Of Shoestrings and Bootstraps: How to Start a Business Without Investors

As a follow up to my recent post on starting a business without breaking the bank, here is another example of a successful business that is being successfully built without angels, venture capital, or other outside investors.  For this entrepreneur, maintaining control over decision-making and keeping the employees engaged through their own ownership stakes seem to be the key to their success. While the founder has to give up some ownership in either case, for this company, giving up value to the employees made for a stronger organization. As she notes in the interview, there may be a time to take on experienced investors at some point in the company's development - so called "smart capital" because with the money comes the expertise of seasoned investors and often former entrepreneurs who can provide value to building your business.  But many entrepreneurs are more reluctant to take that plunge until they have established the business and need the capital to advance to a new level.

I am curious to hear more stories of this (both successful and otherwise).  Has bootstrapping worked - or not worked - for you?

What Are the Essential Components of a Business Plan?

As I prepare to mentor teams from MIT Sloan as part of the Business Plan Contest of its 100k Competition this month, I was thinking about what companies need to produce.  Business plans out there vary from a single page summary to an excruciatingly long dissertation.  The key to a good business plan is to only have the information you need and forget the rest.  Easier said than done though. However, here are some thoughts for companies as they are preparing their plans.  You can see an overview from some very recognizable entrepreneurs in this video.  The entrepreneurs here stress that the market itself, due primarily to the growth of the Internet, is different today than it was in the past, so the model for preparing a business plan is different.  The key is to know the market and have a good idea.  As Marc Andreessen, founder of Netscape turned venture capitalist, notes:

The process of planning ... is very valuable, but the actual plan that results from it is probably worthless.

And as summed up by Kevin Ryan, CEO of DoubleClick, the questions you have to ask to create a good business plan are (1) is this market big enough, (2) do we have a good idea, and (3) do we have good people.

So what should be included?

HubSpot founders Brian Halligan and Dharmesh Shah also have abandoned the large, detailed business plan because once you start showing it to investors, it won't last.  If you have put all of this effort into a 50-page business plan, you either have to throw much of it out as it evolves, or you will be so invested in it that you won't want to change the plan.  Neither result is a happy one for an entrepreneur.  They prefer to think of the "business plan" as a set of three items:

1. a PowerPoint deck describing the business and team
2. An executive summary of the target market and business (see more below)
3. A three-year pro forma profit & loss document

In the early stages of development and the first round of financing, investors are mostly looking at the team and what they are going to do.  It is only when you get into the later stages of financing that detailed financial data become important.  So focus on the market and the concept rather than getting lost in a complicated document.

For the summary, investors will be looking for the following:

1. The Team.  The people who will be running the business and developing the product are key.  The best startup teams will feature a mix of strengths working together.
2. The Market.  You need to describe the size of the target market and the environment to show that you will have customers and they are currently being underserved.  However, no business plan should say that the market is unlimited and there no competitors.  Be realistic.
3. Your Product.  What is unique about the product or service you are providing.  If you have trouble describing it, you will have trouble with Item #2.
4. Money and Forecasts.  Give a reasonable view of what you expect your financials to look like for the next few years (again, understanding that this estimate will change) and provide guidelines of what you see as development and customer relationship milestones to meet along the way.

See my previous post for another perspective.

The key to all of this to show that you have thought through your plan realistically but are ready to adjust when it inevitably changes.

What has been your experience with preparing business plans?  What have you found works or does not work?

"Is VC Past Its Prime?" or "Five Things I learned at the MIT VC Conference"

The keynote speaker at the MIT VC Conference, Alan Patricof of Greycroft Partners, was clear:  venture capital funds are getting 'inappropriately' large and change is coming.  Mr. Patricof is a legendary pioneer in the VC world (but note: while he is fine with being termed a "generational figure", compare him to Bono or Sting but never Tony Bennett), but the current market is not sustainable.  Because of the investment metrics and their need for certain returns, LPs writing larger checks means that VCs are forced to make larger investments into companies that don't need that much money.  The prevailing winds in the VC industry are heading toward capital efficiency and VC2.0, which he summed up as: "small is beautiful".  VCs, said Patricof, need smaller, more targeted investing; smaller funds will find the most success in this economy. Overall, the MIT VC Conference was, in my view, a big success.  MIT always does a great job bringing together talented and accomplished speakers and attendees to advance learning.  And it is always good to reconnect with friends in the industry as well as new many new faces.  While I could go on at some length about the information presented at the conference, here are a few points that I thought were valuable:

