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February 22, 2006

VC Primer from an Entrepreneur’s POV – The Five Year Plan

Congratulations.  You, the debut entrepreneur, have stirred some interest among venture capitalists in providing you with the million dollars or so in financing you need to take your great idea to the next stage.  All of the VCs you’re going to visit are strangers to you although, in most cases, you’ve been introduced by mutual friends.  In once case you’re particularly proud of, the invitation to come in for a visit was purely in response to the well-tailored executive summary you submitted to the email address on the firm’s website.  Good work; that doesn’t usually happen (see previous post for meeting VCs).

So the big question now is what are you going to show these guys and gals.

Back in the dark ages, even at the beginning of the last bubble, you needed to have a formal business plan including five years of detailed financial projections. In the 1980s a mutual friend was kind enough to set up a meeting with the John Doerr of Kleiner Perkins.  He hadn’t yet become “THE legendary VC John Doerr” although he was close; but we were from Vermont; what did we know?  Mary and I told him we were too busy to make a business plan like that.  Somehow, when we changed our minds, I couldn’t get another appointment.  Didn’t see them again until the late 1990s but don’t think they were much impressed with my pitch then – even with the requisite numbers

I asked a few VC friends whether they still want to see a five year plan.

Brad Feld of Mobius Venture Capital said:

“I no longer look at business plans or financial models in any depth.  I
view it as a positive if the entrepreneur has done it, but I'm much more
interested in digging in to the idea with the entrepreneur.  I
fundamentally don't believe any early stage financial models - they are
simply never even marginally correct in my experience.  So - unless the
entrepreneur is completely delusional about the financial dynamics of
his business, I'm not to worried about it.  I want to understand how
they think about the financial dynamics, but I like doing this on a
whiteboard without an Excel spreadsheet as a prop.”

David Hornik of August Capital agrees with Brad:

“That is essentially my attitude. I want to know that an entrepreneur appreciates the sensitivities in his or her business but otherwise I think early stage financials are fiction.”

Fred Wilson of Union Square Ventures makes it unanimous:

“for really early stage deals, its more about how they think about the business and the numbers than what numbers they show”

I couldn’t agree more.  I made the spreadsheets that made the five year plans.  The most that could be said for them were that they were pretty much mathematically correct.  Who the hell knows what the world is gonna look like in five years.

[n.b. I didn’t get an update from Kleiner Perkins so you’ll have to check with them on your own if you’re pitching them.]

Speaking of Fred Wilson, he just ran a post in his VC Cliché of The Week series on the Dog and Pony Show.  You are doing a dog and pony show when you pitch VCs.  They will watch very carefully not only for the content but also for how well you do the show.  They know that there are many pitches by you to customers, strategic partners, vendors, and later-stage investors between now and when they have any chance of getting a return on the investment.  They want to know that you can make a good pitch.

Fred suggests getting a presentation coach.  Can’t say because I never did that.  If you think you need coaching, by all means get it.  But no amount of coaching is going to help you if you don’t know your shit backwards and forwards and with interruptions.  Note what Brad says above about how you answer questions on a whiteboard, what David says about understanding the sensitivities of your business, and what Fred says about how you think. Both your understanding of your business and the quality of your thinking will come out much more in Q&A than in your canned presentation.

It’s very good news that you don’t need to spend time preparing or presenting five years of fictional financial future.  That gives you more time to do what you really need to do in the meeting with the VCs.  See next post in this series.

Previous posts the VC Primer are:

VC Primer from an Entrepreneur’s POV – Source of Funds

VC Primer from an Entrepreneur’s POV – The Funds

VC Primer from an Entrepreneur’s POV – What About Angels?

VC Primer from an Entrepreneur’s POV – Finding First Round VCs

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Tom Evslin questions the value of the five year plan when seeking funding: Back in the dark ages, even at the beginning of the last bubble, you needed to have a formal business plan including five years of detailed financial projections. In the 1980s... [Read More]

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