McStartup

In continuing my experiments with various internet technologies, I decided to put together a quick video that goes through the format I use when pitching investors. Yes, I can year you now saying "Jeff, YouTube videos were "new" like 5 years ago." I know, I know, it's about time I starting messing around with them.

Anyway, I apologize in advance for the ugly green background, my use of the word "um", and the unrehearsed nature of putting this thing together. This was quick and dirty (and it shows), but hopefully the content is useful to someone out there in startup land. Enjoy.

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Brady writes:

I have a question about llc vs s-corps startup advertising. It is my understanding that when I start an llc I have to advertise a certain amount in order to make my llc legitimate to the government. however I have not been able to get any clear answers regarding what exactly qualifies. For example can I advertise on google? and who checks up on this do I just keep my own records etc?

There is no such requirement to my knowledge, and I'm sure there are thousands of LLCs which conduct no advertising.  It sounds like there might be some confusion as far as having a legitimate business for tax purposes, versus using an LLC (or any other business structure) as a tax shelter. 

Your CPA can best address any concerns you have about staying clear of tax trouble, but from my limited knowledge, I can tell you that if you are going to write off business expenses (via an LLC, S-Corp, Sole Proprietorship, or otherwise), the IRS says you have to be running a legitimate business and not just a hobby.  So, if you like to grow corals in your saltwater aquarium and you want to setup a business to do that, you certainly can, and can write off any legit expenses you have in operating that business.  If, however, your are really just growing corals for your own fun and enjoyment, you can't deduct all the expenses in doing so from your taxes, because you aren't actually running a business.

Your guess is as good as mine when it comes to figuring out how the IRS will cast judgement on what is a legitimate business and what isn't, but I suspect that simple honesty is the best policy.  If you are actually trying to make some money selling a product or service, that's a business, regardless of whether or not you actually make any money at it.  If you have a business running for 10 years and have never shown any income, I suspect that's a red flag to the IRS.  At the same time, there are plenty of businesses that will lose money up front to make money later.

Keep good financial records, and keep your personal finances separate from the business.  The "advertising requirement" you refer to is, I suspect, just someone trying to tell you that you need to be trying to make money.  This would be the same regardless of business structure.  It sounds like you are planning to make money, and that you don't need to advertise to do that.  Fantastic.  An LLC is probably the right structure for you, and as I've said before, you can quickly and easily setup an LLC on your own, with help from LegalZoom, or you can use an attorney.

There are many reasons to choose one business structure over another, but an advertising requirement is not one of them.  Be sure to check out my past article about choosing a business structure.

Good luck with the business!

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Jeff's 9 Basic Rules of Pitching Investors

Consider this the most basic introduction to pitching investors.  A few people have asked for advice around this, and I should probably put together a whole series of posts (or maybe videos, which I've been thinking about) on this very topic.  Nevertheless, I can give a high level overview here of some of the basics.

For purposes of this post, I'm talking about equity investors.  Pitching a bank for a loan is a similar but different prospect, and if you're hanging around this blog, debt financing is probably not where you need to look. Anyway, here are some high level considerations:

Rule #1: Recognize that you are SELLING part of your company

When you take an investor on in exchange for an equity piece, you are, plain and simple, selling them part of your company.  This is really no different than if someone came up and said they wanted to buy the whole thing from you, except that the investor probably doesn't want the whole thing, and they expect you to use their money to grow the business instead of buying that beach house. 

Rule #2: Sell this part of your company just like you would sell anything else

See Rule #1 - as I said, you are selling part of your company, and you need to treat the fundraising process exactly like you would any other sales process.  You need to put together a list of target customers (investors) come up with a short phone pitch (elevator pitch), start making sales calls, and start setting up in person meetings.  You then need to gradually walk the prospective customer (investor) through your product (the company) and build their interest and excitement until the point that they are ready to buy it (invest).

Do not think about this any other way.  I've seen plenty of people that are perfectly capable of selling suddenly fall apart when it comes to managing the investment process, because they somehow thought it was different.  Just as you would not trust that your target customers "already know all about your business" you should not trust that an investor has any such knowledge either, which brings me to point #3...

Rule #3:  Start with broad, exciting overviews, and work your way deeper over several meetings

Again, this is no different than selling anything else, but I've seen things run awry during investor presentations all too many times to not call it out separately.  If you are meeting with someone for the first time, do not launch into the minutia detail of your product, technology or service.  They aren't ready for that yet.  You need to build EXCITEMENT, not bore people to death with the details.  Big strokes of the brush are what you are looking for, not details.  And speaking of broad strokes of the brush...

Rule #4:  You are pitching your BUSINESS, not your product

It must be true that nearly 100% of first time entrepreneurs focus FAR too much time and energy on the product when pitching an investors (yours truly included).  Investors are not there to buy your widgets, they are they to buy your COMPANY.  This may seem obvious when I say it, but I can almost guarantee that when you put together your first investment pitch, you'll end up with twice as many slides on the product as anything else, and if you time yourself you'll spent half the time (or more) talking product.  DON'T.  Product is just one piece of the puzzle, bringing me to...

Rule #5:  Answer the big 3 questions

What is the market, how do you fit in, and why should I care?  Why will your business win (a portion of) that market?  Who in the heck are you, and why should I believe you can even pull this off?  How much money do you need, what will you use it for, and how to I get paid back?

Those are the big ones.  Notice, there's nothing in there about how your widget works.  Such information may come out during the course of answering those questions, but that's not what an investor needs to know, especially in the beginning.  They simply need to know if the market is big, can you pull it off, and if so, how much will they make.  Don't over think it.

Rule #6:  Know what you are going to ask for

Don't go in and not have an answer if someone asks "how much money do you need to raise?"  You can have a range, you can have plans that deal with different amounts raised, but you can't lack an answer entirely.  You'll look like an idiot.

