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Do You Need A Business Plan?

Maybe not, says Mario Morino, Founder and Chairman of the Morino Institute, but you should definitely have clear, honest answers to the 10 essential questions that businesses need to address. Here are his comments from a Netpreneur Program's Coffee and DoughNets meeting from February 25, 1998.

Statements made at Netpreneur events and recorded here reflect solely the views of the speakers and have not been reviewed or researched for accuracy or truthfulness. These statements in no way reflect the opinions or beliefs of the Morino Institute, Netpreneur.org or any of their affiliates, agents, officers or directors. The transcript is provided "as is" and your use is at your own risk.  

Copyright 1998 Morino Institute. All rights reserved. Edited for length and clarity. 


Good morning. Thanks, everybody, for another great Coffee & DoughNets turnout.

What I want to do today is challenge your thinking about the concept of a business plan—What is it? Why do we do it? Do we need it?

Let me start by paraphrasing a conversation that Mary Anne Waikart, of our Netpreneur Program team, had with a professor at Babson College, one of the premiere schools of entrepreneurship. He suggested to Mary Anne the possibility that about half of the successful start-ups in the United States get going without a business plan. Now, he quickly noted that neither he nor Babson want to be considered indifferent to business plans, but he thinks there is more to a successful start-up than the plan, no matter how elegant or how detailed it is.

Still, he makes us wonder if business plans are as necessary as we are so often told. And, if true, what are the implications of his observation for how we prepare entrepreneurs?

I'll be honest. At our company, Morino Associates, we never had a business plan. Not one you'd recognize from the templates so many people use and recommend. We did have a document which showed that we knew our market and which presented that knowledge clearly. Like a business plan, it was the result of hard work and hard thinking. I'm not going to tell you that you should or shouldn't have a business plan, but I would like to talk about the questions that I think every entrepreneur must be able to answer about his or her business.


What Is The Business Plan For?

Most people see business plans as an external device, as a communication piece to the outside world. You write them for your investors, for your stakeholders, and so you miss the point. They should be your Bible. The business plan is about you, about the staples of your business. If you do it right, the other stuff will fall out of it. We get so caught up in the form and format issues, that we lose sight of what they're about. They're about you and seeing if you understand your own business. Listen, if you can answer the right questions, I guarantee you that the investor will help you write the business plan. You have to be able to answer the right questions about yourself and your business—not in words, but in substance.

Why do investors want a business plan? That's the issue I want to focus on. It's convenient; it saves them time. They're trying to give you a way to communicate with them effectively. That's what it's all about. There's nothing sacred about a business plan in its own right.

See, when investors are asking you questions, they're actually trying to trap you. They're looking for an inconsistency. They're looking for stones you failed to turn over. They're looking for what you haven't thought about. The business plan is a convenient vehicle for showing them.

In a lot of ways, a business plan is like a resume. A resume is a reason not to hire you. Rarely is it a reason to hire. Did you ever think about that? It's used to screen. I don't believe you should ever send somebody a resume. I think you should send them a letter that's very engaging, very inviting, very specific about what you're after. Make them come to you, to give you the chance to explain your skills. A business plan works the same way. It's there to knock you out of the running because there are too many ideas in the investor's inbox.

Take a good look at your business plan and realize how many ways you invite people to knock you out of the running; to knock you right out of the race.

What I'm getting to is how you lead up to engaging the outside parties and how you prepare yourself in that process. I'm going to keep emphasizing, that this is not to say you don't do business plans. Rather, why is somebody interested in the business plan and what are they interested in?

I'll argue that what they're interested in first, is you. The savvy investor, the savvy customer, the savvy partner is always interested in you first, the individual, the spirit, the personality, the drive of the business.

Secondly, they're interested in your business. What is it? And third, they're interested in the plan, because the plan is only the communication of those first two things. So what you want to focus on is always realizing that you're selling yourself and selling the essence of your business. And you want to figure out how to do that most effectively to all stakeholders, be it investors, customers, partners, and guess your most important partners, the people working with you—how you recruit them, how you convey to them.

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The Right Ingredients For Cooking Up Success

Now, I want to give you a personal story. Some people tell me it's an unusual story from a different time. That's true to some degree, but, on the other hand, it's highly typical for Silicon Valley where they have the social infrastructure to support stories like this. It's a story of Morino Associates, later called Legent Corporation, which my partner, Bill Witzel, and I formed in April of 1973. These events took place at the end of 1972.

We had a meeting one Saturday morning in Gaithersburg with the CEO of Comress, which was the most successful software company in the 1960s. Most of you probably don't know it ever existed. Yes, there actually were software companies in the sixties, believe me, and Comress was one of the leaders.

