project on user and customer value achievement

Focus your project on user and customer value achievement

The two-fold purpose of this article is to:

  • Enable boards of directors and CEOs to better assess projects and potential project success.
  • Enable those preparing project presentations and business cases to increase the success of project success.

Projects which succeed in enabling users/customers to achieve value have a greater potential of achieving revenue and profits.

Looking back over the past 40 years, many, perhaps most, of the project presentations and business cases that I have led or have seen contained major flaws, which led to reduced or no benefits. The following outlines my current thinking, based on observations of countless initiatives and research.

You may download a PDF of this article from: Focus your project on user and customer value achievement

What is a customer value achievement project?

  • Create a sustainable scaling product/service which profitably enables users/customers (e.g. users are people doing searches on Google, customers are people paying money to advertise on Google) to achieve value in a changing competitive environment.
  • Many projects will not succeed, especially those innovating with new target users/customers, new user/customer problems, new channels, new partners, etc.

How to read this article

This article outlines the different components of the project starting with the oral presentation.

 The project has three phases

  • The startup phase, which concludes with the determination that there are a sufficient number of potential cash paying customers to create a scalable solution. Many projects will be terminated before this phase completes. The initial capital approval will be at most to complete this phase. Additional capital may be required during this phase, depending upon what is learned.
  • The getting ready to scale phase concludes with the business having the talent and cost-efficient scalable resources and activities in place. Additional capital approval(s) will be required for this phase.
  • The scaling phase, focuses on increasing the number of distribution channel and partners, combined with marketing and sales investments. Additional capital and resources may be required.

 The 20-minute oral presentation of your project

The purpose of the oral presentation is to demonstrate the leader’s:

  • In depth understanding of the project.
  • Ability to communicate complex ideas and concepts in an easy to understand manner.

The leader’s oral presentation will have 10 sections.

  • What is the problem and who has it (target users/customers)?
  • How will the users/customers see and achieve the benefits of your solution?
  • Why is now the right time to do this project?
  • What is the size of the market i.e. how many users have an urgent need and how much customer would be willing to save money?1
  • What is the product and/or service you are going to create?
  • Who is the project team and what is their relevant experience? The team may include advisors, consultants and partners.
  • What is the business model? e. how you are going to get users/customers and how will you make money?
  • Who is the competition and how are you unique?
  • What are the financials i.e. 24-month cash flow forecast by month as well as years 3-5 by year.
  • What are you asking for to launch the first phase of the project?

The outcomes of the project leader’s oral presentation

The main outcomes of the project leader’s oral presentation are that the audience will:

  • Support sending the project onto due diligence.
  • Have trust and confidence in the leader.
  • Have a clear understanding of who the users and customers will be, their urgent problems and needs, and the potential revenue from cash paying customers.
  • Know how the solution will meet the customers needs and problems.
  • Understand why users and customers will prefer this solution to the competitions.
  • Have confidence that the leader and her team have the relevant skills, and plans to close any skill gaps.
  • Trust that the leader will carefully manage the capital and resources based upon seeing a 24-month cash flow forecast, by month.
  • Understand that the initial project stages will consist of a series of experiments, prototypes, pilots, and phased releases reflecting the requirement to constantly validate user/customer problems as well as what the customer is actually willing to pay for.

The due diligence done on the project

The due diligence will include: review of material, calls/meeting with customers, and potential customers, calls. meetings with team members, and in-depth Q&A sessions with the leader and team. The written material for due diligence is in an online data room.

The outcome of due diligence is an IM (Investment Memo) which is the  recommendation as to whether or not to proceed.  The IM is based on the information provided by the project, information collected by the due diligence team, and due diligence team analysis and judgement.

The written material in the data room will include:

  • Who are your target user/customer segments? What is the user/customer market size?1 How did you validate your assumptions?
  • What is the customer’s perceived value proposition of your solution? How are you different from, and better than, the competition?  The value proposition includes all of the customers’ costs and benefits associated with adopting your solution, which includes any transition costs from existing solutions.
  • What are your customers’ expectations of their relationship with you? g., if it’s a software product, how often will there be updates with new features?  How easy will it be to install a new version?  Will customer service be a chatbot or a live person? Etc.
  • What will be your channels to the customer?
    1. Communications channels with potential customers?
    2. Sales channels which result in a sales transaction?
    3. Logistics channels which deliver the product or service to the customer?
  • Who are your key partners? A partner is more than a channel. A partner may be: enhancing your credibility due to their reputation; adding value to your solution due to their resources; or enabling you to close sales.
  • What are the key activities? Which processes and actions are required to manage partners, channels, and resources in order to enable customers to achieve their value proposition.
  • What are the key resources to enable customers to achieve their value proposition? These include: intellectual property, technology, people, contracts, financial and physical assets.
  • What is the cost structure to create and deliver the value proposition?
  • What are the revenue streams? These could include: subscription-based per person per month, free for a basic service, with multiple tiers of extra services with fees, etc.
  • What’s the talent required for the project? What are the gaps and your plans to address the gaps?  What are the project team member descriptions and how are their skills, experience, and network relevant to this project?
  • What is the 24-month cash forecast, by month, showing key milestones and accomplishments.
  • The oral presentation deck. Designed to support the oral presentation. Lots of visuals, with few words.
  • The written presentation deck

Ongoing project reporting

The following reporting is ongoing from startup through to the business scaling the solution

The written report will include:

  • New customer value achievement leading indicator (e.g. for Slack it was 2,000 team messages sent within 60 days).
  • New customer success metric (e.g. % of new customers achieving new customer value achievement indicator within 60-90 days).
  • Net Promoter Score.2
  • Customer churn.
  • Customer retention.
  • Customer acquisition costs.
  • Lifetime customer value.
  • Issue and problems – there are always problems and issues
  • What help is needed – help is always needed
  • 24-month cash flow forecast – actuals vs plan

There is a monthly review meeting 100% focused on issues, problems, and the asks for help.  The written report is distributed and read prior to the meeting.

Any requests for additional capital will require an updated Investment Memo,

Startup Phase

The additional reporting in the startup phase reflects that there may be many experiments, pilots/prototypes, and a series of evolving revenue generating solution, until the project determine whether there is a solution which meets the cash spending demands of a large enough number of customers and the needs of enough users.  What’s being done is often inefficient and even manual.

Reporting reflects what is being learned, what assumptions are validated or invalidated and what new assumptions are being made.

Getting ready to scale phase

The additional reporting in this phase is now focused on the efficient gaining of users/customers and the profitable meeting of their needs.  (e.g. The onboarding process in the startup phase may have had the CEO call each person who signed up on the website within 30 seconds.  This will be impractical in the long term) The reporting will reflect the talent, process, and technology changes required.

Scaling phase

The additional reporting will reflect the learnings and associated metrics arising from: new geographies, new distribution channels, new partners, etc.

Your next steps

  • Document your current project approval and project management process.
  • Compare your current situation to what I’ve outlined above.
  • Identify the critical improvement requirements and related assumptions.
  • Begin piloting the revised project approval and project management process to validate your assumptions.

 Footnotes

1 Market size

What is TAM (Total Addressable Market)?

  • What would be the project’s revenues with their future solution if 100% of the customers demanding a solution to their problem bought the project’s solution. This assumes all potential distribution channels and partners
  • There is a critical difference between customer needs and customer demands. Customers have a large number of needs.  Demand is customers deciding that they will spend time, effort, and money to get a solution for what they believe is an urgent need.  Often this means that customers will spend less money to meet other needs.
  • Is the project’s TAM large enough to launch and grow the company? For example, the global smart phone TAM is huge, but the global TAM for smart phones that have a keyboard is tiny.
  • The best way to calculate TAM is with a bottom up calculation, starting with a clear description of the target customer segment, its needs, and then considering the subset of customers who will actually provide revenue, and the revenue per customer. Recognize not everyone in every country will be able to afford the solution.

What is SAM (Serviceable Addressable Market)?

  • This is the portion of the TAM that is within the reach the project’s distribution channels and partners, and your ability to deliver and support your solution. Geography may be a constraint. This still assumes 100% market share of those customers demanding a solution. SAM will change over time, as growth occurs in geography, the number of distribution channels and partners, and the volumes from each distribution channel and partner.
  • How will customers connect with the startup?  If they are seeking a solution, how will they find the project?  How will the project make customers aware of the solution?

What is SOM (Serviceable Attainable Market or Share of Market)?

  • SOM will be lower than SAM for two reasons: there will be competitors, and every customer who is demanding a solution may not actually buy a solution.

TAM, SAM, and SOM will vary at different points of the 5-year forecast.  TAM, SAM, and SOM will also change as the project validates assumptions by progressing through: initial assumptions, customers interviews, feedback from prototype in customers hands, feedback from initial revenue producing customers, feedback from MVP (initial revenue producing customers who are delighted from the initial set of value they achieve from the solution), customer feedback as solution capabilities are enhanced to provide value to a greater set of customers, etc.

2 NPS (Net Promoter Score) The single most important question is asking  “Would you recommend our solution to others?”  (Follow on questions could be “If so, why?  If not, why not?”) This metric is known as NPS.  What is your NPS? Above 0 is good. Above 50 is excellent. Above 70 is world class. How do you compare to your industry and competitors? What has been your NPS trend?

The Net Promoter Score concept was initially developed by Bain.  The following is a link to the Bain website homepage for Net Promoter Score, which contains several short articles:

http://www.netpromotersystem.com/about/why-net-promoter.aspx

The following is a quick overview of using Net Promoter Scores:

https://www.forbes.com/sites/shephyken/2016/12/03/how-effective-is-net-promoter-score-nps/#1b1391b423e4

 

 

 

Tom Koor

Can your CEO pass this simple startup investor test?

The two-fold purpose of this article is to:

  • Enable CEO’s of established revenue generating companies to identify some potential survival issues.
  • Enable startup founders to assess if they have some deal-killer issues from an investors point of view and from a survival perspective.

You may download a PDF of this article from:  Can your CEO pass this simple startup investor test

Investors, advisors, the board of directors, employees, and others may already be aware of the CEO/founders issues.  This process is intended to increase the CEO/founder self-awareness.

The following are some questions that you can ask the CEO in a 20-minute period.  The questions are those that some investors use to screen out in a quick phone call early stage companies seeking funding.  These questions are known as deal-killers. Individual investors will have various deal-killer issues.

If the existing company has more than one business unit, with different target users/customers (e.g. users are people using Google to do searches, customers are people paying Google to advertise), then the question should be asked of the business unit leader.  The questions can also be adapted for internal users/customers

Deal-Killer Questions

The following questions are those investor deal-killers for a pre-revenue company.  The questions are valid for any stage and size of company. When asking your CEO these questions, remember that much of the actual work and  analysis may have been done by others in the company.  These questions identify if that work has been done and the degree of the CEO’s understanding.

  • Who are the target users/customers and what are their urgent problems or needs?
  • How did you calculate the market size? Number of customers, users, and revenue if you had 100% market share with all possible distribution channels and partners?  Number of customers, users, and revenue if you had 100% market share using your initial or current distribution channels or partners?  What is your initial or current market share, recognizing that not everyone will actually buy, there will be adoption rates as well as competition.
  • How many potential customers did you interview to validate the assumptions above and what did your learn from your interviews? What did you do differently as a result of your learnings?
  • Can your solution easily be duplicated or copied by other companies? What is unique and hard for others to copy?
  • Would you be willing to step aside, if necessary, for another CEO? If so, why?  If not, why not?

How do the questions address deal-killer issues?

The deal-killer issues I use are:

There is not a large number of people with a problem or need they are willing to spend money on.

  • If the market size isn’t large, then investors are not interested.
  • Many startups merely copy a few numbers from consulting report and don’t do their own bottom up analysis supported by potential user/customer interviews.
  • Existing companies must do ongoing user/customer interviews, and surveys to understand the changing user/customer needs as well as user/customer perception of your company’s solution relative to competition.
  • This insight is provided by questions 1,2,3,4

The CEO/founder is not coachable.

  • Some signs that a CEO is not coachable include: They always think they’re right and don’t possess the ability to self-reflect; They are not willing to experiment, learn new things and are not open to change; They are arrogant about their intellectual prowess; They usually are rolling eyes during constructive criticism; They have answers to every question without even questioning the logic of their answers; They react negatively to any constructive criticism; and they are disrespectful of others and/or others’ opinions.
  • Being coachable means: being open to radical changes; when getting constructive criticism, they ask themselves “What can be the benefit of this feedback to me and what is there for me to learn from this feedback?”; They are comfortable acknowledging their ignorance and are willing to do the work in order to fill the gaps in their knowledge.
  • They need to be coachable because they need to learn from users/customers, advisors, investors, distribution channels, partners, and others in order to change their behaviors and actions in an environment where unexpected change is a constant.
  • This insight is provided by question 4.

The solution is easy to copy and duplicate or is already a common commodity solution.

  • Investors seek what is both unique and hard for competitors to copy.
  • New technology and new intellectual property may be hard to copy.
  • There are markets where all solutions get copied, thus the key actions are: understand the user/customers better than the competition; enable users/customers to obtain value quicker than the competition.
  • This insight is provided by question 5.

 The CEO/founder is unwilling to step aside, if necessary, for another CEO.

  • The majority of startup CEOs/founders will end up stepping aside (either voluntarily or forcibly). Few CEOs are like Bill Gates, able to change and learn as they take a startup to a massive global company.
  • CEOs need to understand that they are in place to meet the needs for a point in time (and the next 24 months) and that in 24 months time, they may not be the right person.
  • A CEO who refuses to recognize this will impact the value of any investment, plus result in a painful and costly CEO exit. The CEO may not be enabling the development of a pool of qualified successors, both short-term and long-term.
  • This insight is provided by question 6.

Your next steps

If you are a startup CEO/founder:

  • Ask one of your trusted: investors, potential investors, advisory board members, board directors, or advisors to prepare their 4-5 deal-killer questions, which may be different from what I suggested.

If you are the CEO of an established revenue generating company:

  • Ask one of your trusted: investors, potential investors, advisory board members, board directors, or advisors to prepare their 4-5 deal-killer questions, which may be different from what I suggested. If you are a public company do not ask: investors, potential investors, or bord directors.

In either case:

  • The reason for a trusted person is the assumption that the CEO/founder will listen to and think about the feedback.
  • You should know the questions in advance.
  • You will be probed and asked for the logic and/or proof of your answers. Opinions, guesses, and hopes are of little value.
  • You will have a 20-minute discussion, in which you’ll be asked the questions. The discussion will be recorded.
  • The trusted person will review both their notes and the recording to set down their observations. The recording will then be destroyed.
  • The trusted person will then share their observations with you.

The implications of the constructive criticism observations:

If you are a startup CEO/founder:

  • The CEO/founder is not coachable. Investors will likely decide to not invest or continue investing.  Advisors will likely decide to not be involved, because there is little value and impact from their time investment.
  • There is not a large number of people with a problem or need they are willing to spend money on. If this is a result of logical, fact-based analysis, the investors will decide if the market size still warrants an investment.  If the CEO/founder is bootstrapping, the CEO/founder needs to determine if the potential warrants continuing.  If there has not been sufficient logical fact-based analysis of the target market, the CEO/founder may be coached on how to address this.
  • The solution is easy to copy and duplicate or is already a common commodity product. The CEO/founder will focus on how she will successfully compete against both current and future competitors. Investors will likely not invest.
  • The CEO/founder is not willing to step aside, if necessary, for another CEO. The CEO/founder will require coaching, assuming the CEO/founder is willing. The willingness may also come about when the startup runs into difficulty or when investors require a new CEO in return for funding.

