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I was recently interviewed by Sean Wise for an article for the Toronto Globe and Mail about whether or not entrepreneurs still need to write business plans.   His conclusion is yes - and he makes some good points - that while the business plan should be considered fungible, the process of writing a plan is what creates value, because

• The process creates a common starting point for the entire team
• The process sets the goals and vision for the team
• The process sets the path and identifies required resources
• Writing the plan forces analysis
• The process can help the team feel more confident about their ideas and strategy

From my perspective, even though the business you’re pursuing is almost always likely to change and morph into something unanticipated (and in fact, many of the most successful businesses end up nothing like what they started as,) the process of writing a business plan creates a lot of value.  I’ve written a couple of business plans for startups that went on to receive venture funding, generate revenue, and have a public offering/be acquired.  Writing the business plan was an extremely grueling process that forced me to think clearly about how all the dots of the business connect, and illuminated some of my assumptions that simply did not hold up under scrutiny. 

 Yes, it’s particularly true that in this day and age, with the greatly reduced costs of launching and iterating a Web-based consumer business, that writing a business plan may seem old-fashioned.  “Why bother, when I can just get a product out there and iterate constantly until I hit upon something that works?”  It’s a fair point, but I think the primary benefit that results from writing a business plan isn’t that you get a document in hand that charts the future course of your business - but rather the primary benefit comes from the discipline that the process imparts onto you and the team building that happens along the way. 

Sean’s specific question to me was, “But I heard investors don’t read plans, so what is the point?”

Sean writes, “While it is true that some investors, might not spend as much time reading full plans as you would like them to, all investors do read the executive summary, which is of course based on the financial and entire business plan.”

My comment was -”VCs absolutely pay attention to the executive summary…Writing a full business plan helps you conceptualize all of the nuances of your business and this understanding is crucial in helping you succinctly articulate your startup’s unfair advantage.”

But ultimately, the purpose of writing a business plan is not to please some VCs, but to really build a deep understanding of your business and build team consensus around what the vision is.  I’d like to hear your thoughts about how this may or may not have worked for you. 

Though I may write about ways entrepreneurs can improve in their efforts to woo and pitch VCs, make no mistake about it: Entrepreneurs are the Customer in this relationship and VCs are merely the service providers. 

I say this because even though a regular part of our job involves saying no to highly qualified entrepreneurs, the process of deciding what VC firm to work with is a mutual one.  It’s not enough that we might want to work with you. You, as the entrepreneur, have the decisive voice in this matter.  It’s a significant decision, much the same way a marriage is.  And you should only enter into this relationship if you think the VC you’re committing to is one you want to be partners with for the long haul. 

(Fred Wilson and Rick Segal have also written great posts about the topic of “Entrepreneur as Customer” on their respective blogs.)

I attend about 30+ pitch meetings a week.   The reason why I bring up this topic of entrepreneur-as-customer is that a pitch meeting is a good chance for you to ask YOUR questions of the VC as well - something many people don’t do. 

Here’s a list of the most common mistakes I’ve observed entrepreneurs make when presenting:

• Talk about the team and your backgrounds as early as you can in the presentation.  This helps us understand why you are particularly well suited to solve the problem you’re tackling.  Who you are can be more important than what you are building.  This is even more true for very early stage companies.   Also, it’s very helpful if you tell us where you think you need to add to your team to round it out.  Being able to realistically inventory your personal strengths and weaknesses as well as understanding how to fill in these gaps is attractive. 
• If you have a working product or prototype, please demo it!  Don’t just mention the fact that you have a working product on a slide.  If you do demo your product, try to do it earlier in the presentation rather than later, because this gives us valuable context for the rest of the meeting. 
• Don’t forget to mention what the financing opportunity is.  How much are you raising? What milestone will it get you to?  Why is this the right amount? Why is this milestone the right milestone?  The amount you’re raising shouldn’t be arbitrary - it should be driven by some well formed assumptions you have about why X milestone is the logical first step to winning in this market.  And by the way, the actual milestone is less important than the thought process you used to reach that conclusion. 
• Do research on the people you’re meeting with.  You should know the backgrounds of the people you’re meeting with so you can better tailor your presentation to their worldview.  Be familiar with the firm’s portfolio companies.  Read up on any interviews the person you’re meeting with might have given recently about their investing style.  If you’re coming in for our QuickStart program, read up on the terms that are published on our web site. 
• Don’t be afraid to ask for guidance.  If you’re uncertain in which direction to take your presentation midway through - don’t be afraid to ask your audience what they would like to hear more about.  (e.g. “I could take you through a few slides about the technology infrastructure or we could spend more time on the partnership strategy - which would you find more valuable?”)   
• Don’t be afraid to rein in your audience.  If your presentation gets sidetracked by too many questions that you don’t think are critically important to understanding your business, don’t be afraid to say, “I would be happy to answer those questions offline, but since we only have 15 more minutes, I want to make sure I get to the really important stuff about X and Y.”)
• Don’t spend too much time on generic market trend data.  This is especially true if you have done research on your audience.  For example, if you know that the person you’re meeting with has already invested in an advertising arbitrage play, you probably don’t need to spend a lot of time telling him/her that the online advertising market is growing at X% a year.
• Be careful of using too much extraneous material in your presentation.  Making heavy use of props such as press clippings or professionally produced videos deters from the primary goal of getting to know who you are.  Unless of course, these props convey something about you or your business that you can’t convey yourself.  We want to hear from you - dynamically and in real time - why your business is so exciting.  