We had a meeting with the CEO and I remember walking in . . . you've got to realize this was a real culture shock for me, because we walked into his office and there was a fireplace and a private bath. I didn't even have that where I was living! And, this guy had it in his office.

We sat down and we had our meeting, which was my first introduction to the CEO. The meeting lasted one hour; we closed the transaction, in principle, by the time we left. Now, when I say closed, we closed with the CEO. We still had to go through all the pro forma of kissing all of the players, but that was just a dance. The deal was sealed that morning because the CEO said, "We're doing this." Well, we had no business plan.

Why did we succeed? What were the ingredients?

We walked in with one piece of paper. That paper had a series of bullets on it in which we talked about the market opportunity. Now, back in those ancient times of 1972, the world of mainframes was going through a material change. The use direct access storage disk space, then called DASD, was exploding. We had the numbers to show this: the compound annual growth of disk space, how it was changing the entire structure of data centers, etc. We had the facts on the table.

We then indicated the particulars of my technical background. I had, by this time, done two technologies in that exact space, and that's a very important ingredient to an investor. We had proven that we could actually deliver a product in a related space. I encourage you to think about the importance of this, because it applies to a lot of selling in life.

Bill Witzel knew the CEO. There was a relationship, so we were being introduced through a valued source. If you've ever worked on Capitol Hill, you know that you don't ever just go to the Hill; you go through a valued connection or they ignore you. Most good deals are done through such a valued connection. Who is your valued connection? Who introduces you? That's what does so much to create the value-add chain of the relationship. When there's an introduction from somebody they trust, there is already more openness and more receptivity for your proposal. It's very important, and I'll argue that all of you can do it. It's a question of taking the time to understand the relationship dynamics.

We stated the business proposition. We laid it out so it wasn't in outrageous numbers; they were sensible and realistic. You should consider this carefully. We gave up our first product to get our start. We put the product on the table. We knew it would fit their product line. We would write it for them, they would own the rights and do two things. First, they would cover our entire expenses for two years, giving us offices, computer time and paying our salaries, but we would not be exclusive to them in those two years—a very important point. Second, when we finished the product, they would pay us time and materials thereafter for things like sales training, etc., and we would get a royalty, a part of the action.

What did that deal give us? It gave us our funding start. It gave us tremendous credibility, having a major vendor buying into us. It gave us the time to write our second product. Do you know when we wrote our second product? At night while we were writing the first one by day. That's one reason there was no exclusivity.

Sound like a hard world? It's the real world. While you're doing one thing during the day, you're probably doing something else at night. That's the way you typically get started. So, we gave away the first product, knowing that there would be others.

This market we're in today is not a six-month market. It may respond in three- and six-month chunks, but it's here for 10 or 15 years. Your first hit may not be the one to focus on. Maybe your first stake is getting to the place you need in order to get stability so that you can get the second and third and the fourth under your belt. I know that's longer range thinking, but don't be afraid to think that way. Figure out what is going to make you most successful in the long run.

Remember that one-page business plan? In it, we showed one number, a very conservative number of 35% compounded annual growth. Most likely it was actually going to be 50%. We didn't show ourselves making $80 million in the third year like so many of the business plans I see. Not many firms do that in life. We showed what the normal model was, because the normal model to the normal investor is pretty good. That's all we had to show.

One other thing I want to stress is that we had a strategic fit. We searched hard when we picked Comress because we knew our product would mean something very important to them if they understood the marketplace.

And what was the last thing we did in the meeting? We very subtly made it clear that he was not the only one we were talking to. Now, candidly, we didn't have anything else yet when we walked into this meeting, but that wasn't the attitude we projected. We projected that we were going to do this, that we were going to lead this industry and that he could be a part of it if he chose to be. The fact that we couldn't afford cab fare home from that meeting was irrelevant. We created in him a sense of urgency and a sense of competition. Don't be ashamed of doing that. So many people walk into these meetings almost begging for help. Show them, "I'm going help you. I've got real value. Do you want to play with me?" Don't be arrogant about it, but take that very constructive, very positive view of your success and create an urgency, a competitive sense. Make them want to be with you.

Anybody who does selling knows this is part of a normal selling cycle. You have to use that same cycle with investors, when recruiting people into your company, when going after partners and customers.

So, we closed the deal. The key ingredients were a trusted introduction, a demonstrated capability in the field and a compelling knowledge of the space.

