What Do I Wish Entrepreneurs Would Ask?
As I watched the video I posted yesterday, I was struck by the last question of the discussion. That question was “what do you wish that entrepreneurs would ask you when they meet with you, but they don’t?”
For me the answer is obvious. I wish they would ask me what I would worry about most if I was an investor in the business. I often give entrepreneurs the answer to that question when they meet with me even if they don’t ask, and they rarely do.
All businesses have challenges, weaknesses, risk factors. These don’t generally get in the way of us investing, as long as we and the entrepreneur(s) are aligned about them and the need to manage and mitigate these risk factors as quickly as possible. We are drawn to an investment by the upside potential of the business and we recognize that every investment we make has significant downside potential as well. Our hope is that the founders and management team can mitigate the downside risk and, in doing so, set the company up to realize the upside potential.
So it is not a negative when pitching to discuss the risk factors. I like to ask entrepreneurs “what keeps you up at night?” There are obvious answers to that question; hiring the right people, shipping product on time, raising capital. But those are common to every business and that’s not what I’m looking for when I ask that question. I am interested in finding out if the founder understands the risks of the specific go to market strategy they have chosen, or the challenges of the market they are operating in, or the difficulties of implementing the business model they have chosen.
If they see those risks clearly and have plans to manage them, that creates alignment and comfort for investors. If they don’t see them at all, that is a huge red flag for investors.
My partners landed on this same answer after talking it through among themselves. As Albert said, entrepreneurs often feel that they have to be selling when they pitch. And many come in telling a rosy story that is all upside and no challenges. That can come off as naive and can be off putting. It is way better to start with the upside. As I like to say, “take me up the mountain and show me the promised land on the other side.” But after you’ve accomplished that, it is wise to explain where the tough spots will be on the way up the mountain and how you plan to manage through them. It’s the latter part that really seals the deal with an investor. You must do the vision part to hook the investor. Reeling them in requires the reality check.
This reminds me of the 6 presentation slide post from 6 years ago, specifically the way @andyswan broke it down:”1. Imagine a world where….2. Here’s how we get there…3. Known obstacles to overcome4 The pot of gold5 Why our team is awesome6 Routing number for investment”#3 being the direct link to this post.http://avc.com/2010/06/six-…
It could be noted that I have never successfully asked @fredwilson for money
Is there risk left in the business? If so, “venture” capital is not yet interested.
Is that really how it works though?If there is no risk, then it is not a venture.I think any good VC understands all ventures have risks.Your plan/measures to face the risks is what would get you their interest. It is also worth pointing out that the VC could simply be not interested because they do not invest in what you are doing.
There was a TON of risk when USV invested in Twitter, among others.
I wonder if appetite for that type of risk diminishes over time? Investing in Twitter would be by turns exhausting and exhilarating. How many of those can an investor stomach?
I love that you added the caveat of “successfully”. Keeping it real!To be fair, very very few have (I think only one or maybe two active people in/from this community have over the years)…but it’s the nature of the VC world in general I think. Gotta be more no’s and mabyes than yes’es…and we gotta continue to do everything we can to make all the no’s and maybes regret being in that camp in hindsight… 😀
I have been beating this drum for ever. I did yesterday. A huge part of being an entrepreneur is deciding among the least worst alternatives. As I said yesterday we can wax poetic about only doing things the right way, but in the real world? We struggle to keep our heads above the water and there is no shame in that.
A phrase that Fred used in a post recently has stuck in my brain– live to fight another day. It’s sobering to realize how many decisions are at this level but it’s that view from the mountaintop that continues to motivate. That and making payroll.
Thanks for sharing this Phil. Really meaningful and rich. Inspiring in spite of the title. I also made my way over to the comments from yesterday and really enjoyed your contribution, like this comment http://avc.com/2015/12/vide…
(I think only one or maybe two active people in/from this community have over the years).A somewhat active person here (in the past haven’t seen them lately) asked me about pitching Fred (or I should say told me they were) and I told them not to and told them what to do first instead.For one thing it was just “an idea” and they wanted his feedback and I said “don’t waste his time on an idea”.Anyone  who would pitch Fred as their first stop is stupid. Did I make that clear enough? If you want Fred (as one example) to invest and assuming you know enough about what he invests in to think he might invest (which you damn well should before crossing the bridge into Manhattan or taking the subway) then you are an idiot to not practice first on 10 other VC’s or angels first so you are better prepared for the meeting which stands a 1 in 1000 chance. In other words you don’t want to come on half cocked (like Michael in the Godfather exiting the bathroom) when you are taking your one shot. Outliers of course are excepted from this rule.
I’m 50/50 on this actually…def. need to be respectful of time and realistic about your current state, abilities, and chances.But I think overall I’m more in the camp of, if you can get on the schedule you get on the schedule and you start the conversation and start building the relationship.If you’re just in the idea stage (and can still get on the schedule), go in with specific questions and get to them quick…again, don’t waste time but I think it’s ALWAYS OK to ask questions…as long as you listen (REALLY listen) to the answers and opinions, and put the advice to action as much as possible…if/as you do that, you’ll have organic check-in points (either about how it’s working or where/why/how it didn’t) and that’s what builds the relationship and confidence over time.Ultimately I think *thats* what it’s all about…but again, take my opinion with a grain of salt because at the end of the day, I’m in the same camp as @andyswan:disqus (so what do I know) 😉
and you start the conversation and start building the relationship.I can actually see Fred agreeing with that “build the relationship” but I think there are ways to do that without actually taking up meeting time in person. Also what works for Fred might not work for other people you are fund raising from. Important thing to keep in mind..
