Business Planning Without Business Plans

I recently ran a couple of business planning seminars at the 5th Annual Inventing the Future Conference put on by Young Inventors. Since it was a no Powerpoint affair (yeah!) I have no slides to share but here is a quick summary:

Business Plans DO NOT EQUAL Business Planning

By The Scott (Creative Commons)

By The Scott (Creative Commons)

It’s amazing how much stock we put in business plans considering they are works of fiction. Few startups really know their precise target market, product, pricing or cost structure. How could they? I guess writing a business plan is a good exercise in research and discipline but only if it doesn’t distract you from real business planning. My personal favorite is figuring out the size of a market. Any time there is 3rd party research on market size your product is probably too late. You can’t really size a market you’re creating from scratch so don’t sweat the details. Just show an intelligent attempt and that will be impressive enough. A recent WSJ article claims that Business Plans Don’t Matter to VCs (though not all agree).

All Customers Are Not Created Equal

There’s not much I can write about targeting specific customers that hasn’t been covered by Geoffrey A. Moore in Crossing the Chasm. If you haven’t read it please stop reading this blog and buy the book! If you have, a re-read will remind you how it still holds true in so many cases. Startups should realize that there is no such thing as a generic customer. When you’re planning, it’s important to find a niche where you can find customers with specific pain points. Even within this niche you have to figure out how to target early adopters, i.e. people who are willing to take a risk on a startup. Targeting the early majority (i.e. more practically-minded people who need proof before they buy) is a waste of time until you have bona fides with early adopters.

From Wikimedia Commons

From Wikimedia Commons

Real-world planning tip: Create fictional caricatures of your customers (e.g. “Joe the plumber”, or more precisely “Joe the small residential plumber looking for ways to level the playing field against bigger rivals”). You should have one caricature for each of your customer types. Then keep these ‘people’ in mind every time you make a strategic decision in your company.

Find The Value

Business plans make us believe that commercializing new products is a linear progress of steps leading outwards from the original idea. Reality is a lot less linear. Sure you may have a breakthrough technology or a wonderful idea and have a great plan to push it to market, but it has to pass the “Who Cares?” test first. It’s easy to convince yourself that people (especially generic people…) will buy your product. It’s a lot harder to go out and talk to them. I always ask entrepreneurs if they’ve talked to 100 prospective customers of their products. This actually takes less time than writing a business plan!

Real-world planning tip: Get to the core of your idea by figuring out if you have a vitamin or a painkiller. The good news is that this early in the game it’s not expensive to start over.

Real-world planning tip: Since Frederick Winslow Taylor invented time and motion studies people have been measuring and analyzing user behavior. Though I’m not recommending startups take up cameras and stopwatches, I am recommending you quantify the value you purportedly add. Think your solution saves time? Detail exactly how much time, in minutes or seconds. This presumes you know what your customers were doing before they bought your product. Once you have a convincing argument bring it to a customer and try to convince them. Then on to 99 more.

Write Once, Don’t-Survive-Battlefield Everywhere

To summarize, I’m not saying that business plans are evil. Sometimes it’s good for entrepreneurs to work out ideas on paper before committing time and capital to them. Other times you have no choice, e.g. for banks or VCs. But don’t confuse writing a plan with real business planning. A plan is something you write, print, file away and celebrate with a pint. Business planning is a continuous discpline you’ll use throughout the life of your business.


Students Invent the Future at Young Inventors Conference

Nobody needs to be reminded how important students are to our startup ecosystem. I started my first Web consulting company in the McGill Music computer lab (which was probably against the rules!) along with two friends who were also students. Yet most universities privately admit they’re not doing a great job turning research projects into commercial products or students into CEOs.

It always surprises me that we see so few students at startup events. There are some but just not very many. At ConnectMcGill, a recent student event in Montreal, most students had never heard of the meetups, mixers and startups surrounding them. We need to do something about this!

One group that’s actively helping young entrepreneurs and inventors is Young Inventors International. Founded by Anne Swift, YII’s mission is…

…to work with leading universities, organizations, and entrepreneurs around the world to educate student inventors and entrepreneurs on how to create new ventures and social enterprises, build intellectual property portfolios, and acquire transferable professional skills. With more than 2,000 members who own almost 700 patented and patent-pending technologies, YII is the leading not-for-profit organization providing a comprehensive network for education and skill training specifically for student innovators and entrepreneurs in North America.

I ran a business planning session at their 5th annual Inventing the Future conference held recently in Pittsburgh at Carnegie-Mellon University. 120 students took part in a gruelling (ok, probably not that gruelling) “commercialisation marathon” that was kicked off by Regis McKenna of Kleiner Perkins fame. You can see some pictures and videos on the YII blog.

