Brendon J. Wilson

This is part of a series of transcripts of the proceedings of the Garage Ventures’ “Art of the Start” conference held in Mountain View. See the complete series of transcripts here.

What we’re talking about now is The Art of Raising Capital. We’re going to assume you’ve gone through all of this hard work that Bill has put you through and now we’re starting to think to ourselves, “Alright – are we ready to go out and pitch to those VCs? Are we ready to go out and raise that venture capital?”

A little about me and in terms of my background in this particular domain: I’ve spent most of my career as a serial entrepreneur. So I’ve done this a lot. I’ve been through this drill a lot. And before Garage I was involved with four different venture-backed startups and raised tens of millions of dollars for those different companies. I had a lot of interesting experiences in that process. Then at Garage, in the early part of our Garage story, we were involved, as I think I said before, at helping companies raise over a third of a billion dollars of venture capital. So, you know, tens of thousands of business plans heard, thousands of pitches went through the process. Now, in our current incarnation as a pure venture capital firm, we’re going through the experience all the time of entrepreneurs who are pitching us for seed stage capital, early stage capital. So, we’ve learned an awful lot – I personally have a lot of scars under these long sleeves from battling with venture capitalists over the years. And so
what I want to share with you right now are a few tips and techniques that you can use to perhaps take a little bit of the F-U out of “funding”.

So now, if you want to go out and raise venture capital, stop first and think. The first question is: is your business venture-fundable? Does it really make sense for you to go out and pound you head against the brick wall of the venture capital industry to try and raise venture capital. Because, the harsh reality is not every brilliant idea is, in fact, venture-fundable. There are a lot of really good ideas – there are even a lot of really good companies – that really should not be going after venture capital, because venture capital is a very special form of capital. It’s not like all other capital. Venture capital firms require that you meet three very distinct criteria in order for you to be justified in receiving their money. The three criteria for raising venture capital are: First of all, you’ve got to have a business that has the potential for rapid sustainable growth. That’s why we’re all here – because we want to start businesses that are going to go, you know, straight to the moon, doubling, tripling every year. That’s great.

There are a number of businesses that can grow rapidly – that’s criteria number one – but you’ve got to be able to get to a significant size and scale in the course of that growth. And you hear this all the time – VCs get on stage and say, “We’re looking for the billion dollar company” – well, of course, they’ve said it so much that all of you believe that every single company that you’re going to start is going to be a billion dollar company. But you got to be honest with yourself – is this really going to get that big over time, and is it going to get to scale? Now, you know, it’s a somewhat more nuanced word, but VCs, venture capital, really needs companies that will scale with growth – in other words, it gets easier as you grow, it doesn’t get harder.

If it gets easier as you grow, then you have the opportunity to meet criteria number three: your business has got to have ongoing disproportionate sustainable profitability. I mean, there are a lot of businesses that can grow rapidly and get to a large size, but they’re not all businesses that have disproportionate profitability. And the only way you can have disproportionate profitability is if you have some very unique sustainable competitive advantage – usually it’s wrapped around some sort of unique technology or know-how you have. And that’s why VCs are so focused on innovative technology, because that tends to be what gives companies the advantages to meet these criteria.

So, first of all, you know, is it venture-fundable? Do you meet these criteria? Let’s assume that you’ve thought about this long and hard, you’ve been honest with yourself, and, you know, you think through the model a little, change your business plan a little bit, and you realize, “OK, this is venture fundable” – now what? Now the question is what is the best way to go out there and raise venture capital? And I want to go through five key components to going out there and being successful raising venture capital.

The first one is: you’ve got to make sure when you start the company, you start smart. There are a lot of very significant details that you’ve got to make sure you get right at the beginning to avoid getting into trouble later on. So you’re going to start smart. And then you’ve got to learn how to tell a good story – you have to understand the fundamentals of your business, you can’t just get pretty slides put together – you really have to understand them, internalize them, and be able to articulate them – that’s a lot of what Bill was just talking about. But on top of that, it’s amazing to me how many entrepreneurs don’t spend the time making sure the numbers add up. There are a lot of economics involved in building a business – and a lot of entrepreneurs just haven’t bothered to get their heads around the economics of their business. I’m going to talk about some of details of that. Once you get all that right, then there’s a very specific process for being successful finding the right investors for you company, and I’ll share with you four techniques are the most appropriate techniques for going after investors. And lastly, throughout the whole process, the key to success in raising venture capital is constantly building your pool of credibility with the people you’re talking to, with the investors certainly, but also with the people who are involved with you in that process – the customers you’re talking with, the gurus you’re talking with, all the people you’re building into your ecosystem – you’ve got to be continuously building your credibility. And we see, all the time, entrepreneurs stumbling in this area and destroying their credibility with very just small, simple mistakes that they don’t have to make.

So, let’s go through each of these one by one.

Starting smart – what do I mean by “starting smart”? Well, when you start your company it’s important that you put together a simple clean company. Back to Guy’s original presentation – all the tasks of starting up – there are a lot of things you have to do when you start up a company. As Guy said, you’ve got to rent office space, you’ve got to buy office furniture, there are a lot of things – but there are some things that are really important that you get right because if you don’t, you’ll be in trouble later on. The first thing is, from the very beginning when you set up the company, incorporating the company, creating the founder stock, distributing the founder stock. Now some of this is technical stuff, and this involves making sure you have the right law firm as your partner in the process. But when you set up a company, you got to make sure you get this right and you don’t waste a lot of cycles fiddling with this because you’ve done it the wrong way. It used to be, here in Silicon Valley in the good old days way back in the nineties, when companies would start up the lawyers would incorporate the company in California because, you know, we had a lot of time and if, in the unlikely small percentage chance that you were going to go public, they’d flip it over to a Delaware corporation at that point and then you’d go public. And that was fine. What was interesting was that during the bubble, the investors and the law firms realized, “Well, we’ve only got nine months between incorporation and going public so we might as well start in Delaware!” So, increasingly what you’ll see is the venture law firms are starting companies out in Delaware – but you don’t want to start out as an S corporation or an LLC and start approaching venture capitalists saying, “Don’t worry – when the time comes, we’ll create the right corporate structure.” Just do it right the first time, set up the right corporation – probably it’s Delaware, maybe it’s California, I don’t know where you’re from – if you’re not from California, probably it’s California, probably it’s not Florida with all due respect to our friend from Florida.

Then you have the process of distributing founder stock. It’s amazing how many people get into trouble here – so you need someone who’s done this before and who understands technically what this all means. And I’m not going to go into all of the technical details here, I’ll just make one comment about one key mistake we see people making. You see a lot of entrepreneurs very early on in the process making promises to their co-founders about how much of the company they’re going to get. And you have this discussion about, “Okay – we’ll each take thirty-three percent of the company!” Well, you know, thirty-three percent of the company when, and on what basis? It’s a very ambiguous kind of phrase – don’t ever get into that discussion with your founders. The next thing you know is you bring on another guy and they get another ten percent, then you bring on advisors and they get two percent, and then there’s this great board member and they got another four percent. Whatever the numbers are – you get into trouble if you start promising percentages of the company. At the very beginning, put together a plan for capitalizing the company over the long term, and make sure you understand how each of the founders are going to fit in to that. Distribute the founder stock very carefully and precisely with real documentation. And then the other piece of it is you’ve got to sign buyback agreements as founders. And every entrepreneur when they here this for the first time, usually they walk into a VC, they’re in multiple layers of discussions – the VC says, “Now, you guys have all signed buyback agreements, right?” and the entrepreneurs look at each other and say, “Well no – we’ve been working on this for five years. We’ve worked long and hard on this in our garage, and we own that stock!” And the VC says, “Well, you know, you don’t really.” And then you have this discussion, and it’s usually bloody and it’s messy. Get into your head that it’s the right thing to do, to have a buyback agreement among the partners who start the company. I can’t tell you how many times we’ve seen companies that have blown up after six months or nine months – one of the partners leaves, one of the founders leaves, you know the founder’s wife ends up having half the stock, whatever it is. Put together buyback agreements so you don’t get all messed up as things evolve over time with the company.