Also in life when dating or going for money don’t forget the advice of Andy (Justin Kirk) on the TV show Weeds. “Go for the defectives” until you are skilled enough to piss in the weeds with the big dogs (my twist based on Wall Street Sheen/Douglas).http://www.imdb.com/name/nm…
Well that is a much more brutal way of putting it than I would say, but we seem to be in much agreement today. Every time you pitch you get better (as long as it’s a tough audience) Not Shark Tank crap, but I’ll listen to people and give tough feedback.So much of this talk today is about basic sales skills and that is why they need to teach it at Wharton. What worries you most as an investor? I.e. asking someone upfront what is going to get in the way of this sale. Not a cheezy what can I do to get this done today, but what concerns do you have?
a much more brutal way of putting it than I would sayYes but “brutal” is memorable. Not a cheezy what can I do to get this done todayOh man don’t get me started on cheezy phrases. Another one is “what can I do to earn your business” or simply “I want to earn your business”. I hate that. Then there was some young guy when I was young telling me he didn’t know much and would learn from me. The best sales people I ever dealt with were guys who came from the technical side and weren’t complete tools with big smiles and could actually answer questions. Ditto for a nice car I bought recently the salesman that got me interested used to fix them and went into sales. (He didn’t follow up so I didn’t give him the order so..) One of the worst sales people was a guy who completely ignored my hot buttons (service response time) and kept pushing another feature even thought I handed him the hot button on a silver platter.is about basic sales skills and that is why they need to teach it at WhartonXerox used to have professional selling courses which they put all of their high end reps through. The first big deal I got (a 250k contract in early 1980’s dollars) was selling up against Xerox professional sales people where I won the contract (and then got overflow and rush business from Xerox..)
If you are good at selling, you will not be perceived as selling, because you aren’t in the traditional sense, which most people think is never saying a negative thing, overcoming any objection, and out talking your opponent.That is really bad selling. That is what they said they wished people wouldn’t do and it’s because they don’t know what good selling is.Good selling:Is realizing that they way you get to yes is finding no’s. You embrace hearing no. You don’t fear hearing objections and you don’t view these as whack a moles to be knocked down you listen.You realize that when you point out a negative it’s ok: “We might not have the flashiest front end but our backend is rock solid” We might not be the cheapest but we are the best quality.You find out what people’s issues are and address them.
I am curious how you address questions where someone asks you to say what is better about you than the competition but the competition hasn’t been mentioned yet and in fact you aren’t even sure that they know who the competition is in the market and further they might never find out. There are different theories on this I’m curious what way you have practically handled this.
I tell people this:I can’t speak for the competition. I can just speak for me. We might not do everything you’ve ever wanted when you want, nobody can. But what we say we do, and what we say we will do is my word. And I would very strongly tell you not take my word or my competitors word on this fact.Call references. Call ones I didn’t give you. Understand half my business is replacing other’s systems, which is great turmoil for the people involved in the original decision. Ask for references from clients that have been lost. I’ll give you mine.That’s all I ask and you make your decision.
Fred recently posted about how asking for advice instead of money can be more appealing for some investors. He’s also made it clear which teams and situations suit venture capital and others that may be profitable and self-sustaining businesses but don’t need VC.How likely is it outliers seek out VCs when it’s seen as “traditional”?
michael did a hack of a good job
I worry if I ask Fred Wilson for money I’d no longer have time to comment on the blog if he said yes so I’ve refrained. 😉
Deleted… Good comment but out of context. 🙂
Duh…just re-read your comment so mine is not really relevant. Deleting.
Hah, it happens to the best of us.
In 1 slide …
One thing I’m realizing is that no startup is perfect. There are lots of imperfections at any stage, even when companies get bigger. What’s more important is to keep moving in the right direction, despite the risks, weaknesses and unknowns.There is that magical feeling that happens when you know that the investor and entrepreneur’s mind lock in, and you’re discussing negative things positively.
” it is wise to explain where the tough spots will be on the way up the mountain and how you plan to manage through them. It’s the latter part that really seals the deal with an investor” 100% agree. Of course, at seed they may not know how to manage them-which is why it helps to have an investor that can mentor them.
Yes, that’s the money passage.
The best trait of an experienced investor is patience and support.By default they are a partner through vested interest.True mentors are a rarity and don’t have to be equated with a good investor.
At a minimum, every founder can do this for their startup. The value-add of the investor-mentor is to connect them with people who can operationally deliver the mitigating strategy and advise them on how to get the best from team dynamics.
Strengths are weaknesses… Weaknesses are strengths.
This makes me wonder, how can an entrepreneur test an investor to see if they are linear thinkers or if they really do see possibility?As investors go, like Fred and Mark Suster and others you’ve been in the trenches, so you understand and appreciate what it means when someone says “hey I have this idea that’s amazing but by god it’s going to be hard so let’s not pretend.” That’s the type of mindset oriented towards opportunity and problem solving, and horizontal building and pivoting where necessary.
Discussing it is a good way to find out if you have a meeting of the minds. Good VCs already have and know their own convictions, and they don’t need to be “convinced” by the entrepreneur. They’ll know when their convictions and the entrepreneurs match-up. When a VC says “We believe in this and that…” and they’re talking about something that you’ve thought about too, that’s a great signal. And the opposite could be true. You start by saying what you believe in, and the VC can chime in. But not all VCs invest based on their thesis or convictions about the future.
That’s true, plus thesis focused investors seem to be more open about their thinking. I’ve seen 1st timers miss the signals but it seems doable to look at someone like you or Fred or Brad and pretty quickly figure out if your startup is a good fit.
Good points. I think one of the common elements is that these VCs blog regularly, and they are already expressing a lot of what’s on their minds, so that’s helpful to the entrepreneur.
Interestingly there are a few VCs out there who epouse a thesis and invest in direct contradiction to it and will also disregard pitches correlating to their thesis just because they do not have a strong connection to the founder.what matters here is that their thesis matters less than hearing a pitch from a stranger.
I’m there with two additions:As a career operator in startups and turnarounds, I know in my gut how hard this is and experience has taught me the gotchas. Hard for the new entrepreneur to know these but they will after they get punched in the face–which they will!I’m with @ccrystle:disqus below that outside of a certain strata of investor they simply as a rule can’t handle the truth (sorry that was an unavoidable movie reference).Especially outside traditional tech models, especially in Family Trusts where you are speaking with the next generation (s) after the haymaker.
below that outside of a certain strata of investor they simply as a rule can’t handle the truthSomewhat understandable actually. If you give them the truth you are either reinforcing things they might already be concerned about or bringing up things that they hadn’t even thought of yet.  I remember as a young person when I was looking to buy my first house (with the girl that I was engaged to at the time) that was located on a particular busy road. The realtor said “and if you live here don’t worry about the cars your kids can play out back in the yard!”. Wasn’t something, at my age, that I even considered since I wasn’t at the time even thinking about kids. But it gave me info that impacted my decision on that property and in that particular case was a mistake to bring up (in other cases it might have been appropriate of course..)
