Keiretsu Forum
3466 Mt. Diablo Blvd.
Suite C-205
Lafayette, CA 94549
© 2004 Keiretsu Forum.
All rights reserved. |
|
If you like this newsletter, please forward it to your friends for them to subscribe.
|
|
|
How Software Entrepreneurs can be Successful Presenters to Investors (Part 2 of 3)
By By Ed Harley, Keiretsu Forum Member
Keiretsu Forum News July 2004
[An open letter to the software entrepreneurs presenting to investors]
Ed Harley's open letter to software entrepreneurs began in the Keiretsu April 2004 Newsletter. In that issue, Ed covered some general do's & don'ts about giving a presentation to investors. The first article of this 3 part series, suggests a format for the first 5 minutes of a presentation where the entrepreneur describes the customer's situation, the seriousness of that situation, the solution, and the value to the customer. In this issue Ed continues with minutes 5 to 8.
***
In the first 5 minutes you needed for me to really 'get it'. Your approach in minutes 5 to 8 should be very different. In these three minutes, you are just 'skimming'. You are not trying to tell all. You are not trying to tell even 50% of all. You don't have enough time - we both know that. You have to pick some key points. In making that selection be mindful that you are attempting to get me to invest in your venture and thus I suggest you pick those things that will reinforce the idea that I will make money as an investor.
Min 5:00 - Min 6:00 Initial Target Segment: Total Market: Market Category (1 slide)
I recommend that you start this 1:00 minute section with a 3-5 second pause. Yes, silence. Then, look clearly at me and give a message similar to this. 'For the past 5 minutes, I have presented how our company has solved an important serious problem for one customer. In the next 3 minutes I am going to present how we are going to grow this into a business with many customers and millions of dollars in annual revenue.' Your pause and transition serve to reconnect with me and prepares me for what is coming.
Above all, I want you to tell me 3 things:
- A description of your initial target market and its dollars
- A description of your total market and its dollars
- The name of your market category
I have intentionally reversed the common order of most market segmentation presentations, starting first with 'Initial Target Segment' and progressing to 'Total Market' and then 'Market Category'. I want you to start with your one customer and tell me that you can grow your business to many customers because there are many customers in the same situation that need your solution. This 'bottom-up' (inductive reasoning) approach is both logical and memorable to me. It is logical because you are starting from the foundation you have built with your one customer. It is memorable because by describing the expansion from one customer to many customers you are describing the growth of your business in the order it would actually happen.
In the next few paragraphs, I going to outline an approach to thinking about your target segment. I hope it will help you tell me your growth story. Market segmentation is an extremely challenging business topic. An excellent book on the subject is called 'The Innovators Solution' (Note 3). I strongly recommend that you read it and study it. In that book, the authors Christensen and Raynor use the phrase 'job-to-be-done' to describe what the customer is trying to do.
I suggest you present one slide with a 'job to be done' hierarchy for your market. The bottom of this hierarchy shows the 'job-to-be-done' by your existing customer and other like customers. This is your initial target segment. The middle of the hierarchy contains more generalized 'job-to-be-done' descriptions, requiring that you do something different with your product, distribution channel, marketing message, pricing, etc. to successfully solve those 'jobs-to-be-done'. Collectively, those segments are your 'Total Market'. Finally, the pinnacle of the hierarchy is the very broad 'job-to-be-done' which is your Market Category.
I realize that the thinking behind that one 'job-to-be-done' hierarchical slide is very difficult. Try this thinking process approach:
- Initial Target Segment - Start with your existing customer and their 'job-to-be-done'. Name that segment and define a few of its key attributes. Estimate how many other customers have the same 'job-to-be-done' that need your solution. Estimate the expenditure of these customers on the problem that your solution solves. Support your estimate with data if possible. This is your Initial Target Segment.
- Total Market - Generalize from that one 'job-to-be-done', horizontally and vertically to a broader principle that includes a similar but not identical 'job-to-be-done'. With each new 'job-to-be-done', ask, 'Can we use our same selling approach and our same product with this new group?' If you conclude 'NO', then you have identified a new market segment. Name that segment and define its attributes and estimate its dollars. Continue to generalize until you decide you are outside the scope of what your company can be in the next 3-5 years or where your product has, or will have, a solution. Add together the dollars of the various segments. Support your total estimate with data if possible. This is your total market. If you want numbers, I am looking for a total market or (TAM - 'Total Available Market') of at least $500m annually, and a market growth rate that is positive.
- Market Category- Continue this generalization upward, to identify the very general 'job-to-be-done' business you are in. This is your 'Market Category'. You are joining that market category and your marketing and sales effort will be to position your company within that market category in the customer's mind (Note 4).
Correctly determining a company's initial target segments is complex. Building segments into a total market is even more complex. Many executives spend countless hours on this subject every year, with vague results. My investor friends' and I have empathy as we have engaged in countless (and fruitless) marketing segmentation discussions ourselves. Persuade me you have successfully identified your initial target segment, your total market, and your market category and you have a powerful, complete and memorable story.
My estimate is that only 5% of you present this market information successfully. Most of you use the 'top-down' (deductive reasoning) approach, starting from the total market and working downward toward your one customer(s). You often do not adequately describe the total market, using only a cryptic heading. You often do not segment the market, leaving the impression this is 'one whole market segment' where one sales approach and one product will satisfy all. Or even when you do segment the market, you oftentimes segment by the customer's attributes or your product attributes, rather than by the customer's 'job-to-be-done'. Come Q&A time, my colleagues and I poke and prod at this milieu and its many disconnects. Almost always your answers don't measure up.
Min 6:00 - Min 6:30 Competitive Similarity: Strengths Declaration: Competitive Differentiation (0-1 slide)
I recommend you start this section with another pause of 3-5 seconds and another transition message something like this 'For the rest of the discussion, I am only going to present information on our initial target market of [name your target market]'.
In these 30 seconds, I want you to discuss who is your competition and how will you successfully compete against them in your target market. I have limited your time on this topic, since it always comes up in the Q&A. Thus, I suggest you present the basics and have some back-up information prepared for my eventual questions.
A common way to present competition is to pinpoint all the competitive companies within a two-dimension diagram. This works fine, but then I suggest you resist immediately discussing the companies themselves. What I am really interested in is the constructs of the diagram. I want you to explain to me why you choose to frame the competitive discussion on these axes. Specifically, I am looking for you to:
- Declare your company's strength - Before you can create the competitive diagram you must declare your company's strength because one of the axes of the diagram should measure your company strength against the competition. Tell me what is it that you plan to do really well - product features, service, channel, customer training, ordering ease, technology, etc. I will listen very carefully to this with three perspectives. First, is your initial competitive advantage in a product attribute or in a non-product attribute? Second, is this a strength that your customer's will value? Third, is it achievable?
- Describe the two axes - Explain your company's strength against the competition and why you chose the other axis.
- Point out important situations regarding any competitor within the diagram - If one competitor has something unique; give me a sentence on that uniqueness.
- Point out important changes over time - Next to the important competitors, I would like for you to indicate using a direction arrow how, over time, those competitors will change. I call this a 'competitive differentiation-roadmap'. I am always impressed when you do this because this indicates strong strategic thinking.
Don't be timid to declare that you have 'no competition', however, you should then include in your financials the considerable cost for the evangelism to create a new sub category or even the more costly challenge to create a new category. I reject the slogan that 'if there is no competition, then there is no market'. I am prepared to invest in new sub categories, which is something that I frequently see. I am also prepared to invest in new categories, which is something that I rarely see.
My estimate is that 30% of you deliver this section successfully. A majority of the time you do not state the strength of your venture or show how the competitive differentiation changes over time. Now and again, when you state that the venture is without competition, you do not include in your financials the considerable cost for the evangelism, leaving an impression of your overall marketing naiveté.
Min 6:30 - Min 6:50 Marketing Strategy (0-1 slide)
In these 20 seconds, you need to tell me your top one or two marketing strategies. Yes, just one or two. Give me some rationale as to why you chose these and then move to the next section.
I am listening for information such as your launch plans or go-to-market strategy, branding and promotion, trade show focus, public relations and press emphasis, and how central is your web page to the overall marketing program.