This last element is something I want to stress. In our market context, on our subject, we could walk with anybody in the world. We had done it two times; most people had not even done it once. If you asked about something, we knew the answer. We knew the competition. We knew where IBM was sitting; we knew where other vendors were sitting. Let me dwell on this for a moment. One of the things people do in their business plans is talk about how they're "world class." I'm going to get into this later, but make sure you can back it up. Otherwise, it's a great way for most investors to blow right through you. You have to demonstrate it. If you're not "world class," don't be afraid to say it. Explain why you will become "world class." Don't blow smoke at people, and don't fool yourself about the facts. The smart partner, customer or investor will see through it. They want to see honesty because it helps the relationship.

Going back to that deal, I want to emphasize, that there were no protracted discussions and no business plan. We went in, we presented, we had a sheet of paper—one sheet of paper. We closed in principle with the CEO, and then we spent several weeks closing everybody else. After the CEO, everything else was pro forma stuff and due diligence. But that deal conceptually was closed at that first Saturday meeting.

Does the same thing happen today? Absolutely. Was that an exception? Yes, in your environment. Is that an exception in the Valley? Absolutely not. It's how angel investing works. Trusted relationships, proven track records. I've done it before, going to sources I know. It's what's starting to happen here in Greater Washington. The infrastructure is coming together and, pop, you get a deal. Sure, we're just in the embryonic stage, but just imagine, as we keep going through iterations, how that social infrastructure will continue to build. It's frustrating for a lot of you now, but it's what the Netpreneur Program is working toward. What we're all working toward.

These ingredients are attainable and you want to establish them for yourself, as best you can, as you go out for funding, for partners, for customers and for recruiting. It's the same issue for all four of those target audiences. Yes, it's easy for me to say that you've got to get these ingredients, but you must get them because it's part of your process. You can't take what we did as an exception because, if you do, you're ignoring your opportunity. This is what entrepreneurs do. It's not just germane to Morino Associates in 1972; it's germane to companies everywhere in the Net industries. And it's clearly a factor in how angel networks operate. Those are the ingredients that make angel funding click and come together.


Key Questions For Knowing Your Business

Now, let's get into the idea of business plans. The February 1998 issue of Inc. Magazine had a column by Norm Brodsky entitled "Due Diligence" (http://www.inc.com/incmagazine/archives/02980251.html). He wrote that we make complex business plans, drawn up for investors, that can yield unrealistic numbers or mistakes. Instead, he suggests, we should actually write simple business plans for ourselves.

I want to argue that's the whole point of this. Don't worry about the outside business plan; make sure you understand the key questions about your own business first. Everything else will flow naturally. If you can answer the following ten questions in ten pieces of paper—simply, like a slide show—you will get the attention of most investors, most customers, most partners and most good recruits.

  1. What is the market opportunity in the market niche?
  2. What is your solution to the market need?
  3. How big or small is the market opportunity? How is it moving?
  4. What is your economic model? How and when are you going to make a profit?
  5. How are you going to reach your market and sell to your buyer?
  6. What's the competition? How will it change? Why are you better?
  7. What's your differentiation and how will you maintain it?
  8. How will you execute? How will you grow and manage your business?
  9. What are the risks? In other words, what might stop you?
  10. Why are you going to succeed? Why you?

The answers to these ten questions are essential to understanding your business and to understanding yourself—why you're doing it. I think the ultimate question you have to ask honestly is, "Why are you doing it?" Remember, the business is important, but it's part of a bigger thing called your life. Don't lose sight of this. Understand yourself, because the more you understand yourself, why you're doing it, and what you're trying to get out of it, the easier it's going to be to deal with investors, partners and your own business growth. I'm not hanging out a shrink's shingle, here, but really, it is important to understand yourself and your motivation.

Some of you may have seen the article in the Washington Post Monday on the ongoing attempt by Computer Associates (CA) to acquire Computer Sciences Corporation (CSC). The reporter, Mark Leibovitch, interviewed me because of Legent's long competition with CA and its eventual acquisition by CA. He made a comment, and it was a fair one, that the $1.8 billion which CA paid for Legent (not all to me, by the way) must have soothed the wound.

I said, "Like hell it did."

You have no idea what I had to do emotionally to deal with that transaction, because I was never in it for the money. I know you hear people say that.—I have an old friend here in the audience, Jim Walker—Jim knows. We worked nights. We worked weekends. We worked because we loved it. We worked because we were tearing up the marketplace. That was fun. It wasn't so much for the money. We wanted to dominate. We wanted to be excellent. We wanted to succeed. We wanted pure recognition. There were a lot of values we were after. Sure, we wanted to make a living, certainly we did.

Anyway, that's why we did things. You have to understand why you're doing them. What's driving you? What turns you on about your business? What's the greatest thing you did today? Why do you wake up in the morning and can't wait to get started? What do you get excited about?

Understand yourself. The process of answering these questions may help you do that.

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1. What is the market opportunity in the market niche?

