Hacking 4 Recovery

We’re holding a series of 5-day online classes at Stanford where teams will learn how to develop new business models for an economy that’s getting back to work and on the road to recovery.

 

Sign up at http://h4r.stanford.edu


The post-pandemic world will be a very different place. The Covid-19 virus has upended traditional ways of doing business, travel, education, entertainment, healthcare, etc. How do these institutions reconfigure and reinvent themselves? What new businesses and services will emerge? Hacking 4 Recovery provides students with the tools to understand the new normal and to build innovative solutions for recovery.


Out of crisis – Opportunity
Do you have a startup idea or new technology that you’d like to learn how to bring to market in the post-pandemic economy? Or perhaps you would like to join a team creating a new business, or reinventing an existing business, and learn the lean startup techniques that will be critical to our recovery.

Stanford’s Lean LaunchPad
Hacking 4 Recovery is a 5-day version of the Lean LaunchPad / Hacking For Defense / National Science Foundation I-Corps curriculum that’s trained tens of thousands of entrepreneurs and innovators. This class offers students a unique online opportunity to build the future with the Stanford University instructors who have inspired a generation of entrepreneurs.

The first 5-day class will be aimed at “Finding New Business Models” for businesses to adapt and pivot to find new customers, new markets, new products and new services to win in the recovery. Additional 5-day-long classes will explore Health, Travel and Hospitality, Food Service, Entertainment and Education.

Course Description
This course provides real world, hands-on learning on what it’s like to actually start a company or to find a new business model for an existing one. This class is not about how to write a business plan. It’s not an exercise on how smart you are in a classroom, or how well you use the research to size markets.

This class combines theory with a ton of hands-on practice. Our goal, within the constraints of a virtual classroom and a limited amount of time, is to give you a framework to test a business model.

You will be virtually “getting your hands dirty” by talking to customers, partners and competitors as you encounter the chaos and uncertainty of how a startup (or a restart) actually works.

You’ll practice evidence-based entrepreneurship as you learn how to use a business model to brainstorm each part of a company and formulate their hypothesis. Next, you’ll use customer development to virtually get out of the classroom and talk to 10-15 customers/ partners each day to validate whether your assumptions are correct, and to see whether anyone other than you would want/use your product or service. Finally, based on the customer and market feedback you gathered, you will use agile development to build Minimal Viable Products (incremental and iterative prototypes) to show prospective customers each day to see if customers would actually buy and use. Each day will be a new adventure outside the classroom as you test each part of your business model and then share the hard earned knowledge with the rest of the class.

This class is team-based.  (We’ll help Individuals without a team find a place on one.) Working and studying will be done in teams. You will be admitted as a teamTeams must submit a proposal for entry before the class begins. Projects must be approved before the class.

The teams will self-organize and establish individual roles on their own.

Hacking 4 Recovery Instructors and Team

Class Dates
Five Hacking 4 Recovery 5-day online classes will be offered this summer:

  • First session: Monday, June 29th to Friday, July 3rd at 4-7pm Pacific
  • Second session: Monday, July 13th to Friday, July 17th at 4-7pm Pacific
  • Third session: Monday, August 3rd to Friday, August 7th at 4-7pm Pacific
  • Fourth session: TBD
  • Fifth session: TBD

Find Out More – Info Sessions
We’ll be offering a series of information sessions describing the class, expectations and the application process.

May 21  4:00 PM PDT  Information session
May 28  12:00 PM PDT  Information session

Signup at the website at http://h4r.stanford.edu

Who Can Attend?
Hacking 4 Recovery is open to Stanford undergraduate and graduate students, as well as all Stanford faculty, staff and alumni. Students visiting Stanford for the summer are also invited to apply for this free course, (if they are registered for at least one Summer Session course (3-unit minimum).

The class is team-based. Priority is given to teams of 3 to 5. We will hold team formation mixers and help you find additional team members or teams to join.

June 4  4:00 PM PDT  Team formation mixer and Q&A
June 11  12:00 PM PDT  Team formation mixer and Q&A
June 18  4:00 PM PDT  Team formation mixer and Q&A
June 25  4:00 PM PDT  Team formation mixer and Q&A

Signup at the website at http://h4r.stanford.edu

Summer Startup Accelerators
Students who take the Hacking 4 Recovery class will have an opportunity to be apply for affiliated summer startup accelerators and incubators, including Pear VC, Stanford Venture Studio, H4XLabs and others.

For More Information
For more information or to apply online, please check out our Hacking 4 Recovery website at http://h4r.stanford.edu or email us at hacking4recovery@gmail.com

Join this class and help restart our economy.

What’s Missing From Zoom Reminds Us What It Means to Be Human

Over the last month billions of people have been unwilling participants in the largest unintentional social experiment ever run – testing how video conferencing replaced face-to-face communication.

While we’ve discovered that in many cases it can, more importantly we’ve discovered that, regardless of bandwidth and video resolution, these apps are missing the cues humans use when they communicate. While we might be spending the same amount of time in meetings, we’re finding we’re less productive, social interactions are less satisfying and distance learning is less effective. And we’re frustrated that we don’t know why.

Here’s why video conferencing apps don’t capture the complexity of human interaction.


All of us sheltering at home have used video conferencing apps for virtual business meetings, virtual coffees with friends, family meetings, online classes, etc. And while the technology allows us to conduct business, see friends and transfer information one-on-one and one-to-many from our homes, there’s something missing. It’s just not the same as connecting live at the conference room table, the classroom or local coffee shop. And it seems more exhausting. Why?

What’s missing?
It turns out that today’s video conferencing technology doesn’t emulate how people interact with others in person. Every one of these video applications has ignored a half-century of research on how people communicate.

Meeting Location
In the physical world the space and context give you cues and reinforcement. Are you meeting on the 47th floor boardroom with a great view? Are you surrounded by other animated conversations in a coffee shop or sitting with other classmates in a lecture hall? With people working from home you can’t tell where the meeting is or how important the location or setting is. In a video conference all the contextual clues are homogenized. You look the same whether you are playing poker or making a sales call, in a suit or without pants. (And with video conferences people are seeing your private space. Now you need to check if there’s anything embarrassing lying around. Or your kids are screaming and interrupting meetings. It’s fatiguing trying to keep business and home life separate.)

In the real world you just don’t teleport into a meeting. Video conferencing misses the transitions as you enter a building, find the room and sit down. The same transitions are missing when you leave a video conference. There is no in and out. The conference is just over.

Physical Contact
Second, most business and social gatherings start with physical contact – a handshake or a hug. There’s something about that first physical interaction that communicates trust and connection through touch. In business meetings there’s also the formal ritual of exchanging business cards. Those all are preambles to establish a connection for the meeting which follows.

Meeting Space Context
In person we visually take in much more information than just looking at someone’s face. If we’re in a business meeting, we’ll scan the room, rapidly changing our gaze. We can see what’s on desks or hanging on the walls, what’s in bookshelves or in cubicles. If we’re in a conference or classroom, we’ll see who we’re sitting next to, notice what they’re wearing, carrying, reading, etc. We can see relationships between people and notice deference, hierarchy, side glances and other subtle cues. And we use all of this to build a context and make assumptions—often unconsciously —about personalities, positions, social status and hierarchy.

Looking in a Mirror While Having A Meeting
Before meeting in person, you may do a quick check of your appearance, but you definitely don’t hold up a mirror in the middle of a meeting constantly seeing how you look. Yet with the focus on us as much as on the attendees, most video apps seem designed to make us self conscious and distract from watching who’s speaking.

Non-Verbal Cues
Most importantly, researchers have known for at least fifty years that at least half of how we communicate is through non-verbal cues. In conversation we watch other’s hands, follow their gestures, focus on their facial expressions and their tone of voice. We make eye contact and notice whether they do. And we are constantly following their body language (posture, body orientation, how they stand or sit, etc.)

In a group meeting it’s not only following the cues of the speaker, but it’s often the side glances, eye rolls and shrugs between our peers and other participants that offer direction and nuance to the tenor of a meeting. On a computer screen, all that cross person interaction is lost.

The sum of these non verbal cues is the (again often unconscious) background of every conversation.

But video conferencing apps just offer a fixed gaze from one camera. Everyone is relegated to a one-dimensional square on the screen. It’s the equivalent of having your head in a vise, having been wheeled into a meeting wearing blinders while tied to a chair.