1. Capital Efficiency is Key.  As Alan Patricof noted in the keynote, which was echoed by several of the presenters, the trend of ever increasing VC funds is not sustainable.  Oversized funds investing $20-50MM in companies will become the exception rather than the trend.  The current economic environment will force VCs to focus on targeting their investments and using more discipline.  That could be good news for early stage companies.  I will note that not all of the VCs on the panels agreed that funds are too large.  Some argued that they invest their funds in different ways, or have founded new efforts like Dogpatch Labs or Start@Spark to bring seed capital to startups, but nonetheless did agree that the market is applying new pressures on VCs.
2. Will This Bring New Relief to the Funding Gap? The effect of this pressure on VCs in relation to angel investors was touched upon at the conference, but will likely be looked at in more detail as the market develops.  As VC funds increased in size over the past few years and angel investors increasingly formed angel groups to invest larger amounts, a capital gap increased for early stage companies struggling to locate seed funding.  If VCs retreat to smaller funds, angel groups may have to do the same, which may alleviate the situation and provide much needed seed capital to entrepreneurs.
3. Entrepreneurs Need to Focus on the Problem.  More discipline in the VC market means that entrepreneurs will need to be ready.  As Rich Wong of Accel Partners noted, it is not enough to pitch the next best thing as a solution - VCs need more than just a cool app.  To paraphrase, "entrepreneurs need to spend more time on articulating the problem rather than just pitching the solution".  If you are not focused on solving a problem, your solution will come up short.  True.
4. Mobile Hardware Doesn't Matter.  An interesting discussion about the future of mobile devices showed that in the greater scheme of things, mobile hardware design is not the future - unless of course it solves a new problem.  Humphrey Chen of Verizon noted that it has 66 mobile devices in its catalog, each of which is pretty similar in functionality in relation to its competitors.  But that means there are 66 different ways for which developers have to design solutions.  That is not sustainable.  As mobile communications develop and people begin to move more services into the cloud, your mobile device will not matter as much.  It is the software that will drive innovation.  But even there, where apps are currently selling for an average price of $2.78, innovation is needed to propel the industry forward.  John Backus of New Atlantic Ventures noted that the current "chaos in the mobile market is a great fertile opportunity for entrepreneurs".
5. Be Bold, Fail Fast.  ChaCha CEO Scott Jones presented important tips for entrepreneurs to remember: you have to be bold in your vision and be sure to fail fast.  Don't be afraid to try new things.  If they don't work, stop doing them.  But also be willing to come back to them later - maybe it was the timing that wasn't right.  The key is that entrepreneurs need to be focused on solving problems and taking risks to provide the right solutions.
6. Oh, and Hubspot can really throw a party.  Thanks Brian and Dharmesh!

What do you think?  Is venture capital working for entrepreneurs?  Can something new provide a better solution?

VC funds are shrinking, but there is still hope for you.

The amount of venture capital financing raised is lower than it has been in years, which of course makes the market more competitive for would be portfolio companies hoping for a slice of that pie.  But how can you improve your chances? A new article in the Wall Street Journal proffers some thoughts on what VCs are looking for and what turns them off.  The key is to present a clear, concise, and realistic plan.  It is surprising how easy it is to overlook these simple concepts, but sticking to the facts will at least give you a shot in this market.

While we are talking about getting the most from your meeting with your VC of choice, keep in mind a couple of other tips to avoid failure:

1. Think carefullly about that NDA.  One thing to understand about the people in the VC community is that they are looking at plans constantly to find new investments.  You will see many VCs who say they won't sign NDAs because it is not practical (and you might hurt their feelings).  This does not mean they won't - there may be times when a NDA is appropriate - but think about how you want to start off your relationship and whether a NDA is truly necessary.
2. Know your VC.  Your meeting will be short.  You need to spend the time you have getting your idea across.  Do your homework on the VCs that you meet.  These days, VCs are all over the Internets telling the masses everything that pops into their heads.  Check out Venture Maven or some VC blogs to see what I mean.  Before you walk into the meeting, you should already know what interests - and does not interest - them (and maybe even what they were up to last weekend).  Personalize your approach and don't waste precious time in the meeting discussing things that should have been part of your homework.
3. Bring concrete and realistic ideas.  VCs do not have patience for your bad assumptions or, worse, your ego making irrational and inflated claims.  There will already be enough egos in the room.  You have to generate excitement but you also have to show how your idea is the solution to a problem and, more importantly, how it is realistically going to make money.