So you want to be a successful high tech entrepreneur? So you want to be a successful high tech entrepreneur? Orange County IEEE 9/24/07 Gordon M. Watson Copyright,

Copyright, WATSON CONSULTING, LLC The Magic Formula! Given: An emerging market and/or a better idea, ergo: Reward($) = f (risk, $, mt, t, w, d, r) where: risk = founders tolerance for taking risks $ = personal cash investments by founders mt = market timing t = time (quantity) spent by founders building the business w = work (quality) performed by founders building business d = founders decision-making abilities (quality & timeliness) r = founders ability to manage relationships

Copyright, WATSON CONSULTING, LLC Reasons to tart a Company Reasons to $tart a Company 1.You dont want to work for someone else 2.You like to control your own destiny 3.You want to get maximum benefit from your talents 4.You are most comfortable being the leader 5.You want to set (and change) priorities at will 6.You think it would be fun and cool 7.You want to leave a business legacy for your family 8.You want to become rich and make lots of others rich too 9.You want to send lots of money back to your homeland 10.You want to be free to create 11.You want to change the business world for the better 12.You want to leave your mark on society 13.You want to work in a location of your choice 14.You dont really trust others 15.You are tied of just designing logic and/or writing code 16.Other:______________________________________________

Copyright, WATSON CONSULTING, LLC How well equipped are you for the job? Key CEO Traits: 1.Demands that the companys products & services solve a real, pervasive and persistent business problem, and that they are demonstrably better than existing solutions 2.Knows where he/she is going with the business; knows: (1) how to get there, and (2) how to determine when he/she has arrived 3.Regularly communicates #2, both externally and internally, and with passion, alacrity, conviction, and credibility 4.Is willing and able to listen to and learn from experienced advisors, and is willing and able to make timely decisions, tough compromises and painful sacrifices to achieve #2 5.Surrounds himself/herself with a few smart, hard working and experienced people who understand and believe in #2, and to whom he/she has generously shared the equity upside, if successful

Copyright, WATSON CONSULTING, LLC More Key Traits 6.Manages cash-flow daily as the life blood of the business…which it is! 7.Is passionate about customers and treats them as kings and queens…which they are; and has a personal relationship with the top customers CEOs 8.Ensures that the business is adequately capitalized and constantly works to build shareholder value 9.Takes the competition seriously, over estimates their strengths, has a plan to beat them, and executes it fearlessly 10.Regularly analyzes, challenges and revalidates the business strategy and model; quickly makes necessary adjustments and implements them without haste

Copyright, WATSON CONSULTING, LLC As CEO, with whom do you need to communicate? 1.Accountants 2.Bankers 3.Board of Directors 4.Consultants 5.Customers 6.Distributors 7.Employees 8.Hardware partners 9.Industry organizations 10.Lawyers 11.Market analysts 12.PP&E people 13.Press 14.Recruiters 15.Sales prospects 16.Software partners 17.Standards bodies 18.System integrators 19.Universities 20.User groups 21.VARs 22.VCs / Investors

Copyright, WATSON CONSULTING, LLC Life Style –vs– Growth Tightly held stock Empty suite Board Centralized control Absence of a senior management team Risk averse Interesting work and quality of life take precedence over market share and stockholders value Small piece of a BIG pie Many investors Strong board Strong senior mgmt. Delegated control Calculated risk taking Aggressive growth Initiate, penetrate, and insulate type of marketing

Copyright, WATSON CONSULTING, LLC Timing is everything…. Growing or recessionary economy Market expansion or consolidation Stock market World events (e.g. terrorism) Capital markets Culture changes (find the tipping point) Politics Government and anti-trust issues Innovations & inventions Weather & natural disasters Emergence of Standards

Copyright, WATSON CONSULTING, LLC Idea Filters Vitamin (nice-to-have) -vs- Aspirin (need-to-have) -vs- Morphine (essential to survive) Known or completely unknown disease Point product -vs- product line Barriers-to-entry: time, money, people, I.P. Existing sales channels or new channels Market size: Rhode Island or Alaska? New product + new market = VERY HIGH RISK! New product + new market + new channel = ALMOST IMPOSSIBLE!