One of the highlights for me was something called BrainBuzz(tm) which was a 3-hour intensive brainstorming session. Small teams were formed and each tackled problems e.g. how to design a more effective passive solar energy collector or how to market a dancing robot (click the link, trust me). What’s amazing is the quality of ideas that flow, even from people without training in a particular field. BrainBuzz not only gives students confidence in their ideas but gives them a taste of the idea generation “buzz” that all startup entrepreneurs feel. That’s one way to get them hooked on becoming entrepreneurs.

If you are (or know) a student thinking about becoming an entrepreneur, I highly recommend you join Young Inventors and get involved. You’ll be joining a community already over 2000 strong, and growing.


Flow Ventures Announces Investment in Symtext

We’re happy to announce that we’ve made an investment in Symtext, a Toronto-based startup. Led by digital media industry veteran Ian Barker, Symtext has created a platform for building “liquid textbooks” which combine content from e-books and other digital content into unique learning tools. Containing both licensed works and royalty-free works, Symtext allows professors to create unique liquid textbooks for their courses and provides students with an interactive learning experience that goes beyond traditional textbooks.

Symtext has made great progress and is already working with recognized learning establishments such as Athabasca University and the Queen’s School of Business. It is also working with several major publishers (more announcements to come).

Flow Ventures has a unique investment model that combines Angel-level financing with strategic services including interim management and direct operational support. We look for opportunities where we can accelerate the development of a startup using our experience as technology entrepreneurs.

Keep an eye out for more Symtext announcements to come, as well as more from Flow Ventures. If you are a professor interested in using Symtext in your course, contact Ian Barker for details.


Students to Startups: A great kick-off event at McGill

ConnectMcGill, the inaugural tech entrepreneurship event at McGill was a huge success. Two computer science students, Nicolae Rusan and Ladan Mahabadi, had the idea of organizing an on-campus meetup for students interested in entrepreneurship. I was immediately interested in getting involved, especially to try to help bring people from the startup scene to mingle with students. We had over 80 participants and a lot of enthusiasm for making this a regular event.

James Duncan (from Joyent) and I gave brief presentations on getting started in entrepreneurship but the real highlight of the event was seeing students mingling with Montreal startup folks. I believe that one of the most important things you can do to encourage students to become entrepreneurs is to give them access to people who are actually doing it. Half an hour spent chatting with a startup CEO is worth 40 hours plugging away at a business plan, in my opinion.

We’ll be organizing our next event with the involvement of students from the other Montreal universities as well. If you are a student, a startup, an investor or a mentor, contact me and we’ll get you involved.


Over $1 billion in stimulus for Canadian startups

This is a great time to be building startups in Canada. Ontario and Quebec have recently announced over a $1 billion in funding for new ventures through matching funds and fund-of-funds. There may be more good news when Ontario tables its budget on March 26.

Here’s a quick summary:


Quebec (link to budget):

  • $825 million for a fund-of-funds to invest in 15-20 VC funds ($700 million from the government, $125 million from the private sector)
  • $125 million for the creation of 3 seed funds ($100 from the government, $25 from the private sector)
  • 10-year provincial tax holiday for new ventures that commercialize research from a Quebec university or research centre

So how does this trickle down to startups?

  1. If you’re raising your first round it means there will be more seed funding sources and more money in existing funding sources. Private investors may be more willing to invest since the government is matching their dollars 1 to 1 or 2 to 1 in some cases.
  2. If you already have investment it means your investors may be more likely to top-up if they are on the receiving end of these funds.
  3. If you’re commercializing research, which Canada does a poor job of, you look a lot more attractive to investors. Not paying provincial corporate tax for 10 years has a huge effect on investor returns (assuming you’re planning on profitability).

The best part of these initiatives is that they support the existing investment ecosystem rather than trying to replace it with something government run. We already have the pleasure, privilege and intestinal fortitude to deal with the government for SRED and other subsidies. Best leave investment to experienced managers.

So is there any bad news? Timing will be an issue as nobody can deploy this much money quickly. It’ll be awhile before funds actually trickle down to companies. I personally don’t like any initiative with a geographical limitation. I understand the desire to create jobs in a particular place but technology companies can be spread out. In Canada, where we don’t have the density of markets and talent, an Ontario-only company doesn’t make sense.

But enough complaining. Does this mean that we at Flow are more likely to make investments in the near future? You bet!

(Link to more budget analysis from Chris Arsenault from Inovia)


A method for finding out if you have a painkiller or a vitamin

The more pitches I hear from startups the more I realize that entrepreneurs have a hard time figuring out if their startup is a painkiller or a vitamin. I mentioned this briefly in a previous idea screening post but I’d like to propose a method to help.

