the golden equation: product + market + team = deal

The Golden Equation: Product + Market + Team = Deal

Tim Dick, General Partner

A few weeks ago, I was asked to speak to a venture accelerator cohort on financing. I thought about doing Termsheets: The Good, The Bad & The Ugly that has proven so popular, but that didn’t seem to fit the bill. Then I got stuck, because financing is usually discussed as an a la carte element of startup development similar to getting first product out or making a key hire. But it’s not…

The Missing Link…

Copyright © 2009-2013 Startup Capital Ventures

Financing Is A Byproduct Of Startup Development… …Development Brings Financing, Not The Other Way Around

The Secret…


Product + Market + Team = Deal

Agenda

For some years, I have been using the equation:

Product + Market + Team = Deal for the simple reason that those three things together determine the success or failure of every company.

The Golden Equation



The Formula: Prove Your Team & Product Can Fill A Market Vacuum Product: credible evidence that you have a unique painkiller for a real need •  Real entry barriers (e.g. IP, structural, regulatory) Market: show you can effectively access a large & growing market •  Clearly identify market segments & potential customers •  Economical customer acquisition & retention strategy •  Strategy to beat competitors Team: evidence you can build a balanced team that can deliver the product to market

Three Axes Of Company Development

Product

Founder

Developers

CEO Core Team Full Team

Market

Team


Repeat B

uys Paid C

ustomers

Successful trials Sales Econom

ics Size/Segm

ents

Version 2.0

Production

Revenue Beta

Prototype

Concept

Balanced Development Drives Financing Rounds

Product

Repeat B

uys Paid C

ustomers

Successful trials Sales Econom

ics Size/Segm

ents

Founder

Developers

CEO Core Team Full Team

Market

Team

Seed First

Expansion

Pre-Seed!

Financing Round


No “Lame Troikas”: Fill Your Gaps!

Version 2.0

Production

Revenue Beta

Prototype

Concept


PRODUCT: How You Plan To Fill The Market “Vacuum” Prerequisites •  A painkiller for a specific customer pain (vs. a vitamin which we

“should” take) •  Scalable product with high margins •  Distinctively different from competition Seed round •  Working beta with customer feedback •  Patent applications where possible First Round •  Version 1.0 production product •  Positive customer feedback Expansion •  Product line extension prototypes •  Growing revenue / repeat buys from customers

Only two eras in company development (Marc Andreessen) 1.  Before Product-Market Fit (change everything

until this works, because nothing else matters) 2.  After Product-Market Fit (a key to financing) Entrepreneurs are in love with their product but, set rigid development deadlines and SHIP IT! Protect and patent your products: Value is created by what you keep, not what you create

PRODUCT: Notes From The Field


MARKET: Large & Growing, Have A Defensible Entry Strategy

Pre-requisite for institutional venture capital: Clear target market and a $10B total available market (TAM)

Seed round •  Well defined and segmented market •  Economical customer acquisition & retention strategy First •  Demonstrating customer acquisition cost & value •  Defined sales force strategy Expansion •  Sales growth through established channels •  Building a recognized brand name •  Clear path to profitability


The #1 company-killer is lack of market (Andy Rachleff, Benchmark Capital): •  When a great team meets a lousy market, market wins •  When a lousy team meets a great market, market wins •  When a great team meets a great market, something special

happens Startups need to show breakeven potential on revenue of $100M in 5-7 years because only 1-2 out of 10 deals hits •  Credibility fail: “$300M revenue in two years with one round!” Selling into a declining market is almost impossible Identify competitors’ positions as you explain how you can win against them •  Credibility fail: “We have no competitors”

"

MARKET: Notes From The Field


TEAM: Balance Is Critical, Fill The Gaps •  Prerequisites

–  Committed founders –  Domain experts in the product, service, or technology

•  Seed round –  Original product/technology developers –  Some general management & sales talent

•  First Round –  Experienced sales and marketing teams –  Fundable CEO with relevant experience

•  Expansion Round –  Strong, balanced team –  Solid sales force –  Experienced CFO as the business become metrics-driven



TEAM: Leverage Your Team With Great Partners Build a GREAT board for “the voice of experience” and the ability to open doors •  “It’s hard to see the picture if you’re inside the frame” - Eugene

Kleiner •  USE YOUR BOARD! – they have been there & have great

networks •  Weekly board updates and monthly board meetings correlate

highly with startup success Entrepreneur-focused partners can help you more than you think •  The right law firm will help you do more than incorporate •  PR Firm - little companies need big voices & good messages •  Accounting firm: startups need conservative books •  Some banks understand entrepreneurs (e.g. SVB, CPB)

Product + Market + Team = Deal

Agenda

Inside the Head of a VC…



…What Are They Really Thinking?