Copyright, WATSON CONSULTING, LLC Law of Risks & Rewards RISK REWARDREWARD Old Product–Old Market Old Product-New Market New Product-New Market New Product–Old Market

Copyright, WATSON CONSULTING, LLC More Filters If there are no competitors then there is probably not a market for your idea Investors love a small guy who is positioned to dominate a niche market Investors hate a small guy who is positioned to win a fractional share of a huge market

Copyright, WATSON CONSULTING, LLC Business Model Template How will the company make money? Who are the target customers and how much money do they have to spend? What is the characterization of the competitive landscape? Are there existing, successful companies in your space; if none, why? What are the pricing dynamics of your industry What is your distribution channel and its economics? Dependencies upon other companies in your supply chain? Dependencies upon other companies for your customer to realize the benefits of your product? Confessions of a Venture Capitalist, Ruthann Quindlen

Copyright, WATSON CONSULTING, LLC Where Does Your Business Fit?

Copyright, WATSON CONSULTING, LLC Basic Fund Raising Tools Executive Summary (1-2 pages) PowerPoint presentation (10-12 slides) White Paper Laptop + projector + remote pointer Business Plan (25-40 pages including business model & financials) Draft Term Sheet, investment memorandum, subscription letter (i.e. legal docs) Evidence of Value Proposition validation (e.g. surveys, interviews, testimonials, alpha test sites, etc.)

Copyright, WATSON CONSULTING, LLC Start-up Equity Sources Your own capital The other founders capital Friends & Family Angels Incubators Boutique VCs Potential customers Strategic partners Government grants Small Business Innovation Research (SBIR) Small Business Technology Transfer (STTR)

Copyright, WATSON CONSULTING, LLC Delivering the Pitch 1.Two people are better than one (e.g. CEO plus a VP) 2.No live demos…use screen shots with balloons 3.Prepare for ~30 minutes of output, 20 minutes of input 4.~10 min. defining business problem you solve 5.~10 min. describing your solution and why it is better 6.~10 min. explaining how you are going to kick your competitors butts 7.Establish credibility early 8.Know how much money you need and why 9.Make changes to the pitch based on feedback (keep refining it as you get feedback from each presentation) 10.Be prepared for aggressive questioning…have the answers; be prepared; practice, practice, practice

Copyright, WATSON CONSULTING, LLC Delivering the Pitch (cont.) 11.Avoid the defensive posture…answer the difficult questions before they are asked 12.Ask questions to confirm your message is being understood 13.Use the strategic pause 14.Take notes 15.Dont be afraid to say, I dont know but follow up with Ill get the answer 16.Get everyones name and title 17.Establish the next step (what, when & who) 18.Do a trial close i.e. ask them how you did 19.Follow the executive summary template 20.Remember, you personally as well as your business opportunity are being screened!

Copyright, WATSON CONSULTING, LLC Some Investor Turn Offs 1.We dont have any competitors… 2.Build it and they will come syndrome 3.Every sentence from CEOs mouth begins with I 4.Absurd revenue or gross margin plan 5.R/D expenses >>15% in out-years 6.Sales & Marketing << 15-20% in out-years 7.Unrealistic and unsupported company valuation 8.Using funds to pay high executive salaries 9.I.P. ownership vague or having legal overhangs 10.Point product solution, not a product line vision (i.e. the one act pony) 11.Little barrier to entry by competitors

Copyright, WATSON CONSULTING, LLC VC Screening of Start-up Deals 60% of all business plans received are rejected after a minute review 100% enter 25% more are rejected after a detailed review 15% are subjected to a thorough, due diligence examination and another 10% are rejected Of the remaining 5% that are considered viable investment opportunities, only 3% are successfully negotiated by founders and VCs, and actually get funded 3% exit with $$$ Pratts Guide to Venture Capital Sources

Copyright, WATSON CONSULTING, LLC Started as small acorns; grew to GIANT OAK TREES! EDS $21B Apple $19B CSC $15B Intel $35B Cisco $23B Microsoft $44B Oracle $14B Sun $13B Dell $57B 2006 Revenue data Total Revenue = $241B!