And then – as you start bringing employees into the company, and you bring in consultants, and you bring in advisors – do it clean, do it right, do it with documentation. Get your law firm to give you standard employee agreements, standard consulting agreements, standard advisor agreements, don’t promise percentages of companies. If you’re going to distribute stock, do it very carefully and precisely. Be sure that everybody that is working for you is developing intellectual property that the company owns.

And that gets to the next point: make sure you manage your intellectual property. People, when you talk about “intellectual property”, they think patents, and they think, “OK, it’s off in this domain of going and filing patents.” But it’s not just about patents. It’s about making sure everybody who works in the company has signed appropriate agreements. It’s about making sure that all the know-how is appropriately protected or licensed, about making sure you’re not stealing something from your prior company, it’s about making sure that the company owns the intellectual property and it’s appropriately protected. And then when it comes time to take some money from some seed investors, make sure you do it, again, the right way – from smart investors who now what they’re getting into. Don’t take money from Aunt Martha if Aunt Martha’s going to give you a lot of trouble – now I used to say “unless your Aunt Martha is Martha Stewart”, now I say especially don’t take money from Aunt Martha.

But there’s a process of taking seed capital using convertible notes, using the right instruments, bringing the right qualified investors into the process – you want to pay good attention to that. And you’ll do that, as I said, in a convertible note or loan rather than trying to sell Series A preferred stock to your Uncle Fred.

And last, earlier today someone said, “Well, you know, startup companies shouldn’t really have to worry about Sarbanes-Oxley and that sort of thing.” But I will tell you, in this environment right now, a lot more attention needs to be spent on proper governance from Day One. And that means things like all the things I’ve talked about before – it means things like thinking through compensation structures, thinking through option policies, thinking through/making sure that you don’t have any funny deals within the founders, and the investors, and the board members, or the customers, or anything like that. At the very beginning, don’t assume that what you’re doing is private – assume the things that you are doing, relationships you’re building, will become public at some level, and you want to make you they can survive the light of day. So pay attention to governance from day one. Be professional about the way you set up your company and you start your company from Day One.

So you put this all together, and what this means, really, is you’ve got to get the right attorney, the right law firm. And, now, I just want to, I should do the disclaimer, I should have done the disclaimer before – I am not an attorney, I just play one on stage. But if you’re going to start your company, you want to make sure you get someone like the Hellerman/Venture Law Group. And there are a number of other attorneys who will, for deferred fees (I’m just now negotiating prices for our friends here), they will defer their fees, they will work with you to make sure you set this up right. It’s doesn’t have to cost a lot of money to set the company up right.

Point two: tell a good story. I’ll tell you, if only every entrepreneur has spent a little bit of time listening to Bill Joos the world would be a much better place. For those of us who are at the other end, you know, receiving it, you know, the sky would be bluer, the birds would sing sweeter, if only entrepreneurs had taken to heart how do you articulate the fundamentals of your business. As Bill was saying, as you approach the venture capital community, you have to understand what’s going on in their heads – inside the heads of an investor there’s generally a scorecard that they’ve developed over the years. They’re scoring you – every communication you’ve got – if it’s an email, if it’s a phone call, if it’s an in-person presentation – they’re scoring you against these different factors and evaluating your business and how well do you understand the fundamentals of your business. Those scorecards vary, you know, from investor to investor – different investors have different biases as to what’s the most important, but it’s usually some combination of these six elements: the team and how good is the team, the problem that you’re going after and how big is the opportunity, the technology and solution you’re putting together, the sustainable advantage that you’ve got, what sort of business model you’ve put together, is it proven, and how do you leverage this business with partnerships. I don’t want to spend a lot of time on these, because I think Bill has already covered a lot of this in great detail, and we’ll talk about some of these elements later on.

The main point here is: it’s not just about getting someone to put together a great pitch for you, it’s about having the whole team understand the fundamentals of the business and being able to articulate any one of these in any given communication you’ve got.

So, you know, too often we see CEOs who will not answer a question and say, “Well, you’re going to have to talk to my CTO about it”. If the CTO is in the room, that’s O. If the CTO is not in the room and you’re the CEO and you can not give an adequate articulation of the value proposition around your technology and what makes it unique, then, you know, you’re not quite fully there. You don’t necessarily have to be able to recapitulate the code that it’s written in, but you’d better be able to articulate each of these elements and the fundamentals of your business in any given context. It’s also important to understand even though we give you kind of a template for how to articulate this, different investors are going to focus on different elements. You’ve got to listen to what they’re worried about and make sure you can address the concerns that they’re most focused on and be articulate about that issue.

Articulate the fundamentals but then, as I said before, make sure the numbers add up. Make sure that you can demonstrate a fundamental understanding of the economics of your business. Now, some entrepreneurs are more analytic financial than others. There are a lot of CEOs that, you know, they position themselves as, “You know, I’m the big picture guy – talk to my CFO when it comes to numbers.” That’s not good enough. If I’m entrusting you with millions of dollars, then I want to know that you understand at a very fundamental level what business is all about. Business is about economics, and that means that it is about numbers, it is about the way you make money. You’ve got to understand the numbers of making money if you’re going to run a successful business.

So, let’s talk about some of the numbers that you’ve got to focus on. First of all, there are the long-term financial projections. Now, as you might guess from what I’m saying, I tend to be more on the analytic financial side of things when I evaluate a business. And to me, the long-term financials are really important. I get a lot of entrepreneurs that push back on me and they say, “You know, Bill, why should I do financial projections for this business? I have no idea what the world’s going to look like in five years! And if I pull it together, everybody’s going to know I’m just making it up!” And my response to you is why should I invest in a company where you’re just making it up? Don’t you have some sort of vision of how the future is going to look? Don’t you have a way of understand how the economics of you business might play out? I don’t believe any long-term financials that I read as being accurate, but every set of long-term financials should tell a story. It should tell a story that maps to a vision of the way the future’s going to unwind. So your long-term financials are not a spreadsheet exercise that you give to some consultant who knows how to use Excel. Your long-term financials are a way you tell the story of you business using numbers. And they’re driven by the underlying metrics that drive your business. They’re not driven by cell formulas – they’re driven by how are you going to go get customers? What are you going to spend to go get those customers? What are those customers going to pay you? Some of the points that Guy was making earlier about you business model and Bill was referring to as well, tell the story using numbers, present a vision of the future that makes sense in your long-term financials. And test them with comparables – go find other successful companies that you want to model and say, “Has any company in the history of the world ever performed the way I’m projecting my company will perform?” Almost always, every set of long-term financials we see outperforms the most successful companies in the history of the economy. Get a little reality in there. Go back, look at great companies and say, “Hey, you know, this is what I will look like if I’m a great company” – test you assumptions there.

Now the other side of this spectrum is the near-term operating plan, and most entrepreneurs see that as the first twelve months of the long-term plan. It’s embedded in the same spreadsheet. Probably that’s not a good way of doing it, because one way or another, either you’re going to get too high level and not have a good near-term operating plan because it’s driven off the long-term financials, or you’re going to spend too much time figuring out how many paperclips you’ve got to buy in year five if you use your operating plan as the same tool. So, just tactically speaking, when you are developing a near-term operating plan, understand that it has a different role than the long-term plan. The long-term plan tells the story, the near-term plan says, “OK, what are my levers and what are my variables in the very near-term as I’m raising capital. Can I adjust quickly to rapid changes in the outlook? If things slip, do I hit a brick wall or do I have a way of escaping if things don’t play out quite the way that I’m hoping they will?” That’s the way a VC looks at the near-term operating plan – they want to see that you have the ability to adjust quickly and react to changes in the environment. And they want to know that you’re going to use their capital efficiently during that initial period of time and that you’ve got the runway to get to the next large milestones in your business. That then enables them to understand your capital requirements, not just for this next round of financing, because you’d better understand your requirements over multiple rounds of financing and be able to model out what’s the capital structure of my company going to look like from here all the way out to whether it’s an acquisition or an IPO or whatever liquidity event. Now, again, a lot of entrepreneurs take the attitude, “Well I don’t really know, I’ll probably go raise some more money at some point in the future.” But if you don’t do the work of thinking that through, then it’s going to fall back on the investor to think through what sort of capital you’re going to require, because investors need to understand how is this company going to look over multiple rounds of investing. So I encourage you to do the work of building the model for the way your company’s going to change with different levels of capitalization.