There are all different kinds of investors out there, and I really consider this to be a numbers game in the sense of finding a fit. Personally, I’m data-driven and vision-driven, so I love to engage investors on the level of how we might solve these potential blocks. Investors who are like-minded love my project.But I have seen some business people who would rather *feel* around the project, and no amount of data, vision, or planning compels them. This is great, because it acts like a natural filter for what I want around me.
great, post.it’s natural for the “always be closing” mentality to kick in when you’re pitching.thank you.
You saw my tweet yesterday:https://twitter.com/wmougay…
i sure did 🙂
Exactly the scene I thought about when reading the post.
As a founder, when I put my former investor hat on … I focus on:(1.) Product.(2.) Execution practicalities.
I wish they would ask me what I would worry about most if I was an investor in the business.In a classic selling situation that could be viewed two ways:a) You generally don’t want to bring up a negative when selling something or put any doubt in someone’s mind. By simply saying “what are you worried about with my product?” you are taking them off the potential high they might have by disturbing it and bringing them down a notch to either think about or acknowledge the drawbacks of what they are contemplating investing in (or purchasing). And it’s not black or white there is an in between and that is actually the most problematic.b) Otoh if they have concerns you are then able to sell to the concerns and address them properly. “Oh ok good question here is how we deal with that…”. Whether to use A or B is determined by how well you read the other party and depending on of course what you are trying to sell and to whom.  And if you are good at what you do and a good salesman you really shouldn’t need to ever directly ask this question and bring up the negative by saying the word “worry” or similar. Don’t underestimate knowing who you are selling to. While Fred might feel this way it’s possible that “a” applies to others that you are selling to or in a different situation.
This is great advice. I’ll give a concrete example.If you are selling marketing technology you are either going to sell it to the CMO or CIO (usually if it’s new it’s to the the CMO if it’s a replacement it’s to the CIO.) If you tell the CMO the risks and struggles generally you are going to lose because they will expect somebody else to handle them. If you tell the CIO there will be no risks or struggles you lose because they assume you are an ass and those will become their problem.
The question I’d ask Fred and other investors is, “Why and how will your knowhow improve the intelligence of systems for Humankind?”What exercises my mind is human+machine coherency.The philosopher in founder-me knows my system is going up against 1000+ years of how we’ve measured and modeled us, our intelligence, our language, our economic behavior etc.The pragmatist focuses on making the system as EASY AS CHILD’S PLAY and better than what existed before, within resource considerations.
One of your key posts of 2015, had to save it to Evernote. IMO. Looking forward to the “year-in-review” and 2016 predictions.
If the upside dwarfs the downside in the investor’s mind (no matter how the founder words it), there is a “we’re in this together, lets do it” mindset.If the downside dwarfs the upside in the investor’s mind (no matter how the founder words it), there is a “we found a few issues during due diligence” mindset.In other words, Venture Investing is just as chemical a reaction as a romance. Everything else is a confirmation bias.
one framework for a founder to avoid the problem of over-selling that Albert brings up is to think of the discussion of risks or challenges as part of the sales process. if founders realized that was actually a part of the sale, more would do it.
I love asking and being asked questions, but unfortunately most just want an answer.There is a very interesting tell: For most people as soon as you provide a response there is an instant response back. Or if you ponder their question for a moment, they either jump in and start talking, or ask you if you understood/heard the question.It’s taught in schools and many people assume intelligence equals being able to respond quickly with an answer. That’s not intelligence if it is a very clear situation, it’s really just memory. Intelligence is when you process the person’s question really think about it, have some questions yourself and be able to come up with the questions that need to eventually be answered and come plan to do that.No business is a clear situation ever, at the top level it’s coming up with questions that need to be answered and deciding how to work to the answer with the realization that just when you think you know the answer the question changes. Even things that seem clear like what does a preferred share mean has tons of nuances.That’s why I really have come to like writeups versus PowerPoints. Could you imagine if all of these posts were PowerPoints not writeups? Generally Powerpoints are meant to try and show you know the answers. I’m not saying they don’t have their place they are great for communicating to large groups where there isn’t interaction.
With all the great investment opportunities that you evaluate, perhaps the Entrepreneur should ask USV, why would consider investing in our business and management team? I think building a connection before you run through the problem/solution brief is really important…
This is a great post. Thank you for sharing it. Planning strategies that factor in risk management are effective at the meta level and at the micro level. I spent a few years at a Big 4 audit firm asking CFOs “what are your top 3 risks for financial reporting errors and what is your plan to address each risk.” It was a rare treat to encounter a CFO who was genuinely open to the question and prepared to answer it. In my experience, it is a helpful planning consideration for anyone in any role – to consistently prioritize risks and focus on continuous improvement.
Great illustration that investors should be accretive to the deal making the company better because they are involved not just investing dollars.
I very much agree with your post Fred. Generally speaking, coaching and teaching leaders to tell stories, this is a good idea as well. Great stories are never only about how great the story teller is. Those make us want to glaze over after we’ve heard about 25 seconds worth. Great stories [and plays and movies and tales in general] show us in almost visual depiction what it has been like for the story teller to overcome a challenge with his or her organization. They are stories of both failures and successes and most of all, they are tales of adaptations and lessons learned. These all of us can related to and invest in emotionally. And if we are VCs, we might invest in them financially.
I wish people would ask me the top ten reasons my startup failed even though we had a great idea and a lot of the right ingredients to success (proven as a great idea when another company had a successful company doing the same thing launched 18 months after us.). But truth is, a lot of people don’t actually want to hear the answer to that question 🙂
Putting aside the specifics of the question -A bigger question (a meta question) I would be asking if I were an investor would be:Will this team glean as much info as they can from customers, networks, advisors, peers, competition and investors?If a NO to this question would be a big red flag, an unprompted ” what can I learn from you? ” , asked with a degree of decorum would be a green flag.
I think about this all the time, and have heard a few responses from investors about what they worry about most about Horizonapp.co (couchsurfing/airbnb within trusted communities). There are three that have emerged:1. Which party (traveler, host, non profits) has such a huge pain point that they will knock down doors to solve it?2. If high trust networks are small (most are), how do we penetrate/reach/scale communities in a way that won’t cost a fortune in customer acquisition?3. Monetization – how do we monetize a transaction that is not tracked & does not take place now (no transaction happens when someone stays at a family or friend’s home)I don’t have all the answers, but certainly have ideas on how to combat them. To address #1 & 3 — we’re adding the ability to post prolonged stay opportunities (sublets/roommates), to add a financial incentive on the host side. In a rental/sublet context, it’s very straight forward of how to make money – posting fees, matching fees, and better facilitating the monthly payments. (the prior model we’ve been testing is flat service fee plus optional donation to charity of choice). To address #2, we’re working on our Android app…as we know we can never scale communities if we’re iOS only (especially since our target demographic skews Android).