Copyright, WATSON CONSULTING, LLC Examples of Investment Sources Friends & Family seed capital (~$100K-$300K) –Good for getting started –Not much business help –Missing or very limited in future rounds Angels round (~$300K- $700K) –$25K - $50K units –Good for mentoring –Usually all smart money –Limited in future rounds Venture Capitalists 1 st round (~$1M-$5M) –Active in future rounds –Board seat participation up to total control Venture Capitalists 2 nd round (~$10M-$15M)

Copyright, WATSON CONSULTING, LLC VC Investments by Region Q – Total: $7,127,489,000 ©PricewaterhouseCooper

Copyright, WATSON CONSULTING, LLC VC Investment by Business Stage Q Total = $ 7.1B ©PricewaterhouseCooper

Copyright, WATSON CONSULTING, LLC VC Investment by Sectors ($7.1B) SectorAmountPercent Deal # Software $1, Biotechnology $1, Med. Devices $ Industrial/Energy $ Media-Entertainment $ Telecomm $ Semiconductors $ Networking & Equip. $ Others $1,

Copyright, WATSON CONSULTING, LLC In an early stage company, what is the #1 thing investors evaluate and base their investment decision upon? The CEO! ANSWER: The CEO!

Copyright, WATSON CONSULTING, LLC Common Start-ups Failure Scenarios (>90%) Chapter 7 or Chapter 11 Acquired for little value and often shut down or completely absorbed with little or no return to investors; common outcome of Chapter 11 filing Do an IPO, then dont perform, get unlisted, stock goes in the sewer, little or no return to investors Founders completely replaced, new team sells company with nominal return to investors Company stagnates with little or no growth, marginal earnings, and no liquidity event likely

Copyright, WATSON CONSULTING, LLC Care & Feeding of your Investment Capital CA$H must be treated as your air supply Triage model: 1.Must spend now 2.Can meter out spending 3.Can defer spending CFO-type is critical 1.Lease –vs– purchase savvy 2.AR/AP management 3.Investor relations 4.Avoids the death of a thousand cuts

Copyright, WATSON CONSULTING, LLC Common Founder Flaws (post funding) Does not understand CA$H management Hires friend to run sales Lacks understanding of marketing fundamentals and under funds the work or squanders money Under plans but over funds development work Build it and they will come mentality Ships an incomplete product that is under supported First word out of his mouth is usually I Forms an empty suit Board of Directors

Copyright, WATSON CONSULTING, LLC Selling is getting rid of what you have; Marketing is having what you can get rid of The Marketing Imagination, Theodore Levitt, 1983

Copyright, WATSON CONSULTING, LLC Strategic Marketing…What is it? What to built? Why to built it? When to built it? Who to sell it to? How much to sell it for? How to sell it to them? What to do next? A Plan for Success!A Plan for Success!

Copyright, WATSON CONSULTING, LLC Six Most Common Marketing Pitfalls 1.Insufficient definition of the target market 2.Nonexistent, incomplete or inaccurate customer profiles 3.Incomplete PRODUCT 4.PRODUCT is priced based upon cost and not upon customer value 5.Inadequate distribution strategy 6.Lack of focus; strategy de jour

Copyright, WATSON CONSULTING, LLC Question? What is most important to creating a successful company: Its products? The market for its products? The people who run the company that create its products?

Copyright, WATSON CONSULTING, LLC Success Right place Right time Right idea Just add water & stir Team Capital Focus Execution Liquidity Celebration