CHAPTER THREE

TELLING THE STORY TO YOUR INVESTORS

Once you've iterated a few times on your Lean Canvas and tested assumptions, you're likely off and running and building your product. Now, as CEO, you can turn your focus to telling the story of your company—the customer, problem, and solution—to your key stakeholders.

In short, you need some kind of a business plan.

THE BUSINESS PLAN IS DEAD—LONG LIVE THE BUSINESS PLAN

The phrase “business plan” conjures images of massive tomes filled with charts and graphs of every variety. Startup business stories come in short bursts rather than dozens of chapters. There are two main constituencies to whom you need to be telling the story at this stage.

First, you need to convince investors to fund the effort. Then you have to articulate how you want your employees to fulfill the problem-solution set you're building so you can start building a company alongside your product. While those stories are similar, they aren't identical. For example, your team is primarily interested in what their work lives are going to look like over the next 18 months, while your investors will want to focus on what the likely return from their investment will be.

These two versions of the story need to be told in two different ways, depending on the audience: 10 to 12 slides for investors and a blueprint document for how you'll execute on that plan—your mission, vision, and values—for the team.

The business plan isn't dead. It's just gotten a lot shorter.

THE INVESTOR PRESENTATION

As I wrote in one of my sidebars in Venture Deals, “There are only a few key things most VCs look at to understand and get excited about a deal.” They are:

• The elevator pitch
• The size of the opportunity
• Your competitive advantage
• Current status and roadmap from today
• The strength of your team
• Summary financials

Some of these details—the problem you're solving, your competitive advantage (or “unfair advantage”), and your summary financials—overlap considerably with details in the “Lean Canvas” I described in the previous chapter, though some are different.

The Elevator Pitch

Start by clearly articulating what problem you're solving and for whom. By now, you should have enough clarity around your big ideas to be able to state them quickly and succinctly. Can't do it? Go back over your notes. Were there a few stumbling points? Spots where either you had difficulty stating your ideas or where the people you were speaking about pushed back? Most likely, a lack of clarity around those specific ideas is holding you back. Take a few steps back, and reconsider them. When you come back to your elevator pitch later, it should be much easier to write.

Your elevator pitch needs to be short and punchy. It needs to fit on one slide. It needs to be something that, unless you're in an incredibly technical niche, is understandable by average people who aren't on your team. Try explaining the problem and solution you're working on to someone outside your business world, like a friend or a relative, in order to refine it.

The Size of the Opportunity

Next, you need to pull some elements from the work you did on your Lean Canvas into one slide. Who specifically is your target audience, and how big is your total addressable market (TAM) and your realistic take of the TAM, based on your initial pricing and competitive landscape? These items will vary considerably depending on your business. The average order for mops and Tilex is going to be considerably lower than what BNP Paribas would pay for a new system to clear its trades. That's why the market opportunity needs to include both market size and transaction size. Are you selling a $10 product to 20 million potential customers, or a $10 million solution to 20 potential customers? How many of those potential customers do you have to reach for this plan to work? Where else are they spending money today on similar solutions, or how much is their problem costing them?

Your Competitive Advantage

For this section, you can draw largely from your work on unique value proposition and unfair advantage on the Lean Canvas. Investors tend to get very excited about underdog startups that can show a path to disrupting larger incumbents in proven markets. This is your time to shine on that front.

Current Status and Road Map from Today

When we started Return Path in 1999, most startups didn't have a “current status” slide in their investor presentations. You raised money first and built product later because, for the most part, you had to. Today, it is so inexpensive to get prototype products to market that you can do an enormous amount of work on your Lean Canvas—testing hypotheses, validating your market—that investors other than your immediate friends and family expect you to have completed before you approach them to raise capital.

This section of the investor presentation then becomes critical. Where are you today, and, more importantly, what have you learned along the way? Again, since we all know that most initial business ideas are wrong somehow, bring potential investors along for the ride. Where did you start out, what did you test, what did you learn, how did you iterate? This is not a sign of weakness—it's a sign of strength!

Once you describe your current status, you need to articulate the road map from today. You know where you want to be in three years. How are you going to get there from where you are right now? This is one section of the investor presentation that needs to start getting into some details. How will you judge your success over the next year? What milestones and key metrics are you looking to hit? What other hypotheses need to be tested? What roles will you need to hire? What investments will you need to make? When will you launch?