There are many questions that entrepreneursneed to have answered. Many of the answersto those questions can be found at a newly-launched on-line resource for startups andentrepreneurs called VCEssence at http://www.vcessence.com.VCEssence’s content addresses over 50 topics vital to entrepreneurs fromsome 30 of today’s most successful, savvy and influential technology investors– among the world’s best, Fred Wilson ofcourse included.Fred discusses the importance of an entrepreneurs’ability to manage and mitigate downside risk. See what Reid HoffmanCo-Founder LinkedIn says on topic at a post called “WhatSets Great Entrepreneurs Apart” at vcessence.com [https://stacey-wernick.squa…].Fred specifically mentions interest alignment,red flags and vision. These are just 3of vcessence.com’s 50+ topics. [Clickon ‘Start-up Issues’ and ‘Fundamentals’ folders.]VCEssence is the ‘must-visit’ solution that enables entrepreneurs to makemore informed decisions, thereby helping them build breakthrough companies andtechnologies. What startup wouldn’t want to know what the greatestinvestors think of all things startup, and use that knowledge to increase theodds of success and reduce the risk of failure?Stacey WernickFounder& CEO VCEssence
I’m an entrepreneur running Zingword, and we’re about to launch in July or so.It’s impossible for me to think that an entrepreneur could not be aware of every nook and cranny, every crack, pothole, etc., in their vision and what they are trying to achieve.Then again, most start-ups fail. I think we’re making all the right choices in Zingword, and still we might fail. But the longer I do this, and the more entrepreneurs I meet, the more I am starting to think that most start-ups fail because their founders don’t have the right combinations.
Well, the obstacles to overcome and the things the investor might be concerned about the business should be the same. If the investor is worried about things you don’t think are obstacles to overcome then you might have bigger problems. That is what Albert referred to as off putting and naive. OR you should have an air tight explanation as to why you think the investor is worrying about the wrong thing.
I hear you. I assume they’d ask you for a spreadsheet and focus on that?Traditional thinking doesn’t like to handle unknowns very well. See a bear, shoot a bear.
That’s a golden opportunity: you raise an issue *that you know how to solve*, but let them stew for a bit (hours, days) before unveiling the solution. Along with some other piece of good news.Talking to VCs is sales, even if we like to pretend otherwise. They see you a bags of money, and reciprocally.
Yup–see my comment to Fred.
Sorry, to be clearer: looking for VC is networking. Like for any networking, you’ve got your canned ready-made spiel for the hoi poloi, and the high-end stuff for sophisticated interlocutors. The first-level stuff should really only be a sales pitch, with a few hints at deeper stuff. But if the counterpart can’t see past the first pitch… keep looking for someone else, but if you can’t find a more sophisticated partner and that first one got lured in by the basic pitch, reel them in ?I see no point in treating VCs like a confessional. It’s a sale, not even really a partnership, unless they bring something other than money.
I’d suggest you are talking to typical people. Typical people have a very hard time with grey area. They want black and white. But there is nothing black and white about start ups (or just about anything, really.)
I said it yesterday. There are precious few people on both sides that have the confidence to bring up the tough issues and worse yet admit they don’t know the answer.But as I also said, sometimes you need the money, and in this case the investor’s perception is your reality and the are right or they are not an investor. That is the hard reality we live with.Now the one investor line I cannot live with is the “when you are successful look me up” Ummmmm, no, when I’m successful I’ll be thumbing my nose at you.
If you don’t how to get to Yes, then you look for reasons to get to No.(True in getting married and other endeavors as well.)
No but the market has sure done more than a few on me over the years;)
sorry to your Bear. Didn’t mean to shoot him except with lots of hugs.
It’s funny, as I was reading the post and answers I kept thinking: “Is there any concern that could be brought up that couldn’t be answered with the right spreadsheet?”And I really couldn’t think of one. I’m going to way over-simplify here, but most of the problems entrepreneurs face are getting the right resources to see their idea to execution, and allocating those resources in a way that moves the idea forward while getting to/maintaining/increasing profitability. And I think a spreadsheet is the ideal way of showing what the answer is to almost any challenge. I’d be interested to hear if anyone thinks I’m wrong.One of the great joys of ongoing Board Meetings as an Entrepreneur is that at every Board meeting we discuss what is the greatest challenge is at that time and how are we going to solve for that. But it’s non-confrontational—there’s not a lot at stake except we know we have to solve for that particular challenge. And it’s been a great development of my skills to be able to say, “Let me come back next month with this problem solved using a spreadsheet and we can talk through what the actions will be.” The key is to continually do that exercise *before* the problems become insurmountable.Also, I remember when raising capital I actually did go into meetings and say, “this slide of the presentation was based on a concern another investor brought up and here is how we solved for it.” I don’t remember it ever being seen as a negative—it was a framework which showed how we would think about solving future problems, of which there will always be many.
Given what your mission is, I wonder if what Fred’s talking about is really a good screen for getting the right investors. The way I’m understanding your current approach, as an entrepreneur you’re explaining vision vs. execution and being honest that your job is to bridge that gap. That’s what a startup really is in the business of no matter the FB or Snapchat dreams an investor might have. But yeah, regular angels, I’ve talked w/a few and outside of 1st (and maybe 2nd) gen entrepreneurs who are now angels, they really like the pretty pictures.The other thing is, some entrepreneurs can deal w/that gap being nice and wide and still go hard, but there’s also a risk that you a) might believe your koolaid (this idea is amazing! it’ll be easy!) and b) that you might setup milestones & expectations that you can’t / don’t want to meet, or that aren’t in the best interest of your startup’s growth later.
The one exception I’ve noticed, w/caveat because I’ve not raised millions so what do I know, is that there is definitely pacing involved when dealing with an investor. I’ve handed and watched others hand over the entire spreadsheet too early, and it’s killed conversations (weird, right?). Letting the conversation flow is important. But maybe that’s just minor league investors? I don’t know..