Rule #7:  Just because the first meeting (or two) went well, don't let your guard down.

Venture Capitalists are notorious for making you feel confident during the first meeting or two, and then unloading on you with probing questions during the next meeting.  Don't let your guard down just because things have gone well thus far.  You'll need to be prepared to dig deep into the specifics, once an investor is interested and has had some time to think about and research your business.  And related to that...

Rule #8:  Don't get flustered when the questions get hard

If the questions are getting hard, it's because the investor is legitimately interested in your investment opportunity, and is looking for the gotchas.  Don't clam up when these questions come.  Answer them as best you can, be honest, and if you don't know, say you don't know.  You are a startup after all, and you aren't going to have all the answers all of the time.  I've seen more than a few entrepreneurs take it personally when these questions start coming, and believe me, they can come fast and furiously.  Again, it's really a good sign, so be prepared, and if the questions turn this way, know that you are making progress to getting an investment.

Rule #9:  Don't get fooled by those that "seem interested"

This, again, is SALES.  You do not stop selling product just because you have a few interested prospects -- you keep selling until someone buys all that you have.  You can do yourself a world of good by continuing to reach out to new investors until the time comes than an investor commits to putting money in, or asks you to sign an agreement that stops you from pitching others while they look deeply into the deal.  Until then, sell, sell, sell, and keep selling.

I hope that's helpful.  I can dive into more detail any any of these things if you have questions, and I may add some follow-up posts later on the same topic.

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I was perusing the traffic logs today and noticed some strangeness around the "contact me" email form.  Turns out, I had left the email address it sent the responses to as the default setting of "yourname@yourdomain.com". 

Perhaps, this explains the lack of email I've been getting from the site.  At least that's what I'll keep telling myself.

In any case, I apologize if you've emailed me via that form anytime OVER THE LAST YEAR (!!!!!) since it's been screwed up.  Gadzooks. 

The "Ask Jeff" form has been working fine (and is the reason you see questions answered on the site, of course), but the "Contact" form under "About Jeff" was broken. 

Whoops.

The Customer is not Always Right.

My friend Jay stopped by and made a comment about one of yesterday's posts, suggesting a link to an article by Steve Blank on marketing. It's a great article and well worth the read, which is why I highlight it here.  This is almost a word-for-word recap of what happened when one of my companies was acquired, and in the acquisition I became the SVP of Marketing for an established, publicly traded company.  The similarity is really uncanny.  It's not even worth relaying the details of the store here, because it would be largely a repeat of his story.  I'll save that spirited tale for another time.

The article did trigger something that I think is worth thinking about:  The old adage "the customer is always right" is completely wrong.  The reason is simple:  customers lie all the time.  They might lie to try and get a better price, they might tell you they're willing to pay for things they are not, they might tell you there are all kinds of new competitors when there are none, and they might tell you everything is going great 24 hours before they cancel your contract.  These might be lies, they might be partial truths, or they might be misinformed attempts at truth -- who knows. 

However, one thing I can tell you is this:  The customer has all the answers.  And it's up to you to get the answers out of them.  Think about that for a bit, and you'll recognize that there is a big difference between having all the answers, and always being right.

This is really the point of Blank's story.  You need to get out there and talk to customers.  I've harped in posts before about the need to get out and discuss your business and product ideas BEFORE you actually launch them, with those people that would be your customers.  The same holds true AFTER you launch the products.  Get out there, talk to customers, and see what's going on.  Marketing is not a passive profession.

The headline of Blank's article is brilliant.  Inside the building there are opinions.  Outside the building there are facts.  Ain't that the truth.

One of the most fundamental responsibilities of marketing is to keep a pulse on what's going on in the market, and the easiest place to measure that pulse is with your own customer base.  For some reason, this simple fact escapes many a would-be marketer, who might spend thousands of dollars on market research from industry analysts without ever picking up the phone or having lunch with, you know, someone who has actually purchased the company's products.  Those analysts probably got their data right straight out of your own customers anyway, so now you're paying someone to get data you could have had for free and in it's more useful raw form.  (There's some food for thought -- a whole industry exists where "experts" extract data from your customers and then sell it back to you!)

In my companies, we go so far as to merge two functions that are often separated in other organizations:  engineering and product marketing.  It is my opinion that these should be one in the same.  The folks that are building the product are the folks that need to be out in front of customers, finding out what that product should be.  They are also the same folks that should be telling those customers how they can use the products they've built better or in different ways.  We call the combined entity "product development" and it is their job to build products people will buy.  They get full responsibility, so there is no blame game between product marketing ("the engineers built a product that sucks!") and engineering ("marketing got the requirements all wrong!").  This one department is responsible for the whole enchilada, no questions asked.

A lot of technology companies delegate the responsibility for coming up with product requirements to "marketing" who then talks to customers (maybe) and analysts (probably) and copies what the competition does (unfortunately and almost certainly), and then hands a list of requirements to engineering, who inevitably further misinterprets the requirements on their way to creating a product that at best is marginally passable and at worst is so far of the mark that no one will buy it.  What an unnecessary chain of misinformation and complexity.  The people who design the product should be out there talking to people who want to buy it, and should build what they will buy.

Now, as I said before, you must be careful to extract all the right information out of the customers, because they have the answers, but they aren't always right when they tell you something.  This is why you need to talk to *lots* of customers, to get a real feel for what is needed out there.

But I can tell you this:  the people who can ask the customers the right questions are the ones who are most intimately familiar with your products and your customers.  For whatever reason, many organizations put up a Chinese wall between the people who build product and the people who talk to customers.  You need to have (and be) someone who knows both sides -- because the customers have all the answers, so long as you can tell the difference between when the customer is right and when they are wrong.

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