If you are the CEO of an established revenue generating company:

  • The CEO is not coachable. The external environment (customers, competitors, technology, regulation, etc.) is transforming at an ever-increasing pace.  An uncoachable CEO, who cannot learn from others and continually transform themselves is dooming the company to eventual failure. Investors and the board of directors will sooner or later (unfortunately often later) make the decision to exit the CEO. /Advisors will likely decide to not be involved, because there is little value and impact from their time investment.
  • There is not a large number of people with a problem or need they are willing to spend money on. If this is a result of logical, fact-based analysis, the CEO needs to fundamentally rethink the target market and the solution.
  • The solution is easy to copy and duplicate or is already a common commodity product. The CEO needs to understand the logic and facts as to why the company has been successful in this environment, what needs to continue, and what needs to be transformed for continued success.
  • The CEO is not willing to step aside, if necessary, for another CEO. The CEO/founder will require coaching, assuming that they are willing. The willingness may also come about when the company runs into difficulty or when investors require a new CEO in return for funding. Investors and the board of directors will take actions to ensure that qualified successors are available.  The investors and board of directors will also prepare and maintain an exit plan for the CEO, which may be triggered at any point.
Tom Koor

Traditional strategic planning dooms companies to failure.

The purpose of this article is two-fold:

  • Help traditional companies succeed when faced with successfully growing startups.
  • Help startups succeed when competing against traditional companies.

You may download a PDF of this article from: Traditional strategic planning dooms companies to failure

What is traditional strategic planning?

Wikipedia (April 20, 2020 definition)

Strategic planning is an organization’s process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy.  Strategy has many definitions, but generally involves setting strategic goals, determining actions to achieve the goals, and mobilizing resources to execute the actions. A strategy describes how the ends (goals) will be achieved by the means (resources).

Advice from strategy advisors

The following are some example of the advice from advisors regarding strategic planning.  Remember, it is up to the boards of directors to approve the strategy and for the CEO and management team to execute.

McKinsey Article “How to Improve strategic planning”1

  • Start with the issues. g. ask CEOs what the issues are, ask CEOs what the 12-month priorities are, interview middle and lower management to identify the issues.
  • Bring together the right people.
  • Adapt planning cycles to the needs of each business.
  • Implement a strategic-performance-management system.
  • Integrate human-resources systems into the strategic plan.

BCG (Boston Consulting Group) article  “Your strategy process needs a strategy” 2

There are five broad approaches to strategy:

  • Classical – analysis, planning, and execution
  • Adaptive – continual experimentation and scaling up of what works. General Electric was the example of a company adopting an adaptive strategy in 2011. I observed that GE’s adaptive strategy took 2011 revenues of  $146.5 billion and profits of $13.1 billion to 2018 revenues of $121.6 billion and a loss of $22.8 billion.
  • Visionary – use of imagination to create a game-changing product, service, or business model.
  • Shaping – collaboration in environments that are simultaneously unpredictable and malleable.
  • Renewal – execution of necessary radical changes when the environment is harsh or there has been a protracted mismatch between the firm’s strategy and its environment

My observations of traditional strategic plans

  • They are inwardly focused and driven by financial objectives set by the board.
  • Limited facts regarding how users/customers behave and perceive the company. However, there are lots of opinions and anecdotes.
  • Significant time is spent on vision and mission.
  • The bulk of the effort is on allocating financial resources.
  • The implicit assumption is that only need to improve what worked last year.

 What are the results of traditional strategic planning?

Few companies survive

Most public companies will not survive. 3

  • A Fortune 500 company will survive an average of 16 years.
  • The typical half-life of a North American public company is 10 years.
  • Global public companies with $250 million+ market cap have a typical half-life of 10 years.
  • 50% of all U.S. companies survive for 5 years.

 Few companies generate significant value.

  • McKinsey analyzed the world’s 2,393 largest corporations from 2010 to 2014. The top 20% generated 158% of the total economic profit (i.e. profit after cost of capital) created by those corporations.  This was an average economic profit of $1,426 million per year. The middle 60% generated little economic profit, an average of $47 million per year. The bottom 20% all generated negative economic profit, with an average loss of $670 million per year.4
  • Mark Leonard, CEO of Constellation Software, said in his final annual CEO letter. “Qualified and competent Directors are very rare, and not surprisingly, the track record of most boards is awful. According to the 2017 Hendrik Bessembinder study of approximately 26,000 stocks in the CRSP database, only 4% of the stocks generated all of the stock market’s return in excess of one – month T-Bills during the last 90 years. The other 96% of the stocks generated, in aggregate, the T-bill rate over that period. This means that 4% of boards oversaw all the long-term wealth creation by markets during that period. Even more disturbing, the boards for over 50% of public companies saw their businesses generate negative returns during their entire existence as public companies.” 5

What is the approach used by successfully growing startups?

  • Focus on a target market with a large number of potential users and cash paying customers. e.g. people doing Google searches are users, people paying for ads are customers.
  • Making assumptions regarding users/customers, based on research. These assumptions include: the number potential customers with urgent needs they are willing to pay for, the benefit to the users/customers if their needs are addressed, the degree to which the benefit is greater than the current situation and the benefit achieved from competitors, and the price the customers might be willing to pay.  Document your assumptions regarding the users/customers value propositions.6
  • The most critical part of understanding is interviewing potential users/customers. This may range from 100 to 300 potential user/customer interviews.  This also provides validation that the potential users/customers believe the solution provides more value that the competition. Note that interviewing is very different from sales calls.
  • Quickly create a minimal solution and get it into users/customer hands. Keep experimenting and changing the initial solution until there are a group of delighted users/customers. Then start charging customers. At this point the solution delivery and sales process are not cost-efficient. At this point the startup doing things that do not scale.
  • Continue experimenting in stages, expanding the solution to meet a larger subset of the target users/customers, and growing the number of paying customers. The solution is still not cost efficient.
  • Implement user/customer focused metrics. There is a never-ending process understanding user/customer needs and measuring user/customer delight relative to the competition. Remember what happened to Blackberry – the number of people who needed keyboards on their phones disappeared.
  • Determine when the solution has reached the point of being able to delight the full scope of target users/customers.
  • At this point, make the solution delivery and sales processes cost efficient and rapidly grow the company.
  • Keep exploring and experimenting with new types of users/customers, new distribution channels, and new partners.
  • Resource allocation decisions driven by fact-based metrics on what large numbers of users/customers perceive as valuable. I recall reading a quote from Google’s CFO, when meeting with a product team. “Why aren’t a billion people using this? If there are a billion people using this, why aren’t we making money?”
  • The sales process is designed based on understanding users/customers and enabling them to achieve value. Most traditional sales processes are designed to sell a solution.
  • The investors, board of directors, advisory board, coaches, and mentors have skills, experience, and networks which the founders and management team lack. The founders and management team have a passion to learn and change.

Why do successful startups doom companies with traditional strategic planning?

Successful startup have a combination of factors driving long-term success while traditional companies with traditional strategic planning have a combination of factors driving long-term failure.

  • They constantly document their key assumptions and validate or invalidate those assumptions. Tradition companies don’t document their key assumptions and don’t constantly validate them, which inevitably leads to crises . “The assumptions on which the company has been built and is being run no longer fit reality.”7
  • Their investment decisions start with and are focused on enabling customers to meet urgent needs. Traditional strategic planning often starts what the company’s opinions and needs are e.g. financial objectives, vision, mission, etc.
  • They have ongoing measurement of how users/customers are achieving value. Traditional strategic planning lacks these facts.
  • They have ongoing measurement of how users/customers perceive the startup relative to competition. Traditional strategic planning lacks these facts.
  • They explicitly assume is that user/customer needs and the competition are constantly changing. Traditional companies assume that change is limited.
  • They are constantly conducting experiments with users/customers, channels, and partners to learn what is valuable to change and what isn’t. Traditional strategic planning is focused on a small number of large projects. Traditional companies don’t have a culture that enable and supports the fact that most experiments fail.
  • They have a passionate curiosity and desire to learn.
  • They minimize what they have to invent by drawing upon proven solutions which don’t impact the user/customer perception of competitive value.
  • They have investors, board directors, advisors, and coaches which provide skills, experience, knowledge, and networks the startup lacks. Traditional companies have board directors who lack skills, experience, knowledge and networks that company management lacks or is weak in.

The external environment has also changed dramatically, enabling startups to take customers from traditional companies.

