"preparing the battleground ", part 3 of the series: six steps to venture capital

this is the 3nd part of the "six steps to venture capital" guide, where the systematic approach to get venture capital for a start.ups is discussed.

after the motivation got sorted out in step 1 and in step 2 the a-b list of potential investors (part 1, part 2) got started, it is time to "prepare the battleground".

it would not be wise, to contact the top 3 vc on the a-b list to start with. even after the excitement of achieving a list after quite some work, this would be a bad thing to do. first, because the potentially best investors should be kept for later, when a routine in pitching was developed. secondly because what would happen if a contacted (still potential) investor directly calls back and ask for the executive summary and you do not have one yet? and no, sending out something that was just compiled in a couple of hours, is not a good idea. not even for the bottom three vc from your a-b list.

following the advise of general sun zi (read more about sun zi, moltke & douglas adams für start.ups here) you should only go into a battle when you know that you will win. therefore preparation before contacting future financiers is key. there are four things that have to be in place:
1) investor picht slides (30-20-10),
2) an executive summary (2 pages, includes financials),
3) business plan (20 pages total, including all attatchments & 1 page financial summary),
4) references.
the best way now is to work through the list top - down.

plan to spend around one week on preparing your investor presentation and executive summary. follow 30 (minimum font size) - 20 (time of presentation) - 10 (number of slides) guideline from guy kawasaki. stick to this rule, do not try to improve it, it only reduces the chances of funding.
use the following headlines, kawasaki again: 1) problem, 2) solution, 3) business model, 4) underlying magic, 5) marketing and sales, 6) competition, 7) projections, 8) team & 9) status & time line.

the structure is the same for the investor presentation as well as for executive summary. for more details, read "the art of the start", or "reality check" from guy kawasaki.
the executive summary shall not succeed more then two pages. and that includes a summary of the financials (projections for revenues, number of customers contracts, personnel & other costs, number of employees, total cash requirements, sources of funds).

focusing that much requires a clear focus of the aim of the start.up and how to achieve it. if two pages are not enough, more thoughts have to be spent on the start.up.

based on the presentation and executive summary the business plan can be compiled. sticking to a readable 20 pages is key again. no vc will read a 60 page manifesto. after the focusing work was done in the executive summary, filling in the prosa can be done in 2 days. if not, going back to thinking for the exec. summary is imminent.

having followed the chronological order of the "battleground" preparation it is time to think about the start.up's references.
first, who can be the references? choose from former employers, colleagues which already made it, customers, former investors, well connected lawyers, reputable professors. whoever can give valuable, connected reference can make sense. a similar procedure as compiling the a-b list can be applied. not everyone which is known by the members of the start.up is a valuable reference for potential investors though.
as the executive summary is ready by now, it will be easier to get 2-3 references on board, using the key pitch topics is the thoroughly prepared "ammunition" at hand.

being prepared with all the materials required and the investor targets identified, it is time for approaching the investors. this will be the next part of the series, six steps to venture capital.

recommendation: while preparing the a-b vc list, create 1) pitch slides (30-20-10), 2) an executive summary (2 pages including financials), , 3) business plan (20 pages total, attachments & 1 page financial summary included), 4) prepare 2 to 3 references.

six steps to venture capital: part 2.2/6 fund selection

this is the 2nd part of the "six steps to venture capital" guide, where the systematic approach to get venture capital money for start.ups is discussed.

part 1 covered "motivation" and can be found here. part 2 deals with the selection of potential funds. the fist section covered fund selection according to investment period, geography and focus. to complete the criteria, let's look at the remaining important criteria:

4) experience
does the potential investor understand your technology, your business model, your market? or would an investment be the “pilot-investment” for a fund e.g. in semantic technologies? if so, a lot of missionary work has to be done with the investor (so b-list). not too much support market and business wise can be expected after investment as well.
smart money, as often described when talking about venture capital, which means that on top of the money from the investor comes a lot of business contacts or business advices, is often promised but seldom delivered. check with reference calls.

on a daily business, it is not “the fund” though, which a start.up is going to interact after investment. it will be a partner and an investment manager. so besides valuing their investment history and their personal background (technology or finance, entrepreneur or big corporate, number of successful relevant exits), it is absolutely necessary, to be able to consider the gut-feeling after a first meeting with them. A start.up should ask themselves the questions: do we like this person? can we work with her also in hard times? If not, then even a otherwise perfect match is useless (lower b-list).

