This quick post covers start-up cap table creation, maintenance and reporting using a Google Docs spreadsheet and two slides. This is a prelude to the updated, 2012 board meeting example discussion that will hopefully be done in the next few weeks.

The CapTable Spreadsheet link is here.

The Power Point link is here.

Fictional company NewCo context

If you look at the spreadsheet, there are two sheets / tabs:  the cap table summary and the cap table itself.  Reading through the summary, it’s clear that this fictional company has raised two rounds of funding (Series A and Series B Preferred) from a total of 3 VC firms and one individual investor.  There are two founders and one early employee that had common stock at the point of the preferred investment; this common stock is listed separately from issued options and the available stock option pool.

NOTE:  There is only one input cell on the summary sheet: the number of shares in the option pool (C25); every other value is input or derived from the cap table sheet.

Number of outstanding vs. fully diluted shares

The two columns on the summary sheet to the left of the number of shares show different percentages.  The number of “outstanding shares” are all the existing common shares PLUS all the preferred shares PLUS the issued options, whether or not the options are exercised.  The number of “fully diluted outstanding shares” is the number of outstanding shares PLUS the unissued option pool.  The reason to delineate between these two versions of share numbers is because, in certain situations (such as an acquisition of NewCo), the unissued option pool will be canceled and the percentage ownership will be equal to the percentage outstanding. With a large option pool, the difference between the two resulting ownership percentages can be significant.

On the summary sheet:

• A good rule of thumb for who should be listed as an investor or holder of common stock is to list anyone with 5% or more ownership separately.  We didn’t do that in the Series A preferred but we did do that in the common holders even thought it was just one individual.  Use your judgment to create a clean, readable summary.
• I think the summary chart is a great cut-and-paste into a board deck (see slides link).
• Always include the date on the cap table because it’s a living document that can change dramatically over time.

On the cap table itself:

• All of the columns are not used for each class of stock.  Columns D-J are only relevant to option grants (the section at the bottom of the sheet).
• The preferred stock has a few “house keeping” columns of information such as the date the stock was issued (probably the ‘close’ date of the investment) as well as the stock certificate number.
• The Rule 144 start date refers to the start of the holding period for the SEC’s Rule 144.
• The strike price for the preferred stock is the price the investors paid per share; the domicile is the state in which the investors do business or live.
• The strike price for the common stock options is the Fair Market Value as determined by the board of directors.  A reasonable rule of thumb is that the option strike price is 20%-25% of the most recent preferred price.   However, this rule of thumb has been complicated by IRS Section 409a.
  • Section 409A suggests that the fair market value of the stock as of a particular date is the “value determined by the reasonable application of a reasonable valuation method” based on all the facts and circumstances available.  This means using a number of different valuation methods to determine the value of an option and the easiest way to manage this confusing guidance is to hire a firm to perform a 409a valuation (which should cost a few thousand dollars, on average and take 2-4 weeks to complete).

I believe the rest is pretty self explanatory; if you have questions, please ask.

A successful pitch deck organizes the concepts and details about your business so that you can clearly and simply communicate excitement, metrics and aspirations to potential investors. It is, at the end of the day, a facilitator of discussion and not a stand-alone product. This post will take personal experience pitching and listening to 100’s (and 100’s) of pitches and help you structure a complete investor pitch for your start-up.

What’s new in this version:

• Slightly adjusted the flow of the presentation
• There are 2-3 examples of some of the more important slides
• NOTE: think you have a better example of one of these slides? Post it to the comments of this deck and I’ll include the best slides in the next version.

• The discussion for each slide has been expanded based on feedback and observations over the past year.
• Along the way, I’ve tried to call out “Best Practices” that represent, for the most part, universal advice that withstands the test of time.  Feel free to disagree.

You can DOWNLOAD THE POWERPOINT DECK HERE.

There are three reoverthinking “companion” posts to this one; Read #1 before you meet with VCs and read #2 and #3 after you’re funded:

1. What to ask in a VC pitch meeting 2012;

2. The current example board presentation;

3. The current start-up planning post.

Swing thought:   Experienced, early-stage investors get excited by the following:

Visionary, experienced entrepreneurs…

Solving a valuable problem in a huge, growing market…

With some fundamental, defensible advantage…

That’s been proven through scalable customer traction…

In a business with healthy-margins and low capital requirements.

A bit of background

Entrepreneurs tend to have consistent questions regarding pitching professional investors (both angels and VCs).  For example:

• What topics are required in a pitch deck?  what should be omitted? WHY?!?
• what is the best way to communicate xyz?
• What depth of information should be provided in the deck?
• What about those 7 really great slides that make the too lengthy?
• What’s is the best flow from slide to slide?  why?!?

The number of companies that have been funded using this template continues to grow…and I hope it helps you refine your company’s story and how you tell it to potential investors.

So what does your company do?

You may be surprised to find that it’s difficult to concisely describe your company, its business model, or market opportunity. If so, it’s critical to investigate, discuss and understand why that is the case.  You might not be ready to pitch professional investors. You may need more iteration on the product, with customers, or in your target market.

An increasingly common way that start-ups answer this question is to describe their company in the context of another company. For example, we’re mint.com for start-up finances.  Or we’re OpenTable for Self-storage.  Clearly, this is a good shortcut if the analog company is successful and the market is large and growing (see above list of 5 things investors want).  I think it’s interesting to consider that Google, Facebook and Twitter probably couldn’t have described their businesses this way because of the lack of analogous companies.

Implicitly or explicitly, investors will ask this question and the others that are posed in the discussion below – and the only truly “wrong” answer is not having thought through the possibilities (“I don’t know because…” can certainly be an acceptable answer).

Starting Suggestions:

• Create your own deck!  This is as true today as it was in the first version of this example deck; create a deck that allows you to tell your story according to your style and your business; use your own look and feel; name the slides what you want; tell your story with text, pictures, spreadsheets, hand puppets, etc.
• Don’t leave out critical information!  This outline is my list of what constitutes “critical information;” no professional investor will fund your company without knowing the information suggested by this outline.  That said, if there are elements to your business that are critical and unique – make sure you include them in your pitch and discussions.  Force yourself to limit your core investor pitch slides to less than 12…put everything else you think you might want to talk about in a “back-up slides” section after the final, “Thank you,” slide.  In my experience, you will rarely get through a 15-20 slide investor pitch.
• Proactively answer the big questions! If there are obvious, elephant-in-the-room sort of questions regarding your business: address them before they get asked.  This is always a better way to go because it proves you understand the issues and are not scared of them. If you let investors “discover” big issues during the pitch by not bringing them up proactively, they can easily assume that you were nervous about that fact or that it’s a true weakness in the business.
• Please please please don’t just read your slides!  Investors can read the words; they want the story behind the story. The details and anecdotes allow investors to get to know you and how you think.  Reading your slides is a rookie mistake.  A complementary suggestion on this point is to limit the font size (the bigger the better) and number of words per slide (less is more).
• Be passionate and informed! A core part of what investors look for and “invest in” is the team itself – show them your passion and be sure to know data from adjacent or competitive markets, companies, and models. Smart investors want to see a self-aware founding team that knows what they don’t know as well as understands their collective strengths and weaknesses. Investors want to see a team that is comfortable NOT knowing all the answers (this is the nature of being an entrepreneur)…as long as the team has the drive and determination to find and verify that answer.
• Finally, at a tactical look-and-feel level, it’s important to have enough white space in your presentation format.  I like a white background because it prints and projects cleanly.  I like titles that are single-line and as few words as possible; less is more in a presentation because it allows for questions and conversation instead of simple presentation of the ideas.