  • There is unlimited capital (e.g. at least $1.5 trillion of uninvested private equity capital) available to fund startups and rapidly growing early stage companies.
  • The investors passionately support the concept of experimentation and realize that most experiments will fail and most startups will fail – a very different mindset from traditional companies
  • The investors are focused on picking talented founders and putting in additional value-added talent to support the founders.
  • It fast, easy, and low cost to get the infrastructure needed to launch a company e.g. financial systems, CRM, billing, etc.
  • It’s become easier to connect with potential customers via social media.
  • Customer needs and expectations are rapidly changing.

Your next steps.

If you are a traditional company with a traditional strategic planning process.

Assess your strategic planning outcomes:

  • The trend for your economic profit generation.
  • Revenue and free cash flow growth.
  • Market share growth.
  • New channels, new partners, new types of users and customers.

How does your planning process compare to the above approach used by successfully scaling startups?

What are your customer metrics?

  • New customer value achievement leading indicator (e.g. for Slack it was 2,000 team messages sent within 60 days).
  • New customer success metric (e.g. % of new customers achieving new customer value achievement indicator within 60-90 days).
  • Net Promoter Score.
  • Customer churn.
  • Customer retention.
  • Customer acquisition costs.
  • Lifetime customer value.

What changes to your planning process do you need to start experimenting with and learning from?

If you are a startup

  • Follow the approach used by successfully growing startups.
  • Ensure that your investors, board of directors, advisory board, coaches, and mentors have skills, knowledge, and networks that you lack or are weak in.
  • Start your metrics with assumptions regarding your user/customer value achievement leading indicator and your user/customer success metrics.
  • Once you have revenue paying customers, start with customer churn and customer retention metrics.
  • Understand your customer acquisition costs and lifetime customer value. You’ll need this understanding to make your startup efficient and scalable later on.

Read the research supporting the value of experimentation in the Further Reading section below

  Footnotes

1 Renée Dye and Oliver Sibony, “How to improve strategic planning”, McKinsey Quarterly, August 2007, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/how-to-improve-strategic-planning

2 Martin Reeves, Julien Legrand, and Jack Fuller November 14, 2018 BCG website, https://www.bcg.com/en-ca/publications/2018/your-strategy-process-needs-a-strategy.aspx

3 “Corporate Longevity”, Credit Suisse, February 7, 2017

4 Chris Bradley, Martin Hirt, and Sven Smit, “Strategy to beat the odds”, McKinsey Quarterly February 2018, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/strategy-to-beat-the-odds

5 https://battleinvestmentgroup.com/effective-directors/

6 https://koorandassociates.org/understanding-customers/what-is-a-value-proposition/

7 Peter Drucker, Harvard Business Review, November 2009, Page 90

Further reading – Research supporting the value of rapid learning and experimentation

The Marshmallow Challenge is to build the largest freestanding structure with a marshmallow on top and using 20 spaghetti sticks, one yard of tape, and one yard of string.  This is done in small teams.

  • MBA students build structures with an average height of 10 inches.
  • Lawyers average 15-inch structures.
  • CEOs average 22-inch structures.
  • Kindergarten students average 26-inch structures.

What’s the difference in behaviour between MBA students and kindergarten students?

MBA students

  • First sort through who is the leader.
  • Then identify and debate options.
  • Then agree upon a single plan.
  • Then build the structure.
  • The final step is putting the marshmallow on top.
  • Very often the structure collapses at this point.

Kindergarten students

  • No time spent determining who is the leader, identifying or debating options, or creating a plan.
  • Immediately start to build something, with the marshmallow on top.
  • Keep experimenting and learning, building multiple structures until the time is up.

Major incentives result in MBA students teams almost always building structures which collapse.

  • Incentives, without the right mindset, produce worse results.

Teams made up of CEOs and executive assistants did better than kindergarten students.

  • Achieved about 30 inches.
  • The researchers have the hypothesis that the addition of a very different skill set: facilitation and process, enabled the CEOs to perform better than they could with only fellow CEOs.

My observations

  • The passion to begin learning and experimenting as quickly as possible is critical when the team is doing something that has not be done before.
  • Understand the range of skills needed. That’s why teams of CEOs and admin assistants performed much better than CEOs alone.
  • Understand when your startup is doing something new and unknown vs something that has been done before with a base of proven knowledge. In the Marshmallow Challenge teams of architects and structural engineers did the best of all because they knew how to design weight bearing structures. Your startup must know what skills, experience, knowledge and networks are needed in management, investors, board of directors, advisors and coaches.  Your startup needs to know where the gaps are, which are critical gaps, and how to close those gaps.  Your startup will also draw upon a broad range of existing proven solutions – not everything needs to ab an innovation.

https://www.forbes.com/sites/nathanfurr/2011/04/27/why-kindergartners-make-better-entrepreneurs-than-mbas-and-how-to-fix-it/#5047f0871394

https://hbr.org/2014/12/innovation-leadership-lessons-from-the-marshmallow-challenge

Tom Wujec’s TED Talk regarding findings from the Marshmallow Challenge

https://www.youtube.com/watch?v=H0_yKBitO8M

Tom Koor

How can restructuring grow value? V2

The purpose of this article is to provide a framework for thinking about restructuring. Any size of company may need to restructure.

You can download a PDF of this article from:How can restructuring grow value V2

What are the different types of restructuring?

Restructuring is much larger change than the day-to-day continuous improvements being made in the company, or the pivoting (i.e. changes to the business model canvas1).

  • Merging with or acquiring a company.
  • Divestiture i.e. selling a subsidiary or major assets to a third party.
  • Spinning of part of the business and assets to create a new standalone company.
  • Changing the legal structure of the business.
  • Changing the financial and capital structure of the business e.g. common stock become worthless, bond holders take a write-off.
  • Turning around the company due to poor performance in the current market place.
  • Repositioning the company to a new marketplace.
  • Reducing costs.

Restructuring is often focused on short-term cost reduction, with workforce shrinkage playing a major role. There is the risk that restructuring addresses short-term issues but does not position the company for long-term value growth and preservation.

What is value?

How is value measured by different people and organizations?

  • Shareholders may look at share prices and dividends. Different shareholders have different expectations and metrics. Angel investors, venture capitalists, short-term hedge funds, private equity, and pension funds look at value differently.
  • Society looks at the value the company is providing to or extracting from society. Some shareholders, such as Blackrock and some pension funds are also starting to look at the value a company delivers to or extracts from society.  A common issue is the impact on climate change.
  • The CEO and C-Suite have very clear measures of value, which are their personal compensation plans.
  • Employees and other stakeholders have their own perspectives on value.

Who and what are the fundamental drivers of the decision to restructure?

  • The board of directors and C-Suite want to transform the company before revenue and profits are impacted. The leadership may perceive future risks.  This is the concept of fix it before it’s broken.  Few companies are this forward looking.
  • To achieve the growth strategy requires closing gaps in: talent, customer relationships, technology, intellectual property, and external partnerships.
  • There are assets (talent, customer relationships, technology, intellectual property, and external partnerships) that are not needed to achieve the growth strategy. These assets may be divested or spunoff.
  • The customers are driving the need to restructure. Customer needs have changed and thus the marketplace is shrinking.  Customer needs for phones with keyboards shrank, resulting in a major impact on Blackberry. Customer needs are changing and there are competitors better able to meet those needs.
  • The company’s debt burden may be destroying profits or the company is getting close to breeching covenants or may have already breeched covenants. Breeched covenants may result in major decision authority residing in third parties.
  • Major shareholders may be driving change. Hedge funds may want a large short term return on their investment.  Pension funds may want climate change addressed.
  • Regulators are driving change.
  • There is the opportunity to make internal changes which do not impact the strategy e.g. changes in legal structure to reduce taxes or risks.

What are the general stages of thinking?