You will get a super strong disagreement from me. I HATE spreadsheets for anything other than showing what the results were, and as a framework for a budget which is completely changeable going forward.If only business was as easy as putting down numbers in a spreadsheet. Does that solve the problem when a competitor raises money and starts spending money? Or your key developer the one you didn’t backstop quits, or a million other things.I can remember when we are going over spreadsheets and I changed a number and the whole thing changed and a investor cried, no, no, put it back. If only it was as easy as changing a number in a cell.
As an outsider evaluating someone else’s idea or plan, I like how effectively a spreadsheet helps me surface their assumptions. As I look underneath the scenarios I understand why and how they have gotten to certain places in their thinking, because of those assumptions. It’s a very quick way to point back, back, back to the concept most worth discussing.
Agree with the pacing. I never meant that you should “hand over the entire spreadsheet.” I meant that the founder uses the spreadsheet to “solve for X”, but that it is still your job to figure out a way to frame the analysis based on those numbers. For example, the spreadsheet always goes into a presentation (where you control the pacing) and you frame it in a way so that the person knows exactly what they are looking at. Maybe you take the spreadsheet, turn it into a bar chart, show the bar chart. Or take the key numbers, combine with a competitive analysis. I remember meeting with one investor early on—before I even had a pitch deck–who said that what was important to him was knowing when we would reach break-even. And the next meeting I met with him and did a formal presentation with my team I said “I have a 30 page pitch, but I’d like to start by turning to page 17 so we can look at the break-even analysis”. For other investors I started on page 1. But even the break-even analysis wasn’t an entire spreadsheet, it was the data simplified but based on many many spreadsheets I had modeled out before getting one I truly believed in. And the slide I presented was a combination of that belief plus the numbers that made sense to show. It’s important to show not just the numbers, but why you have confidence in the numbers.
Because “typical” people aren’t in the business of gambling with their money and don’t have the “startup investing mindset”.  And that is actually more right than wrong. They should be cautious if the money they are investing matters to them. And there is a great different between investing with your own money and the money of people that you have raised to invest from others (and are in fact getting a fee to manage). Not that you don’t want to be successful, but quite frankly it’s not the same thing.To your point about grey area that comes from I am guessing the lack of diversity in the gambles that they take. If you are investing in 100 companies then you would understand grey area. If you are investing in 1 or 3 then sure it would be more black and white in your mind. Unless of course they are gamblers in which case look for the people that travel to Vegas I guess.
Good point, thanks for the clarification – that’s helpful. Never hurts to drum in that context and specificity matter.
In the past couple of years, there is a 100% correlation with being asked for more in depth financial data and the deal not closing for me.I believe that investors have a complete right to know everything.I also know that investing is a gut activity and that if you are looking for market proof you are simply chasing the wrong thing.I’ve learned to walk away–albeit nicely.
I don’t think the spreadsheet solves the problem, but I think it helps you find the answer. For this question: “Does that solve the problem when a competitor raises money and starts spending money?” — I would use a spreadsheet to figure how how much more I need to spend to compete, or use it to figure out if there was a realistic way to put more money into product development to become less of a direct competitor, or even to figure out how much more profitable I need to become so I could then increase spending and compete head to head. For the question of “what happens if a key developer quits” the answer might be somewhere between “how much can I afford for a replacement” to “how do I invest in training so there is always someone who can move up into a key position, because I know that might happen”. I like to view most business problems as systems-based, and the numbers help give an objective view of how the systems are performing. And–you are right in that I would rather look at spreadsheets as a useful tool to help solve problems *before* they become potentially catastrophic.
Exactly. Business is an art. Generally it’s a bit easier if you are awash in money (one of the ways all those startups get by with so little experience is that they can make so many mistakes and paper them over with fixes that can be bought with money).
Bryce recently posted you can’t size a market off of a spread sheet. http://bryce.vc/post/958603… love his sentiments and basically agree
So it seems that you drive decision making based on numbers or goals and then simply set those in a spreadsheet as a formal way to address them? Or does it start with the spreadsheet?For the question of “what happens if a key developer quits” the answer might be somewhere between “how much can I afford for a replacement” to “how do I invest in training so there is always someone who can move up into a key position, because I know that might happen”.I think what I have found is that you can spend untold hours in a business addressing the “what ifs”. And the problem is there is simply not enough time to identify all of those and certainly not enough money to deal with all of them.  Part of business is deciding (no surprise) what chances you can afford to take and how to allocate money and resources. You know if you have a “big customer” that gets a great deal of your production you don’t really need a spreadsheet to know that you need to not have all of your eggs in one basket. I guess my point is that working on the various issues should be a daily activity and the spreadsheet is a tool only not the source of a font of information and answers. Where you say “invest in training for a replacement”. All of this takes time energy and money.
Here is my point. The spreadsheet is not going to make you more profitable. The spreadsheet is not going to replace that developer. Going out in the marketplace selling might, always be recruiting might, coming up with a judo strategy where you steal that overspending company’s heat might.Strategy is not set by spreadsheets and powerpoints. This are one way communications tools (not bad mind you)But I do five things:1. Find and retain the best people2. Orchestrate between departments no department drowns out another3. Make people do the 10% of things they don’t want to do4. Visit and understand the customer/potential customers marketplace5. Set the strategy which is what we don’t do more than what we do.Spreadsheets and powerpoints don’t do any of that. As a matter of fact when you let those be your favored methods you generally break rule number 2, because if it’s spreadsheets finance wins, powerpoints marketing.
Although I agree with you, I think Lisa is coming from a different place. To many people (not me) a spreadsheet is a way to focus and “simmer down” in order to try and solve a problem that they have in business. I am guessing it almost in some cases has a calming effect. It gives them comfort and with that comfort (perhaps) the can come up with solutions. Things that many people can do in their head others feel better using Excel for. (I call my method “hand over fist” calculations).One of the things that constantly annoys me when I watch Marcus Lemonis on CNBC “The Profit” (and I’ve sold him things twice btw..) is that he is always fucking focusing on profit, margins and the numbers almost as a be all and end all in itself.   The margins rule and appear to drive all decisions. Intangibles don’t seem to count or at least count as much. That is one of the dangers of worshiping spreadsheets to much. And this dovetails with my personal experience in dealing with him as well so it’s no act. He is successful but he has never started from scratch and actually run a small business so he is not really seat of the pants with some of the lower level issues or with appropriate empathy.
This is all really good advice. And it is not that I disagree that all of those things are important. I certainly don’t use spreadsheets as a crutch. But for, example, #3 — (which I think is a really great strategy btw) — how do you know that the last 10% of those actions are actually going to get results the results you need? Or do you just decide on the results? The spreadsheets don’t do the work, they just help understand and measure and provide an way of interpreting the data so you know that the actions you are taking are actually the ones that are producing the most effective long term results.
Again total agreement. Never watched the show but assume they are very small businesses. In which case I find the majority need to look at numbers more.But the numbers are not going to tell Charlie to make it his mission to produce bread where he does. Or that he needs to improve X, Y, or Z.As a matter of fact they probably say the opposite. As I had a partner once say: A number is just a number on a piece of paper until somebody buys it.
@domainregistry:disqus and @philipsugar:disqus It’s less of a “simmer down” (although certainly, using numbers to help focus is not something I see as a bad thing) — and more of this. I believe that what we call “intuition” comes from a deep understanding of what actually gets results and what doesn’t. And one way to understand what is getting the results you need is by looking at either numbers or some other clear, objective results. Over time you understand what actually gets results and what doesn’t—and then, sometimes years later—everyone is saying “wow, what an intuitive leader!” It doesn’t mean that on every spreadsheet I put together I am only concerned with the bottom line. But I do want to understand how any actions and decisions I take are going to impact the overall financial health of the business—because that is the way the business will ultimately succeed at a very high level. To me, a spreadsheet is anything that allows you to quantify results. We have a team of 38 people who work virtually and we work on shared spreadsheets so we know when we’ve all, as a team, hit our goals for the day. At the end of each day, everyone knows they are accountable for what needed to get done that day. It’s a very cool, very creative process. But it’s still a spreadsheet.
Kato the bear
I completely agree that working on the various issues should be a daily activity. And obviously the spreadsheet is not going to spit the answers out to you in an actionable form. That’s where leadership comes from. You say “You don’t need a spreadsheet to know that you need not have all your eggs in one basket”. But do you know how many baskets would be ideal? That is what I use the spreadsheet for. In answer to your very first question — I start with the problem that needs to be solved. The spreadsheet helps solve the problem based on data. Sometimes it helps me find out exactly what the real problem even is. It doesn’t mean I can’t be creative about HOW the problem is solved. But– for instance–when you say “all of this takes time energy and money — what I’ve found is that the spread sheet can answer questions like “how much money” very quickly.
Ok really liked your other comment about knowing what we got done. My pet peeve is using email. We use a database program which produces a spreadsheet to set priorities. I am not saying you can’t manage the work that way. Totally agree but see points and figures posts about spreadsheets and market sizing.The way we get this done is to set-up how much time each task will take then set the priorities. Want something done for the next release that is going to take 40 hrs. What do you take out? Also here is the ten percent of stuff that you never would do if it wasn’t written down. Boring shit like cleaning this or that interface up.Great for saying here is what we did here is our backlog, etc, etc.In almost all cases they should not be hand done they should be an output of another system.But what kills me is sitting explaining some variance to an idiot who doesn’t understand anything but a spreadsheet.Use our product, use the competitor’s product if you can. Talk to the market, etc. I cannot tell you how many times I’ve given people the chance to use products and they don’t, but they want to talk numbers.
But do you know how many baskets would be ideal?Well taking into account that each and every situation is completely different and that the sales process isn’t something that is easy or predictable I am curious how you would go about using a spreadsheet to help with this.Let’s say you are a maker of bread that you sell to Supermarkets. You end up getting Whole Foods as a customer and they are now your largest customer taking 60% of your production. You gear your entire operation around catering to them and invest in new equipment without any guarantee that they will remain a customer. So you sort of just know you are up shits creek w/o a paddle (or a small outboard engine) if you don’t increase your business in a way that that 60% loss would sink your company). So get that 60% down to something lower. (Oh yeah you keep them happy as you can that’s obvious..) So all you can do is go out everyday and try to land new accounts. (If you have the capacity that is..) Now should those accounts be a bunch of mom and pops that don’t account for more than 1% of your production or should you go and try to land Shoprite and pickup 25% from them? How does a spreadsheet help you with this? To me this is a core business and most importantly a strategy question. I am curious if you have an example of what you are saying in action.The spreadsheet helps solve the problem based on data. Sometimes it helps me find out exactly what the real problem even is.This seems to be agreeing with what I am saying that the spreadsheet is more a forum that allows you to think and understand the issues and as such may not be the right tool across the board.
But what kills me is sitting explaining some variance to an idiot who doesn’t understand anything but a spreadsheet.Human nature wise I am wondering if this is a focus issue rather than an idiot issue. So the question is how do you get over that tendency in some people to want to focus on numbers on a spreadsheet as a crutch so they don’t have to make eye contact or follow what someone is saying.Made me think of a little trick to get by when cold calling. You walk in with a “prop” something they can read or will look at so they don’t stare at you. Same reason some people use overheads in presentations helps everyone get over cold stares that make some people self conscious when speaking in front of crowds. (Or give handouts let’s say..)
This has been a great discussion and I think it has gotten me to the point of where I can explain myself.Spreadsheets (will use that term generically) can be great tools for measuring and calculating results on things with certainty.They suck for uncertain events. They are great for a we said we are getting this done by this date what happened.They are terrible for saying well the spreadsheet says this is what the market size is, etc.When you meet a bad investor the tell will be they try and understand the spreadsheet forever, not what are you going to do.
So much comes back to packaging, doesn’t it? In your business, literally as well.
