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TheArtoftheStart

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THEARTOFTHESTART

THETIME-TESTED,BATTLE-HARDENEDGUIDEFORANYONESTARTINGANYTHING

GuyKawasaki

PORTFOLIOPublishedbythePenguinGroupPenguinGroup (USA) Inc., 375Hudson Street,NewYork,NewYork 10014,U.S.A.Penguin Group (Canada), 10 Alcorn Avenue, Toronto, Ontario, CanadaM4V3B2(adivisionofPearsonPenguinCanadaInc.)PenguinBooksLtd,80Strand,LondonWC2R0RL,EnglandPenguinIreland,25StStephen’sGreen,Dublin2,Ireland(adivisionofPenguinBooksLtd)Penguin Books Australia Ltd, 250 Camberwell Road, Camberwell, Victoria3124,Australia(adivisionofPearsonAustraliaGroupPtyLtd)Penguin Books India Pvt Ltd, 11 Community Centre, Panchsheel Park, NewDelhi–110017,IndiaPenguinGroup(NZ),CnrAirborneandRosedaleRoads,Albany,Auckland,NewZealand(adivisionofPearsonNewZealandLtd)Penguin Books (South Africa) (Pty) Ltd, 24 Sturdee Avenue, Rosebank,Johannesburg2196,SouthAfrica

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Firstpublishedin2004byPortfolio,amemberofPenguinGroup(USA)Inc.

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ManyyearsagoRudyardKiplinggaveanaddressatMcGillUniversityinMontreal. He said one striking thing which deserves to be remembered.Warning the students against an over-concern for money, or position, orglory,hesaid:“Somedayyouwillmeetamanwhocaresfornoneofthesethings.Thenyouwillknowhowpooryouare.”

—HalfordE.Luccock

Tomychildren:Nic,Noah,andNohemi. Achildistheultimatestartup,andIhavethree. Thismakesmerich.

Acknowledgments

Ingivingadvice,seektohelp,notplease,yourfriend.—Solon

Mythankstoallthepeoplewhohelpedmewiththisbook.First,RickKotatViking,becausethisbookwashisidea.Furthermore,hetoleratedmycrazyideas—includingthetitleandsubtitleandhavingacover-designcontest.Everyauthorshould be so lucky to work with an editor like Rick. (The converse is notnecessarilytrue.)

Second, Patty Bozza and Alessandra Lusardi of Viking, and the Portfolioteam: Joe Perez, Will Weisser, and Adrian Zackheim, as well as Lisa “HerHighness”Berkowitz.Behindeverysuccessfulauthorstandsanamazingteam.

Third, a group of readers who truly sought to help, not please,me. Theyspent many hours reading and refining my drafts. My eternal gratitude to:MaryleneDelbourg-Delphis,GeorgeGrigoryev,RonitHaNegby,HeidiMason,Bill Meade, John Michel, Anne P. Mitchell, Lisa Nirell, Bill Reichert, GaryShaffer,RickSklarin,andAndrewTan.

Fourth, a group of peoplewho contributed bymaking suggestions, coursecorrections,andadditions.Theyare:MohamedAbdel-Rahman,AnupamAnand,ImranAnwar,DaveBaeckelandt,A.J.Balasubramanian,SteveBengston,DavidBerg,ScottButler,TomByers,AntonioCarrero,LilianChau,PamChun,TomCorr, Stephen Cox, Deborah Vollmer Dahlke,Martin Edic, Bob Elmore, Eric

Erickson, Elaine Ferré, Pam Fischer, Sam Hahn, Lenn Hann, Steve Holden,Hilary Horlock, Katherine Hsu, Doug Ito, Bill Joos, John Michel, CindyNemeth-Johannes,TomKosnik,PavinLall,LesLaky,MollyLavik,Eric “I’mOpen”Lier,AnthonyLloyd,RobertMacGregor,TomMeade,ChrisMelching,Fujio Mimomi, Geoffrey O’Neill, Bola Odulate, Colin Ong, Steve Owlett,Lakiba Pittman, Gina Poss, Julie Pound, Warrick Poyser, the Propon Team,Richard Putz, Anita Rao, Jim Roberts, Marty Rogers, John Roney, AaronRosenzweig, Michael Rozenek, Brian Rudolph, David Schlitter, John Scull,Izhar Shay, Marc Sirkin, Marty Stogsdill, Judy Swartley, Russ Taylor, LarryThompson, Amy Vernetti, Ryan Walcott, Shelly Watson, Tim Wilson, RyanWong,andJanZones.

Fifth,thepeoplewhohelpedmetomarketthisbook:AlyssaFisher,SandyKory,TessMayall,RueyFengPeh,ShifengLi,ShyamSankar,BettyTaylor,andKaiYangWang.

Sixth,mylovingandlovelywife,Beth.ThankyouforbearingwithmeasIwrote this book during a very busy time in our lives, and for the best twentyyearsofmylife.

Seventh,SloanHarrisofInternationalCreativeManagement.ThankGodforSloan—otherwise,RickKotandPortfoliowouldhaveeatenmealive.

Eighth, Patrick Lor and the gang at iStockPhoto.com who helped thisgraphicallychallengedauthor.

Finally, John Baldwin, Ruben Ayala, and Ken Yackel of the Ice OasisSkatingandHockeyClub.Wereitnotforthem,Iwouldhavefinishedthisbooksixmonths earlier.But then Iwouldn’t be the best fifty-year-old, transplantedHawaiian,beginner icehockeyplayer inSiliconValley.And this iscertainlyadesirablenichetofill.

Contents

Afriendisonetowhomyoucanpouroutthecontentsofyourheart,chaffandgrainalike.Knowingthatthegentlestofhandswilltakeandsiftit,keepwhatisworthkeeping,andwithabreathofkindness,blowtherest

away.—anonymous

ReadMeFirst

CausationChapter1:TheArtofStarting

ArticulationChapter2:TheArtofPositioningChapter3:TheArtofPitchingChapter4:TheArtofWritingaBusinessPlan

ActivationChapter5:TheArtofBootstrappingChapter6:TheArtofRecruitingChapter7:TheArtofRaisingCapital

ProliferationChapter8:TheArtofPartneringChapter9:TheArtofBrandingChapter10:TheArtofRainmaking

ObligationChapter11:TheArtofBeingaMensch

AfterwordIndex

ReadMeFirst

Themostexcitingphrasetohearinscience,theonethatheraldsnewdiscoveries,isnot“Eureka!”(Ifoundit!)but“That’sfunny….”

—IsaacAsimov

There are many ways to describe the ebb and flow, yin and yang, bubble-blowing and bubble-bursting phases of business cycles. Here’s another one:microscopesandtelescopes.

Inthemicroscopephase,there’sacryforlevel-headedthinking,areturntofundamentals, and going “back to basics.” Experts magnify every detail, lineitem,andexpenditure,andthendemandfull-blownforecasts,protractedmarketresearch,andall-encompassingcompetitiveanalysis.

Inthetelescopephase,entrepreneursbringthefuturecloser.Theydreamup“the next big thing,” change theworld, andmake late-adopters eat their dust.Lotsofmoney iswasted,but somecrazy ideasdo stick, and theworldmovesforward.

Whentelescopeswork,everyoneisanastronomer,and theworld is fullofstars.Whentheydon’t,everyonewhipsouttheirmicroscopes,andtheworldisfull of flaws. The reality is that you need bothmicroscopes and telescopes toachievesuccess.

Theproblemis that thismeansgathering information that isspreadamonghundredsofbooks,magazines,andconferences.Italsomeanstalkingtodozens

ofexpertsandprofessionals—ifyoucanget,andafford,anaudience.Youcouldspendallyourtimelearningandnotdoing.Anddoing,notlearningtodo,istheessenceofentrepreneurship.

The Art of the Start alleviates this pain.My goal is to help you use yourknowledge, love, and determination to create something great without gettingbogged down in theory and unnecessary details.My presumption is that yourgoal is tochange theworld—notstudy it. Ifyourattitude is“Cut thecrapandjusttellmewhatIneedtodo,”you’vecometotherightplace.

You might be wondering, Who, exactly, is “you”? The reality is that“entrepreneur” is not a job title. It is the state ofmind of peoplewhowant toalterthefuture.(Itcertainlyisn’tlimitedtoSiliconValleytypesseekingventurecapital.)Hence,thisbookisforpeopleinawiderangeofstartupendeavors:

guysandgalsingaragescreatingthenextgreatcompanybrave souls in established companies bringing new products andservicestomarketsaintsstartingschools,churches,andnot-for-profits

Greatcompanies.Greatdivisions.Greatschools.Greatchurches.Greatnot-for-profits.Whenitcomestothefundamentalsofstartingup,theyaremorealikethan they are different. The key to their success is to survive themicroscopetaskswhilebringingthefuturecloser.Let’sgetstarted.

GuyKawasakiPaloAlto,California

[email protected]

Causation

CHAPTER1

TheArtofStarting

Everyoneshouldcarefullyobservewhichwayhisheartdrawshim,andthenchoosethatwaywithallhisstrength.

—Hasidicsaying

GIST(GREATIDEASFORSTARTINGTHINGS)

Iusea top-ten list format forallmyspeeches,andIwould love tobegin thisbook with a top-ten list of the most important things an entrepreneur mustaccomplish.However,therearen’tten—thereareonlyfive:

1.MAKEMEANING (inspiredby JohnDoerr).Thebest reason tostart an organization is to make meaning—to create a product orservice that makes the world a better place. So your first task is todecidehowyoucanmakemeaning.

2. MAKE MANTRA. Forget mission statements; they’re long,boring, and irrelevant.No one can ever remember them—much lessimplementthem.Instead,takeyourmeaningandmakeamantraoutofit.Thiswillsetyourentireteamontherightcourse.3.GETGOING.Startcreatinganddeliveringyourproductorservice.Think soldering irons, compilers, hammers, saws, and AutoCAD—whatevertoolsyouusetobuildproductsandservices.Don’tfocusonpitching,writing,andplanning.4. DEFINE YOUR BUSINESSMODEL. Nomatter what kind oforganization you’re starting, you have to figure out a way to makemoney.Thegreatestidea,technology,product,orserviceisshort-livedwithoutasustainablebusinessmodel.5. WEAVE A MAT (MILESTONES, ASSUMPTIONS, ANDTASKS).Thefinalstepistocompilethreelists:(a)majormilestonesyou need to meet; (b) assumptions that are built into your businessmodel;and(c)tasksyouneedtoaccomplishtocreateanorganization.Thiswillenforcedisciplineandkeepyourorganizationontrackwhenallhellbreaksloose—andallhellwillbreakloose.

MAKEMEANING

I have never thought of writing for reputation and honor.What I have in myheartmustcomeout;thatisthereasonwhyIcompose.

—LudwigvanBeethoven

Many books about entrepreneurship begin with a rigorous process of self-examination,askingyoutodetermineifyouaretrulyuptothetaskofstartinganorganization.Sometypicalexamplesare

Canyouworklonghoursatlowwages?Canyoudealwithrejectionafterrejection?Canyouhandletheresponsibilityofdozensofemployees?

The truth is, it is impossible to answerquestions like this in advance, andtheyultimatelyservenopurpose.Ontheonehand,talkandbravadoarecheap.Sayingyou’rewillingtodosomethingdoesn’tmeanthatyouwilldoit.

On the other hand, realizing that you have doubt and trepidation doesn’tmean you won’t build a great organization. How you answer these questionsnowhaslittlepredictivepowerregardingwhatyou’llactuallydowhenyougetcaughtupinagreatidea.

The truth is that no one really knows if he* is an entrepreneur until hebecomesone—andsometimesnoteventhen.Therereally isonlyonequestionyoushouldaskyourselfbeforestartinganynewventure:

DoIwanttomakemeaning?

Meaningisnotaboutmoney,power,orprestige.It’snotevenaboutcreating

afunplacetowork.Amongthemeaningsof“meaning”areto

Maketheworldabetterplace.Increasethequalityoflife.Rightaterriblewrong.Preventtheendofsomethinggood.

Goals such as these are a tremendous advantage as you travel down thedifficultpathahead.Ifyouanswerthisquestioninthenegative,youmaystillbesuccessful, but itwill be harder to become so becausemakingmeaning is themostpowerfulmotivatorthereis.

It’stakenmetwentyyearstocometothisunderstanding.

In 1983, when I started in the Macintosh Division of Apple Computer,beatingIBMwasourreasonforexistence.WewantedtosendIBMbacktothetypewriterbusinessholdingitsSelectrictypewriterballs.

In1987,our reasonforexistencebecamebeatingWindowsandMicrosoft.WewantedtocrushMicrosoftandforceBillGatestogetajobflippingfishatthePikePlaceMarket.

In 2004, I am a managing director in an early-stage venture capital firmcalled Garage Technology Ventures. I want to enable people to create greatproducts,buildgreatcompanies,andchangetheworld.

Thecausationofgreatorganizationsisthedesiretomakemeaning.Havingthat desire doesn’t guarantee that you’ll succeed, but it doesmean that if youfail,atleastyoufaileddoingsomethingworthwhile.

EXERCISECompletethissentence:Ifyourorganizationneverexisted,theworldwouldbeworseoffbecause_________________________.

MAKEMANTRACloseyoureyesandthinkabouthowyouwillserveyourcustomers.Whatkindofmeaningdoyouseeyourorganizationmaking?Mostpeoplerefer to thisasthe“Why”ormissionstatementofanorganization.

Craftingamission statement isusuallyoneof the first stepsentrepreneursundertake. Unfortunately, this process is usually a painful and frustratingexperiencethatresultsinexceptionalmediocrity.Thisisalmostinevitablewhenalargenumberofpeoplearecommissionedtocraftsomethingdesignedtomakean even larger number of people (employees, shareholders, customers, andpartners)happy.

The fundamental shortcomingofmostmission statements is that everyoneexpects them to be highfalutin and all-encompassing. The result is a long,boring, commonplace, and pointless joke.* In The Mission Statement Book,JeffreyAbramsprovides301examplesofmission statements thatdemonstratethatcompaniesareallwriting thesamemediocrestuff.Towit, this isapartial

list of the frequency with which mission statements in Abrams’s samplecontainedthesamewords:

Best—94Communities—97Customers—211Excellence—77Leader—106Quality—169*

Fortune(orForbes,inmycase)favorsthebold,soI’llgiveyousomeadvicethatwillmakelifeeasyforyou:Postponewritingyourmissionstatement.Youcan come up with it later when you’re successful and have lots of time andmoneytowaste.(Ifyou’renotsuccessful,itwon’tmatterthatyoudidn’tdevelopone.)

Insteadofamissionstatementandallthebaggagethatcomeswithit,craftamantraforyourorganization.Thedefinitionofmantrais

Asacredverbalformularepeatedinprayer,meditation,orincantation,suchasaninvocationofagod,amagicspell,orasyllableorportionofscripturecontainingmysticalpotentialities.†

Whatagreat thingamantra is!Howmanymissionstatementsevokesuchpowerandemotion?

The beauty of amantra is that everyone expects it to be short and sweet.(Arguably, theworld’sshortestmantra is thesingleHindiwordOm.)Youmayneverhavetowriteyourmantradown,publishitinyourannualreport,orprintitonposters. Indeed, ifyoudohaveto“enforce”yourmantra in theseways, it’snottherightmantra.

Followingarefiveexamplesthatillustratethepowerofagoodmantra:

Authenticathleticperformance(Nike).‡Funfamilyentertainment(Disney).?Rewardingeverydaymoments(Starbucks).||Think(IBM).Winningiseverything(VinceLombardi’sGreenBayPackers).

Compare the Starbucks mantra, “Rewarding everyday moments,” to thecompany’smission statement, “EstablishStarbucksas thepremierpurveyorofthefinestcoffeeintheworldwhilemaintainingouruncompromisingprincipleswhilewegrow.”Whichismorememorable?

Imaginethatsomeoneasksyourparentsoryourorganization’sreceptionistwhatyoudo.Canitgetanybetterthanathree-wordmantrasuchas“Authenticathleticperformance”?*

EXERCISEIn only the space provided, write your organization’s mantra:________________________

Afinalthoughtonmantras:Don’tconfusemantrasandtaglines.Amantraisforyouremployees;it’saguidelineforwhattheydointheirjobs.Ataglineisforyourcustomers;it’saguidelineforhowtouseyourproductorservice.Forexample,Nike’smantrais“Authenticathleticperformance.”Itstaglineis“Justdoit.”

EXERCISEThe following chart contains the real mission statements of severalorganizations,andhypotheticalmantrasthatImadeupforthem.Whichdoyouthinkismorepowerful?

ORGANIZATION REALMISSIONSTATEMENT

HYPOTHETICALMANTRA

SouthwestAirlines

“ThemissionofSouthwestAirlinesisdedicationtothehighestqualityofCustomerServicedeliveredwithasenseofwarmth,friendliness,individualpride,andCompanySpirit.”

Betterthandriving.

Coca-Cola “TheCoca-ColaCompanyexiststobenefitandrefresheveryoneittouches.”

Refreshtheworld.

Wendy’s “ThemissionofWendy’sistodeliversuperiorqualityproductsandservicesforourcustomersandcommunitiesthroughleadershipinnovationandpartnerships.”

Healthyfastfood.

RedCross “Tohelppeopleprevent,prepareforandrespondtoemergencies.”

Stopsuffering.

UnitedStatesAirForce

“TodefendtheUnitedStatesandprotectitsintereststhroughaerospacepower.”

Kickbuttinairandspace.

UnitedWay(Hawaii)

“ThepurposeofAlohaUnitedWayistoprovideleadershiptobringpeopletogethertocreateahealthier,morecompassionatecommunity.”

Bringpeopletogether.

MarchofDimes “MarchofDimesresearchers,volunteers,educators,outreachworkersandadvocatesworktogethertogiveallbabiesafightingchanceagainstthethreatstotheirhealth:prematurity,birthdefects,lowbirthweight.”

Savebabies.

GETGOINGThethirdstepisnottofireupWordtowriteabusinessplan,launchPowerPointto craft a pitch, or boot Excel to build a financial projection.Wrong, wrong,wrong!

My goal in giving you this advice is not to reduce the sales ofMicrosoftOffice—remember,I’mofftheanti-Microsoftpodium.There’satimeforusingall threeapplications,but it’snotnow.Whatyou shoulddo is (a) rein inyouranaltendencytocraftadocumentand(b)implement.

Thismeansbuildingaprototype,writingsoftware,launchingyourWebsite,or offering your services. The hardest thing about getting started is gettingstarted.(Thisisastrueforawriterasitisforanentrepreneur.)Remember:Nooneeverachievedsuccessbyplanningforgold.

Youshouldalwaysbeselling—notstrategizingaboutselling.Don’ttest,test,test—that’s a game for big companies.Don’tworry about being embarrassed.Don’t wait to develop the perfect product or service. Good enough is goodenough.Therewillbeplentyoftimeforrefinementlater.It’snothowgreatyoustart—it’showgreatyouendup.

The enemy of activation is cogitation, and at this stage, cogitating the“strategic” issues of research and development is a problem. Questions like,How far canwe leap ahead?What if everyone doesn’t like what we do? andShouldwedesignforatargetcustomerormakewhatwewouldwanttouse?arebesidethepointwhenyou’regettinganewventureofftheground.

Instead,observethesekeyprinciplesofgettinggoing:

THINKBIG.Setyoursightshighandstriveforsomethinggrand.Ifyou’regoingtochangetheworld,youcan’tdoitwithmilquetoastandboringproductsor services.Shoot fordoing thingsat least ten timesbetterthanthestatusquo.WhenJeffBezosstartedAmazon.com,hedidn’t build a bookstore with a paltry 25,000 more titles than the250,000-titlebrick-and-mortarbookstores.Hewentto3,000,000titlesinanonlinebookstore.FINDAFEWSOULMATES. History loves the notion of the soleinnovator:ThomasEdison(lightbulb),SteveJobs(Macintosh),Henry

Ford (Model T), Anita Roddick (The Body Shop), Richard Branson(VirginAirlines).Historyiswrong.Successfulcompaniesarestarted,and made successful, by at least two, and usually more, soulmates.After the fact, one person may come to be recognized as theinnovator,” but it always takes a team of good people to make anyventurework.POLARIZE PEOPLE. When you create a product or service thatsomepeoplelove,don’tbesurprisedwhenothershateyou.Yourgoalis to catalyzepassion—proor anti.Don’t beoffended if people takeissuewithwhatyou’vedone; theonly result that shouldoffend (andscare)youislackofinterest.Car design is a good example of the love-versus-hate reaction;considerthebifurcationofpeople’sreactionstocarssuchastheMiniCooper,InfinitiFx45,andToyotaScionxB.Peopleareeitherdevotedfansorrelentlesscritics,andthat’sgood.

MiniCooperPhotocredit:PhotocourtesyMINIUSA

InfinitiFx45Photocredit:©Nissan(2003).InfinitiandtheInfinitilogoareregisteredtrademarksofNissanNorthAmerica,Inc.

ToyotaScionxBPhotocredit:ToyotaMotorSales,USA,Inc.

DESIGNDIFFERENT.Dependingonwhatmanagement fad ishot,youmight be tempted to believe that there is only one idealway todesign products and services.This isn’t true.There is no single bestway.Herearefourdifferentandvalidapproaches—andIamsuretherearemore.

“I WANT ONE.” This is the best kind of market research—thecustomer and the designer are the same person. Therefore, thecustomer’s voice can reach the designer’s mind uncorrupted bycorporatepolitics, relianceon thestatusquo,andmarket researchers.Example:FerdinandPorschesaid, “In thebeginning I lookedaroundand, not finding the automobile of my dreams, decided to build itmyself.”*

“MYEMPLOYERCOULDN’T (ORWOULDN’T)DO IT.” Notas romantic as “Iwantone,”but this is a crediblepath.Youalreadyunderstand the customer base, competition, supply sources, and

industrycontactsbecauseofyourbackground.Youstillneedtobuildthe product or service and get customers, but many questions arealready answered. For example, alumni of Unit 8200 of the IsraeliDefenseForceswentontocreatecompaniessuchasCheckpointafterdevelopingsecuritysoftwareforthemilitary.

“WHATTHEHELL—IT’SPOSSIBLE!”Thistheoryisn’tpopularwhentimesaretough,andmicroscopesareflourishing.Atthesetimes,theworldhas turnedconservativeanddemands thateverymarketbe“proven.” Markets for curve-jumping, paradigm-shifting leaps areseldom proven in advance. For example, when Motorola inventedcellulartelephones,nooneleapedtobuythem.Atthattime,portablephone was an oxymoron because phones were always attached toplaces.Therewasnomarketforphonesthatcustomerscouldmove.

“THEREMUSTBEABETTERWAY.” The organization born ofthisphilosophyisbasedontheidealisticnotionthatyoucanmaketheworld a better place by doing something new. In many cases, thefoundershadbackgroundswithnologicalconnectiontothebusiness.Theysimplygotan ideaanddecided todo it.Example:eBay.PierreOmidyar, the founder, wanted to implement a system for a “perfectmarket” for thesaleofgoods. (Thestoryofhisgirlfriendwanting tosellPezdispenserswasanafter-the-factPRtale.)

USEPROTOTYPESASMARKETRESEARCH.Intheearlydaysof an organization, there is high uncertainty about exactlywhat youshould create and exactly what customers want. In these times,traditional market research is useless—there is no survey or focusgroup that can predict customer acceptance for a product or servicethat you may barely be able to describe. Would you buy a newcomputerwithnosoftware,noharddisk,andnocolor thatsimulatestherealworld—includingatrashcan?*Thewisestcourseofactionistotakeyourbestshotwithaprototype,immediatelygetittomarket,anditeratequickly.Ifyouwaitforidealcircumstancesinwhichyouhavealltheinformationyouneed(which

isimpossible),themarketwillpassyouby.

The expected outcome of the “get going” principle is a first release of aproductorservice.Remember:itwon’tbeperfect.Butdon’treviseyourproductto get prospective customers to love it. Instead, revise it because customersalreadyloveit.Letmeputitinreligiousterms:Somepeoplebelievethatiftheychange, God will love them. Others believe that since God loves them, theyshouldchange.Thelattertheoryistheprototypetokeepinmindforhowtogetgoingandkeepgoingforstartups.

DEFINEYOURBUSINESSMODELYou want to make meaning. You’ve come up with a mantra. You’ve startedprototyping your product or service. The fourth step is to define a businessmodel.Todothisyouneedtoanswertwoquestions:

Whohasyourmoneyintheirpockets?Howareyougoingtogetitintoyourpocket?

Thesequestionslacksubtlety,buttheyareausefulwaytoconsidertherealityofstarting an organization—even, and perhaps especially, not-for-profits, whichhavetofightformoneyjusttostayalive.Youcan’tchangetheworldifyou’redead,andwhenyou’reoutofmoneyyou’redead.

Moreelegantlystated,thefirstquestioninvolvesdefiningyourcustomerandthe pain that he feels. The second question centers around creating a salesmechanismtoensurethatyourrevenuesexceedyourcosts.Herearesometipstohelpyoudevelopyourbusinessmodel:

BESPECIFIC.Themorepreciselyyoucandescribeyourcustomer,

the better.Many entrepreneurs are afraid of being “niched” to deathandthennotachievingubiquity.However,mostsuccessfulcompaniesstartedofftargetingspecificmarketsandgrew(oftenunexpectedly)togreat size by addressing other segments. Few started off withgrandiosegoalsandachievedthem.KEEPITSIMPLE.Ifyoucan’tdescribeyourbusinessmodelintenwords or less, you don’t have a business model. You should useapproximately tenwords—andemploy themwiselybyusing simple,everydayterminology.Avoidwhateverbusinessjargoniscurrentlyhip(strategic, mission-critical, world-class, synergistic, first-mover,scalable, enterprise-class, etc.). Business language does not make abusinessmodel.*ThinkofeBay’sbusinessmodel:Itchargesalistingfeeplusacommission.Endofstory.COPYSOMEBODY.Commercehasbeenaroundalongtime,andbynow clever people have prettymuch invented every businessmodelthat’s possible. You can innovate in technology, markets, andcustomers, but inventing a new businessmodel is a bad bet. Try torelate your business model to one that’s already successful andunderstood.Youhaveplentyofotherbattlestofight.

My final tip is that you askwomen—and onlywomen.My theory is thatdeepintheDNAofmenisa“killer”gene.Thisgeneexpressesitselfbymakingmen want to kill people, animals, and plants. To a large degree, society hasrepressed thisgene;however, startinganorganizationwhosepurpose is tokillanotherorganizationisstillsociallyacceptable.

Hence, asking a man about a business model is useless because everybusinessmodel looksgood to someonewith theYchromosome.Forexample,SunMicrosystemswants tokillMicrosoft.Whenis the last timeyouboughtacomputerbasedonwhomthemanufacturerwantedtokill?

Women,bycontrast,don’thavethiskillergene.Thus,theyaremuchbetterjudgesoftheviabilityofabusinessmodelthanmenare.Don’tagreewithme?The book The Darwin Awards provides irrefutable proof of women’s greatercommon sense. These awards commemorate “those individuals who haveremovedthemselvesfromthegenepoolinasublimelyidioticfashion.”*

For example, in 1998 two construction workers fell to their demise after

cuttingacircularholeinthefloorwhiletheywerestandinginthemiddleofthecircle.†TheDarwin Awards contains nine chapters about the stupidity ofmen,andonechapteraboutthestupidityofwomen.Irestmycase.

EXERCISEStep1:Calculateyourmonthlycoststooperateyourorganization.Step2:Calculatethegrossprofitofeachunitofyourproduct.Step3:DividetheresultsofStep1bytheresultsofStep2.Step4:Askafewwomenif theythinkyouhaveachanceofselling

that many units. If they don’t, you don’t have a businessmodel.

WEAVE A MAT (MILESTONES, ASSUMPTIONS, ANDTASKS)Onedefinitionofmatis“aheavywovennetofropeorwirecableplacedoverablasting site to keep debris from scattering.”* Preventing scattering is exactlywhatyouneedtodoasthefifth,andfinal,stepoflaunchingyourenterprise.Inthiscase,MATstandsformilestones,assumptions,andtasks.†

The purpose of compiling the MAT is to understand the scope of whatyou’reundertaking,testassumptionsquickly,andprovideamethodtofindandfixthelargeflawsinyourthinking.

MilestonesFor most people a startup looks as if it must achieve a seemingly unlimitednumber of goals. However, out of these goals are some that stand head andshouldersabovetheothers.Thesearetheorganization’smilestones—theymarksignificantprogressalong the road to success.Thereare sevenmilestones thateverystartupmustfocuson. Ifyoumissanyof them,yourorganizationmightdie.

Proveyourconcept.Completedesignspecifications.Finishaprototype.Raisecapital.Shipatestableversiontocustomers.Shipthefinalversiontocustomers.Achievebreakeven.

Thesemilestones apply to every kind of business. For example, a new schoolcanproveitsconceptbyseeingiftwoteachers,workingasateam,usinganewcurriculum,canprovidemoreindividualizedinstructionandimprovelearningina test classroom.With thisproofof concept, the school can thencomplete thedesign of its curriculum, raise funds, roll out the prototype, and start teachingclasses.

Thereareothertasks(we’llcometothemsoon)thatarealsoimportanttothesurvivaloftheorganization,butnoneareasimportantasthesemilestones.Thetimingofthesemilestoneswilldrivethetimingofjustabouteverythingelseyouneedtodo,sospend80percentofyoureffortonthem.

EXERCISETakedownthecornyframedmissionstatementinyourlobbyandreplaceitwithaprintoutoftargetdatesforcompletionofthesevenmilestoneslistedabove.Makesurethatemployeesandguestscanreadit.

ExtraCreditRepeat this procedure for every new product or service.Create awall offametotrackthehistoryofyourorganization.

Assumptions

Second, create a comprehensive list of the major assumptions that you aremakingaboutthebusiness.Theseincludefactorssuchas

productorserviceperformancemetricsmarketsizegrossmarginsalescallspersalespersonconversionrateofprospectstocustomerslengthofsalescyclereturnoninvestmentforthecustomertechnicalsupportcallsperunitshippedpaymentcycleforreceivablesandpayablescompensationrequirementspricesofpartsandsupplies

Continuously track these assumptions, andwhen theyprove false, react tothem quickly. Ideally, you can link these assumptions to one of the sevenmilestones discussed above. Thus, as you reach a milestone, you can test anassumption.

TasksThird, create another comprehensive list—this timeof themajor tasks that arenecessarytodesign,manufacture,sell,ship,andsupportyourproductorservice.Thesearenecessary tobuildanorganization, though theyarenotascriticalasthesevenmilestones.Theyinclude

rentingofficespace

findingkeyvendorssettingupaccountingandpayrollsystemsfilinglegaldocumentspurchasinginsurancepolicies

Thepointof the listof tasks is tounderstandandappreciate the totalityofwhatyourorganizationhas toaccomplish,and tonot letanythingslip throughthecracksintheearly,ofteneuphoricdays.

MINICHAPTER: THE ART OF INTERNALENTREPRENEURINGInnovation often originates outside existing organizations, in part becausesuccessful organizations acquire a commitment to the status quo and aresistancetoideasthatmightchangeit.

—NathanRosenberg

Alargenumberofaspiringentrepreneurscurrentlyworkforbigcompanies.Likeall entrepreneurs, they dream of creating innovative products or services andwonder if this can be done internally. The answer is yes. The purpose of thisminichapteristoexplainhow.

The “arts” that this book describes are equally appropriate for internalentrepreneurs—they, too, must innovate, position, pitch, write business plans,bootstrap, recruit, raise capital, partner, establish brands, make rain, and bemensches.Buttherearespecialrecommendationsthatapplyinthiscase.

Ironically, many independent entrepreneurs envy the employees of bigcompanies—they think that these lucky souls have humongous financialresources, large sales forces, fully equipped labs, scalable factories, andestablished brands, plus medical and dental benefits, at their disposal. Howwonderfulitwouldbe,guysingaragesmuse,toinventanewproductorservicewiththeluxuryofsuchaninfrastructurealreadyinplace.