Are Olfactory Cues Another Missing Piece?
There’s one more set of communication cues we may be missing over video. Scientists have discovered that in animals, including mammals and primates, communication not only travels through words, gestures, body language and facial expressions but also through smells via the exchange of chemicals and hormones called pheromones. These are not odors that consciously register, but nevertheless are picked up by the olfactory bulb in our nose. Pheromones send signals to the brain about sexual status, danger and social organization. It’s hypothesized odors and pheromones control some of our social behaviors and regulate hormone levels. Could these olfactory cues be one additional piece of what we’re missing when we try to communicate over video? If so, emulating these clues digitally will be a real challenge.

Why Zoom and Video Teleconferencing is Exhausting
If you’ve spent any extended period using video for a social or business meeting during the pandemic, you’ve likely found it exhausting. Or if you’re using video for learning, you may realize it’s affecting your learning by reducing your ability to process and retain information.

We’re exhausted because of the extra cognitive processing (fancy word for having to consciously do extra thinking) to fill in the missing 50% of the conversation that we’d normally get from non-verbal and olfactory cues. It’s the accumulation of all these missing signals that’s causing mental fatigue.

Turning Winners Into Losers
And there’s one more thing that makes video apps taxing. While they save a lot of time for initial meetings and screening prospects, salespeople are discovering that closing complex deals via video is difficult. Even factoring out the economy, the reason is that in person, great salespeople know to “read” a meeting. For example, they can tell when someone who was nodding yes to deal actually meant “no way.” Or they can pick up the “tell me more signal” when someone leans forward. In Zoom all those cues are gone. As a result, deals that should be easy to close will take longer, and those that are hard won’t happen. You’re investing the same or more time getting the meetings, but frustrated that little or no forward progress occurs. It’s a productivity killer for sales.

In social situations a feel for body language may help us sense that a friend who’s smiling and saying everything is fine is actually have a hard time in their personal life. Without these physical cues—and the loss of physical contact—may lead to a greater distance between our family and friends. Video can bridge the distance but lacks the empathy a hug communicates.

An Opportunity for Innovators to Take Video Conferencing to the Next Level
This billion person science experiment replacing face-to face communication with digital has convinced me of a few things:

  1. The current generation of video conferencing applications ignore how humans communicate
    • They don’t help us capture the non-verbal communication cues – touch, gestures, postures, glances, odors, etc.
    • They haven’t done their homework in understanding how important each of these cues is and how they interact with each other. (What is the rank order of the importance of each cue?)
    • Nor do they know which of these cues is important in different settings. For example, what are the right cues to signal empathy in social settings, sincerity, trustworthiness and rapport in business settings or attention and understanding in education?
  2. There’s a real opportunity for a next generation of video conference applications to fill these holes. These new products will begin to address issues such as: How do you shake hands? Exchange business cards? Pick up on the environment around the speaker? Notice the non-verbal cues?
  3. There are already startups offering emotion detection and analytics software that measure speech patterns and facial cues to infer feelings and attention levels. Currently none of these tools are integrated into broadly used video conferencing apps. And none of them are yet context sensitive to particular meeting types. Perhaps an augmented reality overlay with non verbal cues for business users might be a first step as powerful additions.

Lessons Learned

  • Today’s video conferencing applications are a one-note technical solution to the complexity of human interaction
    • Without the missing non-verbal cues, business is less productive, social interactions are less satisfying and distance learning is less effective
  • There’s an opportunity for someone to build the next generation of video conference applications that can recognize key cues in the appropriate context
    • This time with psychologists and cognitive researchers leading the team

In a Crisis – An Opportunity For A More Meaningful Life

Sheltering in place during the Covid-19 pandemic, my coffees with current and ex-students (entrepreneurs, as well as employees early in their careers) have gone virtual. Pre-pandemic these coffees were usually about what startup to join or how to find product/market fit. Though in the last month, even through Zoom I could sense they were struggling with a much weightier problem. The common theme in these calls were that many of them were finding this crisis to be an existential wakeup call. “My job feels pretty meaningless in the big picture of what matters. I’m thinking about what happens when I can go back to work. I’m no longer sure my current career path is what I want to do. How do I figure it out?”

Here’s what I’ve told them.


In a Crisis – An Opportunity to Reflect
If you’re still in school, or early in your career, you thought you would graduate into a strong economy and the road ahead had plenty of opportunities. That world is gone and perhaps not returning for a year or more. Economies across the world are in a freefall. As unemployment in the U.S. passes 15%, the lights are going off in companies, and we won’t see them back on for a long time. Some industries will never be the same. Internships and summer work may be gone, too.

But every crisis brings an opportunity. In this case, to reassess one’s life and ask: How do I want to use my time when the world recovers?

What I suggested was, that the economic disruption caused by the virus and the recession that will follow is one of those rare opportunities to consider a change, one that could make your own life more meaningful, allow you to make an impact, and gain more than just a salary from your work. Perhaps instead of working for the latest social media or ecommerce company or in retail or travel or hospitality, you might want to make people live healthier, longer and more productive lives.

I pointed out that if you’re coming out of school or early in your career you have an edge –  You have the most flexibility to reevaluate you trajectory. You could consider alternate vocations – medical research or joining a startup in therapeutics, diagnostics, medical devices, or digital health (mobile health, health IT, wearable devices, telemedicine, and personalized medicine). Or become an EMT, doctor or nurse.  Or consider the impact remote learning has had in the pandemic. How can you make it better and more effective? What are ways you might help to strengthen organizations that help those less able and less fortunate?

Here are the steps you can take to get started:
Use the customer discovery methodology to search for new careers.

  1. Start by doing some reading and research, looking to the leading publications in the field you’re interested in learning more about. News sources for Digital Health and Life Sciences are different from software/hardware blogs such as Hacker News, TechCrunch, etc.

If you’re interested in learning more about a career in Life Sciences, start reading:

If you’re thinking about educational technology start by reading EdSurge

And if you’re thinking about getting involved in social entrepreneurship, read The Stanford Social Innovation Review as well as the social entrepreneurship sections of publications like Entrepreneur, Inc., Fast Company and Forbes.

  1. Get out of the building (virtually) and talk to people in the professions you’re interested in. (People on the front-line of the Covid-19 fight (e.g. first responders, health care workers) might be otherwise engaged, but others in the field may be available to chat.) Learn about the job, whether they enjoy it and how you can get on that career track.
  2. Get out of the building physically. If possible, volunteer for some front-line activities. Think about internships in the new fields you’re exploring.
  3. If you’re thinking of starting a company, get to know the VC’s. They are different depending on the type of startup you’re building. Unlike in the 20th century where most VC’s financed hardware, software and life sciences, today therapeutics, diagnostics, and medical devices, are funded via VC firms that specialize in only those domains. Digital health crosses the boundaries and may be founded by all types of firms. Get to know who they are.

Some of the Life Science VC blogs and podcasts:

For edtech the VC firm to know is Reach Capital

  1. Inexpensively pivot your education into a new field. An online education could be a viable alternative to expensive college debt. Coursera, EdX and ClassCentral have hundreds of on-line classes in medicine, health and related fields. Accredited universities also offer online programs (see here.) If you’re in school, take some classes outside your existing major (example here.)

My advice in all of these conversations? Carpe Diem – seize the day.

Now is the time to ask: Is my work relevant?  Am I living the life I really wanted? Does the pandemic change the weighting of what’s important?

Make your life extraordinary.

Lessons Learned

  • Your career will only last for 14,000 days
  • If you’re still in school, reconsider your major or where you thought it was going to take you
  • If you’re early in your career, now is the time to consider what it would take to make a pivot
  • In the end, the measure of your life will not be money or time. It’s the impact you make serving God, your family, community, and country. In the end, our report-card will be whether we left the world a better place.

Customer Discovery In the Time Of the Covid-19 Virus

A version of this article appeared in TechCrunch.

With in-person classes canceled, we’re about to start our online versions of Hacking for Defense and Hacking for Oceans (and here). The classes are built on the Lean Startup methodology: Customer Discovery, Agile Engineering and the Business/Mission Model Canvas. So how do our students get out of the building to talk to customers to do Customer Discovery when they can’t get out of the building?  How do should startups do it?

