There is an interesting article in the NYT today about the value of a business plan. Hopefully the link will stay up for a while. Have a read here:
http://www.nytimes.com/2009/05/14/business/smallbusiness/14hunt.html?_r=1&em
“Researchers found that venture capitalists, who screen hundreds or thousands of solicitations each year, pay little or no heed to the content of business plans. Instead, the study said, because they make decisions “under conditions of high uncertainty,” venture capitalists rely on instinct and their expertise in ferreting out information by other means to evaluate the prospects of a business. That means, the study said, that they pay little attention to the documentation from entrepreneurs about their academic credentials, work or start-up experience, previous success in raising equity capital, ability to form a top-notch management team or even how much money they want.”
I agree with this. Insofar as materials go, I advise entrepreneurs to put together a single page executive summary that covers the vision, team, business model, go to market strategy, differentiation and competition, funding sought and summary of financial projections. Next, a concise 8-10 page powerpoint designed for a 20 minute pitch followed by a detailed (although not excessive) financial model. But really that’s just the start.
Somehow you need to find a way to connect with the VC through a referral. Somone who is referred in will be more likely to get attention because that is already one sign of validation that you are part of a trusted network.
I also agree with Jeff Fagnan’s view that it’s all about validation but also about traction. I’m often asked what it means to show “traction”. Obviously it’s different in every start-up’s case.
Today I was meeting with an entrepreneur with deep industry expertise who had done a successful (IPO) startup in the mobile space targeted at large enterprises. He was now starting a new company in the same space but targeted at SMB and utilizing a more open source/SaaS approach. Great team, solid idea, already had a product up and running on <$150K of friends and family money. Already there are signs of traction – building on experience, keeping a low burn and doing a lot with very little, releasing a product, starting to get customer feedback.
We explored what the next phase to de-risk in the venture would be and demonstrate “traction” and in his case it was all about which verticals would be the first adopters, how to reach them, what the sales cycle looked like and whether they would pay what he thought he would charge. if we could see some early signs of validation here, that would greatly reduce the risks. Being able to show these metrics and the start of proving a hypothesis, in a meaningful and tangible way, is what showing traction is all about.
Utimately the VC is betting on your ability to make the vision happen. There is nothing more validating than showing and doing it. I also encourage you to keep showing updates. Even if a VC says “no” (and many won’t give you that direct an answer unfortunately) for now, you can show traction by continuing to keep them up to date on key things you accomplish.
