BarshBits

Chasing the Money: Stop Trying to Raise. Start Trying to Sell!

I’ve spoken with 5 different early stage companies in the last week that all seemed to be making the same mistake IMHO:

• Trying to raise a serious seed or Series A round from VC’s,
• no customers / users,
• no revenue,
• and have not tried to pre-sell to target customers.

The discussion was nearly always the same:

Entrepreneur

• We have a business plan, and our revenue projections are conservative.
• We’re going to grow like crazy.
• You won’t believe what a great idea this is.
• We need to raise $200,000, $500,000, $2 million (pick a number) for ______.

Me: How many customers do you have today, how many potential customers have you spoken with, and what's your revenue?

Entrepreneur: Answer 5 out of 5 times: “0, 0 and $0.”

Hint: Stop chasing VC’s, start chasing customers / users!

Let me give you a more specific example from this week.

Entrepreneur: We want to do a small raise.

Me: For what?

Entrepreneur: We basically have the product done and have bootstrapped until now.  We need money for purchasing email lists, going to trade shows, travel, advertising, etc.

Me: How much are you looking to raise?

Entrepreneur: Small amount.  Maybe $100,000 - $200,000.

Me: How many customers do you have today?  How much revenue?

Entrepreneur: 0 and $0

Me: Wow, there must be a lot of unverified assumptions and risks in your financial model.  Have you thought about some "baby steps" first to de-risk your model?  If I said you have as a goal over the next 7 days to get 10 LOCAL customers in the Philly area (the company is based in Philly), do you think you could meet that goal without spending any cash on marketing?

Entrepreneur: Yes, I could do that.

Me: And would they all be paying customers? (I've learned to ask that question: people have different definitions of a "customer" which have varying levels of importance based on the revenue model.)

Entrepreneur: We could get 10 customers to sign up (sign up is free); probably 50% would start paying $1,000 each per month. (Note: Company revenue run rate = $5,000 per month.  Also note, multiple assumptions being made here that could be vetted quickly, easily, and cheaply).

Me:  Okay.  I bet you could give those new customers a spiff of $100 if they refer someone else who signs up and starts paying.  So, you’ll give them a $100 credit for your service and you would be happy to pay it as I’m guessing that your cost of customer acquisition is probably north of $300 and you would be happy to pay $100 all day long for referrals that turn into paying customers. (I wonder if the company modeled their viral coefficient?)

Entrepreneur: Absolutely we would do that!  And I think we would get referrals. (Assumption, and I bet it's in their financial model).

Me: And if I asked you in 4 weeks from now do you think, just in the Philly area, you could have a total of 50 customers signed up (including a few referrals), and half of those companies would be paying customers?  No email marketing.  No travel. No trade shows.  Just good old fashioned "drag a bag and go make some sales."  (This is not the way to scale a company, but a way to de-risk, learn, and get started.)

Entrepreneur: Yes, I think that’s really doable.  (Note: Company monthly revenue = 50 x 50% x $1,000 per month average purchase = $25,000 per month).

Me:  I know you’ll learn a ton trying to get those customers on board.  You’ll also learn a lot about the assumptions you have in your financial model.  Now, if in 4 weeks, you can be at a run rate of $25,000 per month, why are you out trying to raise $100,000 - $200,000 now?  How about this: Set measurable stretch goals for the next 1, 2, and 3 months.  Get your revenue up to $50,000 - $100,000 per month (Note: $1.2 million annual revenue run rate), THEN go out and try to raise money.  In 3 months go to investors and say, “I have a problem:  I’m at an annualized run rate of $1.2 million, I just started selling 3 months ago and I have a solid gross margin of x%.  My problem is that my lack of capital is limiting my ability to grab profitable market share and grow my business.”

Now when they go to meet with investors, they would end up having an entirely different conversation.  It's still not a slam-dunk that they'll get outside funding, but their chances have gone up dramatically.  Investors will see that they have greatly de-risked their model, have a lot less assumptions, and they’re off to the races.

We'll be spending a lot of time this summer working with the DreamIt Summer 2009 portfolio companies to roll out early versions of their products and get feedback as well as meet with customers, potential customers, and potential partners as early as possible.  We'll help them make this happen in an accelerated time frame by leveraging our experience and connections.

The above may not fit your situation, but I urge you to try to think outside the box of how you can get to sales, product/service adoption, or potential customer feedback as quickly as possibly so you can learn the realities of the marketplace, and then look to raise funds.  If you're a Web 2.0 company, maybe you'll do this by getting an early beta out onto the web, and attracting traffic via Google Adwords, Twitter, Facebook ads, blogging, PR, etc.