First, thanks to:

Valerie Cunningham and Net Jacobsson for these photos.  John Furrier and Podtech for podcasting the event.  Stanford MBA2 John Anderson and CRV’s Kim Morioka for helping us coordinate the event. 

The premise:

60 pitches in 60 minutes. 4 judges - 3 from Charles River Ventures - me, Bill Tai and George Zachary and 1 celebrity guest judge - Matt Marshall from Venturebeat.   The first half of the contest took place in the Stanford MBA cafeteria - noisy, chaotic, and fun. 

Contestants wait their turn to pitch: 

The judges: me, Matt Marshall, George Zachary, and Bill Tai

The judging criteria: 

The judges scored each contestant from 1-100, with 400 being the highest possible score a contestant could earn.  The criteria? Because contestants only had 60 seconds, this wasn’t intended to be a business plan contest.  We were hoping this could be a fun, educational experience for the Stanford MBAs to learn how to communicate their ideas succinctly and persuasively in 60 seconds or less. 

There are some salient, real world reasons why being able to mount a convincing argument in 60 seconds or less can help you as an entrepreneur.  For example, we’ve received numerous business plan submissions in the first month since launching our CRV QuickStart seed financing program - it’s an imperative for the entrepreneur to make as strong of an impression as quickly as possible.  Or, you may find yourself on an elevator with Rupert Murdoch and want to convince him why he absolutely needs to acquire your startup if he has any hopes of properly monetizing all of the MySpace traffic.  Except, he’s getting off on the 6th floor, so you only have 40 seconds.  

In both cases, what the pitch represents is a means by which you can capture our imagination and make us want to learn more about your idea.  With the Entrepreneur Idol contest, we weren’t looking for fully baked or fundable ideas.  That’s incredibly difficult to convey in 60 seconds.  But the purpose of the 60 seconds is to get us salivating to hear more of what you have to say.  Were you authentic in your delivery? Did you come across as being credible?  Was your general target market attractive? Did you make a logical, persuasive argument?  Did you make us believe that you could be a great entrepreneur to back?

(Tip: Research your VCs before you pitch them.  People tend to fund things they are personally excited about.  It makes your job easier if you seek out people already immersed in your space.) 

 The results:

The judges chose 5 finalists based on the scores.  The top 3 got to present in front of an auditorium full of their peers.  In true American Idol style, each of the top 3 pitched, received feedback from each of the judges, and the audience chose the winner by clapping and making noise.  

The winners, Jeff, Rohin and Ned (left to right) - sorry the photo is blurry:

1st: Ned Tozun, MBA2 - Solid state LED for the developing world
2nd: Rohin Dhar, MBA2 - Online job recruitment services
3rd: Jeff Piper, MBA2 - Hedging instruments for residential real estate market
4th (tied): Vanessa Stanley-Miller, MBA2 - Kid-centric online video service
4th (tied): Ben Savage, MBA2 - Location based mobile game platform

Closing thoughts:

Based on student feedback, people had a lot of fun and it was very educational.  For them, it was illuminating to see the top 3 deliver their pitches in front of a big audience - they could learn from their peers and from the feedback we gave after each pitch.  Moving forward, I’d like to have all 5 finalists (and perhaps more) give their pitches in front of the larger audience.  The margin of difference between the top 9 scores was very small and most of the learning happens by watching other people pitch in real-time. 

We at CRV were very impressed by the quality of the pitches - by the delivery, the ideas themselves, and the enthusiasm of the contestants.

Statistics:

The Second Life business plan contest launch event was fun.  Here’s a snapshot from the event - we panelists are facing the audience: 

We were asked, “What are you looking for in a Second Life business plan?”

My answer is that I’m looking for the same things that matter in every other type of business.  None of this is novel - far wiser and more articulate folks have made the same points in the past. 

1. The team, and its authenticity and empathy for the user experience.  What I mean by this is that I’m looking for founders who come from the community that they aim to serve.  Do they speak the language of their customers? Do they empathize with their customers’ pain?  Do they feel passion for their users? Mitch Ratcliffe wrote in a great blog post today, “Social networks need some soul, not just a business school pedigree.”  For example, I would be a horrible Second Life entrepreneur.  I don’t use Second Life nearly enough to understand the relationship dynamics between its citizens and its service.  My starting a business in Second Life would be presumptuous and arrogant, because I’d be coming in as an outsider. 

That old Hairclub for Men line of “I’m not just the President, I’m a customer!” is comical but rings true.  We are looking for founders who deeply understand the customer problems they are trying to solve.  Don’t despair - even if you’ve never experienced hair loss, you could still build a believable Hairclub for Men business.  Do first hand research.  Go into the field.  Live amongst your subjects.  Take notes. Observe.  Listen.  If you observe and listen well, you’ll learn the local language and customs, internalize your tribe’s aspirations and fears, and your customers will soon begin to accept you as one of their own.