  • The board of directors, CEO, and C-Suite need to have a fact-based description of what is driving the need for change, assess how different types of restructuring will impact the change drivers and impact value.
  • The very first step is to determine if there are the right people on the board and right CEO to conduct this assessment and make the appropriate decisions. For example, a complacent board of directors who have not stayed in touch with the evolving customer needs and market place that resulted in massive losses is clearly not the right talent.
  • The company needs the talent to address the current situation, not the talent that was need in a very different past. Every director and every CEO is not appropriate for any and all situations. The necessary changes to the board of directors and CEO must be made quickly.
  • The board and CEO must agree on the decision-making process. Restructuring may be a rare or unique decision.  The usual decision making process may not be
  • The most critical component of the strategy must be validated: the size of the market place demand and the customer needs.  Market place demand is the number of customers willing to pay to meet their needs.  For example, the number customers with needs for a keyboard based cellphone dropped. The single best measure of the degree to which meeting current needs is the NPS2 (Net Promoter Score).  If your customers are not recommending your solution, then you have a crisis.   The NPS must be supplemented with customer interviews.
  • The board and CEO must agree on the facts and assumptions regarding what is driving the need for restructuring. Any assumptions need to be quickly validated or invalidated.
  • The board and CEO must agree on the restructuring options and impact on the value. There should be a common understanding of what success and value will look like in the future.
  • Then set out the restructuring objectives.  These objectives will be broader than short-term financial targets and consider things such as: reputation, customer retention, employee morale & ability to attract employees in the future, the need for long-term investments, etc.
  • Assign accountability for achieving objectives to specific members of leadership.
  • Assemble a plan, which includes both short-term options (e.g. terminating current and planned consulting projects, eliminating discretionary spending, staff reductions) and longer-term options (e.g. continuing to invest in projects with clear business cases to grow and preserve value, continuing with selected innovation and trials, reviewing and revising the organizational structure.)

Your next steps

Prepare a plan for your specific situation, based upon the above framework.

Footnotes:

1 The business model canvas is the documented story of who your customer is, why they buy from you, and how you make a profit. The story consists of both narrative text and numbers. For futher information go to: https://koorandassociates.org/the-startup-journey/what-is-a-business-model/

2 NPS (Net Promoter Score) The single most important question is asking  “Would you recommend our solution to others?”  (Follow on questions could be “If so, why?  If not, why not?”) This metric is known as NPS (Net Promoter Score).  What is your NPS? Above 0 is good. Above 50 is excellent. Above 70 is world class. How do you compare to your industry and competitors? What has been your NPS trend?  You can find links to more information about NPS in the Further Reading section.

Further Reading

The Net Promoter Score concept was initially developed by Bain.  The following is a link to the Bain website homepage for Net Promoter Score, which contains several short articles:

http://www.netpromotersystem.com/about/why-net-promoter.aspx

The following is a quick overview of using Net Promoter Scores:

https://www.forbes.com/sites/shephyken/2016/12/03/how-effective-is-net-promoter-score-nps/#1b1391b423e4

Tom Koor

Bailouts – the values, morals, and ethical questions.

Many companies and individuals are asking for government bailouts and cash. This raises many values, morals, and ethical questions for the government decision makers:

  • Should employees be bailed out or should cash go to the companies for distribution?
  • How will the government decide which industries and companies will be long term-term survivors? g. will the cruise industry undergo a long-term shrinkage?  Many companies naturally fail each year – should the government keep these going?
  • Should payments to companies keep shareholders and bondholders whole? How much of a loss should shareholders and bondholders take?
  • Should payments to companies be loans with conditions that the loans be repaid before any dividends, stock options, bond interest or bond redemptions occur, any executive bonuses and related long-term compensation?
  • Should payments to companies be conditional on executive compensation reduction?
  • Should the government be funding people to work on long-term infrastructure rather than stay at home?
  • How long will payments go on for?
  • What about the longer-term when the new normal is established? Will taxes go up?  Will we continue to support the very poorest among us?
  • Should the government of Alberta establish a sales tax? Should the rest of Canada support Alberta lower tax regime?
  • Where are the board of directors? Are the directors foregoing their compensation or at least taking major cuts?  Many directors have said that the “tone from the top” is critical.  In this time of mass layoffs and demands for government bailouts are the directors focused on keeping their personal compensation untouched?
Tom Koor

How does a startup communicate with potential investors? V2

The purpose of this article is to outline the various types of messages and information a startup may communicate with potential investors.

You may download a PDF of this article from: How does a startup communicate with potential investors V2

 Communications with potential investors is based on the information pyramid.

The information pyramid outlines the varying types and quantities of information the startup communicates to potential investors.  The top of the pyramid has limited information, with each succeeding layer having more.  A startup has a plan and process for managing this information pyramid with potential investors. The approach varies depending upon the stage of the startup e.g., a founder dealing with friends and family is different from a billion-dollar IPO.

The information pyramid has eight layers:

Layer 1: The one sentence pitch

“My company (company name) Is developing (a defined offering) to help (a target audience) (solve a problem) (with secret sauce).”

The one sentence pitch is further described in this link to the Founder Institute:

https://fi.co/madlibs

Layer 2: The elevator pitch

This 20-30 second summary will enable investors to decide whether to learn more about the CEO and the startup.  The investor decision is based on:

  • The key words include: the CEO’s name, company, solution, target customer, the problem/need being solved, and suggested next steps.
  • How the CEO speaks e.g., does the founder immediately start a one-way broadcast vs first learning about the investor, tone of voice, body language, etc.?

If the investor doesn’t like the founder, chances are there are no next steps.

Layer 3: The pitch deck which supports an oral presentation

This pitch deck is designed to support the oral presentation by CEO to investors. There are lots of graphics and images, with limited detailed information.  This deck is not designed to be read as a standalone document.

Layer 4: The executive summary

The executive summary is a 1-2 page document designed to be read as a standalone document.  This summary contains a broad range of information including: the target customer; customer segments; the customer problem; the solution; business model; sales & marketing strategy; competitors; competitive advantage; financials, etc.

The CEO must clearly, simply, and briefly communicate the most critical points, which will result in an investor wanting to meet and learn more.

MaRS has a document which outlines the creation of an executive summary:

https://learn.marsdd.com/wp-content/uploads/2010/12/The-Business-Plan-Executive-Summary-WorkbookGuide.pdf

The Gust website provides a structure for creating an executive summary.  Gust is an information sharing platform which connects accelerators and angel investor groups with startups. The website also has an automated tool to analyze the executive summary.  .

www.gust.com

Layer 5: The Oral presentation and standalone pitch deck

The oral presentation conveys far more information than the Layer 2 pitch deck. The CEO also has the challenge of building relationships with the investors. During the Layer 4 presentation potential investors are considering: how the founder communicates, their confidence, how questions are answered, etc.  Investors are thinking things such as: Do I want to work with the CEO? Do I trust the CEO?  Does the CEO have a deep understanding of the customers, their problems, and the startup’s solution?

U.S. research shows that investors will spend an average of 3 minutes and 44 seconds reading a pitch deck that has been sent to them.  The deck should be between 10 and 20 pages.  The startup CEO has only a few minutes of reading time to generate interest so that the investor wants to have a meeting to learn more.

Layer 6: The Business model canvas

The business model canvas is the story of who your customer is, why they buy from you, and how you make a profit. The canvas consists of both narrative text and numbers, with assumptions and facts.  On day 1, the canvas may be entirely assumptions – the canvas evolves rapidly as the startup validates or invalidates assumptions.  One page may be enough for the canvas.

The canvas has nine components:

Customer segments; customer value proposition; customer relationships; channels; key partners; key resources; key activities; cost structure; and revenue streams.

Further information on the business model canvas is available at:

https://koorandassociates.org/tools/what-is-a-business-model/

Layer 7: The business plan

The business plan includes details on how the company will be built. A critical part, from day 1, is the monthly 24-month cash flow forecast, with key milestones.  The value of the forecast is ensuring that the startup does not run out of cash.  Many startups underestimate both when revenues appear, and when investors provide capital.

The business plan outlines how the business model canvas will be created, and where the limited resources will be deployed.  The CEO must decide which are must-dos vs nice-to-dos, and what is good enough.

MaRS has a template for a business plan:

https://learn.marsdd.com/article/are-business-plans-for-raising-money/

Layer 8: The data room

The data room contains the documents required by investors for their due diligence. The National Angel Capital Organization has an example of the contents of an online data room:

https://www.nacocanada.com/cpages/common-docs

A later stage startup will require more information in the data room.

