Starting a VC Backed Company - The Art of the Start

The Art of the Start
Starting a VC backed company
Michael Altendorf
Entrepreneur Bootcamp
12.11.2011

About Us

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HOW TO START A VENTURE ?

How to start?
Iterate, iterate, iterate…

Questions to ask yourself before the start
 Do I have a good idea?
 Am I good enough to be an Entrepreneur?
 Where do I get the money for my Company from?
 Who gives me the Money?
 How do I get to know such people?
 Why do the rich people do this?
 What do I have to do?
 What kind of questions do the Investors ask?
 How much Money do they give to me (& how much do they want from me?)
 When do I get the Contract and the Money?
 What happens then?
Source: Computer History Museum

From Idea to concept

No…

…Better…
…Maybe…
…Yes

From first idea to first version of a product – sometimes it
takes only some days – Sales Funnel Analysis Tool


The Team

How to built a great team for the start?
• Motivation is key!
• Experience is something but not much
• You need some experience in several disciplines
but no senior team
• Combination of experience and fresh ideas is best
• Minimum 2 people for the start, 3-4 are better

Source: A-Team

VC's look for the serial entrepreneur

 80% of the success is determined by the Team
 Your Qualification: 1,0 in Informatics + 1,0 MBA + 2 own (sold) companies + 5 years work experience
would be “good”
 BA in XYZ + an internship at McKinsey is not enough to get VC
 Quote from former CFO SAP: “The guys who sold nothing switched to marketing”

Show that you are able to build the product and the company
 Work on your Idea:
 Identify markets
 Calculate Costs and Revenues
 Develop a Prototype
 Talk to experts
 …


Some FAQ for the (Business) Plan

 Yes, you will write it for yourself, but the VC wants to see the potential (100 Mio in 5 Years is the
key, not in one VC round, you need at least 3-5) – start small (50K rev e.g. for the first year and
show how to grow to 100M) think big
 No, salary of more than 50.000€ per Year is not ok for the start when your just graduated
 No, with 3 People you won't reach 5% Market share - please calculate bottom-up
 No, you don't have to mention Gartner and IDC, but 1 Big Player would be good
 No, you can't do it without a business plan (…but with a product which has 10.000 users +)
 No, it should not be longer than 10-25 Pages (10/ 20/30 rule) – no McKinsey 80 page plan with 40
page competitive feature analysis – you can do the longer analysis for you but not for the VC –
VC‟s do not have time to read more than 10 pages
 As short as possible, not longer than necessary
 The core problem is  to write a short plan, not long one!


Where do I get the Money for my Company

Typical Sources for first angel money:
 Own Money
 Family, Friends & Fools
 Business Angel
 Bank
 Seed Venture Capital Fonds
(Seedcamp, Y Combinator)
Prefer Smart Money in the Beginning!

 Venture Capitalists most times didn't had an own company with problems you will get
 Prefer Business Angel with Experience and a lot of spare time


Who gives me the Money?

Prefer an experienced Business Angel with "proven track record", a good
network, and Experience in the right Segment

Source: John Doerr/Ted.com

Source: Ron Conway/Techcrunch Source: Forbes Magazine


How do you meet those people?

 Recommendations by other CEO‟s or VC‟s
 Best Place to pitch VC‟s: University Coffee in Palo
Alto/Sillicon Valley
Or on local Events
 Our own matching event:
Rhein Neckar Technology Ventures
(www.technologyventures.de)
 Heidelberger Innovationsforum or other local events
 Contacts (Lawyer, Tax Accountant)
 BAND/BA Networks
 Karlsruhe
 Frankfurt
 Heilbronn
 Stuttgart

 Mentor or Public Consultant
 Do not pay, if it is not necessary the best advice you will get
for free!

How much should I raise? (…or how much do you get!)

Phase Who invests? Volume Success Factors

Idea Nobody 0 Experience and Background

Orientation Fools 0 Meet the right People

Planning Fools 25.000 € Background - Who can write a clean Plan and make
a good Calculation - only Serial Entrepreneurs in
Silicon Valley are getting Money for Ideas

Founding / Family & Friends, BA with 0 - 1 Mio. Own Funds, persuasive Power, can you get VC with
Business Plan Experience in this Segment your Plan and your Idea - Can you realize the Plan

Seed / Prototyping Business Angel - prefer smart Up to 1 Mio, but 50k -500k How good is the Team and the Prototype
Money average

Startup Business Angel (HTGF or seed Up to 1 Mio. Development, Financial Plan
funds)

