Every year at S3 Ventures, we evaluate hundreds of businesses as potential new investments. Many of those businesses make it into our office to present their business plan and idea. On occasion, though, a team or presenter misses the mark in that first meeting. Our hope in this short paper is to present what we believe will facilitate a more effective first meeting with us and other potential investors who have invited you in to listen to your plan, whether it is S3 or another investor. We call it Meeting One.
One of our sayings here at S3 is “let’s begin with the end in mind”. One end is a funded business plan. Another end is a fast answer on an investment, yes or no. Maybes are hard and clearly ambiguous. So how do you get to an end? With most institutional investors (venture capitalists or VCs as a primary example), there is a process that companies go through from Meeting One to a funded opportunity. Very rarely does a Meeting One end with a deal and a check (despite what Shark Tank might tell you). Therefore, understanding the process is important, and taking steps along the process in order is the most likely path from Meeting One to a funded business. It is also important to note that a fast “No” or “Not now” is a good end, even if it does not feel good. We at S3 believe that the most important outcome of Meeting One is either a definitive No or a second meeting/ongoing diligence. The goal for the entrepreneur during Meeting One should be to get the second meeting.
So, what do you need to do to get a second meeting? We appreciate the fact that, as an entrepreneur, you desire to grow something exciting, even world changing, and hopefully wealth creating for the team and investors. We at S3 are interested in the same thing and we want you to succeed, with or without us. However, many times we invite a team over for Meeting One, they are not prepared for the process they are embarking upon. Common issues we see are a) the entrepreneur is unable to clearly and crisply explain his/her business, b) he/she presents a business proposal that is way outside our investment focus/strategy, or c) spending precious Meeting One time talking about things that will not get them to a second meeting. Let’s talk about what to accomplish in a one hour Meeting One by first laying some groundwork.
Know your audience. Please review our web site and see if we make investments akin to what you are building. At S3, we invest primarily in Texas and the Southwest, yet we do have purview over other locations though it is a small percentage of our portfolio. We like capital efficient companies that typically require between $10M and $20M to get to cash flow positive (less is potentially better). Enterprise solutions (e.g. solutions that sell for $100k and up) are our primary focus, along with medical devices which improve the human condition. We do not invest in any type of farm raised fish (despite the wonderful location you have), businesses with HQs outside the US, reality television shows, fabless semiconductor deals, or the next consumer focused business that will “figure out the revenue plan after we gain users”. Other firms will typically have areas they avoid as well.
Listen well. The best teams we have worked with made an extra effort to listen to their customers, their investment partners, and each other. We have found that, as amazing as it sounds, customers will tell you exactly what they want. Listen well. The same holds true for good investment partners, they should be able to clearly articulate what they see in your plan and what they are looking for as next steps. When you are in a meeting, listen to the questions, as they are both intended to further understanding and to give you clues to building a better business.
Be flexible. We know you have been through numerous pitch competitions and structured pitch environments. We also know there is a story that you want to tell. But we spend a lot of our time understanding markets, so if we derail your presentation by saying “we know about the growth in mobile, tell us about the product,” be prepared to change the order of the presentation. We want this meeting to be a dialogue, not a monologue, so be prepared to abandon your script.
Meeting One Execution:
In a perfect Meeting One, you will hit all of these points in this order in about an hour. In reality, you should be prepared to talk about all of these topics, be flexible about what you actually talk about, and always keep in mind that the goal is to get to the second meeting.
- Clearly state the business problem and your solution (15 minutes). As you have already seen on our website, we are looking for companies that solve large and valuable business problems or improve the human condition. Tell us about the problem and how your solution will give a Fortune 500 business a strong ROI for the hefty price you are planning to charge. Preferably, we would like to see some initial customers using the product, so if that is the case, tell us why they bought the product and why others will follow suit. How did you show them they could not live without your product? Who did you talk to when selling it? What was the title of the person who could write the check? For medical devices, is your product going to reduce costs to the system while also improving patient outcome in material way? How? Why? In Meeting One, we want to know about this solution, but not everything about it. Your goal should be to clearly explain it in fifteen minutes or less. Demonstrations can be very helpful or can be a distraction in Meeting One, depending on the complexity of the product.
- Explain your planned sales model and a go to market strategy (20-25 minutes). For S3, this is the most critical element of Meeting One because we invest in companies ready to go to market. We want to know about unit economics, customer acquisition costs, sales model, sales strategy, product pricing, and product margins. We often ask the question, “Can a direct sales person carry a $1.5M quota per year and make it?” If so, how? Direct sales models typically require products that sell for $100k per transaction or more. We might look at you funny if you come in with a direct sales model and your product has an average sales price of $10 and it is sold one at a time. How does your selling strategy map up with the marketing plan to attract customers? On unit economics, some businesses have positive gross margin contribution with the first sale while others require a number of sales to support an infrastructure for solution delivery. We would like to understand the relationship between fixed and variable costs to deliver your product. In SaaS models, customer acquisition costs are the most likely element to kill a business. You should have thought through the methods and costs of acquiring customers—we know that this will change over time, but we want to understand how you think about this crucial element. Regarding progress to day, what have you sold? For how much? Is a customer or set of customers reference-able? Finally, how is your current team going to get you where you need to go and who are your next hires?