Now, in your Series A, now, you’re going to sell thirty-five, forty, fifty, sometimes even more percentage points of you company. And then you’ve got a Series B, and maybe you have a Series C – god help you, you don’t have to have a Series D, But over time, the way the Series A investors look on your cap table changes pretty dramatically, depending on how things work out. That’s really important to a Series A investor, like Garage. So, do the work of understanding how much capital you need and how your capital structure’s going to change over time.

And then finally, as I said before, make sure you can articulate clearly what are the sensitivity points in your financial model – what are they key metrics and variables that you’re going to be watching like a hawk – that demonstrate whether or not you model is valid, or whether your model needs adjusting. You should have a dashboard of key metrics – that aren’t necessarily financial metrics. You know, it’s things like: how many days does it take to close a sale, what’s the cost of a typical customer acquisition, what’s the value of a customer once you acquire them, how long does it take to get from point A to point B in any given customer relationship, when will they buy up and up, how many customers are converting from the initial product to the advanced product, how many customers are re-upping in a subscription model. You’ve all these metrics that are the most significant variables in your financial model. You better be able to articulate those very clearly, you better be able to show how they drive your long term financial success, and you better be able to show how you are monitoring them over time. So, those are making sure you get the numbers right. Put all this together and maybe now it’s time to go out and find the right investors.

And I want to talk a little bit about some of the key factors for the process of going out and raising capital from investors. First of all, the reality in the venture market right now is probably the single most important thing you have to do before you go after venture capital is you have to generate some form of momentum in your business. It is no longer the case, if it ever really was the case, that you could sit down with an investor and a napkin, and talk about a brilliant idea and raise capital. Now, maybe that will happen again in the future at some point, but don’t count on it – it ain’t a plan for raising capital. What you have to do first is show you’ve got some sort of momentum. Now you say to me, “But I have no money! How can have momentum without any money?” Well, a lot of other people have figured out how to do it. There a lot of ways you can make progress in the development of your technology, in the development of possible customers, in the building of your team, in getting some sort of alpha or beta or something out there to validate your marketplace before you even have money. You’ve got to figure out how to do that so that when you approach investors you can say, “Here’s what we’ve done with nothing – imagine what we can do with your capital. I’ll help you imagine – here’s the forecast for this business.”

So, step one in the process, step one in the process is generate some form of momentum. Then, then, go target the right investors. You’ve got to make sure when you’re going after the venture community that you’re spending your time wisely targeting the investors that make sense for your business, for two reasons. One: if you go to the wrong partner at the right firm, you may have shot your chance at that particular firm. So, it’s not just about figuring out what’s the right venture capital firm to go after, you’ve got to do the eaxtra level of due diligence and figure out who’s the right partner at that firm. Now, most entrepreneurs, the process looks something, variation on two themes. One is: they go around to their friends and they go around to their ecosystem buddies and they say, “Who do you know in the venture community?” and they compile a list of all the people the people know and they assume that list of “who do you know” is the right community to target. But that’s not right. You’ve got to drill into the next level and find out, each of the people, are they the right people or not or is it one of their partners, or is their firm even relevant. Is it a life science firm and you’re an IT kind of company – I can’t believe how many times that happens, right, or vice-versa, IT firm with a life science deal. The other approach a lot of entrepreneurs take is they find the directories, you find a directory of venture capitalists, and, you know, you get as many email addresses as you can possibly get and then you blast the model out. Now, the great thing about the venture community that has changed over the last five years is nobody uses FedEx anymore – so that’s a good thing, it saves entrepreneurs a ton of money. But it’s also a really bad thing, because it seems like it costs less to send an additional business plan to an additional person. But there is a cost, again, if you send the wrong person your plan you’re going to develop a negative reputation, perhaps, in that firm.

I have to tell you a sad story: just a few weeks ago, I got an email that was, it was an email that at the top of the email you saw this CC list and there were about forty VCs in this CC list. And then below the CC list it starts out “To whom it may concern”. So, you can guess my first reaction was, “This doesn’t concern me!” That’s just the most egregious variation on what happens all the time in the community. Do your homework, figure out who the right investors are, and then, once you’ve figured out, “OK, this person at this firm is the person I want to get to” then you go back to your ecosystem and you say, “Who knows this person? Who has a credible introduction to this person? Who can help me get a credible entre to this individual?” And you try to build as many links into that person before you go out to them. And then you personalize your communications with them, none of this “to whom it may concern” or “dear sir”, which is just great if you’re targeting a woman. You personalize communications, you say, “Hey, I noticed that you’ve invested in this space, you invested in this company, we think our company is complimentary, we think that our company is the next generation” – show that you’ve done your homework, show that you understand the space that investor invests in, spend the time to do the homework, and then target at a more limited number of venture capitalists, rather than hoping that it’s a percentage game: “Gee, if I send the plan to two hundred investors, all I need is two percent of them and I can get my company funded!” It just doesn’t work that way.

Then, assuming you get some venture capitalists interested, you’ve got to nurture a syndicate of investors. A syndicate of investors is always headed with a lead investor, so the first thing you have to do is find lead investors: guys who will write the term sheet, or women who will write the term sheet to invest in your round. And then help build the syndicate around that lead investor. The syndicate is a group of other investors who, for whatever reason, would prefer not to lead – they’re a smaller fund, or, in this particular case, they don’t have the time to take the board position and they want to co-invest in the space – you have to build a syndicate. Now there are a lot of fairly straightforward, commonsense rules about this. You want to be careful when you’re building this syndicate that you don’t go out and say, “Hey! I’ve got XYZ, top-tier, Sand Hill Road VC that’s going to be giving me a term sheet any week now! Wouldn’t you be interested in joining them in this deal?” Well, if you don’t have that term sheet, then you’re going to get in a lot of trouble when this person calls this person and discovers, “Well, yeah, I had a meeting with them. But that doesn’t mean I’m writing them a term sheet!” You’ve destroyed your credibility; you’ve lost two investors in that process. So be very careful about how you cultivate this syndicate and you bring them together. What you want to do is get the lead investor to step up to the table, to commit the funding, and to help you build the syndicate.

If you can have two syndicates competing, that’s even better. That’s a hard thing to get to. Ideally though, you want to get one or two investors who are working with you to build the syndicate. Do not abdicate the responsibility for the syndicate to the investor; you’ve got to be part of that work process, to build the syndicate.

And then, last, throughout the whole thing understand the process of raising capital is a selling process. It’s stunning to me that even sales and marketing oriented CEOs, for whatever reason, they get into the venture process and they sort of lose their way. They lose sight of the fact that this is just another complex selling process, and it requires all of the steps that any selling process requires: you’ve got to qualify your leads; you’ve got to make sure that the person you’re talking to is the right person to talk to; you’ve got continuously do trial closing; you’ve got to figure out techniques to progress the process – “OK, so great! When’s our next meeting? Can we do next Wednesday at noon?” You know, “If I get you this information, will you be ready to give me a term sheet?” All of the standard techniques of selling: “Who else do I have to talk to? When do I get to talk to the rest of your partners? What’s it going to take for you to write a term sheet? How much of the round are you interested in?”
Just standard selling techniques. It also includes being persistent. Amazingly, you get these incredibly scrappy, aggressive entrepreneurs – but when it comes to talking to VCs they kind of feel, “Well, I’ll let them drive the process.” You know, “Have you talked to this firm recently?” – “Well, no. He said he was going to get back to me…” “But why don’t you call them back?” There is a very fine line between persistence and stalking. But, you know, you’ve got to push that line. You’ve got to push that line and, worst case, they say ‘no’ – that’s fine! You can focus your energies elsewhere. It’s better to get to a fast ‘no’ than a long, drawn out ‘maybe’ that eventually ends in a ‘no’. So, manage this like a selling process.