This is not about technology, folks, it is about market issues. Forget technology when you present this. In our case in '72, our position was that there was a fundamental business problem for corporations in managing their technology resources. The problem was going to focus around significant increases in the amount of money they would be spending on disk storage space and how they would control it. There was a distinct market opportunity to manage that problem for the customer.

If you could go back and analyze Amazon.com, I will bet they never talked about taking on Barnes & Noble. I'll bet they talked about a specific market niche different from that of Barnes & Noble.

We're talking to an individual today who is starting a company that, on the surface, appears to be competing with E-Trade. It's not. He specifically sees a market opportunity around a premise that mutual funds investors, as they learn more about mutual funds through the openness of the Internet, will realize how much they're paying in fees and the loopholes of those funds. The ease of online trading will lead them to do more online trading themselves. He wants to go after the lower-end niche market of the consumer stock buyer. E-Trade is a cut above that. This person has clearly marked out a market opportunity and niche. It's a very compelling story. You can see how he has dissected the niche opportunity they're going after, how it's going to grow and change. Why it's going to grow and change. He has stated his market opportunity in a paragraph, and you have to do the same. In that paragraph you have to state the market opportunity precisely.


2. What is your solution to the market need?

You have to have a solution description. In ours, we showed that we had the technology tools that businesses could use to monitor, track and manage their disk storage space. That was our solution. And that's all we had to say.

Remember, you want to state the market opportunity in a paragraph or less; now state what you're going to do to address that problem in a paragraph or less. Satisfy the need of that market niche, but don't describe it in technology terms. Don't talk about Java. Don't talk about the Web-site. No one cares. That's not relevant to a solution; it's relevant to an implementation. Your solution description should be in business and market terminology that anybody can pick up on if they understand the market opportunity.


3. How Big Or Small Is The Market Opportunity? How Is It Moving?

Describe the size of the opportunity, because people like to invest in growing sectors. One reason we were successful is that we could demonstrate that the area of systems management for mainframe computers was a generic market that was growing rapidly. Moreover, we could specifically demonstrate that the area around the peripheral storage devices was growing faster than any other component. We could show significant market growth—not our company growth, but our market growth—for at least a five-year window. We had the right statistics to back this up. We didn't have to do the research, we just had to point to the analysts. You want to be able to describe, as best you can, what the market opportunity is today and then how it will change in your view. And you don't have to be precisely right! You're giving an opinion. That's all this is about, you're giving an opinion. Of course, they're going to judge you on how astute that opinion is, because you're telling them something with that opinion. You're telling how well you know your business. And that's very important at that stage.

One thing I will caution you on, when you're looking at that opportunity, avoid gross generalizations. Don't say something like, "It's a $9 billion market and we're going to get 1%, so we're going to be rich." When somebody tells me they're going to get a percentage of the marketplace, I often throw their business plan away. I don't look any further, because they have just told me that they have not thought at all about their sales and marketing channel. That's all they have told me. I'll get into this more in a bit, but you've got to think through the logistics of how you're going to sell and explain the mechanics. Then, I can understand where you're going to get so much revenue.

One company that does a great job of describing the bigness or smallness of market opportunities is MicroStrategies. Michael Saylor has created, no, not so much created as he has branded, the entire area of data mining very well, he and IBM both. Today, Saylor can talk about his product, his product base around data mining, while investors can go to countless publications to show how the data mining area is being formed, how it's growing, how it's developing. Then, boom, they just come back and get into his wake so he can show how their products fit. MicroStrategies has had very little trouble defining its market opportunity. This was true even a couple of years ago, not just today when everybody wants to take them to Wall Street.

When you're answering this question, use comparisons. Let's say, for argument's sake, there's not one clear opportunity for your market. Don't guess, then. Try to find markets that are comparable or similar and make the translation. Say, "Look, we don't know if it holds exactly, but here's what happened in this other sector. We believe that it is transferable to our space." You've got to give people—whether it's an investor, a buyer or a partner—a context, a frame of reference. That's similarity selling. Even though you may not have a defined market niche in your space, you want to be able to take the model that has been used someplace else so that you can pass what's called the "reasonableness test."

An investor is constantly going to apply this reasonableness test to everything you say. They're not looking for you to be 100% accurate; they want to understand whether or not your premise is reasonable. That's where you often shoot business plans down, when you find a premise that just has no rhyme or reason to it. A lot of times people simply don't think enough and, instead, they make these big claims. What they're really saying is, "I don't know my business." Develop a list of comparable firms—I've said this before—and use it, even if you're small or a star-tup.