Monthly communications with potential investors

The primary focus of many investors is customers and customer engagement.  The question in the investors’ minds is: are there a large number of potential customers that would need to buy a solution.  If there aren’t customers with a problem they are willing to pay solve, there is no viable startup.

The purpose of monthly communications with potential investors is to generate interest so that the investor wants to meet again.  A startup with an ever-growing set of customers generates this interest.  The monthly communications do not and must not answer every possible investor question.  Investors will be getting many of these communications and have limited time.  They may well be reading the update on their phone.

The monthly update has historical customer engagement growth, the milestone(s) achieved in the past month and the milestone(s) for the next month.  This enables investors to determine if you accomplish what you say you will accomplish.  An investor red flag is a CEO not achieving what the CEO said they would in the next month.

Customer engagement at the pre-revenue stage may include:

  • The number of potential customer interviews (these are not sales calls). An investor red flag is not interviewing customers to validate that they have a problem they are willing to pay to solve, and that there are a large number of these customers.
  • Potential customer survey results.
  • Website metrics such as number of people reading specific content.
  • Number of potential customers following your blog, signed up for your newsletter, etc.
  • Letters-of-intent from potential customers.
  • Numbers of potential customers and users in your pilots.

At the revenue stage with a minimum viable product, the key metrics include:

  • The number of cash paying customers.
  • Customer churn.
  • Customer retention.
  • Net promoter score. An investor red flag is if the current customers would not recommend the company.  One investor said they look for startups where the customers are “foaming at the mouth” in enthusiasm for the startup.

This monthly communications to potential investors contains a small subset of the information going out to existing investors.  Send these emails the same day and time each month.

Potential investors have other ways to learn about your startup

The communications the startup is doing with other startup ecosystem members may also end up with potential investors.  These types of communications include: advisor and advisory board updates, board of directors updates, customer and supplier updates, employee updates, website updates, press releases, presentations at seminars and conferences, updates on social media, etc.

The startup ecosystem members may be doing their own communications.  For example, employees posting comments on Glassdoor.

 Your next steps

  • From day 1, start to organize your information in the pyramid.
  • The information and messages will be in different layers of your pyramid. Determine how you will keep your information and messages in sync.
  • You will be communicating with different members of your ecosystem. Determine how you will keep your information and messages in sync.
  • To minimize work and minimize confusion in your ecosystem, seek to re-use information and messages rather than creating content from scratch.

Further reading

“Finding new investors” https://koorandassociates.org/points-of-view/selling-a-company-or-raising-capital/finding-new-investors/

Tom Koor

Finding new investors

The purpose of this article is to outline how a startup can find new investors.

You can download a PDF of this article from: Finding new investors

Building relationships with potential investors is the foundation for raising funds.

What is the source of VC’s (Venture Capitalists) closed deals?1

  • 12% of closed deals resulted from a startup making an application.
  • 65% came from referrals and the VC’s professional network.
  • 23% are proactively self-generated by the VC.

Warm introductions to VCs are the most likely way to result in a closed deal.  A warm introduction comes from someone the VC knows and whose recommendation the VC trusts.

Building a trusted relationship takes time

Investors give money to those they trust.  It takes time for the startup founders to build that trusted relationship.  The founders need to contact investors before they need money is needed, update the potential investors each month, be honest and transparent, and achieve the short-term milestones they said they would achieve.

You will have to contact and meet a large number of potential investors

The statistics for an average seed round raise in a U.S. study were2:

  • 58 investors contacted
  • 40 meetings with investors
  • $1.3 million raised
  • 5 weeks to close.
  • The average pitch deck was 19.2 pages
  • The average time an investor spent to read the pitch deck was 3 minutes and 44 seconds.

There are six ways to connect with potential investors

#1 Introductions from your lead investor

Your lead investor has the reputation of investing in good startups and also knows a number of other startup investors.  Your lead investor will make the effort to draw in other investors.

#2 Warm introductions from someone the investor knows and whose recommendation the investor trusts

The following email template is what you send to the person doing your warm introduction. The only work they need to do is forward your email

A sentence regarding catching up/meeting/talking with your contact.

 One sentence bio regarding a big achievement in your career relevant to your startup.

 Three sentence paragraph about your startup.  Your one sentence pitch.  Customer traction growth plus a milestone or two.  What you’re seeking e.g. seed stage investor.

 One sentence thanking your contact for their introduction to XYZ.

 A paragraph regarding XYZ showing what you’ve learned about them and why they might be interested in your startup.  Ideally you could provide some value to the investor e.g. knowledge or someone they’d value connecting with. This could take a couple of hours of research.

#3 Presenting at pitch competitions and other events with investors

This can include events such as: demo day at your accelerators, a booth at Collision.  Identify potential investors who are interested in you.  Suggest a follow up call or meeting.  Get their contact information and follow-up within 24 hours.

#4 Attending events where investors attend

You and the investors are all part of the audience.  Events can include: pitch competitions, conferences, etc. For you, this is a non-pitching situation.  Let’s assume there are a large number of investors present and you’d like to meet as many as possible.  Carefully plan out your three-minute meetings.  The objective or each meeting is to create a relationship, not to make a pitch.  The different stages of the three minutes are:

  • Initial introduction: smile, be enthusiastic, and be 100% focused on the investor.
  • Learn about the investor: be curious and ask questions such as; why they are at the event. Do not pitch.  It would be great if you’re able to provide some value to the investor e.g. knowledge or someone you can introduce them to.
  • Wait for them to ask about you. Then share your one sentence pitch followed by one sentence regarding customer traction, major milestone achieved and what you’re seeking e.g. a seed investor.
  • See how they respond. If they are interested and ask more questions about your startup, you have a prospective investor.  If they are not interested, and do not ask questions about your startup, do not pitch your startup.
  • Meeting conclusion: For prospective investors, you’ll need to judge the appropriate request for next step. Your options are: are meeting, a call (Zoom, Skype, or phone) or an email.  Get the prospective investors business card with contact information, or connect on LinkedIn immediately.  You will be doing no follow-up with non-prospective investors.

Within 24 hours of the meeting, follow-up with the prospective investors.

#5 Scheduled meetings with investors at events

Conferences and other events often enable startups to schedule meetings with investors.

#6 Cold call emails.

The goal of a cold call email is to generate sufficient interest to get a reply back and begin an email conversation.  This is the beginning of a trusted relationship. The goals are not to set up a meeting, get a check, etc.  The cold call email do’s and don’t include:

The cold call email must be short enough to be read within 60 seconds.  An email which takes two or more minutes to read will be deleted by the potential investor because she simply does not have time to read the large number of emails coming in.  The potential investor must be able to read the email, think about it and reply within 2 minutes.

The template for the cold call mail is:

  • Write a subject line than generates interest. If your subject line, does not generate interest, your email may be deleted. The investor often will read your email on her phone. The first 30-40 characters of the subject line are key and you only have about 90-100 characters to generate interest. The two most important things in the subject line are: customer traction and your ask e.g., “$1 million ARR, seeking seed VC”.
  • The first paragraph describes the problem being solved.
  • Next a paragraph with bullets of key metrics e.g. customer traction growth, revenue growth, key milestones achieved.
  • Next a paragraph of what the company does.
  • Then a paragraph showing what you’ve learned about the investor and why they might be interested in your startup. Ideally you could provide some value to the investor e.g. knowledge or someone they’d value connecting with. This could take a couple of hours of research.
  • Concluding with an ask for call or meeting.
  • Attached the pdf of your pitch deck. Do not have a link to your pitch deck.