Then, the fifth point, which is kind of a nuance but it’s so fundamentally important and it’s amazing how many times entrepreneurs blow it on this point: you’ve got to build your credibility. There are a lot of factors that enhance and detract from your credibility during this process. Let me run through a few.

Customers – if you have customers who are reference-able, that’s wonderful. So go – perhaps the best way to go get venture money is to get customers first, customers who say they’ve bought what you have, and they want more of it, and they love you. Not everybody can do it, but it’s a great credibility builder. Short of that, there are strategic partners – now that doesn’t mean you have the Software Development Kit from Microsoft and they’re a strategic partner – it means you’ve got a reference-able relationship with a company that really wants to help you succeed. Some earlier seed investors – have you been able to attract some seed investors who are credible world-class investors. Or at least advisors or board members, and we talked a little about that earlier. Are there industry experts out there who you’ve met with, analysts who you’ve talked to, who will vouch for the fact that this is an important new breakthrough, smart industry gurus who can sign up to say, “Look, what these guys are doing is the next generation”. Back to Guy’s MAT: Are you hitting your milestones? One of the things that happens all the time is entrepreneurs, in their first meeting, they say, “But next week I’m going to sign this deal with XYZ person” and a month later they have their second meeting with the VC and they say, “How’s that deal going?” “Well, you know, in essence we haven’t signed it up yet”. And last, don’t lie. Seems kind of obvious, but how many times do we see entrepreneurs who are basically lying during the process. Now, there are lies and there are lies, and, you know, obviously we’ve seen in the news lots of stories of really bad lies. But there are also some subtle lies that you hear all the time, and so, there’s so many of them in fact, we’ve had to compile a list. So, this is my opportunity to do my top ten list and then I’ll close on that point.

There are a lot of things that entrepreneurs say during the process of raising capital that just demolish their credibility. So, the Top Ten List of Lies That Entrepreneurs The Most Frequently. Lie #10: Our projections are conservative. Now, most people don’t think that’s a lie, but it is. It is – your projections aren’t conservative, you know they’re not conservative, you know you’re going to miss those projections, just stop using the phrase “our projections are conservative”. Lie #9: Our target market is $56 billion. You know, you may be able to add up all the economic activity in every sector in which you’re possibly going to do business, but that has nothing to do with your target market. This destroys your credibility when you say this. Lie #8: We have a world-class team. Now, I know you’re proud of your team, I’m sure you have a great group of talent on your team, but it probably isn’t world-class unless, I don’t know – is Jim Clarke here in the audience? You may have a great team, but don’t tell us it’s a world-class team because it probably isn’t. They may be smarter than anyone else in the world on a specific topic – tell us that, and let us know why that is. Lie #7: Our average sales cycle is 90 days. Well, you know, your first customer who ever bought your product only took ninety days from the time you started to the time you ended. But understand that is not an average. That is not an average – that is at the far end of the bell curve. The average is what happens over the long end – you have not yet sold all the guys you haven’t sold yet. The average is going to be much longer. Lots of entrepreneurs get trapped because they build into their model this ninety day sales cycle, when in fact it’s nine months. Or twelve months. Or longer. Be realistic about your sales cycle. Lie #6 – and Bill touched on this one: We have no direct competition. Almost certainly, you have competition and, as Bill said before, if you think you have no direct competition it’s because you haven’t done the work to find them, or it’s because you’re lying to us. Either way, we’re not that excited about the work you haven’t done. Lie #5: No one else can do what we do. Well, you may be the first team to produce this particular prototype of this particular technology, but everybody knows that with enough resource and talent other people can do it. This is not a compelling competitive advantage. What we want to know is why your competitive advantage is sustainable. Why it is that because you have these three people on your team that your team will be able to sustain your technological advantage over multiple product cycles – that’s a competitive advantage, not the fact that you’ve tinkered together a technology that no one else has bothered to build yet. Lie #4: All we need is 2% of the market. I want to target the company that wants to go after the 98% that you’re going to skip. That’s the company I want. Lie #3: We’ll be cash-flow positive in twelve months. You know, God bless. From your lips to God’s ears – but it ain’t going to happen. Lie #2: Our contract with Nokia is going to be signed next week. Well, don’t start talking about when that contract is going to be signed until after it is signed. You can talk about conversations you’re having with Nokia (if that’s OK with Nokia), you might even be able to get a reference-able relationship discussion. But don’t promise contract signature dates until after they’re done. Underpromise, overdeliver. Surprise investors with momentum. Don’t miss milestones and destroy your credibility. And Lie #1 is: I’ll be happy turn over the reins to a new CEO. You know, as another venture capitalist likes to say, there’s a big difference between the CEO, the entrepreneur you’re talking to, who you know they understand the process, that they’re good at the early stage and they want to bring someone else in the later stage. But then there are those entrepreneurs whose fingers you have to pry off the steering wheels with a crowbar. It’s OK, some entrepreneurs can make that transition, others can’t and shouldn’t, and know that they shouldn’t. And there’s a big difference between the two.

So, in summary: What’s the best way to raise venture capital. Again, answer the first question – make sure you understand that your business is, in fact, venture fundable. Make sure you set your business up the right way. Articulate the fundamentals, both in prose and then understand the economics – make sure your financials tell the story of your company. Understand that raising venture capital is a selling process and use your best selling techniques through the process and then throughout the process build your credibility. So, that’s the best way to raise venture capital. The fact of the matter is: not every company will be able to succeed at the end – we’re going to talk about that later this afternoon. I’m going to be back on stage to talk about The Art of Bootstrapping.

This is part of a series of transcripts of the proceedings of the Garage Ventures’ “Art of the Start” conference held in Mountain View. See the complete series of transcripts here.

I get the privilege of introducing myself, that way we’ll do it correctly – everyone else has run off to some meetings they had. I’m Bill Joos, I’m one of the co-founders with Guy and Bill Reichert, here. And I’d like to start, before you see my name on the screen, by again acknowledging our great friends at Comerica, which brought this morning’s break to us.

We’re going to be talking about The Art of Positioning and you will need for this session this handout that is in your pack. So you will need this handout that is in your pack.

While you’re digging that out, let me go through a couple of housekeeping chores, answering a couple of questions that have already come up. You are all going to be getting an email next week that will tell you how to get each and every one of the hundred and ninety-seven Powerpoint slides that we will be using today. So, you will get all, in the email that will be sent to you, you’ll find out how to get all those Powerpoint slides. Additionally, about seven days from now there will be MP3s of all the sessions available to purchase at an extremely modest price, using one of our partners, you’ll be able to use our partner to purchase those. So you’ll have an opportunity to do that as well.

Additionally, we did give some raffle tickets early this morning – let me explain what those are all about. Our good friends at [spa] Spa have given us two spa packages, and to help us get started immediately after lunch we’ll be giving one of them away exactly at 1:15. But you have to be in the room. That hopefully will provide an incentive for you to get back. We’ll be giving the second one away following the afternoon break at 3:30.

We are in a non-profit organization called the Computer History Museum. And so I made a deal them – and the deal is that the next time a cell phone rings, that person will make a $100 donation, a total tax-write-off, to the museum. So you can choose to either do something with your cell phones now to assist them in their fundraising efforts or you can turn them off. Thank you very much.

We’re going to be spending a jam-packed hour together, and what I’d like to do is give you a little of my DNA – I think it’s always helpful to know who’s on the stage in front of you. If you prick my finger and send it away to the OJ Simpson DNA lab, what comes back is “sales guy with heavy marketing overtones”. So, think of me in that light, and it’ll be helpful as I go through my comments.