Guess again.Creating a new product or service inside such a beast is not

necessarilyeasier;thechallengesarejustdifferent.Ihappentohavebeenpartofa “best-case” scenario: the Macintosh Division of Apple. I can explain thesuccessofthisinternalentrepreneurialeffortintwowords:SteveJobs.Hisoff-the-scale design talents, maniacal attention to detail, and reality-distortingpersonality(plusco-founderstatus)madeMacintoshsuccessful.WereitnotforSteveJobs,Macintoshwouldnotexist—oritwouldhavetakentheformofanAppleIIwithatrashcan.

But if it takes a Steve Jobs to innovate within large companies, you areundoubtedly thinking,wemight aswell give up right now.While that kind ofvisionary is in short supply in any business, anyone with guts, vision, andpolitical savvy should be able to set up an entrepreneurial outpost in anestablishedbusiness.IcollaboratedonthisminichapterwithBillMeade,aclosefriendwhohelpedHewlett-Packardorganizeitssubstantialvaultof intellectualproperty. We came up with this list of recommendations for internalentrepreneurs.

PUTTHECOMPANYFIRST.The internalentrepreneur’sprimary,ifnot sole,motivationshould remain thebettermentof thecompany.Internal entrepreneurship isn’t about grabbing attention, building anempire,orsettingupawaytocatapultoutofthecompany.Whenyouhaveagoodideaforaproductorservice,itwillattractalargenumberof employees, from the bottom up. They will support you if you’redoingitforthecompany,butnotifit’sforyourpersonalgain.Ifyoucanattracta largenumberof rank-and-filesupporters,youmightnotbetotallydependentonwhatthe“vicepresidents”say.KILL THE CASH COWS. Don’t announce this widely, but yourcharterisoftentocreatetheproductorservicethatwouldputanendto existing products or services. Still, it’s better that it’s you who’skillingyourcompany’scashcowsthanacompetitorortwoguysinagarage.MacintoshkilledAppleII.WouldithavebeenbetterforAppleifacompetitorhadcreatedMacintosh?Noway.Thisrecommendationis another reasonwhy it’s so important thatyou’veput the companyfirst:Whatyou’redoingisboundtobecontroversial.Butifyoudon’tkillthecashcows,someoneexternalwill.STAYUNDERTHERADAR.Twoguysinagarageshouldtrytogetas much attention as they can. Awareness of their efforts makes it

easier to raisemoney, establish partnerships, close sales, and recruitemployees. However, the opposite holds true for internalentrepreneurs.Youwanttobeleftaloneuntileitheryourprojectistoofaralongtoignoreortherestofthecompanyrealizesthatit’sneeded.The higher you go in a company, the fewer people are going tounderstandwhatyou’retryingtodo.Thisisbecausethehigheryougo,the more people want to maintain the status quo and protect theirpositions.FIND A GODFATHER. In many companies, there are godfatherfigures.Thesearepeoplewhohavepaidtheirduesandaresafefromeveryday petty politics. They are relatively untouchable and usuallyhave the attention and respect of top management. Internalentrepreneurs should find a godfather to support their projects byprovidingadvice,technicalandmarketinginsights,andprotection—ifitcomestothepointwhereyouneedprotection.GETASEPARATEBUILDING.Aninternalentrepreneur,sittinginthemainflowofabigcompany,willdiebya thousandcutsaseachdepartmentmanagerexplainswhythisnewprojectisabadidea.“Thenewalwayslookssopuny—sounpromising—nexttotherealityofthemassive, ongoing business.”* The Macintosh Division started in abuildingthatwasfarenoughawayfromtherestofApplethatitstayedout of the daily grind, but was close enough to obtain corporateresources.A separate buildingwill keepyour efforts under the radarandfosteréspritdecorpsamongyourmerrybandofpirates.Theidealdistancefromthecorporatepukesisbetweenone-quartermileandtwomiles—that is, close enough to get to, but far enough to discourageoverlyfrequentvisits.GIVE HOPE TO THE HOPEFUL. Inside every corporate cynicwho thinks that “this company is too big to innovate” is an idealistwhowould like to see it happen.Goodpeople in big companies aretired of being ignored, forgotten, humiliated, and forced intosubmission.Theymaybetrampled,buttheyarenotdead.Whenyoushow them thatyou’redrivinga stake in theheart of the statusquo,youwill attract support and resources.Thenyour goal is to advancethese people fromwanting to see innovation happen to helping youmakeithappen.ANTICIPATE,THENJUMPON,TECTONICSHIFTS.Structural

deformationsinacompanyareagoodthingforinternalentrepreneurs.Whethercausedbyexternalfactorssuchaschangesinthemarketplaceor internal factorssuchasanewCEO, tectonicshifts signalchangesand may create an opportunity for your efforts. Effective internalentrepreneurs anticipate these shifts and are ready to unveil newproducts or services when they occur: “Look what we’ve beenworkingon.”Bycontrast,corporatepukessay,“NowIseetheshift.Ifyou give me permission, six months, and a team of analysts, I cancomeupwithanewproductstrategy.”BUILD ONWHAT EXISTS. The downside of trying to innovatewithinabigcompanyisclearandwelldocumented,buttherearealsobenefitstodoingso.Don’thesitatetoutilizetheexistinginfrastructuretomakeinnovationeasier—startbystealing,ifyouhaveto.You’llnotonlygarnerresources,butalsomakefriendsasotheremployeesbeginto feel as if they are part of your team. If you try to roll your ownsolutions (asanextremeexample,buildingyourownfactory),you’llonly make enemies. The last thing a startup inside a big companyneeds is internal enemies—there will be enough enemies in themarketplace.COLLECT AND SHARE DATA. The day will inevitably arrivewhenabeancounterorlawyerissuddenlygoingtotakenoticeofyouandquestionthereasonsforyourproject’sexistence.Ifyou’relucky,thiswillhappenlaterratherthansooner,butitwillhappen.Prepareforthatdayby(1)collectingdataabouthowmuchyou’vespentandhowmuch you’ve accomplished and (2) then sharing it openly. In bigcompanies,datasuppressesantibodies,but itmightbe too late togetthedataoncetheantibodiesappear.LETTHEVICEPRESIDENTSCOMETOYOU.Quickquestion:Doyouthinkthatyourfirststepshouldbetogetyourvicepresidenttosignoffonyourproject?Itshouldn’tbe.Thisisoneofthelaststeps.Avice president will “own” your idea and support it more if he“discovers”itandthenapproachesyouaboutsponsoringit.Youmayhave to ensure that a vice president “accidentally” makes thatdiscoverywhen the time is right, but this is not the sameas seekingpermissiontogetstarted.DISMANTLE WHEN DONE. The beauty of an internalentrepreneurialgroupis that itcanrapidlydevelopnewproductsand

services. Unfortunately, the very cohesiveness that makes it soeffective can lead to its downfall later if it remains separate (andusually aloof) from the rest of the organization. Its effectivenessdeclinesfurtherasitsmemberscometobelievethatonlythey“know”what to do, and the entrepreneurial group creates its own, newbureaucracy.* If the product or service is successful, considerdismantling the group and integrating it into the larger organization.Thencreateanewgrouptojumpaheadagain.REBOOTYOURBRAIN.Manyinternalentrepreneurswillfindthatthe rest of this book prescribes actions that are contrary to whatthey’ve experienced, learned, and maybe even taught in bigcompanies. The reality is that starting something within an existingcompany requires adopting new patterns of behavior—essentially,rebootingyourbrain.Thefollowingtablewillprepareyouforwhat’stocome:

TOPIC BIGCOMPANY STARTUPPositioning Beingallthingstoallpeople Findinganicheand

dominatingitPitching Sixtyslides,120minutes,and

fourteen-pointfontTenslides,twentyminutes,andthirty-pointfont

WritingaBusinessPlan

Twohundredpagesofextrapolationfromhistorical

Twentypagesofwishfuldatathinking

Bootstrapping StayinginaHyattRegencyinsteadofaRitzCarlton

StayingwithacollegebuddyinsteadofaMotelSix

Recruiting CorporateheadhuntersscreeningcandidateswithFortune500orBigFourtrackrecords

Suckinginpeoplewho“getit”andarewillingtorisktheircareersforstockoptions

Partnering NegotiatingI-win/you-losedealsthatthepresswilllike

Piggybackingonotherstoincreasesales

Branding AdvertisingduringtheSuperBowl

Evangelizinginthetrenches

Rainmaking Spiffsforresellersandcommissionsforsalesreps

Suckingup,down,andacross

BeingaMensch

Callingthelegaldepartment Helpingpeoplewhocan’thelpyou

FAQ(FREQUENTLYAVOIDEDQUESTIONS)

Q.Iadmitit:I’mscared.Ican’taffordtoquitmycurrentjob.Isthisasign that I don’t have what it takes to succeed? Am I not trulycommitted?

A.Youshouldbescared.Ifyouaren’tscared,somethingiswrongwithyou.Your fears are not a sign that you don’t have the right stuff. In thebeginning, every entrepreneur is scared. It’s just that some deceivethemselvesaboutit,andothersdon’t.You can reduce these fears by diving into the business andmaking a

littleprogresseveryday.Onedayyou’llwakeupandyouwon’tbeafraidanymore—oratleastyou’llhaveawholenewsetoffears.

Nomatterwhat,neveradmitthatyou’rescaredtootheremployees.ACEOcanneverhaveabadday.Butdon’tgooverboard,either,andactasifyouhavenoconcerns,becausethentheywillknowyou’rescaredstiff.Q.ShouldIsharemysecretideaswithanybodyotherthanmydog?A. The only thing worse than a paranoid entrepreneur is a paranoid

entrepreneur who talks to his dog. There is much more to gain—feedback, connections, opened doors—by freely discussing your ideathan there is to lose. If simply discussing your idea makes itindefensible,youdon’thavemuchofanideainthefirstplace.(SeetheFAQsectionofChapter7,“TheArtofRaisingCapital,”foradetaileddiscussionofnondisclosureagreements.)

Q.How far along should I be before I start talking to people aboutwhatI’mdoing?

A.Startrightaway.Bydoingsoyou’llbeconstantlymullingoveryouridea

—asbothaforegroundandbackgroundtask.Themorepeopleyoutalkto,thericheryourthoughtswillbe.Ifit’sjustyoustaringatyournavel,allyou’llseeislintbuildingup.

Q.Howdoyouknowif it’s timetogiveuprather thancontinuingtopursueadoomedventure?

A.Theoldplatitudeisthatgoodentrepreneursnevergiveup.Thisisfineforbooksandspeeches,butnotfortherealworld.Ifthreeclosefriendstellyou togiveup,youshould listen.As thesayinggoes,when threepeopletellyouyou’redrunk,youshouldtakeacabhome.It’sokaytofailaslongasyoutryagain.

Q. I think that I have a great idea, but I don’t have a businessbackground.WhatshouldIdonow?

A.First, ifallyou’vedoneiscomeupwithagreatidea—forexample,“anewcomputeroperatingsystemthat’sfast,elegant,andbugfree”—butyoucan’timplementit,thenyouhavenothing.Inthiscase,don’twasteanyone’s time until you’ve found other people who can do theengineering.Assuming that you can implement, there are twokindsof peopleyou

canrecruit.First,youcangetamentor.Thiswouldbeanolderpersonwhoiswillingtocoachyoufromtimetotimebutneveractuallydoanywork.Second,youcouldgetabusinesspartner.Thisissomeonewho’swillingtowork side by side with you—even on a part-time basis—whose skill setcomplementsyours.Eitherkindofpersoncanmakeabigdifferenceinyourbusiness.Q. When should I worry about looking like a real business, with

businesscards,letterhead,andanoffice?A.Makebusinesscardsandletterheadimmediately.Spendafewbucksand

getthemdesignedbyaprofessionalordon’tdothematall.Ensurethatthe smallest type size is twelvepoints.Anoffice isn’t necessaryuntilcustomersarecomingtoseeyou,oryourunoutofspacefortheteam.

Q.DoIneedaWebsite?A.Yes,particularlyifyou’regoingtoraisemoney,servelotsofcustomers,

change the world in a big way, and achieve liquidity. Customers,partners,andinvestorswilllookforyourWebsitefromtheverystart.

RECOMMENDEDREADING

Christensen,Clayton.TheInnovator’sDilemma:WhenNewTechnologiesCause

GreatFirmstoFail.NewYork:HarperBusiness,1997.Drucker, Peter F. Innovation and Entrepreneurship: Practice and Principles.

NewYork:Harper&Row,1985.Hargadon,Andrew.How Breakthroughs Happen: The Surprising Truth About

HowCompaniesInnovate.Boston:HarvardBusinessSchoolPress,2003.Kuhn,Thomas.TheStructureofScientificRevolutions.Chicago:Universityof

ChicagoPress,1962.Shekerjian,Denise.UncommonGenius:HowGreatIdeasAreBorn.NewYork:

PenguinBooks,1990.Ueland,Brenda.IfYouWanttoWrite.St.Paul:GraywolfPress,1987.Utterback, JamesM.Mastering theDynamics of Innovation:HowCompanies

Can Seize Opportunities in the Face of Technological Change. Boston:HarvardBusinessSchoolPress,1994.

Articulation

CHAPTER2

TheArtofPositioning

Allowmetointroducemyself.MynameisWileE.Coyote…Genius.Iamnotsellinganything,noramIworkingmywaythroughcollege,solet’sgetdowntocases.Youarearabbit,andIamgoingtoeatyouforsupper.Now,don’ttrytogetaway!Iammoremuscular,morecunning,faster,andlargerthanyouare…andI’magenius.Why,youcouldhardlypasstheentranceexaminationstokindergarten.So,I’llgiveyouthecustomarytwominutes

tosayyourprayers.—TheBugsBunny/RoadRunnerMovie(1979)

GIST

Most people consider “positioning” an unnatural act foisted upon them bymarketingdweebswhoareassistedbyhighlypaidandcluelessconsultants. Intruth,positioninggoesfarbeyondamanagementoffsiteorexercise.Whendoneproperly,itrepresentstheheartandsoulofaneworganization,statingclearly

whythefoundersstartedtheorganizationwhycustomersshouldpatronizeitwhygoodpeopleshouldworkatit

WileE.Coyoteunderstandspositioningbetterthanmostentrepreneurs:He’sa coyote, and he’s going to eat the rabbit for lunch. Organizations shouldpositionthemselveswithcomparableclaritybyexplainingexactlywhatitistheydo.The art of positioning really comesdown tonothingmore than answeringthatonesimplequestion:

Whatdoyoudo?

Developingagoodanswertothisquestioninvolvesseizingthehighground

foryourorganizationandestablishingpreciselyhowitdiffersfromthemassofcompetition.Thenyoumustcommunicatethismessagetothemarketplace.Youwill learn how to do both in a short, differentiated, and powerfulway in thischapter.

SEIZETHEHIGHGROUNDUnlessyouarea rabbit about tobedevouredbyacoyote,goodpositioning isinspiring and energizing. It does not allow itself to getmucked up inmoney,marketshare,andmanagementegos.Thesearethequalitiestoaspireto:

POSITIVE. Entrepreneurship isn’t war, so you don’t describe yourenterprise inwarlike terms.Yourorganization’spurpose isnot toputanotherorganizationoutofbusiness.Customersdon’tcareifyouwantto destroy the competition. They want to know what benefits theyderivefrompatronizingyourcompanyorservice.CUSTOMER-CENTRIC.Positioningisaboutwhatyoudoforyourcustomers—not about what you want to become. Announcing that

your organization is “the leading company” is egocentric, notcustomer-centric.It’salsoimpractical:Howcanyouproveyou’retheleader?Howcanyoupreventanotherorganizationfromdeclaringthatitistheleader—justasyouhave?EMPOWERING.Employeesmustbelievethatwhatyoudo(thatis,your positioning)makes theworld a better place. The employees ofeBay, for example, believe they enable people to gain financialsuccess.Thisattitudeempowers theemployees toexceed their limits—andtoenjoydoingso.

TheToyota Prius is a good example of high-ground positioning. The car getsfifty-fivemilespergallonofgasbyusingahybridof an electricmotor andagasolineengine.It’snotfast,sexy,orluxurious.Butit’sinexpensivetobuyandinexpensivetooperate,qualitiesthatpositionitpowerfullyanduniquely.

Inadditiontoseizingthehighground,goodpositioningisaworkhorse.Itispracticalandservestacticalandstrategicpurposesthatareeasilyunderstoodandbelievedbycustomers,vendors,employees,journalists,andpartners.Thus,goodpositioningalsoembodiesthesequalities:

SELF-EXPLANATORY. Good positioning states its caseunequivocally. It embodies such qualities as saving money andincreasingrevenue,aswellasloftierconceptssuchaspeaceofmind,enlightenment,andjoy.SPECIFIC.Goodpositioningtargetstheintendedcustomer.Ifyouarethe target customer, you immediately understand that. If you’re not,youunderstand that, too.Forexample,“increase thesecurityofWebsites”isamediocreandvaguevalueproposition,comparedto“reducetheriskoffraudforcommercialbanksintheironlinetransactions.”CORE. The core competencies of your organization—not ancillaryproductsorservices—arethebasisofgoodpositioning.Forexample,Apple Computer’s positioning focuses on its ability to createinnovative devices. It cannot tell a good story about informationtechnologyconsultingservices.

RELEVANT.Theflipsideofanorganization’scorecompetencies isthecoreneedsofcustomers.Ifyourcorecompetenciesandtheircoreneedsaren’twellmatched,yourorganizationandyourpositioningwillnotbeattractivetothem.LONG-LASTING.BadpositioningforIBMinitsearlyyearswouldhave been “Provide cash registers to stores.” Even worse was thedecision to name a company National Cash Register.* Aim forpositioningthatwilllastonehundredyears.DIFFERENTIATED. Your positioning should not sound like yourcompetitor’s. Unfortunately, many companies craft positioning as ifthere is no competition—or as if the only competition is totallyincompetent.This isseldomthecase.(Moreabout this in thesection“ApplytheOppositeTest”laterinthischapter.)

EXERCISEReviewyourpositioning.Pickyourreaction:

a) Pride because you’ve achieved laserlike focus onwhat you standfor.

b)Relief becauseyou’vementioned everypossible constituency andcustomer.

NICHETHYSELFWhenF.W.Woolworthopenedhisfirststore,amerchantonthesamestreettriedto fight thenewcompetition.Hehungoutabig sign:“Doingbusiness in thissamespot foroverfiftyyears.”ThenextdayWoolworthalsoputoutasign.Itread:“Establishedaweekago:nooldstock.”

—PeterHay,TheBookofBusinessAnecdotes

Many entrepreneurs try to avoidmarket niches.They are afraid of getting

lockedoutofimportantsectors,submaximizingsales,andputtingalltheireggsinonebasket.Theystriveforbroadappealtolarge,horizontalmarketsbecausetheysee successfulcompanies thatarebroad-basedandassume that theymustbe,too.

TakeMicrosoft, for example.Whowouldn’t want to beMicrosoft? Circa2004,havingdefeated theDepartmentof Justice, it sellsoperatingsystems forpersonalcomputers,servers,PDAs,andphones,aswellasapplicationsoftwareforWindowsandMacintosh,plusonlineaccess,gamesforpersonalcomputers,anditsownlineofgaminghardware.

Youmight think that to build the nextMicrosoft, you’d have to launch amultiprong attack.Nothing could be further from the right approach.To buildthenextMicrosoft, youhave to start in a small niche, establish a beachhead,*and(withluck)moveoutfromthere.

Furthermore,youmightthinkthatMicrosoftstartedoutbroad,whichishowtheynowdominatethecomputerbusiness.Tosettherecordstraight,Microsoftstarted in a sliver of a sector: a programming language called BASIC for anoperatingsystemcalledCPM.

Asa startup,you’re trying to start a firewithmatches,not flamethrowers.(Hence,thedesignofthisbook’scover.)Fewstartuporganizationscanaffordormanageaflamethrower. Inotherwords,putoneniche inyourbasket,hatch it,putanothernicheinyourbasket,hatchit…andsoonyou’llhaveawholebunchofnichesthatadduptomarketdomination.

ValuetoCustomeroftheProductorService

The diagram on the previous page provides a conceptual framework forniche marketing. The vertical axis represents your organization’s ability toprovideauniqueproductorservice.Thehigheryouare,themoreyouareabletoprovidesomethingthatisdifferentfromeverythingelseinthemarketplace.Thehorizontalaxisrepresentshowimportantyourgoodorserviceistothecustomer.The further to the right you are, themore valuable the good or service. Let’sanalyzethefourcornersofthischart:

UPPER LEFT. This is the position that stupid companies occupy.Theyareproducingproductsorservices thatnoonecaresabout,butareunique.UPPERRIGHT. This is the corner youwant to occupy. It’swherecustomers most appreciate you and margins are good because youprovidesomethinguniquethattheystronglydesire.LOWERLEFT.Lookingback, this is the corner thatmanydotcomcompaniesoccupied.Theywereprovidinggoodsandservicesnobodycared about, andmany companies were doing the same. Other thanthat,everythingwasgreat.LOWER RIGHT. The problem with this corner is that life is acontinuous pricewar. Sure, peoplewant to buywhat youmake, butlotsofothercompanieshavesimilarofferings.Youcanbesuccessfulhere,butlifeisagrind.

Accurately assessing the location of your organization on this chart is adifficult task.Most organizations turn it into an exercise in wishful thinking:Whatparameters canweuse thatputus in theupper rightposition?You’dbeamazed at what labels companies use to accomplish this goal, but the onlyrelevantparametersarevaluetothecustomeranduniqueabilitytoprovide.

DON’TCOMPROMISEONYOURNAMEA remarkable name for your organization, product, or service is like

pornography: It’shard todefine,butyouknow itwhenyousee it.Comingupwithagoodnameiseasierthancreatingaproductorservice,butyouwouldn’tthinksobasedontheatrocitiesoutthere.

Spend the time and effort to come up with a good name—it makespositioningeasier.Herearesometipsfortheprocess:

HAVEAFIRSTINITIALTHAT’SEARLYINTHEALPHABET.Somedayyourorganization’s,product’s,orservice’snamewillappearinanalphabeticallist.Bettertobeearlyinthelistthanlater.Imagine,forexample,atradeshowwithathousandexhibitors.Doyouwanttobeinthefirstthirdorlastthirdoftheshow’sdirectory?Also,avoidwordsthatbeginwithXorZbecausetheyaredifficulttospell out after hearing them. For example, if you heard “Xylinx,”wouldyouthinkthatit’sspelled“Xylinx”or“Zylinx”?AVOIDNUMBERS. They are bad ideas for names because peoplewon’t remember whether to use numerals (123) or to spell out thenumber(OneTwoThree).PICKANAMEWITH“VERBPOTENTIAL.”Inaperfectworld,yournameentersthemainstreamvernacularandbecomesaverb.Forexample,people“xerox”documents—asopposedtophotocopythem.Morerecently,people“google”words insteadof“searchingfor themontheInternet.”Namesthatworkasverbsareshort(nomorethantwoorthreesyllables)andnottonguetwisters.

EXERCISESee if the name you’re consideringworks in this sentence: “__________it.”

AWOA(awordonacronyms):Avoidmultiple-wordnamesunless thefirst word has solid verb potential (for example, “Google TechnologyCorporation” would still be fine) or the acronym spells out somethingclever. For example, the name Hawaiian Islands Ministry, a parachurchorganization that trains pastors andministers, becomes “HIM”—a cleverhomonymwith“hymn”andaplayon“Him,”thatis,God.

SOUND DIFFERENT (AS OPPOSED TO “THINKDIFFERENT”).Thenameshouldsoundlikenothingelse.For(abad)example: Claris, Clarins, Claritin, and Claria. It’s hard to rememberwhich name refers to software, cosmetics, antihistamines, or onlinemarketing. Even if you did remember, it’s likely that you wouldassociateall fourwordswithonecategory,and thatcan’tbegood inthreeoffourinstances.SOUNDLOGICAL. In addition to sounding different, your namesshouldalsosoundlogical.Thatis,theyshould“match”whatyoudo.Agood example of this is the names of thePokémon characters.Theyare among the most clever examples of naming that you’ll comeacross.TakeGeodudeandLickitung,forexample.Ask your kids to show you the cards of the characters Beautifly,Delcatty, Flygon, and Huntail, and you’ll see what I mean aboutlogicalnamesandgoodpositioning.AVOID THE TRENDY. With hindsight, we made two mistakesnamingGarageTechnologyVentureswhenwestarteditin1997.First,weinitiallycalledthecompany“garage.com.”Unfortunately,dotcomacquired negative connotations when the Internet tide went outbecauseitcametostandforcompaniesrunbypeoplewithoutbusinessacumeninmarketswithoutbusinessmodels.Thesecondmistakewaslowercasingthe“g”ingarage.com.Itwasasilly act of pseudohumility, but thosewere silly times. The problemwiththelowercase“g”wasthatitwashardtopickitoutinblocksoftext.Thevisual cue that thewordwasapropernounwasn’t there—you’dthinkthatsomeonenamedguy(sic)wouldknowthis.Also,noone could really figure outwhat to dowhen a sentence startedwith

“garage.com”—shoulditbecapitalizedornot?

Thebottomline,inhindsight,isthatyoushouldcomeupwithanamethatwill endure for decades, and save your cleverness for the features of yourproductsandservices.

Ontheotherhand,considerthenameKrispyKreme.Itdoesn’tstartwithaletter early in the alphabet, and both “crispy” and “cream” are spelledincorrectly. Furthermore, the company’s donuts are neither crispy nor creamy.What this proves is that if you have a truly great product, it can overcomeanything.

One last example: I sawagreat name for a company in a restroomat theCalgaryInternationalAirport.Thecompanysellsbillboardadvertisingspaceinrestrooms,anditsnamewasFlushmedia.Brilliant.

MAKEITPERSONALTohisdog,everymanisNapoleon;hencetheconstantpopularityofdogs.

—AldousHuxley

I recentlymetanentrepreneurwhowanted to startanonlineservice toenablepeopletocreatetrustsfortheirpets.Shewasconcernedthatsometimespeoplediedbeforetheiranimals.HerpitchhingedonthefactthatninemillionpetsareeuthanizedeveryyearintheUnitedStates.

Myfirstreaction,asaventurecapitalist,wasthatninemillionpetsmaygeteuthanized, but not all of them because their owners died. Few are probablyeuthanizedfor this reason,so themarket isn’tasbigasshe thinks.Mysecondreaction,asadogowner(RockyKawasaki,boxer),wasthatshewasright:WhatwillhappentoRocky?Hewasn’tincludedinanyofmyfamily’swillsandtrusts.

Thelessonisthis:Positionyourproductorserviceinthemostpersonalwaythat you can. “What happens to Rocky?” ismuchmore powerful than “Whathappenstotheninemillionpets?”Ifyouhookmewithapersonalconcernaboutmy own dog, I can extrapolate this to the millions of other people who areconcernedabouttheirpets.

IMPERSONAL PERSONAL

OuroperatingsystemisanindustrystandardthatenablesMISdepartmentstomaintaincontrolandreducecosts.

Ouroperatingsystemenablesyoutobemorecreativeandproductive.

Reducethesizeoftheglobalozonehole. Preventyoufromgettingmelanoma.

Dozensofairplanesflyinginahub-and-spokepatternaroundtheUnitedStates.

“Youarenowfreetomoveaboutthecountry.”

Increasingthemeantestscoresforchildreninyourschooldistrict.

EnsuringthatJohnnycanread.

Positioningismorepowerfulwhenit’spersonalbecausepotentialcustomersdon’thavetotakethestepofimagininghowaproductorservicefillsaneed.

SPEAK“ENGLISH”Ask yourself, did it…catchmyattention?Holdmy interest?Piercemyarmor?TalkEnglish?Centeron“me”?Makeapoint?

—AllenKay,advertisingmaven,onwhatmakesagoodad

A company CEO showed up one day at Garage and pitched us with thefollowing positioning statement: “Utilizing the 2048-bit Diffie-Hellman keyexchange and 168-bit triple-DES, we provide intrusion protection for digitalvoice,fax,andwirelesscommunications.”

Toencryptionexperts, this statementwouldmeana lot.For the restofus,theCEOmightaswellhavebeenspeakinginGreek.Withourhelp,hechangedhispositioningstatementto“Wesafeguardyourcommunications.”

If the client had let me, I would have further reduced it to a mantra of“securecommunications.”

Nomatterwhatyou’resellingorwhoyou’resellingitto,useplainwordstodescribewhat you do.Whatever jargon is the lingua franca of your industry,rememberthatalotmorepeoplethaninsidersneedtounderstandwhatyoudo.

EXERCISEDelete all the acronyms and technical terms from your positioningstatement.Isitanyweaker?

APPLYTHEOPPOSITETESTMostcompaniesusethesametermstodescribetheirproductorservice.It’sasifthey all believe that their prospective customers have been living on a desertisland and have never before heard a product or service referred to as “high-quality,”“robust,”“easy-to-use,”“fast,”or“safe.”

ToseewhatImean,applytheOppositeTest:Doyoudescribeyourofferingin a way that is opposite to that of your competition? If you do, then you’resayingsomethingdifferent.Ifyoudon’t,thenyourdescriptionsareimpotent.

Forexample,itwouldbefinetodescribeyourproductas“intuitive,secure,fast, and scalable” if your competition describes its product as “hard-to-use,vulnerable,slow,andlimited.”However,thisprobablyisn’tthecase,soyou’resayingnothing.

ADJECTIVE PROOFPOINTIntuitive Youcansetitupinoneday,andendusersneednotraining.Secure Noonehaseverhackedit.Fast Real-worldresultsshowafivefoldimprovementin

throughput.Scalable Ithashandledasmanyas20,000transactionspersecond.

Afarbetterwaytodistinguishyourproductistoofferconcreteproofpointssothatpeoplecandeduceitsuniquequalities.

Obviously,thereareoccasionswhenyoudonothavetheluxuryofusingthismany words to make your point. But this sort of restriction is seldomjustificationtoresort tocommonplaceandmeaninglessadjectives.Findunique

languageorofferscientificproofpoints,anddon’tbetemptedtothinkthatyouhave the only product describedwith such overfamiliar adjectives as intuitive,secure,fast,andscalable.

CASCADETHEMESSAGECrafting the positioning of an organization is a demanding process, but wellworth the effort. It’s apity thatmanycompaniesget to thispoint and thendonothing more than send out a halfhearted internal memo or stick a rotepositioningstatementinanannualreport.Forshame.

Acritical step inanypositioningprocess is toensure thatpeople from themarketing department and top of the organization right down to temps andconsultantsunderstandthepositioning.Youcanachievethisbyprovidingashortdocument detailing your proposal and discussing it in all-hands meetings.Managers should ensure that all employees know it. Think of a waterfallcascadingdownamountain—notjustthesummitiswet.

EXERCISEAskyourreceptionistwhatyourorganizationdoes.

ExtraCreditAsk your latest hires why they joined the organization. Their answersprovidearichveinforagoodandtruepositioningstatementbecausetheyhaveafresh,outward-facingperspective.

Anddon’tforgetyourdirectorsandadvisors.You’dbeamazedathowmanyboard members cannot effectively describe what an organization does. You’dthink that because they “run” the place, they’d know its mandate exactly. Inactuality, they’reusually far removed fromwhat’s reallygoingon—much lesswhatshouldbegoingon.

Thebottomlineisthatcommunicatingthepositioningofanorganizationisnotjustmarketing’sandmanagement’sjob:It’severyemployee’sjob.Thisissoimportant thatyouneedtorepeat theprocessasemployeescomeandgo—andeven the ones who remain need refreshers on the positioning. A six-monthintervalisaboutright.

FLOWWITHTHEGOWhile you cannot let the market position you, it’s also true that you cannotultimately“control”yourpositioning.

You do the best you can to craft a good message and cascade it to youremployees, customers, and partners. But then the market does a strange,powerful, sometimes frustrating, but often wonderful thing: It decides on itsown.Thiscanhappenbecauseunintendedcustomersareusingyourproductorservice in unintended ways. For example, a spreadsheet/database/word-processingcomputerbecomesadesktoppublisher’stool.