The amount of research that exists in the industry is significant, if you know how to find it. Security analysts—this is all published information—are up on the industry trends, on company trends. And the industry analysts publish very actively as well, although it's typically at a high fee. The security analyst is always free. You can go to an investment banker and get the information; it's easily available. Use this research data to show how you fit certain sectors, how certain mappings occur. Use the industry's information to support your own case, but don't go in naked. Don't go with your numbers by themselves because, then, you're all of a sudden suspect. Use things that help you pass the reasonableness test.

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4. What Is Your Economic Model? How And When Will You Make A Profit?

There was an outstanding issue recently of Bill Gurley's electronic newsletter, Above The Crowd. Gurley is with Hummer-Winblad. In this recent piece, "The E Commerce Hypocrisy," http://www.news.com/Perspectives/Column/0,176,137,00.html?
st.ne.per.idx.colp
it's a great article—he analyzes a certain context for online commerce, what he calls "vortex businesses," and explains how they will and won't succeed. He takes apart the expectations which a lot of people have who base their business on getting a piece of transaction fees.

Frankly, I've thought for some time that transaction fee riders have a shaky proposition. Everybody wants a piece of the transaction fee, thinking that sooner or later somebody has got to make a profit, right? Well, if the hardware guy gets a piece and the phone company gets a piece and the middle enabler gets a piece, then what's left for me? There's a flaw in the logic, folks. There's a big flaw in the logic. There are cases where it works, but you've got to be very precise on the idea of transaction fee billing.

Here's an example of an investment we shot down. This firm came out of the box from a group of people who left a very hot company. Their premise was for a new database management architecture which would be founded on transaction-based billing. I took one look at it, turned to one senior guy, and said, "They don't have a chance." They never got off the ground because a company simply cannot afford a transaction-based billing data base mechanism. I can't say that strongly enough. The minute there's any volume on that basis, they've got to take you out. You build a natural incentive for them to take you out of the equation because the transaction-based charge puts more money in their pocket. You're taking huge amounts of money if the volume really takes off, so they've got to take you out. That's the only way they can make a profit. And when they take you out, they don't buy you, by the way. They take you out the hard way.

What's important here is to understand how you are going to price. There are some key questions, like: Is your price point consistent with market expectations? Is it consistent in the buyer's mind? There are always ranges for pricing in the marketplace. The market adjusts, rightly or wrongly, to these ranges. For example, in word processing, if you price a product at $400, forget it. You're out of the game because Microsoft has so nicely set that range low. End of ballgame. You've got to be sure that your price point is within the market expectation range because, if it's not, you've got a pricing problem and therefore, an economic problem with your model.

Does the methodology fit the marketplace? Is it within expected standards? For example, let's say you offer what we call "seat pricing" where you price by the number of users. Or, I'll give you a case that we did which proved to be a fortuitous decision on our part and became a big cash generator. Historically, most software was sold as an up-front, perpetual license, then you would receive 10% in maintenance. That went up to 15% maintenance. This was in the earlier years. We chose to move to an annual licensing charge. It was very innovative. What no one knew was that there was a little company—now a very big company in Cary, North Carolina, called SAS Institute—that was already doing this, and doing it very successfully. We knew they were doing it, because we needed customers to install SAS's product for ours to work. Now, when we sold, we would be going right in on their coat tails. The new model worked for us because it had already been cleared through the customer's procurement department by SAS. We were now doing missionary selling on a new approach. Once we told investors that, or partners, they understood right away and said, "Wow, do you have a cash machine!"

But you've got to make sure that your pricing mechanism is one that the market is ready for. Often you'll hear someone say, "Well, I'm going to price this way." No matter what you want to say, if that market has already adjusted to seat pricing or it's already adjusted to enterprise-wide pricing or subscription-based pricing, then make sure your pricing fits the model. Otherwise, you'd better have very compelling reasons why your model can succeed in the face of these odds

Make sure you factor in price erosion. It's amazing to watch somebody say, "Here's my price and I'm going to increase it over the years." You're not going to increase your price. You're going to bring down your price. Think about it. You're going into a market, you're showing competition coming in year two, and you don't think your prices are going to come down? That's telling the investor you're pretty naive. How do you factor in both price inflation and price erosion due to competitive pressures? Where do you bring that into the play? Be able to state that. If you believe that you won't have competition, then build your case well and explain why there will be no price erosion, but erosion is something that's a fact of life and you should address it in your pricing statement.