2012 Example Investor Pitch Deck

Slide #1:  The Title Slide

Well, Duh.  The title slide is your opportunity to call the investor meeting to order. Most of the time, investors will be in motion ahead of your pitch: stay here until everyone is ready.

NOTE: the black “Slide #X” text will help you track the actual deck to this discussion; each slide in the PPT deck is labeled in this manner.

Include company name and date on your title slide. Also, it’s fair to add an investor-specific “presented to …” note such as shown in the Title Slide picture.  Why the investor-specific tag?  Good VCs will honor the notion of confidential information – but don’t try to get them to sign an NDA (they’d rather not hear your pitch) – they see many different versions of very similar businesses every day and will not risk being conflicted. A simple and effective way to minimize the sharing of your investor deck is to (1) distribute soft-copies only in PDF format and only if asked; and (2) ensure the investor’s name/firm is on EVERY page. That way, if it gets around, everyone will know where it came from and that should create at least some amount of hesitation ahead of sharing.

Ideally, you’re off this slide as soon as everyone is settled or maybe just ahead of that…quick…the clock is ticking and your potential investors probably have very short attention spans. Help them understand your business in as few slides as possible. Let’s go!

Slide #2:  Agenda + Company Overview

BEST PRACTICE:  Every slide should ideally communicate exactly one concept (the “punch line”).  All the words and pictures on each slide should serve the purpose of delivering that punch line in a clear, linear manner.

The Agenda provides an opportunity to ask your audience if there is anything they want to cover that is not in your current agenda.

• Maybe the investor has an investment in this space and therefore has some very specific market questions that they want to be sure to cover;
• Perhaps they have heard a few interesting things about your company that they want to be sure to dig into those items before the meeting is over;
• Perhaps you had an introduction from someone or some firm that they know and want to understand the relationship between parties.

The Company Snapshot serves to key purposes (aside from violating the single punch-line best practice): first, it tells investors who are not familiar with your company what you do.  I can’t tell you how many times I’ve been in a pitch (to me, as an investor) where we’re at slide 5 in the deck and I’m still not sure what it is that this company does.  Don’t make your investors guess…lay it out simply along with the other details of your company so you don’t make anyone spend your precious pitch time on silly information you should have dished out earlier. That said, don’t give your entire pitch while on this slide; 5 minutes max on this slide.

The second thing that the Company Snapshot slide does is create a simple and effective way for partners at the firm who were NOT at your pitch meeting to easily understand the high-level information about your company at-a-glance.  In most cases, there will be more people involved in making the investment decision for your company than are in the room when you first pitch – give them an easy way to start understanding why they should care about you, your company, and your opportunity.   Include: business focus, target market, significant customers & partners, how many employees you have (gives them a sense of your expenses), any other existing investors and how much has gone into the company so far, when & where was the company founded (this is touched upon again in the funding ask slide near the end), where are other offices, and what can they expect in terms of revenue and expenses (”pre-revenue” is a fair answer as well).

Slide #3: The Team Slide

Over the past few iterations of this deck, I’ve been convinced that the team slide should almost always come up front.

Potential investors will want to know about you and your team so you should be prepared to have a slide that allows you to brag on yourself and your team a bit. My advice is to keep the slide short and sweet. Pictures are optional but they’re a nice, visual touch…and clearly less likely as your company and executive team grows in size.

BEST PRACTICE:  if you can have the team details such as background, passion, expertise, etc. to come out organically during the presentation and subsequent discussion, it makes for compelling reinforcement that you’re the right team to tackle this problem.

Hopefully, the core team has direct experience that is relevant to this company in this market at this time.  If so, then it’s great context for the rest of the presentation and espcially as a lead-in to the problem/solution/market slides where you can tell the “in this giant market, our team has such fantastic experience that it informed our killer product for this huge problem.”

If the team is a ‘generic’ group of bright people with an interesting idea, it’s still worth talking about.  For example, how did this team come together?  What are the unique synergies of the group?

If your company has already signed up advisors and board members, then it makes sense to tell your investors about the extended team that is helping lead the company and why you chose them.  Usually, advisors and board members have market-relevant experience and relationships that are worth bragging a bit about.

Slide #4:  The Problem Slide + Why Now?

Slide #4A sets up a generic Problem that your company is solving. It is the first of the three core slides of any great investor pitch: the problem + your solution + the market. If necessary for context, your problem slide can hint at the solution and market but should be as focused as possible on the problem itself.

A great problem slide should not be controversial; it should characterize an obstacle or inefficiency that is inhibiting a coherent group of customers from doing business in a clearly “better, faster, stronger” manner. The benefit to the customer almost universally boils down to positive financial impact over some period of time. You will know if your problem slide resonates with your audience if you see knowing smiles and heads quietly nodding as you’re describing the problem.

You’ll have time to talk about your vision for the market and the future of your product in just a couple sides, here you really need to nail that you have identified a problem that exists, effectively, today.  Why are you not two years too early or two years too late?  Why is this a pressing issue for your target market (2 slides from now)?  What are the various nuances of this problem that you can illustrate so as to show how you elegantly solve them in the next slide?

Slide #4B describes the problem (in 2004) as a “security risk gap” created by security issues exceeding the capacity of the IT group to address them.  Clearly, this “gap” causes reactive fire fighting by the IT department, business downtime, loss of productivity and therefore billions of dollars lost annually. The bullets on the right give plenty of opportunity to discuss the problem in much greater depth if appropriate for the investor audience: What’s a “walk-in worm”?  Firewalls are porous? Patching is impossible – really?

Slide #4C describes broadband service provider challenges rolling out their new (in 2001) broadband service and supporting their customers.  They had all made huge CapEx investments and didn’t know how long it would take to make broadband a profitable service because of the operation expense in rolling it out and subsequently supporting it.  This slide was used with investors and customers and literally described a $100m business in 2001-2002.

Slide #5:  The Solution Slide

Slide #5A sets up the generic solution slide — the second of three core pitch slides (the problem + your solution + the market).

To be clear, slide should talk about your product as well as how it addresses the problem of the previous slide. Screen shots are great; a demo is even better (see #5B below). If necessary for context, the solution slide can hint at your company’s market, business model and go-to-market strategy.

• A great solution slide can be slightly more controversial than the problem slide since it represents your company’s opinion and should describe how you address the problem from the previous slide.
• A great solution slide needs to be as simple as possible; complex solutions and products are harder to create, harder to sell and generally cost more time and money to bring to market.
• A great solution slide basically communicates the value proposition: “we work hard so you don’t have to.”  Yes, you’re the scrubbing bubbles of your industry.
• A great solution slide needs to communicate defensibility and some sort of proprietary advantage.  If there is no technology or process defensibility, winning in a market could come down to which company spends the fastest to get product created, marketed and sold in order win customers faster than competitors. Money will be the bluntest form of differentiation…and the most expensive from an equity perspective.
• Your solution slide might be best served up as a “case study” if your product is more like infrastructure or “part” of a larger solution.  How a big-named customer uses your product to solve their problem is compelling an perfectly illustrative.

Slide #5B shows two solution-slide options: a demo placeholder and a product line slide.

• If you plan on doing a demo, I’d make it no longer than 5-10 minutes and get back to the flow of the pitch.  Most investors will assume that you will make your product work; the demo is brief proof of that plus any compelling features you can show quickly.
• The Intrusion Prevention System product line slide shows the product as well as the automatic security update service as the solution to the looming IT “security risk gap.” This slide isn’t especially simple but it does convey a valuable, proprietary product line and integrated service.  All other things being equal, it’s easier to suggest that hardware is more proprietary and defensible than software.