Whenthishappens,(a)don’tfreakout,and(b)listentowhatthemarketistellingyou.Perhapsithasdoneyouafavorandfoundanaturalpositioningforyou.Isitoneyoucanlivewith?Intheend,it’sbettertoflowwithwhat’sgoingthantotrytopropuptheunnaturalpositioningyou’veconcocted.

EXERCISEStep 1: Write a one-paragraph description of your customer’s

experiencewhenhe’susingyourproductorservice.Step 2: Call up a customer and have him write a one-paragraph

descriptionofusingyourproductorservice.Step3:Comparethetwodescriptions.

FAQ

Q. Should I use a PR firm to craft a positioning statement for myorganization?

A.YoushouldneverhandthetaskofpositioningovertoaPRfirm(oranyotherexternalorganization). It isway too importanta job todelegate.Positioningisafundamentaltask,sodon’twimpoutonit.

Q. Is there a strategic advantage in appearing tobe “the little guy”?Or,shouldItrytoprojectalarger,moreestablishedimage?

A.Lyingdoesn’tscale.Onceyoustartdeceivingpeople,youhavetokeep

trackofhowyoudeceivedthem.Thiswillgetmorecomplex,themorepeopleyoumeet.Youshouldalwaysprojectwhatyouare.Thisisnottosay that you go out of yourway to look undercapitalized, premature,and weak, if that, in fact, is what you are, but don’t try to act likeGeneralMotorsifyou’renotGeneralMotors.

Q.Shouldwetakeintoaccounttheavailabilityofdomainnameswhenwenametheorganization?

A.Yes,absolutely. It’snot justcool tohaveadomainname, it’sessentialthat you have one that customers, partners, and investors can easilyrememberanduse.

Q.DoIneedtothinkaheadandconsiderexitstrategieswhenIthinkaboutpositioning?

A. I don’t know how an exit strategy (which you have no control over)wouldchangeyourpositioning.Buildagreatorganization—oneaspectofwhichwillbegoodpositioning.Don’tworryaboutexitstrategies—and certainly don’t worry about how exit strategies should or couldaffectyourpositioning.

RECOMMENDEDREADINGTrout, Jack. The New Positioning: The Latest on the World’s #1 Business

Strategy.NewYork:McGraw-Hill,1995.

CHAPTER3

TheArtofPitching

Mendyourspeechalittle,lestitmaymaryourfortunes.—Shakespeare,KingLear

GIST

Forget “I think, therefore I am.” For entrepreneurs, the salient phrase is “Ipitch, therefore I am.” Pitching isn’t only useful for raising money—it’s anessentialtoolforreachingagreementonanysubject.Agreementcanyieldmanyoutcomes: management buy-in for developing a product or service, closing asale,securingapartnership,recruitinganemployee,orsecuringaninvestment.

Question:Howcanyoutellifanentrepreneurispitching?Answer:Hislipsaremoving.I’ve long been an evangelist for better pitching because I suffer from a

medical condition called tinnitus.This involves a constant ringing inmy rightear.I’vebeentomanyspecialists,andthebottomlineisthatnooneknowswhatcausesit—muchlesshowtocureit.

I’ve been told to reduce my intake of salt (fat chance for a Japanese-Americanwho lovesmiso soupand sushi); consume lesschocolate,wine, andcheese (fat chance for anAmerican-Japanese living in California); andworrylessandsleepmore(fatchanceforaCEOofatechcompanyinSiliconValley).I have another explanation formymedicalmystery: The ringing is caused bylisteningtothousandsoflousypitches.

Thegistofpitchingistogetofftoafaststart,explaintherelevanceofwhatyoudo,stayatahighlevel,listentoaudiencereaction,andthenpitchoverandoveragainuntilyouget it right. In thischapter,you’ll learnhowtopitchyourorganizationandproductorserviceinashorter,simpler,andmoreeffectiveway.

EXPLAINYOURSELFINTHEFIRSTMINUTEI’ve never sat through a pitch by an entrepreneur trying to raise money, anemployee trying to getmanagement approval for a new product, or a not-for-profithopingtosecureagrantandthought,Iwishthespeakerhadspentthefirstfifteenminutes explaining his life story.While you’re busywarming themup,yourlistenersareinevitablywondering,Whatdoeshisorganizationdo?

This information is the anchor, foundation, or beachhead—whatevermetaphoryouwanttouse—thatyouraudienceneedsforthepitchtogowell.Doeveryone a favor:Answer that question in the firstminute.Once the audiencehaslearnedwhatyoudo,theycanlistentoeverythingelsewithamorefocusedperspectiveandcutyoutheslacktoindulgeinafewdigressions.

EXERCISESetatimertooneminute.Giveyourcurrentpitchuntilthetimergoesoff.Ask the audience to write down one sentence that explains what yourorganizationdoes.Collecttheanswersandcomparethemtowhatyouthinkyousaid.

Unfortunately, many entrepreneurs still believe that a pitch is a narrativewhoseopeningchaptermustalwaysbeautobiographical.Fromthisheartfelttale,theaudienceissupposedtodivinewhatbusinesstheorganizationisinandwhat

theproductdoes.Thinkagain.Itworksintheoppositeway:Firstestablishwhatyoudo,and

then the audience can comprehend, or at least deduce, the particulars of yourbusiness.Clear the air at the start of your pitch, and don’t let anyone have toguesswhatyoudo.Makeitshortandsweet:

Wesellsoftware.Wesellhardware.Weteachunderprivilegedkids.Wehelpsinners.Wepreventchildabuse.

ANSWERTHELITTLEMANBill Joos,my colleague atGarage, toldme thatwhen he started his career atIBM, thecompany trainedhimto imagine therewasa littlemansittingonhisshoulder during presentations. Every time Bill said something, the little manwouldwhisper,“Sowhat?”tohim.

Everyentrepreneurshouldcarrythislittlemanonhisshoulderandlistentohim.Unfortunately,most people are eithermissing the littleman, or, likeme,they have tinnitus. Remember: The significance of what you’re saying is notalwaysself-evident,letaloneshockingandawe-inspiring.

Every time you make a statement, imagine the little man’s asking hisquestion.After you answer it, followwith the twomost powerfulwords in apitch: “For instance,…”* and then discuss a real-world use or scenario of afeatureofyourproductorservice.

Nothing in a pitch is more powerful than combining an answer to “Sowhat?”with“Forinstance,…”

YOU LITTLE YOUREPLIED THENYOU

SAID MANASKED

ELABORATED

“Weusedigitalsignalprocessinginourhearingaids.”

“Sowhat?”

“Ourproductincreasestheclarityofsounds.”

“Forinstance,ifyou’reatacocktailpartywithmanyconversationsgoingonaroundyou,you’llbeabletohearwhatpeoplearesayingtoyou.”

“Weprovide128-bitencryptioninaportabledevice.”

“Sowhat?”

“It’sharderthanhelltobreakintooursystem.”

“Forinstance,ifyou’reinahotelroomandwanttohaveasecuretelephoneconversationwithyourheadquarters.”

“Ms.(bignameCelebrity)isonouradvisoryboard.”

“Sowhat?”

“Whatwe’redoingisinterestingenoughtoattracttoptalent.”

“Forinstance,shehasalreadyopeneddoorsforusinherindustry.”

“WeuseMontessorimethodsinournewschool.”

“Sowhat?”

“Ourschoolfocusesonchildrenasindividualsandenablesthemtolearntomanagetheirownstudyindependently.”

“Forinstance,weenablechildrenwhoaregiftedinspecificareastoproceedinadvanceoftherestofthestudents.”

KNOWYOURAUDIENCENoviceentrepreneursbelievethatthefoundationofagreatpitchistheabilitytospontaneouslygeneratebullsecretion(BS).They’rewrong.Thefoundationofa

greatpitchistheresearchthatyoudobeforethemeetingstarts.First,learnwhat’simportanttoyouraudience.Youcangetthisinformation

from your “sponsor” for the meeting by asking the following questions inadvance:

Whatarethethreemostimportantthingsyouwouldliketolearnaboutourorganization?What attracted you to our idea and convinced you to give us anopportunitytomeet?Are there any special issues, questions, or landmines I should bepreparedforinthemeeting?How oldwill the oldest person in themeeting be? (You’ll soon seewhyyouneedtoknowthis.)

Second,visittheorganization’sWebsite,useGooglesearches,readreports,andtalktoyourindustrycontactstogathercoreinformationabouttheaudience.Thesearetheareastoinvestigate:

ORGANIZATION BACKGROUND. What is the organization’smissionstatement?Whatwastheorganization’sgenesis?Whofundedit?Whofoundedit?EXECUTIVES.Whoworksthere?Whatorganizationsdidtheyworkforintheirpreviouspositions?Wheredidtheygotoschool?Whatboardsandotherorganizationsdotheyworkwithnow?CURRENTEFFORTS.Questionsinthisareawillvaryaccordingtothe type of organization you’re starting and what you’re trying toobtain.Generally,youneedtodetermineexactlywhattheorganizationisdoingandwhatitsdirectionsare.

Third,brainstormwithyourteamtofindconnections,hooks,andanglestomakethepitchpowerfulandmeaningful.Thepossibilitiesaremany,butfiguringthemoutwhileyou’re in frontof theaudience isdifficult todo.Thekey is toconductthisresearchinadvancewhenyou’reunderlittlepressure.

OBSERVETHE10/20/30RULEI’veneverheardapitchthatwastooshort.Apitchcan’tbetooshortbecauseagoodonewillmotivatelistenerstoaskquestionsthatextendit.Hereisagoodguidelineforthecontent,length,andfontofagoodpitch:

tenslidestwentyminutesthirty-point–fonttext

TenSlidesYou should be so lucky that your audience remembers one thing about yourpitch:whatyourorganizationdoes.Rightthere,yourpitchwouldbebetterthan90 percent of the competition’s. Remember: You want to communicate“enough,”noteverything.

“Enough”meansenoughtogetyoutothenextstep—whateverthatnextstepmaybe.Forfunding,thenextstepismeetingwithmorepartnersinthefirm.Forasale, thenextstep isa test installationorsmallpurchase.Forpartnering, thenextstepismeetingwithmorepeoplewithintheorganization.

Understandthis:Thepurposeofapitchistostimulateinterest,nottocloseadeal.Thus, the recommendednumberof slides forapitch is small—tenor so.Thisseeminglyimpossiblylownumberforcesyoutoconcentrateontheabsoluteessentials.Youcanaddafewmore,butyoushouldneverexceedtwentyslides.Thefewerslidesyouneed,themorecompellingyouridea.

Followingarethreetablesthatexplaintheessentialslidesforthreekindsofpitches:

investorpitchforprofitandnot-for-profitorganizationssalespitchtouseonaprospectivecustomerpartnerpitchtouseonpotentialpartner

Awordaboutliquidity:Althoughnoentrepreneurknowswhen,how,orifhewillachieveliquidity,manyinsistonincludingaslidethatsays,“Therearetwoliquidityoptions:anIPOoranacquisition.”Duh,that’sreallyinformative.Ifaninvestor asks aboutyour exit strategy, it usually indicateshe’s clueless. If youanswerwiththesetwooptions,itshowsthatyouhavealotincommonwithhim.

Theonlytimeyoushouldincludeaslideaboutliquidityiswhenyoucanlistatleastfivepotentialacquirersthattheinvestorisunlikelytoknowabout—thisshowsthatyoutrulyknowtheindustry.Bycontrast,sayingthatMicrosoft,ortheMicrosoft of your industry, will buy you will scare off all but the dumbestinvestors.

Behindyourtenslides,youcankeepafewthatgointogreaterdetailaboutyour technology, marketing, current customers, and other key strategies. Ifyou’re asked for amore in-depth explanation, it’s nice to have these done inadvance.However, they usually don’t belong in the set of tenmost importantslides.

TwentyMinutesMostappointmentsaremadeforanhour;however,youshouldbeable togiveyourpitchintwentyminutes.Therearetworeasonsforthis.First,youmaynotgetonehourifthepreviousmeetingisrunninglate.

Second,youwantampletimefordiscussion.Whetherit’stwentyminutesofpresentation and then forty minutes of discussion or a sequence ofslide/discussion, slide/discussion, slide/discussion isn’t critical. But there’s noscenario under which you can run through forty-five slides in a one-hourmeetingunlessthemeetingisgoingpoorly.

You’reprobablythinking,Guy’sreferringtothehoipolloi,greatunwashedmasses,andbozos.Theyshoulduseonlytenslidesandtwentyminutes,butnotus. We have curve-jumping, paradigm-shifting, first-moving, patent-pending

technology.Iam, infact, referringtoyou. Idon’tcare ifyouselldogfood,permanent

life, nanoparticles, optical components, or the cure for cancer:Ten slides andtwentyminutesisallyouget.

Thirty-Point–FontTextThisrecommendationwasoriginallyintendedforentrepreneurspitchingventurecapitalists, but it applies to anymeeting inwhich you pitch your organizationusing a projector. Think about it: Any venture capitalist who survived thedotcomcarnageisprobablyoverfortyandhasdeterioratingvision.Agoodruleofthumbforfontsizeistodividetheoldestinvestor’sagebytwo,andusethatfontsize.

InvestorPitch(forbothprofitsandnot-for-profits)

SLIDE CONTENT COMMENTSTitle Organizationname;

yournameandtitle;andcontactinformation.

Theaudiencecanreadtheslide—thisiswhereyouexplainwhatyourorganizationdoes.(“Wesellsoftware.”“Wesellhardware.”“Weareaschool.”“Weareachurch.”“Weprotecttheenvironment.”)Cuttothechase!

Problem Describethepainthatyou’realleviating.Thegoalistogeteveryonenoddingand“buyingin.”

Avoidlookinglikeasolutionsearchingforaproblem.Minimizeoreliminatecitationsofconsultingstudiesaboutthefuturesizeofyourmarket.

Solution Explainhowyoualleviatethispainandthemeaningthatyoumake.Ensurethatthe

Thisisnottheplaceforanin-depthtechnicalexplanation.Providejustthegistofhowyoufixthepain—forexample,“WeareadiscounttravelWebsite.We

audienceclearlyunderstandswhatyousellandyourvalueproposition.

havewrittensoftwarethatsearchesallothertravelsitesandcollatestheirpricequotesintoonereport.”

BusinessModel Explainhowyoumakemoney:whopaysyou,yourchannelsofdistribution,andyourgrossmargins.

Generally,aunique,untestedbusinessmodelisascaryproposition.Ifyoutrulyhavearevolutionarybusinessmodel,explainitintermsoffamiliarones.Thisisyouropportunitytodropthenamesoftheorganizationsthatarealreadyusingyourproductorservice.

UnderlyingMagic

Describethetechnology,secretsauce,ormagicbehindyourproductorservice.

Thelesstextandthemorediagrams,schematics,andflowchartsonthisslide,thebetter.Whitepapersandobjectiveproofsofconceptsarehelpfulhere.

MarketingandSales

Explainhowyouaregoingtoreachyourcustomerandyourmarketingleveragepoints.

Convincetheaudiencethatyouhaveaneffectivego-to-marketstrategythatwon’tbreakthebank.

Competition Provideacompleteviewofthecompetitivelandscape.Toomuchisbetterthantoolittle.

Neverdismissyourcompetition.Everyone—customers,investors,employees—wantstohearwhyyou’regood,notwhythecompetitionisbad.

ManagementTeam

Describethekeyplayersofyourmanagementteam,boardofdirectors,andboardofadvisors,aswellasyourmajorinvestors.

Don’tbeafraidtoshowupwithlessthanaperfectteam.Allstartupshaveholesintheirteam—what’strulyimportantiswhetheryouunderstandthatthereareholesandarewillingtofixthem.

Financial Provideafive-year Doabottom-upforecast(more

ProjectionsandKeyMetrics

forecastcontainingnotonlydollarsbutalsokeymetrics,suchasnumberofcustomersandconversionrate.

aboutthisinChapter5,“TheArtofBootstrapping”).Takeintoaccountlongsalescyclesandseasonality.Makingpeopleunderstandtheunderlyingassumptionsofyourforecastisasimportantasthenumbersyou’vefabricated.

CurrentStatus,AccomplishmentstoDate,Timeline,andUseofFunds

Explainthecurrentstatusofyourproductorservice,whatthenearfuturelookslike,andhowyou’llusethemoneyyou’retryingtoraise.

Sharethedetailsofyourpositivemomemtumandtraction.Thenusethisslidetoclosewithabiastowardaction.

SalesProspectPitch

SLIDE CONTENT COMMENTSTitle Organization

name;yournameandtitle;andcontactinformation.


Problem Describethecustomerpainthatyou’realleviating.

Besurethatyouaresurethatyou’redescribingpainthecustomerhas.

Solution Explainhowyoualleviatethispain.

Thisisnottheplaceforanin-depthtechnicalexplanation.Providejustthegistofhowyoufixthepain.

SalesModel Ensurethattheaudienceclearlyunderstandswhatyousellandyourvalueproposition.

Thisisyouropportunitytodropthenamesoftheorganizationsthatarealreadybuyingyourproductorservice.Ifyouhaveastrongstoryinthisarea,addaslidecalled“CurrentCustomers”insteadoftalkingaboutithere.

Technology Describethetechnology,secretsauce,ormagicbehindyourproductorservice.

Thelesstextandthemorediagrams,schematics,andflowchartsonthisslide,thebetter.Whitepapersandobjectiveproofsofconceptsarehelpfulhere.

Demo Ifpossible,segueintoalivedemoofyourproductorservice

Ademoisworthathousandatthisslidesifyoucandoagoodpoint.one.

CompetitiveAnalysis

Provideacompleteviewofthecompetitivelandscape.Toomuchisbetterthantoolittle.

Findoutinadvancewhatcompetitiveproductorservicetheprospectuses.Evenbetter,trytofindoutwhatproblemstheprospectishavingwithit.However,neverdismissyourcompetition.Customerswanttohearwhyyou’regood,notwhythecompetitionisbad.

ManagementTeam


Thepurposeofdoingthisistomaketheprospectfeelcomfortablewithbuyingfromastartup.

NextSteps Endyourpresentationwithacalltoactionsuchasatrialperiodoratestinstallation.

EXERCISEDeleteallthetextthatissmallerthanfourteenpointsinyourpresentation.Whatremainsiswhatyouraudiencecanread.

Seriously, if you have to use a small font to accommodate yourmaterial,you’re putting too much detail on the slide. Each slide should portray oneprimarypoint.Allthetextandbulletsshouldsupportthispoint.

PotentialPartnerPitch

SLIDE CONTENT COMMENTSTitle Organizationname;

yournameandtitle;andcontactinformation.


Problem Describethecustomerpainthatyou’realleviating.

Besurethatthepotentialpartnercurrentlysells,orwantstosell,tothesamecustomerasyoudo.

Solution Explainhowyoualleviatethispainforthecustomer,plushowyoucoulddoanevenbetterjobwithapartnership.

Thegoalistogetthepotentialpartnerthinkinghow2+2canequal5.

PartnershipModel

Explainhowthepartnershipwould

Thisslideshouldcontinuethepositiveeffectsofthepreviousslide

work:whodoeswhat,when,how,andwhy.

—makingthesynergiesmoreandmoreapparentandappealing.

UnderlyingMagic

Describethetechnology,secretsauce,ormagicbehindyourproductorservice.

Thelesstextandthemorediagrams,schematics,andflowchartsonthisslide,thebetter.Thepurposeistoconvincethepotentialpartnerthatyouhavesomethingspecial.

Demo Ifpossible,segueintoalivedemoofyourproductorserviceatthispoint.

Justlikeforcustomers,ademoisworthathousandslidesifyoucandoagoodone.

Competition Thisisanoptionalslide.Themainreasontoskipitistoavoidinformingyourpotentialpartnerofabetterorganizationtoworkwiththanyours.

ManagementTeam


Thepurposeofdoingthisistomakethepotentialpartnerfeelcomfortablewithworkingwithastartup.

NextSteps Endyourpresentationwithacalltoactionsuchasatrialperiodoratestinstallation.

Use slides to lead, not read. They should paraphrase and enhance what’scomingoutofyourmouth.Becausepeoplecanreadfasterthanyoutalk,ifyouput toomuchdetail on the slide, the audiencewill read ahead of you and notlistentowhatyou’resaying.

SETTHESTAGEIf there’snoprojectorwhenyoushowupforameeting,it’syourfault.Ifyourlaptopandtheprojectordon’tworktogether,it’syourfault.Ifthebulbblowsoutinthemiddleofyourpitch,it’syourfault.Ifyoustartslowly,seemdisorganized,andlookdisheveled,it’syourfault.

It’salmostimpossibletorecoverfromabadstart,sogetthereearlyandsetthe stage. Bring your own projector. Bring two laptops loaded up with yourpresentation.BringacopyofyourpresentationononeofthoseUSB-basedflashmemory products. Bring printouts of your presentation in case all hell breakslooseandnothingworks.

Thefirstwordsoutofyourmouthinthepitchshouldbe

“HowmuchofyourtimemayIhave?”Thisquestionshowsthatyourespectthevalueoftheaudience’stimebynotrunningoveryourlimit.“WhatarethethreemostimportantthingsIcancommunicatetoyou?”(Youshouldhavegottenthisinadvance,butitdoesn’thurttoclarifythisagain.)“May I quickly go through my PowerPoint presentation and handlequestionsattheend?However,pleasefeelfreetointerruptmeifyouneedto.”

Ifyousetthestagesothateveryonehasthesameexpectations,you’rewayaheadofthegame.

LETONEPERSONDOTHETALKINGEntrepreneurshaveitstuckintheirheadsthatinvestors,customers,andpartnerswanttoworkwithteams,andteamsshow—guesswhat?—teamwork.Usingthislineof reasoning, theybelieve that fouror fivepeople from their organizationshouldattendthemeeting,andtheyshouldeachhavearoleinthepitchbecauseitshowshowwelltheteamworks.

Thislogicisterrificforaschoolplay:Everykidgetsatalkingrole.Parents

and grandparents get their photo opportunities. Everyone participates. Life isgood,fair,andequitable.Apitch,however,isnotaschoolplay.

Inapitch,theCEOshoulddo80percentofthetalking.Therestoftheteam(andthereshouldbenomorethantwoothers)canpresenttheoneortwoslidespertaining to their specific area of expertise. They can also provide detailedanswers if any questions arise.However, if theCEOcan’t handlemost of thepitchbyhimself,heshouldpracticeuntilhecan.Or,youshouldgetanewCEO.

Often team members try to “rescue” the CEO when the audience pushesback on something he said. For example, suppose someonewants to debate amultiple-tierdistribution system for sellingproducts.A teammember,with allgoodintentions,asserts,“I thinkyou’reright. I’vethoughtfora longtimethatweshouldonlyselldirectlytothecustomer.”

Badmove.Thisdoesn’tshowflexible thinking,anopenenvironment,orabroad-basedsetofexpertise.Itshowsalackofcohesion.TheonlyrightanswerisfortheCEOtosay,“Youraiseagoodpoint.Canwefollowupwithyouonthat?”

CATALYZEFANTASYEvery—literallyevery—entrepreneur showsupatGaragewithapitch thathasthreeorfourslidesthat“prove”thesizeofhismarket.Usuallytheslidescontainaquotefromawell-knownconsultingfirmsuchasGartner,IDG,ortheYankeeGroup stating unequivocally that the size of the “shrimp-farming softwaremarketwillbe$50billion”withinthenextfouryears.

It’safunnythingabouttheseslides:

Everymarketisgoingtobeatleast$50billion.The forecast is four to five years in the future. This time horizon isshortenoughtomaketheforecastbelievable,butlongenoughsothatitisnotprovable.No one in the room, even the entrepreneur, believes the numbers orthinkstheyareparticularlyrelevant.

There are two solutions to this problem. The first is to startwith the $50billion number and peel away the layers of the onion until you arrive at therealistic “total addressable market” (TAM). The TAM is the true size of thepotentialmarketyoucangoafter,notthetotalityofeverynickelthat’sspentinsomethingrelatedtoyourproductorservice.

Forexample,theTAMofanewsushibarisnotthe$50billionspenteveryyearbyAmericanseatingout.Norisitthe$5billionspentonethnicfood.It’sthe $1 million spent on Japanese food within fifty miles of your prospectivelocation.

The advantage of taking this approach is that it shows that you trulyunderstandthemakeupofthemarket,andthatyouarerealisticinwhatsegmentsyou can address. This builds your credibility for the rest of the pitch—whilequitetheoppositeoccursifyouinsistthatthemarketis$50billion.

The second solution is bolder: Forget the market research and catalyzefantasy. You do this by providing a product or service that is so obviouslyneeded that members of your audience can do the math in their heads. Thismethodwon’tworkinallcasesbecausesomemarketsarenotthatobvious,butwhenitdoeswork,itisspectacular.

Here isanexampleofhow it canwork.Supposeyoumakeaproduct thatteststhesecurityofWebsitesthataccepttextinputfromvisitors.Yourproductensuresthathackerscannotpenetrateyoursitethroughtheseinputfields.

Here’showthefantasywouldgo:

AlmosteveryWebsitehasaplacetoentertext.TherearealotofWebsites.Everycompanyisafraidofbeinghackedinto.Lotsofcompanieswillneedtobuythisproduct.

This lineoffantasy ismuchmorepowerful thancitingastudythatprovesthemarketforsecuritysoftwarewillbe“$50billioninfouryears”becausetheaudience has heard four other pitches that daywith numbers just as big.Andthose pitches were for shrimp-farming software, wireless access points, nanoparticles,andgraphicschips.

GETTOONETHOUSANDFEETANDSTAYTHEREIpromisethatthisistheonlywaranalogyinthisbook.Considerthreemethodstodeliverlethalforce:

B-1B LANCER. This is a long-range bomber for intercontinentalmissions that iscapableofpenetratingsophisticateddefensesystems.It can fly up to thirty thousand feet above the ground. It costs $200million.NAVYSEALS.Theyarepartof theU.S.Navy.Theyare trainedforspecial operations in enemy territory. They provide unconventionalwarfarecapabilitiesandreal-timeeyesontargetsbystrikingfrom,andreturningto,thesea.A-10WARTHOG.Thisplanewasdesigned for close air support oftroops.Itissimpleandrugged.Itssweetspotisflyingatonethousandfeet.Itcosts$13million.

Ifpitcheswereweapons,themajoritywouldbeB-1LancersorNavySeals.The B-1 pitch is up in the clouds. It features a lot of hand-waving, coolPowerPoint animations, and use of terms such as strategic, partnerships,alliances, first-mover advantage, and patented technology. Typically, it’sdeliveredbyanMBAwithafinanceorconsultingbackground.

Geeks, propeller heads, and engineers deliver the Navy Seal pitch. Theyexplain the subtle nuances of their technology and use a lot of acronyms thatonly they understand. It’s clear that these people know every bit of theirtechnology—andwouldlovetoexplainitalltoyou.

TheB-1pitch is toohighbecause listenerswant to learnspecificallywhatthebusinessdoesandwhyitwillsucceed.Bigwordsdon’taccomplishthis.TheNavySealpitchistoolowbecauseitfocusesonthebits,bytes,andnits.Butapitchisn’taboutmicroscopicduediligence.

The right analogy for pitching your business is neither the B-1 Lancer(30,000feet)northeNavySeal(0feet).It’stheA-10Warthog(1,000feet).Likethe plane itself, your pitch doesn’t have to be pretty, just effective: above thegroundbutstilltactical.

Pitchatthethousand-footlevel.Upthereyou’renotabovethecloudswherethe air is thin, but you’renot on thegroundwith aknife inyour teeth, either.Provideenoughdetailtoproveyoucandeliverandenoughaerialviewtoproveyouhaveavision.

SHUT UP, TAKE NOTES, SUMMARIZE, REGURGITATE,ANDFOLLOWUPThere are very few peoplewho don’t becomemore interestingwhen they stoptalking.

—MaryLowry

Ionceaccompaniedastartup’sCEOandCOOonapitchtoaventurecapitalist.A few days after the pitch, I met with the venture capitalist alone.When webegantodiscusstheManagement(withacapitalM),allhesaidwas,“InoticedthattheCEOdidalotoftalking,buttheCOOwassittingtheretakingnotes.TheCEOdidn’twritedownathing.IthinktheCOOisaqualityguy.”

Idon’trememberwhetherwhattheventurecapitalisthadbeensayingattheoriginalmeetingwasactuallynoteworthy,but that’snot thepoint.Thepoint isthatshuttingupandtakingnotesor,Godhelpyou,actuallylisteningforwaystoimproveisagoodthingtodoinapitch,whereeventhesmallestactionscreateabigimpression.Thevisibleactoftakingnotessays

Ithinkyou’resmart.You’resayingsomethingworthwritingdown.I’mwillingandanxioustolearn.I’mconscientious.

Takingnotesprovidesthesebenefits,plusthevalueoftheinformationthatyou’rerecording.Itcan’tgetmuchbetterthanthis.

Also,attheendofthemeeting,summarizewhatyouheardandplayitback

in order tomake sure yougot the correct information.You canmake an evengreaterimpressionbyalsofollowingthrough,withinaday,onall thepromisesthatyoumadeduringthepitch—forexample,providingadditionalinformation.

REWRITEFROMSCRATCHThis is a difficult recommendation for people to accept, but first, allowme todigress briefly and tell you about cars in the Philippines. Because of importduties,restrictionsontrade,andthelowcostoflabor,fixingcarsthereisamuchmoreattractivepropositionthanbuyingnewones.

Thus,manycarsarerebuiltandpatchedwithpartscannibalizedfromothervehicles, aswell aswithhandmade components.For example, it’s common toseeaJeepwithaChevroletengine.

Unfortunately,afterawhile,manypitchesstartlookinglikethesecars.Theystartedasonemodel,buttheirownerskepteditingandpatchingthemaftereachmeetinginresponsetothemostrecentquestionsandobjections.

Thisprocessgoesonforweeks—witheachmeetingproducingmoreedits,fixes,andpatches—untilit’sdifficulttorecognizethepitchatall,whichbythispointtouchesuponeverysubjectbutobfuscatestheoverallmessage.

Here’s my recommendation: After ten or so pitches, throw away yourpresentation. Start with a clean slate andwrite the text from scratch. Let this“version2.0”reflectthegestaltofwhatyou’velearnedtodateinsteadofbeingapatchworkquilt.

PITCHCONSTANTLYFamiliarity breeds content. It’s when you are totally familiar and comfortablewith your pitch that you’ll be able to give it most effectively. There are noshortcutstoachievingfamiliarity—yousimplyhavetopitchalotoftimes.

Twenty-five times iswhat it takes formost people to reach this point.Allthese pitches don’t have to be to your intended audiences—your co-founders,employees,relatives,friends,andevenyourdogarefineauditors.

Forget the theory of “rising to the occasion” when you actually give thepitch. If you’re lousy in practice, you’ll be lousy in the pitch, so get going—becauseifthere’sanythingworsethangettingtinnitus,it’scausingit.

EXERCISEVideotape yourself giving your pitch. If you can watch it without beingembarrassed,you’rereadytogo.

MINICHAPTER:THEARTOFPOWERPOINTINGInsomecases…theknifecan turnsavagelyupon thepersonwielding it….Youusetheknifecarefully,becauseyouknowitdoesn’tcarewhoitcuts.

—StephenKing

PowerPointisaSwissArmyknifeforentrepreneurs.Itstartedoffasatoolandhasbecomeanendinitself—clutteringtheeffectivenessofmostpitches.Beforeyoucutyourself,heedthisadviceabouttheartofusingPowerPointasameanstoanend.

