In an earlier post, we discovered it is important to build a business plan for your music business. Today we are going to look at a couple of experts on business plans and the advice they offer those building a plan.
Reid Hoffman is the co-founder of LinkedIn and, according to TechCrunch, “undoubtedly one of [Silcon] Valley’s most prolific angel investors.” He has made angel investments in several tech startups and joined as partner with the venture capital firm, Greylock, which announced a $20 million fund for angel investments.
Reid wrote an article for TechCrunch giving advice to those developing a business plan. He gives three key components he looks for when determining if a plan is worthy for his investing.
1. How will you reach a massive audience?
In the old days of business, everything was about “location.” In the new days of Internet business, it is all about “distribution.” How will your business stand out from all the rest on the Internet. Reid says, “Every Net entrepreneur should answer these questions: How do we get to one million users? Then how do we get to 10 million users? Then how will you get deep engagement by your users[?]”
2. What is your unique value proposition?
When building a business product for the Internet, make your product innovative enough to distinguish your product from all the others out there. Don’t make your product too innovative, however. If the product is too far ahead of its time, it won’t be accepted by the general populace and it will risk failure.
3. Will your business be capital efficient?
Even if a business has both a large audience and the right product, without cash flow, everything will end in failure. The business plan must make allotments for not only the initial funding but ongoing stable funding. By having available capital, a business can continue to operate and grow no matter what unforeseen changes may take place.
David Skok has built three companies since the age of 22, with three of them going public. One of those companies reached revenues in excess of $100M, employed 800 people, and had offices in more than 20 countries before its acquisition by Novel. David joined Matrix Partners as a General Partner in 2001.
David wrote an article for VentureFizz describing eight keys to understanding how investors value startups.
1. Understand How Startups are Valued
The value of a startup is based on a calculation of risk and reward. As risk goes down, the value goes up. Risk is not reduced over time linearly, but reduces at various milestones. The biggest milestone that shows a reduction in risk is the evidence of increased traction with paying customers. Another key milestone is when the business sales model can be seen to be repeatable and scalable.
2. Identify your specific risks
Every startup is different and has different risks. Specifying risks displays an understanding and ability to overcome risks pertaining to that startup.
3. Look for quick ways to Mitigate Risks before fundraising
A couple of quick ways to mitigate risks would be to display current customer traction and obtain expert advice for overcoming risks.
4. Either raise enough cash to match the milestones
Targeting a milestone helps lessen the risk of the business. Base the amount of money to raise on the amount of time it will take to reach that milestone. Many entrepreneurs do not raise enough funds for fear of dilution. It is better to have a cushion of cash to make it to the next milestone. Then the next round of funding will require less cash.
5. Or match your milestones to the available cash
If you have already raised cash, it is better to calculate your milestones so that you can successfully reach them with the cash on hand. Alter day to day operations to make sure the current funds last until the milestone is reached.
6. Validate your milestone / valuation targets with investors
7. Focus all energies on reaching those milestones
8. Avoid a down round at all costs
Down rounds can cause a company to seem to not be performing according to expectations. Down rounds take place when a company fails to meet a milestone with the cash allotted for meeting that objective.
David closed his article with these words:
I have one final comment: success at raising money does not equal business success. I have generally found that it is far easier to raise money than it is to get paying customers. If you have just raised a round at a great valuation, don’t confuse this with real success in business. That only comes from selling your product to lots of customers!