Early Stage BA, VC Up to 10 Mio. International, 1-5 The right Contacts, Potential and Team
Mio. national Fonds

Expansion VC 5-25 Mio. Growth in Sales, Business Model (reoccurring
revenues)

Late Stage IPO, VC, Private equity (in Unlimited Growth in Sales, EBIT, Market Share
exchange for angels and VCs)


Ideal Way of increasing value – Facebook (at least till 2011)

Source: Techcrunch.com


Define a Business Model, test it and iterate, iterate, iterate…

1 Infrastructure 2 Offering
3
3 Customer

Core Partner Customer Customer
Competencies Network Relationship Segments
Value
Proposition
Value Distribution
Configuration Model

Costs 4 Finance Revenue Model

Source: A. Osterwalder Business Model Design Template


The unique selling proposition of your product?

Some questions to answer:

• Why should somebody buy your
product?
• What needs to you address?
• What are the key USP‘s for your target
customer?
• Why are you better?
• Is there a market?
• If there is no competition there is no
market! That is not an USP – nobody
will buy it!

Source: Forbes Magazine


5 Forces (Porter)

Potential
Entrants
Threat of new
Entrants

Bargaining Industry Competitors
Suppliers Power of Rivaly among
Bargaining
Buyers
Power of Buyers
Suppliers existingfirms

Threat of Substitute
Products or Service

Substitutes


The Competition


The Gartner Hype Cycle – Define the right time to market


New Markets are different

Source: Steve Blank


How to find the first Customer

Search

Customer Discovery Customer Validation

Pivot


Crossing the Chasm in an existing market

Source: Steve Blank


Crossing the Chasm in a New market takes much longer

Source: Steve Blank


Customer Development - How the find the Target Customer

• Week 1: Define a beachhead where to
enter the market
• Define the pricing

• Week 2: define a new target customer
• Define a better package and better
pricing

• Week 3: …

• After one year: Market clearer but
iterations every 4-8 weeks to improve
pitch and feature set


Plattform vs. One Trick Pony

Easier to enter the market, niche leader
but can become obsolete with game
Very hard to sell, indirect business models, high changing technology (Facebook vs.
investment but maximum ROI
Studivz
Source: Facebook


Define a Sales Process and potential customer market and
positioning in the value chain

Source: Slideshare


What's up with the Marketing - there is no Budget

WEB 2.0 TOOLBOX
 Todays Online Marketing Technologies for the Web 2.0 are
Viral Marketing more Creative
 The new Tools are used to make all kinds of Advertising:
Early Adopter Marketing
PR News, Blogs or Twitter
Buzz & Guerilla Marketing  An interesting and interactive way of Advertising is the viral
marketing (Word of Mouth Marketing)
Blogging & Twittering
 The Problem of these creative Advertising:
Brand Page

Facebook Fan Pages  You can't predict the effect
Online Events / Webinar

Youtube Video PR  Viral Campaigns are unique - you can't replicate them

Company Radio & TV


Raising VC & Sales – Money is Oxygen

Raise 50% more money than you need in the
beginning

Example:
HTGF gives 500K for 15% (+ one time anti
dillusion clause) as they know that you will
need additional money from other investors


Working Capital

• There is some time between
order entry and cash flow

• This can become your core
problem!
• If you have contracts, the
bank can be used for this but
not unlimited


An important "period" Break Even (HGB vs IAS vs US GAAP)

…cash flow break even is important


Building a great Team

 Look for talent not for CV
 Motivation is more important than previous
internships etc.
 Grades make no good great sales guy


The SMT – Building a Senior Management Team

 Like in a rock band: All instruments have to be played and not everybody can play everything
 Very important to find 5 key people in the company
 In the beginning you need 2: one to sell, one to build
 Later you need: CEO, VP Sales, COO, CFO, CTO/visionary


Finance Planning and Venture Capital

 Create a Financial Plan in 2 ways
 Bottom Up
 Top Down

 From where to you get the Numbers?
 Gartner & Co

 Calculate 3 Scenarios (+/+/=) (if you have a
negative scenarios – how to innovate the
business mode to still make money?

 How do I have to calculate to get VC?


Who are the Key Players to get VC?

E.g. in the valley Check it out: http://linksviewer.com/free/view/Map.htm


Try to reach Network Effects

Year 1 Year 2 Year 3


Scaling the Company & Establish an Expansion Strategy

Many ways to grow:

• Product differentiation
• Go into verticals
• Expand into other countries
• Start partnerships

Problem: Which way is right?
Try everything but stop fast if ist not
working

Exit Scenarios

Selling to Google is best, but there
are many other which are ready to
buy

• IPO – not necessary, you can use private equity
first
• As an expert first before you sell (M&A advisors in
London, NY , silicon valley)
• Stay with your company?
• Merger with competitor?
• …


What kind of Questions do the Investors ask?