If you are building a new product or service that will be very capital intensive (e.g., a new hardware device, new type of robotics, new medical device, very large scale software application, etc.), then it will be hard to actually sell something to a customer without having cash up front to develop the product.  If this is the case, meet with companies / potential partners to get their input and reactions to your ideas.  Have meetings with companies that meet your target customer criteria and ask them the right questions to find out if they would buy your product, how much they would be willing to pay, the potential objections, etc.  Check out my BarshBits blog post: When can I start speaking with potential customers?  Take your learnings into your meetings with investors and you'll have a lot more credibility.

Now, not every company I meet with are like the ones described above.  As a matter of fact, quite a few of the companies I know that tried to sell first and build revenue before raising outside cash: nearly 50% of them have gone on to raise outside money or are growing without it. 

Entrepreneurs seem to think that when they have a new idea the first thing they need to do is put together a plan and go out and raise money.  I’m a big believer that you should go out and try to sell, get adoption, or get marketplace feedback first, and then try to raise money.

It’s okay to “ask for the money.”  Just TRY to start the “old fashioned way” by selling something to a customer or getting user adoption, rather than selling a vision and a set of assumption-riddled numbers to an investor.  I think you’ll have more success with the former, and just pound your head against the wall with the latter.

5 Do or Die Tips For Demoing Your Product To Deliver Awesome Results

Over the weekend I watched 11 different companies demo or discuss their products at DreamIt Ventures' Kickoff Event.  These are brand new companies many of whom have never demoed or pitched their concept in front of a large audience.  Without any guidance or coaching, they did a very nice job.

Watching their demos reminded me of a trend I often see where people completely miss a great opportunity to showcase their solution and really connect with the audience. Often when demoing a new product (software, hardware, device, physical product, etc.), the person giving the demo misses the boat on getting the right message across effectively.

Too often, I see demos where the person just goes through feature after feature, but never "brings it home" to show the value that those features bring.  Remember, during a demo, you are selling benefits, not features.

So, for your next demo, think about the following demo checklist:

1. What are your top 3 key messages / benefits you are trying to show/prove/sell?   During the demo make sure to hit your "top 3" multiple times.
2. Think about using "use cases."  Talk about the problems your target customer typically has ("use cases"), and use those problems to drive the demo making sure to clearly demonstrate how the problems are solved using the product.  Once you show how a problem is solved, wrap that up by saying something along the lines of "... so, the benefit is ____."
3. What are your core differentiators?  Make sure to demonstrate them clearly.  Often demos don't clearly show what truly makes your product unique and different.  Make sure to highlight what makes you special.
4. Make sure to connect with your audience as you go through the demo.  Don't talk TO them, instead have a "conversation" and pull them into the demo.  Ask leading questions like "Do you have this problem too?"  "What are your top problems?"  "Would this work for you?"  Generate buy in by having a conversation.
5. When you are done the demo, what do you want your audience (whether it's an audience of 1 or 1000) to think, say, do, or ask?  Create a list of answers to those in advance, and create your demo to drive your desired outcomes. 

Other terrific blog posts on how to deliver great demos can be found here, here, and here.

Let me know what works for you and add to the conversation in the comments below.

10 Do or Die Questions to Ask Before Selling With a Pilot Project

Why don't more companies have well defined success criteria when trying to close new sales using pilot projects?  Maybe the problem is companies don't know the questions they should be asking.

Here are the 10 key questions I like to see asked of potential customers before starting a pilot project.  These questions are designed to get new opportunities successfully through the sales pipeline.

1. What are the measurable success criteria you will be using to decide if the pilot is a success?  (Optional to probe further: Why are these success criteria important to you?)
2. In what time frame will you be running the pilot?  (Optional to probe further: Why this time frame?)
3. Who will be the person at the company responsible for driving the pilot project forward?
4. What value would this product/service bring to your company?  Can you express that in a monetary form?
5. If the pilot is a success, are you committing to purchase the product or service?
6. When would you be making the purchase decision?
7. Do you have the budget now to make the purchase?
8. If the pilot is a success, when would you purchase, how many units | licenses | users | person days, etc., and over what period of time?
9. What are the steps necessary to make sure the purchase goes forward once that decision is made?
10. Who would be involved in making the final decision to purchase?  What is their involvement now on the pilot project?

More information on creating successful pilot projects can be found here and here.

If you have other questions you like to ask or experiences with pilot projects and sales, please join the conversation and share your questions, ideas, and thoughts in the comments below.

When can I start speaking with potential customers?

Earlier this week I gave a talk at the TechAviv New York meetup at the NYU Stern School of Business.   About 250 people attended the event.  After my talk on de-risking and turning assumptions into knowledge in a capital-efficient manner, an entrepreneur came up to me to ask a question:

When is it too early to meet with potential customers?