USEADARKBACKGROUND.Adarkbackgroundcommunicatesseriousness and substance.Awhite or light background looks cheapandamateurish.Also, staringat aharshwhitepresentation for forty-fiveminutesgetstiringfortheeyes.Thinkaboutthis:Haveyoueverseenmoviecreditsthatuseblacktextonawhitebackground?ADDYOURLOGOTOTHEMASTERPAGE.Everypresentationisachancetobuildbrandawarenessforyourorganization,soputyourlogoonthemasterslidepage.Bydoingthis,yourlogowillappearoneveryslide.USECOMMON, SANS SERIFFONTS. A presentation is not theplacetoshowthatyou’veaccumulatedtheworld’slargestcollectionoffonts. Use common fonts because someday your presentation mayneedtobegivenonacomputerthathasadifferentcollectionoffontsthan your computer has. Also, use sans serif fonts because they aremucheasiertoreadthanthedelicateseriffontyoulove.Youcannever

gowrongwithArial.ANIMATEYOURBODY,NOTYOURSLIDES. PowerPoint hasmorethansixtywaystoanimatetextandgraphics.Thisisaboutfifty-nine too many. Many entrepreneurs use animations and transitionsbetweenslidestojazzuptheirpresentations.Doyoureallythinkthata“faded fly-in from the bottom left” is going to make a presentationbetter? Do yourself a favor: Don’t use fancy animations. Use yourbody, not PowerPoint, to communicate expressiveness, emotion, andenthusiasm.Generallyspeaking,ifyouthinksomethingiscool,cutit.“BUILD” BULLETS. Most entrepreneurs don’t use bullets. Theydisplayandreadbigblocksoflongtext.That’samistake.Usebulletsinstead: short bursts of text that capture themain point. Evenwhenentrepreneursusebullets, theyput themallupatonce.That’s alsoamistake. Build your bullets: click, bullet 1, explain; click, bullet 2,explain;click,bullet3,explain.This is theonly timeyoushoulduseanimation, and I recommendusing the simple “appear” animation atthat.USEONLYONELEVELOFBULLETS. The use of bulletswithbulletsmeansthatyou’retryingtocommunicatetoomuchinformationon a slide or that your thinking is fuzzy. Each slide shouldcommunicate one point, with bullets to support that point. If youobservethe30partofthe10/20/30rule,itwillbehardtohavebulletswithbullets,anyway.ADDDIAGRAMSANDGRAPHS.Better a bullet than a block oftext, but better a diagram or graph than a bullet. Use diagrams toexplain how your businessworks. Use graphs to explain trends andnumericalresults.Andbuildyourdiagramsandpicturesbybringingintheseelementswithclicks,justlikebullets.MAKE PRINTABLE SLIDES. There is a cautionary aspect toadding diagrams and graphics. Sometimes these objects build upon,and cover, previous ones.This is okay during a presentation but notwhenprinted,soensurethatyourslidesworkforthisuse,too.

FAQ

Q.HowdoImakemypitchmemorable?A.Theproblemisnotthatpitchesareboring.Inavacuum,manyarequite

exciting, what with their promises of first-mover advantage, patentedtechnology,$50billionmarket, andproven teamsofhighlymotivatedgeniuses.Theproblemisthatsomanypitchessoundalikebecausetheyallmake

thesameclaims.Youcanmakeyoursmemorablebypreparingashort(ten-slide, twenty-minute) presentation with a compelling story of how yousolverealpain.Lessthan1percentofpitchesdothis.

Todevelopamemorablepitch,imaginethatyouraudienceisattheendof a long day of boring meetings; everyone is barely awake, much lessattentive;andpeoplejustwanttogohome.Moreoftenthannot,thisiswhatyou’llwalkinto,sobepreparedforit.Q.ShouldIsendmypresentationinadvancetotheattendees?A.No.Agoodpresentationtypicallyfeaturesonlysnippetsoftext(inabig

font!), so recipients will most likely find it difficult to comprehendwithoutyourrivetingoralpresentation.

Q.ShouldIhandoutmypresentationatthestartofthemeeting?A.Iwouldn’t.Mytheoryisthatifyoudothisatthebeginning,peoplewill

skipaheadbecausetheycanreadfasterthanyoucantalk.However,thismakes itmore difficult for the audience to take notes.An alternativestrategy is tohandout thepresentationat thestartof themeeting,butaskpeoplenottoskipahead.

RECOMMENDEDREADINGBorden,Richard.Public Speaking—asListenersLike It!NewYork:Harper&

Brothers, 1935. (Also recommended inChapter 9, “TheArt ofBranding,”thisbookisseriouslyoutofprint,butIfoundacopyatAmazon.com.)

Piattelli-Palmarini,Massimo.InevitableIllusions:HowMistakesofReasonRuleOurMinds.NewYork:JohnWiley&Sons,1994.

CHAPTER4

TheArtofWritingaBusinessPlan

InpreparingforbattleIhavealwaysfoundthatplansareuseless,butplanningisindispensable.—DwightD.Eisenhower

GIST

AccordingtoCelticmyths,therewereoncemagicalvesselsthat“satisfiedthetastesandneedsofallwhoateanddrankfromthem.”*Thesemythsledtothelegendof theHolyGrail.Themodern-day equivalent of theHolyGrail is thebusinessplan.

It, too, is supposed to satisfy everyone (investors, directors, founders, andmanagers)andinducemagicaleffectson thosewhopartakeof it—specifically,theirresistibleurgetowriteacheckorapproveago-aheadaction.

Also,liketheHolyGrail,thebusinessplanremainslargelyunattainableandmythological. Most experts wouldn’t agree, but a business plan is of limitedusefulness for a startup because entrepreneurs base somuch of their plans on

assumptions,“visions,”andunknowns.Anentrepreneurialendeavorwithinanexistingcompanywillalsofindthata

business plan is of limited use. For external and internal startups, the MAT(Milestones,Assumptions,andTasks)thatwediscussedinChapter1isthemostusefulguidefortheday-to-dayoperationofanorganization.

However, many investors, recruits, potential board members, and internaldecisionmakersdoexpectabusinessplanandwon’tproceedwithoutone.Plus,writingabusinessplandoeshavethebenefitofforcingateamtoworktogetherto formalize intentions. Sowrite a plan, andwrite itwell, but don’t convinceyourself that it’s theHolyGrail.Organizations are successfulbecauseofgoodimplementation,notgoodbusinessplans.

WRITEFORTHERIGHTREASONIronically,formostentrepreneursthebusinessplanitself(thatis,thedocument)isoneoftheleastimportantfactorsinraisingmoney.

Ifaninvestor is leaningtowardapositivedecision, thenthebusinessplanonlyreinforcesthisinkling.Itprobablywasn’tresponsibleforthepositivepositionitself.Iftheinvestorisleaningtowardanegativedecision,thenit’sunlikelythattheplanwillchangehismind.Inthiscase,theinvestorprobablywon’tevenreadtheentireplan.

Unfortunately, naïve entrepreneurs believe that a business plan alone canproduceanawestruck reaction, followedbyone follow-upquestion: “Canyousendmewiringinstructionsforthemoney?”

Dreamon.Therightandrealisticreasonstowriteabusinessplanare

In the later, due-diligence stage of courting an investor, the investorwillaskforone. It’spartof thegame—abusinessplanhas tobe“in

thefile.”Writing a plan forces the founding team towork together.With anyluck,thiswillhelpgenerateastrong,cohesiveteam.Youmightevenfigureoutwhomyoudon’twanttoworkwith.Writingaplanmakestheteamconsider issuesthat ithadoverlookedorglossedover in its euphoria—for example,developinga customerservicepolicy.Finally, thewritingofaplanuncoversholes in thefounding team.Ifyoulookaroundtheroomandrealizethatnoonecanimplementkeyelementsoftheplan,youknowthatsomeoneismissing.

All the late-night, back-o’-the-envelope, romantic intentions to change theworld become tangible and debatable once they’re put on paper. Thus, thedocument itself is not nearly as important as the process that leads to thedocument. Even if you aren’t trying to raise money, you should write oneanyway.

PITCH,THENPLANManyentrepreneurstrytoperfecttheirbusinessplanandthenpullPowerPointslidesoutof it.Theyview thebusinessplanas thebe-all andend-all, and thepitchasasubsetofthismagnificentdocument.

This isbackward thinking.Agoodbusinessplan isadetailedversionofapitch—asopposedtoapitchbeingadistilledversionofabusinessplan.Ifyougetthepitchright,you’llgettheplanright.Theconverseisnottrue.Here’stheproperprocess:

Throwtogetherapitchthatcontainsthetenslideswediscussedinthepreviouschapter.Try it out on some mentors, colleagues, relatives, angels, andinvestors.Dothisabouttentimes.Gettheteaminaroomanddiscusswhatyou’velearned.

Fixthepitch.Startwritingtheplan.

Here’swhythisistherightmethodologytowritingaplan:

Your pitch is more important than your business plan, as it willdetermine whether you’re rejected or generate further interest. Fewsophisticatedinvestorswillreadabusinessplanasthefirststep.A pitch is easier to fix than a business plan because it contains lesstext.You won’t get feedback on your business plan. Frankly, it may noteven be read. You will, however, get immediate reactions to yourpitch.Youmay get lucky and raisemoneywithout ever having towrite abusinessplan.(ButIwouldstillwriteoneforthevalueoftheprocess.)

FOCUSONTHEEXECUTIVESUMMARYAs a refresher, these are the ten slides that are necessary in a good pitch forinvestors:

1. Titleslide2. Problem3. Solution4. Businessmodel

5. Underlyingmagic6. Marketingandsales7. Competition8. Managementteam9. Financialprojectionsandkeymetrics10. Currentstatus,accomplishmentstodate,timeline,anduseoffunds

These ten items provide the framework for your business plan as well. Anexecutive summary takes the place of the title slide and is themost importantpartoftheplan.Agoodexecutivesummaryisaconciseandcleardescriptionofthe problem you solve, how you solve it, your business model, and theunderlyingmagic of your product or service. It should be approximately fourparagraphsinlength.

Itisthemostimportantpartofyourbusinessplanbecauseitwilldeterminewhetherpeoplereadtherestofthedocument.Ifallgoeswell,they’llaskyoutocomeinforameeting.However,iftheexecutivesummaryfailstosparkinterest,then the game is lost before it even begins, and the rest of the business planwon’tmatterbecausenoonewillevergettoit.

Thus,oftheeffortyouputintowritingabusinessplan,80percentshouldgointo the executive summary.These are themost important paragraphs of yourorganization’sexistence.

EXERCISEPrintyour currentbusinessplan.Throwawaypage3 andbeyond.Wouldthefirsttwopagesmakeyouwanttoreadthewholedocument?

KEEPITCLEANIn addition to writing a great executive summary, you can increase the

effectiveness of your entire business plan by keeping it short, simple, andeffective:

DO NOT EXCEED TWENTY PAGES IN LENGTH. You’reprobablythinkingthatthisprincipleisonlyrelevanttootherpeople’splans,andthatyourowncurve-jumping,revolutionaryorganizationistheexceptiontotherule.You’rewrong.Theshortertheplan,themorelikelyitistoberead.SELECT ONE PERSON TO WRITE THE BUSINESS PLAN.While the plan should reflect the wisdom of the team, it should bearticulated by a single voice. It should not read like a patchwork ofcuttingandpasting.BIND THE PLAN WITH A STAPLE. Leather-bound, gold-leaf,embossedtomesmakeyoustandout—butasacluelessbozo.Investorswill probably ask for a Word document or PDF electronicallytransmittedcopyanyway.SIMPLIFY YOUR FINANCIAL PROJECTIONS TO TWOPAGES. Investors don’t care—and you have noway of knowing—howmuchyou’llspendforpencilsintheeleventhmonthofthefourthyear.Themostimportantprojectionisyourcashflowstatementforthefirst five years. (See the next section for more information aboutfinancialprojections.)INCLUDETHEKEYMETRICS,SUCHASTHENUMBEROFCUSTOMERS, LOCATIONS, AND RESELLERS. Often thesemetricsprovideabetterunderstandingofanorganization’splansthanfinancialprojections.Forexample,youmayprojectthatyou’llsellto250oftheFortune500companiesinthefirstyear.INCLUDE THE ASSUMPTIONS THAT DRIVE YOURFINANCIALPROJECTIONS. Everyone knows that you picked arevenue number that you thinkmakes your business look interestingbutnothallucinatory.Theassumptionsbehindyourforecastaremuchmoreinformativeandimportantthantheforecastitself.

PROVIDETHERIGHTNUMBERSInvestorsdon’tspreadbusinessplansacrossthetableandpicktheonestofundbasedsolelyonfinancialprojections.Mostbusinessplanssubmittedtoventurecapitalistsaremoresimilarthantheyaredifferent.Specifically,theyallprojectfourth-or fifth-year salesof$25million to$50million.AnyonewhocanbootExcelcanachievethesetheoreticalresults.

However, financial projections, which investors require, are a significantpart of a business plan.Generally, theywant five years of projections to helpthemunderstandthescaleofyourbusiness,determinehowmuchcapitalyou’llrequire,andconsider theassumptionsinherent inyourbusinessmodel.Hereishow four leading venture capitalists describe what they look for in financialprojections.

HEIDI ROIZEN (MOBIUS VENTURE CAPITAL): “I like to seedetailed monthly numbers for the whole use of the round of capital inquestion, then quarterly for the year after that, then annual throughprofitability, which I realize are fantasy but I want to understand theassumptionstheentrepreneurisusingtogettototalmarket,totalsharetheywillget,andwhatitwillcosttogetthere.”

MIKE MORITZ (SEQUOIA CAPITAL): “No projections ever cometrue,soentrepreneursshouldforgetabouttryingtoassembleacompendioussetoffinancials.Anearly-stageventurecapitalinvestorreallyjustwantstogauge how much money is going to be required until the company cansupportitselffromitsowncashflow.Wealwaysfocusonthefirsteighteenmonths to twoyearson theassumption that ifwecanweather thisperiodwewillbeinfarbettershapetodealwithwhatcomesafter.Welikeafewwell–thought-outprojections(byquarterforthefirsttwoyearsandannuallyfor years 3, 4, and 5) that present a profit-and-loss statement, a balancesheet,andcashflowprojections.”

GARY SHAFFER (MORGENTHALER VENTURES): “Five years istypical, despite the typical lack of credibility of the further-out years. Ashortertimeframe,likethreeyears,maybefineforrawstartups.Asaruleof thumb, investors are typically looking for a forecast that goes out towhateveryearisnecessaryforthecompanytogetto‘significant’revenues.And if that’smore than five years, thatmight be appropriate. That helps

bracket how much cash will be required to finance the company toprofitability,whichissomethinginvestorsalwayswanttohavearoughideaabout.”

STEVE JURVETSON (DRAPER, FISHER, JURVETSON): “Everybusiness plan has financial projections that start low and shoot up toabsurdlyhighprofitforecastsforthethirdyear.Wetypicallydiscounttheseprojections, but the forecast is useful to show optimism and growthpotential. What’s more important than the projection, however, are theassumptionsusedtoreachtheconclusions:thebusinessmodel,themarketsize, the pricing, channels and resulting gross margins, and the capitalintensityneededtofundgrowth.Ultimately,wewanttofundentrepreneurswhowanttochangetheworld,andtoinitiatethosediscussions,ahalf-pageof five-year financial projections coupledwith a thoughtful discussion ofthekeydriversshouldsuffice.”

WRITEDELIBERATE,ACTEMERGENTIn The Innovator’s Solution coauthors Clayton Christensen and Michael E.Raynor explain the difference between a “deliberate strategy-making process”and an “emergent strategy-making process.” The former is “conscious andanalytical,”featuringrigoroususeofhistoricaldata,technologyroadmaps,andcompetitiveanalysis.Itisusefulformaturecompanieswithoperatinghistories.*

Bycontrast,anemergentstrategy-makingprocessisinfluencedbytheday-to-dayrealitiesexperiencedbymiddlemanagersandworkersonthefrontline.Itisadhocandcanreactquicklytoproblemsandopportunities.Thisistherightprocesstouseinsituationswherethefutureismurky,andit’sthereforedifficultto develop suitable strategies.† It is appropriate for startups, and for startupswithinmaturecompanies.

Here’sthedirtylittlesecretofbusinessplansforstartups:Youshouldwritethem in the “deliberate” style, but you should be thinking and acting in the“emergent”style.Investorswantdeliberateplansbecausetheywanttoinvestincompaniesthatsupposedlyknowwhattheyaredoing.Mostofthemwillnotfind“we’llreactfast”tobeapalatablestrategy.

YouandIbothknowthatyoudon’tknowwhenyourproductorservicewillship,whowillbuyit,howmuchtheywillpay,andifthey’lleverreorderit,but

youcan’tstatethisinabusinessplan.Sowriteasifyouknowexactlywhatthefutureholds,butreactopportunisticallywhenyouencounterreality.

Restassuredthatmanysuccessfulorganizationshavechangedtheirbusinessmodels along the way. Thismeans you have to conserve your capital so youhavemoneytomakeit throughthechanges(henceChapter5onbootstrappinglaterinthisbook),andyouhavetobewillingtoalteryourplans.

Theworstthingtodoistowriteadeliberateplanandthensticktoitsimplybecause it is “the plan.” If you’re successful, no one will care if you didn’tfollowtheplan.Andshameonyouifyoufailbutyoudid.

FAQ

Q.Won’tmybusinessplanlookprettymuchlikeeveryoneelse’s?A.Thisdependsonwhatyoumeanby“looklikeeveryoneelse’s.”Inone

sense, it should look like other plans. That is, it should contain theessentialtopicsmentionedearlierinthischapter.Furthermore,itshouldnothaveanunusual layout,design,orbinding—much lessyourcolorpictureon thecover.Arial fontforheadingsandPalatinofontfor textarejustfine.

Q.OK,thenhowdoImakemyplanstandout?A.Therearefourwaystomakeyourplanstandout.First,haveacredible

referralsourcebringittotheattentionofthereader.Second,providealistofcustomersthereadercancalltodiscusshowmuchtheyneedyourproduct or service—or, evenbetter, howmuch they arealreadyusingyourproductorservice.Third,ensurethattheplanisinfusedwithreal-worldknowledgeaboutandexperiencewiththemarket.Fourth,includediagramsandgraphicstoexplaincomplexpoints.

Q.Isitbettertowritetheplanmyselforuseaconsultant?Howaboutaconsultantjustforthefinancialmodel?

A. You, or your team and you, should write the entire plan, includingbuildingthefinancialmodel.AsImentionedabove,themostimportantoutcomeof thebusinessplanprocess isgetting thefounding team,nopunintended,onthesamepage.Ifyouabdicateanypartoftheprocess,you’remakingabigmistake.Afteryouwrite theplan,youcanuseaconsultanttoreviewwhatyou’vedone.

Q.HowoftenshouldIreviewthebusinessplan?

A. The usefulness of a business plan rapidly declines after the first sixmonthsorso.Initially,abusinessplangetstheteamonthesamepage,helpsgetnewemployeesuptospeed,andraisesmoney.However, from the second year on, you won’t be writing emergent

plans. At that point, your business plan will be deliberate: focusing onbudgetingand forecastingwithquick summarizationsofgoals (what)andstrategies(how).

RECOMMENDEDREADINGChristensen, Clayton, and Michael E. Raynor. The Innovator’s Solution:

Creating and Sustaining Successful Growth. Boston: Harvard BusinessSchoolPress,2003

Nesheim,John.HighTechStartup:TheCompleteHandbookforCreatingSuccessfulNewHigh-TechCompanies.NewYork:FreePress,2000.Trout,Jack.ThePowerofSimplicity:AManagementGuidetoCuttingThrough

theNonsenseandDoingThingsRight.NewYork:McGraw-Hill,1999.

Activation

CHAPTER5

TheArtofBootstrapping

It’sallrighttoaimhighifyouhaveplentyofammunition.—HawleyR.Everhart

GIST

BillReichert,amanagingdirectorofGarage,likestotellentrepreneursthattheodds of raising venture capital are equal to the odds of getting struck bylightningwhilestandingonthebottomofaswimmingpoolonasunnyday.He’sexaggerating.Theoddsaren’tthatgood.

Mostentrepreneurshavetodig,scratch,andclawoutabusinesswhilelivingonsoysauceandrice.Thischapterexplainshowtosurvivethecritical,capital-deprived early days of any startup’s existence by picking the right businessmodel,making cash king, immediately getting tomarket, and taking the “redpill.”

Incidentally, some people think that a bootstrappable businessmust by itsverynaturebea trivialone—that is, ifyoukeepcapital requirements lowand

can’t raise wheelbarrows full of venture capital, you’ve limited yourself tosomething small. They are wrong. Companies such as Hewlett-Packard, Dell,Microsoft,Apple,andeBayallstartedwithabootstrapmodel.

Ifyouplancarefully,bootstrappingwillonlybeastage inyourbusiness’sdevelopment. It doesn’t have to be your permanent lifestyle—because after awhile, soy sauceand ricedogetboring.But for the timebeing, thinkbigandstartsmall.

MANAGEFORCASHFLOW,NOTPROFITABILITYIn the early days of The NewYorker, the offices were so small and sparselyfurnished thatDorothyParker preferred to spend her days at a nearby coffeeshop.Oneday,theeditorfoundhersittingthere.

“Whyaren’tyouupstairs,working?”demandedHaroldRoss.“Someonewasusingthepencil,”Mrs.Parkerexplained.*

Entrepreneurscanbootstrapalmostanybusiness—especiallyiftheyhaveno

choiceinthematter.Imayneverbeinvitedtospeakatabusinessschoolagainfor saying so, but a bootstrappable business model means managing for cashflow,not“paper”profits,growth,marketshare,orbranding.

Abootstrappablebusinessmodelhasmanyofthefollowingcharacteristics:

lowup-frontcapitalrequirementsshort(underamonth)salescyclesshort(underamonth)paymenttermsrecurringrevenueword-of-mouthadvertising

Ontherevenueside,managingforcashflowmeanspassingupsalesthatareprofitable but take a long time to collect. On the expense side, it meansstretchingoutpaymentsforeverythingyoubuy.

On paper, your organization will appear to be less profitable—primarily

because of the foregone sales. However, paper profits are a secondaryconsiderationforabootstrapper.

Theserequirementspointtoproducts,services,andtargetmarketswiththefollowingcharacteristics:

People already know, or it becomes immediately obvious, that theyneedyourproductorservice.Youdon’thavetoeducateyourpotentialcustomersabouttheirpain.Your product or service is “auto-persuasive.”* That is, once peoplerecognize their pain and how you solve it, they can persuadethemselvestotakethenextstepandbuywhatyou’reoffering.Amegatrend tsunamiofamarket isbreakingdownbarriers foryou.The Internet was an example of this. (Realize, however, that everywaveeventuallyrunsoutofenergy,soyoumusthavea“realbusiness”bythetimethathappens.)You can piggyback on a product or service that already has a largeinstalledbase.Youreduceriskbybettingonanotherproductorservicethatisalreadysuccessful.

Managingforcashflow,notprofitability,isn’talong-termpractice,butuntilyouaresittingonapileofcash,it’sthewaytogoforabootstrapper.

BUILDABOTTOM-UPFORECASTNobootstrapperinhisrightmindwoulddoatop-downforecastbycalculatinghowmuchofamarketoneneedstobesuccessful.Thisisthekindofmodelthattypically starts with a large number and works down to extrapolate projectedsales fromthat figure.Forexample, let’ssayyou’restartingacompany tosellInternetaccessinChina.Here’satypicaltop-downmodel:

Thereare1.3billionpeople.

1percentwantInternetaccess.We’llget10percentofthatpotentialaudience.Eachaccountwillyield$240peryear.1.3billionpeoplex1%addressablemarketx10%successratex$240/customer = $312 million. And—added bonus!—look at howconservativethesepercentagesare!

If you pick a big enough market, it’s easy to fool yourself into thinkingsuccesswon’tbehardtoachieve.Onepercent,forexample,alwaysseemslikeasmall,easilyattainedmarketshare.

Bootstrappersdon’tbuildtop-downmodels.Forthem,topdown=bellyup!Instead,theybuildbottom-upmodels,startingwithreal-worldvariablessuchas

Eachsalespersoncanmaketenphonesalescallsadaythatgetthroughtoaprospect.Thereare240workingdaysperyear.Fivepercentofthesalescallswillconvertwithinsixmonths.Eachsuccessfulsalewillbringin$240worthofbusiness.Wecanbringonboardfivesalespeople.Ten calls/day x 240 days/year x 5% success rate x $240/sale x 5salespeople=$144,000insalesinthefirstyear.

Youcanargueasmuchasyoulikeabouttheprecisenumberofcallsperday,successrate,averagesale,etc.;thepointhereisthatabottom-upmodelyieldsamuch more realistic forecast than even the most pessimistic market shareestimatesofaconsultant’sforecastaboutthetotalsizeofamarket.

The magnitude of your bottom-up forecast will establish the degree ofbootstrapping you’ll have to do. The only information that will point out the

needforbootstrappingmoreaccuratelyislookingatyourbankaccountbalance.

SHIP,THENTESTIfyou’restartingabiotechormedicaldevicecompany,ignorethissection.Allothers,readon.Oneofthehallmarksofbootstrappingistogetyourproductorservice immediately to market. Think this way: Ship, fix, ship, fix, ship, fix,ship…instead of fix, fix, fix, ship.Admittedly, there are pros and cons to thisphilosophy.

PROS

immediatecashflowreal-worldfeedback

CONS

tarnishedimageiftherearequalityproblems

Because a tarnished image is potentially a big negative, there’s always agod-awful tension involved indecidingbetween shippingandperfecting.Herearesomequestionstoconsiderasyoumakethisdecision:

Doesourproductorservice,atthisstageofdevelopment,leapfrogthecompetition?Canweshipitintoageographicareaormarketsegmentthatissmallandisolated,sothatpotentialdamageislimited?Is therea tolerantandunderstandingcustomerorgroupofcustomers

whoarewillingtobeguineapigs?Does our product or service largely fulfill our vision for makingmeaning?Doesitlargelyfilltheneedsofourcustomers?Canthecurrentstateofourproductorserviceendangerordoharmtothecustomer?Havewealreadydonesomuch“invitro”testingthatweneedtoknowwhattherealworldthinks?

EXERCISETrueorfalse?ThefirstMacintosh(1984)didnothavesoftware,harddisks,slots,color,andEthernet.

Youcanspendhoursdiscussingthesequestionswithyourteam.Itwon’tbeeasytoreachaconclusion,andthereisno“right”or“wrong”answer.Anotherwayyoucanapproachthisdilemmaistoaskyourself,WouldIletmymotherorfatherusetheproductorserviceinitscurrentstate?Iftheanswerisyes,shipit.

Another question you could pose is this: Are we running out of money?Nothingcanfocusanorganizationliketheprospectofdeath.

FORGETTHE“PROVEN”TEAMExperienceisthenameeveryonegivestotheirmistakes.

—OscarWilde

If you’re bootstrapping your organization, forget about recruiting the well-known industry veterans and building a dream team. Focus, instead, onaffordability—thatis,inexperiencedyoungpeoplewithbushelsofrawtalentand

energy.This will initially reduce the prospects of raising venture capital, but

standing on the bottom of a swimming pool isn’t that enjoyable anyway.Besides, thefollowing tableshowshoweasy it is tobuildacaseforunprovenpeople.

PROVENPEOPLE UNPROVENPEOPLESalary High,butyoudon’talwaysget

whatyoupaidforLow,andyoualmostalwaysgetatleastwhatyoupaidfor

Perks Secretaries,nicehotels,first-classtravel,limos,andtop-of-the-lineequipment

Self-service,motels,coachclass,carpools,andequipmentboughtatauctions

EnergyLevel

Stillhigh,ideally Controllable,ideally

Knowledge Don’tadmitwhattheydon’tknow,butyouassumetheyknoweverything

Don’tknowwhattheydon’tknow,sothey’rewillingtotryanything

Ofthesefactors,thelastoneisthemostimportant:Ignoranceisnotonlybliss,it’s empowering.Back in theeighties (when Iwasyoung), Ididn’tknowhowharditwouldbetoevangelizeanewoperatingsystem,sowhenAppleofferedme a job, I jumped at it—it was like being paid to go to Disneyland. Post-Macintosh,Iknowhowharditis,andIwouldnevertrytodoitagain.HadInotbeenempoweredbyignoranceofthe“impossibility”ofmytask,Iwouldneverhaveattemptedit.

EXERCISEGo on the Internet and investigate the backgrounds of the followingentrepreneurs:

BillGates DavidFiloSteveJobs LarryPageMichaelDell SergeiBrin

PierreOmidyar

OprahWinfrey

JerryYang AnitaRoddick

Youwillseethat“onpaper,”noneofthemhadthe“right”backgroundtocreateamultibillion-dollarcompany.

STARTASASERVICEBUSINESSOne of the advantages of a service business is that cash starts flowingimmediately. The classic example of this form of bootstrapping is a softwarecompany.Thefairytalegoeslikethis:

Someprogrammersgettogethertoprovideservicestoanichemarket.Theyoperate as consultants—gettingdownanddirtywith the client.Billingisonanhourlybasisandpayablewithinthirtydays.Inthecourseofprovidingthisservice,theydevelopasoftwaretoolfortheclient.Astheyaddclients,theycontinuetoenhancethetool.Soon,theyrealizethattherearemanycustomerswhocanusethistool.Theyusetheconsultingfeesfromclientstofundfurtherdevelopmentof the tool. At this point, the consulting practice has grown andprovidesasteadybaseofprofits.Theycompletedevelopmentofthetoolandtrytosellitindependentofconsulting services. Sales take off. The company stops doingconsultingbecause“there’snoleverageinconsulting.”Thecompanygoespublic,orMicrosoftacquiresit.ThefoundersbuyPorsches,Audis,orMercedesandlivehappilyeverafter.

Anotherway,slightlygrimmer,thatcompaniesadopttheservicemodelgoeslikethis:

Acoupleofguyshaveanideaforasoftwarecompany.TheyaregoingtoputOracle,Microsoft,orSymantecoutofbusiness.They start creating the product. Maybe they raise venture capital.Maybetheyraiseangelcapital.Maybetheyjuststarve.Forthefirsttimeinthehistoryofmankind,developmenttakeslongerthantheentrepreneursexpected.Also,customersaren’twillingtobuytheproductfromtwoguysinagarage.Thecompanyisrunningoutofmoney.Togetsomecash flowing, theguysdecide that theyshoulddosomeconsulting. They take their partially finished product and pound thepavementlookingforanybusinesstheycanfind.Theyrationalizethisdecisionasapositivestepbecauseithelpsthemdevelopaproductthatcustomerstrulyneed.Loandbehold,customersreallydoneedtheirproduct.Thedeveloperscomplete it and start selling it. Sales take off, and they stop doingconsultingbecause“there’snoleverageinconsulting.”Thecompanygoespublic,orMicrosoftacquiresit.ThefoundersbuyPorsches,Audis,orMercedesandlivehappilyeverafter.

Whether the path your company takes is the fairy tale or the grim fairy taledoesn’t reallymatter, if you pull it off. Themessage is that starting (or beingdrivento)aservicemodelisaviablebootstrappingtechnique.

If you do take this path, however, understand that starting as a servicebusiness is a good initial path but isn’t always the right long-term strategy.Getting customers topay foryour research anddevelopment shouldbeonly atemporarystrategyforaproduct-basedcompany.

Inthelongrun,aservicebusinessisfundamentallydifferentfromaproductbusiness.Theformerisallaboutslavelaborandbillablehoursorprojects.Thelatterisallaboutresearchanddevelopment,shipping,andspreadingcostsoverthousandsofboxesgoingoutthedoor.

FOCUSONFUNCTION,NOTFORMWhenspendingmoney,alwaysfocusonthefunctionyouneed,not theformittakes.Forexample,properaccountingdoesnotmeanretainingabig-namefirm(form)andthenassumingthejobwillgetdone(function).What’s important isthefunction,nottheform(seethefollowingtable).

Serviceprovidersareabigpartofstartupcosts,soherearetipsonmakingtherightchoicewhenassessingthem:

Selectafirmthatspecializesinthetypeofworkthatyourequire.Forexample, toreviewventurecapital financework,youshouldnothireUncle Joe the divorce lawyer because he’s cheaper, or aWall Streetlawfirmsimplybecauseithasabigname.Understand that at times the right decision will be to pay more.Investors, for example, may feel more comfortable dealing withcompaniesthatusethe“usual”lawyersandaccountantswhodoyourtypeofwork.Check the references of the individuals who are handling yourbusiness—andnotjust“thefirm’s.”Themostpowerfulreferencetheseproviderscanhaveishappyentrepreneurs.Negotiate everything. Circa 2004, everything is negotiable: rates,payment schedules, andmonthly fees. Even in good times, don’t beafraid to negotiate—it’s part of the game.Many firms, for example,willdelaybillinguntilyou’refundedifyouhavethechutzpahtoask.Ifyoucan’tstandthepersonyou’llbeworkingwith,switchpeopleorswitchfirms.Lifeisshort,soworkwithvendorsyoulike.