Now, here's a very important point about flexibility and leverage. I'll use an example of an investment we have which is not paid off yet, but still looks pretty good. Cogito is a company selling content to higher education. Why did we invest in the company? The woman who leads the firm is dynamite; she's just absolutely electric. She had eight years experience as president of a publishing house that sold to higher education, so she really understood her space. Their model was to create VHS study tapes to augment text and exercise books. You might have a text on molecular chemistry and here's their tape to go with it. Now, the interesting part of their model—it's a low tech pricing model in which they justified their R&D base on the sale of the videotape to a defined market—they own the content rights to everything on that videotape so they can repurpose it into CDs in much longer based programs that could sell at an entirely different price point and to a much broader audience. What they have is a price strategy that is very sane because it isn't high tech at all. It goes back to a clearly proven pricing model that funds their R&D base and their distribution base. Then, there is this wild card on top that becomes a plum. They're just breaking even, now, but they are building significant content products which, as the Net expands, positions them for an entirely different margin.. So, a very interesting pricing model helped convince us to go with them.

By the way, each of these items I'm describing is a bullet point in that plan we talked about. "I price so much per seat." "My model is such and such. " "We're not expecting price erosion until the third year, but by that time we're guessing a 20% increase due to added functionality so we're covered." Bullet, bullet, bullets. Forget the text.


5. How Are You Going To Reach Your Market And Sell To Your Buyer?

It's amazing how many people don't get into this subject. Often, the more technical you are, the more you tend to avoid it. We had one person come in, he gave us a tremendous description of a product, but he never once discussed the market, the channels or how it was going to sell. You knew right away that this was the last discussion because there was too much to overcome.

You've got to think through how you're going to sell. It's not Einstein-level, but are you going to use direct sales? telesales? telemarketing? Are you going to do express marketing? Are you going to do Web-based sales? Maybe alternate channel selling? If so, what are your transaction assumptions?

You can make simple guesses and say, "Look, if I'm doing direct sales, I'm going to have this kind of quota to move this kind of product." That's going to dictate what kind of revenue you bring in. "I'm going to move through these channels, and the sales rate that other people are experiencing in these channels for similar types of efforts is X." Now you've given the investor a frame of reference. You've got to state how you're going to reach the market, who the buyer is, what the market sector is, what channels you are going to use and what the margins are for each channel.

Now, that may sound really sophisticated, but it's not. A good salesperson can give you reliable parameters on this quite easily. It's a thought process and there are a lot of good salespeople in this region who can help you. I'm not saying it's a one-night discussion, but it's probably a relatively small fee to get them in, to spend some days with you to help. Maybe it's a couple of weekends. It's a cup of coffee or a case of beer, depending on your disposition, and you have a strategy. Spend the time and you'll learn enough, even if you're foreign to sales. You'll have something that you can show an investor or partner or consumer about how you're going to get the market. It also helps you in your thinking because it's market-centered.

Clearly, the game today is not about technology; it's about distribution. You can have the greatest technology in the world, but without the channel you're dead. You can have the worst technology in the world and, with the right channel, you can still sell it. That's a hard lesson to learn, one I had to learn myself. It's a painful lesson because your pride tells you it just defies all logic, if you're originally a technical person like myself, anyway. It shouldn't be that way, but reality sets in and, guess what, you've got the channel, you own the client, you sell the product. End of game. Pretty cold and brutal.


6. What's The Competition? How Will It Change? Why Are You Better?

This is one of the real traps in dealing with an investor. You've got to know your space, cold. Don't ever get yourself caught where an investor informs you about a competitor. That meeting is over. The conversation may continue, but I guarantee, that meeting is over right then and there.

People tend to have a myopic view of competition. They say, "Well, I'm competing against X, Y and Z." You've got to make a guess about who you will be competing against, because the more you make the market, the more you get other people—some of them with real big guns—to come into that market. Who are the logical players that will step in? What happens if this little guy you're competing against is acquired by a firm with a big channel? If you're caught surprised, boom, you're dead. It's quick. It's surgical. You're dead.

I'll give you an example. We bought technologies that were selling $1 million, $1.5 million a year. In the first year of moving through our channels, they would be pushing $20 or $30 million. No change in product, no change in staffing, but we had a solid channel to the market and boom, boom, out the door. That's the power of a channel.

Understand your competition. It's an area in which to be absolutely precise, absolutely detailed and absolutely objective. It's so easy to allow your emotions to obscure how you look at competition. OK, so you want to sack their villages, to slide into them with sharpened cleats, but afterwards, step back and say, "Now, how good are they really? What are my customers saying? What's the market saying about them?" Do everything you can to debrief your sources of intelligence. Know what they're doing. Know their plans. Know where they're going. Get inside their heads.

I'll go back to that Washington Post story and our competition with Computer Associates. I will pride myself on one point with Computer Associates—I think I had a healthy understanding of Charles Wang. He is an absolute street fighter and he never quits. When he's challenged, he will come at you with every ounce of energy. There were many people who underestimated his absolute persistence and enormous strength. If you're in his sights and you stumble once, you're gone. So we fought the same way, with a street mentality and guerilla warfare. You've got to get inside the heads of your competitors, know what's driving them, how to beat them.

We were once up against a particular competitor whom we knew was about to launch a series of seminars across the country. As they launched in an area, we would blanket the same area right behind them with telemarketing, follow them out the door exactly and blunt their entire sales effort. They didn't know we were doing this for about five or six months. We were literally shutting them down on their own seminars, leveraging their activity right back to our backyard.

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7. What's Your Differentiation And How Will You Maintain It?

Know what makes you different. Is it branding? Is it channel? People? Proprietary technology? Is it your knowledge or your management? Be very specific about your differentiation points, and don't have 12 of them. Two or three very good ones will do. That's what investors are looking for.

Today, in many cases, differentiation comes down to people. That can lead to very awkward conversations because you're trying to justify your staff. What you want to avoid is this "we've got the best staff in the world, we are a world class staff" mantra. Look, everybody can't have the best staff in the world, right?

Don't make those outlandish claims. When you make a claim about your staff, support it. Come back to the investor with very specific attributes and accomplishments. So many people say, "Wow, we've got the best technology office in the world." And an investor will say, "How many products have they written." Well, none. Let's just say there's a slight disconnect. Someone may know a lot of technology, but if he hasn't gotten wet yet, has never delivered a product, well, he's not yet "world class." Writing a software product is very different from writing software. Remarkably different. Or, if you're going to produce content, have you ever been a publisher before? Have you done daily journalism? Well, what's their background? "They're good writers." Then, tell me more about what "good writer" means.

Just substantiate the skills and qualities of your people so the investor, the buyer understands your true strengths and avoid the grandiose claims. One key point of differentiation is knowing where you're really different. Be very honest about it.

Some of you know that in '79 and '80 Boeing's information systems was a massive complex. They used to own the outsourcing, time-sharing business in the country. Once, we were part of a strategy meeting there and we were doing an exercise. A good friend of mine was a senior vice president and we were going through strengths and weaknesses. They asked, "What's the most compelling differentiation you have?" He said, "Boeing." This was a big thing because Boeing's pride ran deep and they had earned it. The trouble was, the market was changing on them. At the time, the market was saying the Boeing name was no longer carrying the same value in the outsourcing world. So, when I piped up and said, "It's no longer a differentiation," boy did that room go dead still. Boeing was no longer the name it had been in the buyer's mind, like it had been for the years previous. They lost their brand differentiation, but they weren't ready to deal with it.


8. How Will You Execute? How will you grow and manage your business?

I'll come back to the issue of how you're projecting the business. The person who projects off-the-charts growth is probably not really thinking through execution. I've looked at too many business plans, probably half of them based on Internet models. So many of them say something like, "I'm losing money in my first year, I'm losing money in my second year, I'm going to make $20 million in the third year, and I'm hitting $150 million in the fourth year."

They're not going to do it. There are only a few who do. Count the number of firms which have done this and compare it to the grid of firms out there. You don't have to be Yahoo!. Yahoo! was an aberration—perfect timing. Everything went in their favor. Give them credit for what they pulled off, and for their adaptiveness, but the current was also running in their favor.

Investors die for 50% compounded growth. They love 35% with good, conservative, substantial numbers. You don't have to show 100%, 200%, asymptotic growth, because then you're usually saying, "I don't know my business." Be realistic about what you can execute and think it through. What you say should pass the reasonableness test on how it works.

How many times does an investor see tremendous talent, but is left wondering how the entrepreneur is going to manage it? What happens in that equation? Let's say you are that dynamic talent, but you're not the executing person. That's okay, if you leave open the option for your partners and investors that you're willing to bring in a partner to help on that part of the equation.

Are you coachable? That's the key word, coachable. I'm involved with one firm where the young man who runs the business is very definitive. He will make up his own mind, but he is imminently coachable. He will listen to opinion, he'll listen to his staff, he'll listen to his market, he'll listen to his board. He'll digest it all and make a decision. He's coachable. There are several of us who work with him a lot. If we say something, we know he's listening. He won't necessarily agree with it, but he's listening and he's coachable.

You have three options. You can show that you have the wherewithal to execute on your business; you can show that you have the disposition to bring somebody in to help manage that business for you; or else you have to show the willingness to grow. Show that you are coachable, that you can learn and adjust. The investor loves that. It's what he's after and probably just what you need.


9. What Are The Risks? What Might Stop You?

Be open about the risks, but with a positive sense of arrogance here. Honestly, what keeps you up at night? What are you most afraid of? Are you afraid of AOL stepping into your space? Are you afraid of your own inability to execute?