I agree this has been a great discussion and I appreciate all the points you and others have made. I am actually going to use some of these insights in the way I work. I do agree it is too easy to get too dependent on spreadsheets—in fact, as a leader I can see how they can also be used as a way to absolve yourself of responsibility—i.e. “well, the data said…” And I agree that if an investor tries to understand ONLY the spreadsheet, that is probably not a good fit for anyone trying to do something really innovative and creative. There still has to be a leap from data to action.
challenges. And that is what Fred’s post was about originally. How do you get through the real challenges that no one else wants to talk about?Now let’s get back to your previous example. Let’s continue with the bread-making scenario. Let’s say that you took on Whole Foods as your biggest customer and—in an effort to make sure you kept them, you invested in the new equipment and people. Well the first thing you should do is obviously look at the profitability of that one account. How much are you spending to service Whole Foods, what are they paying you and what are your margins? Then take the data of any other account you have. Do a comparative analysis of the profitability of the smaller Mom and Pop shops. Then—even if you don’t have a medium sized account yet, you can start to extrapolate what the profitability of, say a ShopRite would be. So you start to chart out exactly how profitable accounts of every size are or would be.Then figure out the cost of acquiring those accounts. How many hours will you need to spend getting one ShopRite vs. 5 Mom and Pops? Is it something you as a founder can do or do you need to hire someone to do it? What is the actual cost of acquisition for accounts of every size?You can then put those assumptions into a spreadsheet to get the relative cost of acquisition vs. the profitability of each. You may find that 5 Mom and Pops take less time to acquire and are more profitable than getting one ShopRite. You could also look at a risk analysis—if you lost Whole Foods, how many other accounts would you need to land to make up for that revenue? What this data together might tell you is to first put your time into getting 5 profitable mom and pop shops and THEN go after ShopRite to minimize the risk of Whole Foods. Or it might become clear that the mom and pop shops take just as much time to service as larger account, they nickel and dime you every step of the way, and they will never be more than 5% of your total revenue combined so your should ONLY go after larger accounts. I don’t know any other way to do those types of analysis without a spreadsheet of some sort.The thing is—it may seem like it will take too much time to do this kind of analysis. But once you have the spreadsheet set up as a framework, you can constantly add new data, tweak the variables, and get smarter and smarter about the information it gives you. Make assumptions, put the assumptions in, then as you get real data the spreadsheets are all set up so you are replacing assumptions with actual numbers based on what is really going on in your business. And you can look at changes over time. And most importantly—if Whole Foods does drop you, you have now created a plan for exactly what you need to do to replace them.
Or you say the only people that are willing to pay a premium and hear my story are those that shop at Whole Foods, the rest think which is 2 pennies cheaper, so how do I build my brand so Whole Foods customers will revolt if it is removed.
Many valid points above however you know Lisa I think we just view this differently. As only one example where you say:How much are you spending to service Whole Foods, what are they paying you and what are your margins?So I think “Whole Foods can be a loss leader or less profitable if that helps me get other accounts that are more profitable”.  So to me that is the danger (and to my point about Marcus Lemonis) about concentrating on numbers and not taking into account intangibles which quite frankly can’t be measured. Now that is not to say that you should take a loss on 60% of your business obviously. I guess the point to me is at least a rough idea and the proper direction (the way the wind is) is better than spreadsheet accuracy for something like this.You know there is a local upscale “Whole Foods clone” market in our area. I went there a few times and the takeout section is always closing down early (I mean like 7:30 sometimes earlier) when it should be open until 8pm or later. Despite how much business they do. They staff cleans up early (because the management isn’t probably aware) you know they want to get a head start on leaving and bowling I guess. Anyway I told the big manager of all of the stores (they have only been open for maybe a year or a bit longer) what was going on. I said “you know you might have to take a loss on this because otherwise you aren’t going to build a clientele that can depend on you.” When I go to get Sushi takeout they are there at 9pm and 9:30 pm even though they are not busy so I tend to go there a great deal as a result. He thanked me and now they stay there until 8pm (I would like later but it’s a step in the right direction). My point is they were for sure just looking at numbers saying “nobody comes in at this time so we will just shut down early”. But sometimes you need to look at things other than numbers just because it’s kind of business common sense.Back in the day when I used to do barter there were restaurants that bartered and lost money. You know why? Because the barter clients made the restaurant look busy and also to a lesser extent of course boosted volume and kept the waiters happy. (Ditto for vacation barter). And in fact there are many people that successfully give away things for free in order to land bigger fish.
Now we are really hitting at the heart of the issue. You have to have the numbers so you are not guessing, but here might be the heart of the issue.Company (here is my worry)Whole Foods might be a really high maintenance customer that pushes us on our margins, and we are really dependent on them, but they give us cache that gets us into the smaller stores. So we are willing to take the hit to build our brand. If we lose them that will really be a setback so I personally will make sure I manage the relationship. That’s a really big deal. We can also push across their multiple regions, for some of the smaller independent stores they are a pain, but they know if they don’t have the Whole Foods things they can’t compete, and Whole Foods wants to sell what I they have, they don’t worry about them they want the whole basket. I can get into Wegman’s and not kill that relationship.Investor (here is my worry)Well just having one line of food that you sell to Whole Foods because people believe it is produced locally by people making sustainable wages which helps the community doesn’t mean squat to me. Now if we can reproduce that horizontally (across different items) and regionally (across different regions), and vertically (across chains) that moves the needle.But let’s not only make up a spreadsheet to model that. Let’s discuss that together. What is that Whole Foods relationship like? Is he just a simple buyer sourcing food, or is she an up and comer in their planned local first campaign??To cross categories do you have to start all over again or can you span??What does that mean for your production, if you make one type of food does that help you with another??Does a Shop Rite view having food that is in a Whole Foods a good or a bad?? How about Safeway or Kroger?? (Frankly having been forced to go in a Shop Rite, I would say no chance in hell,might as well try an Aldi or Walmart which you have a snowballs chance in hell) and knowing the other two, they hate the fact Whole Paycheck gets better margins. So let’s talkHave we asked those tough questions and gotten feedback or did we just say: My spreadsheet says they have five regions, we will introduce three new product lines, and since Whole Foods market share is only five percent we will capture just four times that and our sales will be 60x in the next two years. 5x3x4=60
Your discipline with spreadsheets is totally inspiring.Of course we know that only up to 50% of the investor’s decision can be made based on spreadsheets and whatever other documents are requested in due diligence.The other 50% is pure personal chemistry, gut instinct and the irrationality of the market that isn’t modeled in an Excel cell.Still, getting towards 50% with spreadsheets is a good strategy.
It has been. My point is that excel is great at allowing people to break the rule of significant arithmetic: https://en.wikipedia.org/wi…Now I practice all disciplines (and am great at none)But the scale dramatically changes.At accounting level you need significant digits to the penny. I.e. if you are off and don’t balance that is an issue. You cannot mess up my bank account one penny.Same for a pure scientific measurement of performance.But then it starts getting muddy;At the engineering level when it gets done it is much less precise: What happens when you hit problems and have dependencies on outside systems???Same for Finance.Then you hit sales (been over this a bunch but don’t kid yourself: Fred is selling himself and his brand every single day)Wow the significant digits go down to maybe one. Maybe you and I are competing and your best friend is the decision maker unbeknownst to me.
