How to present the market slide on your Overview presentation at demo day?

Most investors and others who attend the demo day dismiss the “our market is very large Gazillion dollars” hype that startups state in their size of market slide. Since the size of market is part of the 3 step process to raise capital from institutional investors, spending enough time on documenting the assumptions you have made are important, as well as having a believable set of numbers to back up your claims.

In their quest to ensure that they are excited about how large it is, most entrepreneurs only do a top-down market analysis and usually mistake total market size with addressable market. For example, if your app helps teenagers communicate with each other using only animal pictures, then technically all teenagers are your target market. Realistically, if you factor in the # of teenagers who have cell phones with good camera, who have reliable Internet connection and then those that like animals it is likely to be much smaller.

If you market is small, it is small. No amount of you trying to make it big is going to make you look credible.

There are 2 types of audiences you are trying to convey to and 3 most important things you need to articulate about your market.

The audience that knows the market and instinctively knows it is big. These are the “insiders” who have been following many other startups in the same market and understand either unmet needs or displacement opportunities.

The second audience (the larger set) that does not know the market at all and needs to see a clear breakdown of total market size, immediate opportunity and complete potential.

The market slides you put together in your overview deck, is aimed more at the 2nd audience than the first one. The insiders only need to know that you have thought through the size of market.

For the uninitiated, you need to keep in mind.

1. You have credibly broken down the “large” market into addressable chunks and have a credible process by which you came up with the market size.

2. Walk your audience through your thinking process on how you came up with the size of your market to gain their appreciation for your understanding of the space.

3. Cite as many good dependable sources in your market slide to show that you have done a good landscape map of your market.

I would highly recommend you do both a top down, as well as a bottoms-up analysis to come to your market size.

Here are 3 market slides from companies I have seen. The first one from Tealet is pretty poor, the one from Mattermark is better, but the one from Square is the best.

Square Market SlideMattermark Market Slide

Tealet Market Slide

If you were presenting in front of a large audience, I would use the Mattermark slide – large size fonts. If you are making a market size slide for the operating plan deck, I’d use the Square format. If you were looking to put a slide on Angel.co for your profile, I’d use the Tealet approach.

Why you need 3 presentations (with increasing depth) to land investment post your seed round

The 3 step process to raising money post your seed has

a) an overview step – usually at a demo day (3-5 min presentation) or via a warm introduction followed by

b) a first meeting (30 – 60 min) where your pitch deck showcases your company and business and finally

c) a follow on second meeting (60-90 min) with partners at the firm where you outline your operating plan

Your overview presentations’ goal is to pique interest in 5-7 slides and generate enough excitement to warrant a follow on meeting

The pitch deck’s purpose in 12-15 slides is to give enough visibility into your business to help potential investors understand it.

The operating plan’s purpose in 15-25 slides is to share the details of how you plan to invest the raised capital to get to the milestones that will make your company succeed.

Over the next few days I will take each slide deck and share some of my experiences with examples.

Let us first take the overview deck. This is typically given at your demo day or when you have 3-5 minutes alone to pitch, instead of 30 minutes (when you will need your pitch deck)

Your should cover 5-7 key areas and here is what I recommend:

1. Your single line positioning, company name, founder’s email and angel.co profile address.

E.g.

1. Get Magic Now – Text this number to get what you want with no hassles

2. Seed.co – Modern business banking without branches

3. Get Meadow – Buy medical marijuana for delivery today.

The positioning is different from your tag line, which focuses more on being memorable and different about how you do something as opposed to what you do.

Here is how I think about positioning: Try to address in one word who your customer is, another word for what you do for them and third word for how you do it differently

2. The problem you solve (and focus on the customer specifically) – be as specific as possible, and show how customers are currently solving that problem.

3. Your solution & how is it different – use screen shots to show your product if you wish

4. Size of your market – total and addressable market size is preferred

5. Traction – be as specific as possible either in terms of users, revenue, or other metric you are tracking. # of meetings with customers or discussions with prospects is not traction.