Nearly 100% of you say something about marketing, unfortunately, almost all of you also say too much. You put up a slide with a long list of strategies, giving me little indication of priorities.
Min 6:50 - Min 7:10 Sales Strategy: (0-1 slide)
In these 20 seconds, you need to tell me your sales strategy and/or your distribution approach. Be clear here. If you will deploy a direct sales force, say so. If you will use a channel strategy, say that.
Next, give me a few words on your sales cycle to sell to your existing customer and what you project that sales cycle to be going forward. Also indicate your unit pricing and how that will change over time.
Only 50% of you will present this sales strategy section successfully. A few simply do not cover what is the sales strategy, leaving a seriously bad impression that you are more interested in creating the product than in selling the product.
Min 7:10 to 7:30 Product Strategy: (0-1 slide)
In these 20 seconds, I want you to tell me about your product strategy. What I am looking for is your product roadmap. I know that an initial product lacks a comprehensive set of features and capabilities. Please give me a few words about future versions, focusing on if these new versions will allow you to provide a solution for additional target segments.
Also if you have patents, this is the place to mention them. Be prepared to talk about patents in the Q&A.
Over 80% of you will present this product strategy successfully. A few skip the section altogether.
Min 7:30 - Min 8:00 Management and Board of Directors (1 slide)
A qualified leader and a solid management team is a key reason for me to invest in your venture.
In your opening remarks, you should have briefly alluded to your own background to keep the skeptics attention (Note 5). Assuming you have given a clear and persuasive presentation to this point, I already have some evidence of your own experience, expertise, perspicacity, ingenuity, insight and whatever other characteristics you have tried to convey. Now I desire to know more about the management's qualifications.
In these 30 seconds, you should further establish your own credibility and the credibility of the management team. I want another sentence or two on your capabilities. I expect you to present a slide of the names of the key executives, their experience and their expertise. I also want to know who is on your Board of Directors.
But the point is not just to give me a line-up of the players. The question I am mentally asking and you should answer in a sentence or two is 'Why do you believe that this team is qualified to build this enterprise'? 'Why will this team be a winning team, i.e. the right team at the right time to do the right job?
Perhaps only 10% of you will present these management qualifications successfully. Most of the time you just give the line-up of players. Frequently, you 'pad' the list by giving names of non-employees who are working only a few hours a week, which is uncovered during Q&A when I ask you to reconcile your apparent employee costs with your current 'burn rate'.
***
At this point you have completed 8 minutes of your 10-minute presentation. Assuming you have successfully given me just enough information, then I should now understand how you plan to build a multi-million dollar revenue company. I eagerly wait the final two minutes where you will give me your financials and what resources - money, management, and introductions - you need to make this plan a success. Good Job.
Notes
- I was inspired to write this open letter to software entrepreneurs by the 1995 book titled Writing Winning Business Proposals by Richard C. Freed, Shervin Freed, Joe Ramano, [McGraw Hill 1995] which was written as an open letter to business consultants.
- Spin Selling by Neil Rackham [McGraw Hill 1995]
- The Innovators Solution by Clayton M. Christensen and Michael E. Raynor [Harvard Business School Publishing Corporation 2003]. An Important book on the advantages of segmenting markets by the customer's 'job-to-be-done'.
- Positioning: The Battle for Your Mind by Al Reis & Jack Trout [McGraw Hill 1985]
- The 5 Paths to Persuasion by Robert B. Miller and Gary A. Williams. [Time Warner Book Group 2004]. They concluded after interviewing 1,700 executives that approximately 20% are skeptical in nature.
Copyright 2004 Edward P. Harley All Rights Reserved
***
I thank the Keiretsu Forum membership-at-large, of which I am a member. I have gleaned many of the letter's thoughts from one-on-one conversations and group discussions. I specifically thank members John King, Phil Chernin, and Ken Taylor for their insightful editorial comments and wordsmithing.
Next issue - Ed Harley will continue with minutes 8 to 10 of the presentation. Ed welcomes any comments or suggestions on this open letter. His email is epharley@pacbell.net
| | |