Slide #5C describes a broadband service management product (the product had a name, but was removed from this slide) that no only saves operational costs for customers but speeds time to market and creates happy subscribers!  The combination of tangible and intangible benefits worked well together in both investor and customer meetings; the intangible “icing on the cake” value propositions wouldn’t have won the deal but they resonated strongly in an early, competitive market.

Slide #6: Market + Market Context

• Why is your market interesting?   How large is the market and the opportunity in your market? 
• Conversely, if the market seems small, explain why it’s sufficiently large to support growing your company to a compelling size?
• Is something currently driving disruption or creating new opportunity in an old market?  Or are there any compelling dynamics currently at play?  (do you have insights that nobody else has?)
• How fast/slow is growth or change occurring in this market?  (are you early or late?)
• Is your market segmented in a unique way? How so? (All Fortune 500 or SMB / mid-market?)
• WHAT PORTION OF THIS MARKET DO YOU HAVE ACCESS TO AND WHY? How do you fit in?  Note: This can help set up your unique competitive advantage / “secret sauce” slide.

When building the Market / Context slide, assume that your audience knows very little about your market, its size and related data.  You need to show that you deeply understand the market and clearly frame up why your market is interesting: it’s big and growing; it’s going through massive disruption; it’s enormously fragmented; it’s suddenly ready to enjoy the leverage of technology for the first time; everyone else is thinking about the problem/solution/etc wrong.

Most importantly, you must answer the question: given the market and opportunity, what portion of this market do you have access to TODAY and why?  What is your company’s birthright in this market given your current solution to today’s problem? Where exactly is your foothold on the other side of Geoffrey Moore’s chasm?  Please, explain.

This is also your opportunity to describe any compelling dynamics currently at play; perhaps something that gives your company an advantage. In a real sense, this slide should be the set-up for your “secret sauce” / “why we win” slide that is coming right up.  This is also an opportunity to set the stage for discussing product-market fit:  your company should be positioned such that its clear how you will enter and start to capture a small and growing portion of the opportunity.

Slide #6A shows a somewhat non-traditional market size and opportunity chart. In this example, the Intrusion Prevention System (IPS) market of 2004 was a tiny fraction of the over-all $10b IT Security market.  This IPS segment was literally stealing budget from other more traditional (and better known) security segments because of the product’s efficacy and this was a good way to show the momentum of a relatively small and less-well-known opportunity. And yes, did you notice how that arrow looks like it’s coming out of the bucket (the DDoS graphic is able to be ungrouped if you care how that was done). Come on.

Slide #6B shows a market that comprises a subset of on-line retailers in the US.  This subset is characterized in detail on the right with a visual representation of their relative size on the left.  While my initial impression was that this was a small target market, the clarity of description and the rest of the pitch made me comfortable that the team was chasing a compelling opportunity.

Slide #6C sets up the growing home security and automation market. This slide does a nice job of showing the timeframe, a visual+numerical representation of the growth and a sense of a increasingly complex market segmentation in the out years.  This is a great slide to have an detailed conversation around that could clearly demonstrate you know your market well.

Slide #7A, 7B:  One-slide biz overview (optional)

• As much as I hate to say it, I consider this slide optional.  For very early-stage start-ups, this slide will be too difficult to create because of the breadth of reality and vision it requires. That said, I highly recommend giving it a shot.
• In some pitches, you’ll spend the entire meeting talking while sitting on a single slide; when that happens, this should be that slide.
• Done right, this allows you to describe what you do, who you do it for, why that’s important and your vision for the future. It should also allow you to explain why your company should win as compared to competitors or the status quo.  Therefore, to me, this slide can be the most valuable slide in the deck …and it will probably take the most effort, revision and contemplation of any slide in your deck.

While this slide can look VERY different from company to company, I believe it contains the same basic information for any company.  The concept of the past, present and future is key to this sort of slide because it allows you to talk not only about the product/solution you’re selling today but your vision of the future and the associated products. Your customers value your ability to see into your / their collective future and anticipate problems they don’t even have yet.

In this example, the left of the blue bar (obviously nothing shown in the slide) represents the past …where customers didn’t need to (or didn’t KNOW they need to) use your company’s solution. But now, here in the blue bar, “we all now know we have this problem.”  Naming this “phase” is a good use of the header space.  Here, it’s called “The Land Grab” – which referred to broadband service provider’s need to quickly and efficiently acquire new broadband customers before their competitor beat them to it.  NewCo has products to help with this…and the effect is “Broadband Deployment Acceleration.”  Investors should appreciate how well you understand the problem (so well, in fact, that you named it). It also shows that NewCo’s products map to the problem and have a clear value proposition.  …and it leads to straight to the green bar.

The middle, green bar represents the near-future.  Perhaps NewCo’s customers are already experiencing problems associated with this near future. In any event, this represents the next step in how NewCo would work with their customers…and forecasts the products they might sell to address the next phase of challenges.  If it makes sense, name this one too!  This helps investors understand that you’re thinking down the path of product / market evolution and that you’re less likely to be a one-trick pony.  The more logical the linkage, the better. Here, it makes all the sense in the world that FIRST you have to initiate the service, THEN you have to manage and support effectively while minimizing the costs to do so.

Finally, the orange section represents your vision of the future. If your company could wave a magic wand, this would be the resulting condition or capability. In general, this phase should be predicated in some capacity on the earlier phases. It’s really important for investors to hear your vision of the future; everyone will understand that it will take great products, a willing market, superior execution and money to get there…but you have to have a sense of where “there” actually is.  If your company vision is having your first / only product increasingly adopted – that’s not a company vision – that’s just execution. In this case, the vision was to eventually enable broadband service providers to sell value-added services (gaming, security, triple-play) to their subscribers in order to create some lock-in and differentiation for their service…instead of being relegated to providing only the increasingly commodotized broadband “pipe.”

Slide #7B is the version of the slide that was actually used for the broadband management software company.  All I can say is that EVERY customer loved this and it opened many doors for the company that would have otherwise been closed because it demonstrated that we understood the lifecycle of our customer’s business.  It also super important to note that the company never executed to the final vision on the chart – we never achieved that value-added service vision because the company became successful along the way in only the first two columns.

Slide #8:  Business Model and Traction

• How, exactly, does your company make money?  Do you have any examples of this working so far? If you do, how many and how exactly did you validate your product-market fit?  If you don’t, how do you plan to validate your assumptions?
• Does any part of your business act as a “loss leader” for another, more valuable part?
• Is it software? Packaged or SaaS?  Subscription or License revenue? What your MRR (monthly recurring revenue)?
• How does your product get sold or distributed into the hands of your customers?  Physical sales force, SEO/SEM LeadGen or inside sales reps?
• Do you have two models running simultaneously?  is that good or bad & why? Make sure you clearly describe and delineate between them…and hopefully describe how they benefit and support each.
• Relative to this model, what you’ve accomplished so far?  How does that de-risk your business?
• What you plan to do in the near future?  Why? and in what time

The business model (how we make money) and traction slide is a critical conclusion to the set-up of the problem-solution-market triumvirate.

BEST PRACTICE:  It’s easiest to discuss your business model by talking about the consequence of that business model in action…aka “traction.”  This slide can take many different forms but the punch line is the same:  “our company does this set of stuff in order to make money and now let’s talk about the results (if any) of our execution so far.”  It may be packaged or SaaS-based software, it may be an appliance sold directly into IT departments, it may be sold in any number of models…now is the time to ensure investors understand how the business works.