—-

Reminder: What’s the Point of Talking to Customers?
Talking to customers seems like a simple idea, but most founders find it’s one of the hardest things they have to do. Founders innately believe they understand a customers problem and just need to spend their time building a solution. We now have a half a century of data to say that belief is wrong. To build products that people want and will really use, founders first need to validate the problem/need, then understand whether their solution solves that problem (i.e. finding product/market fit). Finally to have a better chance of a viable enterprise, they need to test all the other hypotheses in their business/mission model (pricing, demand creation, revenue, costs, etc.)

The key principles of customer development are:

  1. There are no facts inside the building so get the heck outside
  2. All you have are a series of untested hypotheses
  3. You can test your hypotheses with a series of experiments with potential customers

Now with sheltering-in-place the new normal, we’ll add a fourth principle:

  1. In-person interviews are not the only way to test your hypotheses

Reminder: What’s the Point of Physically Getting Out of The Building?
One of the reasons for interviewing people in person is to engage in a dialog that lets you be sure you understand the problem you are solving and measure customers’ reactions to the minimal viable products you put in front of them.

There’s a rule of thumb that says, “If you can see their pupils dilate and can tell they’re checking not their watch,” it’s a valuable interview.  The gold standard are in-person interviews where you can not only do all of that, and get to see what’s on their desks, the awards on their walls, the books on their shelves, and other ephemera that may give you clues about their interests and behavior. But today, with the Covid-19 pandemic that’s no longer possible. So the next best thing is a Video Teleconference.

Video Teleconferencing is Your Virtual Friend
Video (via Zoom, Skype, Google Hangouts, Microsoft Teams, etc.) with enough resolution to see someone’s facial expressions –  is more than an adequate substitute, and in some cases better – as it allows you to connect to more people in a shorter period of time. When we first taught the National Science Foundation Innovation Corps 11 years ago, the first 75 teams did Customer Discovery this way. (More advanced tools for remote user testing like ValidatelyUsertesting, Lookback, etc. are worth checking out.)

Our classes require students to talk to 100 Customers/Beneficiaries in 10 weeks. Before the pandemic, customers were found where they worked or played. Today, while some may still be at work, most will be sheltering at home, and almost all have more time on their hands than before. (You certainly do! Given you’re not traveling to customer interviews, you ought to be able to do more than 100 interviews.)

Getting a Meeting in the Midst of Chaos
Don’t assume potential interviewees are answering their work phones. And if they’re working at home, they may have a different email address. Don’t use the same opening email pitch you did before the virus. Your email should recognize and acknowledge the new normal. (i.e. Hello, my name is xx. I know this must be a crazy time for you. I’m a student/PI at xx University. All our classes have gone online. I’m investigating whether [problem x] would be valuable to solve today or when the world returns to normal. Would you be willing to speak to me?)

One upside is that you may now be able to get access to people who normally have a cloud of administrative gatekeepers around them. If you have a solution that is relevant to their business in this uncertain time, reach out to them.

Find Out How Their World Has Changed
In addition to the standard customer discovery and validation questions (how they did their job, what pains they had around current solutions, etc.) you need to understand:

  • What were their needs/problem/solution/industry pre-Covid 19?
  • What is it like now?
  • Have there been regulatory changes? Customer behavior changes?
  • What do they think it will be like when the recovery comes?
  • Will their problem/solution be the same or do they think it may change?

Presenting Your Minimal Viable Product (MVP) Online
An MVP is an experiment. It’s what you can show a potential customer/ user/ beneficiary/partner that will get you the most learning at a point in time. You build MVP’s to validate the need/problem, then to validate product/market or mission/solution fit and finally the rest of the business/mission model canvas. You can use wireframes, PowerPoints slides, simulated screenshots, storyboards, mockups or demo’s. The rest of the canvas might be validated with pricelists, spreadsheets, etc. (Alex Osterwalder and David Bland’s new book, Testing Business Ideas is a great help here.)

Given that you are now presenting over video, you are going to be trying to communicate a lot of information in a small window on a computer screen. On-line MVP building and delivery will need to become an art form. Rather than doing every demo of your MVP live, consider 1) recording it 2) highlighting the key points.

  • Break your MVP demo into <1 minute segments. Edit the video to illustrate each of your points, This allows customers/beneficiaries to interrupt and ask questions and allows you to jump to different parts of the demo.
  • If you would normally have your potential customer hold, feel or use the product, make sure you demo someone doing that. Take the time to zoom in.
  • As you show your MVP, split the screen so you can see the customer’s reaction as the demo unfolds.
  • Practice, practice, practice the delivery of MVP’s. First it needs to be built and practiced, then the smaller parts for delivery need to be practiced. Anticipate questions and prepare your answers to them.
  • Ask if you can record the session. If not, make sure a team member is online to take notes.
  • Remember – at this point you’re testing hypotheses – not selling.

Validate the Rest of Business/Mission Model Components
A common mistake in building a startup is testing only product/market (mission/solution) fit. But other business/mission model components must be tested and validated, too. How can you test demand creation hypotheses during shelter in place for the Covid-19 virus? Important ideas you’ll want to consider:  Are potential customers beneficiaries now reachable in new ways? How can you test distribution/deployment? Are they the same now? Will they be the same after the recovery? Which changes are temporary? Which are permanent?

Your Business Model and the World Have Changed
If you’re business model still looks like your original assumptions a month ago, you’ve been living under a rock. Every part of your business model – not just product and customer – will change now. Recognize that in the post pandemic world, the map of surviving competitors will change, regulations will be changed, distribution channels may no longer be there, the reimbursement environment will be different, etc.

Ask everyone you interview, “What’s changed since the Covid-19 virus? What will the world look like after?” (Be specific. Ask questions not just about product, but about every other part of your business model.

Some Discovery Can’t Be Done Now
The reality is that some discovery and validation can’t be done right now. If you need to talk to people on the front-line of the Covid-19 fight (e.g. first responders, health care workers, delivery, network, remote work, telemedicine), ask yourself if your solution is relevant to making people healthier, safer, more effective?  If it is, then keep at it.

If not, don’t be tone deaf. In the midst of the crisis, testing ideas for businesses that are shutting down (travel, hospitality, etc.,) or from employees who are worried whether they’ll have a job will not work. Even if you have great new ideas for when recovery comes, most responses you’re going to get will be framed in the moment.

If so, consider putting your project on hold or find another problem to solve. Be conscientious about not taking people away from the important work required on the front line of this fight.

Lessons Learned

  • Customer Discovery and Validation can be easily done via video teleconferencing
  • Recognize that many potential interviewees are working from home
  • Break your MVP demos into small pieces, leaving time for people to respond
  • Adjust your questions to understand how customers’ situations have been changed by the pandemic
  • Some Customer Discovery can’t be done now

How To Keep Your Company Alive – Observe, Orient, Decide and Act

This article previously appeared in the Harvard Business Review. It’s been updated with new information about the U.S. Paycheck Protection program and the Economic Injury Disaster Loan program.

 

What cashflow-negative companies must do to survive

We’re in uncharted territory with the Covid-19 pandemic. But it’s increasingly looking grim.

Companies that outlast this crisis will have CEOs who can rapidly assess these new circumstances, recognize new patterns and opportunities, and act with urgency to take immediate action to pivot and restructure their companies. Those that don’t may not survive.

So here’s a five-day playbook to help CEOs of cash-flow negative startups, or ones about to go negative, assess the new normal and respond with speed and urgency.


Your Company Survival Depends on A Simple Formula
Your company’s survival in this downturn can be captured in a simple formula.

Survival = (speed of your understanding of the situation) x (the magnitude of the pivots/cuts/lifeboat choices you make) x (the speed of your time to make those changes)

Notice that the word speed appears twice. This is not the time for committees, study groups or widespread consensus building. Even with imperfect information, the future of your company depends on your ability to make rapid decisions and start acting.

If you’re a CEO who can’t quickly bias yourself for action and if you wait around for someone to tell you what to do, then your investors, or more likely the market, will make those decisions for you.

Huge segments of the economy have shut down: travel, hospitality, restaurants. Any place with a fixed cost that relies on foot traffic will come under pressure. With millions of people out of work in the next quarter, it’s obvious that discretionary purchases like furniture, fashion, lifestyle will take a hit. But other businesses like law firms, contracting firms, real estate firms, will take hits, too. The ripple effects won’t be obvious at first. Your customers will no longer be your customers. Your revenue plans are no longer valid. To understand the state of things, you need to rapidly assess your internal and external environments going forward.