I’ve come up with five measures so far:

  1. Do you have a problem or a feature? – “Mobile access” is a feature, not a problem. E.g. I don’t really want mobile access to my tax return. A lot of startups have a feature idea at their core, not a pain point, mostly because the initial idea was created by an engineer.
  2. Do you have a specific target market? – A telltale sign of a feature looking for a problem is to target “everyone” or “small business”. Saying everyone needs your product doesn’t mean a trillion dollar opportunity. It just means you don’t understand the problem.
  3. Can you describe the person who will use your product? – How, where and when do they work? What are they doing exactly that causes them ‘pain’? What alternatives do they look for? Can you draw a picture before they use your app and after?
  4. Is the pain measurable? – Any convincing CEO can make you believe that bad UI is as painful as a root canal. But how do you measure it? Extra clicks? Time lost? Money lost due to errors? If you can’t measure the pain you have two problems: 1) you might be wrong and 2) you can’t tell if your solution is an improvement.
  5. Is it verifiable? – Sure, you may find some way to quantify pain but how do you verify with the people who matter, i.e. users? Have you identified ways to double check, like surveys, focus groups or one on one interviews?

So let’s look at an example:

Bad Better
Problem or Feature? We create social networking tools for non-profits We help non-profits engage more volunteers and raise more money from funders, using social networking tools
Clear market segment? Non-profits Geographically-distributed non-profits with less than 10 staff whose target volunteer base is 18-35
Detailed description of user? People who work at non-profits 3 user types: 1) the Volunteer Coordinator & Fundraiser (who regularly communicates with volunteers and funders), 2) volunteers who network with the non-profit staff and other volunteers, 3) funders who don’t want to network but enjoy the profile they receive on the network
Measurable? All non-profits wish they reached more people We measure the # of volunteers needed each year to deliver programs minus turnover to calculate the total annual volunteer hours needed. There is often a deficit. We measure the annual budget deficit that needs to be covered by outside funding. We measure the opportunity cost of programs not delivered due to insufficient funding. If we’re successful, the # of volunteers, funders and programs goes up.
Verifiable? We talked to a local non-profit and they loved our product We have identified a list of 25 non-profits in our target market. Within 30 days we could contact each one, ask them to complete a survey, and give us feedback on some screenshots of our product. If feedback is negative we will try other segments until we find the right one

Of course, having answers to the five questions doesn’t guarantee that you have a painkiller. It just makes it more obvious whether the pain you think you solve is really all that painful. Stated one way, the lack of a social network is no big deal for a non-profit. Stated another way, helping find volunteers and funders is a life-or-death part of how non-profits operate.

The main benefit of this process? Forcing you to spend more time digging into the problem. You may abandon your original problem but you may also find some legitimate pain points that are a lot more interesting to tackle.

Next time I’ll post a few more examples and analyses. Feel free to send me some examples from your startup.


Join a startup! Launching Flow’s Startup Jobs site

It’s a reminder of the great little innovation bubble we live in that we always hear about startups trying to grow while the rest of the business world seems to be shrinking. Sure, startups are affected by the recession but that doesn’t mean firing is a bigger concern than hiring. Just the opposite.

We’ve just launched a new section of our site where we’ll be highlighting jobs at great startups in the Flow Ventures network (our investments, our clients and our friends). We’ll also be promoting entrepreneurs who are looking to find co-founders. If you’re looking for co-founders (no matter where you are), send us a bit about yourself and who you’re looking for. We’ll help get the word out.

Take a look:

by kandyjaxx (Creative Commons)

by kandyjaxx (Creative Commons)

At Flow Ventures, we have the privilege of working with startups from the idea stage to periods of rapid growth. One thing experienced entrepreneurs know is that there isn’t anything more important than building a great team. But it’s not easy. You have to find people with a combination of skill, passion (bordering on fanaticism), and humor. When you’re trying to find co-founders, you need people who understand that your project is a long-term commitment.

We’re launching with postings for a senior C# Web developer, two front-end developers (here and here), a project manager, and a PHP developer/founder for a file-sharing startup. Stay tuned for more.


Skills Entrepreneurs Lack: Part 2 – Negotiating

As Monty Python taught us in the Life of Brian, entrepreneurs really have no choice but to negotiate. You’ll negotiate how much equity to give your partners, your pre-money valuation, the salary of your first employee, the deal terms of a strategic sale, etc. But most people are terrible negotiators. Recognize yourself in any of the following?