A core aspect of the business model slide is an articulation of how the business scales within this business “model” and go-to-market strategy.  The concept of “product / service distribution” is highly related to this for certain start-ups.  For example:

• If you are selling directly to IT departments, you probably will need to build a direct sales force (this is considered relatively “old school” but still works in certain situations);
• for a product that can leverage existing channels, it’s finding and signing up channel partners or indirect sales folks;
• for SaaS businesses it’s how customers “find” your company on the Internet and your cost / method of distribution.  What is the customer acquisition cost versus your lifetime value of the customer?
• …or maybe it’s a necessary mix of these models.

The model/traction slide is also an opportunity for you to forecast what your company will do next. Nothing suggests great execution to an investor such as calling your shot and coming back later and showing that “you did what you said you were going to do.” Conversely, be very careful NOT to over forecast.  The first question out of an investor’s mouth during any follow-on meeting will inevitably be: “so, did you land hit that big milestone?”   You don’t want to have to say “No” to that question.

Slide #8A shows two of examples of Milestone / Progress slides; When your business model doesn’t have much run time on it (when the start-up is pre-product or pre-revenue), use this type of slide because it allows you to discuss the progress you’ve made when that progress is not users or revenue. This sort of slide gives investors a short-cut to understanding how well you’ve executed so far in your company’s life.  Important, value-creating milestones over a reasonably SHORT amount of time suggest that your company is focused; you’re prioritizing what is important to grow your company and executing against that list.

Slide #8B shows a company with real traction; the business model implication in this chart is that there is a clear understanding of the conversion rate from traffic-by-channel to customers-by-channel. If the cost to acquire the traffic across each channel is also well understood, then the cost to acquire a customer is basically just math.  This is when investors start to get excited.  Because if you know the lifetime value of a customer, then it may be that one or more channels are profitable already and much of the model risk has been eliminated from the business…now it’s just a matter of adding sufficient capital to scale the business more quickly.

Slide #8C shows a a nice “funnel” picture with two months of data in an overly complex table.  Despite the confusing table, it does show monthly improvement in conversion rates from sign-ups to activations and then to paying customers. Even more interesting to the investor who is paying attention is the impressive depth of data that the company is tracking relative to customer acquisition efforts and costs. This slide provides great fodder for a high-quality discussion: how did you get that many sign-ups? What did you do to improve conversion rates?  How good can conversion rates get?   What is your churn rate?  Again, if these customers are valuable enough, we may have a “working” business model on our hands here.  exciting!

(optional) Slide #9: Other Key Business Metrics

• What metrics do you track? why?
• How have your metrics trended over the past and what are your forecasts for the future?
• What are these particular metrics important to your business?
• Can you control them?  How?   In what timeframe?

Metrics are critical in today’s businesses and especially early-stage start-ups because in many cases, pre-revenue companies only have proxies for success and good execution.  Good metrics are a tactical reflection of the business milestones you discussed in the previous slide.

And fortunately, detailed metrics are easier to gather and track than ever before: Google analytics, salesforce.com, and many other bits of infrastructure tend to spit metrics out in volume. Picking the metrics that make sense for your business and making decisions based on those metrics is a critical part of early scaling efforts; the most important metrics for your business will likely change over time.

The slide at right shows a list of potential business-relevant metrics that you might track, including: traffic to site, recurring revenue, website conversion percentages, up-sell ratios, # of product downloads, average revenue per user, and so on.  It’s important to show the past, present and future in a timeframe that is meaningful to your company.

(Optional) Slide #10:  Competition & your company’s “Secret Sauce”

• How are you different?
• If you’re not wholly different, how do you compare to others in your market?
• How will you defend your business from competitors?

To be clear, if your start-up has some real, preferably proprietary competitive advantage, this slide isn’t really optional – you should talk about it!

It’s important to realize that investors (any many other people) will begin to understand what your company does by ANALOGY.  Having seen many different companies over time (and understanding how THEY operate), understanding your company is largely an exercise in figuring how you are similar to dissimilar to the companies that investors know well.  Framing up a set of similar and/or dissimilar companies is one of the key purposes of the competition chart.

That said, category defining companies (facebook, twitter, zynga, etc.) probably didn’t have a chart that looked like this. If you are category defining, by all means paint that picture as clearly as possible; otherwise, optimize around making your company as easy to understand as possible for your potential investors.

For the typical chart, it is universally accepted that the standard “check-box” comparison will start with your company in the first column, having the vast predominance of boxes checked, and then proceed to list 3-4 other less-checked competitors that you’re in the process of wildly out executing.  The example Slide 9 has three examples of these charts; feel free to mix up the model in anyway that tells the best possible story.

While nearly cliche, such a slide still serves the purpose of listing the competitive criteria that you deem important relative to your company and this market and how other companies in your space stack up.  …and it’s probably best to NOT use the phrase “secret sauce” in your pitch…we’re using it here colloquially.

The set of competitive criteria for your company – the rows on these sort of slides – leads directly to your company’s unique competitive advantage (aka “secret sauce” or “unfair advantage”).  There are a number of standard, competitive differentiators:  being first to market, unique technology, patent protection, your amazing team, and others; these differentiators all have varying degrees of “defensibility,” which is an important concept when it comes to describing your company’s competitive advantage.  For example, being first to market may simply illuminate the path for a larger competitor who is willing and able to fast-follow your strategy and throw huge dollars at solving the same problem.  Is that true?  why or why not?  Have your data-backed (versus emotional-bias-backed) answers ready!

The question that investors will have and that you must answer as best you can is this:  if your company is successful, how will you defend its business from competitors who see your success and want some or all of it for themselves?What can you do differently? What can you do uniquely and realistically for how long?  What CAN’T (or is really really hard to) be duplicated?

(Optional) Slide #11: Partners, Customers, Pipeline

• Who are you working with today?
• Who will be your customer tomorrow?
• How, exactly, do you acquire customers?
• What is your go-to-market strategy?

Your company may be too early stage to have a slide like #11; and more than any other slide, this example can take a variety of forms.  The “punch line” for this slide is to communicate what ever progress your company has made relative to actual customers, the future customer pipeline, and partners that help your business be successful in some capacity. Logos are always nice to look at but don’t get hung-up on anything other than clearly communicating your current status.

If this slide doesn’t add to the “traction” story from Slide #8…then don’t do it. This slide helps if there is a story behind the story or a set of impressive customers that deserve special mention.

You may not have customers yet; or your customer base may be every consumer in the world. In any case, you need to communicate the current status of how well your business is working and customers (because they pay or should pay you  money) are a great metric for investors to use to judge your progress so far.  Revenue Solves All Problems and revenue is the most binary judge of success…but revenue from a top-tier, brand-name, market-leading customer is (to some real degree) more valuable than revenue from a friendly or no-name company because markets tend to follow (adopt the same solutions in a similar time frame) the market leaders.  Alpha or Beta (or non-paying customers) should be called out explicitly.

The discussion of your company’s “pipeline” is basically a description of how customer acquisition is going.  Whether you’re an Internet consumer application or building widgets to sell directly to other businesses, how efficiently your company acquires new customers is material to investors as they judge the state of your business and what could / should happen if they choose to fund you.  How, exactly, do you acquire customers?  How much does it cost to acquire them?  What is your average deal size?  How could your business make the average deal size go UP?   What is the average deal size of other companies in this same market?  Does this information align with the Market Size / Market Context slide (hint: it should)  Once you have a customer, can you sell them MORE stuff more easily?  Why / why not / how much / when will you have it to sell?  What is the expected life-time value of a customer (be careful to think about this relative to the cost to acquire a customer)?