FORM FUNCTIONLegal Officesaroundtheworldfora

Fortune500clienteleandboxseatsatsportingevents.

Understandingyourlegalliabilities,protectingyourassets,

andfacilitatingdeals.Accounting Big-Sixstatuswithformerclients

injailandwalnutwallsinconferencerooms.

Controllingcostsandensuringfiscallysoundoperation.

PR Good-lookingaccountrepswhomajoredinAsianarthistoryandwhotellyouthatyou’reagreatspeakerareatthe$100,000presseventtheyplanned.

Creatingandproselytizingeffectivepositioningandestablishingclosecontactswiththepress.

Advertising Awallfullofawardsfortelevisioncommercialsandprintadswithemployeeswhodonothingbutbuymedia.

Understandingandreachingyourcustomerandgettingcurrentcustomerstoattractfuturecustomers.

Headhunting EstablishedreputationforplacingtheCEOsofpubliclytradedcompaniesthatownprivatejets.

Hiringgreatemployeeswhowilltradeoptionsforsalary.

Thislogicoffocusingonfunction,notform,appliestoalmosteveryelementofastartuporganization.Oneofthesymbolsofthedotcomcraze,forexample,wastheHermanMillerAeronchair.Thiswasa$700pieceofofficeequipmentthatwasthederigueurindicatorofcoolduringtheperiod.Itwasaterrificchair,butIdon’tknowifitwas$700terrific.Thefunctionofachair,afterall,istosupportone’sbutt.

EXERCISEGotoeBayandsearchforusedAeronchairs.Themoreyoufind,themoreitmeansthatentrepreneursfocusedonform,notfunction.

PICKYOURBATTLES

Whisperthewordcommoditytomostentrepreneurs,andyou’llsendshiversuptheirspines.Thetermhascometomeantheprocessbywhichaproductthatwasonce unique and proprietary and that commanded high margins has becomecommonplace,standardized,andcheap.

However, bootstrapping startups love it when products becomecommodities,becausetheircostofgoodssolddecreases.Forexample,Neoteris,the Sunnyvale, California, provider of networking security devices, sells itsproductfor$10,000.Thecostofpartsisonly$2,000.*

IfNeoterisweretodesignandmanufacturethepartsforitsproduct,thecostand risks would be much greater. By buying off-the-shelf parts from largerbusinesses,thecompanyistappingintotheresourcesofindustrygiantssuchasIntel.

Bootstrapperspicktheirbattles.ThebattleforNeoteris,andwhereitmakesits money, is in writing software—not designing and manufacturing chips orhard disks. Don’t try to make money doing the things anyone can do.Makemoneyfromyourmagic:

Whatisthecrucial“magic”thatwe’recreating?Arecustomersbuyingfromusbecauseofthe“parts”inourproductorservice—orbecauseofhowweintegratethemtocreateasolution?Howcanwetapintotheeffortsofotherorganizationstogettomarketbetter,faster,andcheaper?Howmany processes canwe dowell?Are there other organizationsthatcandothembetterforus?

GODIRECTMany startup organizations try to implement a multiple-tiered distributionsystem.Thatis,thecompanysellstoareseller,whothensellstothefinaluserofthe product or service. The thinking here is that an establishedreseller/consultant/distributor brings the benefits of a sales force, brand

awareness,andpreexistingcustomerrelationships.That’s the theory, anyway. It usually breaks down because most resellers

wanttofilldemand,notcreateit.They’renotinterestedinhelpingyouestablishamarket—theysimplywanttotapintoaprovenone.Marxist(Groucho)asthismayseem,youwouldn’twantanyresellerthatwouldhaveyou.

Therearethreeadditionalissuestobeweighedwhenconsideringamultiple-tiereddistributionsystem.First,itisolatesyoufromyourcustomer.Withanewproductorservice,youneed tohearwhat’swrongandwhat’s rightassoonaspossibleandasunfilteredaspossible.Second,becausethere’smuchlessprofitmargin,youneedtogeneratealargevolumeofsales,andit’susuallydifficulttoachievelargevolumeasastartup.Finally, it takesa longtimetobothsetupadistribution systemandget your product through the system into thehandsofcustomers.

Forallthesereasons,selldirectlytocustomers.Onceyou’vedebuggedyourproductor service andestablished sales, use resellers to accelerate, expand,orsupplement your efforts. But do not think that resellers can establish yourproductorserviceforyouorprovidethequalityfeedbackyou’dgetfromsellingtocustomersonyourown.

POSITIONAGAINSTTHELEADERSeth Godin, the author of The Bootstrapper’s Bible, makes a strong case forpositioningagainstthemarketleaderoragainstacceptedwaysofdoingthingsasavaluablebootstrappingtechnique.Ratherthantryingtoestablishyourproductor service from thegroundup,youutilize theexistingbrandawarenessof thecompetition.

Considertheseexamplesofhowyoucandoit:

Lexus:“AsgoodasaMercedesorBMW,but30percentcheaper”SouthwestAirlines:“Ascheapasdriving”7UP:“TheUncola”Avis:“Wetryharder”(thanHertz)

Positioningagainsttheleadersorstandardwaysofdoingbusinesscansavelotsof marketing, PR, promotion, and advertising dollars, so pick the “goldstandard” in your industry and isolate an important point of differentiation inyourownproduct,suchas

costeaseofuseconvenienceindustrialdesignreliabilityspeed/performancerangeofselectioncustomerservicegeographiclocation

Byspendingmillionsofdollarsandyearsofeffort toestablish itsbrand,yourcompetition has done you a terrific favor—all you have to do is positionedagainst it. There is a catch, though, because successful positioning against aleaderrequiresthreeconditions:

The leader is, and remains, worth positioning against. Imagine, forexample, if you had positioned your company against Enron whenEnronwasthedarlingofWallStreet.Theleaderdoesn’tgetitsacttogetheranderodeyouradvantage—forexample,ifyoupositionyourcomputerasfasterthanIBM’sandthenIBM quickly responds with an announcement of a radically fastermodel.Your product or service surpasses the competition’s in truthful,perceptible,andmeaningfulways.Ifnot,noonewillcareaboutyour

hype. Worse, you’ll lose your credibility, and credibility is hard toregain.

Still, for thenear term, thiscanbeauseful technique toenableyou toexplainwhatyoudoonalowbudget.

TAKETHE“REDPILL”This isyour lastchance.After this, there isno turningback.You take thebluepill—thestoryends,youwakeupinyourbedandbelievewhateveryouwanttobelieve.Youtaketheredpill—youstayinWonderlandandIshowyouhowdeeptherabbitholegoes.

—TheMatrix,1999

InTheMatrixNeochoosestheredpill,whichbringshimfacetofacewiththeharshrealitiesoftheworld.Ifhehadtakenthebluepill,hecouldhavelivedinthecomfortablefantasyoftheMatrix.

The leaders of new organizations face the same choice: reality or fantasy.Thechoice is as simple asNeo’s. Ifyouwant tobe a successfulbootstrapper,youhavetotaketheredpillanddeterminehowdeeptherabbitholecalledyourorganizationgoes.Ifyouareseriousaboutstayingintouchwithreality,thesearethetenmostimportantquestionsyoucanask:

1. Whenisyourproductorservicegoingtobereadyformarket?2. Whatareyourtrue,fullyloadedcostsofoperations?3. Whenwillyourunoutofmoney?4. Howmuchofyoursalespipelineisgoingtoconvert?5. Howmuchofyouraccountreceivablesiscollectible?6. Whatcanyourcompetition’sproductorservicedothatyourscan’t?7. Whoareyournonperformingemployees?

8. Areyoudoingallyoucantomaximizeshareholdervalue?9. What is your organization doing to change the world and makemeaning?10. Howgoodareyouastheleaderoftheorganization?

GETAMORPHEUSEverydrug,eventruth,needsadeliverysystem.InTheMatrix,itwasMorpheus,the character played by Laurence Fishburne. Who is Morpheus in yourorganization?

Ifyoudon’thaveone,youneed togetone.Typically,yourMorpheus isachieffinancialofficer,chiefoperationsofficer,controller,oraccountant.

The adult doesn’t need to be a grump, but simply someoneknowledgeableaboutthereal-worldoperationofanorganization.Theperson’sroleisn’t“naysayer”but“realist.”Assuch, thisperson is theyin to theCEO’syang.TheCEOdecides“what,” while this person decides “how” and “why not.” Theirrelationshipisnotanoppositionbutacounterbalance.Morpheus should have at least ten years of operating experience. Abackground primarily as a consultant, auditor, banker, journalist, oranalystisabadideabecauseit’seasyto“advise”buthard“todo.”Thesinglebestquestiontodetermineifaperson’sbackgroundisadequateis“Haveyoueverfiredorlaidoffsomeone?”Iftheanswerisno,keeplooking.

Inactuality,yourMorpheusmaynotwindupbeingasingleperson.During

differentphasesandfordifferenttasks,theMorpheusrolemayshiftaround,with

aresearch-and-designMorpheus to tellyouthatwhatyou’recreatingisflawedanoperationsMorpheustotellyouthatyoursystemscan’thandlethebusinessafinanceMorpheustotellyouthatyou’respendingtoomuch(ortoolittle)moneyan ethics Morpheus to tell you that you’re inculcating the wrongvalues

Each organization has a need for a different kind of Morpheus, but allorganizationsneedatleastoneofthemtodelivertheredpill,whennecessary.

UNDERSTAFFANDOUTSOURCEThere’sanage-oldquestionthatallCEOsface:Whichisworse—toleavemoneyon the table because you can’t handle all the business, or to lay people offbecauseyouoverestimatedrevenues?Thethoughtofleavingmoneyonthetablemakesmyearsring,butlayingoffpeopleisworse.

Atitspeak,theheadcountofGaragewasfifty-twopeople.Afteraseriesoflayoffs,Ireducedtheheadcounttoundertenpeople.Sure,almosteveryoneatthetimethoughtthatthetechnologymarketwasgoing“toinfinityandbeyond”(asBuzzLightyearwouldsay),soweweren’taloneinrampingupthestaff.

Imadeamistake,though;CEOsarepaidtodotherightthing,notthesamethingaseveryoneelse.Overstaffingcausesawickedwebofproblems.Dealingwithitisnotsimplyamatterofloweringheadcount,asyou’llhavetofacetheissuesof

excessspacelockedinalong-termlease

excessfurnitureandcomputerstraumaintheorganizationaspeopleareletgotraumainthelivesofthepeoplewhoareletgotrying to hire different kinds of people (for your new reality) in themidstoflettingothersgogoing through gyrations to convince the world that you’re notimploding

There’sa short-termsolution tounderstaffing, and that’s tooutsourceasmanyfunctions asyoucan.Don’toutsource strategic functions suchas researchanddevelopment,*marketing,andsales.Butthere’slittlereasontocalculatepayrollinternallywhen organizations such as PayChex* andADP can handle this foryou.

Doas I say, not as I did. If youwant tobootstrapyourorganization, thenintentionallyunderstaff.Youmayleavesomesalesonthetable,andyoumaynotachieveescapevelocityasfastasyou’dlike.Butitsurebeatslayingpeopleofforrunningoutofmoney.

BUILDABOARDMany entrepreneurs believe that a board of directors is appropriate only fororganizations that have raised boatloads of money and are fairly far along.Accordingtothistheory,untilthen,theseorganizationsshouldmakedowithnoboardorwithaboardofonlytheinternalteammembers.

This reasoning iswrongon several counts.First, goodguidance is alwaysvaluable.Theneedforitisnotdependentonthestageoftheorganizationortheamountofcapitalithasraised.

Second,money,ortheamountofcapitalyou’veraised,isnottheonlyfactorthat can attract high-quality board members. Other factors include theinnovativeness of your product or service, themeaningyou’re going tomake,andyourpersonality.

Buildingaboardofhigh-qualitydirectors—justasassemblingagreatteam—without funding is solid testimony to your product or service and yourevangelismskills.Plus,agreatboardwillhelpyougetmoneyasmuchasmoney

willhelpyougetagreatboard.

SWEATTHEBIGSTUFFBootstrapping goes awry when entrepreneurs focus on saving pennies to thedetriment of theBig Picture. The reason for starting an organization is not tobuild desks out of sawhorses and doors—nor is it to make HermanMiller abiggercompany.Hereisalistoftheusualbigstuffandsmallstuffentrepreneursmustmanage.

SMALLSTUFF

officespacefurniturecomputersofficeequipmentofficesuppliesbusinesscardsandletterhead

BIGSTUFF

developingyourproductorservicesellingyourproductorservicecollectingthemoneyforyourproductorservice

Wheneveryoucando so reasonably,do the small stuff cheapanddon’twastemoneyontheaccoutrements.RickSklarin,aformerAccentureconsultant,putsit thisway: “Make one trip toCostco and be donewith it.”Do sweat the bigstuff,however—butthereisn’tthatmuchbigstuff.

EXERCISEThe next time there’s something that you “can’t livewithout,”wait for aweekandthenseeifyou’restillalive.

EXECUTEA friend at Stanford University, ex–Sun Microsystems, George Grigoryev,pointed out to me that the real enemy of bootstrapping isn’t spending—it’sfailingtoexecute.Ifbootstrappingisallittooktosucceed,everyorganizationintheworldwouldbeusingsawhorsesandwoodendoorsfordesks.Justbecauseyou’re cheap doesn’t mean you’re effective. For this reason, here are therecommendationsthatGeorgeandIcameupwithabouttheartofexecuting.

SET AND COMMUNICATE GOALS. The simple act of settinggoals and communicating them increases the likelihood that yourorganizationwillachievethem.Itgetseveryoneonthesamepageandprovides a day-to-day guide for what employees need to do. Thisapplies to every task: finalizing specifications, building a prototype,signingup early customers, shipping, collecting, recruiting, finishingmarketingmaterials…thelistisendless.MEASUREPROGRESS.Goalsonlyworkifyoumeasureprogress.As the old saying goes, “What getsmeasured gets done.” This alsomeansyou’dbetterpick the rightgoals,or thewrong thingswillgetdone.Inastartup,youshouldmeasureandreportresultseverythirtydays. As your organization gets older and more deliberate, you canshifttoaquarterlyschedule.ESTABLISH A SINGLE POINT OF ACCOUNTABILITY. If ittakes more than ten seconds to figure out who is responsible forachieving a goal, something is wrong. Good people acceptaccountability. Great people ask for it. For the good of your entireorganization,establish it.Apersonwhoknowshe isbeingmeasuredandheldaccountableishighlymotivatedtosucceed.

REWARDTHEACHIEVERS.Thepeopleyou reward in a startupare theoneswhodeliver.Youcanuseoptions,money,publicpraise,daysoff,or free lunches—itdoesn’tmatter.Whatdoesmatter is thatyourecognizeachievers—andonlyachievers,notthepeoplewhoarealongfortheride.FOLLOW THROUGH UNTIL AN ISSUE IS DONE ORIRRELEVANT.Weall like toworkon thenewest,hottest stuff. It’shuman nature. Who wouldn’t rather be involved with the nextbreakthrough product rather than fixing the current one? Don’t stopwhen something simply gets boring. Fixing bugs may be boring toyou,butit’snottothecustomerwhorecentlyboughtyourproduct.HEED MORPHEUS. Realism is the ally of execution, so payattentiontowhatyourMorpheussays.Everyoneinagivencompanyisindenialaboutsomething.Somedenialisgoodforanentrepreneur—for example, denying that the “experts” are rightwhen they sayyoucan’t succeed. The critical issue is whether the denial is ultimatelygoingtohurttheorganization.Insistonrealism,andyourorganizationwillbootstrapbetter.ESTABLISHACULTUREOFEXECUTION. Execution is not aonetimeevent.Norisitaprocesswhereyoucheckoffgoalsasifyoursixth-gradeteacherwerelookingoveryourshoulder.Rather,executionis a culture that produces a set of organizationwide habits.The onlyway toestablish thisculture is for theCEOtoset the rightexample:answering inquiries, solving problems, and promoting people whodeliverresults.Thissendsanunmistakablemessage:Executioncountsinthisorganization.

FAQ

Q.HowdoIknowwhenbootstrappinghastakenusasfaraswecango?

A. This is a seemingly logical question, but itwill seldom come up in a

real-world situation. If you’re bootstrapping merrily along, you’lleventuallybeabletofundnewefforts.Morelikely,thequestionyou’llfacewillbe,“WhatwouldIdoifIhadmorecapital?”

Q.WillIforsakegrowth—andmaybeevensuccess—ifIbootstraptoomuch?

A. I can’t come up with a single example of an organization thatbootstrapped too much. There’s greater danger of blowing anopportunity because of too much money than because of too little.Negativelystated,thinkofventurecapitalassteroids:Itmightgiveyouanimmediateadvantage,butitcouldkillyou.

Q. If I can successfully bootstrap an organization, do I even have tolook for outside capital? What’s wrong with doing it the old-fashionedway?

A. Respectively, no and nothing.Outside capital isn’t the onlyway—it’ssimplyoneway.Thegoal is tobuild somethinggreat, nomatter howyouraisecapital.

Q.Ifwedon’thaveseveralmilliondollarsinventurecapitalfunding,willwenotbetakenseriously?

A.Onlybypeoplewhodon’tmatter.Ifyoudoraisethiskindofmoney,useittoaddtoyourcredibility,butdon’tbelievethatitwillguaranteeyoursuccess.Ifyoudon’traisethiskindofmoney,don’tsweatit.Justbuildagreatbusinessanddon’tlookback.

Q.Withyouremphasisonexecution,whatdoIdoifsomeonedoesn’texecute?ShouldIsimplyfiretheperson?

A.It’snotthatsimple.Findtherealreasonthatapersonfailedtoexecute.There may be problems that were out of his control. Isolate thoseproblems and fixwhat you can.A good rule of thumb is to give thepersonthesame“dueprocess”thatyou’dlikeyourboardofdirectorstogive you.When due process is exhausted,make the cut, andmake itquicklyanddecisively.

RECOMMENDEDREADINGGodin,Seth.TheBootstrapper’sBible:HowtoStartandBuildaBusinesswitha

GreatIdeaand(Almost)NoMoney.Chicago:UpstartPublishing,1998.Hess, Kenneth L. Bootstrapping: Lessons Learned Building a Successful

CompanyfromScratch.Carmel,CA:S-CurvePress,2001.

CHAPTER6

TheArtofRecruiting

Itisessentialtoemploy,trust,andrewardthosewhoseperspective,ability,andjudgmentareradicallydifferentfromyours.Itisalsorare,forit

requiresuncommonhumility,tolerance,andwisdom.—DeeW.Hock

GIST

There are few tasks that face an entrepreneur that are more enjoyable thanrecruitingemployeestoahotstartup.Whatcouldbebetterthanfindingpeopletohelpchangetheworld?Andtherearefewfactorsthataremorecriticaltothesuccessofastartupthangoodpeople.

Goodrecruitingstartsatthetop:CEOsmustrecruitthebestpeopletheycanfind.Next,goodrecruitingrequireslookingbeyondsuperficialitiessuchasrace,creed,color,education,andworkexperience.Instead,youshouldfocusonthreefactors:

1. Canthecandidatedowhatyouneed?2. Doesthecandidatebelieveinthemeaningyou’regoingtomake?3. Doesthecandidatehavethestrengthsyouneed(asopposedtolackingtheweaknessesyou’retryingtoavoid)?

Ifcandidatespassthesetests,thengogetthem,butinasmartway—byusingallyour weapons, negotiating at the right moment, and double-checking yourintuitions.

Afterthey’reonboard,youshoulddefineahoneymoonperiodduringwhichboth parties can analyze whether things are working out. Finally, as aphilosophicalframework,maketheeffortto“recruit”youremployeeseveryday—tomakesuretheywanttocomebackthenextday.

HIRE“A”PLAYERSI start with the premise that the function of leadership is to produce moreleaders,notmorefollowers.

—RalphNader

SteveJobshasasayingthatAplayershireAplayers;BplayershireCplayers;and C players hire D players. It doesn’t take long to get to Z players. Thistrickle-downeffectcausesbozoexplosionsincompanies.

If there is one thing aCEOmust do, it’s hire amanagement team that isbetter than he is. If there is one thing a management teammust do, it’s hireemployees who are better than it is. For this to happen, the CEO (andmanagementteam)mustpossesstwoqualities.Thefirstisthehumilitytoadmitthat some people can perform a function better than they can. Second, aftermakingthisadmission,theyneedtheself-confidencetorecruitthesepeople.

Admittedly,urgingmanagerstohireAplayersishardlyarevelation,andyetmany organizations are filled with bozos. This happens because most peopledon’theedthisprincipleandbecauseitissodifficulttofilteroutbozos.Ican’tforce you to take this advice, but I can provide fiveways to avoid hiring the

wrongpeople:

DON’T CONFUSE CORRELATION AND CAUSATION. Acandidate may have worked at an organization when it achievedsuccess; this doesn’t necessarilymean he contributed to the success.He couldhave just been along for the ride.The rising tide floats allboats.

To separate theeagles from thedodos, findoutwhat specificprojectsthe candidatemanaged and analyzehis results.Also, try to find someoneinside the company who worked with the person to see if the candidatecausedorcorrelated.

DON’TCONFUSEBIG-ORGANIZATIONSKILLSWITHNEW-ORGANIZATIONSKILLS. Success in a big organization doesn’tguarantee success in a startup.The skills needed in each context aredifferent. A vice president of Microsoft (with its established brand,infiniteresources,and100percentmarketshare)maynotbetherightpersonfora“twoguysinagarage”operation.

BIGORGANIZATIONSKILLS STARTUPSKILLSSuckinguptotheboss BeingthebossGeneratingpaperprofits GeneratingcashflowBeatingchargesofmonopoly Establishingabeachhead

Evolvingproductsandservices CreatingproductsandservicesMarketresearch Shipping

Squeezingthedistributionchannel Establishingadistributionchannel

DRAMATIZEYOUREXPECTATIONS.Make itcrystalclear thatworking in a startup is different fromwhat theymight beused to intheirpreviousorganization:“Canyoufunctionwithoutasecretary,flycoach,andstayincheapmotels?”Youmightscareoffafewdesirablecandidatesthisway,butit’sworthriskingthistoavoidendingupwithpeoplewhocannotfunctioninastartupatmosphere.READTHETEALEAVESWHENCHECKINGREFERENCES.BecausethelawsintheUnitedStatespreventprovidingjobreferencesthatmaydamageacandidate’sabilitytogetajob,wheneveryoudon’tgeta reference that’s superlative,youare ineffectgettinganegativeone. If the reference sends you to the human resources department,then you know the candidate had problems. (See the end of thischapterformoreonreferencechecking.)TRUST THE RICHEST VEIN. Your current employees are therichest resource for finding great people and for preventing a bozoexplosionatyourorganization.Ifyouremployeesaren’tmotivatedtobring in good staff, who is? If there’s a close call between twocandidates,andoneisknownbyanemployee,youshouldusuallytakethatone.

Manyentrepreneursdon’trealizethis,butstartupsneedthreekindsofAplayers:first,kamikazeswhoarewillingtoworkeightyhoursaweektoachievesuccess;second,implementerswhocomeinbehindthefirstgroupandturnitsworkintoinfrastructure; third, operators who are perfectly happy running theinfrastructure.

Thus,goodhiresshouldnotonlybebetter than theCEOandmanagement

team,theyshouldalsobedifferentfromthem.Startupsneedpeoplewithdiverseskillsthatcomplement,notoverlap,eachother.Forexample,ageekCEOshouldhiresomeonewhohassalesskills—notanotherengineertohandlesales.

HIRE“INFECTED”PEOPLEIt’snotenoughthatcandidatesaregoodanddifferent;theymustalsobelievethatyourorganizationcanchangetheworld.Theymustbeinfectedwithenthusiasmfor what you do. Working in a startup isn’t easy: Salaries aren’t as high aselsewhere,benefitsaren’tasgenerous,andthere’salwaystheriskofrunningoutofmoney.Therefore,beliefinwhatyou’redoingisasimportantascompetenceandexperience.It’softeneasiertoteachaninfectedcandidatehowtodoajobthantoteachanagnostic(oratheist)howtobelieve.

Irecommendtakingachancewithanyreasonablyqualifiedcandidatewhoalreadybelieves inyourmeaning.Thismeansthat thepersonisauserofyourproductorservice.Forthatreasonyourcustomerbaseisthemostfertilegroundforrecruiting.Forexample,someonewholovedusingaMacintoshmadeagoodcandidateforApple.

If the candidate isn’t coming to you as a proven believer, then use thesetechniquestodetermineifhe“getsit.”

Askthecandidatetodemonstrateyourproductorservice.(Companieswith crappy products, though, run the risk of losing candidates thisway.) Someonewho truly loves a product or servicewill be able topresentittoitsadvantage.Measure theamountof time thecandidate talksaboutcompensation,benefits, and perks versus your product or service. This provides agoodapproximationofwhether thecandidateviews thepositionasawaytomakemoneyortomakemeaning.Analyze the candidate’s questions: Are they built on a strongfoundationofknowledgeaboutyourorganization?Or,isthecandidatetrying to figure out the basics—what youdo,whoyour customer is,andwhoyourcompetitionis?

IGNORETHEIRRELEVANTThere is a shortage of A players in this world. Therefore, it’s stupid (not tomention illegal) to make recruiting decisions based on gender, race, religion,sexualorientation,orage.Whyreducethegenepoolbytakingalimitedview?

Your goal, remember, is to make meaning and change the world. Manypeopleputtoomuchemphasisontheexperienceandbackgroundsofcandidates.TomisquoteGeorgeOrwell,ignoringisbliss.

Itsometimespaystoignorethelackoftheperfectandrelevantbackground,while at other times it pays to ignore the presence of the perfect and relevantbackground.Bothcanultimatelybeirrelevant.

EXPERIENCE INABIG,SUCCESSFULORGANIZATION. Aswediscussed earlier, a big-organizationpedigree is not necessarily areliablepredictorofsuccessinastartupenvironment.Thesepedigreesmight be good for fundraising, but there’s scant room for windowdressing in a startup. The relevant question, again, is, “Did thecandidatehelpcreatethesuccess,orwashealongfortheride?”EXPERIENCE INAFAILEDORGANIZATION. This is the flipside of experience in a big, successful organization. Many factorscould have caused the failure of an organization—perhaps thecandidate was one of them. Or perhaps not. Failure, however, isusuallyabetterteacherthansuccess.Thecandidatetoavoid,though,isonewhohasaconsistenthistoryofworkingforfailures.EDUCATIONAL BACKGROUND. You want smart people, notnecessarily “degreed” people. The two are not the same. Steve JobsneverfinishedReedCollege.SteveCase,thefounderofAOL,wenttoPunahou.* Half the engineers of the Macintosh Division of Appledidn’t complete college. I dropped out of law school, and StanfordBusinessSchoolrejectedme.EXPERIENCEINTHESAMEINDUSTRY.Industryexperienceisa double-edged sword. On the one hand, understanding the industrylingoandpossessingpreexistingrelationshipsarehelpful.Ontheother

hand,acandidatewhoisstuckinhiswayofthinkingaboutanindustry(“thisiswhatcomputerinterfaceshavealwayslookedlike”)canbeaproblem.EXPERIENCEINTHESAMEFUNCTION.Functionalexperienceisalsoadouble-edgedsword.Appleoncehiredanexecutivefromthetamponbusinessbecausewethoughtweneededconsumermarketingexpertise to sell Macintoshes as a consumer good. However, hisexperience did not effectively transfer to the computer business. Ontheotherhand,FordMotorCompanybuilt thefirstassemblylineforcarsusingtheexpertiseofpeoplefrommeatpackinghouses,granaries,andbreweries.†

There is one final characteristic that should often be ignored: functionalweaknesses.Youwouldn’tsaythatoneofSteveJobs’sstrengthsiscompassion.Nor isBillGates’sstrengthaestheticdesign.Shouldyou thereforenothire thenext Steve Jobs or Bill Gates because of such weaknesses? There are twotheoriesinhiringpeople:

Find the candidate who lacks major weaknesses (but doesn’t havemajorstrengths).Findthecandidatewhohasmajorstrengths(eventhoughhehasmajorweaknesses).

Thefirstlineofreasoningisflawedbecauseeveryonehasmajorweaknesses—it’sjustamatteroffindingoutpreciselywhattheyareovertime.Performingwellinoneareaistoughenough;tryingtofindpeoplewhocandoeverythingisMission:Impossible.

Thesecondlineofreasoningisthewaytogo.Ateamofpeoplewithmajorand diverse strengths is what your organization needs in the early dayswhenheadcount is low, and there’s no room for redundancy.High achievers tend tohavemajorweaknesses.Peoplewithoutmajorweaknessestendtobemediocre.

EXERCISEThinkbackaboutyourfirstfewjobs.Trueorfalse?

__Iwasperfectlyqualified.__ I am holding candidates up to standards higher than the person whohiredmeused.

USEALLYOURTOOLSAsIwritethisin2004,itseemssillytoworryaboutrecruiting,sincepeoplearedesperatetogetjobs.However,ingoodtimesorbad,itishardtohirethebestpeople,sowhenyouarepursuingthem,youhavetouseallyourtools.

Mostpeoplethinktheirrecruitingtoolsarelimitedtosalaryandequityplusfringebenefitssuchasinsuranceandmedicalcare.Buttherearemoreincentivesatyourdisposal:

YOURVISION. Formany people,money isn’t themost importantreward of a job. They will work for less to do more by makingmeaningandchangingtheworld.YOUR TEAM. Don’t limit the candidate’s interviews to hisimmediate supervisorandco-workers. Ifyou’vegota fewsuperstarsinotherdepartments,addthemtotheseductionprocess.YOUR BOARD OF DIRECTORS, ADVISORS, ANDINVESTORS. There’s likewise something powerful about meetingwith thesefolks.Theyareusuallywellknown,highlyrespected,andrich. They can influence candidates to accept your position, so askthemtospendsometimewithyourtopcandidates.RÉSUMÉ-BUILDINGPOTENTIAL.Let’sfaceit:Fewpeopleworkforoneorganizationfortheirentirecareer.Ifyoucangetafewgoodyearsoutofgreatpeopleandhelpthembuildtheirrésumés,doit.Plus,youneverknow,theymaystickaroundlongerthanyouanticipated.

Once you decide on a person, don’t hold anything back and use all yourtoolstohirehim.

SELLALLTHEDECISIONMAKERSMostpeopleassumethatthesoledecisionmakerinajobsearchisthecandidate.Slightly more enlightened people consider the spouse of the candidate, too.However,acceptingaposition,particularly inastartuporganization, isusuallyevenmorecomplexthanthis.

Thedecisionmakerscanalsoincludesuchrelationsasthechildren,parents,andfriendsofthecandidate.It’seasytoimaginesomeoneaskingaparentifheshouldgotoworkforastartupandbeingtold,“Don’t.It’stoorisky.Getajobinanice,safecompanythatwillbearoundalongtime—likeArthurAndersenorEnron.”

Therefore, be sure to ask the candidate who all his important decisionmakers are, and then work with the candidate to answer their concerns, too.However,beawarethatsomecandidatesmayfear this isa trickquestion—If Iadmitthatmyparentsarepartoftheprocess,they’llthinkI’mawimpandwon’thireme—sodoyourbesttoassurethemthatthequestionisaseriousone.

You’regoingtohavetodoyourbesttofindoutwhoallthedecisionmakersareinordertoensurethebestfitforbothyourorganizationandthecandidate.Afteryoulearnwhoallthedecisionmakersare,sellthem,too.