Each of us has a slightly different view of what we’re looking for, and I’m going to breaking my presentation into two parts, roughly thirty minutes each. The first is going to be done almost in the way of a workshop talking about perfecting the art of your positioning. Additionally, after that, we’re going to be talking about pitching. I am going to be available this afternoon during the break, I will not be able to take Q and As during my hour session, because we actually have about an hour and fifteen minutes of stuff to go through. So, I’ll be happy to take some questions when you can catch me in the hall during the break.

We’re going to start with the Art of Positioning. And again, you should have that worksheet in front of you. It would be extremely helpful if you all stay on the same page, because I talk at about two hundred words a minute, with gusts up to three hundred and if you’re on the wrong page, you’ll probably miss some of the things that we’re going to chat about.

Everyone has a slightly different view of problems that entrepreneurs face, but the one that I see through my eyes the most often, as being somewhat of a professional coach working with our clients, the number one problem is the inability to explain what they do correctly. Now, you may laugh and this certainly probably, therefore, applies to the people on all sides of you, if it doesn’t apply to you, but it is extraordinarily difficult to talk about what you do quickly and precisely. So we’re going to talk about the two foundation underpinnings for that: Market Definition and Value Proposition.

I’m going to offend some of the marketing people in the audience and I’m even going to offend the conference, because positioning and marketing is, in fact, an art. However, I’m going to approach it with a little bit of scientific spin today, and give you a formulaic approach that will make a PR firm cringe, but will nevertheless help you get started down that path. So there is a way to do this and to attack this problem systematically.

When we do this with our clients, we will get their entire management team together and we will spend about six to eight hours spread over several days going through the exercise that we’re going to be going through here in about twenty minutes. So the realities are it’s going to take you and your team many hours to do this, and I say “team” because without buy-in from your cohorts, without this being a team exercise, clearly the value of this exercise is extremely diminished. Additionally, today I just want you to grasp the concepts and the fundamentals. I want you to take adequate notes so if you choose to this exercise by yourself, you know how to do that.

Additionally, I want you to think of your positioning as a living document; however, there will be a time when you want to freeze that document. You do not want your positioning to change based on whoever wrote the last marketing piece for you, whoever changed the last website. You don’t want it to creep. If you’re going to change it, you want to do that consciously and have your management team do it. And, with all exercises, there’s no bad ideas. So it’s extremely important to hold your judgement as you do this exercise. Now, again, we’re not going to be able to do the entire exercise, so let’s recap again what I’d like you to do: understand the process, take adequate notes so you can do it when you go back.

Now, I think it’s extremely helpful to have a model or an example to look at. And so I’m going to take a look at a model, but let’s talk about what we’re doing first. The underpinning is: who do you do things for? It is the market definition statement. Now, some of you are going to be troubled by the fact that the market definition statement is going to be a long, complex, compound sentence that isn’t going to fall off your lips correctly. Don’t worry about that, we’ll talk about how to address that in a moment.

The second thing, once we know who we are doing something for, we want to talk about what we’re doing, and this is going to be the value proposition statement. Again, don’t be troubled by the length, by the fact that it’s long and complex and compound. Because what we’re going to then do is use these two as a yardstick. And on that yardstick, we’re going to have a number of communication vehicles that are built. These could be mantras, although I don’t happen to have that, but clearly that could be one. It could be any of the other targeted marketing communication vehicles that you or your company needs to develop. And these are the ones that need to roll off your tongue, and these are the ones that need to be more precise.

But what we’re going to find is once we have a valid market definition and value proposition, all of these, something’s going to happen. We’re going to get amazing consistency, and what we say is that our targeted communications need to be faithful to the underpinnings. Once you have your underpinnings developed and temporarily frozen, you can then use them as a yardstick to measure your other communication vehicles against.

I’ll give you an example: at Garage, we’ve had over fifteen hundred face-to-face meetings with entrepreneurs. And the first thing we sort of do is go back and look their web site. You would be amazed at the inconsistencies between which they just told us in our boardroom trying to get money from our billfolds, we look at their website and see various differences. So the answer is you want a consistent look, and one of the things we want to be able to do is that.

So we’re going to take a look today at a case study, and we’re going to look at a company that happens to be one of our portfolio companies – in fact, it’s going to be the way in which you can buy the MP3s, because I’d like you to get familiar with them. And it’s a company called BitPass.

Now to help you understand – and I don’t need you to understand their business model as much as the thinking – to help you understand their thinking, let me just share with you how their looking at their case study. The CEO is from Salon and is very familiar with subscription-based models – and what they have done is they felt that the world has gone through things: in the early days, everything was free; in the medium days, everything was a paid subscription; and now, thanks to people like Apple and iTunes and others, people are willing to pay by the sip rather than by the subscription. And so they see that individual purchasers of unique items are the new way of the future. And it is on this premise that we went through this exercise with them. Now I wanted you to just understand that to have the case study be more helpful.

So the first thing that’s going to happen – and I’m on panel A now of this exercise (you’ll notice the big letter in the lower right corner) – the first thing that we’re going to ask you to do in this exercise – should we be doing it as a real workshop, rather than as a lecture – the first thing that we’re going to have you do is, top of mind, write down as quickly as you can: who do you think your primary and secondary constituents are? And again, I don’t want you to do it for your company now – I just want you to understand the process.

Once you have done this, then we’re going to go into the engagement of a discussion of how to refine that. And what we’re going to find is a couple of things. Example: one of the things that was a factor in their decision was: what size companies are we going after? And obviously the different tiered companies, have different – it affects things differently. In a similar vein, the entire discussion built around this took into account a whole bunch of other things: are we doing video? What are the rights management? Is it one-use? Is it multi-use? All of those issues came into effect, and a discussion ensued, and it may not surprise you to learn that frequently it takes forty-five minutes or an hour for a group from a single company to agree on their primary constituents.

If in doubt, chase the cash. So, if you’re in doubt about who your primary constituent is, think of your company’s cash flow at the time you break even. And I stress that because early on, you may choose to do some unnatural things to make cash. You may choose to do some things to get reference customers and others that aren’t your steady-state business. So your primary constituent should be the largest slice of your pie chart at the time you break even.

In a similar vein, there’s going to be a discussion about who your secondary constituents are, and in some of your cases you may find that you may or may or may not have them, it may not be quite as clear. But here we have the same thing – if we’re going after a pool of buyers, we want to understand: is that a pool that we have to make, or is that a pool that we can adopt? I’ll give you an example: if you were a famous cartoonist, you would maybe put up your own website and built a culture around selling your cartoons online – but you would have to build it. If, on the other hand, a company was lucky enough to land CNN, they already have fifteen million users, therefore there’s a pool. So, in a similar vein, there is an entire discussion built around the secondary constituents.

And what comes out of this process is a clear-cut market definition. And in their case, here’s what they found: tier one large resellers of premier digital content. That is their primary source of revenue at the time they break even. That isn’t saying that selling my cartoons online is unimportant – but in the scheme of their pie chart at the time they break even, this will be their primary constituent.

In a similar vein, their secondary constituents are different than they initially thought – and that is, it is all Internet buyers of digital content and anyone other than tier one. So the walk-away from panel A is pretty simple, that is that you should be defining a very broad focus and then a come narrow to a reachable market. Nothing makes a VC crazier than having you come in saying you’re going to conquer the world – we don’t believe you. Find a reachable market – start broad and go narrow.

Moving over to panel B, we then have to figure out what the burning problem is that our primary constituent has. Now in the old days (eighteen months ago), steroids and vitamins could get sold online. I don’t mean that literally, but I mean things that made your website “stickier” or marginally better or beefier. That’s the old days – the only thing that’s getting funded nowadays is painkillers. You can’t sell a painkiller until you’ve identified the pain. And you can’t identify a pain, until we establish a burning problem. So thinking in terms of our primary constituent, their first cut problem is that they have lowered than desired usage levels. And that is, there’s only so many people in the world who will go for subscriptions, but they’re a whole bunch of other people that would sure like to sign on maybe an read, oh, about Ronald Reagan. There’s something very timely that doesn’t justify a full subscription – maybe they want to read about Ray Charles, but they don’t want to join an entire subscription. So people will buy by the sip.