Day 1: Prepare An Assessment of the Internal and External Environment:
What did the external and internal environment look like for your company today? What do you believe the world will look like for each of the next five quarters? For companies burning cash, such as startups, how much cash do you have? What’s your monthly cash burn at your new low revenue level? How many months of cash do you have?  Cut costs to stay alive for 24 months.

External Assessment

  1. State of the economy
    • Unemployment %
    • Shelter in place yes/no?
  2. Health of Your Current Target Market(s)
    • Actively buying? Not returning calls? Out of business?
  3. Emergence of New Market(s)
    • Are there new opportunities?
  4. Forecasted recovery date
    • Workers can return
    • Your customers start buying
  5. Check if the the Paycheck Protection Program, (here and here) which provides 100% federally guaranteed loans to small businesses, can apply to your company. Also see if the the Economic Injury Disaster Loan program applies.
  6. If you were raising money, validate whether your investors are still on board – with the same terms – or at all

Internal Assessment

  1. Operating Numbers
    • Liquidity and likely cash-out date under your worst-case scenario
    • Accounts receivable, accounts payable
    • Sales pipeline/forecast
    • Marketing programs spending
    • Payroll costs/other variable costs
  2. Sources of additional capital – For existing companies: debt commitments, and new lenders. Can the Paycheck Protection Program, (here and here) be a source of capital?For startups: source of VC money?

Don’t overthink this. And most importantly do not outsource this to your staff. Set up a war room and work with your CFO and C-level staff together until it’s done. That will start to get your team aligned about the size of the problem. The CEO should dial through as many of the largest existing customers to get a firsthand understanding of the magnitude of any revenue shortfall. If you were expecting angel or venture funding get on the phone to your investor(s). Some VC’s are walking away from signed term sheets. Others are cutting their valuations. The CFO should be on the phone to sources of additional capital. There is no market research that’s going to get it “right.” No one can predict how this plays out and for how long. All we know is that it’s going to be very different than it was a few weeks ago and likely going to be worse a few weeks from now.

Day 2: Iterate the assessment with your investors/board
Whatever assessment you develop, you need to get feedback from your board and investors. While you’re seeing just your own company, hopefully they’re getting data from multiple companies across a wider set of industries. If you’re a startup you’ll also get a sense of how much of a nuclear winter the funding scene is for your market/company.

Boards need to insist on an immediate assessment and be actively engaged. I listened in on a board call with an enterprise software company this week, and when the CEO said, “Our VP of sales assured me our pipeline won’t be affected.” Board members gave her a wakeup call: there was either going to be a much more realistic assessment tomorrow based on her first-hand customer conversations, or a new CEO. Some CEOs can and will rise to the occasion by themselves but having a unified board can accelerate the process.

But what if you think the situation is more dire and you disagree with your board’s assessment? CEOs in this position are going to face a major career decision – go along with advice you think will damage/destroy the company – or put your job on the line. Remember, a year from now no one wants to be the CEO of a company out of business whose lament is, “I did what the board told me to do.”

Once you have agreed on what the world will look like, it’s time to build the plan for your new company. This plan has three parts: Pivots to your new business model, changes to your operating plan, and what initiatives you save for the recovery. The plan must also take into account that this crisis has exposed how vulnerable companies are to a single source of supply. CEOs of companies that manufacture goods in the U.S. are about to face a moral dilemma. China and South Korea are starting their factories up again. Going forward, do you move your supply chain from China or at least create a second source from other countries? Do you source/build things there while laying off people here? What does your board suggest? What do you think is the right thing to do?

Days 3 and 4: Prepare new business model and operating plan
First, think about potential pivots. Ask yourself: Are there now new customers, new services and new channels to pursue? Which parts of your business model can now serve the new normal where business is booming – remote work/education, social cohesion over distance, telemedicine, home delivery, etc.?

For example:

  • If you had brick and mortar locations, how much can you pivot to Ecommerce (for basics), so customers can acquire goods without having to leave the house? Can you also offer specialized services?
  • Automated delivery services – the more people you can take out of the equation, the safer the product. Are there parts of your supply chain that can be repurposed? What about parts of your manufacturing lines?
  • Online/Virtual learning – schools will need to embrace virtual learning in a way they haven’t before.
  • B2B – cloud services, online meetings, virtual workforce management, collaboration tools. With more work from home happening, all of these services will see increased demand from companies
  • Virtual Travel/Tourism – how can consumers get out without leaving the safety of their house?
  • Remote Workforce automation – past the obvious conferencing tools, how do you maintain cohesion and coordination?
  • Remote health care – Can you do initial triaging/diagnosis online before having a patient come in?
  • Personalized Video Entertainment – VOD, AVOD, Short Form Social Sites, Twitch, etc. …

Next, plot out the changes to your operating plan. What cuts will you make to spending programs – marketing, service, manufacturing, R&D? What are your “lifeboat choices” – what layoffs to make, renegotiate payables, rents, leases, how to trade off cash management versus revenue growth? How can you shift focus to customer retention versus acquisition?

As part of these operating changes, make sure your heads of HR and finance recognize that they have entirely new jobs.

Your CFO now becomes the head of cash management. Draw down all debt commitments. Ask existing and new lenders for additional funding. Call all large vendors and ask for lower prices. If appropriate, offer to sign a longer agreement in exchange for lower cash payments in 2020 and 2021. See if your fixed costs are really fixed, or will they agree to defer some for higher payments at a future date. Make sure your CFO is familiar with the Paycheck Protection Program, (here and here) as a potential source of cash and to avoid/defer layoffs.

Nothing is more important than assuring the company can continue to pay its employees.

Your head of HR is now head of layoffs. He or she has 48 hours to grow into it, or you need to find someone else from the ranks to do it. Before layoffs, cut all salaries by 20%. Cut CXO salaries by at least 30%. Award equity to employees equal to the value of their reduced salaries. Try to protect the most vulnerable employees. Letting people go needs to be done with compassion and adequate compensation. And if you do it correctly, it will hopefully be done just once.

For those remaining employees, offer remote therapy to deal with the stress of working from home and pay for any equipment/network upgrades.

As you make these plans, remember: There will be a morning after. What changes in your industry will be permanent? If you have sufficient cash reserves, what initiatives do you want to keep in the lifeboat that may give you the ability to take advantage of these changes? To recover and grow quickly? Or to launch new products? Or if you have sufficient cash, now is the time to hire great people who were never available.

Although you prepared the internal and external assessment with just your C-level staff, now you want to rapidly engage the collective intelligence/wisdom of the company. Ask everyone in the company to suggest changes to the business model, operating plan and recovery plan.Your employees likely have ideas and see opportunities not visible in the C-suite. This will signal to every employee that now is the time for all-hands-on-deck and that you will be making decisions to quickly separate the crucial from the irrelevant.

You need to communicate, communicate and communicate some more to your employees about why you’re asking for their ideas. This is the perfect time to start a daily update from the C-suite. This is critical if your employees are working remotely. Let them know what you’re learning and then when you begin implementing changes, tell them why.

Day 5: Iterate with investors/board
Whatever business model, operating plan and recovery plan you come up with, you need to get feedback from your board. Keep in mind they’re likely dealing with multiple companies rapidly replanning, so remind them about the assessments you mutually agreed on. Then walk them through why the changes you’re suggesting match that plan. They may have seen new ideas from other companies in their portfolio so be open to additional suggestions.

Beyond the five-day plan, I want to specifically address two of the most challenging parts of the new operating plan you need to address: Layoffs and culture.

Carpenters use the aphorism “Measure twice, cut once.” The same applies to layoffs. In every downturn I’ve lived through, there were CEOs who handled layoffs as “a death by a thousand cuts.” For example, in a company with 1000 employees, they’d layoff a 100 people the first month, another 100 the next month, then a 100 the third month to downsize to 700 people over several months. Rather than being productive, the constant layoffs were demoralizing and paralyzed the remaining workforce. Employees saw that the direction was a downward spiral with no end in sight. And everyone worried: “Am I next?”  I’ve watched other CEOs immediately layoff 400 people and have 600 left. If/when they overshot, they could rehire 100 people (including some of the same people who had been laid off). While the mass layoffs created an immediate shock, people adjusted. They worried but began to feel more secure. When hiring began again, everyone was relieved: “The worst is over. Things are getting better.” (Remember to investigate whether the Paycheck Protection Program can save some or all of those jobs.)

To begin adjusting the culture to this new reality, communicate these business model and operating plan changes to your employees. Offer relentless optimism for survival, but ruthless cost-cutting (starting with the CXO salaries.) Let them know that as CEO you are going to be micromanaging for survival and expect each of them to do the same. You’re going to be relentless, direct and clear that once decisions are made, there are no disagreements. And remind them that together you are all working to save the company and their own jobs.

At some point this crisis will run its course. Running this five-day playbook will help your business survive so when the recovery does come, you’ll emerge stronger and ready to hire and grow again.

Lessons Learned

  • CEOs need to take control and take drastic action. Be decisive and do it immediately
  • Survival = (speed of your understanding of the situation) x (the magnitude of the pivots/cuts/lifeboat choices you make) x (the speed of your time to make those changes)
  • Involve the board and the rest of the company
  • Communicate with all employees daily
  • Move with speed and urgency, you have days — not weeks or months
  • As painful as it might be, when you make cuts do it once
  • Assume you’ll emerge on the other side. What will you wish you had kept?

Action Today for CFO’s

Jeff Epstein is on the board of Shutterstock, Twilio, Kaiser Permanente, and was the CFO of Oracle, DoubleClick, Nielsen and King World and is an operating partner at Bessemer Venture Partners. He teaches the Lean LaunchPad class at Stanford with me. And the minute he talks about financing I shut up and take notes.

He sent this message to the CFOs of his companies yesterday.
(Read it along with yesterdays survival strategy advice to CEOs.)

I thought it was important enough to share it with all of you.


Action This Day
Our first priority is the health and safety of our families, employees, customers and communities.

As CFOs, our next key priority is preserving cash.

For immediate action:
1. Evaluate your liquidity and likely cash out date under your worst-case scenario.
2. Objective: minimum of 18 months of cash. 24 months is better.

If you have more than 24 months, congratulations.

If not, take action now.

  1. Draw down all debt commitments. It’s like buying insurance. There’s a cost, but it’s worth it if things get worse. Ask existing and new lenders for additional funding.
  2. Make a list of all vendors, by $ spend amount. Call all large vendors and ask for lower prices. If appropriate, offer to sign a longer agreement in exchange for lower cash payments in 2020 and 2021.
  3. Review all marketing programs. Cut marketing by x%.
  4. Payroll costs are probably your largest cost item. If necessary, you may need to take action. Choices include:
    • Hiring freeze
    • Layoffs.
    • Cut all salaries by 20%. Cut CXO salaries by 30%. Award equity to employees equal to the value of their reduced salaries.
  5. Some of your customers will delay paying you; some will default. Credit card customers will dispute charges leading to chargebacks to you. Monitor collections and chargebacks frequently. Develop a playbook for mitigation.
  6. If you own bonds or other investments, review them for risk. Some companies, and perhaps some governments, may default.
  7. Because events are changing so quickly, have your CEO consider sending a short weekly email to your Board with any updates.
  8. Call if you’d like a sounding board to discuss the decisions you’re considering.

Most of all, stay safe.

Jeff

The Virus Survival Strategy For Your Startup

“Winter is coming.”

This is the one blog post that I hope I’m completely wrong about.

With the Covid-19 virus a worldwide pandemic, if you’re leading any startup or small business, you have to be asking yourself, “What’s Plan B? And what’s in my lifeboat?”

Here are a few thoughts about operating in uncertainty in a pandemic.


Impact
Social isolation and a declared national emergency have had an immediate impact on industries that cluster people; conferences, trade shows, airlines/cruise ships and all types of travel, the hospitability industry, sporting events, theater and movies, restaurants and schools. Large companies are sending employees to work at home. Large retail chains are shutting down their stores. While the impact on small businesses and workers in the “gig-economy” hasn’t made the news, it will be worse for them. They have fewer cash reserves and less margin of error for managing sudden downturns. The ripple and feedback effect of all of these closures will have a major impact on our economy, as each industry that gets impacted puts people out of work, and those laid off workers don’t buy products and services.

It’s no longer business as usual for the rest of the economy. In fact, shutting down the economy for a pandemic has never happened. Millions of jobs may be lost in the next few months, as entire industries get devastated, something not seen since the Great Depression of 1929-39. I hope that I’m very wrong, but the impact of this virus social and economic effects are likely to be profound, and will change how we shop, travel and work for years.

If you’re running a startup or small business, your first priority (after your family) is keeping your employees and customers safe. But next the question is, ‘What happens to my business?”

The questions every startup or small business CEO needs to ask now are:

  • What’s my Burn Rate and Runway?
  • What does your new business model look like?
  • Is this a three-month, one-year or a three-year problem?
  • What will my investors do?

Burn Rate and Runway
To answer the first question, take stock of your current gross burn rate i.e. how much cash are you spending each month. How much are fixed expenses (those you can’t change, i.e. rent?) And how much are variable expenses (salaries, consultants, commission, travel, AWS/Azure charges, supplies, etc.?)

Next, take a look at your actual revenue each month – not forecast, but real revenue coming in each month. If you’re an early stage company, that number may be zero.

Subtract your monthly gross burn rate from your monthly revenue to get your net burn rate. If you’re making more money than you’re spending, you have positive cash flow. If you’re a startup and have less revenue than your expenses, that number is negative and represents the amount of money your company loses (“burns”) each month. Now take a look at your bank account. See how many months your company can survive burning that amount of cash each month. This is your runway –  the amount of time your company has before it runs out of money. This math works in a normal market…

The World Turned Upside Down
Unfortunately, it’s no longer a normal market.

  • All your assumptions about customers, sales cycle and most importantly, revenue, burn rate and runway are no longer true.
  • If you’re a startup, you’ve likely calculated your runway to last until you raise your next round of funding. Assuming there was going to be a next round. That may be no longer true.

What does my business model look like now?
Since the world today is no longer the same as it was a month ago, and likely will be worse a month from now, if your business model today looks the same as it did at the beginning of the month, you’re in denial – and possibly out of business.

It’s the nature of startup CEOs to be optimistic, however you need to quickly test your assumptions about customers and revenue. If you are selling to businesses (a B-to-B market) have your customers’ sales dropped? Are your customers closing for the next few weeks? Laying off people? If so, whatever revenue forecast and sales cycle estimates you had are no longer valid. If you’re selling directly to consumers (a B-to-C market,) were you in a multi-sided market (consumers use the product, but others pay you for their eyeballs/data?) Are those assumptions about payers still correct? How do you know?

What are the new financial metrics? Receivables – get on top of them. Days of cash left?

You need to figure out your actual burn rate and runway in this new environment now.

Is this a three-month, one-year, or a three-year problem?
Next, you need to take a deep breath and ask, Is this a three-month problem, a one-year problem or a three-year problem? Are the shutdowns of businesses going to be a temporary blip in the economy or will they drive the U.S. and Europe into a long recession?

If it’s just three-months, (looking more unlikely by the day) then an immediate freeze on variable spending (hires, marketing, travel, etc.) is in order. But if the effects are going to reverberate in the economy longer, you need to start reconfiguring your business. You need a lifeboat strategy. That’s a fancy phrase for figuring out what are minimal things you need to keep your company alive and what to leave behind.

A one-year problem means taking a knife to your burn rate (layoffs and elimination of perks and programs to reduce your variable expenses,) renegotiating what previously seemed liked fixed expenses (rent, equipment lease payments, etc.) and putting only the essential elements for survival in the lifeboat.

[Update: Read the detailed financial advice to CFO’s here.]

If you were selling online versus in-person, you may have an advantage (assuming your customers are still there.) Or you change sales strategy.

Whatever your product/market fit was last month it’s no longer true and needs to change to meet the new normal. Does this open new value propositions or kill others? Alter the product?

And if it’s a three-year problem? Then not only do you need to jettison everything that isn’t essential for survival, it probably requires a new business model. In the short term, explore if some part of your business model can be oriented around the new rules of social isolation. Can your product be sold, delivered or produced online? Does it have some benefits if delivered that way? (See the advice from Sequoia Capital here.) If not, can your product/service be positioned as a lifeboat for others to ride out the downturn?

Leadership – Plan, Communicate and Act with Compassion
Revise your sales revenue goals, product timelines and create a new business model and operating plan – and communicate them clearly to your investors and then to your employees. Keep people focused on an achievable plan that they clearly understand. From the perspective of having lived through the last three crashes, I’ve observed the biggest mistake CEO’s made was not making draconian cuts to expenses quickly enough. They dripped out layoffs and cuts holding on to favored projects with magical thinking that somehow this was just something that would pass.  You need to act now.