  • The Robot – You state your position and keep repeating it until you get what you want or walk away
  • Mr. Nice Guy – People love negotiating with you, mostly because they always win
  • Type A – You win the negotiations but lose the relationship

Learning effective negotiating skills will allow you to create true win-win scenarios. The best book I’ve ever come across about negotiations is called Getting to Yes. It’s $10, will take you less than an afternoon to read and is considered the classic text on how to negotiate. There are few books that will do more to improve your skills. The Wikipedia entry has a great summary of the five key points (but please read the book):

  1. Don’t bargain over positions – Unless you’re buying a house, the traditional offer-counter offer style of negotiating doesn’t work.
  2. Separate people from the problem – Don’t let emotions and styles ruin your negotiation.
  3. Focus on interests – Figure out what people really want, there’s often overlap with what you want.
  4. Invent options for mutual gain – Make sure the other side wins as well.
  5. Insist on using objective criteria – De-personalize negotiations using facts and figures

If reading Getting to Yes makes you realize that negotiating is not the same as improvising, then it’ll be the best $10 you ever spent.


Skills Entrepreneurs Lack: Part 1 – Accounting

I’ve had a lot of thought-provoking conversations lately about how to develop the skills entrepreneurs need to be successful. Although building a successful startup depends on luck, timing and passion, it also depends on skill.

#1 on my list is accounting (finance is also important but it’s further down the list). If you’re a founder/CEO you should never leave “the numbers” to your accountant. You don’t need to master double-entry bookkeeping by hand (unless you want to impress a very select group of people) but you need to grasp the fundamentals. For example:

Jim Frazier (Creative Commons)

Jim Frazier (Creative Commons)

  • The difference between profit and cash flow (hint: profitable companies can and do go bankrupt because you pay rent with cash, not profit)
  • Budgeting and forecasting (i.e. using accounting to gain control your business)
  • The balance sheet (i.e. knowing whether you or your creditors own your business)

If you think this should be the domain of your CFO or accountant, you’re mistaken. Running a business without a good grasp of accounting means you’re flying blind. You won’t know where you’re leaking cash or how to control your expenses. You won’t recognize which products or services make or lose money. You’ll risk running out of money even when things are running smoothly.

Here are 3 suggestions on how you can improve your accounting skills:

  1. Take an entry-level accounting course at a local business school or an online school. You may not enjoy learning about debits and credits but a semester’s worth of evenings and weekends will buy you a true understanding of the relationship between money and your business.
  2. If you’re an autodidact, work your way through books like Accounting for Non-Accountants, The 36-Hour Accounting Course, or for true beginners, The Accounting Game. Don’t try this at home if you aren’t a self-studier. Sleepiness will ensue.
  3. Do your own accounting (under the supervision of a chartered accountant) and prepare your own financial statements. You should be able to make entries, reconcile your bank statements, and make sense of your income statement, cash flow statement and balance sheet, at least for a few months. This is easy with software like Quickbooks and Simply Accounting but you’ll still be learning the basics while gaining a new found respect for your bookkeeper.

The language of accounting is used whenever you raise money, get a bank loan, communicate with your Board, or measure your performance. It’s one of the fundamental skills of being a CEO.


Why startups don’t need more pitch coaching

If alien economists went to startup events they’d conclude that all startups fail because they don’t know how to pitch VCs. (Some people think that all economists are, in fact, aliens, but I digress). The Canadian Regional Boot Camp for Technology Start-Ups was announced recently by StartupNorth and others and I was struck by how much emphasis was placed on pitching.

The agenda consists of a session on “Funding Pitch Preparation” followed by “Pitching Session to a Review Board” consisting of Canadian and US VCs. I’d like to ask a simple question:

Why do so many startup events focus on pitching investors?

Here are some of my concerns:

  1. Funding is a solution to a problem that not everyone has. There are many great businesses that never raised a dime of outside capital. So why does every startup event talk about funding?
  2. When you put lipstick on a pig… We spend too much time training startups how to speak the language of VC. Investors are in serious trouble if they’re filtering deals based on the ability to pitch.
  3. The pitch does not equal the business. People argue that honing the pitch means improving the strategy of the business. But in the real world, hardly any startups have everything figured out in advance. What’s the point of hearing them lie on stage?
  4. 1 size does not fit all. Lots of people do unspeakable things in Excel to force their revenue projections to scale to $50 million. Why? Because VCs are only interested in business that “scale”. But scalable busineses are usually riskier businesses. A lot of entrepreneurs would be happy with the payouts from smaller exits.
  5. Watching awful pitches is entertaining... That’s why people watch the Dragon’s Den and pitch coaching at startup events. But entertainment value aside, isn’t there something more useful we could be doing?

I don’t mean to criticize event organizers all of whom are honestly trying to help entrepreneurs. I’m also not criticizing the VC model which is a very specific type of investment that has been improperly promoted as a funding solution for everyone.

I’d just really like to see more startup events focused on all of the problems facing startups, not just how to attract VCs.