6. Team – answer why you are uniquely positioned to execute this opportunity

7. Call to action – Dont say we invite you to talk to us. Ask for folks to download, or ask them to tweet for early access, etc.

Over the next few days I will outline each of these slides with examples.

How to use “forcing function” events to buy time on your side as a sales person

Some VC’s are known to ask the question “Why is now the best time for your idea / startup / venture to succeed”?

That question is indicative of the key underlying themes of successful venture funded companies – they have to grow extremely fast in a very short period of time (3-5 years), unlike other businesses which take 7-10 years. That helps drive valuations of early stage startups higher quickly and soon.

The question also forces you to think about why a customer would buy or pay or use your product now, versus stall and not have a large reason to buy.

This is what most of us in sales call a “compelling event“. A compelling event is a forcing function that has a hard date for your customer to buy by.

If your customer does not buy from you by that day, really bad things happen – for example Sarbanes Oxley law required you to report certain items of your company or you would face stiff fines. Or your customer has an upcoming product launch within the next 2 months and they need to get a logo, website and social presences up and running.

There are some natural forcing functions, such as year end, quarter end, new product launches, regulatory deadlines, obsolescence of an existing solution or their current vendor withdrawing support for their current product.

In many cases, customers dont have forcing functions. They may not have them because the problem you are trying to solve is not a visible pain for them. It may be latent, so they dont even know that if they solve this problem they will benefit otherwise.

So, if your customer does not have a compelling event, or forcing function, can one be created?

Here are 3 techniques that I have used to create a forcing function:

1. Create competition by the date: This works best when you are trying to raise money, sell your startup or when you have something to sell that is produced in limited quantities. For example, if you have an event space or a training event and there are limited seats, you can let your customer know that their competitors might get the product which leaves them behind.

When does it backfire? When you truly have no competitors lined up, and claim to have them, and your customer calls your buff, you are left without a deal and an artificial deadline that passed. You leave the opportunity with no deal and also a customer who knows you are now possibly desperate.

2. Show the paucity of resources: This works best when you are selling consulting or services. If a client is taking too long to let you know if they can start a services engagement, some sales people let them know that the resources they want will no longer be available if the customer does not make a decision by a certain date.

When does it backfire? When the customer believes that resources and people are “replaceable” and so they can make do with any resource not just the person they want on the project.

3. Offer time-bound discounts: This is the most used and abused technique by software sales people. Offering a discount by end of the month or quarter (or any other time they are measured) helps the customer understand that if they dont sign up by that period, the offer is no longer valid and the negotiation process and sales process begins again.

When does it backfire? In most cases. Truly. This is what happens, when most sales people try to set discounts by their defined time schedule. The deadline passes, the customer does not buy and the sales person sets a new artificial deadline. Meaning, the discount is now valid for the next quarter, month or week.

Forcing functions or compelling events are rare. So if you have one at your disposal, use them to the fullest. Else, find another way to get time on your side, since the customer has the money.

How to be a more innovative startup by changing just 2 words in your meetings daily

Most every startup wants to be innovative. That’s the essence of being in a startup. To be innovative, most entrepreneurs realize they have to get their culture right. An innovative culture fosters and innovative workplace which builds an innovative company.

So, now the question is how do you build an innovative culture?

To build an innovative culture, I believe you have to encourage experimentation. Lots of it. Most people learn only by experimenting, not by sitting in classrooms and being taught. While it is important to sit and learn the first principles, most everything else needs to be learned by doing. You will have to let people try lots of things and learn what works for your company, your industry, your market and your customers.

The trouble with experimentation is that it breeds failure. Lots of failure. If everyone of your experiments were successful, then you are not taking enough risk, which means the company wont be as innovative. In fact, the leading indicator for innovation in most companies is the number of failures they have. Which means they are taking more, but managed risk. A good metric to measure, is the # of experiments your startup conducts in a unit of time and what the failure rate is.

The best way to do this is to practice the art of disciplined experimentation. Which is why I am a fan of the phrase “My discipline will beat your intellect“.

So, if you do conduct a lot of experiments, you will fail. How do you understand, organize and learn from your failure?