My feeling is that it's almost never too early to start speaking with customers. Whether you are creating a business facing or consumer facing product or service, I strongly believe in speaking with customers as early as possible (being careful, though, if you have any particular intellectual property you are trying to protect via patents).  Think about trying some of the questions below and modifying them to fit your particular situation (whether a product or service; whether business or consumer facing):

• Would you use this product?  Why or why not?
• What do you think are our strengths and weaknesses?
• Does this solve a large, urgent need for you?
• Can you describe how this would help you increase revenue or decrease costs?
• How are you solving this problem today?
• What product(s) would you be replacing if you started using our product?
• What do you think is missing?
• What do you see as the top benefits this would provide?
• Who do you see as a competitor to us / our product?
• What obstacles would you see to implementing / purchasing this product?
• What value do you see this provides?  Can you describe that in monetary terms?  (In other words, "What would you be willing to pay?")

When finishing the meeting with a potential customer / consumer, don't be afraid to try a trial close and ask something like "So, if we fixed the things you pointed out and were willing to sell it at the price we discussed, would you go ahead and purchase it now?"  LISTEN carefully to what they say.  Hear if they throw up and objections / obstacles to the sale.  You may have to drill down a bit more if new things come up but the information will be highly valuable.

De-Risking Your Business Model: A How To Guide

I recently presented to the current crop of companies at DreamIt Ventures -- a pre-seed fund that helps great people with great ideas build great companies.  DreamIt is based in Philadelphia and is very similar to Y Combinator.

During the last few months at DreamIt, many speakers have discussed how early stage companies need to de-risk their business plans, and one of the DreamIt founders, David Bookspan, asked me if I could come in and talk about how to actually do it.  So, I put together a presentation for DreamIt with categories of risk to think about with specific checklists and "how to's" for de-risking particular classes of risk common to many types of business.  The presentation is embedded at the bottom of my blog post.

For more great reading on de-risking, Josh Kopelman of First Round Capital has 2 excellent blog posts here and here.

Thanks to Brett Berson, an awesome summer intern at First Round Capital for his quick edits and feedback as well as his comments and input he offered during the talk.

Please comment below and feel free to add your ideas on how to de-risk, and let me know if / how these techniques work for you.

Finally, don't forget to de-risk the next time you get in your car.  Wear your seat belt!  It's one heck of a value proposition! ;-)

New additions to blog post made 30 July 2008, based on a comment below from James Nelsen:

There are similar techniques to de-risking that I did not point out in my original blog post.  Thanks to James Nelsen for pointing out the Wharton technique of Discovery Driven Planning (DDP).  This is an excellent technique that you can use for de-risking and more information can be found on it here.  Another great technique is called Assumption Based Planning, and that de-risking technique can be found here.  Thanks James!

Derisking Your Business Model Dream It July 2008 V2.1

view presentation (tags: barshbiits.com sbarsh steve@barsh.com barsh.com)

Assumptions Kill Your Estimates. How to Fix the Problem.

Last week I wrote a post as the first step to help solve a problem I see most people have -- creating accurate and reliable estimates.  The technique is called confidence-based estimating (CBE).  When building a product, company, or just about anything, how or why do you expect people to believe your estimate if you are really just "winging it?"  In last week's post I started by saying there were 2 easy questions you need to ask to increase estimating accuracy quickly.

I said that the first question you need to ask is:

What’s your level of confidence in your estimate?

It looks like a simple little question and it is.  But dozens of times I have seen this "little question" be the first huge step to creating highly accurate estimates.  For a detailed discussion on the question above, please read the post here.

I promised at the end of that post to "take you through the 2nd killer question to ask."  So, here we go...

The 2nd Killer Question to Ask:

What assumptions are you making?

Again, it looks like another simple, innocuous question.  But wait until you see what happens as the question starts getting answered!  Here's how it works...

It's great to get a detailed list of all the assumptions someone is making when they are creating an estimate.  In my first post on estimating I talked about asking the person to give you their estimate at a "95% level of confidence" (after they've given you their initial estimate).  When creating that estimate, make sure to capture all of the assumptions the person or team is making.

Categorizing Your Assumptions

I would strongly encourage you to think about classifying / categorizing assumptions.  Here is a simple (but not complete) example for a software development project:

Example 1: Assumption Categories for a Software Development Project

• Methodology (e.g., Agile Development)
  
• Development Framework (e.g, Ruby on Rails, Django)
  
• Development Environment
• Requirements & Scope
• API's
• Widgets
• Interfaces
• Staffing (on shore / off shore)
• QA and Testing
• Other

You would use something like the above to ask about assumptions by category when you are going through the estimating process and trying to get to a 95% level of confidence.  The questions would be phrased / presented using the Assumption Categories using the following type of pattern... "What <Assumption Category> assumptions are we making when we think through this estimate?"  So, based on the Assumption Categories listed above you would end up with questions like: "What Requirements and Scope assumptions are we making when we think through this estimate?" "What API assumptions are we making when we think through this estimate?"  And so on..

Example 2: Assumption Categories for an early stage Web 2.0 company:
This is just a subset of the assumption categories and yes, there are overlaps in the below...

• Management team
• Marketing
• Positioning
• Competition
• Pricing
• Cost of customer acquisition
• Viral coefficient
• Customer churn
• Customer adoption
  
• Development environment
• Development team
• Product development
• API's / widgets / interfaces (inbound and outbound)
• Business model
• Financial
• Funding / valuation / capital requirements
• Other

Again, use the following type of pattern with the assumption categories.. "What <Assumption Category> assumptions are we making when we think through this estimate?" So questions look like "What pricing assumptions are we making when we think through this estimate?"  "What competition assumptions are we making when we think through this estimate?" "What product development assumptions are we making when we think through this estimate?"  And so on.

Assumptions = Risks

All of the assumptions that you come up with are risks that need to be managed.   As Josh Kopelman likes to point out when he and his firm are looking to invest in early stage companies, one of the things he is trying to do is "de-risk" a company/idea at the earliest possible time and as capitally-efficient as possible.  I urge you to spend time trying to flush out the assumptions and risks.

So, think about how you can verify or de-risk your assumptions.  How can you really justify your assumptions?  How can you be sure?

Recently, I was listening to a pitch and I quickly went through this confidence-based estimating process with the entrepreneur when they stated their estimated product launch date.  This was a May 2008 meeting and the launch was forecast for Q1 2009 (so let’s call that March 31, 2009 – 10 months later).  Assumptions came back along the lines of:

1.    Software will be ready
2.    Hardware will be ready
3.    We’ll have the management team on board
4.    We’ll have the financing closed by the end of June 2008.

Those are 4 huge assumptions / risks. Expectations were being set.  Were they accurate?  I asked him for his confidence level in his estimate.  His response: "65 - 70% confident."  I asked him for a 95% level of confidence now that he was thinking through his assumptions.  He  added 6 months to his estimate with a new projected launch date of September 2009.  That's a huge change!  Think about if he had not really thought through his estimate, raised his first round of financing, and subsequently ran out of cash after missing his originally forecast launch date.  Good time to be raising more funds?  Don't think so.  You don't want to have a great idea but run out of cash due to estimating problems and end up here.

Please post in the comments your experiences on how confidence-based estimating works for you.

I'll do one more post on estimating with some final thoughts.  Stay tuned...

Estimates Are Usually Wrong. Fix The Problem With Just 2 Easy Questions.

In this post, I want to share with you a technique I call confidence-based estimating (CBE). I’ve been using this CBE technique for about 15 years when building software, building companies, managing large teams, building and renovating houses, managing complex projects, and dealing with complex life-threatening medical issues.

Background

I’m amazed how time and again I meet with people (during VC pitch presentations, review meetings on software development schedules, product development updates, financial projection reviews, etc.) and someone gives an estimate, and invariably they are wrong.  Very often, WAY wrong.

Think about it.  How many estimates/forecasts have you provided or heard that turned out to be accurate?  Think about the estimates/forecasts you have given or heard concerning:

• Sales forecasts
• Capital requirements
• Costs to develop a new product
• Product launch dates
• Software completion dates
• Product shipping dates

And, count on your hands how many times those estimates were accurate.   Most likely you only needed one hand. What’s going on?

Estimates = Expectations

So much is riding on the accuracy of estimates!  Estimates set people’s expectations. Those people may be customers, investors, employees, or others.  Managing expectations is critically important. It’s always great to meet or exceed expectations but when it comes to most estimates, more frequently than not, people’s expectations are not met because estimates are missed.

How Confident Are You?

So, how do you apply this deceptively simple confidence-based estimating (CBE) technique?

When someone gives you an estimate (an amount of money, a date, a number of days/weeks/months) come back with a killer follow-on question:

What’s your level of confidence in your estimate?

So, on a scale of 0 – 100%, how confident are you that your estimate is correct?  By the way,100% means you’re willing to "bet your paycheck."

If the answer does not come back around 95%+ (trust me, it usually won’t), use this follow-on question:

If I asked you for a 95% level of confidence, what would you say is the correct amount of money / date / number of days/weeks/months?

As they start to think their answer through don’t be surprised when the new number / date / amount of money goes WAY up.  I’ve seen initial estimates come in with people saying, “That will take 9 months.”  You ask for the confidence level.  They come back with 65%. You ask for 95% confidence.  They come back with 12 – 18 months (by the way, read that as ’18 months’).  So, they went up 30 points of confidence and their estimate doubled!  That’s okay, because now people are actually thinking it through.  If they can’t get to a 95% level of confidence, that’s okay too.  Get as high as possible and realize the risks you are taking with lower confidence levels.

In my next post, I’ll take you through the 2nd killer question to ask.

Stayed tuned…