“So you want to be a
successful high tech
entrepreneur?”
Orange County IEEE
9/24/07
Gordon M. Watson
www.watson-consulting.com
Copyright, 2000 - 2007
The Magic Formula!
Given: An emerging market and/or a better idea,
ergo:
Reward($) = f(risk, $, mt, t, w, d, r)
where:
risk = founder’s tolerance for taking risks
$
= personal cash investments by founders
mt = market timing
t
= time (quantity) spent by founders building the business
w = work (quality) performed by founders building business
d
= founder’s decision-making abilities (quality & timeliness)
r
= founder’s ability to manage relationships
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WATSON CONSULTING, LLC 2000-7
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Reasons to $tart a Company
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
You don’t want to work for someone else
You like to control your own destiny
You want to get maximum benefit from your talents
You are most comfortable being the leader
You want to set (and change) priorities at will
You think it would be fun and cool
You want to leave a business legacy for your family
You want to become rich and make lots of others rich too
You want to send lots of money back to your homeland
You want to be free to create
You want to change the business world for the better
You want to leave your mark on society
You want to work in a location of your choice
You don’t really trust others
You are tied of just designing logic and/or writing code
Other:______________________________________________
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How well equipped are you for the job?
Key CEO Traits:
1.
Demands that the company’s products & services solve a real,
pervasive and persistent business problem, and that they are
demonstrably better than existing solutions
2.
Knows where he/she is going with the business; knows: (1) how to
get there, and (2) how to determine when he/she has arrived
3.
Regularly communicates #2, both externally and internally, and
with passion, alacrity, conviction, and credibility
4.
Is willing and able to listen to and learn from experienced
advisors, and is willing and able to make timely decisions, tough
compromises and painful sacrifices to achieve #2
5.
Surrounds himself/herself with a few smart, hard working and
experienced people who understand and believe in #2, and to
whom he/she has generously shared the equity upside, if
successful
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More Key Traits
6.
Manages cash-flow daily as the life blood of the
business…which it is!
7.
Is passionate about customers and treats them as kings
and queens…which they are; and has a personal relationship
with the top customer’s CEOs
8.
Ensures that the business is adequately capitalized and
constantly works to build shareholder value
9.
Takes the competition seriously, over estimates their
strengths, has a plan to beat them, and executes it fearlessly
10. Regularly analyzes, challenges and revalidates the
business strategy and model; quickly makes necessary
adjustments and implements them without haste
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As CEO,
with whom do you need to communicate?
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Accountants
Bankers
Board of Directors
Consultants
Customers
Distributors
Employees
Hardware partners
Industry organizations
Lawyers
Market analysts
12. PP&E people
13. Press
14. Recruiters
15. Sales prospects
16. Software partners
17. Standards bodies
18. System integrators
19. Universities
20. User groups
21. VARs
22. VCs / Investors
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“Life Style” –vs– “Growth”
•
•
•
•
Tightly held stock
“Empty suite” Board
Centralized control
Absence of a senior
management team
• Risk averse
• Interesting work and
quality of life take
precedence over market
share and stockholder’s
value
•
•
•
•
•
•
•
•
Small piece of a BIG pie
Many investors
Strong board
Strong senior mgmt.
Delegated control
Calculated risk taking
Aggressive growth
Initiate, penetrate, and
insulate type of marketing
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“Timing is everything….”
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Growing or recessionary economy
Market expansion or consolidation
Stock market
World events (e.g. terrorism)
Capital markets
Culture changes (find the “tipping point”)
Politics
Government and anti-trust issues
Innovations & inventions
Weather & natural disasters
Emergence of Standards
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Idea
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Filters
Vitamin (nice-to-have) -vs- Aspirin (need-to-have)
-vs- Morphine (essential to survive)
Known or completely unknown “disease”
Point product -vs- product line
Barriers-to-entry: time, money, people, I.P.
Existing sales channels or new channels
Market size: Rhode Island or Alaska?
New product + new market = VERY HIGH RISK!
New product + new market + new channel =
ALMOST IMPOSSIBLE!
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Law of Risks & Rewards
New Product-New Market
R
E
W
A
R
D
New Product–Old Market
Old Product-New Market
Old Product–Old Market
RISK
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More Filters
• If there are no competitors then there is
probably not a market for your idea
• Investors love a small guy who is
positioned to dominate a niche market
• Investors hate a small guy who is
positioned to win a fractional share of a
huge market
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Business Model Template

How will the company make money?

