With Ann Arbor’s Fetchnotes starting the TechStars Boston program I started to reflect on the development of our entrepreneurial ecosystem. I’m a college football fan and, if you are like me, watch recruiting in college. There is always a town with a great program that pumps out several college stars. Ann Arbor is getting closer to being that for startups.  Sure the Bay area is like the California, Texas, or Florida of football recruiting.  Lots of people playing football almost year-round so you can play the odds that there will be a 6-6 receiver that runs a 4.4 forty with hands of Gorilla Glue.  Imagine if you saw a small town, lets say 110,000 people, pump out D-1 prospect after D-1 prospect.  5-star recruits …not to mention a bunch of 3 and 4 star recruits (which many times turn out to be all-pro after college.)  As a scout, you’d keep your eye on that place. Startup scouts, keep your eye on Ann Arbor.

Measuring stars in football is hard enough and it’s just as difficult in startups. In football you look at skills and measurables but credibility often goes to the ones who have received “big-time” offers (the pinnacle, of course, is the University of Michigan.)  The startup world is similar. You look at the company’s skills and measurables and their offers; accelerator programs and (more importantly) venture investors.

We have had some good activity here in A2. Fetchnotes started TechStars Boston this week. But like college football, they don’t always play for the home team. Occipital went to TS Boulder but stayed there. Olark went to YC and partially stayed, they have a presence here at the Tech Brewery. Other A2 YC companies are Chirply and Farmlogs and then there is Ambassador (OK, actually Birmingham, MI) and TempoDB to round out TechStars for team A2. I’m hoping that Fetchnotes will come back after their stay.

The home team:
But it is Ann Arbor community that is so Awesome. Dug and JonO are killing it at Duo. There are many entrepreneurial programs and quality mentors. Check out the great companies in “the brewery”. The entrepreneurial culture seems to gets better every day. It reminds me of something that Jason Mendelson of Foundry Group said, he pointed out that in great entrepreneurial communities like Ann Arbor, the members want all the local startups to succeed. (The valley is moving towards an “It isn’t enough that I succeed, you have to fail” mentality.) In communities like Ann Arbor and Boulder, the mentality is that a rising tide lifts all ships.  I have always referred to it as “entrepreneurial karma.”  I help 15 entrepreneurs and a different 5 entrepreneurs will help me. 

Ann Arbor has entrepreneurial karma. 

Smart people live here and it is a good place to be and start a company. We have great companies forming and they are attracting investment from outside funds such as Google Ventures, True Ventures, DFJ Mercury, Khosla Ventures, and more.  Lean startup guru Steve Blank is investing in the area (eLab.) Funded companies that have a significant A2 presence have investors such as Lightspeed, Rho, Sequioa, etc. (The names are just as impressive on the life science side: Frazier, 5am, Arch, InterWest, Clarus, Venrock, etc.) The local VC environment is picking up.  Newer funds Detroit Venture Partners and Resonant Ventures are very active in engaging the community and working with entrepreneurs.  Established funds like RPM Ventures and even North Coast are actively investing in software startups.

The eyes are starting to look here and much of this has to do with the University of Michigan.  For starters, Tech Transfer does a good job commercializing the $1.24 Billion of research in its labs.  The students are highly sought after.  Places like the TechArb, Center for Entrepreneurship, and the Zell-Lurie Institute have a large population of students talking about starting companies on campus.  The Law School’s new Entrepreneurship Clinic is taking off like a rocket. Dana and Bryce and their student teams offer great advice.  In the short time (less than a year) the clinic has been around they have worked on (real) financing documents, IP, contracts, corporate structures, and more.  I have worked with Byrce Pilz for many years and he is an exceptional attorney. What a tremendous asset for students.