Once you’ve done this “first glance” burning problem, then engage in a discussion of the symptoms: how do I know if I have that problem? And this will generally fill up a whiteboard. And in this case, I’ve put some more illustrative examples: churn, low subscription renewal, competitive losses, flat growth, abandonment, user reluctance to subscribe to one pressing need (you know, the all or nothing).

And once you’ve done this, symptoms and secondary problems, I want you to scrape them all off the whiteboard, put them in a kettle, put them on the stove, turn the heat up to ‘simmer’ and see what comes off. And we noticed, and they noticed, some commonalities – and that is the commonalities were all tied around the premise they had that the subscription model isn’t the only way to go forward, even though for many people it had been in the past.

Armed with those commonalities that came off stove in the simmer, I then can go back and I can refine the burning problem to be: limited product offering because of subscription-only modeling.

Now problems are not actionable. Pain is actionable. When Maslow did his breaking study on what motivates humans, he found that people run from pain faster than they run toward pleasure. So a burning problem means nothing – I also have to have, and identify, what the big pain is of my primary constituent that has the problem we just discussed. And in this case, we’ve identified the big pain. And the big pain in this case is: lack of revenue growth. Lack of revenue growth.

Pain’s an interesting thing – people buy or sell for a combination of reasons. Like, I wasn’t going to buy my car which I happened to like until I learned it had eight airbags. That appealed to part of my brain, totally irrational, but nevertheless it helped me and allowed me to make that buying decision. So from pain, we have to involve emotion into the selling or buying solution.

So the answer is: if my primary constituent is tier-one content resellers, and the primary problem is limited growth for lack of revenues, what of emotions would that evoke? Well before we go there, let me give you the acid test. If your primary constituent can instantly identify with the burning problem and big pain, you’ve got it right. You start telling them and the guy finishes the sentence for you and slaps his forehead and says, “That’s me!” – you’ve got it right. If you’ve got to explain it – you’ve got it wrong and you will not succeed. So the acid test: will your primary constituents, a subsample of your primary constituent, will they instantly identify with the big pain and the burning problem? You’ll be amazed how many…don’t.

So, once I have it, I have to evoke emotion. What kind of emotion does my primary constituent have with my big problem and big pain? And this is a whiteboard exercise: what does somebody feel like? Maybe I’m at an individual level – and the gamut, runs the whole gamut of things. And once again you’re going to pick one of those, you’re going to pick one of those to build your argument around. In this case, the example we’re going to be using is centered around fear. It’s a tremendous motivator. Tremendous motivator.

So, we’re going to start concatenating and bringing some of the work we’ve done together. Don’t be troubled by the fact these are long, complex compound sentences because, remember the foundations? You’re not here to use them in that manner. These are only going to be the common yardstick. And I’m going to start with the tag line that establishes your space in the present. And in BitPass’ case it is: they want to be the leading payment platform for digital content. And when we get to value proposition, I’ll explain why they chose “platform” rather than “solution”, or some of the other things it could be.

So if I go over panel, if I go, this should hook them. This should get you to the point that you sort of say “tell me a little bit more”. If I now go over to Panel E, you’re going to find that I’m going to pull together some work that I’d previously already done. So, I’m going to start with this: “BitPass is becoming the leading payment platform for digital content.” And my linking words are going to be “for” and “who”. And we’ve already done the heavy lifting on the panels that we’ve identified. This one’s going to come from Panel A, this one’s going to come from Panels B and C. And so let’s take a look at how this would read.

“BitPass is becoming the leading payment platform for digital content for [primary constituent] who fear stagnant revenue growth due to subscription-only pricing.” And when I pull those together on F (I told you we’d move quick), we have the example of the market definition for the case study. And since it’s helpful to always have an example, when you go back and do this yourself, you’ll see there’s a spot to put your own in there. Make sense?

What really transpired? We have two pieces to this puzzle, and the first one is market definition, and it has these three elements (this slide you do not have): who, pain, and emotion. This gets someplace so it’s actionable by your solution. So let’s move onto the second piece: who, pain, emotion. The three elements that are in our long version market definition. Remember, I’m never going to use it in this manner. I’m going to build my silo communication vehicles on top of this, targeted for individual audiences. So let’s move onto the second piece.

The second piece has to do with your Value Proposition. And what we want you to do in an exercise manner, and on Panel G, is I want you to engage in a role-play exercise with your team on every single thing that you really do. And in BitPass’ case, there’s a whole bunch of stuff that they do – and it’s not my job today to make you understand all of these, but suffice it to say there’s a wealth of things that they have to do to make good on their dream of selling content by the sip. And, just as we’ve done before, we’re going to take all of these words and, for the second time today, we’re going to put them in a kettle on the stove and turn the heat up and see what comes off.

And when they did this exercise, we found that a couple things came off. What they really do is they provide an elegant digital content payment platform. When you really understand what they do, “elegant”‘s a key word because they’ve taken something that’s unbelievable complex and made it extremely easy for me as the seller of my hand-drawn cartoons, or any of those Internet buyer to go ahead and engage in that transaction. So I’ve come up with, I’ve come up with the composite essence of what you do as a firm or an organization.

Now I know for a fact, from looking at the registration, I have some non-profits in the room, I have some people that don’t have products in the traditional sense of the word, but the answer is “what is it that you really do?” Even though all of our examples today are based around venture-capital fundraising. A lot of this trends, goes across all segments of all industries. If you’re a member of a large corporation, and I know I have some of you in the room, you have to justify your projects to management – you have some of the same issues, and in fact you may have even some harder issues.

So once I’ve figured out the composite essence of what you do, I can then go on, and I’m going to link some things together. And again, I’ve already done some of this work on prior panels. So, the first thing you’re going to do is talk about “what we do”. In this case: BitPass offers an elegant digital content payment platform” – and then I have two linking words, “that” and “which” – “provides an efficient technical and economic solution” – remember those were identified as a problem of the primary constituent – “which allows our customers to grow revenues by adding new products” – “new products” here being digital content by per-use, per-sip, per-file, per-photo, per-whatever.

So, when I start putting this together I then end up with a Value Proposition that has some elements. And we’ve already talked what those elements are. We know that this first slide is “who, pain, and emotion”, the other slide is easy. It’s “painkillers” and “benefits”. If you’re not selling a painkiller, good luck today. You only do that when you haven’t identified pain on the part of your primary constituents. We’re going to talk a little about benefits, matter of fact I have a couple of slides devoted to it in my closing session today which is The Art of Rainmaking, so hang on and we’ll come back to some of those issues on the “benefits” side later today.

Painkiller. Benefits.

So when I put this all together, you’ll see that there’s market definition – who do I do things for, predominant emotion and pain – and I have the value proposition – which is the painkiller and appropriate benefits. And because we really would like you to do this later, this Panel J is where you can carry your work forward.

Generally, the things take this form. They take the form of a problem being in the negative and the solution being in a positive. But you can do that other ways, but this is generally the form this will take. Now, remember what I said: our market definition is going to be long, complex, compound sentences that are going to fall into the market definition and the value proposition, and we’re going to custom-tailor the silo messages to the audience. And what I’d like to do is I’d like to spend a few minutes to talk about competitive response. So if you jump with me over to Panel K.

Here, you want to make a page for each and every competitor. And you’ll notice a very careful wording. This is where outsiders feel are your competition, because inside, you’re too close to it. You may say to yourself “Oh, those guys are not my competitor”, but knowledgeable outsiders may think they are. And we have case after case after case where our potential clients, when they did their competitive slides for us, didn’t put some names on there that our analysts found when they went to do due diligence – and that tells me something. They either don’t get it or are clueless, or they’re lying and none of those are conducive to funding.