Some do’s and don’t to consider for your email are:

  • Build a list of potential investors and research them. Do not contact investors who would not be interested in your type of startup e.g., the investor only funds U.S. headquarters companies and your headquarters is in Canada. Research the potential investor to understand what they want. What have they said about their investment targets: industries, geographies, technology, stage of company, types of founders, valuation, etc. How much money do they typically invest? Are they a lead investor or do they require a lead investor?
  • The email must state: the problem, the solution, customer traction, if you have revenue paying customers and what the customer growth has been, market size, who the co-founders are, and the unique insight or special sauce the startup has.
  • The email must not contain: The story about how the company came about because the history does not determine whether or not the investor is interested.
  • The email must not contain the CEOs biography.
  • Do not use industry specific jargon or acronyms because the person reading the email may not be an industry
  • The email must come from the company’s email with the person’s name e.g., jane.doe@website.com
  • Don’t send a follow-up within a month. The investor has made the decision on whether or not to reply.  When doing a follow-up, there should be some new information, especially regarding customer growth.
  • Attaching a standalone pitch deck is optional. Your research of the investor can indicate what they want included in a cold call email. Do not have a link to your pitch deck – make it easy for the investor to look at the pitch deck on their phone.
  • Email must contain facts, not vague claims.
  • Use a CRM to send the email so that you can track whether or not the email has been opened. Do not do a mass emailing.  You’ll also need the CRM to manage the large amount of information you’ll be collecting about a pool of potential investors.

Your next steps

  • Define your fundraising plan. You need to start building investor relationships before you need money.  The plan should include time and funds to travel outside of the Toronto area.
  • Implement a CRM to manage your investor relationships and related investor information.
  • Research investors to build a list of potential investors. Resources to find potential investors include: your existing network, LinkedIn, AngelList, Crunchbase, Gust, Hockeystick, Startup HERE Toronto funding database, and VCWiz.

 Footnotes

1 Paul Compers, Harvard Business School, Will Gornall, University of British Columbia Saunder School of Business, Steven N. Kaplan, University of Chicago Booth School of Business, Ilya A. Strebulaev, Graduate School of Business Stanford, “How do venture capitalists make decisions”, April 2017, Page 42  This survey of VC firms included: 63% of all VC US assets under management, 9 of the top 10 VC firms and 38 of the top 50 50 VC firms.

2 “What we learned from 200 startups who raised $360 million”, Professor Tom Eisenmann, Harvard Business School, and DocSend

Further reading

“How does a startup communicate with potential investors?” https://koorandassociates.org/points-of-view/selling-a-company-or-raising-capital/how-does-a-startup-communicate-with-potential-investors/

Tom Koor

How do venture capitalists create value?

You may download a PDF of this article from: How do venture capitalists create value

The purpose of this article is to help startups and investors in venture capital funds understand what VCs (venture capitalists) do to create value.  VCs are focused on creating financial returns for their investors.  VCs often have other objectives, such as helping women founders, or having social impact.  Many startups apply to VCs.  VCs go through a multi-stage process to filter out startups before making an investment decision.

Very few startups succeed. 

Andreessen Horowitz, a U.S. VC fund with over $10 billion of asset under administration, has public shared their experience1.  They receive 3,000 startup applications per year. 200 startups are looked at seriously. 20 startups are funded.  Only 8% succeed i.e. 92% failure rate.

What do VCs actually do to achieve their objectives?

The following facts are from a survey of institutional VC firms (i.e. not private equity, angels investors, etc.) which included: 63% of all VC U.S. assets under management, 9 of the top 10 VC firms and 38 of the top 50 VC firms.  The survey results are averages.  A startup or VC fund investor needs to research what each individual VC does.  I have focused on early stage investments. There are different survey results for late stage VC investments.

#01 What is the source of closed deals?

  1. 12% of closed deals resulted from a startup making an application
  2. 65% came from referrals and the VCs professional network
  3. 23% are proactively self-generated by the VC

Startups need to build relationships with the VCs network, in order to enable valuable warm introductions.

Startups also need to build social presence and a network of relationships to enable VCs to find the startup.

#02 What does the median deal funnel look like for a VC firm?

  • 250 startups are seriously considered
  • 60 result in management meetings
  • 20 are reviewed with partners
  • 13 undergo due diligence
  • 5 are offered a term sheet
  • 4 close

1.6% of the seriously considered startups are funded.

#03 What financial metrics are used by VCs to analyze investments?

The average VC uses close to 2 metrics.  The most common metrics are:

  • 56% cash on cash multiple
  • 26% IRR
  • 17% no financial metrics
  • 12% NPV
  • However, 48% often make gut investment decisions and only 12% quantitively analyze past investments.

Financial metrics are often used, but the investment decision is not driven by financial metrics.  The assessment of the team is the most important factor.

#04 What are the VCs IRR and Cash-on-cash multiple requirements for an individual investment?

  • IRR 33%
  • Cash-on-cash 7.5

The requirements are high because the few investments that do succeed must cover-off the vast majority of investments that fail.  Part of the VCs’ filtering process is eliminating those startups that do not have the potential for a large number of customers leading to a large amount of revenue.

#05 What exit multiple have the VCs achieved according to the survey?

  • The average is 4.2
  • 27% of the time it’s less than 1 i.e. lost money
  • 12% of the time it’s 10X

To make an overall profit, VC must have these 10X home runs.

#06 What is the most important factor when deciding to invest?

  • 53% is the team
  • 13% fit with the fund 12% product
  • 7% market
  • 7% business model

By the time an investment decision is being made, a lot of filtering has already occurred.  Poor products and small markets have already been filtered out. Most VCs focus on the ability of the team to both execute and to make the necessary changes as the team learns more about the market.

#07 What % of VCs believe is the most important factor in the success of their investment?

  • 64% the team
  • 11% timing i.e. being either too early or too late costs money.
  • 7% luck
  • 6% technology
  • 6% industry
  • 4% business model
  • 1% market
  • 1% misc.
  • 0% board of directors. 32% of VCs believe the board of directors is an important factor.

#08 What % of VCs believe is the most important factor in the failure of their investment?

  • 60% the team
  • 10% industry
  • 8% timing
  • 7% business model
  • 6% technology
  • 4% luck
  • 3% market
  • 2% board of directors

#09 What % of VCs believe is among the most important factors for the team?

  • 65% ability
  • 59% passion. Passion is a combination of execution and vision.
  • 58% industry experience
  • 52% teamwork
  • 48% Entrepreneurial experience

#10 What does deal closing look like?

  • 73 days to close the deal
  • 81 hours on due diligence
  • 8 references called

Many VCs use consultants to conduct part of the due diligence. Reference calls may be made to: current and lost customers, former employees, suppliers and other partners, other investors etc.

#11 What are the key items VCs demand in their contracts?

  • Pro-rata rights
  • Liquidation preferences
  • Anti-dilution provisions

#12 What % of VCs say their interaction with portfolio companies is in the first 6 months after investment?

  • 2% every day
  • 28% multiple times a week
  • 33% once a week i.e. 63% of VCs interact at least once a week.
  • 23% 2-3 times a month
  • 13% once month
  • 1% less than monthly

A startup needs to be prepared for frequent interactions with their VCs.

#13 What % of VCs take specific actions in portfolio companies?

  • 86% strategic guidance
  • 81% connect with other investors
  • 69% connect with customers
  • 65% operational guidance
  • 55% hire board members
  • 51% hire employees

#14 What benchmarks do VCs think are the most important to LPs (Limited Partners, the investors in the VC fund)?

  • 59% Cash-on-cash multiple
  • 26% net IRR
  • 9% relative to VC funds
  • 2% relative to S&P 500

#15 What are the performance results reported in the survey?

  • Cash-on-cash 4.0

#16 What do VCs market to their LPs?

  • IRR will be 24%
  • Cash-on-cash will be 3.8
  • 93% of VC say that will they will out-perform the stock market.

Next steps if you are a startup

  • Find your lead investor who will have the network to draw in your other investors.
  • Target VCs who may be interested in your type of startup.
  • Define what your VC requirements are (e.g. ability to introduce to customers) and target those investors
  • Stay in touch with potential VC with a brief monthly update.
  • Understand what the VC needs from an exit and how your startup meets those exit requirements.
  • Do reference checks on your potential VCs.

Next steps if you are an investor in a VC fund

  • Define the role the VC investment class within your overall asset allocation and long-term financial plan.
  • Define your financial and non-financial requirements for your VC investments.
  • Ask your potential VC for the necessary facts. Cash-on-cash results should be from the investor perspective i.e. net of all fees. Understand whether VC IRR results are based on valuations or exist, and if reflect net investor returns.
  • Do reference checks on your potential VC.

