A Framework for Thinking About Your Startup Idea…that also helps with elevator pitches and executive summaries
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.
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?
What if you don’t take your Flintstones™ today, do you feel any different?
How about a week?
Now change that with a Vicodin® because you blew out your knee. What happens when you forget to take your pill?
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.)
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.
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.
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?
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.
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.
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.