Who are the target customers and how much money do they have
to spend?

What is the characterization of the competitive landscape?

Are there existing, successful companies in your space; if none,
why?
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What are the pricing dynamics of your industry
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What is your distribution channel and its economics?

Dependencies upon other companies in your supply chain?

Dependencies upon other companies for your customer to realize
the benefits of your product?
Confessions of a Venture Capitalist, Ruthann Quindlen
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Where Does Your Business Fit?
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Basic Fund Raising Tools
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Executive Summary (1-2 pages)
PowerPoint presentation (10-12 slides)
White Paper
Laptop + projector + remote pointer
Business Plan (25-40 pages including business model
& financials)
Draft Term Sheet, investment memorandum,
subscription letter (i.e. legal docs)
Evidence of Value Proposition validation (e.g. surveys,
interviews, testimonials, alpha test sites, etc.)
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Start-up Equity Sources
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Your own capital
The other founder’s capital
Friends & Family
Angels
Incubators
Boutique VC’s
Potential customers
Strategic partners
Government grants


Small Business Innovation Research (SBIR)
Small Business Technology Transfer (STTR)
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Delivering the Pitch
1.
2.
3.
4.
5.
6.
Two people are better than one (e.g. CEO plus a VP)
No live demos…use screen shots with balloons
Prepare for ~30 minutes of output, 20 minutes of input
~10 min. defining business problem you solve
~10 min. describing your solution and why it is better
~10 min. explaining how you are going to kick your
competitor’s butts
7. Establish credibility early
8. Know how much money you need and why
9. Make changes to the pitch based on feedback (keep
refining it as you get feedback from each presentation)
10. Be prepared for aggressive questioning…have the
answers; be prepared; practice, practice, practice
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Delivering the Pitch (cont.)
11. Avoid the defensive posture…answer the difficult
questions before they are asked
12. Ask questions to confirm your message is being
understood
13. Use the “strategic pause”
14. Take notes
15. Don’t be afraid to say, “I don’t know” but follow up with
“I’ll get the answer”
16. Get everyone’s name and title
17. Establish the next step (what, when & who)
18. Do a “trial close” i.e. ask them how you did
19. Follow the executive summary template
20. Remember, you personally as well as your
business opportunity are being screened!
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Some Investor “Turn Offs”
1. “We don’t have any competitors…”
2. Build it and they will come syndrome
3. Every sentence from CEO’s mouth begins with “I”
4. Absurd revenue or gross margin plan
5. R/D expenses >>15% in out-years
6. Sales & Marketing << 15-20% in out-years
7. Unrealistic and unsupported company valuation
8. Using funds to pay high executive salaries
9. I.P. ownership vague or having legal overhangs
10. Point product solution, not a product line
vision (i.e. the “one act pony”)
11. Little barrier to entry by competitors
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VC Screening of Start-up Deals
100% enter
60% of all business plans received are
rejected after a 20-30 minute review
25% more are rejected after
a detailed review
15% are subjected to a thorough,
“due diligence” examination and another
10% are rejected
3% exit
with $$$
Of the remaining 5% that are considered
viable investment opportunities, only 3%
are successfully negotiated by founders
and VCs, and actually get funded
Pratt’s Guide to Venture Capital Sources
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Started as small acorns; grew to GIANT OAK TREES!
2006 Revenue data
Dell
$57B
Microsoft
$44B
Intel
$35B
Cisco
$23B
EDS
$21B
Apple
$19B
Oracle
$14B
CSC
$15B
Total Revenue = $241B!
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Sun
$13B
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Examples of Investment Sources
• Friends & Family seed capital (~$100K-$300K)