- Tell us your plans for operating and scaling the business (10 minutes). How do you expect the business to scale over the current year and the next year, by month? What amount of cash will be needed to accomplish what milestones? Why are these milestones important? This is an area in which many companies are under-prepared. The answers to these questions are typically the difference in understanding whether a company should raise $3M or $6M in the Series A. Please see our complete financial model and reporting package available free for entrepreneurs on our web site.
- Where are you in the fundraise process, and what are you looking for in an investor? (10 minutes) Are you just starting to talk with investors or do you have a term sheet from a group and are you looking to round out the financing? Good venture capitalists like to perform due diligence. This means they want to talk with people they know or can find about your business, solution, marketplace, and examine the financials to see if the business can make sense for their type of investing. This takes time, which, as you know, is a precious resource for startups. Spend a few minutes on this topic and dialogue about what is next. Also, talk about your expectations of the potential investor and vice versa.
The view from our side of the table: It is common knowledge that about 1% of businesses get institutional funding. The numbers look similar at S3 although the number of deals we fund is less than 1% of what comes through our door. Be cognizant of this statistic and spend your time in Meeting One efficiently. Not only are you competing with others in your marketplace, but you are competing amongst the other companies we are currently in diligence with. Unfortunately, we cannot invest in every great business.
Final advice: “I do not know” is an acceptable answer. No one knows everything, especially in the early days of a startup. Honesty and openness are what we are looking for in an entrepreneur partner in an investment. In a multi-year, often very intense experience with your investment partner, you will want someone with you that is rational, calm, thoughtful, experienced, measured and forthright. Pick your partners well. Do your own reference checking on potential investors. Finally, this process will take time and can often be frustrating so be prepared for that.
Go for it. At S3, we have worked with some great folks. Also, we have helped some great entrepreneurs build their business that we ultimately did not invest in. S3 wants to see you succeed and we hope you enjoy the journey.
Every day at S3 we see the benefits of a thoughtful, well-articulated and validated business plan. In his book Disciplined Entrepreneurship, Bill Aulet gives excellent advice on how to step-wise organize a new business and its associated product or service. It is the most comprehensive book we have seen on the topic, and we believe following his 24 steps will prepare one optimally for Meeting One at S3. Bill’s thesis is that entrepreneurship can be taught. We agree wholeheartedly. Building a company is not about conjecture, but about a disciplined method for approaching a customer problem, designing a solution and validating that a profitable business can be built around it. Learning, listening and self-honesty with the process are keys we emphasize and Bill articulates throughout. The book covers topics like market segmentation, total available market assessment, life time value of a customer, customer acquisition cost, development of a persona that you will likely be selling to, identifying your core value proposition and business model, knowing how you are competitively positioned, pricing on value (which we think is excellent), and validating your assumptions via an iterative process. All of these are placed in a logical, step-wise order. Threaded throughout is the encouragement to be honest and accurate with all the data collected. Finally, Bill uses real world examples of start-ups that he was involved with, his students were implementing or well know industry examples to illuminate each point. We highly recommend Disciplined Entrepreneurship as a guide to developing your start-up business.
At S3, we want to work with game changing entrepreneurs. Andy’s book identifies what game changing entrepreneurs do each and every day. He has enumerated twelve helpful rules that we consider critical to successful startups. This book touches on how to make something from nothing, how to help the world be more productive and create wealth for the masses. Creation is at the foundation of entrepreneurship and, in our minds, imperative for improving the human condition. You will read rules like “If it doesn’t scale, it will get stale”, “Waste what’s abundant to make up for what’s scarce”, “Markets make better decisions than managers”, and “Use zero marginal cost to create a flood”. In these rules and others, we see that scale is what matters to build large enterprises. Time is not on anyone’s side, so using what is abundant to save time is highly prized. Markets are for price discovery, work with them and not against them. And finally, pricing on value rather than cost is critical to building a premium value enterprise. Andy has great insights for today’s entrepreneur and he writes in a no nonsense style.
The “Law of Unintended Consequences” typically refers to actions of people or the government that result in outcomes that were unanticipated, or, as the law states: unintended. Economists Steven Levitt and Stephen Dubner highlight various situations in which unintended consequences come into play in their book Freakonomics, which I recommend to all entrepreneurs. Levitt and Dubner argue that economics is essentially about incentives and how people respond to them. One entertaining example in the book that highlights incentives tries to the answer the question: “What do school teachers and sumo wrestlers have in common?”
At S3, we are constantly looking for underlying incentives both within our portfolio companies and also while evaluating new investments. How is the sales team incentivized? Why would a strategic buyer be incentivized to buy your company? Why is your customer incentivized to buy your product? As we dig into these questions and others, we sometimes find that incentives are misaligned, leading to some unintended consequences. Levitt and Dubner attempt to “discover the hidden side of everything” in this entertaining and thought provoking book that will surely have you rethinking some previous assumptions about your business.