If you’re in a large company considering layoffs, the first option should be to cut the salaries of the higher paid exec/employees to try to keep the people who can least afford it, employed. (Good things will come to CEOs who first try to save everyone on the ship before they jump in the lifeboat.) If/when people need to be laid off, do it with compassion. Offer extra compensation. If in the worst case you see you’re running out of cash, under no circumstances run it down to zero. Do the right thing and have enough cash on hand to offer everyone at least two weeks or more of pay.

Your Investors
One of the key elements of survival is access to capital. As a startup or small business you should realize your investors are also asking themselves how this pandemic will affect their business model. The cold hard truth is that in a crash VC’s are running their own “What do I save in the lifeboat?” exercise. They triage their deals –  first worrying about liquidity of their late stage deals which have the highest valuations. These startups typically have very high burn rates and funding for those could fall off a cliff. You and the survival of your startup may no longer be their priority and your interests are no longer aligned. (VC’s who tell you otherwise are either naïve, lying through their teeth, or not serving the interests of their investors.) In every major downturn inflated valuations disappear and the few VC’s still writing new checks find it’s a buyer’s market. (Hence the term “Vulture Capitalists.”)

Some investors have only lived in a booming market when valuations only went up and investment capital was plentiful. But investors with grey hair can remember the nuclear winter after the past recessions of 2000 and 2008 and can offer some historical patterns of crashes and recovery to CEOs running early stage startups – some who weren’t born when the crash of 1987 hit, were 10 years old in the crash of 2000 and 18 in the last crash of 2008. Keep in mind, that today’s circumstances are different. This isn’t a bear stock market. This is a conscious shutdown of most of our economy, trading jobs for saving hundreds of thousands of lives, that’s causing a bear market and a likely recession.

Data from the last large crash in 2008 had seed rounds recovering early, but later stage funding cratered and took years to recover. (see the figure below showing quarterly VC investments before and after this crash – part of this post from Tomasz Tunguz.)

This time around, the health of the venture business may depend on what hedge funds, investment banks, private equity firms, sovereign wealth funds, and large secondary market groups do. If they pull back, there will be a liquidity crunch for later stage startups (Series B, C…). For all startups in the short term, the deal terms and valuations will get worse, and there will be fewer investors looking at your deal.

As a startup CEO you need to know if your board is going to be screaming at you for not radically cutting burn rate and coming up with a new business model or, will they be yelling at you to stop being distracted and stay the course?

And if the latter, I’d want to know what skin in the game they have, if they’re wrong. It’s pretty easy for VC’s to tell you that they’ll be right behind you when you’ll need a next round, until they’re not. Unless your investors are matching their orders for “full speed ahead” with a deposit into your bank, now is not the time to be railroaded into a burn rate that is unrecoverable.

Prepare for a long cold winter.

But remember no winter lasts forever and in it smart founders and VCs will be planting the seeds for the next generation of startups.

Lessons Learned

  • This is a conscious shutdown of our economy, trading jobs for saving hundreds of thousands of lives
  • It’s likely going to cause a recession
  • The Covid-19 virus will change how we shop, travel and work for at least a year and likely three
  • It’s inconceivable that you can have the same business model today as you did 30-days ago
  • Put in place lifeboat plans for three-month, one- year and three year downturns
  • Recognize that your investors will act in their interests, which may no longer be yours
  • Take action now
  • But act with compassion

You’re Not Important to Me but I Want To Meet With You

If you’re a busy startup founder, you’re likely delegating the task of scheduling key meetings about things you want/need to your admin. This is a mistake.

That’s because the dialog you have in setting up the meeting is actually the first part of your meeting, not some clerical task. Treat it this way and you’re much more likely to achieve the objective you’re hoping to. Here’s why:


A few weeks ago I got an email from a VC friend asking me to talk to a founder at one of his startups. The founder had sent him a note, “We’d love to partner with Steve on getting his frameworks and templates from his books – The Four Steps and The Startup Owner’s Manual – onto our product. Can you connect us to him?”

I told the VC, of course, and sent an email to the founder suggesting a couple of dates.

In response I got an email from him telling me how busy he was, but his admin would coordinate some dates for us…

If this doesn’t strike you as a red flag of a relationship that was broken before it started, and an opportunity wasted, let me point out what went wrong.

Who’s Doing the Ask?
Outside of a company there are two types of meetings; 1) When you want something from someone, 2) When they need something from you.  This meeting fell into the second category – a founder wanted something from me and wanted my time to convince me to give it to him. Turning the scheduling over to an admin might seem like an efficient move, but it isn’t.

What Message Are You Sending?
A startup CEO handing me off to an admin sent a few signals.

First, that whatever his ask was really wasn’t that urgent or important to him. Second, that he didn’t think there was any value in forming a relationship before we met.  And finally, that he hadn’t figured out that gathering data in premeeting dialog could help him achieve his objective.

Instead, skipping the one-on-one dialog of personally setting up the meeting signaled to me that our meeting was simply going to be a transactional ask that wasn’t worth any upfront investment of his time.

Why, then, would meeting be worth my time?

What Gets Missed
When I was in startup, I treated every pre-meeting email/phone call as an opportunity for customer discovery. If I wanted something from someone – an order, financing, partnership, etc., I worked hard to do my homework and prepare for the meeting.  And that preparation went beyond just finding mutually agreeable meeting times.

 Early on in my career I realized that I could I learn lots of information from the premeeting dialog. That initial email dialog formed the basis of opening the conversation and establishing a minimum of social connectivitywhen we did meet.

I always managed to interject a casual set of questions when I was setting up a meeting. “What type of food do you like? Do you have a favorite restaurant/location?” If they were going be out of town for a while, ask if are they traveling on vacation? If so, ask “where?” And talk about the vacation.  And most importantly, it allowed me to confirm the agenda, “I’d like to talk about what our company is up to…” and telegraph some or all of the ask, “and what to see if I can get ….” Sometimes this back and forth allowed both of us to skip the meeting completely and I got what I wanted with a simple email ask. Other times it laid the foundation for an ongoing business relationship.

The key difference with this approach is in understanding that the dialog in setting up the meeting is actually the first part of your meeting.

Of course, in a company with 1,000s of people, it’s possible that the CEO is too busy to get on email or to call someone whose time he wants for every meeting. However, CEOs of major corporations who are winners will get on the phone or send a personal email when there’s something that they want to make happen.

Lessons Learned

  • The dialog in setting up the meeting is actually the first part of your meeting
  • Don’t miss the opportunity
  • If you want something from someone, don’t outsource scheduling your meeting

How to Raise Money – It’s a Journey Not An Event

Every year I teach classrooms full of students who leave class understanding the basics of how to search for product/market fit—and thinking their next goal is to “get funded.”

That’s a mistake.

There are two reasons to raise money:

  1. You have a killer idea that is only partially validated, that you think can get to $50M+ of revenue in 5 years with 80%+ gross margins (if margins are lower, you need a lot more revenue)and you need money to get to product-market fit, or
  2. You (think) you have product-market fit with real customers and real revenue and need money to grow and expand.

Not all startups need outside investment to grow.

What most founders don’t realize is:

  • Every stage of a startup requires a different set of metrics and milestones and founder skills. Knowing these will help a founder position her pitch to get investors’ attention.
  • Founders need to keep their eye on the prize — not just the next funding round

Luckily, I teach with two great VCs, Mar Hershenson of Pear Ventures and Jeff Epstein of Bessemer Venture Partners who both put together presentations unraveling the mysteries of how and why startups raise money. Jeff’s presentation is from the point of a view of “What Investors Want” (see resources here) while Mar’s takes it from a founder trying to figure out the funding landscape. And thanks to Ann Miura-Ko of Floodgate (my first Lean LaunchPad co-instructor) for her suggestions.

Keep in mind that there is no “one way” to raise money Different investors will almost certainly have different models, and different regions may have different math. Still, there are some benchmarks to keep in mind.

Here’s the first 2½ years of a startup journey.


The Startup Investment Landscape

For startups the early stage funding landscape looks like this:

  • Step 1: The Pre-seed round – you raise $500K-$2.5M
  • Step 2: The Seed round – you raise $2.5-$7.5M
  • Step 3: The Series A – you raise $7.5-$25M
  • Step 4: Series B – you raise $15-$65M
  • Step 5: Series, C, D….