5) cash available for investment
finding out how much cash a fund can invest is vital. if a start.up requires 2 million € and that is all the money a fund has left, that’ b-list of even worse. regular start.ups need more money then they expect, often twice as much as projected. if the fund which did the first investment can not put in additional money the start.up might run out of cash maybe just three month before taking off. finding a new investor without the first round investor putting any additional cash on the table will be very difficult (this is often seen as: the first investor does not believe in the company any more).

6) fund exit horizon
when will the fund close? some funds run for 10 years, some are evergreens.
A ten year fund invests for five years and spends the next five to sell his investments. at the end of the 10th year, the fund has to pay the money to his investors. evergreen have no determined duration. And are therefore a-list candidates. Other funds within their investment period as well.

7) references.
references are important. venture funds will check the references of their potential project – so should start.ups. fund recommendations from fellow entrepreneurs, reference contacts given by funds and even cold calls are possible. only funds with three positive references make it on an a-list place.

recommendation: prepare ranking “a-b list” of potential funds according to 1) investment period, 2) geography, 3) focus, 4) experience, 5) cash available for investment, 6) fund exit horizon and 7) references.

coming up in the next step of "six steps to venture capital" is all about preparing the "battleground".

web2expo berlin start-up lessions review by fabian topfstedt

fabian topfstedt, freelance developer and start.up co-founder just recently posted his impressions from this year's web2.0expo berlin.

fabian attended business as well as developer tracks and especially for the latter, takes a closer look at rest, oath and the like. to read the full story, visit his website webiste.

the most important thing besides all the inputs from the conference fabinan concludes - after all and never to be forgotten - is to "Have fun!".

moo, fat free sites and user action: best of web2.0 epxo berlin 2008 part 2

after pitchcamp and yossi vardi at this year‘s edition of web2.0expo berlin, moo, user interfaces and user action through design conclude the best of show sessions.

let's start with number three:

3)moo
stefan magdalinksi, cto of moo allowed open insights into the challenges of building moo. two years after starting, with a team of 30, they are shipping to around 187 countries worldwide.

How we made MOO

View SlideShare presentation or Upload your own. (tags: web2 scaling)

starting their business just before amazon web services surfaced, they build their own infrastructure. to transfer their infrastructure now to s3 would be to complex and thanks to the fact, that storage costs decrease faster then their data growth, costs are kept under control. they use virtually hosted squid caching proxies for $100 per month to speed up u.s. site access.

„ajax is great, but breaks ability to test“ according to mr. magdalinksi. in order to maintain to keep their website up and running when introducing new funcionalites, the developed around 400 rollout test, using watir.

business wise, they share 15 percent of their revenue with they affiliates. marketing analysis is mostly done by looking at actual user behavior. user feedback is currently managed by a mix of self made solutions of salesforce. and while the implementation of salesforece took just two hours and only costs a few hundred dollars a year. the „web 0,5“ style interface slows down customer service.

delivering physical products to the customers is the core challenge of moo. an overall of two percent of shipments get lost on the post. surprisingly canada hast the most unreliable postal system overall. developing the plastic cardholders proved to be one of the big challenges: designed in europe, produced in china, the first shipping of card holders did not meet the quality requirements. coordinating all the production process proved to be more time consuming then expected.

best of show number 4 goes to:

4) mobile user interfaces
creating specialized mobile user interfaces, presented by brian suda, maxed out the capacity of the room.

phrasing the term „fat free sites“ for mobile web sites, he showed why list views can be 2-3 times more efficient in terms of number clicks necessary then drop down menues.

that power user „fat free“ interfaces prefer to have everything on one screen, in order to reduce search times.