Footnotes:

1 https://corporatefinanceinstitute.com/resources/knowledge/other/how-vcs-look-at-startups-and-founders/

2 Paul Compers, Harvard Business School, Will Gornall, University of British Columbia Saunder School of Business, Steven N. Kaplan, University of Chicago Booth School of Business, Ilya A. Strebulaev, Graduate School of Business Stanford, “How do venture capitalists make decisions”, April 2017, Page 42  This survey of VC firms included: 63% of all VC US assets under management, 9 of the top 10 VC firms and 38 of the top 50 50 VC firms.

Tom Koor

How do venture capitalists assess teams?

You may download a PDF of this article from: https://koorandassociates.org/wp-content/uploads/2020/02/how-do-venture-capitalists-assess-teams.pdf

The purpose of this document is to help startups understand how VCs (venture capitalists) assess founding teams.  Everyone has their own point of view.  I will share with you some research.

Research shows that the most important factor early-stage VC (venture capitalists) consider when it’s time to make the investment decision is the team.

  • 53% of VCs believe the team is the most important factor.1
  • 64%% of VCs believe the team was the most important factor in their startups’ success2
  • 60%% of VCs believe the team was the most important factor in their startups’ failure3

An analysis of the personality traits of the founders of 500 startups revealed 4 key traits correlated with success or failure.4

  • Quick and decisive decision makers were the most negatively correlated with success. The most successful founders were calculated, deliberate, and focused.
  • Compassion, consideration, and concern for people were negatively correlated with success. The greatest  degree of negative correlation with success was when the team thought the founders were people focused.   A startup founder needs to make many difficult, unpopular decisions especially those regarding the exit of team members.
  • Self awareness is critical. The most successful companies had a very aligned understanding between the founders and the team members regarding each others traits.  The smaller the discrepancy between the founder’s self-awareness and the team’s perception of the founder, the higher the startups performance.  I read research that for large companies, there are huge differences between the CEO and C-suite perception of themselves vs the employee perception of the C-suite.
  • Women founded companies performed better than companies with only male founders.

Have a calm demeaner when pitching to VCs.5

An analysis of how VCs evaluated pitches revealed that the finalists tended to have a calm demeaner.  Further study showed that VCs equate calmness with leadership strength.

California angel investors’ judgement as to which CEOs should go into due diligence tended to prefer trust over skills.5 Technical skill gaps can be addressed via training, hiring, and advisors. Character is hard to change.  The angels sought CEOs who were honest and trustworthy.

California angel investors’ judgement as to which CEOs should go into due diligence preferred CEOs who were open to new ideas from investors regarding ways to increase value5.  The angels did not want CEOs who refused to consider new ideas or refused input from the angels.

CEOs should view pitches as an improvisational conversation with investors, listening to questions, and even asking the investors what they think.5

 My own observations are:

  • Gaining understanding of the points raised above requires meetings in addition to pitches, most likely in the due diligence process. Investors determine if they can work with the founders for several years.
  • Many investors seek founders who are able to learn knowledge(e.g. about customer, the marketplace, competition, etc.) and skills (e.g. cash flow forecasting, key business metrics, technical skills)
  • Most investors seek founders who demonstrate a deep understanding of the customers’ problems, the benefits, and the competition. I’ve seen too many founders first build a solution and then try to find out if customers actually have the problem and are willing to pay for it.
  • Many investors seek founders who have some unique capabilities.
  • Many investors seek startups with unique technology or a unique solution which cannot be easily copied by competitors.
  • Successful founders tend to be brilliant, able to assimilate and analyze large amounts of information (both quantitative and qualitative) and focus execution on the unique insights they’ve gained.
  • Investors, especially angel investors, vary in terms of the potential size of the market and company they are seeking. I’ve seen angels get excited about a company that has the potential to grow to $10 million in revenue per year.  Other angels seek the potential for $1 billion per year future revenue.

Your next steps

You must research each VC to understand how they assess startups.  All VCs are not the same.

 

Footnotes:

1 Paul Compers, Harvard Business School, Will Gornall, University of British Columbia Saunder School of Business, Steven N. Kaplan, University of Chicago Booth School of Business, Ilya A. Strebulaev, Graduate School of Business Stanford, “How do venture capitalists make decisions”, April 2017, Page 42  This survey of VC firms included: 63% of all VC US assets under management, 9 f the top 10 VC firms and 38 of the top 50 50 VC firms.

2  “How do venture capitalists make decisions”, Page 53

3  “How do venture capitalists make decisions”, Page 54

4 Brittney Riley ,”How should investors evaluate founding teams”, Medium posting, April 24, 2017 This is an analysis of the relationship between company performance and personality traits of 500 startups.

5 Lakshmi Balachandra, “How venture capitalists really assess a pitch”,  “Harvard Business Review”, May-June 2017

Tom Koor

How can portfolio companies update investors?

You may download a PDF of this article from: How can portfolio companies update investors

 Why do existing investors want monthly updates?

  • Meets any contractual requirements for specific reporting.
  • Offers regular confirmation of investors’ confidence and trust in the CEO and management team.
  • Ensures transparency from the CEO. No lies, misrepresentations, or embellishments.  Assess whether the CEO has the courage, values, morals, and ethics to admit problems and mistakes.
  • Keeps the CEO accountable.
  • Demonstrates to investors the CEO’s ability to achieve results and milestones. The CEO made a commitment to achieve certain milestones and results with the investors funds.
  • Sees regular growth in customer traction. If customers are not growing, there is a major problem.
  • Reflects growth trends e.g., % monthly growth in paying customers, along with an explanation of why the growth trends have changed.
  • Documents which actions taken, and results and milestones achieved.
  • Forecasts what actions, and milestones to be taken, and impacts on customer traction.
  • Allows for investors to understand how their help is needed.
  • Reduces investor worries i.e., if there’s no news, perhaps there are big problems.

What is the value to the CEO and management team of monthly updates to existing investors?

  • Builds a stronger relationship with investors, deepening their trust and confidence.
  • Helps focus the startup on a rhythm of monthly achievements and results.
  • Helps keep the CEO and startup top-of-mind with investors.
  • May reduce any ad-hoc time the CEO devotes to responding to investor questions.
  • Helps the CEO and management team look at the company from an outside perspective.
  • Can support a monthly discussion among the CEO and leadership team.
  • Monthly updates may be distributed to management, staff, advisors, and the advisory board thus establishing a common set of understandings.
  • Provides a means to ask investors for help.

What might a monthly investor update template look like?

This template should be customized for your specific situation.

  • The sentences comprising the current 20-30 second elevator pitch. This reminds investors about the startup.  The pitch may be changing over time.
  • Key customer traction trends. A pre-revenue company may show interviews done, website engagement, other potential customer engagements.  Later on, growth trends for the number of cash paying customers, revenue, etc.
  • Milestones achieved. g., product/service launches, hires, new partners.
  • Challenges and problems. A startup always has challenges and problems.
  • Future milestones and expected impact on customer traction. Next month, there will be comments on these.
  • Finances:
    1. Cash balance;
    2. Monthly burn rate; and
    3. Project runway – number of months before cash runs out.
  • Investor ask. This may be unique to different investors or shared with all.  An ask could be: serving on the board of directors or introductions to potential directors; serving on the advisory board or recommending advisory board members; introductions to potential investors; supporting meetings with potential investors; introductions to potential customers, partners, distribution channels, and suppliers; strategic advice; operations advice; introductions to coaches and mentors; etc.  This assumes you have selected investors who can provide more value than just money.
  • Acknowledgements and thank you.

Your next steps

  • Create a custom template for a brief monthly email.  Many investors will read this on their phone and will have limited time.
  • Re-use existing information, content, and reporting, to reduce the effort.
  • Start the monthly process as soon as you have one investor, even if that investor is a friend or family member.
  • Email the current investor update on the same day and time each month, along with the monthly update to potential investors. The potential investor update will contain a subset of the information that’s in the existing investor update.
  • Consider using a service such as Mailchimp to distribute and track your monthly investor updates.
  • Determine if the investor update can also be shared with your advisors and advisory board, who will all have signed confidentiality agreements.
  • Determine the quarterly and yearly reporting requirements for investors. These will include more information.