Partners are a necessary evil in most businesses.  “Evil,” because in general, a company’s life would be much easier if it ran and scaled just fine without help from any other company. Partners might be a critical part of your business/market ecosystem; they might give you efficient access to potential customers; they might provide a critical part of your overall solution; they might actually sell your product or service for you.  What ever they “might” do, the one thing that is for certain is that they require some level of “care and feeding” and that equates to time and money for your business.  Make SURE they are worth it.  And remember that all partnerships tend to fail in the long term if both sides are not benefiting to approximately the same degree relative to their business. What did the partner commit to, if anything?  What did your company commit to?  Do you need more than one such partner?  How long will it take for you to measure partnership success?  What is required to ensure they are effective?  How might this partner accelerate, add scale, or de-risk your business and your execution?

One concept that you must keep coming back to (thinking about, analyzing, modeling, planning) is the concept of scaling your business.  Investor’s excitement about your business is predicated on their beliefs regarding how your business scales from where it is today to something much larger and much more valuable in the future. Desire for scale in your business is, without question, is applied most directly to revenue. That said, there are many other factors related to scaling your company:  business processes (go-to-market, sales, manufacturing, testing, etc), hiring, geographical expansion, and general awareness of your company / product / service. Of course, all these factors are related to revenue scale in some direct or indirect way.  Think through the discussion generated by this slide as a tool to proactively address questions regarding how your business scales.

Slide #12:  Financial Details (revenue, expense, HC, projections)

• What is your current and future headcount (this equates to your burn rate as headcount is almost always the biggest expense)?
• what is your current monthy/quarterly burn rate and how does that ramp over time?
• what is your current revenue and how does that ramp over time?
• How quickly are you approaching a cash-flow breakeven point?
• What’s your revenue run-rate 12 months from now?  What’s the net loss / gain over the same period?

Independent of the stage of your company, communicating simple and clear financial details is critical to an investor’s understanding of the current state of your business. What they care about is very simple:

• current revenue and expense trends,
• projections for the same going forward,
• current equity situation (who owns what, option pool, near-term option usage), and
• current cash position.

…Cover these items clearly and you’ll be answering their questions before they get asked.

For early stage companies, I believe that a “one quarter ago, current quarter, and 4-quarters-out” view presents a reasonably complete set of financial information.  With such a time frame, you’ll show a bit of history, where you are today, and a reasonable guess at what is going to happen in the next year.  I think a simple auto-generated excel graph help quickly communicate the ramp in both expenses and revenue.  If the company is really early stage and doesn’t have revenue or limited expense detail, it’s still far better to say something is explicitly zero (or unknown) than not mention missing/needing important data.

This example chart is a bit busy as it combines both the graph as well as a screen-grab from the company’s financial model spreadsheet. If you have a longer operating history or feel like you need to communicate more detail, it makes sense to break this into two slides:  a graph (the reader’s digest version) and the spreadsheet detail.

Data that investors will always want to clearly understand include:  what is your current and future headcount (this equates to your burn rate as headcount is almost always the biggest expense)?   what is your current monthy/quarterly burn rate and how does that ramp over time? what is your current revenue and how does that ramp over time?  How quickly are you approaching a cash-flow break-even point?  What’s your revenue run-rate 12 months from now?  What’s the net loss / gain over the same period?

Slide #13:  Funding “ask” + use of proceeds

The funding ask slide requires a bit of finesse as you are starting a set of discussions that could turn into negotiations if your potential investor turns into your actual investor.

In this slide, a little background is very helpful.  Make sure you let your audience know who you have raised money from in the past and at what valuation. This is not “secret” information; be open and transparent.  If you seed funded your company, that’s a good story, make sure you talk about it.  You should also talk about the structure of any prior formal investment by a third party: who, how much, when, format (common, preferred, convertible debt, etc). It’s important to get right to the punch line of this slide; You MUST be prepared to address the following (have data, be thoughtful, use a clear explanation):

• how much money would you like to raise?
• why that amount?  what will it be spent on? how long will it last?  what value will you create in your business using it?
• could you do what you need to do with less?   what might you do with more?
• are you actively working with anyone else on this round?

When it comes to timing, it’s important be realistic. If this is the first time you have met with this firm, it’s typically just the beginning of a process that will almost certainly involve multiple meetings over weeks if not months. For larger VC firms, you will not receive a term sheet until you’ve run the gauntlet of their Monday partner’s meeting…if you’re dealing with a top 25% firm, you’re not even close to “done” until you’ve got the Monday invite.  Smaller firms are able to be much more dynamic and efficient…however, that doesn’t guarantee that they will.

If the conversation is going remotely well, you’re likely to be asked about your valuation expectations.  If you have raised money at a particular valuation in the past, that is your starting point…but in this current macro-economic environment previous valuations do not guarantee ANYTHING.  If you have a number in mind that is based on data that is realistic – don’t be shy – flop it out there.   It’s important to understand enough about the VC business to know that investors tend to model their business on investment exits, cash returned to their limiteds against the size of the fund raised…and consequently ownership percentages in their portfolio companies at the time of exit.  Given this, it’s reasonable to approach a valuation discussion by starting with “how much of the company you’re comfortable selling in this round of financing.”  Fixing the amount raised and how much you’re comfortable selling implies a valuation.  Raising $300k while targeting selling 25% of your company implies a valuation of $1.2m.  This is a useful way to have a valuation discussion because if the round size happens to go up (not uncommon) as the round & syndicate come together, you can at least make an argument for raising the valuation. No guarantee it will work.

Slide #14:  Thank you, questions, contact info

Come on:  it’s polite to say “thank you.”  So do it.  …even if you just pitched a raging egomaniac VC who talked about themselves and played angry birds instead of listening to your pitch.

More than anything else, this slide serves as the indication of the end of the presentation.  Questions and other discussions are welcome.

That said, if you somehow managed to get here in a linear, non-distracted manner it’s probably more cause for concern than celebration.  The flow of most investor presentations diverges wildly as questions, deeper details and anecdotes drive the conversation – and that is a good thing. It shows your investors are interested.

Conclusion

Whew! That’s it for 2012; PLEASE ASK QUESTIONS AND COMMENT.  I’ll try to address them ASAP.

Pitching investors is part art and part science.  The goal here is to make the science part well understood, dissected and discussed. The good news is there is real learning to be had after giving and getting about 1000 different investor pitches over the past 10-15 years.

One of those lessons is the benefit of asking questions of the VCs themselves.  It’s hard to switch from pitch/sell mode to asking tough questions and putting yourself in the mindset of a buyer – which you are: you’re shopping for cash with your start-up’s equity.  And it’s never been more important to understand the VC business, the fund, and the attitude of the firm that you are going to partner with on your start-up.

And remember that VC firms are (almost always) partnerships which means that, in general, it really helps to have broad consensus across the partnership that an investment should be made.  To the extent that there is not consensus, the partner wanting to do the deal will have to “do work” to convince the other partners. These questions should help you understand how inherently aligned you are with a particular firm.

With all that in mind, below are a set of questions (and associated explanations) that you should consider asking both BEFORE and DURING a VC pitch.  They’re all “fair game” and none should be considered too invasive by any good VC firm.

Questions to ask before a meeting

Who will you be meeting with?  Associate?  Partner? General Partner?

Especially in larger firms, there is a well-defined hierarchy that is important to understand because of the analysis and decision-making processes within VC firms. General Partners (GPs) are the most influential decision makers at a firm, Partners are a notch down and associates are typically the entry-level position in a firm.  Of course, the goal would be to meet with a GP if at all possible; that said, it’s unfortunately uncommon to get a firm’s GP in a “first meeting.”

Many times, associates proactively reach out to companies in specific market segments and start-ups in a particular category; they also do much of the front-end company and deal analysis.  The one sentence summary is that they can say “no” but rarely can say “yes” when it comes to their firm making an investment.