2. Unfair advantage.  This is the elusive secret sauce that sets you apart from all of your competition.  What about your business and your approach can’t be done by anybody else? Focus on that, and outsource/open source the rest.   That din you hear at your door? That’s [Google|guy in a garage] waiting to crush you.  Your unfair advantage is what keeps them at bay.  Unfair advantage can manifest itself as proprietary and differentiated technology, a superior business model, an incredible team iterating on past success solving similar customer pain, or a network of relationships that drives down customer acquisition costs. 

Furthermore, you need to demonstrate that this unfair advantage is sustainable.  Sustainable, unfair advantage is directly correlated to your ability to consistently receive better economic returns than your competitors.  Software as a service has a sustainable advantage over traditionally delivered enterprise software because it’s simply a far more efficient alignment of capital allocation and customer needs.  That being said, SaaS by itself is no longer a sustainable competitive advantage of its own - not in a market where every emerging software company employs a service strategy.  [I've written about the economic advantages of SaaS and open source on another blog.]

 3. Attractive market.  Let’s imagine that I’m the most cynical financier possible and the one and only thing that matters to me is delivering economic returns to my investors.  I’d be looking for businesses that served the entire world population and whose customers were completely price insensitive.   [Oil.] [Drinking water, in unregulated markets.]  Businesses with high customer switching costs.  [Cigarettes.] An attractive market doesn’t necessarily have to be sizeable - though size and [willingness to pay | average revenue per user] are on the same axis.  However, I’m happy to say I’m not a completely cynical financier.  Ideally, I’d love to back businesses that deliver sound economic returns and also do good for society.  [eBay. Google, maybe.]

That all being said, there are some tangible differences between building a Second Life startup and building a more traditional startup.  Though it may seem like the traditional startup business resembles the Wild West, the Second Life frontier is far hairier.  The risks inherent in Second Life startups reminds me a bit of investing in China - there’s a mostly benign dictator (Linden Labs, in this case) who wields enormous regulatory power over the landscape.   Audience members at our session had a lot of questions about currency and economic stability in Second Life.  Just as we trust the Federal Reserve of the United States to keep our dollar stable and valuable, so too must entrepreneurs have faith in Linden Labs to maintain the stability of the Second Life economy.   The Linden dollar has only as much value as you have faith in Linden Labs.

[sidebar:
friend (12:12:09 AM): What are you up to?
me (12:12:18 AM): I'm writing a blog post about unfair advantage and how it's critical to startups
friend (12:12:29 AM): What's your unfair advantage in writing about it?
....
me (12:15:23 AM): my sparkling personality?
]

I had a lot of fun last week cohosting the “How to pitch to VCs” session at StartupCamp with Nasser Manesh of Frucall.  This is a particularly salient topic for me as I’ve been going through many business plans recently as a result of our newly launched QuickStart program.   There’s been quite a bit written about the topic of presenting and pitching, including the wonderful “How to get a standing ovation” from the inimitable Guy Kawasaki.  Martin Tobias from Ignition also has some good suggestions for how to create a super crisp, logical pitch.

Though we covered a good many topics, as you can sort of tell from all of the scribbling on the whiteboards behind me, it can all be boiled down into a couple of takeaways:

1. Though the process may seem labyrinthine and intimidating, we VCs are just human beings. 
2. Your customers are all human beings.  Even if you are building super high tech widgets[1], your customers are still human beings.

Yes, I know, you’re wondering why this is insightful.  Let me try to explain.  This post just skims the surface of what will be many topics on this theme.

- Human beings are prone to making errors.  Entrepreneurs, I urge you to guide us and help us frame our thinking.  How I parse language is different than how you parse it, because each of us is anchoring meaning to our own localized, contextual data store (our memories and experiences.) Only through socialization and trial & error do we come to understand the filters that others use to translate what we say.  Unfortunately, the entrepreneur only gets anywhere from 1 to 60 minutes in front of a VC, which is not enough time to develop any of the appropriate filters.  Within your brains are wondrous visions of your business and product in 64 bpp color, though I can see none of this save for what you communicate to me. And believe me, I want to see it.

Use descriptive language and analogies.  What constitutes “community centric collaboration tools” may mean blogs to you, wikis to me, and email to someone else.  Reduce the probability of misinterpretation by using visuals, showing demos, and telling stories about customer use cases. 

- Help us empathize with the customer pain you are trying to solve.  We consume so much creative media in the form of novels, movies and video games because they do a good job of putting us in some protagonist’s shoes, transporting us momentarily into someone else’s existence.  Tell a story about how you make our lives easier, more efficient, more enjoyable, more fulfilling.  In order to do this, you need to understand what your business is really about.  Understanding how a customer relates to your product or service emotionally also helps illuminate how they might value it economically.  I like to ask people the question “how did you come up with this idea?”  This is your chance to transport me into your world and to help me feel the pain of the problem you’re solving. 

[1] A photo of a super high tech widget making process from Tim Burton’s Charlie and the Chocolate Factory: