All posts by Tim Berry

5 Secrets of Creating a Great Business Team

team working together

My favorite five secrets of a great business team? This list came to me first as an answer to the question how do you build a great business team on Quora.  These five points aren’t something from the business school curriculum. They come from the experience of actually doing it, recruiting a team and growing a business from zero to millions. (For more on that story, click here).

My list

  1. No skill or experience justifies lack of integrity. You need to trust the people you work with, and particularly, the people who become key team members to build on.
  2. Diversity makes better businesses. Not for fake political reasons, but for real business reasons. Teams of different kinds of people – gender, background, ethnicity, and so forth – have broader vision than teams of people who are all the same. Diversity has been given a bad name by bigots. It’s not just morally correct, it’s also better business.

What diversity does and doesn’t mean.

  1. Different skills and experience. You don’t want all developers or all marketers, you want developers, marketers, administrators, producers, leaders, and so forth. I see student groups that are three and four people who share the same major; that rarely works.
  2. Shared values create strong bonds. Palo Alto Software was built by a team that shared my founder values about good business planning, startups, and small business. Jurlique was built by a team that shared founder values about cosmetics with only natural organic ingredients not tested on animals. And don’t confuse shared values with diverse types of people, skills and backgrounds. They are compatible, not contradictory, ideas.

Avoid the all-C-level-officers team

  1. Beware of title inflation. Having the first four people all have C-level titles is usually a sign of youth and lack of experience. In the real world, founders are rarely all fit to be C-level officers for the long term. I recommend vague non-committal titles in the beginning, like “head of tech,” “marketing lead,” and so forth. Leave room to recruit stars later on, as needed, with the big titles.

 

Business Plan Events and Why They Matter

(Note: I posted this earlier this week on the SBA Industry Word blog. It’s reposted here for your convenience.)

What do you think of when you hear the phrase “business plan?” Does that bring to mind a formal document that starts with a summary and includes modules describing your business’s products, market, strategy, team, and essential projections? If so, let me introduce you to the concept of the business plan event and explain why this is worth thinking about.

The more common business plan events

Sometimes, in the normal course of running a business, growing a business, or starting a business, you need a business plan. I refer here to situations that require showing a business plan document to somebody outside the organization.

For example, the most common business plan events are:

  • Banks often require the business plan document as part of a business loan or other commercial credit. Most SBA loan programs, which guarantee bank loans made by local small business banks, require a formal business plan.
  • Angel investors usually require a business plan from a startup as part of the process of seeking investment. Unlike the common myth, they don’t use the business plan as an introduction to a business. Instead, they use it during what they call the due diligence phase, after they’ve met with founders and had a pitch, when they study the details before making a final decision.
  • Business plans are usually part of the process of buying and selling a business. That applies to the small business transactions that happen all the time, as well as to major acquisitions by big businesses.

There are other business plan events that come up. When I started my business 30 years ago, I needed to show a business plan to my bank just to get authorized to take credit cards. And I’ve heard of business plans used as part of negotiating divorce settlements and inheritance claims.

Widespread confusion between plan and planning

If you answered yes to my question in the first paragraph above, that you do think of a business plan as something hard to do that has only specialized use, then I say you are in good company. Let me suggest that you’d be better off, as a business owner, with an attitude adjustment.

My recommendation is that you dismiss the idea of the daunting big formal business plan, but adopt business planning instead. The distinction, in my mind, stands out with the famous quote from former president and military strategist Dwight D. Eisenhower: “The plan is useless; but planning is essential.”

I love that quote and use it a lot because it leads to what I call good planning process.

  • The process starts with a simple, lean business plan that covers the main points you need to write down. You can do this with simple bullet point lists and tables. Set down strategy, tactics, major milestones, metrics, and essential projections.
  • Then, as you steer your business with ongoing planning process, take that lean plan and review results regularly. As results uncover insights, revise that plan. Keep it lean, and review and revise it often.

The business conclusion: planning, not plan

My suggestion for business owners: Think about what business plan events are. Separate, in your mind, the business plan required for a specific business plan event from the business planning you can use on a regular basis to run your business better.

Then, once you’ve seen the difference, manage a lean plan that’s always fresh, with regular reviews and revisions. And when you face an actual business plan event, then and only then take your latest version of your lean business plan and dress it up, adding descriptions and summaries, as a formal business plan document.

Top 10 Pitch Fails

I was asked recently for a list of things that annoy me in angel investment pitches from startups. I’ve done this before, so there will be some duplication here. But here is my top 10 pitch fails list. 

  1. Profits. Talk of profits, overestimated profits, the failure to understand that investors make money on growth, not profits; startups with high growth rates are rarely profitable; profits in high-growth startups stunt growth and reduce the odds of successful exit. That’s why you need to spend other people’s money, right?
  2. “I don’t need no stinking projections.” Surprises me how often I’ve seen it. “We all know,” the pitcher says in a cynical tone, “that all those projections are useless.” And dismisses the idea, often with a wave of the hand. Or sometimes it’s a holier-than-thou tone. But no. I need you to think though unit costs, realistic volume, the conceptual links between marketing spend and volume, what it takes to fund growth. I want to know that you know, roughly, that you’re growth will take a ton of marketing spend, and that when you get to $20 million annual sales you are going to have a big payroll and overhead.
  3. Expecting me to believe your numbers. You’re damn right I want to see them, but don’t expect me to believe them. I use them to guess how well you know the nuts and bolts of your business. But at the moment of truth, I’m going to trust my instinct for what I think you can sell, and how much I think you can grow, given the stories you’ve told me and the markets you’ve carved out.
  4. Discounted cash flow. IRR and NPV. Amazing how people can believe numbers that project the future based on a compounded absurdity of assumed sales, less assumed spending, multiplied by an assumed discount rate, five years from now. And yet, I see young people crushed because I wanted something that had a lower IRR than their thing. Y’see, I didn’t believe the IRR either way. I went with the people and the market. This is actually a particularly annoying subset of the point above it.
  5. The annoying myth that nobody reads business plans. Big mistake: confusing the obsolescence of the big pompous formal use-once-and-throw-away business plan of the past with not wanting or needing planning. Ask the two faces of lean startups, Eric Ries and Steve Blank, whether startups need to set strategy, tactics, milestones, metrics, and essential projections for revenue, spending, and cash, and they’ll say the equivalent of “yes of course.” But they are (mis)quoted often as saying don’t do a business plan. What they mean – ask them – is don’t do an old fashioned business plan. Keep it lean, revise it often, and manage with it.
  6. Knowing everything. Sometimes people think investors want founders who know everything, answer each question no matter what, and are the world’s leading expert on any possible subject to come up. No. I want people who know what they don’t know, and aren’t afraid to be not certain.
  7. I don’t want people who get all defensive when challenged. The win is in the relationship, long term. I can’t tell you how many times I’ve seen private discussions between investors, after a pitch, go negative for somebody who investors feel “isn’t teachable.” It’s easier to work with people who listen, digest, than with people who think every doubt is a challenge to their leadership and authority.
  8. The small piece of a huge market. No, please, don’t ever tell me that your $10 million sales figure is realistic because it’s only one percent of a $10 billion-dollar market. Or 1/10th percent of a $10 billion market. That logic never works. Build your forecast from the units up, not from the top down.
  9. Oversharing the science or technology. I want to hear about the business, not the physics, not the biology, not the chemistry. Pitches and plans are not the right place to show off all of your knowledge.
  10. Not needing the money. If you don’t need the money then don’t seek investment. Own it yourself. Never seek outsider money you don’t really need. People who can live off of their generated cash flow are never going to exit
  11. (bonus point) Stock words and phrases like “game changer” and “disruptive.” Don’t tell us that you are either that. Cross your fingers, and hope we tell you that you could be.

This is another of my Quora answers. The original is at: What are the things that annoy you when entrepreneurs pitch to you Angels and VC? And someday I’m going to answer the question what annoys me about my fellow investors. Because writing these items generates a thought about that side of the table too.

20 Reasons to Write a Business Plan

all businesses need a business planQuestion: What are some of the main arguments for writing a business plan?

Here are 20 good reasons to write a business plan. Please note, however, that a business plan is not necessarily a traditional formal business plan. It ought to be a lean business plan that gets reviewed and revised often. It ought not to be static, used once, and then forgotten.

These apply to all businesses, startup or not:

Key elements of a lean business plan

  1. Manage the money. Plan and manage cash flow. Will you need working capital to finance inventory purchase, or waiting for business customers to pay? To service debt, or buy assets? To finance the deficit spending that generates growth? Are sales enough to cover costs and expenses? That’s planning.
  2. Break larger uncertainties into meaningful parts. Go from big vague objectives to specific numbers, lists, and tables. It’s compatible with the way most humans think. A plan makes it easier to estimate and visualize needs, possibilities, and so forth
  3. Set strategy. Strategy is focus. It’s what you concentrate on, and why. It’s who is in your market, and who isn’t; and why and why not. It’s what you sell, to whom. You need to set it and then refer back to it, frequently, as things change. You can’t revise something you don’t have.
  4. Set tactics to align with strategy. Tactics like pricing, messaging, distribution, marketing, promotion have to work and they have to align with strategy. You can’t manage a high-end strategy with low-end pricing.
  5. Set major milestones. Concretely, what is supposed to happen, when? who is responsible? Humans work better towards specific milestones than they do moving in general directions. New product launch, website, new versions, new hires. Put it into milestones.
  6. Establish meaningful metrics. Of course that includes money in sales, spending, and capital needed. But useful metrics might also include traffic, conversion rates, cost of customer acquisition, lifetime customer value, or calls, emails, ads, trips, updates, hires, even likes, follows, and retweet. Good planning includes methods to track.

Dealing with business decisions

  1. Set specific objectives for managers. People work better with specific objectives, especially when the come within a process that includes tracking and following up. The business plan is the perfect tool for making this happen. Don’t settle for having it in your head. Organize and plan better, and communicate the priorities better.
  2. Share your strategy selectively. Let other people involved with your business know what you’re trying to do. Share portions of your plan with key team leaders, partners, spouse, bankers, allies. Don’t you want them to know.
  3. Deal with displacement. You have to choose, in business; particularly in small business; because of displacement “Whatever you do is something else you don’t do.” Displacement lives at the heart of all small-business strategy.
  4. Decisions on space and locations. Rent is a new obligation, usually a fixed cost. Do your growth prospects and plans justify taking on this increased fixed cost? Shouldn’t that be in your business plan?
  5. Hire new people or not. Who to hire, why, and how many. Each new hire is another new obligation (a fixed cost) that increases your risk. How will new people help your business grow and prosper? What exactly are they supposed to be doing? The rationale for hiring should be in your business plan.
  6. Make asset decisions and asset purchase or lease. Use your business plan to help decide what’s going to happen in the long term, which should be an important input to the classic make vs. buy. How long will this important purchase last in your plan?

More on sharing information

  1. Onboarding for new hires. Make selected portions of your business plan part of your new employee training.
  2. Manage business alliances. Use your plan to set targets for new alliances, and selected portions of your plan to communicate with those alliances.
  3. Lawyers, accountants, consultants. Share selected highlights or your plans with your attorneys and accountants, and, if this is relevant to you, consultants.
  4. When you want to sell your business. Usually the business plan is a very important part of selling the business. Help buyers understand what you have, what it’s worth and why they want it.
  5. Valuation of the business for formal transactions related to divorce, inheritance, estate planning and tax issues. Valuation is the term for establishing how much your business is worth. Usually that takes a business plan, as well as a professional with experience. The plan tells the valuation expert what your business is doing, when, why and how much that will cost and how much it will produce.

The standard arguments that apply more to startups

  1. Create a new business. Use a plan to establish the right steps to starting a new business, including what you need to do, what resources will be required, and what you expect to happen.
  2. Estimate starting costs. Aside from the general in the point above, there’s the specific estimates that list assets you need to have, and expenses you need to incur, in order to start a new business.
  3. Seek investment for a business, whether it’s a startup or not. Investors need to see a business plan before they decide whether or not to invest. They’ll expect the plan to cover all the main points.
  4. Back up a business loan application. Like investors, lenders want to see the plan and will expect the plan to cover the main points.
  5. Vital for your business pitch and summaries. You can’t really do a good business pitch without knowing already the key parameters you estimate in your business plan, for headcount, starting costs, and of course milestones and key strategy and tactics.

 

What Are the Normal Steps for Angel Investment?

Question: What are the normal steps for angel investment? What’s involved in submitting a business plan?

I decided to answer this question here because I see it so often in email and in question and answer sites on the web, especially Quora, which is where I first saw it and answered it.

Yes you do need a business plan

In the U.S. market the business plan generally stays in the background while investors look at summaries first, then pitches, and only eventually, after a lot of screening, if they are interested enough to do the detailed study called due diligence, then the business plan.

You want a bare-bones lean business plan to guide your summary and pitch deck. You need to know strategy, tactics, milestones, and essential projections. But investors screen startups based on summaries and pitches before they look at full business plans.

But that’s not what you show investors first

So here are the normal steps:

  1. Summary. That’s either summary memo, or profile on Startup Funding & Investing and AngelList, or similar.
  2. If and only if the summary is interesting, then the pitch. There is a lot more information on the business pitch here on bplans. And for more of my posts, on this blog, choose the business pitch category.
  3. If and only if the pitch is interesting, investors will want to see a full business plan for due diligence.

However, this applies as general norm only, and in the U.S. market only. Generalizations are never always true. There are always exceptions.

(note: this first appeared as my Quora answer to What are the steps involved in submitting a business plan?

7 Things Wanna-be Entrepreneurs Need to Know

What do entrepreneurs need to know as they get started? Of course there’s need to know, absolutely; and there’s ought to know.  I was asked to come up with a list, and here is my best guess.

  1. Know the difference between cash and profits. You Think in Profits, but You Live on Cash. Things like sales on credit, inventory, and waiting to get paid can make a huge difference. Profits are accounting. It takes cash to pay bills.
  2. Know that business owners have legal constraints related to dealing with employees, employees vs. contractors, copyright and intellectual property, and dealing with tax authorities and investors. You can’t just say “I don’t know” later on. You are supposed to know.
  3. Know that getting outside investment is the exception, not the rule. Be familiar with the pros and cons of bootstrapping. Read this: 10 Good Reasons Not to Seek Startup Investors.
  4. Know that bad behavior and selfishness, which seems to correlate with other people’s success sometimes, doesn’t often work out on the long term. Things like integrity and fairness matter.
  5. Know that good decisions sometimes have bad outcomes. Not every bad thing that happens is your fault. Bad things will happen. And you have to live with that.
  6. Know that you will make mistakes. We all make mistakes. You have to live with them. If you can’t deal with mistakes, don’t start a business. You Will Make Mistakes. Deal With ItMistakes About Mistakes.
  7. Know how to live with uncertainty. Understanding Uncertainty is Vital to an Entrepreneur.

Note: This post is based on my answer to What should first-time entrepreneurs know that can help them on the road to success, a question posted on Quora.

Good Data Debunking Popular Startup Myths

Contrary to popular startup myths and misunderstanding, tech founders aren’t mainly younger than 30. They are generally well educated, not dropouts. They tend to start up where they are, instead of moving to Silicon Valley or other tech hubs.

Here’s a summary of data published by the Kauffman Foundation:

We observed that, like immigrant tech founders, U.S.-born engineering and technology company founders tend to be well-educated. There are, however, significant differences in the types of degrees these entrepreneurs obtain and the time they take to start a company after they graduate. They also tend to be more mobile and are much older than is commonly believed.

Founders are in their late 30s, 40s, and older

  • The average and median age of U.S.-born tech founders was thirty-nine when they started their companies. Twice as many were older than fifty as were younger than twenty-five.

90+% have college degrees

  • The vast majority (92 percent) of U.S.-born tech founders held bachelor’s degrees. Additionally, 31 percent held master’s degrees, and 10 percent had completed PhDs. Nearly half of all these degrees were in science-, technology-, engineering-, and mathematics- (STEM) related disciplines. Onethird were in business, accounting, and finance.

  • U.S.-born tech founders holding MBA degrees established companies more quickly (in thirteen years) than others. Those with PhDs typically waited twenty-one years to become tech entrepreneurs, and other master’s degree holders took less time to start companies than did those with bachelor’s degrees (14.7 years and 16.7 years respectively).

  • U.S.-born tech founders holding computer science and information technology degrees founded companies sooner after graduating than engineering degree holders (14.3 years vs. 17.6 years). Applied science majors took the longest (twenty years) to create their startups.

Top-rank universities are over represented

  • These tech founders graduate from a wide assortment of schools. The 628 U.S.-born tech founders providing information on their terminal (highest) degree, received their education from 287 unique universities. But degrees from top-ranked universities are over-represented in the ranks of U.S.-born tech founders. Ivy-League universities awarded 8 percent of the terminal degrees to U.S.-born tech founders in our sample.

  • The top ten universities from which U.S.-born tech founders received their highest degrees in our sample are Harvard, MIT, Pennsylvania State University, Stanford, University of California- Berkeley, University of Missouri, University of Pennsylvania, University of Southern California, University of Texas, and University of Virginia. U.S.-born tech founders with Ivy-League degrees tend to establish startups that produce higher revenue and employ more workers than the average. Startups founded by those with only high school education significantly underperform all others.

They start closer to home

  • Nearly half (45 percent) of the startups were established in the same state where U.S.-born tech founders received their education. Of the U.S.-born tech founders in our sample receiving degrees from California, 69 percent later created a startup in the state; Michigan, 58 percent; Texas, 53 percent; and Ohio, 52 percent. In contrast, Maryland retained only 15 percent; Indiana, 18 percent; and New York, 21 percent.

 

 

 

 

Infographic: 12 Visual Principles For Everyday Design

Design is essential and affects so much of our work. But design is also expensive. And the tech world, social media, the web, and business are full of designs we do ourselves. Profile pages, presentations, for example. Turning to designers is a luxury that takes time and money. And I care about quality too, so this infographic on visual design principles for everybody caught my eye.

I got it from Payman Taei, founder of online design tool Visme. I was attracted to Visme some time ago and I’m still on the email list. But, to be honest, I haven’t used it. I’m passing this on because it seems really well done and useful. And, for the record, it comes along with a useful blog post that explains these principles with more examples. (And no, this is not a paid insertion or paid post; I just like this content. There are no paid posts on this blog.)

Created using Visme. An easy-to-use Infographic Maker.

10 Most Common High Tech Business Plan Fails

I was asked about high-tech business plan fails on Quora recently. So this isn’t about lean plans for all business owners, but just the business plans submitted for angel investment and business plan competitions. I read about 100 of those business plans per year. So here’s my list of high-tech business plan fails:

  1. Naive profits. Drives me crazy. First of all, startups are rarely profitable. Secondly, get a clue – if the industry average is 8% profits to sales, you aren’t going to make 43%. You’re not showing that your business will perform way better than most; you’re showing you don’t know the business. Thirdly, why would I value your plan based on numbers that aren’t credible. It makes your plan worse, not better.
  2. Self-assigned superlatives. Disruptive, game changing, etc. Skip the fashionable check-the-list buzzwords. The more you claim it, the less credible you are. Stick to the content and leave the adjectives out.
  3. Not having projections. You don’t get to say projections are useless. Readers won’t believe them on the surface, for sure. But savvy plan readers want to look at your projections not because they will believe the top or bottom lines, but to see how well you understand the drivers and the workings of the business. Do you know what drives sales? Do you understand direct costs? Are your expenses realistic.
  4. Amazing headcount. I often see plans that would run enterprise-level businesses with startup-level head counts. I’ve seen plans in which 20 people supposedly run $20-million-annual-sales businesses. (Yes, this is a variation on #1 above; and relates to #3)
  5. No marketing expenses. Another variation on #1 and #3. The projections show huge profits and tiny marketing expenses. Fat chance. Marketing expenses are what make profits and growth incompatible.
  6. IRR and NPV. Nobody cares what your calculator or spreadsheet function tells you is the results of multiplying one far-out unrealistic assumption by another and another. These analyses are useful for teaching the time value of money and for some sophisticated financial analyses. Not for business planning.
  7. No competition. A sure-fire sign of lack of research, depth, and understanding of the way competition actually works.
  8. Cash machines. I’m surprised how often this happens. Plans that are supposed to be related to angel investment project cash immediately and more cash every day, and even accumulate huge cash balances. First of course that’s completely unrealistic. Second, why would yo share ownership of that cash machine with investors?
  9. Good business, bad investment. This is quite common, and I often encourage and admire these. Businesses that don’t need investment do show up now and then. Hats off and congratulations. But that doesn’t make a good investment for outsiders who need you to need more cash and eventually to exit to liquidity.
  10. Vague puffery in team backgrounds. Way too often people talk about relevant experience in generalities. For example, “a startup veteran” or “had a successful startup exit.” Tell me what companies and when. When the vitals are left out everybody suspects exaggeration. I sometimes insist on details and discover there was really nothing there. The startup was a poster campaign on a college campus. The exit was dissolving the business and selling the computer it owned.