VI

I’m toying with the idea of putting on two “Sales Survival” seminars.  Part 1 Sales and Part 2 Sales Management.

The objective would be to give some basic structure to the selling processing (sales script, process, objectives, closing)  and managing those that sell (sales cycle, pipeline management, forecasting).  It will also need to be generic in nature, so will never be a fit for your actual business.

I’d like to hear if this is needed and there is enough interest in putting this on?  And what specific concepts need to be covered?

This has come up on three different occasions in the past two weeks, so a brief overview ….

You can raise money for your business from getting an investment (equity) or taking a loan (debt).  Each is fairly clear.

With an investment, you sell equity in your business and the investor gets his/her return when the shares are sold.  Of course there is always the risk that may never happen.

With a loan you borrow money and are expected to pay it back over a specified period (term) at a specified interest (rate).  In theory its less “risky” than equity so earns less return to the investor.

A convertible loan is a hybrid instrument, that always starts out as a loan, but may be converted – at the lenders discretion – to equity.

Let’s suppose you needed $100,000 and that was best suited to a loan.  You could look at a “straight” loan (as opposed to a convertible loan) which would come with a repayment schedule (term) and interest (rate) attached.  Let’s say, for illustrative purposes, that the terms of the straight loan were 8% APR over a five year period.

A convertible loan would give the lender the ability to “convert” any of the unpaid principal into shares in the business at an agreed share price.

Why would the borrower or lender want to do that?

First, the lender.  Perhaps he/she would like “a piece of the action” – equity – but for a number of reasons isn’t willing to jump in with a straight investment.  Those reasons could include their intolerance to risk.  By using a convertible loan, they get their cake and eat it too.  The risk is reduced (in theory) and they can jump in with equity if they decide.  That’s a good option to have.

From the borrow’s side. He/she is giving up something here, by giving the lender the right to convert.  That’s worth something.  In general the value prepresented by the right to convert on the lenders side, is matched by better loan terms for the borrower – usually reduced interest rate or more favorable general terms.  In this case, the convertible loan may look like; $100,000 borrowed at 6% over a seven year period, with the unpaid principal converting to shares at $5/share.

Et voila.

/d

1381 The tower of London is stormed by rebels who enter without resistance.
1648 The first witch is hanged in Boston.
1775 The birth of the US Army.
1777 The Stars and Stripes is adopted as the US flag.
1789 The mutiny on the Bounty survivors arrive on Timor.
1807 Napoleon defeats the Russian army.
1822 Charles Babbage propose his “difference engine” to the Royal Astronomical Society.
1846 California is proclaimed a republic.
1919 The first non-stop transatlantic flight.
1937 The House of Congress passes the Marihuana Tax Act.
1940 Paris falls to Germany.
1967 Mariner V is launched towards Venus.
1982 The end of the Falklands War.
2010 StartVI starts.

Three questions came up after the last bootcamp session. The third is associated with general selling (this applies to both selling your product and selling an investment in your company – which can be considered as a product).

As a product manager, it was my job to provide sales training each quarter to the new sales reps.  I found that 25% of the time was spent training the reps on the product – but only it’s features, functions and benefits. The other 75% was spent on competition, competitive differentiation and customer objections.

Over time, I’d been called by sales reps with every customer objection imaginable.  (In sales management I’d never accept that a there even *existed* a reason for “not buying”, I’d always turn it around to ”we haven’t yet been able to establish the product’s value proposition”.

(Tip. Use that concept liberally when you are dealing with sales!!!!)

If I was pitching an investor for an investment in my business, I’d start by really understanding *all* of the value propositions that can constitute a “win” for an investor.

Obviously investment size, coupled with your (negotiated) valuation will serve as a basis for establishing the investors return. But I’d also look for all other “value” that can help create a “win”. Being the first, or the biggest, or the one with the most prestigous board, or even the company with the wildest launch parties may represent “value” to the investor, give them a “win” and help sell the deal.

Then I’d have someone try to sell me the investment.  I’d list every objection I could come up with, as to why I wasn’t going to invest. (You be surprised at how, with your inside knowledge, you’ll be able to come up with a very comprehensive list.)