Creating a Specialized Mobile UI

View SlideShare presentation or Upload your own. (tags: web2expoeu08 ui)

this leads to the last best of show session of this year's web2.0 expo berlin.

5) user action

„User: Action! Leading Users to Action Through Design“ of solana crawford brought not only a driving speaker but a welcomed step away from the tech driven sessions.
her key messages were a) to know your goals - your audience - the action you want users to take on your site and b) realize the power of coulors - shapes - screen layouts.

User: Action! Leading Users to Action Through Design: a presentation by Solana Crawford at O\'Reilly Media Web 2.0 Conference ,Berlin 2008

View SlideShare presentation or Upload your own. (tags: interface user)

so much from this year's web2.0 expo berlin. a experience hopefully to be repeated next year.

how to turn-off investors and what business plans & sausages have in common: best of web2.0 expo belin 2008

the second incarnation of o‘ reillys web2.0 conference took place at the bcc - well placed at the center of berlin, next to alexanderplatz.

the new location was a welcomed change to last years 60ies-bunker style berliner messe facilites like a „community lounge“ promoted interaction between attendees and with last year‘s food problems solved people were happy to focus on the topics at hand.

besides the „big pictures“ keynotes for tim o‘ reilly, john lily (mozilla), martin varsavsky (fon) et al., the show brought a wide range of in depth topics , ranging from business to marketing and design to development.

the collective presentations of the show can be found on slideshare, respectively on the conference website . going through the (until now) uploaded 42 presentations on slideshare is too much noise, so let‘s setup up best of the show. start with the five best events of the show:

1) pitch camp
pitch camp was a driving event. 12 companies were selected to pitch for two minutes each, in front of a 200+ crowd and a grand jury (ranging from techcrunch and venturebeart to accel and index ventures, see here).

the short intro giving on the art of pitching can be reduced to 3 points:
1) clear view of business
this is necessary to be able to communicate the start.up (business objectives, market segments, problems solved)
2) understand your audience and what they care about
who are they, what do they want, why would they care about you.
3) build 3 month, 9-12 mont and long term business objective

there were book recommendations as well, crossing the chasm (again!) & blue ocean strategy, chan kim, renee mauborgne, understand the problems of your market.

also interesting to note were comments by the jury what turns them OFF, when the listen to pitches.

investors

• lack of ambition displayed
• lack of character and leadership
• homework not done (not knowing the background of people start.ups pitch to, not done the business metrics, not having market figures, competitor ignorance, lack of execution plan, ...)
• lack of understanding potential customers, investors, partners

media

• old stories
• no potential to bring journalist on techmeme/digg for x weeks
• clones of anything
• no magic sauce begin

potential partners

• telling the potential partner how cool the start.up is
• not telling or not being able to tell what the partner will exactly (=cash) gain from partnership, when and how.
• unfulfillable expectations from partners (like: just put my link on the google landing page...“)

how to get in contact?

• through references
• email (keep it short, send a compelling 2 sentence pitching email)

not just also judging on the start.ups at pitch camp but also discussing on stage was:

2) keynote speaker yossi vardi

being a serial entrepreneur himself and a rather successful venture capitalists, yossi vardi gave some interesting statements at the discussion with tim o‘ reilly.
that at the end of the days successful vc just have luck, is quite a open statement.
also that it is very important to check the vc a start.up is interested in. is he friendly? do entrepreneurs work repeatedly with him?
and that business plans and sausages have one thing in common: only people who do not know how they are made eat them.

this made the 2nd of the best web2.0expo berlin events. read more about moo, user interfaces and user action through design in the 2nd part of the upcoming web2.0expo roundup.

six steps to venture capital: part 2.1 fund selection

after being sure, that venture capital is the best choice (see “six steps to venture capital: part 1/6 on funding motivation) , the next step is to select which funds to approach.