WAITTOCOMPENSATEManycompaniesmake themistakeofpreparinganoffer letter tooearly in thehiring process. They use it as a “strawman”* to get compensation details onpaperinordertoshowhowinterestedtheyareandtoreachclosurequickly.Thisisabigmistake.

Anoffer lettershouldcomeat theendof therecruitingprocess. It isnotanegotiating tool toget thecandidate tosayyes,butsimplyawaytoconfirmaverbal agreement. It’s like a marriage proposal: Make it when you know theanswerwillbeyes.

INTERPRETTHELIESAmyVernetti,aheadhunteratKindredPartners,cameupwiththislistofthetopten lies of job candidateswhile sheworked atGarage. Study them.Theywillhelpyouavoidmakinghiringmistakes.

LIE TRUTH“I’vegotthreeotheroffers,soyou’dbettermovequickly.”

I’vehadthreeotherinterviews,andnoonehasflat-outrejectedmeyet.

“Iwasresponsibleformycompany’sstrategicalliancewithMicrosoft.”

IpickedupthefaxafterBillGatessignedthedocument.

“I’mleavingmycurrentorganizationafteronlyafewmonthsbecausetheorganizationisn’twhattheCEOtoldmeitwas.”

Idon’tknowhowtododuediligenceonanopportunity.

“I’veneverbeenwithacompanyformorethanayearbecauseIgetboredeasily.”

IttakespeopleaboutayeartofigureoutthatI’mabozo.

“Ididn’treallyreporttoanyoneatmyoldcompany.”

Noonewantedmeinhisdepartment.

“Mostofmyreferencesarepersonalfriendsbecausetheyknowmebest.”

NooneIworkedforiswillingtogivemeareference.

“You’veneverheardofmylastthreeemployersbecausetheywereinstealthmode.”

AllthecompaniesIworkedforimploded.

“I’mnolongerwiththeorganization,butImaintainanexcellentrelationshipwithpeoplethere.”

Iwasforcedtosignanondisparagementagreementtogetmyseverencepackage.

“Iamavicepresident,butnoonereportstome.”

Anybozocanbecomeavicepresidentatmycompany.

“I’mexpectingtoatleastdoublemypriorcompensationpackage.”

IwasoverpaidandunderstandthatthatImayhavetotakeacashhitforagoodopportunity.

DOUBLE-CHECKYOURINTUITIONAccordingtocommonwisdom,tomakegreathiresyoumustlearntotrustyourintuition about people. You’ll frequently encounter two circumstances inrecruiting:

Thecandidate’seducationandbackgroundaren’tquiteright.Forthesereasons, others don’t think you should hire him. Your rational sidesays,Don’t hire him.He doesn’t have the right experience, but yourintuitionsays,Grabhim.The candidate is perfect onpaper (education,work experience, etc.),and the rest of your team thinks that you should grab him. Yourintuition,however,tellsyoutopass.

Theseareboth situationswhenyouwant to trustwhatyour intuition is tellingyou.Unfortunately,yourintuitionisoftenwrong.Perhapsyoulikedacandidate,soyousoftenedupontheinterviewquestionsandreferencechecking.Also,youmayrememberwhenyourintuitionprovedrightandconvenientlyhaveforgottenall the times it was wrong. Follow this procedure* to balance any undueinfluencefromyourintuition:

PREPARE A STRUCTURE FOR THE INTERVIEWBEFOREHAND. You and your team should decide on exactly theattitude,knowledge,personality,andexperiencethatarenecessaryforthepositionbeforeyouconductinterviews.ASK QUESTIONS ABOUT SPECIFIC JOB SITUATIONS. Forexample,ask thefollowingkindsofquestionsforavicepresidentofmarketingposition:

Howdidyoumanageaproductintroduction?Howdidyoudeterminethefeaturesetofanewproduct?Howdidyouconvinceengineeringtoimplementthesefeatures?HowdidyouselectyourPRfirm?Howdidyouselectyouradvertisingfirm?Howdidyouhandleacrisissuchasafaultyproduct?

STICK TO THE SCRIPT. Minimize spontaneous follow-upquestionsandmakingupnewquestions in real time. Ifyou’reafraidthat you, and therefore your organization, will appear rigid andstandoffishtothecandidate,explainthatyou’reusingatechniquefrom“thisbookaboutstartups”thatyoureadandthatyou’renormallynotlikethis.DON’T OVERDO OPEN-ENDED, TOUCHY-FEELYQUESTIONS. For example, any half-decent candidate can bluffthrough questions such as “Why do you want to work for thisorganization?” More pointed questions are better: “What are theaccomplishments you’re most proud of?” “What were your biggestfailures?”“Whatwasyourmostgratifyinglearningexperience?”TAKE COPIOUS NOTES. You’ll need these notes to accuratelyrememberwhat each candidate said.Don’t depend on yourmemorybecause itwillbewarpedby thepassingof timeandyoursubjectivereactionstocandidates.CHECK REFERENCES EARLY. Many organizations checkreferences for a candidate towhom they’vealreadydecided tomakeanoffer.This is a setup for a self-fulfillingprophecybecauseyou’regoingtohear,andwanttohear,commentsthataffirmyourdecision.Bigmistake.Youshouldusereference-checkingasameanstodecidewhetherthecandidateisevenacceptable,andnotasaconfirmationofa choice that you’ve already made. (More on reference checkingappearsattheendofthischapter.)

After thisprocess, ifyour intuition is tellingyouone thingand“the facts”aretellingyouanother,answerthesequestions:

Shouldyou like thecandidate (becausehe iswellqualified),butyoudon’t?Shouldyounot like the candidate (becausehe is notwell qualified),butyoudo?Isthereafactualandobjectivebasisforyourintuition?Wouldtheinterviewhavegonedifferentlyifyouhadconducteditoverthephone?Let’snotdenythatthephysicalappearanceofapersoncaninfluenceyourdecision.

After taking all these precautions, follow your intuition. Going with myintuitionhasservedmewellinthepast(granted,mymemoryisselective).AndIwouldbeahypocritetotellyoutorelyon“justthefacts”becauseApplehiredme—anex–jewelry-schlepperwithapsychologydegree—toevangelizethemostimportantproductinthecompany’shistory.

On paper, Iwas not even close to being the right person for evangelizingMacintosh to software developers. Somebody’s gut reacted positively—or atleastnottoonegatively—tome.EitherthatorSteveJobswasoutoftheofficethatday.

APPLYTHESTANFORDSHOPPINGCENTERTESTThere’sonemoretesttoapplytoacandidateonceyou’repastdouble-checkingyourintuition.It’scalledtheStanfordShoppingCenterTest.Thismallislocatedin Palo Alto and is close to Menlo Park, Portola Valley, and Woodside—communities populated by entrepreneurs, venture capitalists, and investmentbankers.Wheneveryoushopthere,you’reboundtoseesomeonefromthehigh-techbusiness.

A few years ago, I was at the mall when I caught sight of a Macintoshsoftwaredeveloper,buthehadnotyetseenme.Iinstantlymadeanabruptturn

inorder toavoidhaving to talk tohimbecausehewasapain in theass.ThisexperienceledmetoconceivetheStanfordShoppingCenterTest.

This is how it works. Suppose you are at a shopping center. You see acandidate(oremployeeorpartnerorserviceprovider)beforehenoticesyou.Atthatpoint,youcandooneofthreethings:

1. Scootoverandsayhello.2. Figurethatifyoubumpintohim,fine.Ifnot,that’sOK,too.3. Getinyourcarandgotoanothershoppingcenter.

Nomatterwhatyourintuitionandadouble-checkofyourintuitiontellyou,youshouldonlyhireandkeeppeoplethatyou’dhustleovertoandengageinaconversation.Ifyoufindyourselfpickingoption2or3,don’tmakethehire.Lifeistooshorttoworkwithpeopleyoudon’tnaturallylike—especiallyinayoung,smallorganization.

(By theway, ifyoupickoption2or3 for someonecurrentlyemployedatyourorganization,eitherfixthesituationorgetridoftheperson.)

DEFINEANINITIALREVIEWPERIODDespiteyourbestefforts,yourrecruitingprocess(oryourintuition)issometimeswrong,andthenewhiredoesnotperformtoyourexpectations.Forme,oneofthehardesttasksistoadmitthismistakeandcorrectit.

However, if there’s one thing that’s harder than firing someone you don’twantaround,it’slayingoffpeopleyouwanttokeep.Restassured,ifyoudon’tmake a course correction or terminate people who aren’t working out, youincreasetheprobabilityofhavingtolayoffpeoplewhoare.

Tomakethiseasieronboththeorganizationandtheemployee(becauseit’salso the right thing for the employee to stop working for the wrongorganization),establishaninitialreviewperiodwithincrementalmilestones.Themoreconcretetheperformanceobjectives,thebetter.Forexample,objectivesforasalespersonmightinclude

completionofproducttrainingcompletionofsalestrainingparticipationinfivesalescalls

Thisperiodneedstobelongerthanthehiringafterglow,butshorterthanthetimeittakesforthepredominantfeelingtobecomeWhydidwehirethisperson?

Inshort,ninetydays.Establishanunderstandingthatafterninetydays,therewillbeajointreview

inwhichbothsidesdiscusswhat’sgoingright,what’sgoingwrong,andhowtoimproveperformance.Someissueswillbeyourfault!

DON’TASSUMEYOU’REDONEIn 2000 Garage recruited a well-known investment banker from a big-namecompany.Ittookweeksofwooingandtworoundsofoffersandcounteroffersashiscurrentemployersweetenedhiscurrentcompensation.

Finally,we landedhim.Everythingwas set togo.Heandhis familyevencametoourcompanyBBQ.Afewweekslaterhestartedatourfirm.Heshowedupforworkforafewdays.Thenhecalledinsickforacoupleofdays.Lateonenight,Igotane-mailfromhimsayingthathewasresigning.

He leftGarage towork for a former client of the investment bank.A fewmonths after that, he returned to his original employer. I learned three lessonsfromthisexperience:

We should have checked him out better; perhaps we would havelearnedthathewasn’tsuitedtoastartup.Beware of “big-company disease.”That is, once someoneworks forthe top-of-the-line, most lucrative, most prestigious firm, it’sextremelyunlikelythatthepersonisrightforabootstrappingstartup.Neverassumeyou’redone.Recruitingdoesn’tstopwhenacandidateacceptsyouroffer,norwhenheresignsfromhiscurrentemployer,nor

onhislastdayathiscurrentemployer—notevenafterhestartsatyourorganization.

Inactuality, recruitingnever stops.Everyday is anewcontractbetweenastartupandanemployee.

MINICHAPTER:THEARTOFREFERENCECHECKINGYoucan’tbuildareputationonwhatyou’regoingtodo.

—HenryFord

Referencecheckingisacrucialpartofrecruitingagreatteam.However,startupsusuallydoitinacursoryandcasualway—usuallyafterthecompanyhasmadeahiringdecision.CourtesyofAmyVernetti,theheadhunterforKindredPartners,here’sashortcourseonreferencecheckingtoimproveyourresults.

The goal of referencing is not to disqualify a candidate, but to look forconsistencyinhowthecandidaterepresentedhimself.Youarealsolookingforcluesaboutwhetherthecandidatecanbeeffectiveatyourorganization.

Inordertopaintacompletepictureofacandidate,youshouldspeakwithatleasttwosubordinates,twopeers,twosuperiors,andtwocustomers.Investorsorboardmembersarealsointerestingreferences.

Thesearesuggestedquestions:

Howdoyouknowthisperson?Howlonghaveyouknownhim?Whatareyourgeneralimpressionsofhim?Howwouldyourankhimagainstothersinsimilarpositions?Whatcontributionshashemadetotheorganization?Howdoothersintheorganizationviewhim?Whatarehisspecificskills?Whatishebest/worstat?Whatarehiscommunicationandmanagementstyles?

Inwhatareasdoesheneedimprovement?Ishecapableoffunctioningeffectivelyinasmallorganization?Howwouldyoucommentonhisworkethic?Wouldyouhire/workfor/workwithhimagain?ShouldIspeakwithanyoneelseabouthim?

In addition to followingAmy’s suggestions about reference checking, youshouldgetunsolicitedreferencesfrompeoplethecandidatedidnotprovide,too.Findsomeonewhoknowssomeoneatthecompanyandcheckoutthecandidate.Youcanalsocoldcallintothecompanyandsimplyasktheoperatortoconnectyoutosomeonewhoworkedwiththecandidate.

FAQ

Q. When interviewing candidates, should I be honest about ourorganization’sweaknessesaswellasourstrengths?

A.Letmegetthisstraight:You’rewonderingifyoushouldlietocandidatesknowingthatif theytakethejob,they’lleventuallydiscoverthatyourorganizationsucks?Alwaystellitlikeitis.Lowertheirexpectations.You’llencounterthree

types of responses to your candor. Some candidates simply need anexplanation of the problems. Go down the list of problems and explainthem.Chances are, they justwant toknowwhat they’regetting into, andyouwon’tscarethemoff.

Other candidates want the challenge. For them, problems areopportunities. You should consider telling this type, “You’re the guy weneedtosaveus.Canyoustepupandbeahero?”

You will scare off the third kind of candidate. This person probablywasn’twellsuitedtoastartupanyway.You’vedoneyourselfafavor.Q. Does it look bad to the outside world if we only have a few

employees?Isitbettertohavesixpart-timeemployeesratherthanthreefull-timeemployees,forthesakeofnumbers?

A.Havingsixpart-timeemployeesforthesakeoflookingbiggerisinsane.If you’re doing this for other reasons—offering flexible hours to getbetterpeople,forexample—it’sOK.Butnotforasillyreasonlikethis.

Q.WhenistherighttimetorecruitCXO-levelpeople:beforeorafterfundingtheorganization?

A.Manypeoplethinkthattheprocessofstartinganorganizationisserial:A followedbyB, followedbyC, etc. It’s not that simple.Starting anorganizationisaparallelprocess:YoudoA,B,andCatthesametime.Theanswertoyourquestionisthatyou’rerecruitingbefore,during,andafterthefundingprocess.Icautionyou,however,against falling into this trap:An investor tells

youthathewouldinvestifyouhada“world-class”CXO.Youtakethisasayes,recruittheperson,andgobacktotheinvestor.Thentheinvestorcomesup with a different reason: “Good job. Now show us some customersactuallypayingforyourproduct.”Thelessonisthis:Don’trecruittomakeaninvestorhappy.Recruittobuildagreatorganization.Q.ShouldIspendmoneyonretainer-basedsearchesorrelyonmyown

capabilitytoattractthebesttalent?A.Priortofunding,yourjobistouseyourpassiontotapyournetworkto

findtherightpersonwithoutpayingfees.Afterfunding,usewhateveryouhaveto—includingretainer-basedsearches.

Q.Ifasked,shouldIprovideasalaryrange?A.No.Ifyou’reaskeddirectly,respondbysayingsomethingsuchas,“We

willpaywhatittakestogetagreatcandidate.”Thenask,“Whatisyourcurrentsalarylevel?”Thiswillteachthemtoasktoughquestions.Thebeginningoftheinterviewprocessistooearlytostartmentioning

numbers.Candidateswillrememberwhatyousaid—especiallythetopendof the range. And whatever number you throw out could affect thecandidates’answersintheinterviews.Q.Ifmygoalistorecruit“peoplemoretalentedthanmyself,”howdoI

retaincontroloftheventureandavoidgettingoustedfrommyownbusiness?

A. This question saysmore about you than you probably intended.Yourgoal shouldn’tbe to“retaincontrol”and“avoidgettingousted.”Yourgoal should be to build a great organization. Theremay come a timewhen you should be ousted. Deal with it.Would you rather have aninferiororganizationthatfailed,butthatyouwereincontrolofuntilthebitterend?

Q. I’m working with my best friend. Do I really need a legal

agreement?A.Yes,absolutely.Timeschange,peoplechange,andorganizationschange.

Difficult and inappropriate as itmay seem, youmust do this. Such alegal agreementmay turn out to be the best thing for your friendshipandyourorganization.

Q.Whatisareasonableenticementandcompensationforamemberofmyboardofdirectors?

A.Therangeisusually.25to.5percent,butforanabsolutesuperstar,I’dgoashighas1to2percentofthecompany.Ifittakesmorethanthistoget the candidate,move on. The person ismore interested inmakingmoneythaninmakingmeaning.

Q.Whatdoyoudowhenyouhave to fire thepartnerwhoconceivedthebusiness,broughtyou in tohelprun it, trustsyou,and isnowclearlyinoverhishead?

A. You take him aside and have a private conversation explaining thesituation. You offer the person some choices about how to take asmallerrole,butyouareclearthatsuchamoveisnecessary.Asmallerrolecanmeantakingadifferentpositionorservingonlyontheboardofdirectorsorboardofadvisors.Try topreserve theperson’sdignity. Inmostcases, therewillbeablowup.Expect that.Itmighttakeyearstohealyourrelationship,butthat’showitgoes.

RECOMMENDEDREADINGLewis,Michael.Moneyball: The Art ofWinning anUnfairGame.Waterville,

ME:ThorndikePress,2003.Meyers, David G. Intuition: Its Powers and Perils. New Haven, CT: Yale

UniversityPress,2002.

CHAPTER7

TheArtofRaisingCapital

AtapresentationIgaverecently,theaudience’squestionswereallalongthesamelines:“HowdoIgetintouchwithventurecapitalists?”“What

percentageoftheequitydoIhavetogivethem?”Nooneaskedmehowtobuildabusiness!—ArthurRock

GIST

This chapter explains the process of raising capital from outside investors.These investors may be venture capitalists, management, foundations,governmententities,oranyofthethreeFs:friends,fools,andfamily.

Myexperience iswith theSiliconValley venture capital industry, a groupfromwhichyoumaynevertrytogetaninvestment.However, ifyoucanraisecapital from a Silicon Valley venture capitalist, you can raise capital fromanyone. As the Frank Sinatra song goes, “If I canmake it there, I’ll make itanywhere.”

Skillfulpitching,whichwecoveredearlier,isanecessary,butnotsufficient,partofraisingcapital.Moreimportantaretherealitiesofyourorganization:Areyoubuildingsomethingmeaningful,long-lasting,andvaluabletosociety?

BUILDABUSINESSIf there’s someone tobelieveabout raisingmoney, it’sArthurRock.Hewasafounder and chairman of Intel and backed companies such as FairchildSemiconductor,Teledyne,andApple.Many,manyventurecapitalistsaresimplylucky.TomisquoteEugeneKleiner,alegendaryventurecapitalistfromKleinerPerkinsCaufield&Byers,inatornadoevenadodo’sinvestmentscanfly.

ArthurRockismorethanlucky,andthemanistellingyouthis:Ifyouwanttogetaninvestment,showthatyouwillbuildabusiness.Makemeaning.Makea difference.Don’t do it for themoney.Do it because youwant tomake theworldabetterplace.Thisappliestothegeekiestoftechnologystartupsaswellastolow-tech,no-tech,andnot-for-profitorganizations.

Ifyoudosucceedinbuildingabusiness,eitherinvestorswillbefightingtogive you money or you won’t need their money. Both are good problems tohave. On the other hand, if you perform unnatural acts to raise money, youprobablywon’tbuildabusiness,andyouprobablywon’tgetthemoney,anyway.

A logical and fair question isHow do I build a businesswithout capital?This was covered earlier, in Chapter 5, “The Art of Bootstrapping,” but thebottom line is this: You find a way. As venture capitalist Hunt Green said,“Everythingisalwaysimpossiblebeforeitworks.Thatiswhatentrepreneursareallabout—doingwhatpeoplehavetoldthemisimpossible.”

GETANINTROThankyouforsendingmeacopyofyourbook.I’llwastenotimereadingit.

—MosesHadas

In publishing, movies, music, and venture capital there’s a fairy-tale scenariothat goes like this: You submit a draft, script, song, or business plan to anorganization.Despitethemoundsofothersubmissions,thequalityofyourpitchissostellarthatsomeonefranticallyasksyoutocomeinforameeting.Afterone

meeting,youcutadeal.Dreamon.Godasmywitness,thefollowingisatruestory.Astartuphadgivenupon

gettingmoney from a top-tier venture capital firm because the startup sensedtherewasnointerest.Iaskedapartneratthefirmwhyithadpassed,andhetoldmeitwasbecausehisassociateknewacompanyinEuropethatwasdoingthesame thing.Also, the company had supposedly achieved “100 percentmarketshareinEuropeandwascomingtotheU.S.”Therefore,itwasprobablyalreadytoolateforanotherentrant.

Iaskedtheassociatewhothecompanywas.Hedidn’tknow—afriendhadtold him about it. I contacted this friend, and he also didn’t know who thecompanywas.Apparentlyanother friendhad toldhimabout thecompany,andabout how it had 98 percentmarket share in a tiny verticalmarket inEasternEurope(asopposedtoallofEurope!).

Let’sreview:Afriendtoldafriendwhotoldanassociatewhotoldapartnernot to bother looking at the company. This tale illustrates why you need anintroductionbyacredible thirdparty togetadecisionmaker to takea seriouslookatyourorganization.

Thepointisnotthatthesubmissionprocessshouldbealevelplayingfield.Thepointistotilttheplayingfieldinyourdirectionbygettinganintroductionbysourcesthatinvestorsrespect:

CURRENT INVESTORS. One of the most valuable services acurrentinvestorcanprovideistohelpfindadditionalinvestors.Thisispartofthegame,sodon’thesitatetoaskforhelp.Mostinvestorswillatleastlistentotherecommendationsofother,currentinvestors.LAWYERSANDACCOUNTANTS. When you pick a lawyer, anaccountant, and a PR firm, look for connections as well ascompetence.Askthemiftheywillintroduceyoutosourcesofcapital.Lotsoffirmscandothework,sofindonethatcanbothdotheworkandmakeintroductions.OTHER ENTREPRENEURS. A call or an e-mail from anentrepreneur to his investors saying, “This is a hot company. Youshould talk to them,” is powerful. Go to the investor’sWeb site tofigure out which companies he’s invested in—you may well knowsomeoneatoneofthem.Ifnot,gettoknowsomeone—execsatthese

companiesareprobablyeasiertogettothantheinvestorhimself.Forthosewhoarestartingnot-for-profits,lookattheorganizationsthatthetargetfoundationshavefunded.PROFESSORS. Investors are impressed by the suggestions ofprofessors. InSiliconValley, forexample,acallorane-mail fromaStanfordengineeringprofessorwillget theattentionofeveryventurecapitalistaround.Ihopeyoudidwellinschool!

What if you don’t know these kinds of folks? It’s a cruel world. Raisingcapital isn’t an equal opportunity activity, so get out there and get connected.I’vetriedtohelpwithashortcourseaboutschmoozingattheendofthischapter.

SHOWTRACTIONGenerally, investors are looking for a proven team, proven technology, andproven sales. Investors rank these factors in different order, but theone factorthatcutsthroughallthehyperboleisrackingupsales.(InSiliconValleywecallthis “traction”—in the sense that a tire grips the road and moves a vehicleforward.)

Traction counts the most because you’ve demonstrated that people arewilling toopen theirwallets, takeoutmoney,andput it inyourpocket.That’sthebottomline.Ifyoucandothis,theprovennessofyourteamandtechnologyislessimportant.Idon’tknowofaninvestorwhowouldratherlosemoneyonprovennessthanmakemoneyonunprovenness.

Traction takes different forms in different industries. It’s a straightforwarddefinition for companies with products or services: revenues. In other cases,revenuemaynotbetheparameter:

Schools EnrollmentandstudenttestscoresChurches AttendanceatservicesMuseums NumbersofvisitorsVolunteerorganizations Contributionsandnumberofvolunteerhours

Thisraisestwologicalquestions:

How can I show traction if I don’t have any money to start thecompany?Whatifmyproductorserviceisn’tfinishedyet?

The answer to the first question is a resounding “Who said it would beeasy?”SoreviewChapter5(“TheArtofBootstrapping”),cutaconsultingdealforapotentialclient,anddowhatyouhavetodo.

Theanswertothesecondquestionismorecomplex.ThereisaHierarchyofTraction—with all due respect to Maslow’s Hierarchy of Needs. This is thepeckingorder:

1. Sales (or the parameters discussed above for nonproduct or servicecompanies)2. Fieldtestingandpilotsites3. Agreementtofieldtest,pilot,orusepriortoshipment4. Establishingacontacttopursueafieldtest

Thehigheryouareinthishierarchy,thebetter.Butifyoudon’tatleasthaveacontactforafieldtest,youwillhaveahardtimeraisingmoney.

CLEANUPYOURACTOther than in times of irrational exuberance, most investors are looking forreasons not to do a deal. Statistically, theywould be right becausemost deals

don’t pan out. Think of an investor’s deal flow as a funnel. Two thousandbusiness plans enter at the top of the funnel. Two hundred are moderatelycredible. One hundred are interesting enough to read. Forty undergo duediligence.Tengetfunded.Onemakesabundleofmoney.

Investorswant toweedout the rejects asquicklyaspossiblebecause theydon’twanttowastetime,andobviousflawsmakeiteasytothrowoutaplan,soyoumustpresentacleanslate.Herearetheareasinwhichflawsabound:

INTELLECTUALPROPERTY:Lawsuits,ortheriskoflawsuits,byformeremployersclaimingthatyourtechnologybelongstothem;coretechnologybelongingtoafounder,notthecompany;infringementonsomeoneelse’spatents.CAPITAL STRUCTURE: Ownership of the vast majority of theorganizationby a few founderswho are notwilling to spread it out;dominant control by an inflexible investor who doesn’t want anydilution;substantiallyoverpricedorunderpricedpreviousrounds.MANAGEMENT TEAM: Married or related co-founders;unqualified friends or roommates in CXO-level positions; lack ofrelevantindustryexperience;criminalconvictions.STOCKOFFERINGS: Grants of stock (as opposed to options) toconsultants and vendors in lieu of payment; common stock sold tofriends and relatives at highvaluations; solicitationof investorswhoarenotqualifiedaccordingtosecuritieslaws.REGULATORY COMPLIANCE: Noncompliance with state orfederallawsandregulations;nonpaymentofpayrolltaxes.

DISCLOSEEVERYTHINGIf there’s crud that hasn’t been—or cannot be—cleaned up immediately, thendiscloseittoinvestors.Anddoitearlyintheprocess.Thelateryourevealit,theharderitwillgettodosoandthemoreitwillharmyourcredibility.

For example, Garage once invested in a company that disclosed that apotentialinvestorhadaconsultingagreementwiththecompany.Thisdealcametolightshortlybeforethefinancingwasclosing.Thisinvestorwasbuyingstock,aswellasreceivingstockandcashforconsultingservices.Nootherinvestorhadasimilardeal.

Whentheotherinvestorsfoundoutaboutthisarrangement,thedealalmostcollapsed.Hadthecompanymadeafulldisclosureearlierandexplainedwhyitmadesenseforeveryone(which,infact, itdid), thingswouldhavegonemuchmoresmoothly.Unfortunately,ahigh-value investorbailedoutbecauseof thislast-minuteissue.

What ifyoustarted,orworked for,anorganization that failed?There’snouse in trying tohide this fact, because investorswill uncover it. It’s alsopoorformtoblameanyoneoranythingelse:themarket,otheremployees,customers,or,inparticular,theinvestors(nomatterwhatthetruthis).

Myrecommendationisthatyoudoameaculpa.Thatis,youacceptasmuchblame for the failure as is justified and “confess” your sins. Sophisticatedinvestors find this admirable, and many an investor has made boatloads ofmoneybettingonentrepreneurswhofailedinearlierefforts.What’simportantisnotthatyoufailed—it’sthatyoulearnedfromyourfailuresandareeagertotryagain.

The lesson is this:Cleanupyourproblemsordiscloseyourproblems,butneverhideyourproblems.

ACKNOWLEDGE,ORCREATE,ANENEMYManyentrepreneursbelievethatinvestorswanttohearthattheorganizationhasnocompetition.Unfortunately, sophisticated investors reachoneorbothof thefollowingconclusionsifentrepreneursmakesuchclaims:

There’s no competition because there’s no market. If there were amarket,therewouldbeotherstryingtowinit.Thefoundersaresocluelessthattheycan’tevenuseGoogletofigureoutthattenothercompaniesaredoingthesamething.

Starting an organization to serve amarket that doesn’t exist or exhibitingcluelessnessisnotconducivetoraisingmoney.Amoderatelevelofcompetitionisagoodthingbecauseitvalidatesthemarket.Furthermore,thefactthatyouareawareofyourcompetitionshowsthatyou’vedoneyourhomework.

It’s your job to show how you are superior to the competition, not that itdoesn’t exist. A chart that explains what you and your competition can andcannotdoisusefultoaccomplishthis.

COMPANY WECANDO,THEYCAN’T

WECAN’TDO,THEYCAN

X Y Z

Youshouldlistthethingsthatyoucan’tdoandthecompetitioncanbecausethisbuildscredibility,showingthat

Youcanrealisticallyappraisecompetition.Youcancommunicateyourknowledgeclearlyandsuccinctly.Youarewillingtopresentfactsthatdon’talwaysmakeyoulookgood.

You can also use this chart to promote the relevance of your product orservice to themarketplace bymapping your capabilities to the needs of yourcustomers.Thatis,thelistof“whatwecando”capabilitiesshouldimmediatelyillustratethatthere’saneedforyourproductorservice.

So be bold.Openly discuss your strengths andweaknesses.Doing sowillmakeyourstrengthsmorebelievable.

Unfortunately,nooneeverdoesit thisway.Instead,theycontriveamatrixthatmakes them lookgood—frequentlywith irrelevant, if not downright silly,parameters.Somethinglikethis:

US COMPANYX COMPANYYRight-handedCEO Drivehybridcars Veganemployees UseOpenSourcecode

If you truly don’t have competition, then zoom out until you can definesome.Competitioncanbeassimpleastherelianceonthestatusquo,Microsoft(sinceat somepointMicrosoftwill competewitheveryone foreverything),orresearchers in universities. Pick something, because saying you have nocompetitionatallisanonstarter.

TELLNEWLIESInatypicalday,aninvestormeetswithtwoorthreecompaniesandseesanotherfour or five executive summaries.Each company claims to represent a uniqueand earth-shattering opportunity with a proven team, proven technology, andprovenmarket. No company claims to be a bunch of losers who don’t knowwhatthey’redoing.

Also,whileyoumightthinkthatyouandyourmeetingarethecenteroftheuniverse,infactyou’rejustthe10:00A.M.meeting,whentherewasalreadyoneat9:00A.M.andtwomorefollowyouat1:00P.M.and3:00P.M.

Part of the center-of-the-universe delusion is that entrepreneurs invariablybelieve that they’re telling investors something new. For the sake of investorswhoaretiredofhearingthesameoldliesandforthesakeofentrepreneurswhohurt their caseby telling them,here are the top ten lies that entrepreneurs tellinvestors.Studythemcarefully,andattheveryleastbepreparedtotellnewlies.

Lie#1:“Ourprojectionisconservative.”Not only is your projection conservative, but you’ll be doing $100million byyear3.Infact, thecompanyisgoingtobethefastest-growingcompanyinthehistory of mankind. Your projection isn’t conservative. Frankly, you have nocluewhatyoursaleswillbe.

Ifantasizeaboutthedayanentrepreneurtellsme,“Frankly,ourprojectionisanumberwe’repickingoutoftheair.We’retryingtomakethemhighenoughtointerest you, but low enough so thatwe don’t look like idiots.We reallywillhavenoclueuntilweshiptheproductandseehowit’saccepted.”Atleastthatentrepreneurishonest.

Lie#2:“Gartner(Forrester,Jupiter,orYankeeGroup)saysourmarketwillbe$50billioninfiveyears.”

In Chapter 3 (“The Art of Pitching”), I discussed what listeners think whenentrepreneurs try to “prove” market size, and I advocated “peeling away theonion” or catalyzing fantasy instead. To repeat my advice: Don’t cite thesenumbersandexpecttoimpressinvestors.Noonecomesinandsays,“We’reinacrappylittlemarket.”Everyonedoeswhatyoudo.

