On Investors-

1. On Investors- MGT 709 New Venture Creation

2. Agenda • Adams • Thoughts on Business Plans • Business Model Analysis • Room for Dessert • Walnut Venture Associates

3. Adams On Investors • The business plan is not the be-all and end-all for getting funded • Sometimes investors don’t even read plans • Writing a business plan is not the problem • Viewing the business plan as your primary goal is the problem • More evidence of output rather than execution orientation • Myth: Investors fund business plans

4. The Work • Don’t focus on the plan…do the work • Put together a great team • Execution intelligence • Great idea, poor team = no • Great team, so-so idea = maybe • Great advisors and directors are crucial for legitimacy and guidance • Validate the market • Get to market fast • Define value inflection points • Presentation and executive summary may be all you need (and “the pitch”)

5. The Pitch • Cater your message to the audience’s needs • Clearly articulate features and benefits • Relationships rule • Who can influence the investors? • One or two good referrals cuts through the noise • Supplement the pitch with collateral • Treat the plan as a brochure – it has about the same effect on investor decision making • Ideal: twelve slide PowerPoint, an executive summary, and team/advisor bios

6. The Pitch • Contents • Company Overview • Customer pain/problem • What problem are you solving? • Why is it a problem? How severe? • How big is the market? • What segments have the worst pain? • How have you validated the needs? • Solution • Competition • Team • Business Model • How will you make money? • Revenue model, distribution model, milestones • Financials • When will you be profitable? How much capital?

7. The Pitch • Process • Have as many team members participate as you can • Investors want to assess your team • Project energy, enthusiasm, confidence • Malleability • You have to be comfortable not keeping your sacred cows • Do you want to be king or rich? • You don’t need to have all the answers but you must be able to respond thoughtfully

8. Thoughts on Business Plans • On a scale from 1 to 10, business plans rank no higher than a 2 • Four components that must “fit” • People, opportunity, external context, deal • Three questions • What can go wrong? What can go right? • How can management make more go right than wrong? • The role of management is to increase the fit

9. People • Adages • Successful founders have two characteristics: they are “known” and they “know” • I’d rather back an “A” team with a “B” idea than a “B” team with an “A” idea • Citing the need to recruit experienced people is like wishing to draw 4 cards to make a straight – a low prob. Event! • Questions: • Who are the founders? What have they accomplished in the past? What directly relevant experience do they have? What skills do they have? Whom do they know and who knows them? What is their reputation? How realistic are they? Can they adapt? Who else needs to be on the team? Can they make hard choices? How will they respond to adversity? What are their motivations? How committed?

10. Opportunity • Adages • Is the total market large and/or growing? Is the industry attractive? • Use analogies to describe what the venture will look like if it is successful – the next Walmart • “Invest in industries where growth can overcome the shortcomings of management” • Buy low, sell high, collect early, pay late, have growth options • Questions • Who is the customer and how do they make decisions? is the product a compelling purchase for them? how will you reach the customer? at what price? How much does it cost to acquire a customer? How much does it cost to deliver the product? How much does it cost to support a customer? How easy is it to retain a customer? Who are your competitors? How will they respond? Abnormal profits will go away.

11. Context & Deals • Context • A shift in context can turn an unattractive business into an attractive one • Deals • From whom you raise capital Is often more important than the deals • How much money to raise and in what stages? • Money is time • time to discover the right team, opportunity, and context • Investors have to decide whether to give you more time • Deals are fair, simple, robust, reflect trust rather than legalese • Questions • What new information would change the likelihood of success? How much time and money are required to “buy” that information? To what degree would more money increase the rate of growth? Without extra money will you lose a winner takes all market? • From whom should the money be raised? How much is needed? What deal terms are fair?

12. Risk/Reward Management • Myth of entrepreneur as risk seeker • All sane people want to avoid risk • True entrepreneurs want to capture all of the reward and give the risk to others • I hardly ever look at the numbers any more • They are most likely wrong • I like to see the team has thought through the key business drivers • Due diligence is important for investors

13. Business Model Analysis • A business model is a “profit engine” or cash generating machine • Revenue drivers • Cost drivers • Investment size • Critical success factors

14. Revenue • Types • Single stream, multiple streams, interdependent, loss leader • Models • Subscription, volume or unit-based, advertising-based, licensing/syndication, transaction fee • Fishbone model

15. Fishbone Revenue Model Avg. tuition rate Student mix Tuition Curriculum # of students Rate of return COB Revenue Endowments Reputation Size of endowments Grants Grant applications Quality of faculty Executive education

16. Costs • Types • Fixed, variable, semi-variable, non-recurring • Structures • Payroll-centered (direct) • Payroll-centered (support) • Inventory • Space/rent • Marketing/advertising

17. Fishbone Cost Model # of faculty Productivity Faculty Salaries (80%) Market rates COB Expenses # of staff Support ratio Support Salaries (10%) Salary rates Teaching resources Operating Expenses (10%) Research resources

18. Investment Size • Maximum financing needs (lowest point) • Positive cash flow • Cash breakeven • Cash flow diagram is useful • cash balance over time • Cash is needed for infrastructure, salary, inventories etc.

19. Critical success factors • Which factors have the greatest impact on profitability? • Sensitivity analysis

20. Room for Dessert • How well do you rate the plan? The idea? • Does the plan address its audience’s needs? • What are the strengths and weaknesses of the idea? What are the economic drivers? • What would you like to see before committing funds to this venture?

21. Walnut Venture Associates • Who are angel investors? Why are they investing in startups? Why would you seek an angel investor? • Evaluate the potential investment from Walnut’s point of view • What issues require more investigation? What needs to be resolved before you write a check? • What issues does Bob O’Connor have with Walnut? How should they be resolved?