See my comment below
Food, particularly bread, is a staple and anything that’s a staple with known revenues and existing customer base is scaleable.It’s mostly a question of whether the investors have imagination and can see other people using the service like them.La Ruche Qui Dit Oui would be a useful case study of a “very basic business”:* http://techcrunch.com/2015/…
But what do you think personal chemistry between a founder and an investor is based on?Before I pitched to potential investors, I spoke to someone who reviewed thousands of business plans as a first set of eyes for an investment bank. And this person’s advice was: “What an investor is really looking for is a CEO who has confidence in the numbers.” And…sure. Maybe that’s not true 100% of the time. But so what? There is not a single negative I can think of for a CEO who DOES have confidence in the numbers he or she presents. It doesn’t mean a CEO shouldn’t have great leadership skills. It doesn’t mean the vision or idea doesn’t have to be brilliant. But—-I still stand by this. I think great leaders understand data in ways that others might not. I think they work harder at it. The work might be invisible. The hours getting the spreadsheet model to work so that the data is unique to their business and makes sense for what they are trying to accomplish don’t get seen by a lot of people. A deep understanding of trend data and how those might be extrapolated into the future might be what keeps them up at night. The time spent on “spreadsheets” are often nearly invisible to others.But a deep understanding of the numerical data brings confidence in a way that “oh this idea is the best ever” simply cannot.And confidence brings chemistry.Let’s look at it another way. If you have ever taken care of someone who is dying, you know that at a certain point, the doctors will look at a patient’s numbers and let you know they only have a few days to live. When it comes to dying, they look at the numbers, and the numbers tell them a patient is on the verge of catastrophic systems failure. When my daughter used to have ongoing asthma attacks, we’d watch while they would hook her up to the oxygen monitor and we’d know exactly how long she would stay have to stay in the hospital based on a set of 3 numbers that would come up on the screen. Doctors in those critical life or death situations don’t have time to guess and make wrong moves. The same goes for aerospace engineers. Those guys who put people up into space? They spend all day not just looking at numbers—but solving problems with numbers. That was why The Martian was so popular. Despite its improbability, it was a story about a guy who did all his problem solving with math. And that grounded it in reality and made it believable. If you can take an entrepreneurial idea that may seem so ‘out there’ that no one has ever done it before, and then ground that idea in reality make it believable—you are well on your way to having a great pitch deck.Is running a business—-and trying to get a business to scale up to a big business—harder than being a doctor or a rocket scientist? I think the problems are different, but not more or less hard. If it’s just as easy to build a big business, why do such a high percentage fail?One investor I have worked with told me that most of the times he has seen a company fail it is because “the CEO had a fundamental denial of the numbers.” I am not about to be that CEO.Spreadsheets are a great way to track systems over time. And tracking data over time is one of the best ways to predict potential systems failure. And if you can predict potential failure with enough advance warning, you can prevent it.And that is why I stand by my original answer. If an entrepreneur can see risks but also understands how to objectively plan for, model, and course-correct using analytical data, I think that is a plus.But to be clear—how an entrepreneur acts on that data, how they lead from that data, how they use that data to help execute their vision—that is every bit as important as the data itself.
Preaching to the choir, :*). I was on the other side of the table; the person who got Private Placement Memorandums in my in-box, due diligenced the opportunities, risk managed existing investments (writedowns, re-investments, exits) and dialed-in to board calls every month so that I could write a concise report on 50+ tech investments.That grounding is why, years later, when I watch the earnings calls of major techcos, my attention is on the numbers and how confidently a CEO can sell those numbers to the market.
I’m on vacation and was having a nice chat about this with someone this morning. You are right you have to understand the numbers EXACTLY.So while I was taking the con do I have spreadsheets that I use sure here are a few:Accounting: P&L, Balance Sheet, Cash FlowFinance: Budget, Backlog, Forward looking revenueSales: Number of prospects in which stage of the pipeline, number of callsMarketing: Number of leads, sources, and costsSupport: Number of cases by client, severity, tasks generatedOperations: Graphs of server performance, number of customers on servers.Development: What tickets we are working on how much time we projected they take, where we stand on the releaseI don’t love timesheets but if we are in a business that needs to track time for projects those too.You better know every number better than anybody else. You better know how they inter-relate and what is happening. Also I would really recommend each of those spreadsheets is generated by a true system: Quickbooks, Salesforce, FogBuz, etc. That is table stakesBut it’s not just numbers, that’s all iBankers can see so that is what they focus on.But you better know your product as well as anybody, you better know what your current customers think about you, what is important to prospects, you better understand the market dynamics.Those are not in a spreadsheet.Yes spreadsheets can be used as a hammer when things are certain. I.e. we are going to make this many calls.But all too often I’ve seen people use them as a hammer for things that are not certain. I.e. we projected that we would close X% of P1 prospects into clients.Not that we shouldn’t discuss that. Hell yes.But the hammer of the spreadsheet said we would do that uncertain outcome, you aren’t doing your job, and that becomes the focus of the meeting.Now you get this behavior: Ok, I need to game the spreadsheet. I’m going to start sandbagging the numbers.Then you get management and finance saying here is the number you need to make.Now people don’t take ownership for their work. They just say, this is all bs let me find someplace else.And the board doesn’t focus on the big pictures. That is what I want to talk about.
Thanks David. “I like how effectively a spreadsheet helps me surface their assumptions.” That’s really important. Because, quite frankly, getting the assumptions right before putting a number in a single cell is often the hardest part. In the Whole Foods example we’ve been tag teaming above—what LE and Philip and Charlie and others were really talking about were — how do we make sure the assumptions we are making about the business are smart? That is where business sense and knowledge and leadership and creativity come in. And yes, you should research and go out into the field and talk to customers and collaborate with your team and look at competitors before making a single assumption. The spreadsheet is not going to do that for you.I often create a slide that I present before I present a spreadsheet that actually lists out the assumptions. And if someone asks “But did you consider this…?”—well then, I either say “Yes I did and I discarded it because…” or “No I didn’t, but that might be going back and looking at.” And I get excited when the original spreadsheet is such a good framework that it’s easy to do that.Also—I’ll say it again—if you and the person across from you at the table agree on the concept most worth discussing—then that is chemistry. That is the basis of chemistry. Agreeing on what is most worth talking about.