2) fund selection

the best resources out there to find professional risk capital are the european venture capital association (evca) and the local venture capital associations, like avco in austria. on the evca webpage, all the national venture associations can be found.
Other sources are local economic newspapers, blogs (as can be seen in the blogroll, with lists like here), or the webpages of known venture backed start.ups in general, like jaja.

based on that basis research, a list can be compiled from all the vc out there, meeting the requirements of

1) investment period,
2) geography,
3) focus,
4) experience,
5) cash available,
6) fund exit horizons and
7) references.

the result will be an “a-b list”. “a” for your hot hits, “b” for the maybes.

1) investment period
start.ups will be looking for early stage, seed funding focus or even incubators. funds having no investments and no mission to do so will not make it on the list. funds having no early stage investments but write that they want to get into, are on the b-list.

2) geography
most investors stay within their local area. looking at their profile and their portfolios will tell that easily. if for example a uk fund has no investment outside of uk, chances are low, that they will invest e.g. in romania at all. if they are otherwise a perfect hit, make them a b-list candidate. we will see later why those are needed as well.

3) focus
there are different investment philosophies existing. funds can focus on investment stage or selected industries (horizontal or vertical). it is important to be in the funds focus, otherwise an application means wasted time.
if a fund has similar companies in it’s portfolio, for example three other software companies in the field of telecommunications, then that is an a-list candidate. because this fund should have an deep understanding of the technology, the business models, the market addressed. just to dig deeper on one point here: the technical due diligence will be faster and more accurate, as the funds typically use their portfolio companies to evaluate potential new investments.

coming up in the next post (six steps to venture capital: part 2.2) are the relevance of fund and investment manager experience, why cash matters and checking out the investors.

six steps to venture capital: part 1

recently established self financed start.ups have tight cash restrictions. sooner then later, further financing will become a main issue. in order to approach the financing process in a sustainable and therefore successful way, founders shall consider the following six steps.

1) funding motivation
2) fund selection (part 2.1, part 2.2)
3) preparing the battleground
4) approach (part 4.1, part 4.2)
5) negotiate (part 5.1, part 5.2)
6) survive after investment

each single step will be discussed in upcoming posts and brief recommendations will be given about how to handle them best. let’s start with number one:

1) funding motivation

before getting on the roller coaster-one way road to venture capital (vc), start.ups should take a short break and think about the motivation to get risk capital for early stage companies. why looking for vc money, besides the pure cash-requirements?

when the initial enthusiasm of a start.up is gone, cash is running out in some months, bug-fix lists are growing, market feedback is slow and long nights start to take their toll it is time to discuss some real basics. where should the company go? developers sometimes loose motivation, after the proofed they can do it - not everyone likes to upscale until finally becoming a legacy application. marketers and sales people might struggle hard to find first and paying customers, after the initial marketing bravo wore off.

there are three main paths after all: a) full steam up the hill or into the wall, b) bootstrap, bootstrap & bootstrap or c) stop it right there.

in a situation like this, and every start.up goes through that now or then, it is time for the whole team to sit down and discuss. at the end of the process one of the paths will be taken.

those who do not fully support the decision better leave then, so the company can move ahead united and focused. there is nothing worse then a company funded with millions of vc money, which actually does not really want to grow the fastest possible and (in reality) hand over control to the investors. and this is true for the founders, co-workers, customers and the investors.

recommendation:
- match growing ambitions with sources of fund: vc for j-curve, bootstrap for the rest.
- make sure all the founders and the core team support the direction of the company. those who do not, should leave the company. make a written note of the meeting and let everyone sign it.

having cleared the basic strategy of the company's direction strongly determines the next step in acquiring vc money. assuming that risk capital is the right choice, then the next action point is fund selection. this will be discussed in part 2 of ”six steps to venture capital".