– Good for getting started
– Not much business help
– Missing or very limited in future rounds
• Angels round (~$300K- $700K)
–
–
–
–
$25K - $50K units
Good for mentoring
Usually all smart money
Limited in future rounds
• Venture Capitalists 1st round (~$1M-$5M)
– Active in future rounds
– Board seat participation up to total control
• Venture Capitalists 2nd round (~$10M-$15M)
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VC Investments by Region
Q2 2007 – Total: $7,127,489,000
©PricewaterhouseCooper
7%
3%
4%
4%
35%
5%
5%
5%
6%
12%
7%
7%
Silicon Valley ($2527)
New England ($862)
San Diego ($478)
LA & OC ($466)
NY Metro ($446)
Southeast ($356)
Texas ($347)
Northwest ($331)
Midwest ($295)
DC/Metroplex ($272)
Philidelphia Metro ($196)
Other ($524)
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VC Investment by Business Stage
Q2 2007 Total = $ 7.1B
©PricewaterhouseCooper
Later-Stage ($3142)
3%
19%
45%
Expansion-Stage
($2377)
Early-Stage ($1388)
33%
Start-up/Seed-Stage
($221)
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VC Investment by Sectors ($7.1B)
Sector
Amount
Percent
Deal #
Software
$1,529
21.5
248
Biotechnology
$1,177
16.4
120
Med. Devices
$ 995
14.0
103
Industrial/Energy
$ 552
7.8
67
Media-Entertainment
$ 482
6.8
73
Telecomm
$ 476
6.7
80
Semiconductors
$ 455
6.4
53
Networking & Equip.
$ 371
5.2
34
Others
$1,090
15.2
199
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In an early stage company, what is
the #1 thing investors evaluate and
base their investment decision
upon?
ANSWER:
The CEO!
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Common Start-ups “Failure”
Scenarios (>90%)
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Chapter 7 or Chapter 11
Acquired for little value and often shut down or
completely absorbed with little or no return to investors;
common outcome of Chapter 11 filing
Do an IPO, then don’t perform, get unlisted, stock
goes in the sewer, little or no return to investors
Founders completely replaced, new team sells company
with nominal return to investors
Company stagnates with little or no growth, marginal
earnings, and no liquidity event likely
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“Care & Feeding” of your
Investment Capital
•
•
CA$H must be treated as your “air supply”
Triage model:
1. Must spend now
2. Can meter out spending
3. Can defer spending
•
CFO-type is critical
1.
2.
3.
4.
Lease –vs– purchase savvy
AR/AP management
Investor relations
Avoids the “death of a thousand cuts”
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Common Founder Flaws
(post funding)
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Does not understand CA$H management
Hires friend to run sales
Lacks understanding of marketing fundamentals
and under funds the work or squanders money
Under plans but over funds development work
“Build it and they will come” mentality
Ships an incomplete product that is under
supported
First word out of his mouth is usually “I”
Forms an “empty suit” Board of Directors
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“Selling is getting rid of what you have;
Marketing is having what you can get rid of”
The Marketing Imagination, Theodore Levitt, 1983
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Strategic Marketing…What is it?
•
•
•
•
•
•
•
What to built?
Why to built it?
When to built it?
Who to sell it to?
How much to sell it for?
How to sell it to them?
What to do next?
• A Plan for Success!
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Six Most Common
Marketing Pitfalls
1. Insufficient definition of the target market
2. Nonexistent, incomplete or inaccurate
customer profiles
3. Incomplete PRODUCT
4. PRODUCT is priced based upon cost
and not upon customer value
5. Inadequate distribution strategy
6. Lack of focus; “strategy de jour”
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Question?
What is most important to creating a
successful company:



Its products?
The market for its products?
The people who run the company that
create its products?
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Success
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Right place
Right time
Right idea
Just “add water & stir”

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Team
Capital
Focus
Execution
Liquidity
Celebration
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