So, this is who would knowledgeable outsiders think are your competition. This is as important as who you think is your competition. So, obviously in the case of BitPass, one that always comes up is PayPal. So then the answer is “how do you differ?” And there’s a whole discussion that goes around how this differs. There’s a whole discussion that goes around. But now I have to find a way to communicate this. And remember what I said to you: be complete and comprehensive on who these are.

And the last point, let me explain. What if you really are, what the cynic would call, the tenth solution? Well, you gotta tell me the other nine, but you’re going to scare me if you don’t do it right. So the answer may be to put them in groups. You may say, and this is not a BitPass example, you may say that historically there have been multiple approaches to solving the solution.

“The original solution was founded by this company and three or four people followed in that model. Then there was a new approach and these other companies followed in that model. But we’re a fresh, different approach, and here’s what we do.”

You see what I’ve done? I’m now the third-generation solution, not the tenth competitor – follow me on that? Remember on the K panel, we had you do one page per competitor. Now we’re going to pull them together and we’re going to use, just as we’ve done before, some linking words.

On my K Panel: the first thing we do is we acknowledge them: “who or which primarily handles money transfer for the sale of physical items” – and the example that comes to mind is eBay, and this in fact is their primary business, some of you may be aware of some others, but their primary business is the sale of physical items – “BitPass handles the unique needs of digital content: access control, authentication, and payment.” Now this is why they call themselves a “platform”, because they have those three elements; access control, authentication, and payment.

So the key here is, when you’re talking about competitors, never again should the name of a competitor just come out of your mouth – what should come out of your mouth is the phrase dealing with that competitor that has these attributes: you acknowledge them, you categorize them, and then you differentiate yourself from that categorization. And on your top three or four competitive issues, you and everyone in your company that touches, outreaching/outward facing in your organization, should clearly understand how to do a competitive statement for each of those three.

The key again is: never just mention them, but differentiate yourself every single time you have the chance. So again, we have the foundation, we have a number of other things. Let’s talk a little about one other before I move into how to pitch. And the one that I’d like to talk about is the mission statement. Now it’s interesting. One of the very largest Sand Hills venture capitalists, whose name I will not mention, invited me to their CEO summit last year where they had ninety of their executives in the room, and they wanted me to talk to them about positioning. Many of these companies you would know because you envy them. And you would envy getting money from the VC. And they had prepared in advance, for the use of the other people in the room, a brochure that showed the logo of the company and their mission statements. There were ninety of them on this page. Hold that thought.

Part of what we do as a VC is pattern matching. We look for things that we think are going to be most conducive to betting correctly. And I’ve come to an observation that we have a lot of dialogue with people on the phone, and then when you get together, you’re sort of guess what that meeting is going to look like. And when I say people who is “us” oriented mission statements – “we’re going to be come the market leader by…” – sure enough, more often than not, that face-to-face meeting is mostly about them. If, on the other hand, I’m having a dialogue and reading executive summaries and things that we see in advance of having a face-to-face meeting, I see that it has a customer-orientation – “we give corporations an unfair competitive advantage by…” – guess what? The presentation very frequently is more customer-centric. And more often than not, when I find things that are in this category, the focus is exactly one-hundred-and-eighty degrees opposite where it should be. Back to my CEO executive summit.

Ninety people in the room, seventy-two of them started that way. When I made this slide, they all pulled it out and some giggled and some didn’t. So, before we move to the second half of my presentation and the final twenty minutes, let’s take about a couple of things.

We didn’t do it all here, we just got started. And any quality PR firm or professional is going to say we left a whole bunch of stuff out. It’s not my intent to do it all. Bring professionals in when you need them – but you’ve got to be able to articulate who you do things for and what do you do. You’d be amazed how difficult that is for many people to do. Take the time to do it right. This isn’t something you go back just do. Matter of fact, you may need to bring someone in to facilitate this.

It’s a great exercise and the real hidden value is once you’ve done it, you’re going to repurpose your market definition/value proposition endlessly as you change your silo messaging. Now, remember what I said when I started: your company, of course, has to be fast, fluid and flexible. Of course there’s going to be factors in the marketplace that require you to change your market definition and value proposition. I’m not saying be rigid – but I’m saying that if you’re going to change them, change them consciously. Don’t have creeping positioning.

Part two.

You’ll notice that the next page in your handout’s going to talk about the ten things I’m going to talk about. Give you a quick place to put a few notes.

Everyone knows you got to talk about what, and everyone knows that you should talk about how, but the fact of the matter is most people presenting spend a disproportionate, if not exclusive, amount about the what and they don’t worry about the how. The fact of the matter is, this really should really be more analogous to 50-50. So let’s go through and here’s where Guy’s ten points come in – I am going to do ten, so you can track my progress.

The first five. Now let me peel open the mind of an investor to show you what really goes on. If you think about an investor, or your boss (if you’re in a corporation), or your grantors (if you’re a non-profit), they’re going to be looking at you doing this sort of SWOT analysis. They’re going to look at you in terms of: strengths, weaknesses, opportunities, and threats. Now, some of our executives, when we work with our clients, they actually come to our management meetings on Monday with a SWOT, they actually do this for the people we’re looking at. But whether the person says they’re doing it or not, they really are, and if you understand what’s in their mind, you’re going to know how to position yourself better. In The Art of Rainmaking later today, we’re going to talk about setting up and qualifying your audiences correctly and playing into this. So this is going to dovetail into something that I’m going to be dealing with later in the day.

Point one: allow for pitch decay, begin at the end. Now I’m a student of presentations- my undergraduate degree was psychology, I love learning how to persuade. And one thing that study and study after study says is there is this thing called “pitch decay”. And let me tell you how brutal it is. Pitch decay says that when you hear someone say something to you, like I’m doing now, you’re going to start forgetting it almost immediately. In fact, you’re going to lose half of it one hour after we close. Half – one hour after we close. You are going to lose eighty percent of it by this time tomorrow. This time tomorrow, eighty-percent of what you’ve learned at this conference will be gone past you. Which is why many of you are listening with a pencil – that’s good idea. A week later, there’s only ten percent left.

Now, imagine you went to a VC partner or associate on Tuesday – that associate is going to get back together with his partners at their Monday morning meeting, six days away, and they’re going to say “What did you see when you looked at XYZ on Tuesday?” They’re only going to know ten percent of it. So the answer is, if pitch decay is a factor, figure out what the ten percent is that matters and drive it home relentlessly in your marketing, in your communications to them: “if you just remember three things today – A, B, and C…” And wouldn’t you be disappointed in me if this wasn’t my last slide when I’m done today?

That’s why, when you put together your presentation the first slide your put together is the last. Your summary isn’t an accident of putting a presentation together, it’s the reason for the presentation. The rest of the presentation is to prove those points. This is the ten percent.

We’re going to talk about the Dirty Dozen slides. We think any good company should be able to tell their story crisply and briefly in what we call the Dirty Dozen – I’ll call it twelve today. You’ve already done the hardest one, and this is the reason for the presentation. And as you put your presentation together, this slide may take you the longest. What do you want them to remember a week from now? What’s the ten percent that matters?

Point two: Be brief.

How ironic: I’m going to use eighty-seven slides in an hour to tell you, but I happen to like Mark Twain, whose famous quote was: “I didn’t have time to write you a short letter, so I wrote you a long one.”

Brief is hard. Brief is very hard. And I could replace the word “letter” with things like “overview presentation”, “elevator pitch” – it’s hard to be brief. It’s hard to be brief. I carry around in my billfold the best executive summary I’ve ever seen: it’s on a fan-fold business card. And I asked the team that did that how long did it take them, and it took them forever because just like the elevator pitch should be limited by time, you should limit your executive summary by space. A secret: all of us VCs have attention deficit disorder.

Somebody came in, they did this: “Our technology integrates all yadda yadda yadda” – you know what happens to my brain? It does that, and then I say to myself, “Boy is this guy boring me to death!”

“We capture the future of knowledge” – oh, that’s interesting. Keep it simple, stupid.

We had a company, came in from Monteray, they had this phenomenal product. And the product was used with landlines, and it would allow me to plug a device into my handset that encrypted my phone call to somebody else on a landline – and if you don’t think that’s important, read the book someday on how Boeing lost an order to Airbus because of a wiretap. It was a two billion dollar sale that was lost – it’s well-documented it was tapped offshore. And so they came in, and they had this terrific device and here’s, honest to God, what they said:

“Utilizing the 2048-bit Diffie-Hellman key exchange, and 160-bit TripleDES, we provide intrusion detection for digital voice, fax, and wireless connections”

Doesn’t that grab you? We changed it to: “We safeguard your communications”

Be brief.

Three: Bait the hook.

You know in the old days, let’s talk about US Mail – I’m old enough to remember that. In the old days of direct marketing, there were two schools of thought on direct mail campaigns: bait the hook or feed the fish. Do you want to entice them to do something (lick the sticker, put it on, mail it back), or do you want to sell them something on that direct mail piece? Well we sort of have the same continuum available to use when we talk to anybody we’re talking to. On one hand, we have the “bait the hook” side, which is really talking about getting them interested. On the other hand, we have the “feed the fish” side, which is really on “close’em” and most people make the mistake of having the elevator pitch way, way too far to the right. The elevator pitch is a “bait the hook” activity – you want me to get of the floor with you, when you stop the elevator, to ask you more. That’s what you want. That’s what you want.

Because like all communication vehicles and especially with my example, which is VCs, you have to peel the onion – and you’re going to peel this onion at various stages when it’s ready to be peeled for whatever audience you are with. So the trick is: know what the task of each communication vehicle is, and don’t make it something it’s not. It should be proud to be an elevator pitch – it shouldn’t lust after being a mission statement.

Simple elevator pitch, you all know them. Heck, I’ve got people in this audience who should be up here doing this presentation. It’s pretty simple really. Now you can make it as complicated as you want, but the fact of the matter is that it has to grab them. It has to grab them.

Four: Give high, stay high. No, it’s not what you think.

You need to be flying at fifty-thousand feet, you need to be up in the zone where you’re talking about the “what” and the “so what”. We’re going to talk a lot about “so what” as I close the session today, the conference, because “so what”‘s are the benefits and are they are the keys to what you’re going to be doing. The trap is, you do not want to get down into the “how”. Stay high. Stay high. There’s a time to get down into the “how” and they will tell you what that time is, if you just ask and listen. Again, benefits are so important, I’m going to hammer on them a couple times today. Think about them in different categories. Think about them in different categories. I can have technical benefits. I can have business benefits. We’re going to match benefits to the audience when we talk about this later today.

Five: Obey the 12-15 rule.

About a dozen slides in fifteen minutes. Now that doesn’t mean the meeting’s going to take fifteen minutes. I mean, nothing makes me crazier than the potential client, I say, “Off to see another VC on a syndication?”, and he says, “Yeah, it’s an hour meeting and I’ve got forty-five slides.” Did that hit close to home? Uninterrupted, your slides should take fifteen minutes – that’s an hour meeting because you’re going to ask a lot of questions and you’re going to do a lot of listening in that meeting.

Now at this point, some of you in the room have done this – you’ve mentally crossed your arms and said, “But Bill, you obviously don’t understand my business – I can’t possibly tell my story in fifteen slides.” And the answer is “Yeah, you can” – and on my hard drive I have a hundred and fifty client presentations to prove it. Now some of you are going to get real anxiety about what’s on each of these slides – don’t. There’s nine pieces of information I need to disseminate – you’re going to get these slides when you download them for free, so don’t go wild on me here.

But I’ve already done number twelve – it’s the reason for the presentation. I’m going to tell people who I am, what I’m after, how much money I’m looking for, I’m going to give them an overview and a mission statement. I’m going to talk a little about problem buy-in – if they don’t agree there’s a problem, I might as well stop talking. I’m going to spend a couple of slides talking about my solution and the benefits. I’m going to spend at least one slide talking about some technology. I certainly am going to talk about who else is involved. I’m going to talk about who are my leverage points on my success – and we’ll talk about that today, leading up to five o’clock. We’re going to talk about some success metrics – this doesn’t say revenues per se. What drives revenues? You know, Guy mentioned in his opening comments, and you see it time and again – “I don’t care what your spreadsheet says as much as I care about the assumptions that went into your spreadsheet. I’m going to look at assumptions more than I’m going to look at the mathematical role of those assumptions.” I’m going to spend a little time talking about who’s doing it, and I’m going to spend a little bit of time talking about where you are, you progress and these milestones that Guy talked about earlier today.

I’m going to spend about fifteen minutes and about a Dirty Dozen slides to tell a competent brief story at a high level. It’s like any politician: what do they want – they want their next term. What do we want? We want the next meeting, driving the ball down the court.

We talked about the “what”, and we’re now going to spend a little bit talking about “how”. And the first one is going to be: you’ve got to change people’s pulse. I will joke with clients – I will put my finger like this, I will listen to their pitch and I will say, “Didn’t do it for me.” Didn’t do it for me.

So what I really want to be able to do is understand who my audience is, I want to understand how to bond with them, and then how to communicate with them on their level. And we will spend some time chatting about that.

It’s OK to ask questions. Here’s a couple of my favorites: “What are the three most important things I could tell you about my company today?” – I love stack-ranked questions, it gives me insights inside that person. Now, I can better off do this on the phone – “Yep, we’re coming over to see you next Thursday. Yes, it’ll be my CTO and myself – great. To make this the most productive meeting possible, what are the three most important things that you and your partners would like to learn about my company?” Gee, “I want to have a productive meeting” – that’s pretty nice. “Help me understand” – boy, I’ll tell you there’s no wrong answer to that question. The other one is, “I’m really glad you decided to see us – what attracted you to my business plan?” – most don’t have the guts to ask this, but boy is this a good one. You’re going to find out whether it’s revenues or technology, or whether they’re thinking of a keiritsu with one of their other portfolio companies, we’re going to find out a lot of things. It’s OK to ask them questions. I love this one: “How will you accelerate our success?”

Now, I have a lot of tools – I’m a big talker, I talk loud. If I want to draw you into a meeting, I’m going to talk softer. So I have a lot of tools in my ability to help communicate and to change people’s pulse. Use them. And the thing that I want, is I want to see passion, I want to see energy, and I want to see a compelling reason on why you’re going to change the world and I should come along and help you do that.

Eight: […] transition

You ever seen a presenter get up and they click the slide and it’s like the next slide is like a total surprise to them? And it’s their slide? You know, make these things work together. Make these things work together. You may say, as an example, a rhetorical question, “This is the big problem, how are we going to solve it? Let me show you our underlying technology…” You may want to build upon the last topic – “We just talked about the background of our team. Let me tell you what expertise they’ve brought from their prior employers to make our company successful.” I may want to build on the last statement, or worst-case scenario, say, “Next.” Next.

When we have people going out to syndicate around, it is not unusual for us to videotape them several times and have them look at themselves. Most people have never done that. And whether you practice or not, it shows either way. It shows either way. You know, figure out whether you really can do your pitch in the time allowed. Figure out what you really do look like on camera. I’d guess ninety percent of you in the room have a hand camera, video camera of some sort. Use it!

Now, we’re already talked about the meeting. At the start of the meeting, I want to tell them what I’m going to them. In the middle of the meeting, I want to tell them. And on the summary slide, I’m going to tell them what I told them. Now, it isn’t going to be this transparent, but why am I gong to do this? It’s simple: I need to allow for pitch decay, and I need to make sure that ten percent sticks.

My last point: pitching is an attitude, don’t give up.

Pitching is an attitude, don’t give up.

What’s the ten percent that matters from my pitch? I like these: begin at the end, be brief, and change people’s pulse. Understand your position, understand your market, understand how to change people’s pulse, and do those things. And you’ll notice that I finished on time.