(Btw, the definition of each startup financing stage has changed in the last decade.  What was a Series A round in 2005 is now a pre-seed or seed round. And what used to be a seed round a decade ago is now a pre-seed round. Lots of reasons for this shift, but it basically boils down to there’s a lot more money that wants to invest in startups, and all of it is racing to get in early.)

This is a journey that can be planned and measured. In a pre-seed round you are focused on building minimal viable products, testing your insights and searching for product/market fit.  In the seed round you have an early product and by the end you’ve found product/market fit and understand the scale of what you’re building and the levers that you can pull to accelerate growth. For a Series A round you want to prove you have built a repeatable and scalable sales/revenue model and understand all parts of the business model. Series B is about proving your net revenue model (can you be profitable?). Series C onwards funds growing your company to $100M in gross profit.

(At the end of this post, we’ll discuss the valuation at each step (how much the investors value your company and therefore how much of it you need to give up to get this money) and how much revenue you should generate at each step.)

Pitch
By the way, If your pitch is not going to knock investors’ socks off, if you cannot communicate a big vision and a unique insight about the 10x advantages which customers and users will care deeply about, then even if you build out the smartest, most thoughtful process of chasing fundraising, you will fail.

Team, Product, Traction, Business Model and Market
In each step of funding there are five questions you (and potential investors) will be asking: Tell me about your team, your product, your traction, your business model and the market.

Team is just what it sounds like. Tell me why you’re the right person to lead this company (bad answer “Because it’s my idea.” Better answer, “Because I’m the customer.”) Tell me about the group of people you’ve surrounded yourself with – your cofounders and then your key executives. Each stage of funding and company growth requires additional expertise and new skills, and you’ll want to demonstrate that you have these with potential investors.

Product (sometimes called the “value proposition”) is the product or service you’re building. One of the tough things for a startup is to figure out how much of the “product” has to be real and working at each stage of funding.

Traction is a fancy investor word for “Show me you’re making progress.” It’s sometimes called “product/market fit.” In a startup’s early days – pre-seed and seed – this is not about how much revenue you’ve made but more about how much customer passion your product is creating and how many more are loving it each week/month.  (Read Ann Miura-Ko’s article on product/market fit here.)

Business Model
Founders tend to fixate on the product. Now that product/market fit is part of the lexicon most understand that the product also needs passionate customers. But great product and eager customers are just part of what makes a great business. The rest that makes up a company is called its business model. These elements of the business model– revenue (pricing, pricing strategy), distribution channel, How to Get/Keep/Grow customers, Key Activities, Resources and Costs – are other, critical parts your start up needs to understand and have in place.

Market is a euphemism for “How big can your company grow?” Investors want to put their money to work in a startup that can be worth billions or tens of billions of dollars. What are your unique insights about technology, economics, change in market, etc. What evidence do you have that you can grow this big? How will you do it?

The big idea about all of this is that at each step of funding, the order and priority of team, product, traction and market changes.

Pre-seed Round of Funding
In the pre-seed stage, a startup is searching for product/market fit. There are no customers and no product, just a series of minimal viable products.

Funding:  Startups typically raise anywhere from $500K to $2,500,000 in pre-seed. At the low-end this might come from friends, family or angel investors. At the high-end pre-seed angel funds might invest. (Yes, there are venture funds that look for and invest in startups this early.)

  • Team: As you’re raising money from friends, family or angels, investors in this round are betting mostly about you and your team. Have you or your team members achieved anything important in the past? Any wins to date in your startup? Do you have co-founders who complement your skills? (Warning signs are “We were in the dorm together” or “It’s my team from the class I took.”)
  • Traction: Tell investors about your search for product/market fit and what you’ve learned from potential customers to date. Show them the evolution of your minimal viable product and its current state. You need to begin to “instrument” your customer acquisition process with analytics.

(Product/market fit means that you’ve found the match between your potential customers’ pains, gains and jobs to be done and the features of your minimal viable product. I.e. your product fits the needs of your target customers.)

  • Product: At this stage you are building a series of low-fidelity products (sometimes called a minimal viable product or MVP.) It might be a wire-frame, PowerPoint demo or prototype. The goal of the product at this stage is not a sale, but to test hypotheses about customer product/market fit. (Along with the MVP you share your three-year product vision to see if your product vision engages a passionate customer response.
  • Market: Tell us why this is going to be a huge market. Even better, start with a unique insight – what have people missed, what’s changed, what’s now possible? (Warning signs are, “No one has thought of this/is doing this/we have the exclusive patents.”)
  • Business Model: List all the parts of your business model. What are your assumptions about each part? What is some of the critical metrics that matter? Number of customers? Revenue per customer? Number of employees? Revenue, Gross Margin? Expenses? How do you plan to test them.

Goal/Time: By the end of the pre-seed stage the company ought to have evidence that it has found product/market fit. You should be thinking about an end-to-end pipeline of how to Get/Keep/Grow customers. This pre-seed stage typically takes 6-12 months.

Pre-Seed Round Paperwork: Smart investors will typically give you minimal paperwork – either a convertible note or a SAFE (Simple Agreement for Future Equity) or a KISS (Keep It Simple Securities).

Seed Round of Funding
By the end of the pre-seed stage (about a year into your startup), your startup has evidence that they’ve found product/market fit. (One sign is that you are no longer changing your website/sales PowerPoint/product/app every time you need to acquire a customer.) Now it’s time to raise money to acquire paying customers.

Funding:  Startups typically raise anywhere from $1.5 million– $7.5 million in a seed round. At the low-end this might come from angel investors and pre-seed funds. At the high-end, funds specializing in Seed rounds and Series A funds might invest.

  • Traction: For a seed round investors want to focus on traction. You need to provide proof that customers love and can’t live without your product. This means you have evidence that you’ve found product/market fit and have fanatic customers who are reference accounts. You’ve built detailed analytics tracking into your product and you should be seeing organic and viral growth; and can provide Daily/Weekly/Monthly Active Users, 30d/90d/120d retention. Retention and low attrition are good signs of customer validation.

(Note that each market – web/SAAS/physical products – and channel – online/direct sales –  has different metrics and a different funnel steps.)For example, this should translate to revenue ~$0-200K/Annual Recurring Revenue with a clear plan to reach $1.5M-2M in 18 months. The goal is to iterate on building a repeatable engine for growth that makes the economics work. This is different than focusing solely on the gross revenue number.

(Your ARR and revenue milestones will depend on what business you’re in.  For example, not all revenue is recurring and even in a subscription model for a consumer goods company, your recurring revenue will not be valued the same as if you’re selling enterprise software and operating costs are so vastly different.  As an example, $1 of revenue for a direct to consumer company is worth ~$1 in valuation at scale (Zappos was sold for $1B when they had $1B in sales).  On the other hand, in a SaaS business $1 in recurring annual revenue equals ~10x in valuation.)

  • Product: At this stage you have a high-fidelity product, one that earlyvangelists (early passionate customers) can use and pay for. Enough of the product is demonstrable enough that you can gauge customers’ price sensitivity, depth of engagement, etc. The three-year product roadmap gets earlyvangelists engaged.
  • Team: Do you have a core team that can build the first product and get early sales? The culture needs to be hypothesis > experiment > data > insight > validate/invalidate/modify hypotheses.
  • Business Model: In seed you often discover that your business has more moving parts than you originally thought. You may be in a multi-sided market with other customer segments/partners that are critical to your business. You should be testing all parts of your business model; revenue models/pricing, resources, activities and partners.
  • Market: Tell us why the data validates that this is going to be a huge market. At first the founders do the first sale, then they prove your first salespeople can repeat that sale.

Goal/Time: By the end of the seed stage, the company ought to have evidence that repeatable sales can be made by the founding team.  This typically takes 12-18 months.

Seed Round Paperwork: While founders will still want minimal paperwork – either a convertible note or a SAFE or a KISS– professional investors at this round often want an equity round with a more formal set of documents for their investments. You’ll see a Term Sheet, Stock Purchase Agreement, Amended and Restated Certificate of Incorporation, Investors’ Rights Agreement, Right of First Refusal and Co-Sale Agreement and a Voting Agreement.

Series A Round of Funding
By the end of the seed stage–about 2½ years into your startup– your startup has a repeatable and scalable sales model and a provable case that there can be a multi-billion dollar valuation.