Quick sidebar:  how to handle inbound calls from a VC firm

Some firms have a staff dedicated to outbound calling every company in a particular market segment for the purposes of generating market research, analysis and deal flow.  When your start-up receives a call “out of the blue” from a VC firm – this is probably what’s happening.  Don’t be overly flattered because you’re probably one of 25 companies that have received a similar call.

First, ask who you’re talking with and their title; ask why they’re calling and who else they’ve called.  Second, don’t feel obligated to give out any information that you wouldn’t give to someone cold-calling from Techcrunch or GigaOm.  Finally, if you’re in the process of raising or thinking about it soon – tell them and ask to set up a meeting with a larger group or to meet in person the next time you’re in their geography.  No decision will be made on this basis of this first call…so more exposure to a broader group is the goal.

If the firm is reluctant to set up a follow-on meeting – then they’re probably just investigating at this point – don’t waste any more time with them.

What is the firm’s investment focus? Market segment?  Geography?  Stage?

Some firms focus on particular market segments or specific geographies.  Some firms want to be the first money in a deal and others only invest after the first “one million dollar quarter” as been achieved.  Inquire as to the firm’s focus when it comes to market segments and stage of company.

It is common for a VC firm to prefer to have a “local partner” when they’re investing in a geography that is a plane flight away from their home offices.  This is a form of “security blanket” for the out-of-town investors because they know that a local investor partner would be able to help the company more frequently.

Clearly, if they are not focused on your market, geography or stage, it may not be worth your time to meet with that particular firm.

Are there related investments? Competitive? Complimentary?  Partners?  Acquirers?

This is a logical follow-on question if the firm likes and invests in your market segment.  They may have a competitive or complimentary investment that are important to know about before you pitch.   At the very least, this will tell you how familiar the firm is with your market – which can make your pitch MUCH more focused and detailed because they already have the market context.

Clearly, if the firm has a competitive investment, it’s probably not a good idea to meet.

Do you lead?   Do you follow?

This question is really simple but very important.  If the firm you’re pitching doesn’t lead, you’re not done even if they want to invest.  A lead investor prices the round, sets the terms of the deal and generally makes the majority investment for that financing.  Many firms are happy to lead the investment – but some don’t.  And you need one in order to raise this round of financing.

Similarly, some firms won’t follow other leads. In other words, they want to be the lead investor for one reason or another.  There are always exceptions to this rule but understanding the firm’s basic philosophy is helpful. This particular philosophy is usually related to the ownership a firm targets for each investment (see below).

Questions to ask during or after the pitch

How much time do I have?

Always a good place to start; you may get a couple of different answers based on how many people are in the meeting.  In general, I suggest you pitch to the time frame of most senior partner and use any remaining time with anyone who has more time to fill in details and context.

What is a typical investment size?  Do you have a target ownership percentage?

This is related to the next question (fund size) and a good way to calibrate the potential fit with this investor.  Depending on fund size and the firm’s investment philosophy, there will be a minimum (and maximum) amount of money that the investor targets for each deal.

Understanding how much of your company the VC needs to own to make their business work is really important information and very related to whether they lead and how much they can invest.  In terms of ownership targets, most firms want to own 20% – 33% of a company in the fullness of time.  That means they don’t have to achieve that level all at once but expect to be able to invest to that level over time and potentially other financings.  While firms will tell you that this is never a binary decision point, it’s true that not achieving these targets make the investment much more difficult to get through a partnership.  There are some firms that don’t have target ownership percentages; also, angel investors almost never have such targets.

How big is the fund that you’re currently investing out of?    When did you raise it?

This is simply calibrating how much “dry powder” the firm has on hand.  Big, new funds have different dynamics than small or older funds.

Funds typically have a 10-year life span with new investments being made in the first 3-4 years; if the firm you’re talking to raised it’s last fund 8 years ago, it’s an older fund with less probability of supporting new deals…and the next few questions are really important.

How much have you invested out of that fund so far?   How many deals is that?

This will tell you what’s really left in the fund. There are issues with both “brand new” funds (such as new capital calls and when investments can start taking place) as well as with funds that are so old that they basically must be kept in reserve for companies the firm has previously invested in.   “How many deals” gives you a sense of how much capital they typically put to work per deal…which is a fine question to ask directly (see above). This also gives you a sense of the firm’s over-all volume.  A very low volume means that your company really needs to line up with the firm’s core domain/interest or there is likely no deal to be had.

How many deals have you done this year so far?   How many do you expect to do?

This is related to the previous question but starts to consider the firm’s behavior in the current environment…and this is where it starts to get interesting.  If the firm does x deals per year and they’ve already done that many, then the investor is really going to need to love your start-up to justify a higher volume than their firm was planning.

How long do you think it would take to close this round if we started today?  And would you anticipate any unique “conditions to closing” for this deal?
Closing typical rounds of financing takes time; and, in general, the larger the round, the longer it takes. Even in the best situation, 60 days would be considered blazingly fast.  Today, honestly, 3-6 months isn’t surprising. There are many standard conditions to closing a round of financing, such as due diligence.  However, this question is trying to get at whether or not there are conditions that might make the financing more difficult than usual. For example, does the VC require another venture firm to participate in the round?  Does the VC require some significant new customer traction before being ready to fund?

What other firms / individuals do you like investing with?

A syndicate (the set of venture investors in a single round of investment) adds complexity to any round of financing AND the go-forward board and outcome dynamics for any company.

That said, finding out what other firms this VC likes to invest with in a syndicate is a great way to do two things: first, you find out who you should go talk to next.  And don’t forget to ask for an introduction to whoever comes up after asking this question.  Second, it is increasingly important to make sure you have a set of investors that get along and have history together. As your company executes through typical challenges, venture firms will be forced to make decisions around their portfolio, funds, and strategy. Trying to ensure that you have a set of investors who have a good relationship and have worked together on other deals can de-risk the negative effects of diverging investor/firm agendas.

…more questions and updates as I can think of them.

It’s interesting that, really, only Amazon is still innovating and would qualify as a serious “brand.”  And of course, this is before Amazon could spell PUBLIC CLOUD.  Also interesting that I don’t ever think of a company as a Internet or non-Internet brand these days.  If I recall correctly, Netscape is already part of Yahoo! at this point in time (June 2000) so we’re talking about a 4 companies…3 of which are largely in decline these days.

Here’s another fun chart:  Global Internet User Growth:

The chart below shows the actual Global Internet user growth (blue) compared to the predictions (red) in the chart above.  It great that, despite being very bullish, the MS forecast was low by about 36% by the end of 2004.  …so let’s see: in (more or less) one decade, the dominant companies crumble or are in serious decline and adoption far outpaces the most bullish projections.  Even if we guessed that the big players of 2000 would wane, could we have predicted Google or Facebook?  What would have been done differently if we all knew that more than 2 billion folks would be online in a dozen years?  thoughts?

 A couple obvious things worth pointing out: first, this was only 12 years ago.  A little more than the average life span of a typical VC fund; basically just a decade ago; really, the blink of an eye.  Second, this was really interesting timing relative to what was about to happen to the tech industry and stock market. One of the main analysts was Mary Meeker (now at VC firm  Kleiner Perkins).

The chart below shows the NASDAQ run-up leading to March of 2000 where we hit an all-time high of just over 5000. Today, of course, we’re trading about 2700 up from a low in October of 2002 of 1139.  So, really, this report was published just before the crash of 2000-2002 (everyone tends to remember it as just 2001).

If nothing else, it’s amazing how quickly things can change. That’s a great lesson for start-ups (and large companies).

so…in the spirit of learning from the (recent) past and in the spirit of having some fun, I’m going to pull some choice bits out of this research over a few posts in the coming weeks.  I might even scan some of this stuff in and post it if there is interest.