I’d then reverse seats again, listen to the objections, and develop rebuttals to them.  You’ll never get all of them, trust me some really strange objections come out of the woodwork during sales negotiations, but you get a great start.

It also helps when you’ve been in the barrel a few times. Nothing develops sales experience like sales experience!!

Three questions came up after the last bootcamp session. The second is:

“I’ve been talking to potential investors, but keep getting surprised when I think we have a deal. What am I doing wrong?”

Whilst this (and the following post) are way beyond the scope of the bootcamp, it’s worth touching on a couple of points that may be helpful.

“Negotiating” is really just another way of saying “selling”. Selling (as opposed to taking orders) involves some exchange of value between a seller and a buyer, and an explicit or implicit win-win. If the seller can convince the buyer that the value the buyer is receiving is greater than or equal to the value they are giving, then it’s a win for the buyer. If it’s also a win for the seller, it’s a deal!!!

In an investment negotiation the entrepreneur is “selling” the risk-considered value of the return to the investor, and the negotiation is usually around differences in opinion of valuation and risk.  The entrepreneur is likely to have a higher view of the valuation and a lower view of the risks than the investor.

Now, when the investor is a VC, a win can mostly be created when (s)he has a favorable return on their investment, and the points of negotiation are usually valuation and equity position.

But, “win” can encompass more than “return”.

In any buying/negotiating situation, people “buy” for all sorts of reasons; ego, prestige, power, etc. And closing a sale is – to a greater or lesser extent – about understanding what constitutes a “win” for the buyer, that also enables a “win” for the seller.

In an investment negotiation, a “win” can be more that financial return for a VC.  In a down round or a down economy, a “win” maybe an egregious valuation – just because they can!!

Similarly, a “win” for an angel investor can be all sorts of things – power, publicity, position.

And sometimes a “win” for an entrepreneur that’s running out of cash is simply being able to stay afloat.

Three questions came up after the last bootcamp session. The first is regarding P&L’s and their role in business plans and operational plans.

P&L is a set of financials that are required for both the business plan and the operations plan. However they serve fundamentally different purposes in each plan.

In a business plan, the P&L is a 5-year overview of revenue and expenses. The goal is to create a financial picture for investment and exit valuations, and determine cash/investment needs. It’s a very much top-down approach, and I’m perfectly happy seeing it driven from market share acquisition rates. I’m also perfectly happy to see expenses “bucketed” in general accounting categories; like R&D, Marketing, Sales, and G&A and be derived as a percentage of revenue. To do this with credibility, it’s essential to have previous (and possibly extensive) experience with actual business operations to get really comfortable with operating expense percentages. Lacking that experience, an excellent proxy would be to look at the annual reports of your three closest competitors, or companies in the same industry space, and use *their* operating expense percentages as plugs for these values.

Just as a note, that exactly what I look at in due digence anyway.

On the other hand the P&L in an operations plan *is* a real budget!!!  It’s bottoms-up from the actual level you care about. Personally, I don’t care to breakout paper clips or pencils, but rather just lump those things into a general account of “Office Supplies”. And if that is less than 5% of you operating expense budget roll it up into a higher level category until it reaches that percentage. That gives you ~20 expense categories to manage, and ensures you are not majoring in minors.

BTW. Once you have a budget for four quarters, roll that into your business plan, and use it as a base to roll forward your projections for the next four years.

From a new report by Deloitte.

We briefly scratched the surface of the dozens of potential terms that could be included in a  term sheet, but I wanted to emphasise a few points from our discussions.

1. In most cases the “terms” in a term sheet (or more accurately in the Investor Agreement – which is the legal document) are not *law* but contractual conditions that become binding upon successful completion of the agreement. As such, the writer of the terms can ask for anything they want.  Just because a clause in the agreement is titled “Liquidation Preferences” doesn’t mean that is “boilerplate” and there’s not some little twist in there that make its different than you expect.  Golden rule – always read the fine print!!!  And if you don’t understand the fine print, or sometime, even if you think you understand the fine print, ask an attorney.