Most companies conduct an audit of their experiments, the hypothesis, the initial learning and the final results. That’s where the the biggest problem is to be found.

Most managers and executives are trained to ask the question –

“Who to blame”?

That’s the question that most meetings post experiments start with? What happened? Why did it happen? Who is to blame?

I propose a small change instead, which will get your people less defensive, more open to taking risks and experimenting.

The right question to ask is –

“What to blame”?

Focusing on the process, steps, methodology and systems brings out the best answers to the question “how do we get better”?

Surprisingly you learn more about people, their strengths, limitations, weaknesses and biases if you focus on the process that was broken instead of assuming that the people messed it up.

For most founding entrepreneur CEO’s this is one approach that works best to foster a culture of innovation and risk taking.

Do you have a manager who has followed this principle? I’d love to understand what you have learned from them. Drop me a note on Twitter. (I do respond to all @ replies BTW).

Hiring your “best” friend as a first employee, at your startup – pros and cons

Many startups have co founders who are best friends. I have heard of many cases when that has worked out well and a few cases when it did not. I would say in more cases than not, it has worked out (anecdotal). Hiring your best friend as the first employee has different connotations for your startup. You want to hire so that the person is individually proficient and collectively efficient.

The word “best” indicates to me that you know each other very well. There are secrets you’d keep from your family and other friends, but not from your friend.

The word “friend” indicates someone you know for a long time. This person is not someone you worked with for 1-2 years, but typically someone you either grew up with, studied with or worked with for an extended period.

Sometimes this can apply to your spouse or significant other as well.

Your best friend comes by and you start to think, why dont I ask her to join my company?

Even if they are not a “perfect” fit for the role you are trying to hire, you think you need a utility infielder anyway, so why not get them on board.

First the pros:

1. She knows you very well, so it is likely you will have a good relationship and be able to talk about anything about the business. Even if you have a co founder, running a startup is a lonely business, so having a sounding board, who wont judge you is a great advantage.

2. She can help you see things you dont see. Most entrepreneurs (not just Steve Jobs) create a reality distortion field around themselves, so having someone who can objectively point out the flaws in your argument, without you getting defensive will help you go a long way in your ability to grow as an entrepreneur.

3. You trust the person instinctively so it is likely you will be able to have them take on any role and be supportive when they make mistakes. This helps a lot when you have to explore new markets, attempt a new technique to sell your product or investigate a new architecture framework to use.

The other advantage is that the journey is a lot more fun when you like and enjoy working with the people you interact with daily.

Now the cons:

1. If you are both alike, (regardless of what people say, I think most people are best friends with people who are *very* similar to themselves), then it is likely you will see things the same way. This makes your company fairly uni-dimensional. Opportunities are best created when there is a good mix of different skills, talents and perspectives. Diversity creates dissonance, which leads to new ways to think about the same problem.

2. They may not be the perfect fit for the job – either because you need a front-end UI person and they are a back end developer, or they are a marketing person and you need a quota carrying sales person or if they dont have connections in the industry you are trying to tackle.

3. They are more likely to take liberties in the company (rare, but happens). This creates an environment where other professionals you hired will feel a sense of resentment towards the employee, since they believe your best friend will snitch on them.

In the last 3 years, I have seen about 120 companies go through our accelerator programs and looking back I notice about 10 cases where a best friend was hired as an employee (as opposed to a similar number of cases where the best friend was a co founder).

I cant think of a single case where it ruined a relationship even though the company did not do too well.

In my own personal opinion, bringing on your best friend to work with you at your startup is one of the best things you can do.

Funding the best company from each accelerator is a better strategy than funding all from the top program

Yesterday, I had the chance to talk to a friend who is an angel investor and an entrepreneur. Over the last 1 year he had a chance to view our work at the Microsoft Accelerator and he was keen to come and talk to me about funding companies from our program.

Over the last 3 years, we have helped over 350 companies at Microsoft Accelerator programs worldwide, which has resulted in 15 acquisitions. Over 85% of the companies got funded after our program, largely from angel investors. Looking at these numbers, he was keen to participate in the upside.