Remember:

• this was before Google
• this was before broadband was ubiquitous
• this was when AOL and Yahoo! were kings

fun stuff to follow… see?  good thing I didn’t throw it away.

Knowing when to bring experienced management talent into a young company is a subtle, yet critical decision point that almost all successful companies will pass through in their lifetimes.

In the early days, with little or no revenue traction from their products, start-ups can benefit from having a scrappy culture and a flat organization obsessively focused on delivering a compelling value proposition to their customers.  At Silverton Partners, we work with early-stage companies and tend to favor entrepreneurs who have a “lean start-up” mentality.  We believe the discipline of having to make hard decisions about where and when to allocate resources builds better, more capital efficient companies.

Maintaining an overly lean mentality as the company scales up can, however, have drawbacks.  As early-stage start-ups execute well, their success brings added complexity to the business.  If these new challenges are not adequately addressed, the company’s ability to continue to grow can be seriously inhibited.  It is around this time, when the founding team may need to consider bringing on an experienced executive to help take the business to the next level.

What sort of help executive help do I need?

The answer to this is different for each business.  Complexity arises in a number of forms, including the need to hire an increasing number of people, build out the required infrastructure and business processes, supporting and on-boarding larger numbers of new customers, generating more detailed financial reports and forecasts, as well as other issues.  In our experience, many of the new challenges that arise within a growing start-up, including those listed above, fall into the finance and operations area.

When is the right time to invest in such expertise?

All too often, management teams wait until issues surface and things start to break before they seek help. And when a hire is finally made, it is often too junior.  This can happen because the company is hiring for its current needs and existing budget instead of making a hire to address where in company will be in 12-18 months.  In a rapidly growing company, that can mean disaster or, at the very least, it means the company is not as well prepared as it could have been.

Here are a few scenarios that suggest your start-up might need to bring an experienced executive on board.

Your company must scale multiple business processes simultaneously

The company’s customer traction has caused an implementation and support backlog that must be scaled simultaneously with limited budget to avoid jeopardizing the company’s credibility and reputation with customers. The company is bringing additional products or services to market that require different sales motions or have different support requirements. The company is acquiring a technology or another business which must be integrated and operate without disrupting every-day operations.

Your company requires a more mature financial function

The company’s product traction is driving increased revenue and your revenue recognition policy is undefined or unclear; implementing the wrong policy today becomes increasingly difficult to correct as time goes on and the company continues to execute.  The company must perform a financial audit without disrupting the business. The company must develop an operational plan that extends further into the future than you have planned for in the past; here, any forecasting error has material impact on the businesses’ decision making and, in some cases, viability.

Your company’s audience expands

At their start, companies only have employees to manage. Then investors are added to the mix and eventually a few customers are won.  As the company grows, its audience will likely expand to new board members, new investors, investment banks, commercial banks, formal Fortune 1000 customers, channel partners, potential acquirers and others.  Who should get what information?  What is the proper messaging and presentation of information to demonstrate that the company is a professionally operated business?

The company wants to “future-proof” certain operational scenarios

Is an acquisition is likely in the next 18 months?  Who will be interfacing with the legal teams? Are you fully prepared to go through due diligence?  If so, is the company going to have IRC Section 280g / 4999 / golden parachute issues as a result of an acquisition?  Not sure what that means?  Well, that’s the point.

Is the company selling to a Fortune 1000 customer that requires financial due diligence to be completed prior to allowing business to be done?  In order to look credible, what is the right amount of information and in what format? How do you handle confidential information? How do you negotiate the contract that is they have said is non-negotiable?

Does the company’s sales compensation model not only incent the proper behavior today but scale well in the case of unexpected success?  Are there scenarios that create business-limiting liabilities or revenue recognition issues?  Does the compensation model pay out at the right time such there are no working capital issues and customers have accepted the product?

Why senior is better

An experienced executive knows many of the traps and pitfalls that young companies get into and can help prevent them proactively.  Employing more junior talent may help solve today’s problems at a bargain price, but could create larger problems in the future that must be solved in a reactive and more costly manner.

In the end, the exact right time to bring in financial and operational expertise depends on the company and its particular circumstance.  Without question, it’s hard for a young company to see around corners that it doesn’t know exist.  However, what remains universally true is that by the time it becomes obvious that an experienced CFO/COO’s expertise is necessary, it may already be too late.

• active planning cycles in many of Silverton’s portfolio companies
• growth targets and revenue scale discussions in those same companies
• reading Fred Wilson’s post on the dearth of start-up exits above $100m http://kipm.cc/qtwwas
• thinking about the details & drivers of past acquisitions of my companies (for example).

We need more companies that have a vision for building real businesses that scale to produce more $100m+ exits (not just $100m+ valuations).  As an investor, I’m generally less interested in the sort of pre-product or talent-based acquisitions that have become popular at places like Google, Twitter and Facebook because it takes the team out of the game and keeps their vision — the one that I invested in — from being realized. I believe that a $25m-$30m annual run-rate means that the company has a long-term perspective and executed well enough to have options:  stay independent and (likely) profitable, be an attractive acquisition target or even consider an IPO.

But let’s talk about acquisitions. For acquisition targets with revenue, acquirers tend to value acquisitions as a multiple of revenue that increases based on how strategic the business is to the acquirer and the potential leverage of the business model for the acquirer.

For example, for a business with lower strategic value to the acquirer, multiples tend to be 1x – 3x forward 12-month revenue.  For businesses that have less business model leverage (such as low-margin, services-based company that requires a significant human component to scale), the multiple could even be less than 1x forward 12-month revenue or, where possible, simply valued as a multiple of EBITDA.

For businesses that are highly strategic to the acquirer, multiples go up significantly.  3Com paid an ~11x multiple when they acquired TippingPoint because they wanted to get back into the large-enterprise IT space and wanted to do that via a high-margin security product.  TippingPoint’s cutomers were exclusively in the global 2000 and we had a world-class security product. TippingPoint was at a ~$38m annual run rate and therefore had sufficient traction to prove that customers were repeat buyers and referenceable.  BroadJump achieved around $50m in revenue in three years with about as much in backlog.

Once your company clears the $25m+ annual revenue bar and an acquirer has assessed the strategic value of your business, the following criteria will drive that acquirer’s valuation analysis:

1. revenue concentration risk.  if you company achieves revenue scale through (to be extreme) a single, $6.25 million dollar deal each quarter (aka “elephant hunting”), the revenue concentration risk will discount your multiple.  More transactional businesses where many smaller deals make up your revenue drives a higher multiple because losing any one deal won’t de-rail your quarter.
2. revenue consistency.  Hitting your revenue target one quarter and missing the next will obviously discount your appeal (and multiple) to acquirers.
3. time to scale.  As a general guideline, if a company achieves $25m in revenue in less than 4 years, it’s a defacto a high-growth company with good execution. Conversely, if your company has been around 8 years and has yet to achieve such critical mass, both investors and acquirers will (at least) wonder what’s wrong with the business.

Given the above, if your company is a reasonably strategic acquisition target, executing well, with at least a $25m revenue run rate should deliver an exit over the $100m mark because your multiple should be more than 4x the current annual revenue run rate.

Let’s assume we’re talking about a software product company.  Whether you price and sell your product on a monthly basis, you can certainly do the math to understand the revenue it delivers on a per-month basis.  Therefore, the very first observation is that your product’s selling price has a huge impact on how complex it will be to scale your business. A product that delivers $100 per month will require nearly 21,000 customers to achieve $25m annually; a $10,000 per month product will take (only!) 208 customers. For what it’s worth, I think the most resilient, scalable software businesses charge somewhere in between these two monthly goal posts.

