5 and 1/2 Steps to Seed Your Startup
After spending the better half of my career, launching startups, I thought it was about time to share the love. Below are the top five documents I prepare when starting a new company.
All of these items are critical to complete if you want to successfully raise professional money. Professional investors are the people you want on your board and listed on your cap chart. Why? They give you the best probability of success.
In a recent article published for Entrepreneurs magazine Joel Cannon writes, “according to CB Insights, 42% of startups fail because there is no market need for their product, and another 29% because they run out of cash.”
He goes on to say,
“Logic suggests that if there was a strong market need, they likely would not run out of cash, because they’d attract both more sales and/or more investment. So I’ll argue that this statistic really says 71% of startups fail because of no market need for their product.”
To be clear, I’m not talking about VC’s yet. You’re in idea phase and need to seed the beginning of your business. You’re not ready for institutional money yet. That means you need Angels. But there's a big difference between family members with money and professional angels. The latter will help you access resources out of your network and help create those initial much-needed partnerships with hard to access distributors, initial customers, celebrities, advisors, etc. So unless your uncle is Richard Branson, getting friends and family to invest isn’t always the best start. Why? Because if you are good at what you do, you’ll always spend more cash than you originally projected. And that puts a lot of unneeded strain on personal relationships. IMO, Better to keep Dad or Aunt May out of it.
1. Market Selection (start in the US)
It’s hard enough to launch a successful brand in one market, keep it simple and start stateside. Starting with research, find a viable market that’s growing and sizable enough to have room for you to obtain a reasonable portion of the market share. This doesn’t mean if you are targeting a massive market ($10 billion+) then you’re good-to-go. What I usually do is start by selecting a large US market size, only initially looking at global trends as applied to future opportunities for growth.
Focus on the USA. We’re in an ERA where US brands are highly valued over other regions. Start there, and expand after establishing a baseline of customers and brand evangelists.
Also, It’s not just about the total market size:
You must ensure you have a handle on the Serviceable Addressable Market (SAM). This is critical.
Investors dislike when a founder pitches a massive market with little understanding of what market she can deliver to or reach, and what market share she plans on obtaining. It’s what they call the Chinese white glove faux pas. I first learned this helpful illustration years ago from Tech Coast Angels.
Here’s the breakdown: You can’t just claim you’re going to obtain a 1% market share of a twenty billion dollar market by selling 10 million people a pair of $20 gloves. Without evidence of a real serviceable market, this claim is unfounded.
In other words, throwing large numbers around unsubstantiated without research and data to back up your claim is a big turn-off to investors.
To give you a more practical example, for my previous business the serviceable addressable market was $1 billion dollars. That’s the actual dollar amount spent in the US on nootropics-based supplements alone. It’s a sliver. A niche. Or a segment of a segment of a larger market. For us, it was a segment of the massive and fragmented dietary supplement market of $35 billion dollars. But it meant that we had real people, spending real money on our specific need. That proves in part that there is a product/market fit.
2. Draft a Business Canvas
Above is a snapshot the business canvas I designed. I’ve used this with every single business I’ve founded and/or sat on the Board of Directors with.
The key: You need to get everything that’s in your brain on paper. Ideally one piece of paper. And fast. One of my mantras is “fail fast or die”.
I have redesigned a common tool called the Business Canvas to include all the essentials. Download here if you want to use it. Props to Creative Commons for the original template. I’ve modernized the design and tweaked it a bit over the past several startups I’ve launched.
The business canvas comes first because if you’re raising money, and every seed startup has to raise money right out the gate! So draft the canvas, show it to friends you trust to poke holes in it, tweak it, sleep on it, tweak it again, and then memorize it. Remember, you’re idea/business isn’t complete yet, so you can’t wait to complete all the details before you put pen to paper. I have seen far too many founders fail because of fear. Overanalyzing the initial stage is what I call, well…stage fright (pun intended). If you get cold feet and over think things before you allow them to materialize and evolve on there own, it almost always means you won’t be selected to play in the next round. Period. Full stop.
Writing a formal document doesn’t mean its all set in stone and you’re committed to this for eternity. To quote Brad Pitt from World War Z, “movement is life.” So draft your business canvas early, and pivot the model frequently. And as you stew on it, be comfortable with fluidity, iteration and change.
I once read a study done by Inc Magazine (they took the article down, so my apologies for not providing a link), every startup will pivot at least once from initial seed stage before it successfully generates revenue, achieves breakeven, or makes a profit. If you’re going to survive. Move! And be exceedingly comfortable with change. This canvas is only your starting point and should evolve over time. And time and time again.
NOTE: After you complete the next three items, immediately rinse and repeat this step.
3. Write A Brief Business Plan (8 pages max)
Studies have proven entrepreneurs who draft a business plan are more likely to seed success. But the good news is, the days of the fifty to one-hundred-page cumbersome business plans are over. However, you still need to show your investors you are willing to think through every angle of your business model.
That means some of you may have to struggle through the hard stuff to formulate an 8-to-10-page plan. Start with the canvas. That’s your canon. Why? The canvas is always more visible and effective with investors than a longer doc. Honestly, they love it! Truth is, you rarely have to send the business plan to a prospective investor at the Seed stage. Why? Because they usually are using your knowledge of the content coupled with your passion, energy, and your team as markers for success. This will ensure you do well after the initial phone call.
This document is more for you to own the content in that second meeting than it is for investors to ensure a good investment. It’s for the times when you’re asked hard questions about your model on the spot. Helping you answer like a rockstar, it will create confidence in you and your prospects.
So don’t skip the business plan, know every aspect of your blooming business model.
Here’s a little anecdote from college on how the logic works
in my head:
In college, I enrolled in one of the hardest courses. It was a history-rich course with a ton of information. In fact, the enrollment counselor told me to avoid “Professor Boyd”. It even rhymed! I remember her going on to say, “If you don’t want to fail, avoid Boyd.” Eager as I was to oblige her and avoid the challenge, I wanted to push myself hard. So I took the course!
Several months later we had our first midterm exam. We were given a twenty-page study guide. I remember staying up in a study group numerous nights until the wee-hours memorizing that document. Then the day of the test came, and there wasn’t a single question form the study guide on the test. It was only after I received back my grade (I passed with a B-), that I realized our Professor knew we would know the answers if we took the time to search for the hard-to-find nuggets. Get it!? They were never meant to be on the test. He wanted us to dig deep. And although I didn’t ace the test, I knew my history better than most of my peers after that class.
Look at your business plan as health insurance. You hate making the payments, question its value daily, and don’t ever want to have to use it;
but when something hard happens, you’re damn glad you have it.
Business Summary Template:
I was first introduced to the basis for a good short business plan by a mentor and friend Rick Simmons, a former Pasadena Angels Chairmen. You can probably still find it here on Gust. Start there and expand.
4. Financial Model
Dozens of investors will insist you have a 3–5 yr financial model. And the same amount of people will tell you it doesn’t matter for a seed-stage startup. They will almost always say it’s because all the numbers are bloated, mere assumptions and only fluff. Smoke and mirrors. So don’t do it.
Wrong.
I suggest being on the diligent and thorough side of things by getting this done early. Regardless of what you hear. It’s going to change a lot, but everything changes a lot in a startup. Everyday. So, ensure you hire someone good with numbers who have experience with modeling for startups. it may cost you several thousand dollars, but its worth it. It helps you think through distribution, COGS, expenses, growth mechanics and economies of scale early. Most businesses don’t grow, because the numbers won’t scale. But finding this out 3 years down the road won’t help anyone. Besides, a well formatted financial model will always be impressive to an investor. It says, that you’ve put in the work to think through the math. And all businesses come down to the numbers. So forget the ones that say they don’t want it because when it comes down to making a commitment and cutting a check, their MP, LP, or key decision maker will almost always ask for some kind of financial projection. And when you send a 3–5 yr comprehensive model, you will close the deal.
No matter what anyone says, no matter the stage (Pre-seed or Seed), do the financial forecasting. It will save you on a rainy day.
5. Deliver a Killer Investor Pitch Deck (15–20 pages max)
This is your Magna-carte, your capstone, and you must make it look good. One of my coaches Max Liu, gave me the best advice I’ve gotten in years,
“Investors don’t invest with their wallets, they invest with their eyes.”
For me, a former creative director and designer, this was natural. But be careful with this. If the creative juices flow in your blood too, be careful not to rest on your laurels. Ensure you still pack your deck full with strong data and customer-centric market research. And don’t nerd-out too much. Length is important. Investors don’t have time, one of my friends David Jee at a TechCrunch fund called Tuesday Capital said, he and his colleagues are going through hundreds of decks per week. Looking for one thing that sticks out.
A note on length: The old school guys don’t want it to be more than 25 slides, the new schoolers, no more than 14 slides. I’ve found that to keep a deck designed well and not too crowded you need at least 15 slides. I haven’t been able to keep it within 14 and still have it look sexy. I haven’t been able to really make it self-explanatory in under 20. That said, take time to write a compelling story and hire a capable designer to design it.
Design it in Google Slides: Make sure to have them design it in Google Slides so you can iterate on the fly. There’s nothing worse than a PowerPoint or Keynote built wrong. This could cost you several wasted hours.
“Invest in the deck that will invest back.”
In the end, no one will tell you how to tailor the deck each time you send it out. And if you’re raising money, you’ll be sending loads of emails. So remember to cater the deck to each investor as much as you can. Each group has a different priority. And finally, be sure to prioritize aesthetic, story and team over technical ability, testing, and testimonials.
Because in the end, investors are looking for something they can connect with emotionally. Something they can be proud of. An exemplary experience. So give them just that. After all, we live in the era of design-led business. So give them you. Give them design. Give them a well-designed fresh deck, and it will invest back. Guaranteed.
5 1/2. Form Your Team Early (Create an Org Chart)
Much can be said about the team; but the best startups start with two founders, not one. There’s a great book I recommend on this subject called
Rocket Fuel.
Below, I’ve added a snapshot of what my org chart looks like. Notice the bottom “anchors”. Those are people not on your payroll, but who have decades of experience more than your team. They will be your mentors to guide you through times you’re faced with challenges that you need poised and longstanding wisdom to navigate. you should have one advisor per founder/C-level executive on your team. This should only change as you grow. But it gives your early-stage investors a look at your plans to expand.
And always remember, there’s a direct correlation to the number of employees you have and the growth you can obtain. After the due diligence phase, investors often look at the team as one of the key factors in making a final decision to invest in a startup. Make sure you are planning ahead and have your org chart dialed-in well before you actually onboard the first employee.