2. Terms in term sheets are like vestiges of DNA – they served a very important purpose at some stage, under some set of conditions, or as a result of some catastrophic event, and are just carried along  – “in case”.  The result is two-fold.  (a) Terms sheets always seem to get bulkier and (b) just because there’s something in a term sheet that looks horrible, doesn’t mean that you can’t negotiate it away, or down to more agreeable term.

3. Terms can be fundamental or fads, depending upon the economic climate, legal situation or political temperature.  As many of you are aware, there is very contentuous but very real legistlation on the books that would treat VC carried interest as ordinary income verses capital gains.  That has the potential of having a real impact on VC  net income, so – even though I have no idea what – I’m expecting significant chance in terms to “compensate”.

Finally, one of the reasons for spending a whole session on one or two of the elements in terms sheet was to get you all to be become smartreprenurs.  The challenge is that you get involved with two possibly three or four term sheets in you lifetimes.  I’ve seen probably twenty.  One of the values of @StartVI is the aggregationof deal experience and the accumulation of specific knowledge that will help individuals.  So?  Start asking questions and sharing issues?  It’s the “consequences” of terms that you need to be wrapping your heads around, not the specific interpretation.  As we discussed on Wednesday, the financial impact of Liquidation Preferences can be negotiated for a better valuation.  If someone is asking for high multiples of  Liquidation Preferences *and* a low valuation, either they don’t know how it works, or they do and they’re counting on the fact that *you* don’t.

Next week @Start\UP bootcamp, we’re going to be looking at strategies and plans for getting investment. Of course, a significant proportion of that will be what VC’s are looking for in a company and business opportunity, but equally, we will be covering what a company should look for in a VC. In most cases I preface the following comments with “if you have a choice”, but “if you have a choice in which VC to take investment from” then it’s important to do as much due diligence on the VC as they will do on you. A relationship with a VC if like a marriage, except its usually easier to get out of a marriage!
I strongly recommend that startups dive into the VC’s web site. It’ll give the “nut’s and bolts” – things like investment philosophy, industry/sector focus, stage and typically round size. It’ll have a list of active and past portfolio companies, and usually the resumes/CV’s of the partners.

But that’s all the “selling side” of the VC. It’s best to dig into the “buying side”. What do founders in the portfolio company think, was it a good, bad or ugly experience. Are there biases, preferences? Landmines to avoid?
There’s a interesting “reputation” web site – www.thefunded.com – that provides a vehicle for anonymous feedback from founders, both those that were funded and those that were rejected. Typically, it’s usually the dis-satisfied that are the most vocal, and this site has had its fair share of “VC arm twisting” to get their reps up. But it DOES have feedback on a number of Irish and Northern Irish funds (Crescent Capital, Enterprise Equity (Irl and NI), ACT, QUBIS). There may be some value in the comments.
In the interest of help startups make a decision “if they have a choice”, I’m looking to start a “form guide” on Irish and Northern Irish VC’s, something a little more objective that typically “bitching”. I’m looking for considered feedback for anyone who has experience with (good or bad) any VC on the island.
Here’s my initial thoughts on the questions I look for opinions on
(all answers on usual scale 1-5, 1 is low/bad, 5 is high/good)
1. How responsive were they? (Returning calls)
2. Did they respond when they said they would?
3. Did they make decisions quickly?
4. Do they have operational experience (P&L) to offer?
5. Have they been part of a startup?
6. Have they had an executive position in a multi-national corporate?
7. Have they invested their own money?
8. Did they inspire confidence that they could add value to your startup?
9. Did they encourage or discourage you?
10. Would you take them for a drink, socially?
Please let me know if the answers to these questions would help budding entrepreneurs evaluate VC’s – “if you have the choice”.

There was very lively discussion tonight at @startvi on the, seemingly, blind requirement, for startup software companies to have patents. Rather that repeat the discussion here, let me summarize.
Patents do almost nothing for software startups, and do a lot of actual harm via the opportunity cost (in time and money) to gain an illusion of “defensible IP”.
Anyone requiring that a software startup has, or applies for, a patent earlier than one year before their anticipated exit either (a) doesn’t know software, (b) doesn’t know the software business or (c) doesn’t know the investment business.