The Strength of Your Team

At the dawn of a startup, your first investors are not investing for cash flow, since the business is likely not profitable. They aren't even investing at a valuation that is a multiple of revenue, since there is usually no significant revenue. They are investing in your idea and your market opportunity as well as your theory about how to prosecute that opportunity, in the early work and learning you've done. They're investing in your story. In short, they're investing in the strength of your team.

Unless your team is 100 percent made up of people with zero business experience and zero direct experience as a potential customer of the product you're building, you should take this opportunity to show off your talent. Why should the investor give you his or her money? You need to communicate why you'll be a good steward of that investment based on the experience you have as a collective team. The only thing you need to make sure you do in this section is to be 100 percent scrupulously honest. Today, it takes only a couple of clicks of the mouse to check facts on LinkedIn or Google. If you were an actual founder of a company before, say so. But if you worked at a startup as an intern during its founding period, don't pretend you were a founder!

Summary Financials

This needs to be the most detailed section of your investor presentation, even more so than your road map from today. Even though, as with all forward-looking plans around a startup, the numbers will be wrong over time (and the further out you get, the more wrong they will be!), it's critical to demonstrate to your prospective investors, and to yourselves, that you understand all of the financial drivers of your business at a detailed level. It's also important to show that you know how to build a financial model and that you understand how to manage a business around cash. Finally, it's important to have a good financial model so you know how much cash you're looking to raise!

On the revenue side, you can draw heavily from your TAM work and from the revenue hypotheses you tested on the Lean Canvas. How many customers will you add or lose each month, and how much will they spend with you?

On the cost side, model out the four main expense items: cost of goods, salaries/benefits, marketing, and capital expenditures (CapEx).

Cost of goods is usually defined as the “raw materials” that go into producing your product, or expenses that are variable with revenue. If you're running a software company, these tend to be things like hosting and bandwidth, credit card processing fees, and sales commissions.

Determining your spending on salaries and benefits starts with a headcount plan. What bodies do you need in what seats, and when, in order to execute your plan? How much will you be spending on health care and payroll taxes? Look at every functional area that's appropriate for your area of business, and map out the resources you have today (if any) against where you are today. If you are missing a functional area and don't know how to plan it, ask for help from an adviser.

Marketing and CapEx will differ dramatically based on the kind of business you're running. But you need to think carefully about all the elements of each, as well as the planning that has to go into making the expenses come to life. If you need to renovate your office or expand to a new location in order to accommodate new hires, you need to give your office manager significant lead time to make arrangements. Don't let the excitement of hiring a new sales team turn into a scramble to find desks and monitors.

Don't let your resource planning stop there. Look at every single line item on an income statement. If you're just starting out, a basic accounting software package can be your guide, as can Google or Wikipedia. From rent to travel expenses, to consultants, to the software your people will be using, your planning needs to include every dime.

INVESTOR PRESENTATIONS FOR LARGER STARTUPS

Unless you invent not only cold fusion but a model that funds your business without requiring outside capital, you'll go through the process described in this chapter a number of times as you scale up your business. This may seem like a hassle, but it's actually a good thing for you as the entrepreneur in the end. If you have to absorb $20 million in losses before building a profitable business, better to raise the money in chunks at escalating valuations so you minimize dilution. More to the point, it's required, since investors will always want to see you derisk their investment piece by piece over time.

As you get larger and larger, the preceding steps are still relevant as an outline, but the work you do to flesh out the outline has to get more and more detailed. New sections or slides have to be added. Who are some reference customers? How are they using and liking the product? If you lost a couple of customers (or are in a consumer business where you lose lots of customers), why did you lose them? How did actual financials compare to your plan? How specifically will you use the dollars invested in the business? Are your early investors going to put more money in this round?

Virtually every company in the world has investors and shareholders. Learning how to tell your company's story to them is an incredibly important part of running a company. Even if you're a product-oriented CEO, or the company's best engineer, if your title is CEO, you are doing this work yourself. Although a good CFO will participate in this process, especially as you get larger, raising money is the process of selling someone else on your vision of the business and of a world made better by it. This is awfully hard to delegate to someone else.