Starting from ZERO-revenue, your start-up will progress through several phases on your way to $25m annually…which is $6.25m quarterly…which is about $2.1m per month.  As the business passes through these phases, more and more of the business is understood and infrastructure to scale is put in place.

The five phases of revenue scale & what they mean:

Phase One:  $0 — the first sale or two

• the company starts to prove it can build a complete product
• it proves that you can twist someone’s (mom? dad?) arm to become a “customer”
• it proves that you’re not unrealistically priced (although you may be leaving money on the table)
• phase one is the beginning of measuring conversion, activation and on-going activity rates

Phase Two:  getting to the first dozen sales

• entering this phase, the the company has achieved some degree of product-market fit but it is still learning something new with each sales transaction
• it proves the company can stick to their product and sales plan but says nothing of how good those plans will be in the long term
• the company can to begin to characterize the cost to acquire a customer…but not yet able to characterize cost to serve this market.  cost to serve = cost to acquire + support + keep active (and therefore remain the customer)
• in phase two, the company has yet to prove that it can really scale sales and the sales motion is most likely “brute force” with little repeatability

Phase Three:  getting to $1m per year

• entering this phase, the company has generally proven product market fit and, consequently, the list of next “critical” features to add will be a mile long thanks to customer input
• it proves the company has started to scale sales and characterize cost-to-serve at this level:
• the company has a defined and repeatable “sales motion:” a fully direct sales force, lead gen + an ISR (inside sales rep) team, or touchless via leads and web-based transactions.
• data-driven understanding of where to invest to grow sales and revenue
• the customer or buyer is well understood… And therefore messaging should be mature at this point
• the company should have knowledge of market trends such as seasonality and other buying behavior such as multiple decision makers and sales cycle lengths
• it proves that the company is measuring and improving conversion, activation and on-going activity rates as part of daily business.
• phase three is the first meaningful revenue milestone for a start-up and its investors.

Phase Four: getting to $1m quarter

• Entering this phase, the company has reasonably proved that you have a scale-able business (versus being able to scale small sales process in Phase Three)
• it proves that the product is differentiated enough to beat competition consistently
• it proves that you can maintain reference-ability and keep customers (since getting here will typically take longer than a year…which is usually the maximum amount of time between customer re-commits)
• it proves some financial discipline and that there is leverage in the business model (ie you don’t have to perpetually spend a dollar to make a dollar in revenue)
• in phase four, the company is typically leaving the “early stage” and maturing into the “growth” phase; profitability is usually possible around Phase Four; and while profitability may be possible, maintaining it will challenge rapid, sustained growth at this level

Phase Five: getting to $6.33m per quarter

• entering this phase…
• the company likely has more than one product in market;
• the company has likely expanded the opportunity in existing accounts beyond the initial “deal;”
• the company has continued to beat the competition in competitive situations;
• the company has continued to scale the sales team and process to an even more mature state and know what it will take to get to $100m in annual revenue
• in phase five, the company is unquestionably a “growth-stage” business and, in general, the company should be sustainably profitable.

These five phases are at least one swag at the “stair steps” to growing a start-up from zero to $25m in annual revenue; scaling beyond $25m up is never easy but the creative requirements and range of unknown problems have generally been addressed by the time you get to $25m.

Finally, it’s interesting to remember that a clear path (or achievement) of at least $100m in annual has been the most common lower bar for IPOs for quite awhile now (although the window has slammed shut pretty recently). If you’re able to achieve $25m, I sincerely believe that you will have executed your way to a range of options for raising future capital, running a profitable stand-alone business, being an attractive acquisition target, or even driving toward an IPO. Having those options available is the definition of success.

It’s clear that the CEO’s role in a venture-backed startup is unique and critical to its success. What’s not so obvious is that the core job description — while it would be possible to roll out a laundry list of nuanced, superhuman characteristics — comes down to a few, simple things.

Before we get to those, let’s discuss two important conditions mentioned above: venture-backed and startup.

Being venture-backed means you’re using other people’s money to build your business, and that creates an obligation to build a high-value business as quickly and efficiently as possible. And the person accountable to investors for that obligation is the CEO. This is in contrast, for example, to a lifestyle business such as a local house painting company whose owner has no outside investors or desired outcome other than to provide a decent living for the few involved. A venture-backed company also has board of directors, usually made up of the founders, CEO, investors and independent industry experts. While the company reports to the CEO, the CEO reports to the company’s board of directors.

Being a CEO in a startup is an important distinction because there are different skills and kinds of experience that might be required for later-stage companies. For example, a public company might want a CEO with experience dealing with industry analysts, institutional investors and operations in different countries. An older, troubled company might want a CEO with experience restructuring and strong financial skills. A startup is a unique life stage with specific challenges and requirements for the CEO.

With that said, the requirements of a venture-backed, startup CEO fall into just four buckets:

First and foremost, the CEO must be able to hire great people and give them the autonomy they need to thrive. One common failing among CEOs in this regard is being unable or unwilling to hire people who are better at their jobs than the CEO. This is precisely opposite of the desired behavior: The most successful CEOs in the best companies hire people far beyond their own abilities. In the worst case, the CEO simply may not be able to recognize great talent.

Another failing among CEOs is not inspiring enough confidence in themselves, the existing team or the business to attract great people to the company. This is a difficult challenge to overcome and typically is the clearest sign that the CEO may be putting the company at risk. Even if the CEO can hire great people, he or she must also be willing to delegate responsibility to those employees. Being a successful startup CEO is often characterized as a process of slowly giving up control to an ever-growing team. It sounds counterintuitive, but every successful CEO figures this out at some point.

The second requirement is being financeable. Just as CEOs must inspire confidence and excitement in themselves, the team and the business to hire great talent, they must do the same with investors — new and existing ones. If the CEO can’t communicate the company vision and opportunity in a way that compels investors to continue to fund the company, that’s a big problem. To be successful, the CEO must have a mix of passion, market insight and selling skills to present the company in an articulate and inspiring way. If that sounds subjective, it is.

Third, being self-aware is critical. A typical startup learns something new about itself, its product or market opportunity nearly every day. CEOs need to know what they don’t know along with having a sense of their strengths and weaknesses. This isn’t as easy as it sounds because the CEO stereotype is a person with all the answers.

This is a trap: The CEO must be comfortable not immediately having the solution to every problem and must possess the intellectual curiosity — and humility — to find the correct answers with the management team, advisers and board members.

UPDATE to original article:  On the topic of being self-aware and CEO psychology, Ben Horowitz had a great post. I highly recommend it.

By far the most difficult skill for me to learn as CEO was the ability to manage my own psychology. Organizational design, process design, metrics, hiring and firing were all relatively straightforward skills to master compared to keeping my mind in check. Over the years, I’ve spoken to hundreds of CEOs all with the same experience. Nonetheless, very few people talk about it, and I have never read anything on the topic. It’s like the fight club of management: The first rule of the CEO psychological meltdown is don’t talk about the psychological meltdown.

Finally, the CEO needs to be the keeper of and spokesperson for the company’s strategic vision. Many successful leaders have the ability to inspire and motivate people. They are able bring people together to focus on a common and unifying purpose, which is, more often than not, the company’s strategic vision. This skill is especially critical in startups because of the risks employees undertake when they join and the uncertainty that will undoubtedly present itself during the ensuing journey.

In the very early days of a startup’s life, the CEO may not have all of these qualities, and that’s acceptable. Every CEO is a first-timer once, and learning on the job is certainly possible. But over time, these qualities are critical, and a CEO who doesn’t develop these skills puts the business at risk.

The best CEO education comes from being an active student of the position with an open mind and being aware that the job really comes down to a few key qualities.