Funding:  Startups typically raise anywhere from $7.5 million – $25 million in a Series A round. This size round typically comes from a venture fund or a corporate VC.

  • Market: You need to convince investors that this is at least a $1B+ company.
  • Product: At this stage you have a fully-featured first version of the product needed to scale sales. And you are working to the three-year product vision, iterating and course correcting based on customer feedback.
  • Traction: For a Series A round investors want to focus on a repeatable and scalable sales model with efficient growth. That means you need metrics that prove you have it. Repeatable sales means if you hire an account exec, you know that they will close $1M Annual Recurring Revenue in a year. Or if you spend $100K in ad spend, you can get 100,000 new users.Startups raising an A round typically have $ ½M-$4M Annual Recurring Revenue. Note that the focus should not just be on growth month-to-month but also on efficient growth.

For example, other metrics include achieving net retention of 80-150%, getting a Lifetime Value/Customer Acquisition Cost ratio greater than 3, getting to two times Customer Acquisition Cost Payback Period in less than 18 Months. You should have a realistic plan to grow revenue 3-5x in 12 to 18 months.

These numbers differ dramatically for e-commerce versus consumer, versus SAAS, etc. You should know what the right success metrics are for your industry. (The best VC’s will actually tell you what metrics they are looking for.)

  • Team: The core product team is working efficiently and the sales team for scale is in place and 75% are meeting quota.
  • Business Model: By the end of Series A, all parts of the business model have been tested and they add up to a scalable, repeatable and profitable business.

Goal: By the end of the Series A, the company ought to prove that you’re a business not a hobby. You need to show > $5M in gross profit.  Just to put your journey in perspective, if you want to achieve Unicorn status or go public, you ultimately need to deliver $100 million annual gross profit in Years 6 – 8.

Series A Paperwork: You’ll be seeing a Term Sheet, Stock Purchase Agreement, Amended and Restated Certificate of Incorporation, Investors’ Rights Agreement, Right of First Refusal and Co-Sale Agreement and a Voting Agreement.

Revenue Growth
Some investors think of the ideal startup revenue growth with a shorthand of “triple, triple, double, double, double.”

Years 1-3: $0-$2M in revenue
Year 4: Triple the revenue to $2-$6M
Year 5: Triple the revenue again to $6-$18M
Year 6: Double the revenue to $12-$36M
Year 7: Double the revenue again to: $24-$72M
Year 8: Double the revenue again to: $48-$144M

Valuations
Fair or not, not all startups are equal in the eye of their potential investors. Some startups may be considered “hotter” than others and get much higher valuations. A hot startup may be even able to skip the pre-seed round and go directly to a seed round – meaning more money raised at a higher valuation. The criteria for a “hot” startup include:

  • The background of the founders
    • attended a top university i.e. Stanford, MIT, Harvard
    • had previous experience at a high-growth company, ie Facebook, Google, etc.
    • serial entrepreneur
  • A “hot” market
    • It depends on the month or year – is it AI? Big Data? AR/VR, Cyber, Robotics
  • Hype
    • Do you have a big investor leading the round?
    • Have you gone through Y-Combinator?
    • Are you famous?
  • Location
    • Silicon Valley
    • Other innovation clusters
  • FOMO
    • A startup with a huge vision and story can create FOMO (fear of missing out) in investors – one of the strongest forces for accelerating your fundraising process.
    • At the same time VCs worry about FOLS: Fear of looking stupid
    • FOMO> FOLS

Lessons Learned

  • Every stage of a startup requires a different set of metrics and milestones and founder skills.
  • Knowing what investors want at each stage provides founders with guideposts
  • Founders need to keep their eye on the prize not just the next funding round

Clayton Christensen

Say not in grief he is no more – but live in thankfulness that he was

If you’re reading my blog, odds are you know who Clayton Christensen was. He passed away this week and it was a loss to us all.

Everyone who writes about innovation stood on his shoulders.

His insights transformed the language and the practice of innovation.

Christensen changed the trajectory of my career and was the guide star for my work on innovation. I never got to say thank you.

Eye Opening
I remember the first time I read the Innovator’s Dilemma in 1997. Christensen, writing for a corporate audience, explained that there were two classes of products – sustaining and disruptive. His message was that existing companies are great at sustaining technologies and products but were ignoring the threat of disruption.

He explained that companies have a penchant for continually improving sustaining products by adding more features to solve existing customer problems, and while this maximized profit, it was a trap. Often, the sustaining product features exceed the needs of some segments and ignore the needs of others. The focus on sustaining products leaves an opening for new startups with “good enough” products (and willing to initially take lower profits) to enter underserved or unserved markets. These new entrants were the disruptors.

By targeting these overlooked segments, the new entrants could attract a broader base of customers, iterate rapidly, and adopt new improvements faster (because they have less invested infrastructure at risk). They eventually crossed a threshold where they were not only cheaper but also better or faster than the incumbent. And then they’d move upmarket into the incumbents’ markets. At that tipping point the legacy industry collapses. (See Kodak, Blockbuster, Nokia, etc.)

Christensen explained it wasn’t that existing companies didn’t see the new technologies/ products/ markets. They operated this way because their existing business models didn’t allow them to initially profit from those opportunities – so they ignored them – and continued to chase higher profitability in more-demanding segments.

Reading The Innovator’s Dilemma was a revelation. In essence, Christensen was explaining how disruptors with few resources could eat the lunch of incumbents. When I finished, I must have had 25 pages of notes. I had never read something so clear, and more importantly, so immediately applicable to what we were about to undertake.

We had just started an enterprise software company, Epiphany, and we were one of those disruptors. I remember looking at my notes and I realized I held a step-by-step playbook to run rings around incumbents. All I had to do is to exploit all the gaps and weaknesses that were inherent in incumbent companies.

We did.

Thank you, Clay for opening my eyes.

Inspiration
Christensen’s impact didn’t end there. For the last 20 years he inspired me to think differently about innovation and teaching.

Building better startups
After retiring I began to think about the nature of startup innovation and entrepreneurship. It dawned on me that the implicit assumption startups had operated under was that startups were simply smaller versions of large companies.  Over time, I realized that was wrong – large companies executed known business models, while startups searched for them.

I went back and reread the Innovator’s Dilemma and then a ton of the literature on corporate innovation. My goal was to figure out how to crack the code for startups like Christensen did for corporations. My first book The Four Steps to Epiphany was a pale shadow of his work, but it did the job. Customer Development became one of the three parts of the Lean Startup as Eric Ries and Alexander Osterwalder provided the other two components (Agile Engineering and the business model canvas.) Today, the pile of books on startup innovation and entrepreneurship likely equals the literature on corporate innovation.

Teaching a different kind of innovator
Unlike corporate executives, founders are closer to artists than executives – they see things others don’t, and they spend their careers passionately trying to bring that vision to life. That passion powers them through the inevitable ups and downs of success and failures. Therefore, for founders, entrepreneurship wasn’t a job, but a calling.

Understanding the students Clay was teaching gave me the confidence that we needed to do something different. The result was the Lean LaunchPad, I-Corps and Hacking for Defense — classes for a different type of student that emulated the startup experience.

Dropping the curtain on Innovation Theater
The next phase of my career was trying to understand why the tools we built for startups ended up as failing (i.e. Innovation Theater) in companies and government organizations, rather than creating actual innovation.

Here again I referred to Christensen’s work not only in the Innovators Dilemma, but the Innovators Solution. He had introduced the idea that customers don’t buy a product, rather than they hire it for a “job to be done.” And offered a set of heuristics for launching disruptive businesses.

I realized what he and other management thinkers had long figured out. That if you don’t engage the other parts of the organization in allowing innovation to occur, existing processes and procedures will strangle innovation in its crib. In the end companies and government agencies need an innovation doctrine – a shared body of beliefs of how innovation is practiced – and an innovation pipeline – an end to end process for delivery and deployment of innovation.

Thank you, Clay for all the inspiration to see further as an educator.

How to Measure your Life
For me, Clay’s most important lesson, one that put his life’s work in context, was his book How to Measure Your Life.

In it, Christensen reminded all of us to put the purpose of our lives front and center as we decide how to spend our time, talents, and energy. And in the end the measure of a life is not time. It’s the impact you make serving God, your family, community, and country. Your report-card is whether the world is a better place.

He touched all of us and made us better.

Thank you, Clay for reminding us what is important.

You left us way too early.

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