He was considering joining a syndicate which allowed investors to buy a chunk of a startup fund, which invests in all startups coming out of YCombinator. He was asking my advice on why he should consider investing in other accelerator companies at all instead of putting his weight behind YC companies.

Angel list syndicates are the new and efficient way to invest in a lot of startups using a single instrument. Think of them like a Mutual fund for privately held technology companies.

If you buy into the construct that accelerators are the new MBA programs for entrepreneurs, then it makes more sense to invest in the top graduates from every program than all the graduates from a single program.

Here is some evidence as to why based on research and in this piece it is presented by Malcom Galdwell.

The research so far suggests that the best performing students from even the worst colleges perform better than the worst students at the best colleges.

That’s even when you consider that the students at the top college performed better in standardized tests than the top performers in the not-so-good colleges.

The question is then does this hold true for tech startups as well? There is very little data to suggest that it is possible to make a completely data driven argument for the case.

Considering that companies going through accelerators made up < 10% of all Venture funded companies worldwide last year, there will be good data only in a few years.

If you look at the historical data and compare 3 programs – YC, 500 startups and TechStars, the data seems to indicate that it might make sense.

YC has funded 800+, 500 startups over 700 and TechStars over 400. The top 10 companies from each of these programs, has outperformed the remaining 95% of the startups from the other programs.

Again, the data set is limited, but it proves the theory.

The second question is how do you know which are the top startups from each cohort or program before or at demo day?

If you look at traction as a proxy or mentions in the press ( I am going to use TechCrunch and VentureBeat as examples), during the demo day, then traction “seems” to be a better indicator. In fact, if you bet against the press, you’d do very well. So there might be a contrarian investment thesis around not investing in companies that the press anoints as the “best companies from the demo day for each accelerator”.

The final question is does this hold true for all accelerator or just the top 10 accelerators?

That means should you just fund the top 10 companies from the top 10 accelerators or the top 1 company from every accelerator?

That’s also a question that’s not easy to answer directly, but you can make some educated guess via proxies.

If you look at the 1500 companies that have gone through accelerators over the last 2 years (check out SeedDB), you will notice that 21% of them have gone through multiple accelerator programs. So the best from each program (or the worst, not sure) make it to other programs as well to eventually be among the top in the top programs.

So I think the best strategy is to fund the top 1 or 2 companies from each of the top 100 accelerators, instead of all the top program or the top 10 from the top 10 accelerators. 

Founders make good money when a VC funded company exits very rarely

Dragons:

A dragon is a company that returns an entire fund — a “fund maker.” VCs can have dragons in their portfolios just as LPs can have dragons in their portfolios.

Unicorns:

Many entrepreneurs, and the venture investors who back them, seek to build billion-dollar companies.

Decacorns:

Billion-dollar companies join a club of “unicorns,” a term used to explain how rare they are. But there are more than 50 of them now. There’s a new buzzword, “decacorn,” for those over $10 billion

Cartazonos:

The company where founders make significant money as well as investors.

According to Wikipedia: 

Unicorns are not found in Greek mythology, but rather in accounts of natural history, for Greek writers of natural history were convinced of the reality of the unicorn, which they located in India, a distant and fabulous realm for them.

The growing number of startups with unicorn valuations is leading many entrepreneurs to believe that they will be billionaires when their startup realizes the $Billion valuation externally, or when they get an “exit”.

Turns out the only time the founders get an exit that’s worth the effort is when all the stars align.

Here are 3 examples of good, bad and ugly.

1. Good: Cloudera’s funding resulted in founders (4) worth more than $250 Million in paper.

2. Bad: The cautionary tale of RedBus acquisition for employees and everyone but the founders.

3. Ugly: Get Satisfaction gets acquired by Sprinkr for < $50 Million after raising about $20 Million so far and the founders get washed out.

Gives you pause on the “headline” announcement for the huge fund raising that companies do.

If you are a founder and are looking to hit pay dirt, you will do that only when the exit is aligned with investor interests after their liquidation preferences and return restrictions.