When that question was always asked of us, there was one answer: our ability to execute. Do you know what? That's a very positive statement, because it's saying all the market factors are in our favor and we recognize that it's up to us to deliver. But we pointed out that risk. In a lot of the cases I see, a big gun like AOL could take them out in a blink, if they choose to move into the space.

So what are the things that keep you up at night? It arms your investor or your partner to know what you'll be dealing with. It doesn't mean they're going to do or not do the deal; it means they've got to be conscious of the risks to be managed, just as you must be. We can avoid or counter those risks in how we grow and develop the company.


10. Why Are You Going To Succeed?

Why you? What is it about your plan, about you, that's going to make this successful? It could be just the way you carry yourself. It could be the enthusiasm you bring. It could be how well you know the space, but tell them. Don't be afraid. "These are the two or three reasons why we're going to do this. We're going to succeed because of this." Do it very constructively, without arrogance.

It's that Bill Gates cockiness. In one article he was asked, "Why are you going to beat IBM?" He said, "Because we're simply smarter." Sure, it came across as an arrogant comment, but it wasn't. He was being honest. He was dead on the money, absolutely accurate when he made the comment. They were smarter and they worked harder and they proved it. Say things like that when it conveys your confidence in your knowledge of yourself and your business.


Getting The Answers

So, will you need a business plan? Yes, most likely you will. But the answers to these ten questions are for yourself. If you answer them thoroughly and honestly, your business plan will fall into place. Once you actually get to the business plan, remember that there are resources out there for you. David Gladstone's book, Venture Capital Handbook, is great; so is William Sahlman's article in the July-August, 1997, issue of Harvard Business Review entitled "How To Write a Great Business Plan". You have centers in the region—the Dingman Center at the University of Maryland has a business planning service that leads the parade, Elaine Romanelli's group at Georgetown is doing a great job, George Mason University offers service. The StoryBoard effort from Jeff Bergman and Interboard has helped many people, Tony Carter and IBG's new Internet incubator. All these and more are there to help you.

What's important is that you go through the thought process first. Know why you are doing this for yourself and what you expect out of your business. Imagine it's 20 years from now. What do you visualize about your life? What will the line on you say?. That's a tough thing to answer, but it's very effective to do the exercise. I do it annually. I don't always like the answers, but I do it anyway. Be very introspective about it.

Find an alter ego, a mentor, an advisor, somebody who will help you think through these questions. You want somebody who can play devil's advocate. It doesn't have to be vast, time-consuming work for this person, but get somebody you can trust. Somebody inside the firm possibly, or most likely somebody outside, who will simply help you to answer those ten questions objectively. He or she is your governor, your check and your balance.

I know, I've said this before, but secure a customer at all costs. I don't care if they buy only the sheet of paper, but get a customer. Get somebody early in the game to work with you. That customer is such an important reference to everything you do thereafter. We tell this to people over and over again and they shake their heads and go back inside to do development. The customer buying process is a litmus test. You want them involved from day one. You may give them a different set of terms; you may not even charge them anything. What they're putting in the game is their talent and their research for the sake of your product or service. Get customers as early as you can, and get customers at every step of the way—for product idea, business conception, business design, alpha test, beta test. New customers, every time. They become your proving ground because, if you can't get them, you can't get anybody. When you have them, it's so much easier to get everybody else. The investor loves a customer. They are an outside validation point to what you're saying. And I'm saying it, you can get a client on one piece of paper. We always sold in advance. We always landed somebody early in the cycle to partner with us. Then, all the way through the cycle, we could turn and call Boeing, USAir, or State Farm, and bingo. Did they get a final answer? No. Did they get really nice warm and fuzzy answers? Boy, you bet. The fact that they were at the table said something about us to partners, recruits and new customers.


Presenting Yourself

If you can put the answers to those ten questions all in a one-page summary plus ten slides, you've got one heck of a story. When you answer those ten questions, you should answer them for yourself, but also for your family, your team, your investors, your customers and your partners. Those are your stakeholders.

Then find your trusted emissary, your ambassador, the individual who can introduce you and broker you into places. There are people who do this for a fee. Most are good at it and worth the money. And there are people who will simply help you. You need somebody who knows a lot about your business, who can open up doors and get you in for that introduction, or who can get you to somebody who can get you the introduction.

Try never to be in the position where you are going into a situation cold, because then you're always at a disadvantage. Always be introduced into a situation. Work like mad to get the introduction to your audience and get as much qualification as you can in advance. Come in when there's a warm receptivity or a positive inclination before you ever walk in the door. Have a customer and be very confident. Always create the sense of urgency. Always create the sense that you're going to accomplish this, and that, if they're not there with you, it's going to be in someone else's bag. They're going to have to deal with it sooner or later, so why not with you?


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