Week 4 Update
- Week 3 Recap
- Finance, Operations, and Legal Considerations
- Persevere Or Pivot?
- Communicating Your Traction And Progress
- Additional Resources
Week 3 Recap
Last week, we talked about the go to market strategy and business models. Depending on the type of business, your stakeholder maps and buyer personas may differ. For B2C, the economic buyer is often (but not always) the end user. For B2B, the economic buyer is almost never the end user. It is paramount that you start by mapping your stakeholders, so that you know who to interview in order to build knowledge about your market and your customer.
We also talked about building and testing a business model.
- How do you make money off your customer?
- What are the ways your business can get paid for your products and services?
- How do your customers pay, how often do they pay, and how can you build towards a recurring revenue stream to smooth out your finance and operations?
- How might you test these hypotheses with your economic buyers?
Finance, Operations, and Legal Considerations
This week, we are going deeper into the world of entrepreneurial finance. If you are new to the world of finance, start by watching the following short videos from the Kaufman Foundation.
The Income Statement (aka the Profit and Loss Statement)
Now we are ready to dive into Finance and Operations with the Income Statement, also called the Profit and Loss Statement (P&L).
The P&L is one of three financial statements that companies use to operate their business (the other two being the Cash Flow Statement and the Balance Sheet). Boiled down to its essence, the P&L basically communicates the following things.
- Money you make (revenue)
- Minus money you spend (expenses)
- Equals money you keep or lose (bottom line)
Using Financial Forecasting To Guide Entrepreneurial Decision Making
Entrepreneurs building new ventures frequently find themselves creating a 5-year projection of your income statement or P&L. This is called a “pro-forma“. The purpose of the pro-forma is for the entrepreneur to clearly think through their assumptions about their business.
A 5-year pro-forma income statement for a new business is guarantied to be a work of fiction. So why do we still encourage entrepreneurs to create one?
The reason is that putting your core assumptions down on paper forces you to do a bottom-up thought experiment to think through how you manage your business activities to achieve your revenue projections – and what it takes from a people and budget standpoint to get it done. The accuracy is not the point. The structural thinking is the actual value.
Using The 5-Year Pro-Forma To Understand The Business You Are Building
Creating a pro-forma also helps the entrepreneur get a sneak preview on what kind of business they are building. Here are two common patterns that reveal themselves once you have some fun with spreadsheets.
- B2C – low value, high volume, short lead time: A B2C business charging a low price per consumer (e.g. <$100 per year) will find it easy to start and can start generating revenue very early, but getting to a $100,000 per year revenue will require large numbers of consumers in their install base that can be expensive to acquire.
- B2B – High value, low volume, long lead time: A B2B business charging a large amount to enterprise customers (e.g. >$50,000 per year) will have long sales cycles, so the first couple of years might be characterized by much smaller pilot deployments – and they need to hire sales folks a year or more before the new sales force can close deals and generate revenue.
Is Your Venture “Investable”, Or Should You Bootstrap?
One last benefit is that you will see the scale, scope and rate of growth of your business at a glance from the rate of revenue growth. This is tremendously helpful for many for-profit businesses, because investors want numbers.
- In February 2019, Jacob Mullins posted an article where he shared what it takes to raise an A round. Quotable quote:
- “Where is the bar today for Series A? At least $1M in ARR (annual recurring revenue) minimum, $2m — $3M + even better, if you’ve gotten to that level in 12 to 18 months and have a 2x — 3x year over year growth rate, this will excite investors.”
- In May 2023, Crunchbase posted an article documenting the decline in seed and Series A funding. Quotable quote from Steve Lehman of Cofounders Lab:
- “…investors, particularly in seed to Series A, are looking for something a little more tangible where the wheels are already on the bus.”
In 2023, the VC industry is more cautious than 2019 or 2021. The euphoria immediately following the COVID years has subsided. It is in the interest of every founder to clearly examine their businesses and find ways to prove their traction, validate their economic buyers’ purchase intent, and be rock solid in their value proposition and business model before considering raising funds.
Entrepreneurial Operations: Legal considerations
For new ventures, understanding how to run their business means understanding legal implications.
Legal considerations include but are not limited to the following:
- Company formation: C-corp, S-corp, B-corp, LLC, or 501(c)(3)
- Intellectual property (IP) protection: Patents, trademarks, copyright, trade secret?
- “Capitalization Tables”: Who owns how much of the company
- … etc
Watch Professor Joe Volman’s workshop on Entrepreneurial Business Law to learn more.
Entrepreneurial Operations: Systems and Processes
Systems and Processes refer to the infrastructure that allows your company to operate effectively. When you are just starting out, the processes that tend to help include the following.
- RACI models – clarity around roles and responsibilities
- Accountability rituals – things like daily standups, sprint planning and retrospectives help keep the team on task
- Communications platforms – agree on when and how you communicate on which platforms, synchronously and asynchronously
- Task management platforms – use something like Trello, Asana, Monday.com or make your own Kanban board on a multi-purpose platform like Airtable or Notion to manage work and share status
- Accounting platform – this is the financial backbone of your company. A lot of people start with Quickbooks Online then move on to a full-fledged Enterprise Resource Planning (ERP) platform when they are mature.
- Customer Resource Management (CRM) platform – this allows you to manage contacts, record and write notes about sales calls and the like. Hubspot is an example of a CRM platform with a free tier.
- Marketing Technology (Martech) platforms – platforms like ThriveHive or Hubspot help you keep all your online marketing activities in one place and to manage the massive amounts of data that helps you build brand and acquire customers.