Lie#3:“Boeingissigningourcontractnextweek.”AsIsaid,tractionisgood.Itreallymakesyoufundable.Butuntilacontractissigned,it’snotsigned.Whentheinvestorchecksinaweek,andthecontractisn’tsigned, you’ve got a real problem. In five years, I’ve never seen a contractsigned on time. Talk about Boeing and your big deals after they’re done. Ingeneral,makesurethatallsurprisestoinvestorsareupsidesurprises.

Lie#4:“Keyemployeeswilljoinusassoonaswegetfunded.”Letmegetthisstraight:You’retwoguysinagarage,you’retryingtoraiseafewhundredthousanddollars,yourproductistwelvemonthsfromcompletion,andyou’re telling me that these well-known people are going to resign their$250,000peryear,plusbonus,plusstockoptionjobstojoinyourcompany?

Whenwe’ve checkedwith these key employees about whether they’re infactallsettojointhecompany,theresponse,moreoftenthannot,is,“IvaguelyremembermeetingtheCEOatacocktailparty.”Ifyou’regoingtotell thislie,make sure that these potential employees are locked and loaded and ready toquit.

Lie#5:“Severalinvestorsarealreadyinduediligence.”Thatis,“Ifyoudon’thurry,someoneelsewillinvestinus,andyouwon’thavethechance.”Thisworkswellintimesofirrationalexuberance,butitisgenerallyalaughabletactic.Thereality,andwhatthelisteneristhinking,isYou’vepitched

afewotherinvestors,andtheyhaven’tgottenaroundtorejectingyouyet.Theoddsarethattheinvestorsknowoneanotherbetterthanyouknowthem.

Theycaneasilycalluptheirbuddiesandfindouthowinterestedanotherfirmisinyourdeal.Topullthislieoff,you’dbetterbeeitheragreatblufferorsmokin’hot,oryouwon’thaveachanceagainsttheinvestornetwork.

Lie #6: “Procter & Gamble is too old, big, dumb, and slow to be athreat.”

Procter&Gamble,Microsoft,Oracle,Ford…pickasuccessfulcompany.Manyentrepreneursthinkthatbymakingsuchastatement,theyare(a)convincingtheinvestor of their moxie, (b) proving that they can defeat an entrenchedcompetitor,and(c)establishingacompetitiveadvantage.

Inreality,theyareshowinghownaïvetheyareaboutwhatittakestobuildasuccessfulbusiness.There’sareasonwhypeoplesuchasLarryEllisoncankeeptheSanJoseairportopenlatefortheirprivatejetswhileyouandIaremunchingpeanutsonSouthwestAirlines.Andit’snotbecausetheyareold,big,dumb,andslow.

It’s scary enough to investors that you are competingwith an establishedcompany.Don’tsealyourcoffinbyshowinghowcluelessyouarebydenigratingsuchcompetition.Instead,buildthecaseforthesekindsofalternatives:

partneringwiththecompetitionflyingunderitsradaraddressinganichethatitcan’torwon’taddress

Lie#7:“Patentsmakeourbusinessdefensible.”Patents do not make a business defensible. They might provide a temporarycompetitive advantage—particularly in material science, medical devices, andbiotechcompanies—butthat’saboutit.

Garage, for example, has a patent on the process of investors andentrepreneurs using the Internet to catalyze investments. Do I sleep better atnight because of this? Has it prevented investment banks, laid-off investmentbankers,andconsultantsfromusingtheInternettoconnectbuyersandsellersof

private placements? Would we try to enforce the patent? The answers are,respectively,no,no,andno.

Byallmeans,fileforpatentsifyoucan,butdon’tdependonthemformuchmorethanimpressingyourparentsunlessyouhavethetime(years)andmoney(millions)togotocourt.IfAppleandtheU.S.DepartmentofJusticecan’tbeatMicrosoftincourt,youcan’t,either.

Whentalkingtoinvestors,theoptimalnumberoftimestomentionthatyourtechnology ispatentable isone.Zero isbadbecause it impliesyoudon’thaveanything proprietary.More than onementionmeans that you’re inexperiencedandthinkpatentsmakeyourbusinessdefensible.

Lie#8:“Allwehavetodoisget1percentofthemarket.”This is what venture capitalists call the Chinese Soda Lie. That is, “If just 1percentofthepeopleinChinadrinkoursoda,wewillbemoresuccessfulthananycompanyinthehistoryofmankind.”Therearefourproblemswiththislineofreasoning:

It’snotthateasytoget1percentofthepeopleinChinatodrinkyoursoda.VeryfewentrepreneursaretrulygoingafteramarketaslargeasallthepeopleinChina.The company that came in before you said something similar aboutanothermarket.Sowillthecompanyafteryou.A company that is shooting for only 1 percent market share isn’tinteresting.*

The right thing to do, as I discussed earlier, is to either come up with abelievabletotaladdressablemarketfigureorcatalyzefantasysotheinvestorcancome up with a number himself. But saying that all you have to do is get 1percentofabigmarketlabelsyouabozo.

Lie#9:“Wehavefirst-moveradvantage.”

Thereareat least twoproblemswith this lie.First, itmaynotactuallybe true.Howcanyoupossiblyknowthatnooneelseisdoingwhatyou’redoing?Asarule of thumb, if you’re doing something good, five other organizations aredoing the same thing. If you’re doing something great, ten are. Second, first-moveradvantageisn’tallthatit’scrackeduptobe.Beinga“fastsecond”mightbebetter—letsomeoneelsepioneertheconcept,learnfromtheirmistakes,andleapfrogthem.

Lie#10:“Wehaveaworld-class,proventeam.”The acceptable definitionofworld-class andproven in this context is that thefounderscreatedenormouswealthforinvestorsinapreviouscompany,ortheyheldpositionsinhighlyrespected,publiclytradedcompanies.Ridingthetornadoofasuccessfulcompanyinaminorrole,workingforMcKinseyasaconsultant,or putting in a couple of years atMorgan Stanley doesn’t count as a provenbackground.

EXERCISEGive the list of lies to a friend and ask him to listen to your pitch.Howmanyof these liesdoyoutell?Youfail theexercise ifyoutellmore thantwo.

DON’TFALLFORTHETRICKQUESTIONSInadditiontotellingnewlies,youalsoneedtocorrectlyanswertrickquestions.Investorsposethesequestionstoseeifyou’reinexperiencedordumbenoughtoutterthewronganswers.Usethefollowingtableasaguideline.

INVESTORTRICKQUESTION

WHATYOUWANTTOSAY

WHATYOUSHOULDSAY

“Whatmakes “Whatmakes “I’vedoneOKsofar,gettingustothis

youthinkyou’requalifiedtorunthisorganization?”

youthinkyou’requalifiedtorunthisventurecapitalfirm?”

point.Butifiteverbecomesnecessary,I’llstepaside.”

“Doyouseeyourselfasthelong-termCEOoftheorganization?”

“Whatdidyourlimitedpartnersseeinyou?”

“I’vebeenfocusedongettingourstufftomarket.Iwilldowhateverisnecessarytomakethissuccessful—includingsteppingasideifneeded.Herearethelogicalmilestonesatwhichwecanmakethistransition…”

“Isownershipcontroloftheorganizationabigissueforyou?”

“I’mgoingtobeputtingineightyhoursaweektomakethissuccessful,andyou’reaskingmeifIcarehowmuchofitIown?”

“No,it’snot.Irealizethattomakethissuccessful,weneedgreatemployeesandgreatinvestors.Theyallneedtohaveasignificantstake.Iwillfocusonmakingthepiebigger,notongettingorkeepingabigpartofthepie.”

“Whatdoyouseeastheliquiditypathfortheorganization?”

“AnIPOthatsetsanewrecordforvaluationforNASDAQ.”

“Weknowthatwehavealotofhardworktodobeforewecanevendreamofliquidity.We’redesigningthiscompanytobealarge,successful,andindependententity.Rightnow,ourheadsaredown,andwe’reworkingashardaswecantotodothis.AnIPOwouldbeadreamoutcome—plusthesefivecompaniesarepossibleacquirersinthefuture…”

Gotthisstraight?Tellnewliesandoldtruths—notviceversa!

HERDTHECATSTheremaybefiftywaystoleaveyourlover,butthereareevenmorewaysfor

investorstotellyouno.Unfortunately,entrepreneurscan’ttakenoforananswer(this is part of being an entrepreneur). Simultaneously, investors don’t like toprovide clear and unequivocal rejections; they prefer the SHITS technique:(Show High Interest, Then Stall). Here are the common responses (using thetermloosely)thatentrepreneursreceive:

“You’retooearlyforus.Showussometraction,andwe’llinvest.”“You’retoolateforus.Iwishyouhadcometousearlier.”“Ifyougetaleadinvestor,we’llbepartofthesyndicate.”“Wedon’thaveexpertiseinyoursector.”“Wehavea conflict of interestwithoneofour existingcompanies.”(Trustme,iftheythoughttheycouldmakemoneywithyourcompany,they’dresolvethisconflict.)“Ilikedyourdeal,butmypartnersdidn’t.”“Youneedtoprovethatyourtechnologycanscale.”

Mostofthetimewhattheinvestorisreallytellingyouis“Whenhellfreezesover.”Buttherearesomecasesinwhichinvestorsaregenuinelyinterestedbutnotyetcommitted.Youmaygetaninvestmentfromthem,butitwillbeashardasherdingcats.

Thekeytoherdingthecatssuccessfullyis(tomixmetaphors)togetoneinthebagratherthanseveralclosetothefinishline.It’shelpfulifthiscatisabig,beautiful, and well-known one, but any cat that isn’t your relative will do.Investors—likemisery—lovecompany.

Winningoveraninvestorisnotonlyaboutprovidingobjective,quantifiable,and compelling information through your pitch, business plan, and references.It’s as much a dating process as it is an analytic process. The investor who“might”havesaidnoisstillwatchingwhatyoudo:

Didyoutrytoestablishcontactafterthepitch?

Didyouanswerquestionsthatcameupinthepitch?Didyouprovidesupplementalinformationthatsupportsyourcase?Haveyousurprised the investorbyclosingbigcustomersormeetingmilestonesearly?Haveotherhigh-qualityinvestorswrittenyouacheck?

Persistence along these lines canpayoff, andyoucanprovide this sort ofupdate weeks and months after your initial pitch to herd the cats. However,continuing tomakecontactwithoutdemonstrable, significant improvements inyourstorywillchangeyourstatusfrom“persistent”to“pest.”Andnobodyfundsapest.

UNDERSTANDWHATYOU’REGETTINGINTORaising money, particularly from venture capitalists, is a difficult and longprocess—andthisisifitgoeswell.Maythego-godaysofthe1990sreturn,buttheymaynot,andonlyabozowoulddependontimingthemarket.

To illustrate what kind of people professional investors and venturecapitalistsare,letmetellyouastory.It’snotanurbanlegendlikethestoryabouttheguywhostrappeda rocketengineonhiscarandplowed into thesideofamountain.Iheardthisstorydirectlyfromtheventurecapitalistherself.

The woman in question took her father to dinner one night, to a swankyrestaurantwithvaletservice.Onthewaythere,herfatherchidedherforbuyinga snazzyBMW.She pulled up in front of the restaurant, and the twoof themwentin.

Severalhourslater,sheandherdademergedandsawthathercarwasstillwheresheparkedit.Seizingthemoment,shetoldherfather,“See?ThisiswhyIdriveaBMW.Restaurantskeep thenicecarsout front.Nowwedon’thave towaitforavalettogetit.”

Atthatmoment,anirritatedvaletapproachedherandsaid,“Lady,youtookyourkeyswithyou.Wecouldn’tmoveyourcar.”

Whatcanwelearnfromthisslice-o’-lifeventurecapitaliststory?

1. Venturecapitalistsbelievethattherulesaredifferentforthem.2. Theybelievetheyareentitledtospecialtreatment.3. Youshouldleaveyourcarrunningwhenyoupulluptoavaletservice.4. Venturecapitalistsaren’tnecessarilydifferentfromyouandme—theyjusthappentomanagehundredsofmillionsofdollars.

Thecorrectansweris“alloftheabove.”Allowmetodemythifytheauraofventurecapitalists:

Theydon’tknowanymorethanyoudoaboutyoursector.Still,howcouldyounotthinkthattheydowhentheyaremanaginghundredsofmillionsofdollars?Gettingatop-tierinvestordoesn’tguaranteethatyou’llsucceed.Thesefirmsmakemanybets,andtheyassumethatmostwon’tpanout.Themomentyou takeadollarofoutsidemoney,you lose“control.”Controlhasnothing todowith themathofvotingshares.Whenyoutakeoutsidemoney,you’reobligated toall shareholders even if theyownaminorityposition.Loweryourexpectationsofwhattheycandoforyou,andyouwon’tbeasdisappointed.Outsideinvestorscanopendoorsforyoutokick-start sales andpartnerships.Theycanhelpyou find future investors.They can prevent you from making mistakes if they’ve seen othercompaniesmakesimilarmistakes.Theycanmaketheworldtakeyouslightly more seriously because “they invested in you.” But this isaboutit.

FINDYOURTRAINTICKET

Icannotverifyifthisisatruestoryoranurbanlegend,butagoodentrepreneurorwriterneverletsthetruthgetinthewayofagoodlesson.

Albert Einsteinwas on a train.He couldn’t find his ticket after searchingthrough all his pockets and bags. The conductor approached him and saidsomethingtotheeffectof,“Dr.Einstein,everyoneknowswhoyouare.WeknowthatPrincetoncanaffordtobuyyouanothertrainticket.”

To which Einstein replied with something along the lines of, “I’m notworried about the money. I need to find the ticket to figure out where I’mgoing.”

LikeEinstein,youshouldworrynotaboutthemoney,butaboutwhereyouaregoing.Ifyoufigureoutwhereyou’regoing,themoneywillcome.

MINICHAPTER:THEARTOFRAISINGANGELCAPITALIshotanarrowintotheair,anditstuck.

—graffitoinLosAngeles

Professional investorsandventurecapitalistsarenot theonlysourceofmoneyfor startups.There are also thousands ofwealthy individualswho can providefunding.Raisingmoneyfromthesefolksrequiresadifferentapproachbecausetheirgoalsaredifferentfromthoseofprofessionalinvestors.Thisdoesn’tmeantheyareeasiertogetmoneyfrom—onlydifferent.Thisminichapterexplainstheprocess.

DON’T UNDERESTIMATE THEM. They may care less aboutfinancial returns than professional investors, but this doesn’t meanthey are suckers. Approach them with the same level ofprofessionalism as if you were pitching a top-tier venture capitalistsuchasKleinerPerkinsCaufield&ByersorSequoiaCapital.UNDERSTAND THEIR MOTIVATION. Where professionalinvestors want to make money and maybe pay back society, manyangelswant topaybacksocietyandmaybemakemoney.Angelsseetwoways topaybacksociety:helpyoung(er)peoplegeta start, andhelpaproductorservicethatmakesmeaninggettomarket.

ENABLE THEM TO LIVE VICARIOUSLY. A side benefit thatmanyangelsseekisachancetorelivetheiryouthoraromanticpast.Eventhoughtheycan’tordon’twanttostartanotherentity,theycanenjoywatchingyoudoit.MAKEYOURSTORYCOMPREHENSIBLETOASPOUSE.The“investment committee” of an angel is his or her spouse. It’s not abunchofgeeks,pundits,orformerentrepreneurs.Thisunderscorestheimportanceofmakingyourbusinessunderstandableinplainterms.BEANICEPERSON.Whereasaprofessionalmightinvestinajerkbecause“money ismoney,”anangelwon’t.Angels fall in lovewithentrepreneursinafatherlyormotherlyway:“She’sanicekid.Iwanttogiveherastart.”Sobenice,malleable,andapproachable.Cometothink of it, this attitude can’t hurt when dealing with professionalinvestors,too.SIGNUPPEOPLETHEYKNOWORHAVEHEARDOF.Angelinvestingisoftenaboutsocializingasmuchasprofiting.Thus,ifyoucan attract one member of the “club,” you can usually get more tofollow.

MINICHAPTER:THEARTOFMANAGINGABOARDBeing in the army is like being in theBoy Scouts, except that theBoy Scoutshaveadultsupervision.

—BlakeClark

Withmoney comes responsibility.One of the blessings and burdens of takingoutside investments is that you will have to create a board of directors. Thisminichapterexplainstheartofboardmanagement.

The first issue is the composition of the board.Yourmajor investorswillrequire a board seat, so some choices are alreadymade for you. In total, youneed people with two kinds of expertise: company-building and deep market

knowledge.Herearethetypicalrolesthatneedtobefilled:

“THE CUSTOMER.” This person understands the needs of yourcustomers.Hedoesn’thavetobeacustomer,butshouldbethoroughlyversedinwhatyourmarketwantstobuy.“THE GEEK.” This person provides a reality check on yourdevelopmentefforts.Forexample,isyourtechnologydefyingthelawsof physics? Even if you don’t have a tech company, the questionremainsthesame:Isyourtaskpossible?“DAD.” Dad (or Mom) is the calming influence on the board. Hebringsawealthofexperienceandmaturitytohelpmediateissuesandreachclosureonproblems.“THETIGHT-ASS.” This is the bad guywho tells you that you’refull of sushi when you’re lying. This person also pushes for totallylegalandethicalpractices.“JERRY MAGUIRE.” This is “Mr. Connections.” His mostimportantassetishisRolodexofindustrycontactsandhiswillingnesstoletyourorganizationuseit.

The second issue is creating a goodworking relationshipwith your boardmembers.Herearesometips:

SAVETREES.Lesspaperisbetterthanmorepaper.Itisamistaketoburyyourboardindocumentationbecausethesearebusyfolks.Makeyour accounting and financial reports about five pages long. Theyshouldincludeaprofit-and-lossstatement,cashflowprojections,yourbalancesheet,andalistofaccomplishmentsandproblems.PROVIDE USEFUL METRICS. On their own, accounting andfinancial reports aren’t sufficient. Nonfinancialmetrics—such as thenumberofcustomers,numberofinstallations,ornumberofvisitorstoyoursite—areequallyimportant.Thisinformationshouldaddnomore

thanthreetofourpagestoyourreports.SEND THESE REPORTS TWO DAYS BEFORE A BOARDMEETING. Board meetings are the time and place for discussingstrategic issues—not for conveying the factual informationcontainedin your reports. You should spend little time in the meetingcommunicating the facts—and a lot of time figuring out how toimprove them in the future.Thus, it’s useful to send your reports inadvance.However,don’tassumethatyourdirectorswillreadthem—youstillneedtoreviewtheminthemeeting.NEVERSURPRISEABOARD(EXCEPTWITHGOODNEWS).Theworsttimeandplacetoannouncebadnewsisataboardmeeting—unless you want a pack of hyenas tearing your flesh from yourbones.Whenyouhavebadnews,meetprivatelywitheachmemberinadvanceandexplainwhathappened.GETFEEDBACKINADVANCE.Thecorollaryofneversurprisingaboardistoprepareboardmemberswellinadvanceofkeydecisions.Ifyouknowthatyouaregoingtodiscussakeyissueatanupcomingmeeting, then talk to each member before the meeting. They mightprovidefeedbackthatwillchangeyourperspectiveaboutthedecision.

FAQThisFAQisthelongestinthisbook.Itslengthreflectshowdifficulttheprocessof raisingmoney is formost people. I answered themost common questionsaboutthistopicwithinthemainbodyofthechapter,andI’veincludedonlythemostspecializedoneshere.

Q. I’ve got a venture capitalistwhowants to invest $5million inmycompany!What should I expect in terms of how he will want tointeractwiththecompany?

A. As long as things are going well, a venture capitalist will leave youalone. Understand a venture capitalist’s life: He’s on as many as tenboards thatmeet at least quarterly and sometimesmonthly; he has to

raisemoney to invest and keep about twenty-five investors informedandhappy; he’s looking at several deals a day; andhe’s dealingwithfiveotherpartners.Hedoesn’thavethetimetomicromanageyou—andifhethoughthe’dhaveto,heprobablywouldn’thaveinvestedinyouinthefirstplace.Themoreimportantquestionis“WhatcanIexpectfromagoodventure

capitalist?”Here is the answer: five hours amonth ofmind-share duringwhichheopensdoorsforyouwithprospectivecustomersandpartnersandinterviewscandidatesforhigh-levelpositionsatyourcompany.Q.How can I identify the venture capital firms that have new funds

withamaturitysufficientlyfaroutsotheyalignwithmyliquiditytimeframe?

A.You’rethinkingtoomuch.Thetimingofafundishardlyeverafactor.Besides,thefirmisgoingtopickyouandnotviceversa,andthereisnowaytopredictaliquiditytimeframe.

Q.Whatistheorderofapproachingthetiersofventurecapitalists:tierone,thentwo,thenthree,ortheotherwayaround?

A.You’re thinkingwaytoomuch, too.Pitchalmostanyfirmyoucangetinto.Aftertryingtoraisemoneyforninemonths,you’llrealizethatallmoneyisgreen.Plus,it’snotatallobviouswhoisatier-one,-two,or-threefirm.

Q.Whatistheinternalrateofreturnexpectedfromtier-one,-two,or-three venture capitalists? How firm do they stand by thatprojection?

A.Firstofall,itisunlikelythataventureinvestorwilladmitthathisfirmisnot a tier-one firm.Even ifhedid,he isn’t saying tohispartnersandinvestors, “Since we’re not a tier-one firm, let’s just try to get 10percent.”All venture investors are looking for a high return on your specific

investment, not a return that matches their target average. (Remember:They know there is a high likelihood that your companywill flame out.)But your question misses on another point. Although venture firms arerankedagainstoneanotherbytheirIRRperformance,ventureinvestorsdonot evaluate individual deals by calculating prospective IRRs. Not evenVCsaresoarroganttobelievetheyarethatvisionary.

Practicallyspeaking,investorslookatcash-on-cashreturns—thatis,ifIputin$1milliontoday,whatcanIreasonablyexpecttogetbackinfourorfive years? ($5millionwould be a 5× return.) Expectations for cash-on-cashreturnsvarybythetypeofinvestorandthesectorofinvestment,not

by the prestige of the firm.For an early-stage, high-tech investment, youhadbetterbeabletoconvincetheinvestorthatthereisarealisticplanforreturning5×to10×hismoneyinthreetofiveyears.Q. Should I admit that our sales to date are lackluster (or even

nonexistent)?A. Yes, but I would spin it: Your sales aren’t lackluster—you’re simply

“early in the salescyclewithanextremely innovativeproduct.”Also,thisiswhythelongeryoucanbootstrapandgettorevenue,thebetter.

Q.ShouldIadmittotheventurecapitalistthatIamnewtoallofthis?A.Youwon’thavetobecauseitwillbeobvious.Thus,youmightaswell

tell the truth.However, to ameliorate this situation, surround yourselfwithdirectorsandadvisorswhoareexperienced.Also,expressclearlythatyou’ll“dowhat’srightfortheorganizationandstepasideifthisistherightthingtodo.”

Q.Howmuchdoventurecapitalists talkamong themselves?Willmyfauxpasinfrontofonebethetalkofthewateringholeandpoisonthewellformewiththeothers?

A. It’s unlikely that venture capitalists will talk about you because thereisn’t enough time in the day to discuss all the lousy meetings andcluelessentrepreneurs.You’dhavetodosomethingastoundinglystupidtobeatopicofconversation.

Q.Isitnecessarytohavehiredalawfirmandaccountingfirmpriortofundraising?

A.It’snotnecessary,butit’sbetterifyouhavealawfirmfortworeasons.First,assumingyoupicka lawfirmthat’srecognizedfor itscorporatefinance/venture capital work, it shows that you know what you’redoing. Second, you need an experienced corporate finance lawyer toworkthroughthepaperworkofafinancing.Anaccountingfirmislessimportantbecausethere’sprobablynotmuchtoaccountforyet.

Q.Isitbettertoaskforthecashtosupportthewholeprojectuptoaliquidityeventorjustwhatisneededforthefirstoneortwoyears?

A.Youcan’tpossiblyknowiftherewillbealiquidityevent,whenitwilloccur, andhowmuchmoneyyou’ll need toget there.However,whatyouwant toget,andwhat investorswant togive, isenoughcapital toget to the next big milestone, plus six months of cushion for whenyou’relate.

Q. Does my business need to be fully functioning and profitable inordertoattractinvestmentcapital?

A.Theventurecapitalbusinessiscyclic—somewouldsaybulimic.During

times of feast, venture capitalists will fund anyone who can bootPowerPoint. During times of purging, most venture capitalists turncautiousandwant“fullyfunctioningandprofitable”companies.Your job is to find venture capitalists who make early bets on

“unproven” companies. When venture capitalists tell you that they onlyinvestin“proven”companies,they’relying.Whattheyaresayingis,“Wedon’tgetit,sowe’reblowingyouoffbytellingyouthis.Ifwereallygotitandbelieved,we’dtakethechancewithyou.”Q.Doestheexistenceofaclearleaderinmytargetmarketprecludeme

fromgettingfunding?A.Icanunequivocallysay,“Itdepends.”Ifit’searlyinthelifecycleofthe

market, and it’s “clear” that the market will be huge, you can getfunding.Commodorewas the clear leader in personal computers, andplentyofcompaniesgotfundedafterit.Ontheotherhand,itwouldbedifficultinamature,capital-intensiveindustrysuchasautomobiles.It also depends on the investor. Somewill be scared off by amarket

leader.Otherswillseetheexistenceofamarketleaderasproofthatthereisamarketandbewillingtotaketheleaderon.

There’s one more thing to think about. Your question is specificallyabout funding.However, fundability and viability are not the same thing.Yourideatotakeonthemarketleadermaynotbefundable,butitcouldstillbeviable,sodon’tletnegativeresponsesfrominvestorsstopyou.Q. Is it better to have fewer, bigger investors or numerous, smaller

investments?A.Youshouldbesoluckytohavethechoice.Fewerinvestorsmeansthat

there are fewer relationships to manage. Also, if bringing in moreinvestorsmeansyou’realsogettinglesssophisticatedones,forgetit.However, there are several compelling reasons to get additional

investors:(1)Moreinvestorsmeansthattherearemorepeoplehelpingyouby opening doors, recruiting, and generating buzz. (2) When you needadditionalcapital, it’snice tohaveseveralsourcesalreadyin thedeal. (3)It’sdangeroustohaveonlyoneinvestorcallingtheshotsincaseyouhaveadisagreement.Q.Whenacceptingangelmoney,isitreasonableandcustomarytohave

abuy-outclause,toallowmetoretainmystockifIamabletopaybacktheangel’sloanwithinterest?

A. Absolutely not. Angels are putting money into your company at theriskiesttime,sotheyshouldbenefitasmuchasanyone.Ifyoudopulloff a buy-out clause, you’ll rack up bad karma points—and a startup

needsallthegoodkarmaitcanget.Q. Should current investors attend company pitches to prospective

investors?A.Ifit’sOKwiththeprospectiveinvestor,thisisusuallypositivelyviewed:

“The current investors care enough to comewith the company to ourmeeting.”Ifthecurrentinvestorisafamousperson,byallmeansbringhimorher.

Q.Whichwouldappealmoretoinvestors:aproductconceptthathasaproven billion-dollarmarket inwhich there are already some bigplayers,oraproductideathatwillcreateanew,potentiallybillion-dollarmarketthathasnocompetitorsintheshortrun?

A.Thisdependsontheinvestor.Thereareahandfulofinvestorswholike“brave new world” investment, but the vast majority are similar tobuffalo:runningwiththeirheadsdowntowardacliffbecausetherestofthe herd is, too. At some level, raising money is a numbers game:You’vegottomakealotofpitchestofindoneinvestortowriteacheck.

Q.Whichshouldwehavemorefocuson:pitchhowtheproductsolvespainandcompetitiveanalysis,orpitchhowtheinvestorscangetxpercentreturn?

A.Theformer,neverthelatter.Noonecanpredictwhenandhowliquiditywilloccur.Attemptingtodosowillmakeyoulooksilly.

Q.When should an entrepreneur give up on getting capital from aninvestor?

A.I’veneverseenanentrepreneurreverseanegativedecisionbyarguing.When an investor says no (in so many words, as discussed earlier),acceptthedecisiongracefully.Dogoback,however,whenyoucanproduce“proof.”Yougetproofby

finishing your product or service, opening prestigious accounts, raisingmoney from other sources, and building a great team. Persistence, withproof,works.Q.WhatisareasonablesalarythataCEOshouldsethimselfupwith

thatwillnotscareaninvestoraway?A.Thisishardtoanswerinabsolutenumbers.Circa2004,fortechnology

startups,theanswerisprobably$125,000peryear.Ananswerthatcanbetterstandthetestoftimeisthis:TheCEOshouldnotbepaidmorethanfourtimesthelowest-paidfull-timeemployee.

Q.Angelswantentrepreneurs tohavesomeskin in thegame.Idon’thaveanymoneytoinvestinthebusiness.HowdoIovercomethis?Whatdoventurecapitalistslookforthesedaysasfaras“skininthe

game”?A.Anentrepreneur’sskininthegame,foraventurecapitalistoranangel,

is nice to have—not a necessity. Certainly you shouldn’t believe thatbecauseyouwerestupidenoughtoputmoneyintoalousyidea,otherinvestorswillfollowsuit.If you think that the only reason a potential investor declined was

becauseyoudidn’thaveskininthegame,youweregoingtogetanegativeansweranyway.What’smoreimportant ishowlongyou’vebeenworkingon the product and bootstrapping the company andwhat progress you’vemade.

Conversely, if the investoragrees toprovidecapitalprimarilybecauseyou have skin in the game, then the investor is a fool, and youwouldn’twanthim.Also,inalmostallcases,youwillhavealotofskininthegameintheformofdaysofsweatequity.Q. If an angel investor askswhathis returnwill be,what is thebest

answer?A.Thebestansweristotellhimthathemustnotbeasophisticatedinvestor

becausesuchaninvestorwouldknowbetterthantoaskaquestionthathasnoanswer.I’llbet,however,thatyoudon’thavethegutstodothis.Instead,youcanaskhimtogooveryourfinancialprojectionwithyouandthenaskhim,“Whatdoyouthinkisrealistic?”

Q.WhatdoIweartomeetingswithventurecapitalists?A.Itdependsonwhatpartofthecountryyou’rein.OntheEastCoast,you

shouldwearajacketandtie.OntheWestCoast,youcanbemuchmorecasual—Dockersandapoloshirtwilldo.Nomatterwhereyouare, ifyou’rethegeekgenius,youcanprobablygetawaywithacleanT-shirtandjeans.

Q.IfIdonothaveanIPOoracquisitionasmyexitstrategy,willIeverbeable toattract investors?Would investorseverbe interested inmaking theirreturn throughprofit sharingorabuy-out fromthefoundersofthecompanyinfivetotenyears?

A. Only if the investor is your mother. If the investors are professionalinvestors,youcanforgetaboutraisingmoneywithoutashotatanIPOor acquisition. If they’re angels, investing in your organizationmightrepresentaflightoffancyorsympathy—thenliquiditydoesn’tmatterasmuch. But profit sharing or buying out investors is attractive to fewinvestors.

Q. Do entrepreneurs have to accept the valuation proposed by theventurecapitalistwhowantstoinvestintotheirbusiness?

A.Whatever the firstoffer, ask fora25percenthighervaluationbecauseyou’reexpectedtopushback—infact,ifyoudon’tpushback,youmayscaretheventurecapitalistifhethinksyou’renotagoodnegotiator.Itwouldbenicetohavesomeargumentstoshowwhyyoubelieveyourvaluationshouldbehigher—sayingthatthisbooktoldyoutopushbackisn’tsufficient.At the endof the day, though, if the valuation is reasonable, take the

moneyandgetgoing.You’llseethateitheryouwillmakemoremoneythanyou ever thought possible or your organization will die. In either case,valuation and owning a few more percentage points seldom make adifference.

Foraroughapproximationofyourvaluation,circa2004,youcanalsouseKawasaki’sLawofPremoneyValuation:Foreveryfull-timeengineer,add$500,000.Foreveryfull-timeMBA,subtract$250,000.