Product - What is the Product Roadmap? What are you developing next, how long will it take, and who are your hires to
develop it? How did you make the decisions regarding the Direction the Product is right now? We want to understand your
Decision making Process and your vision of the company. This last point is extremly important.
Market - How big is the market and how will it grow? What are the trends in the market that make now the right time for your
product? If you're in a big enough market, you can afford to make some mistakes (which as startups you will always do!). Who
are your first customers? Are they referenceable? What does your pipeline look like?
Competition - Who are the competitors? What is your competitive advantage and is it sustainable? Hint: IP patents are not
enough.
Team - What are your backgrounds, where did you meet, and why are you the right team to execute on this plan? Who does
what, and who else do you need to hire to build out the right team? Be lean with your costs. No VC likes to see a company that
is spending extraneous money.
Scalability - What are the barriers to growth? There will always be some; be aware of what they are. This could be from the
business model side or the technical product side. Within this there is also the issue of customer acquisition strategy and cost.
Finally, although we do not ask the founder this question, we ask ourselves: In what ways do WE as the VC investor
provide value to this particular entrepreneur/team/startup?
Source: Janet Zhou //Silicon Valley VC Mai 2010


How much should I raise?
Phase Who invests? Volume Success Factors
Idea Nobody 0 Experience and Background
Orientation Fools 0 Meet the right People
Planning Fools 25.000 € Background - Who can write a
clean Plan and make a good
Calculation - only Serial
Entrepreneurs in Silicon Valley are
getting Money for Ideas
Founding / Business Plan Family & Friends, BA with 0 - 1 Mio. Own Funds, persuasive Power, can
Experience in this Segment you get VC with your Plan and your
Idea - Can you realize the Plan
Seed / Prototyping Business Angel - prefer smart Up to 1 Mio, but 50k -500k average How good is the Team and the
Money Prototype
Startup Business Angel (HTGF) Up to 1 Mio. Development, Financial Plan
Early Stage BA, VC Up to 10 Mio. International, 1-5 The right Contacts, Potential and
Mio. national Fonds Team
Expansion VC 5-25 Mio. Growth in Sales, Business Model
(reoccurring revenues)
Late Stage IPO, VC, etc. Unlimited Growth in Sales, EBIT, Market
Share


Week 1: When do I get the Contract and the Money?

 When the Investor is interested : First
Round 2 -3 Month Due Diligence Phase
 "Finding the Rock": Investors asking
question Founders are answering
 Months of Contract Negotiations

 Meeting with Notary (Founding GmbH)
 Open an Account Source: Wooga

 Don't wait for the certificate of registration,
start immediately
 Then the Money comes


Week 2: What happens then?

 Get an Office
 Go to IKEA or buy on eBay
 Get a Phone
 Write Job Ads
 Hire People - Is the Team complete?
 No, you can't order a Porsche, a Macbook
or an iPhone
 Long Term Investments  You can„t go to
the Customer with a ALDI Notebook?

Source: Blog


Key Learnings

 Being self-employed means working the every day
and own your own - 60 - 100 hrs a week is normal
 Never Stop Learning, iterate!
 Writing and Optimizing the Business Plan
 Get a "Level of Trust" - Visit Events and enlarge
your network
 Investors are paying for the growth of the Company,
not for luxury like concord flights – don‟t worry you
will be invited to cool locations and events all the
time all over the world!
 Get in the Market when everybody makes fun of you


Thank You
Information: www.adtelligence.de
E-Mail: ma@adtelligence.de
Become a fan: www.facebook.com/adtelligence
Twitter: www.twitter.com/Michael1980
Connect: www.linkedin.com/in/michaelaltendorf
www.xing.com/profile/Michael_Altendorf

Annex
Information: www.adtelligence.de

Books to Read

 Starting a Venture - The Art of the Start – Guy
Kawasaki

 First Steps - The Lean Startup – Eric Ries

 Go to market & productization - Steve Blank – 4 steps
to epiphany

 Go to market - Crossing the Chasm, Geoffrey Moore

 Fast Growth – Inside the Tornado, Geoffrey Moore

 German Business Plan handbook:
 http://www.cyberone.de/cms/fileadmin/download_file
s/Businessplanhandbuch.pdf


Starting a VC Backed Company - The Art of the Start

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