He or she has a $100 million early-stage fund dedicated to enterprise software and medical devices The firm must invest the fund within 5 years – about per year for a total of around 20 deals (4 per year) •  The investment typically buys 20% of the company He plans to put around $5 million to work in each company in three rounds (say $1.5M, $1.5M, and $2M including reserves) •  Many companies won’t make it past round two... •  He’s hoping that 2 in 20 deals will be a home run - and “return

the fund” of $100M •  8 will probably die or be sold at low value •  10 will probably do “OK” So every deal must have the potential of achieving a $100M exit from the VC’s 20% share = $500M valuation


Financing Steps

1: Plan Research Communic- ations Sequence

2: Contact Leverage contacts Prepare!

3: Pitch Crisp Listen!! Right Pitch Team

5: Due Diligence Be Responsive Dig deep

4: Term Sheet Benchmark Norms Legal Counsel


Step 1: Plan Because It Will Take 6+ Months To Deliver

Research the firms who fund your sector •  Are they making investments? •  Have they funded a competitor? •  Who is their expert in your space? Sequence your fundraising •  Talk to a few VCs to get feedback & edit •  Save your best shots for after you have feedback Get intros to sources of funding whenever possible •  Avoid cold calls: “send me the executive summary”

Step 2 Contact: Find Financiers That Match Your Industry & Stage

BIO-MED SOFTWARE / CLOUD

CONSUMER

Angels Acclerators Angels 500 Startups

Accelerators Angels 500 Startups

MPM NEA Sprout

Epic MPM Andreessen Horowitz Emergence

Epic Kleiner Andreessen Horowitz

Crosspoint NEA Sprout

Greylock InterWest ITV Accel

Accel Sequoia Maveron KPCB

Industry Segment

Deal Size Pre-Seed (<$500K) Series A ($1-3M) Series B ($3-8M)


Step 3: Develop Clear Communications

Elevator Pitch: you may have 10 seconds to interest a source

Executive summary: one or two pager that tells the story (no 6 point font!)

Business Plan: Power Point 10-20 slide pitch •  Many investors will decide go / no-go ten minutes into a pitch •  Fact-based: no exaggerations or “we have no competition” •  Cover Market Opportunity, USP, Sales Strategy, Competition,

Team, Revenue & financials, financing plan, milestones & use of proceeds, exit strategy & comparables

Back-up materials for deeper questions


Investor may want to introduce you to other potential investors to syndicate the deal & test their own judgement You may have a valuation in mind, but the golden rule applies: he (or she) who has the gold makes the rules Investors will propose terms include valuation, board seats, liquidity preferences, registration rights, anti-dilution provisons, etc. •  Get familiar with the terms and the norms •  Find example term sheets from law firms online •  Check “Term Sheets: The Good, The Bad & The Ugly” If you don’t have an attorney, get one!

Step 4: The Term Sheet



Valuation “Push-Me / Pull You” Ask For More $, Not Less

In early stages, you can “push” your company’s value The 60/40 rule: Your “ask” can be $2M or $5M but the “money” will take 40%+ either way Have a full capital plan (multiple rounds) that funds to cash-flow positive

When your company has real revenues, the market will start to “pull” your value

Market becomes more efficient due to comparable deals

Analytical measures are measurable (EPS, ROI)

A few quarters of profitable growth can get close to a liquidity event


Step 5: Due Diligence

Lead investor does this for syndicate Will want to get comfortable with you and your team VC will study and learn your space, want to talk with your customers, see all paperwork, etc. Follow up promptly and thoroughly with all data requests •  Have your books in order and be prepared to provide all

contracts, investor lists, references, and as much time as the investor wants


The Fear-Greed-O-Meter Of Deal Psychology…

I can get a higher value for my deal I’m going to ding that low-ball offer

I can get this deal cheap if I wait a little longer I’ll fund a copycat deal cheaper

My deal might not get done My milestones don’t support the valuation I want

I might miss out on this good deal Will there be another deal like this?

Fear Greed

You!!!!!!VC!

“Meat’s Not Meat ‘Til It’s In The Pan”

Painting: Charles Russell

The Author

Tim is a partner at Startup Capital Ventures where he sits / sat on the Boards of SilverTail Systems, (acquired EMC), TagArray (acquired MXIM), Adama Materials, and TuneIn. He has raised over $300M in capital with $1.2B in exit value. Tim previously founded Hawaii Superferry, Grassroots.com (acquired by Edelman), WorldPages.com, (NYSE: WPZ then acquired by BT). He has advised and invested in companies including match.com (first angel investor, acquired by IAC), Accept.com (acquired AMZN). Previously, Tim was a principal at the Boston Consulting Group (BCG) where he advised clients including Microsoft and Disney. Earlier he was an engineer at Beckman Instruments, where he developed the first electronic speech synthesizer for use ICUs, and the world's first instrument-on-a-chip. A believer in social responsibility, Tim co-founded TRUSTe.com the internet’s privacy standard. He is currently chair of Entrepreneurs Foundation of Hawaii and a board member of HiBEAM. He sponsors the student program at Hawaii Venture Capital Association Tim holds an MBA from Stanford and a BSEE from the University of California

the golden equation: product + market + team = deal

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