Related articles

• Ann Arbor – The Potential Sleeping Giant for Entrepreneurism (jasonmendelson.com)
• College is Like A Sandbox (feld.com)
• Thoughts from Ann Arbor (informationarbitrage.com)
• Open Letter (Dug Song via a2geeks.org)
• One Hand Clapping – Entrepreneurship In Ann Arbor, Michigan (steveblank.com)
• Michigan eLab Connects Silicon Valley VC to U-M Entrepreneurs (xconomy.com)
• Former Arbor Networks leaders launch new Ann Arbor-based cloud data company (annarbor.com)
• U-M Venture Accelerator to welcome Michigan Venture Capital Association and an 18th startup company (growdetroit.com)
• Michigan Pre-Seed Capital Fund Invests $600K in Three Tech Startups (xconomy.com)
• U-M Student Startup Fetchnotes Wins TechStars Spot (xconomy.com)

As an MBA and someone who works with a bunch of MBA students who think they are entrepreneurs it is nice to see this from someone else….

(From Jason Freedman’s humbledMBA blog:

I have an MBA from Dartmouth’s Tuck School of Business.  It was some of the best experiences of my life.  I met fabulous friends, learned from incredible professors, and developed in many important my ways.  My entrepreneurship professor, Gregg Fairbrothers, is one of my all-time favorite teachers and he taught me a lot about doing start-ups right.  The professors and administrators at Tuck never claimed they were teaching me how to run a startup.  In fact, they were explicitly teaching general management curriculum to be applied towards larger businesses.

 

The problem that I see a lot now that I’ve been in startup land for 4 years is that too many MBAs think that their education in business can be applied directly to startups.  They forget that startups are not a smaller version of a larger company.  Applying a set of frameworks designed for success with larger companies is a good way to guarantee failure when dealing with start-ups.  Professors like Gregg Fairbrothers preach this all the time.  Yet, I still get calls regularly from MBA friends ready to do their first start-up, believing that their MBA education will give them the right tools.

 

The reality is, we MBAs come with a lot of baggage.  A good way to understand why MBAs are damaged goods for startups is to understand the actual curriculum.  

 Here are standard core courses at any business school: 

Strategy: 

 This is the most dangerous of all MBA courses.  In this course, you learn high level analysis, using the 3 C’s, the 4 P’s, and, of course, Porter’s Five Forces.  So, on a typical day, you read a 15-page case on a company’s mistakes and then apply one of these frameworks to think through how you would have done it differently.  Doesn’t sound so bad right??  Wrong!  This is all high-level business strategy for larger companies.  For a start-up, no one ever knows what will work and what won’t.  That’s why there’s such a focus on iteration in the lean startup methodology.  Great startups figure out what to do by building really fast, listening to customers, and iterating.  More like guess and check.  An MBA, fresh out of a Strategy course, will try to figure out everything on a white board, naively believing that they can think their way out of mistakes.

 

Accounting: 

In accounting class, you study the annual reports of big companies and learn about gross margin, cash flow statements, balance sheets.  You learn that assets=liabilities + equity and how to convert LIFO to FIFO.  This is all really, really useful if you have warehouse full of stuff and customers that pay on credit.  Pre-revenue start-ups usually have no Cost of Goods Sold, no revenue, none of that.  The only accounting you need is to know how many users are out there, how much it costs to acquire a user, and how much money you’ll have from that user.  That and a shoebox to store your receipts until you’re ready to pay someone to type them in and do your taxes for you.  An MBA will way-over complicate things with talk of deferred taxes, accrual basis, yada yada—and they forget that their gorgeous, complex set of spreadsheets fails the most basic axiom of all analysis: garbage in, garbage out.

 

Organizational Behavior:

OB was one of my favorite classes.  I would love to have a company big enough someday to implement some of the stuff on building great structure.  For startups with less than 10 people, all that stuff is irrelevant.  No one in OB tells you to let your top hacker work whenever or wherever he wants or that status meetings are best done standing up or that people are motivated more by technical challenge then by compensation.  To be fair, when you’re startup gets big enough (over ~20 people), it rocks to have an MBA come in and start to implement structure just as it’s really needed.  Too much structure before that gets in the way of the magic.

[more…]

I hear a lot of elevator pitches and read a lot of executive summaries, not to mention business plans.  When I work with students or mentor companies I often offer them this framework to help them think about their idea. It also translates well to an executive summary or elevator pitch.

You will hear that many venture capitalists will tell you that they read a business plan from the back to the front, starting with the financials (they want to know if the market is big enough to consider investment) and the management team. That’s fine.

Not me.  Maybe that is because I work with really early stage companies, in some cases concepts…way too early for VC investment.  Some of them have not even figured out themselves how to make money, or fully monetize their idea (i.e. “we’ll make money selling ads” followed by “oh yeah, your right. Our information has value too.”)  (I don’t advocate going to VCs before you have a well worked out plan.  Find a mentor to help you…you need it.)

Truth is, I know before I even look at your financials that they are bullshit.  Seriously, how can anyone truly predict the revenue of a company with a completely new/novel product? (You can’t.)  I want to know that A) you have thought it through and B) the market is big enough I should care.  In terms of thinking it through, make sure you tell me units.  I hate seeing we will sell $X,XXX,XXX in product.  I want to see the number of units you expect to sell and the sales growth.  I’ll judge how realistic it is.

And your team?  Well, the jackass in me will tell you that if I’m going to invest in your company, I can bring in the right people with my investment, or depending on valuation do it later.  Remember, management teams change.  Sergey and Larry don’t run Google. <edit 2011: Larry is now running the company again but you get the point.  Everyone looks at Bill Gates and Michael Dell but the truth is that many founders (especially technical founders) don’t run the company.>

So this gets me to the framework, which is what I want to hear in a pitch or see in an executive summary.  I like it when it funnels down in this order from the macro to the micro.


The Problem
First, I want to know the problem you are solving and that it is a real problem.  I need to know that you are selling pain killers not vitamins.  (You will hear this a lot in entrepreneurial circles.) What do I mean by that?

Do you take vitamins?
Sure every morning.
Do they work? 
Don’t know.
What if you don’t take your Flintstones™ today, do you feel any different? 
No.
How about a week? 
Nope.
Now change that with a Vicodin® because you blew out your knee.  What happens when you forget to take your pill? 
Ouch.
And when you take it?
Ahh, much better. 

Which is easier to convince someone to buy?  How do you know your idea is a pain killer?  Well, pain is measureable.  For most businesses that is either time or money (or both.)  When talking to potential customers (yes, you have to do that) do they say “that’s cool, I’d buy that” (vitamin) or “I/my company cannot live without that.”  “I’ll cut you a check right now if you solve this problem.”  “Can I be your beta tester right now?” (pain killer.)


Solution
Tell me how you are solving my pain.  This is a chance to tell me about your technology but be careful.  Don’t geek out on me and start talking bout the strength properties of your new nano-biomaterial or why you are using Python over PHP.  I don’t care yet.  Stick to making sure you are solving the problem.

Other things to think about as it relates to your solution: Are your creating barriers to entry?  Do you have intellectual property?  Why would I buy from you?

There is an old adage “No one got fired for buying IBM”  …maybe now it is GE. What it means is that if you are going head-to-head with an established player and Jane customer is looking for a solution at $100,000.  Her choices are you, at NewCo. startup with a cool technology or GE, with an inferior product but it comes from GE.  If she buys from you and you go under she frivolously wasted the company money on your product and thus is at risk of getting fired or she buys from GE and you turn out the be the next Google and she says “well I was conservative with the company money because GE was the safer choice” and keeps her job.

Is your product different from what is out there? I hear “my idea is 10x better” a lot.  My response is “who cares?”  If I told you the black pen on my desk writes 50x darker than any other pen on the market what would you say? …Who cares?!


How do you make money?
You have to tell me how you make money.  What are your margins?  If you don’t know - keep working until you solve this.  Things to think about once you figure out how you make money: Does you solution cause a fundamental shift in how things are bought and sold in your industry? (This can be both good and bad.)  What is the sales cycle? What is the product life?  How do these affect how you make money?  Does the way you make money affect the brand/image of your product? You get the picture.

I also want to know about your customer.  Is the buyer the same as the end user? Think: patient (end user), doctor (selector and implementer), and insurance company (payer) relationship.


Market
Tell me about your market.  Is it big enough that I care?  Is the market growing? What makes your customers alike? Can your dominate your market?  (If you tell me that “There are 1.3 billion Chinese in the world. If we just get 10% we’ll be rich” I just threw your executive summary/business plan in the trash. I need to know that you can carve out a niche, dominate it, then leverage that total domination to get into other markets.)  What is your addressable market?  Here is an (true) example on addressable market I gave in a lecture to MBA students in FIN/ES 629 Financing Research Commercialization class at Michigan (Ross.)

The University of Michigan invented a new device for Esophageal Atresia (EA).  EA is a birth defect where there is a faulty connection between the esophagus and the stomach.  Simple ones can be corrected with surgery.  Some EA cases are so called “long-gap” where there is a complete separation between the esophagus and the stomach and it is so long that it cannot be simply surgically repaired, instead requiring several surgeries over several months to slowly stretch the esophagus to the stomach. A gastric tube needs to be put in place.  It’s generally awful for the child and parent.  U-M invented a traction device to limit surgeries and avoid the feeding tube. So lets quickly review. Problem? Yes. Pain (Definitely. Babies in pain, complicated surgeries on tiny parts… who couldn’t sell this?) How do you make money?  Sell devices. Simple. It was even novel enough that a patent could be filed.  So how about the market?  Well, let’s do the math. EA occurs once in every 4,425 births. Roughly 14% are long gap. There are 136 Million live births a year. That is 30,734 cases of EA which translates to 4,302 long-gap cases worldwide (roughly 215 in the USA) and it is not growing. Sorry folks, no business here.

Many venture capitalist need to hear markets that are at least $1 Billion (I have heard Ken Pelowski of Pinnacle Ventures talk about the $1B magic number several times.)  If your market is not that big don’t fake it.  It doesn’t mean it is a bad idea.  Just find a smaller fund or angels.


Go-to-Market strategy
Tell me how you are going to introduce your product.  Do you need channel partners?  Who holds inventory?  Tell me about your supply-chain?  How do you get the word out?  How are they going to find your website? …and more specifically, how are you going to leverage social media since I usually get a two word response.  Why is Amazon.com or Wal-mart going to carry your product?


Team
I often tell companies I mentor that a good idea is necessary but not sufficient.  We all know the best technology doesn’t always win (think: Mac vs. PC adoption or Betamax vs. VHS). The best executing team wins.  Teams are often what investors back, not the idea.  Now, I don’t subscribe to the “you have been a CEO to be a CEO” model.  That logic only makes the CEO pool infinitely smaller.  That said, your team must have a business leader who has deep industry knowledge, who has a lot of contacts that she can call on to get deals to happen.  This most often comes with some time working in the industry.  The only exceptions to this rule appear to be in web 2.0.  The CEO needs to focus on the market and how the product gets to the customers.  If you have a technology based product the technical staff needs to have geek cred.  You don’t need the faculty who invented the technology, the recently minted Ph.D. student will do.  But they have to know your technology and competing technologies intimately. Be careful of a team that is made up of a bunch of friends. Great business partners make good friends, the inverse is not true.


Financials
Like I said earlier I know this is hocus-pocus.  Convince me that you have thought it through.  Tell me how many units you are going to sell.  Show me your predicted cash flows for 5 years.  The reader will call you a liar, just be able to back up your statements.  Oh and never say “this is a conservative estimate.”  They always are and they all seem to optimistically over shoot.


The Ask
If you are giving an elevator pitch let me know what you want.  If you need money tell me how much you need, what it is going towards and how long it will last.  If you are not asking for money, ask for the sale or ask the listener to join the team.  It is really the same pitch just different asks.

Too good not to post.

THE NEW DORK - Entrepreneur State of Mind (Jay-Z ft Alicia Keys Spoof)