RACI: A Structured Way To Divide And Conquer
First in this list is the RACI model. RACI is an acronym for “Responsible, Accountable, Consulted, Informed”. It is an established way for teams to think about who does what within the team. First time founding teams often make the mistake of doing everything as a group. That is the right approach when you are in early market validation, but as you make progress, there will be more tasks than you can process in a serial fashion and you will need to find a way to parallel process.
The best way is to divide and conquer, while coordinating tightly with each other multiple times a week. Consider adopting an accountability ritual like the daily standup (borrowed from the Agile software development process). Read this Atlassian article to learn how it works and get inspirations in how to adapt this ritual to your own team.
Persevere Or Pivot?
When you invalidate your hypotheses
When entrepreneurs are following the process diligently, there inevitably comes a time when their hypotheses get invalidated. In some cases, the invalidated hypothesis involves a product feature, a marketing tactic, or a pricing strategy. In this case, you can persevere while incorporating the feedback into your work.
In other cases, new data may invalidate the entire foundation of the business: You may find that the target market does not have the need you believe they do, or the product and service you are offering does not address a big enough need for your opportunity to be big enough to be worth building. This is the time you need to pivot.
Failing Fast And Pivoting
If this happens to you, congratulations! This means that you are doing exactly the right thing to “Fail Fast”. Building a new venture is hard, and it is much better to find out earlier than later.
You can now zoom back out within the problem area of interest. You can either find a different beachhead market to work with, or find another problem to solve within your beachhead market. It will take you a lot less time to come up with a second business idea to pursue.
Transitions: Ending, Neutral Zone, New Beginning
Knowing you are doing the right thing does not mean that you will feel wonderful about moving on. It is perfectly normal to feel an emotional attachment to something you have poured your heart and soul into.
One framework that helps entrepreneurs work through these feelings is to explicitly manage the pivot through the three phases outlined in the book “Transitions” by William Bridges, written over 40 years ago. We suggest you adapt this approach to the pivoting process.
- The Ending. Every transition begins with one, and letting go of the old approach is the start of the pivot.
- The Neutral Zone. This is the uncomfortable space where the old approach is invalidated but you haven’t come up with a new approach. This feels unsettling – but this time of re-orientation can be a time of great creativity. Brainstorm alternatives, and do as much customer research as you can as quickly as you can to build new knowledge.
- The New Beginning. With new hypotheses that see early validation, you have a new approach. You can build back faster and better than the first time around. Keep calm, and trust the process!
Communicating Your Traction And Progress
Different Pitches For Different Purposes
Most entrepreneurs have plenty of experience pitching their ventures to a variety of audiences. It should not come as a surprise that there is no such thing as the “One Perfect Pitch”. The pitch you will do depends on the audience (Funder? Advisor? Potential Employee? Members of the press? General Audience?) and the length of time you have for the pitch.
You are always pitching to earn the next pitch: a 1-minute pitch earns you 5 minutes, a 5-minute pitch earns you 10-20 minutes, and a 20-minute pitch might earn you more time with additional stakeholders.
Every entrepreneur ought to have a 1-minute pitch and a 5-minute pitch. The 1-minute pitch captures the interest and imagination of their target audience. A 5-minute pitch is infinitely adaptable and helps you clarify your thinking.
A Demo-Day Pitch Must Communicate Your Plans For Achieving Financial Sustainability And Your Traction To Date
The 5-minute pitch is the most common length of time for a Demo Day pitch. It is a product designed for a general audience.
If you have presented at pitch competitions like the Tufts $100k New Ventures Competition, you will be very comfortable with the components of such a pitch. Following is the rubric for the Tufts $100k. Note the absence of “traction” in the rubric.
- Problem: Does the team understand the problem and their target customer?
- Solution: Does the solution solve the problem in a unique manner compared to the alternative?
- Go to market strategy: Does the team have a credible and actionable go-to-market strategy?
- Financial sustainability: Is the proposed business model financially sustainable?
- Scale: Is the venture capable of scaling up to impact a large number of people?
- Impact: How is the world a better place if the team solves this problem?
- Team: Did the team convince the judges they are the right people to solve this problem?
- Presentation: Was the presentation engaging and effective?
- Wildcard: Did anything else particularly impress you?
A Demo Day pitch has far higher expectations in two areas: Financial sustainability and Traction. A story is no longer enough. We are looking for data from the field that shows your progress.
Expectations On Financial Sustainability
Financial sustainability involves having a clear idea of your business model, your unit economics, the timing and amount of capital injections (if any), and a practical, credible plan towards raising funds to meet those capital needs.
Expectations On Traction
Traction for an early stage venture typically includes proof that you are able to acquire customers and early indication of their willingness to pay. This can come in the form of acquired customers for an unpaid beta, customers in a paid beta, customers who have pre-ordered your product, letters of intent / memos of understanding to enter into a paid pilot with you, or other forms of early revenue.
Communicating Your Traction
For a 5-minute Demo Day pitch, you may find it hard to fit everything you want. You may over-invest in the problem statement and the merits of your product or service. While that is very important, you need to reduce the level of detail to make time for the business fundamentals.
There are numerous pitch deck templates. This includes Guy Kawasaki’s 10-slide infographic. You will find that none of them exactly suits your venture. Use these templates as a launchpad to make sure you include the right content at the right level – then make the pitch your own.
For more pitching resources, peruse the Pitching Page within the Derby Entrepreneurship Center’s Online Learning Center. We will also be providing practical pro-tips on the content, narrative, and delivery of a great venture pitch in the next weekly update.
Here are additional resources that might help you get started: