Hey startups: You don’t live in Silicon Valley Pt. 2
You might still need a business plan. No matter what Silicon Valley sez.
What the rest of the world wants
When I first got the idea for Classana, I was accepted into the State of Ohio’s Third Frontier program via a regional collaborator. This program, funded both by the state and matched funds, offers capital (loans and grants) and other business resources to startup and early stage technology companies. (Third Frontier is a tremendous resource for Ohio startups, and I’m glad we have it). The very first thing we did as part of the program —even before I had a solid idea, user, customer, or MVP, was get to work developing a business plan. (Many of my SF friends are now shaking their heads in amazement, I’m sure. I can hear them now: “Business plans are a waste of time! Build something fast and get it in front of users and customers!”, “Financial projections are fiction! How can you build any projections and you haven’t made or sold anything!?”, “Oh, the world is sooo backwards! You should just move to San Francisco!”)
Am I in favor of business plans?
No, so I won’t make the case for them… except to say that you might still need to build one.
Did I learn anything in building the plan?
No, so I won’t make the case for them… except to say that they’re often a necessary evil.
Now that I have a workable product out in the wild, does anything in that plan we spent all that time on have any tie to real life today as the co-founder and CEO at Classana?
No, nothing applies… but you still might need one. Everything changed after we built our MVP and started talking to customers, so, I just can’t make the case for spending time writing a book that spells out an entire strategy for a technology startup that is, by definition, a moving target working under uncertain conditions — except to say that, darn it, you might still need to build one!
Silicon Valley investors might never ask you for a Business Plan. But remember, you are not in Silicon Valley.
Why the heck is a startup building a PPM? Because non-Valley investors asked for one.
At this very moment, we’re deep into raising our Seed round, and I was asked just yesterday by the financial advisor to our potential lead investor for our PPM (Private Placement Memorandum). Another name for a PPM is Offering Memorandum.
Offering Memorandum — a legal document stating the objectives, risks and terms of investment involved with a private placement. This includes items such as the financial statements, management biographies, detailed description of the business, etc.
This was unexpected. If tech companies ever develop a PPM, its not until later stage. Waaaay later stage. We’re pre-revenue, and currently in public-beta working on finding product/market fit. Anyone investing at a Seed level should, if they’re smart, be betting on the horse(s) and probably not solely the idea of the company as so much of the business and business model will be moving targets as it works to find said product/market fit.
Am I in favor of developing a PPM?
No, so I won’t make the case for them… except to say that I might still need to get one.
Will I learn anything in building one?
Who knows — I haven’t done one yet, so I won’t make the case for them… but, I will say it might be a necessary evil.
Will developing one help my company?
Highly unlikely. So much will change as we grow, iterate, and listen to users so, I won’t make the case for them… but I still might need one. I will say however, that investing in one will keep some lawyers employed for another few days or weeks. And, of course that’s why we’re all here, amiright?
Silicon Valley investors might never in life ask you for a PPM. But remember, You.Are.Not.In.Silicon.Valley.
What I’m not saying
I’m not saying you shouldn’t be well versed in your industry vertical. I’m not saying don’t have any idea how you might eventually make money or the size of your addressable market or who your competitors are or what unique insight you have or the implications of how this funding round might help/hinder you in later stages or what your key performance indicators and milestones are or use of funds. There are a hundred other things also that I’m not saying.
What I am saying is that the rules and advice of Silicon Valley, and the SV dialect apply only in the narrowest of strokes. Speak SV dialect outside of SV, and you’re cooked. You already know the dialect of the audiences in your community. You just got messed up & turned around morphing into a Valley startup headquartered in Toledo.
The right twang
Where I’m from, Toledo, Ohio, the business people (read: the people who have the $$ to invest in fledgling companies) understand two things very well — manufacturing, and healthcare. So, if you’re building a slick rubber mallet or a DVT pump, you’ll find many friends. If you’re building software, however, good luck.
This being true, you have what you have and must make do. And you would do well to translate what you’re doing into a language these potential funders can understand. As a founder looking for capital, I need to both understand and appreciate what the potential investor wants and needs to hear from me. They do, as is said, live by the “Golden Rule”. You know the one: He who has the gold, makes the rules.
Why this matters
I would argue that the people who spend the most time trying to understand how startups work, how to develop winning ideas and teams, and how to woo investment capital — and then adopting those ideals and ways of thinking, are the people who themselves are hoping to be successful at building companies, cultivating ideas, organizing teams, and winning startup dollars. This isn’t a radical idea. But, the money you need to fuel your growth is likely in the hands of people who’ve built businesses in very different ways than you’re about to pitch them. They understand investments differently. They think about making and selling products and services differently. And, they vet investment opportunities differently. It’s probable that they’re not listening to Paul Graham or Jason Calacanis for investment advice. (Nothing against those guys, they’re two of my favorite tech personalities and I have ton of respect for both of them and their contributions). The investors in your town live in an entirely different world of business-building. So while you as a startup founder might cling to every word the very well accomplished and very well-deserving influencers preach, in your reality, the people holding the checkbooks are not. Go ahead, try to convince a guy who made a mint building a company named “City Rubber Stamping Supply” that you’re building a tech startup that isn’t expected to earn a single dollar in revenue for the first three to five years, but requires a million dollars to start up. Let me know how that goes for you.
Skip those guys, and raise outside of your community. That’ll fix it!
Sorry, but it won’t. I can tell you this from experience.
Have you ever heard any variation of the following questions?
- “Are your local investors interested?”
- “Who do you already have committed?”
Remember, pre-revenue Seed rounds are all about the horse, not the idea. At this stage, investors are investing in people, not proven ideas. Seed-stage investors are simply committed-believers that the founding team is going to find a way to win no matter what comes thy way. They’re betting on your chutzpah. External investors get comfortable enough to invest by seeing the people who actually know you in real-life shower you with cash. If the people who know you and live in your community don’t invest, it’s a bad signal.
Do what you have to do
Business plans are a fallacy for tech startups. Financial projections are fairy tales. PPM’s are great for lawyers, not for bootstrapped startup teams. But, they might be a reality for you. Your job is to find the money. Smart money, dumb money (with terms that at least don’t screw you for life), and ANY money in the early days to put gas in the tank. It doesn’t matter how great your idea or team is — if you can’t get the resources to build the idea and start getting users & customers, well, that dog don’t hunt.
In the early stages especially, the money to fund your idea might need to come from outside of Silicon Valley. If you’re studying only Silicon Valley’s methodology on securing financing, you’re probably only preparing yourself to pitch Silicon Valley investors. The rules to getting money elsewhere don’t work the same way. Outside the Valley, you’ll painfully and continually be educating rich people who know nothing about “the future” you envision. You will spend more time than you’d to like explaining pre- and post-money valuations, and more time than you wish you had to on why you won’t make a single dollar in revenue for 48 months.
Good luck.