Ifthisistoounscientificforyou,thenuseservicessuchasVenture-One(www.ventureone.com) or VentureWire (www.venturewire.com) forinformationaboutcurrentfinancings.Q.Howcanoneprotectan idea,given that few investorswill signan

NDA(nondisclosureagreement)?A.You’reright.Fewinvestorswillsignone,andevenif theydid,simply

hearing your idea had better notmake it copyable. I’ve never seen acase where an entrepreneur told an investor about an idea, and theinvestorrippeditoff.Investorsare lookingforpeoplewhocan implement ideas,notsimply

comeupwiththem.Ideasareeasy.Implementationishard—andwherethemoneyis.Quitefrankly,fewinvestorsarecapableofimplementinganidea—that’swhythey’reinvestors…butIdigress.

HerearethefinepointsofusinganNDA:

Neveraskaninvestortosignonetohaveafirstmeetingorinthefirstmeeting.Noonewhowould signone this early is an investoryou’dwant.If you’re asking for anNDA tomerelydiscussyour idea, keepyourday job, because you’re clueless.To this day, I get asked to sign an

NDAtohearsuchideasassellingbooksonline!FreelycirculateyourexecutivesummaryandPowerPointpitch.Thesedocumentsshouldenticeinvestorstogotothenextstep.Theyshouldnotrevealyourmagicsauce.AskforanNDAifaninvestorisinterestedinyourdealandwantstolearnmoreatthebits-and-bytesormolecularlevel.Itisreasonableforan interested investor to ask this in the due diligence stage. This ismostrelevantforlifesciencesandmaterialsciencescompanies.Oncepatentsare filed,youshouldfeelprettysafe indiscussingyourmagicsauceunderanNDA—notthatyou’llhavethetimeorresourcestosueforpatentinfringement.

The bottom line is still that the best protection of an idea is greatimplementationoftheidea.

Q.WhendoIstoptryingtofind/negotiateabetterdealandtakewhat’soffered?

A.It’sagoodideatostoplookingandnegotiatingifyoucan’tmeetpayroll.Ifthedealthatyou’reofferediswithin20percentofwhatyouwanted,takeit.Focusonbuildingyourbusiness,notfindingthebestdeal.Inthelong run, the quality of your business determines how much moneyyou’llmake,notthedealyoucutyearsbeforewithaninvestor.

Q.ShouldIworrymoreaboutdilution,therealneedsofmybusiness,ortheamounttheinvestorwantstoputin?

A. Here’s the priority: the real needs of your business, the amount theinvestorwantstoputin,and,lastandleast,dilution.

Q.HowdoIgetmorevalueoutofmyboardofdirectors?A. The first and most important step is to take away their Blackberrys

during board meetings. Then, generally, you ask. Surprisingly, manyentrepreneurs are too intimidated by their board to actively managethem. Give them assignments and hold them accountable. They’reholdingyouaccountable,too.

RECOMMENDEDREADINGStross, Randall E. eBoys: The True Story of Six TallMenWho Backed eBay,

Webvan, and Other Billion-Dollar Startups. New York: Crown Business,2000.

Proliferation

CHAPTER8

TheArtofPartnering

Alliance,n.Ininternationalpolitics,theunionoftwothieveswhohavetheirhandssodeeplyineachother’spocketsthattheycannotseparately

plunderathird.—AmbroseBierce

GIST

Anyonewhotookpartinthedotcomphenomenonofthe1990sdevelopedalotof partnerships. There were research partnerships, marketing partnerships,distribution partnerships, and sales partnerships. Frankly, there were morepartnershipsthantherewererevenues.

Whatmostorganizationslearnedisthatpartnershipsarehardtomakework.Thoughbothpartieswanted2+2toequal5,theyendedupwith3instead.Theproblem is that glamour, flattery, and potential press coverage often seducedorganizationsintoenteringnonsensicalcollaborations.

Thegist of goodpartnering is that it should accelerate cash flow, increase

revenue, and reduce costs. Partnerships built on solid business principles likethesehaveamuchgreaterlikelihoodofsucceeding.

Once you understand this, a partnership is simply a matter ofimplementation: making sure the people who do the real work buy into it,finding internal champions, focusing on strengths, cutting win–win deals,waiting for the right moment to bring in lawyers and legal documents, andestablishingwaystoendtherelationship.

PARTNERFOR“SPREADSHEET”REASONSAneffectivepartnershipcanproduceattractiveresultsforastartup.Itcanspeedentryintoanewgeographicareaormarketsegment,openadditionalchannelsofdistribution,acceleratenewproductdevelopment,andreducecosts.

I call these “spreadsheet” reasons because they change your financialforecast. Unfortunately,many organizations form partnerships for reasons thatdon’t affect spreadsheets. Instead, they enter into them for a halo effect, tosilencecritics,becauseeveryoneelseisdoingthem,orforthethrillofthechase.

For example, Apple and Digital Equipment Corporation formed apartnershipinthelateeightiesinresponsetocriticismofbothorganizationsbythepress.Inshort,Appledidnothaveadatacommunicationsstory,andDigitaldidnothaveapersonalcomputerstory.

Little cameof this alliance—certainly no products that vaultedApple intobig-business legitimacy orDEC into personal computer coolness. I doubt thatspreadsheetsateithercompanywereaffected,unlessitwastoreflectincreasedcosts. It was, at best, a PR ploy to get the press off the backs of bothorganizations.

At least I learned a valuable lesson from that experience: Never form apartnershiptomakethepresshappy.

Apple created a much more successful partnership with a startup calledAldus Corporation, the publisher of PageMaker. At the time, Apple wasflounderingbecausebigbusinessesperceivedMacintoshasacutelittlegraphicstoy,nota“businesscomputer.”

Apple needed a “killer application” that would jumpstart the sale ofMacintoshes.Simultaneously,Aldusneededhelpsellingitssoftwarebygettinginventory into the distribution channel, educating retail salespeople, openingmajoraccounts,andtrainingendusers.

Thiswasperfectserendipity:Eachorganizationneededtheothertoincreaserevenue.Withitssalesforce,advertising,andmarketingclout,Applecouldhelp

Aldusachievecriticalmass.AldusdiditspartbyprovidingacompellingreasonforpeopletobuyMacintoshesinsteadofWindowscomputers.

The Apple–Aldus partnership created a new market called desktoppublishing, anddesktoppublishing“saved”Appleand“made”Aldus.As theysay,therestishistory.

EXERCISEGo back to the bottom-up revenue forecast that youmade in Chapter 5,“The Art of Bootstrapping.” Does the partnership you’re thinking aboutcauseyoutochangeanynumbers?

DEFINEDELIVERABLESANDOBJECTIVESIfyouacceptthetheorythatthefoundationofagoodpartnershipisspreadsheetreasons, you’ll understand why the next step is to define deliverables andobjectivessuchas

additionalrevenuesreducedcostsnewproductsandservicesnewcustomersnewgeographicmarketsnewsupportprogramstrainingandmarketingprograms

Therearetworeasonswhyveryfewcompanieseverdefinedeliverablesandobjectives.First,thepartnershipisbuiltonsand,soit’sdifficulteventocomeup

withdeliverablesandobjectives.Thisisabadomen.Second, and less depressing, is that people don’t have the discipline to

establish these deliverables and objectives because they are too busy,disorganized,orlazy—ortheyaresimplyafraidofmeasuringresults.

Hereisachecklistofareasthatshouldbecovered:

Whatwilleachorganizationdeliver?Whenwilltheydeliverit?Wherewilltheydeliverit?Whatinterimmilestonesmusteachorganizationmeet?

You’llfindthatbybasingapartnershiponspreadsheetnumbersanddefiningdeliverables and objectives, you’ve tripled the probability of the partnership’ssucceeding.

ENSURETHATTHEMIDDLESANDBOTTOMSLIKETHEDEALA second fundamental flaw of the Apple–Digital partnership was that themiddlesandbottoms(thatis,wheretherealworkisdone)ofbothorganizationsdidn’tbelieveinit.

As an Apple employee at the time, I remember thinking,What would abunch of East Coast, minicomputer people add to Apple’s story? It’s safe toassume that theDECemployeeswere thinking,WhyarewepartneringwithaflakyCaliforniacompanymadeupofhippieswearingBirkenstocksandGratefulDeadT-shirtswhositaroundinbeanbagchairsallday?

Ifyouwant tomakeapartnershipwork,don’t focusongettingCEOsandupper management to agree and show up at the press conference. Ensure,instead,thatthemiddlesandbottomsunderstandthepartnership,wanttomakeitwork,andvalueeachother’scontributions.

Thiscooperationstartswhenthereisatruewin–winsolution,andbothsidesneedeachother.Anannouncement,ifany,shouldcomeafterthepartnershipis

workingwell.Indeed,thebestpartnershipsformwhentheuppermanagementofeachcompanyisbarelyinvolved.

FINDINTERNALCHAMPIONSToformasuccessfulpartnership,bothorganizationsneedaninternalchampionto keep the partnership going.CEOs are seldom effective in this role becausemost CEOs have attention-deficit disorder. It’s got to be a person or a smallgroupwhotrulybelievesintherelationshipandwillliveordiebyit.

ManypeoplehaveheardofJohnSculley,theformerCEOofApple.Fewerpeople have heard of John Scull. John Scull was the desktop publishingchampioninsideApple.Theyearwas1985,andJohnwasthepointpersonforApple’seffortsinthisnascentmarket.

Atanygivenpoint,heworkedwithAppledepartmentssuchasengineering,sales, training, marketing, and PR to help Aldus. Simultaneously, he workedwithAldustofillApple’sneedsforproductinformation,copiesofthesoftware,andanalysisof theneedsofcorporatecustomers.Additionally,heproselytizeddesktop publishing to journalists and pundits. To both internal employees andexternalparties,JohnwasclearlyestablishedasMr.DesktopPublishing.

If desktop publishing had failed, itwould have been John’s fault. Since itsucceeded,itwasmanypeople’sidea.(Suchisthenatureofachampion’slife.)Andarguably,ifithadfailed,therewouldbenoAppletoday.HerearethekeytakeawaysfromJohn’ssuccesswithdesktoppublishing:

IDENTIFY A SINGLE POINT PERSON IN EACHORGANIZATION. The partnership’s success can’t be built on amatrix where multiple organizations each contribute a slice of theirtime.MAKESUCCESSOFTHEPARTNERSHIPTHESOLEGOALOF THE CHAMPION. For the point person, nothing but thepartnership counts. Thus, the champion can seldom be an executivebecauseexecutivesalwayshavesomethingelsetodo.EMPOWER THE CHAMPION. Making a partnership workinvolvescuttingacrossinternaldepartments,priorities,andturfs.Itcanrequire steppingonpeople’s toes andgetting them to do things they

don’t want to do. For all these reasons, the champion must beempowered, and people have to know he’s empowered. It’s alsohelpful,asinthecaseofJohnScull,tohaveanamethatsoundssimilartotheCEOofthecompany.

ACCENTUATESTRENGTHS,DON’TCOVERWEAKNESSESThethirdfundamentalflawintheApple–DECalliancewasthatitwasbuiltonweakness. Both organizations were trying to ameliorate fundamental gaps intheirproductofferings.Thephilosophywas“Youcoverupourweakness, andwe’llcoverupyours.Together,we’llfooleveryone.”

Afarbetterphilosophyistoaccentuatethestrengthsofbothpartners:“Youdothisreallywell;letushelpyoudoitevenbetter.Wedothisreallywell,pleasehelpusdoitevenbetter.”

IntheApple–DECexample,itwouldhavegonethisway:“Apple,youbuildagreatpersonalcomputer.Ifitcoulddodatacommunicationsbetter,itwouldbeeven better.” And, “DEC, you really understand data communications. If youcouldbringdatacommunicationstothemassesbecauseofeaseofuse,itwouldbeevenbetter.”

By contrast, the Apple–Aldus partnership did accentuate each party’sstrengths. Apple’s strengths were its marketing resources, field sales force,trainers, andnationalaccountconnections.Aldus’s strengthwas itsknowledgeofpagecompositionsoftwareandpublishing.

CUTWIN–WINDEALSTomaketheflowofproducts,services,customers,andmoneytrulywork,bothpartnershavetowin.Manypartnershipsareformedbetweentwoorganizationsofvastlydifferentsizes,sothereisoftenatemptationtocutwin–losedeals.

In 1990United Parcel Service (UPS) andMailBoxesEtc. cut awin–windeal.*MailBoxesEtc.providespacking,shipping,receiving,secretarial,faxing,and photocopying services via retail store-fronts. UPS invested about $11millioninthecompany;here’showbothsideswon:

UPS got an instant nationwide network of convenient sites forcustomerstodropoffandpickuppackages.Itdidn’thavetoinvestthetimeandmoneytobuilditsownoffices.MailBoxesEtc.lockedinUPS’sbusinessandavertedthecompetitionthatwouldhaveoccurredwithUPSifithaddecidedtobuilditsownoffices.

The lopsidedness ofmany partnerships is not born of necessity. It usuallyoccurs “just because” the larger entity canmuscle the smaller one into a poordeal.Thisisabadideaforbothpartners:

Win–lose deals won’t last. Oppression has seldom proven to be asustainablesystem.Ifyouwant themiddlesandbottomstosupport thepartnership,bothsideshavetoseetheunionasawin.It’sbadkarma,andkarmacountsforeverythinginapartnership.

If you’re in a startup, bewary of entering into awin–lose partnership nomatter how attractive the terms. They seldom work out. If you’re in a bigcompany, rein in your hormones and cut win–win partnerships. They are theonlysustainablekind.

FOLLOWWITHTHEFILEHere’sanontheoreticalquestion.Whichcomesfirst:aKumbayameetingofthemindsoradraftofalegaldocumentdetailingthepartnership?Youcanguessmybias.

Manyentrepreneurssendadraftofthedocumentasastrawmantogetthediscussionrolling.Thethinkingisthatyourorganizationismorenimblethanthebehemothyou’re trying topartnerwith.Youcanmove faster, soyou’lldo thedrafting. Also, if you draft the document, then the other party has to startnegotiatingfromyourstartingpoint,nottheirs.

Infact,thisisahigh-riskapproachbecauseadocumenttakesonalifeofitsown. Itmay, for example, be forwarded straight to an executive—orworse, alawyer(seenextsection)—whowasn’tinformedthatitwas“justastartingpointfor our thinking.” A document that’s floating around can raise premature redflagsthatcanderailtheprocess.

Here’sabetterapproach:

1. Gettogetherfacetoface.Discussthedealpoints.2. Whenyoustartagreeing,gotoawhiteboardandwritethemdown.3. Followupwithaone- to two-pagee-mailoutlining the“framework”forapartnership.4. Reach closure on all details via e-mails, phone calls, and follow-upmeetings.5. Draftalegaldocument.

Manypeople try togofromStep1directly toStep5—notagood idea.Adocumentshouldalwaysfollowadiscussion,neverleadit.

WAITTOLEGISLATEForcertainpeople,afterfifty,litigationtakestheplaceofsex.

—GoreVidal

Ifthere’sonewaytoensurethatapartnershipwon’tgothrough,it’saskingforlegaladvicetooearly.Ifyoudothis,you’lllearnthatthenumberofreasonsnot

todoadealalwaysexceedsthenumberofreasonstodoit.Thepointistoagreeon business terms before you bring in the lawyers. Then find a lawyer whogenuinelywantstododeals,notpreventthem,andsettherightlegalframework.

Many lawyers view their role as the “adult supervision” that will preventstupid deals from taking place.However, their bias is often that a deal is baduntil provengood.Avoid thiskindof lawyer. Instead, findonewhoviewshisroleasaproblemsolverandservicefunctionforyou,thecustomer.

Havingfoundtherightlawyer,youneedtoestablishthisperspective:“Hereiswhat Iwant todo.Nowkeepmeoutof jail.”This isdifferent fromasking,“CanIdothis?”

PUTAN“OUT”CLAUSEINTHEDEALAs the Japanese (sic) say, “Mazel tov”—you’ve got the deal nearly done.Becauseeverybodyshouldwin,thelastthingintheworldyouwantisforyourpartnertobeabletoendthearrangement,right?

Counterintuitiveasthismayseem,youshouldalwaysbesuretoincludeanout clause in thedeal, something along the lines of “Either party can end thisagreementuponthirtydays’notice.”Thereasonisthataneasy“out”promotesthelongevityofadealbecauseitassuresbothpartiesthattheywon’tbetrappedinanuntenablepredicament.

Asafetylikethisenableseveryonetochilloutandworkhardertomakethepartnershipfunction—knowingthat in theworstcase, it’seasytoendthedeal.Also, people are more likely to take chances and be innovative when thepartnershipisn’tsetinstone.

Don’tmisunderstandme:Iamnotadvocatingpartnerships thatareeasy toget out of. On the contrary, a good partnership involves the commitment ofseriousresourcesbybothsides.However,itshouldbehardtogetoutofbecauseof the importance of the partnership to both parties, not merely because of acontract.

GETOUTOFTHEBELLYInthewordsofHeidiMason,coauthorofTheVentureImperative,tryingtoformapartnershipwith a larger, establishedorganization is likebeing “stuck in thebellyofasnake.”Youmaygetitdone,butallyou’llhaveleftisapileofbones.Thus,it’sveryimportanttorecognizeandinterpretthetoptenliesofpartnering.

BIGORGANIZATIONSAYS… YOUHEAR…1.“Wewanttodothisforstrategicreasons.”

Theycan’tfigureouthowwhythispartnershipisimportant.

2.“Ourmanagementreallywantstodothis.”

Avicepresidentheardabouttheproposalforthirtysecondsanddidn’thavetimetosaynoyet.

3.“Wecanmovefast.” Noonehastalkedtothelegaldepartmentyet.

4.“Ourlegaldepartmentwon’tbeaproblem.”

Thelegaldepartmentwillbeahugeproblem.

5.“Wewanttotimetheannouncementofourpartnershipwiththereleaseofanewversionofourproduct.”

Thereleasewillbelate,andthere’snotathingwecandoaboutitsdelayingourpartnership.

6.“Theengineeringteamreallylikesit.”

Themarketingteamisgoingtokillit.

7.“Themarketingteamreallylikesit.” Theengineeringteamisgoingtokillit.”

8.“Theengineeringandmarketingteamsreallylikeit.”

Thelawyersaregoingtokillit.

9.“Theengineering,marketing,andlegalteamsreallylikeit.”

Pinchyourself—you’reasleepanddreaming.

10.“We’reformingacross-functionalteamtoensurethesuccessofthisproject.”

Nooneisaccountableforthesuccessofthisproject.

MINICHAPTER:THEARTOFSCHMOOZINGIt’snotwhatyouknoworwhoyouknow,butwhoknowsyou.

—SusanRoAne

It’smucheasier tobuildpartnershipswithpeopleyoualreadyknow—or,moreaccurately,with peoplewho already know you. The process of building thesesocialconnectionsiscalledschmoozing.

Ifyou’rereticentaboutschmoozing—becauseyouareshyoryouconsideritoffensive or manipulative—you shouldn’t be. In his book The Frog and thePrince,DarcyRezacdefinesnetworking(whichis“schmoozing”forgoyim)as“discoveringwhatyoucandoforsomeoneelse.”*

World-class schmoozers adopt Rezac’s outward, what-can-I-do-for-youattitude.It is thekeytobuildingextensive, long-lastingconnections.Uponthisfoundation,here’showtogetmorepeopletoknowyou:

GETOUT.Schmoozingisacontactsport.Youcan’tdoitathomeorin the office alone, so force yourself to attend trade shows,conventions,seminars,conferences,andcocktailreceptions.ASK GOOD QUESTIONS, THEN SHUT UP. Good schmoozersdon’t dominate conversations. They start them off with interestingquestionsand then listen.Goodschmoozersaren’tgood talkers; theyaregoodlisteners.Nooneismorefascinatingthanagoodlistener.Thebestopeningquestionis“Whatdoyoudo?”FOLLOW UP. Follow up within twenty-four hours of meetingsomeone.Sendane-mail.Givehimacall.Sendhimacopyofyournewbook.Somepeopleareafraidtogiveouttheirphonenumberore-mailaddressbecausetheyfearthey’llbeinundated.That’sneverbeenmyexperience.Sofewpeopleeverfollowupthattheoneswhodoareclearlyspecialandworthknowing.MAKE IT EASY TOGET IN TOUCH. This is ironic, but manypeoplewhowanttobegreatschmoozersmakeithardtocontactthem.Forexample,theydon’tcarrybusinesscardsordon’tprinttheire-mailaddress and phone number on them. If they do provide contactinformation,theydon’trespondtoe-mailorvoicemail.UNVEIL YOUR PASSIONS. If you can talk only about yourbusiness, you’re a boring person. Good schmoozers are passionateaboutmultipleanddiverseinterests.Abenefitofthesepassionsisthattheyprovideadditionalwaystoconnecttopeople.I’mnotsayingyoushouldtakeupahobbybecauseitwillbegoodfor

business.Forexample,I’dratherbepoorthanplaygolf.However,I’vemade many business connections through hockey—and I’ve mademanyhockeyconnectionsthroughbusiness.Just in case you don’t like hockey, here are other points of passionthrough which we can connect: Audi cars, Breitling watches,tinnitus/Ménière’sdisease,boxers (thedogbreed),adoptingchildren,London, digital photography, and Macintosh. With these eightpassions,Icanconnecttoanyoneintheworld.READ VORACIOUSLY. If you’re a pathetic person with nopassions, then at least read voraciously so that you can talk a littleabout a lot of things. Set your home page to Google News(http://news.google.com/)tomakethiseasier.GIVEFAVORS.There’sakarmicscoreboardinthesky(moreaboutthis in Chapter 11, “The Art of Being aMensch”). This scoreboardtracks what you do for people. If you want to be a world-classschmoozer,ensurethatyou’rehugelypositiveonthescoreboard.You accomplish this by helping people—especially folks whoseeminglycan’tdoanythingforyou.Anddothiswithoutexpectationofreturn.Eventually,thescoreboardwilltakecareofyou.RETURNFAVORS.SinceIbelieveindoingfavors,Isurelyadvocatereturningfavors.Whensomethingisdoneforyou,youhaveacceptedamoralobligationtopayitback.Greatschmoozersreturnfavorsanddo so with joy. This not only moves the scoreboard a little in thepositivedirectionbutenablesyoutoaskformorefavors.ASKFORTHERETURNOF FAVORS.* Counterintuitive as thisseems, you should ask for the return of favors.Doing so reduces orremovesthepressurefromapersonwhofeelsheowesyousomething.Thus,itprovidesanopportunitytoclearthedeck.Thentheotherpartycanaskfornewfavors.

MINICHAPTER:THEARTOFUSINGE-MAILI have made this [letter] longer, because I have not had the time to make it

shorter.

—BlaisePascal

E-mailisakeytoolofagoodschmoozer.Itisfast,almostfree,andubiquitous.It’s also poorly used by most people. Here’s how to improve your e-maileffectivenesstomakeitapowerfulschmoozingweapon:

FIXYOURSUBJECTLINESANDNAME. If people think yourmessages are spam, they won’t read them. You may not be able topreventspamfiltersfromsortingoutyourmessages,sobesuretousegoodsubjectlinestomakeiteasytoseethattheyaren’tspam.Forexample,“Follow-uptoourmeeting,”“Enjoyedyourspeech,”and“Nice to meet you in Kona” sure beat “Save on Viagra now!”“Increase your sales,” or “Funds in Nigeria.” Also, send yourself amessagetoseehowthe“from”lineappears toarecipient. Ifyoure-mail client software isn’t sending out your properly capitalized firstnameandlastname,fixthis,too.ANSWERWITHIN TWENTY-FOURHOURS. As I said before,responsiveness is a big factor in cementing a contact. You need toanswerwhilethetopicofthee-mailisfresh.Messagesthatarebelowthefirstscreenofaperson’sinboxareoftenforgotten.DON’TUSEALLCAPS.All-capstextismoredifficulttoread,anditisconsidered“SHOUTING”atthereader.Ifnothingelse,it’sasuresign that you’re clueless about e-mail, and cluelessness is notconducivetosuccessfulschmoozing.QUOTE BACK. Select the question or section of the e-mail thatyou’re responding to and quote it back so the sender knows whatyou’rereferringto.Peoplegetdozensofmessagesperday,soasimple“Yes,Iagree,”isnotuseful.KEEP IT SHORTANDSIMPLE. Cut the crap and get to it. Theideallengthforane-mailisfewerthanfivesentences.Ifyoucan’tsaywhatyouhavetosayinfivesentences,youdon’thavemuchtosay.Useplaintext,notHTML.IassumethatallHTMLe-mailisspamandhave my e-mail client delete them automatically. If you have

somethingsignificanttosay,youdon’tneedbold,outline,shadow,redtext,andgraphicstosayit.Don’t attach files unless you have permission. Imagine that yourrecipient is sitting in ahotel roommakinga slowphoneconnection,andyou’vesentatwo-megabytePowerPointfile.Doyouthinkyou’llget a positive reaction? Also, many people think attachments fromstrangersareviruses.BLINDCARBONCOPY(BCC)E-MAILSTOLARGEGROUPS.Asaruleofthumb,themorepeopleyousendane-mailto,thefewerwill respond. Thus, you should either reconsider whether everyoneshould get the e-mail or if you should conceal the list of recipients.Whenyousendane-mailtoseveralpeople,itshouldalwaysbeaBCCtopreventinadvertentresponsestoeveryoneandtopreventrevealinge-mailaddressestotheotherrecipients.REDUCECARBONCOPIES (CCs). Either a person needs to getthee-mailornot.ACCisinthemeaninglessmiddleground—itmightbe nice if the person were informed. The other heinous (andineffective) uses of a CC are to cover one’s butt (“But you wereCCed!”)ortothreaten(“Lookhere!ICCedyourboss.”).WhenIgetaCC, I assume that other people are taking care of the issue, and Iignorethee-mail.INCLUDEAGOODSIGNATURE.A“signature”isseverallinesoftext that your e-mail software automatically includes at the end ofevery outgoing message. A good signature provides your name,organization,postal address, phoneand faxnumbers, e-mail address,andWebsiteinformation.Thisisusefulforcopyingandpastingintoacalendar or database. God forbid someone should actually want tomake more contact with you, and they have to hunt down theinformation.Here’swhatminelookslike:

GarageTechnologyVentures3300Hillview,Suite150PaloAlto,CA94304650-354-1854

650-354-1801(fax)[email protected]

DON’TFORWARDSOMETHINGYOUTHINKISFUNNY.Theodds are that your recipientshave alreadygotten it ten times. If yougenerate something funny, more power to you. But if you’re justforwardingaforward,spareyourrecipients.WAITWHENYOUHATE.Althoughyou shouldgenerally answere-mailinundertwenty-fourhours,thereisonecasewhereyoushouldwaitatleasttwenty-fourhoursbeforeresponding:whenyou’reangry,offended, or argumentative. E-mail written when you’re in thesemoodstendstoexacerbateproblems,sodelayyourresponse.It’sevenbetter to call when an issue is touchy because e-mail is a poorcommunicatorofemotionandtone.

FAQ

Q.Sincepartnershipsaresupposedtobefifty–fifty,win–winsituations,shouldn’t the other party meet halfway in setting up meetings,movingtheprocessalong,gettingitsemployeestocooperate,andsoon?

A.“Should”and“will”aretwodifferentthings.You’rerightthattheotherparty shouldmeet you halfway, but it probablywon’t. If youwant apartnership, sale, or almost any transaction to happen, you’ve got topushforit.Theotherpartymayoweyouaphonecallorresponse,butdon’t just wait for it. Call again. You’ll probably have to make 80percentoftheefforttobringsomethingabout,soswallowyourpride.

Q.I’venoticedthatexecutiveswhoarewellestablished intheir fieldstendtoresentanewcomer.There’sasensethatI“haven’tearned”the idea and that they should rightly have it because they were

therefirst.HowdoIworkwiththisattitudeinpotentialpartners?A.Findotherstopartnerwith.Q.HowdoIavoidbeingbulliedbymycontractualpartnersiftheyare

larger,moreestablished,andbetterfundedthanIam?A.Neverbelieve,orat leastneveract likeyoubelieve, thatmightmakes

right.Forallyouknow, theelephantneedsyourproductorserviceasmuchasyoudo.Gointherewithawin–winattitude.Ifyouencounterawin–loseattitude,andyoucan’tchangeit,thendon’tdothedeal.

Q.We’reinsomepartnershipsthataren’tgoinganywhere.Shouldweinvestthetimeandmoneytomakethemworkorsimplyabandonthem?

A. There’s an oldmedical proverb that goes like this: “Nothing requiresmoreheroiceffortsthantokeepacorpsefromstinking,andyetnothingisquitesofutile.”*Focusyourenergiesonpartnershipsthatareworkingandnewonesthathavegreaterpromise.Butbeforeyoucommittonewpartnerships,figureoutwhythepreviouspartnershipsdidn’tpanout.

RECOMMENDEDREADINGRezac, Darcy. The Frog and the Prince: Secrets of Positive Networking.

Vancouver:FrogandPrinceNetworkingCorporation,2003.RoAne, Susan. The Secrets of Savvy Networking. New York: Warner Books,

1993.

CHAPTER9

TheArtofBranding

Thebestbrandsneverstartoutwiththeintentofbuildingagreatbrand.Theyfocusonbuildingagreat—andprofitable—productorserviceandan

organizationthatcansustainit.—ScottBedbury

GIST

Therearetwomajorschoolsofthoughtregardingbranding:Thefirstholdsthatit’s incomprehensible voodoo that marketers practice. I belong to the second,whichcontendsthatit’sasimplematterofapplyingtheclassicPsofmarketing:product,place,price,andpromotion.

Tothislist,somepeoplehaveaddedanotherP:prayer.Theyarenotfaroff—but instead of prayer, I prefer proselytization, which is the process ofconvertingotherstoyourbelief,doctrine,orcause.

Proselytization,orevangelism,representsthecoreofbrandingforstartupsintoday’shighlycompetitiveworld, inwhichinformationisfree,ubiquitous,and

instantaneous.The art of branding requires creating something contagious thatinfectspeoplewithenthusiasm,makingiteasyforthemtotryit,askingthemforhelpinspreadingtheword,andbuildingacommunityaroundit.

ThoughIlovemarketing,greatbrandsstartwithagreatproductorservice,sothat’swherewe’llstart,too.

CREATEACONTAGIONIcallit“Guy’sGoldenTouch.”It’snotthevaingloriousconceptthatwhateverItouchturnstogold,butrather,simplyandmorehumbly,“Whateverisgold,Guytouches.”

Hereinliesthesecrettobranding:Alignwithaproductorservicethat’sgold—or enhance it until it is gold. Then successful branding is easy if notunavoidable.HowharddoyouthinkitwastobrandMacintoshin1984whenthecompetitionwasbutt-uglyandboring?

Ifyouhavesomethingthat’sgold,youcanmakealotofmistakeswithitandstill succeed. Ifyoudon’t,youhave todoalmosteverything right.Somake iteasy on yourself and create or find products and services that are inherentlycontagious.Thesearethekeyelementsofcontagiousness:

COOL.Coolisbeautiful.Cooliship.Coolisidiosyncratic.Andcooliscontagious.Fewcompaniespurposelydesignproductsandservicesthat aren’t cool, but we continue to see hundreds of eye-numbingefforts.Whydid it takeApple to ship anMP3player as cool as theiPod?EFFECTIVE.Youcan’tbrandcrap.Youcan’tbrandsomethingthatdoesn’t work. No one would have heard of TiVo if it didn’t almosteffortlesslyrecordthetelevisionshowsyouwanted.DISTINCTIVE.Acontagiousproductiseasytonoticeandadvertisesitself.Itleavesnodoubtthatitisdifferentfromthecompetition.DoesanyoneconfuseaHummerwithothervehicles?DISRUPTIVE.Contagiousproductsaredisruptive.Theyeitherupsetthe status quo (“Oh, hell, this is better.We’re in trouble.”) ormakethem go into denial (“Why would anyone want a graphical userinterface?”).Buttheydonotleavepeopleunaffected.

EMOTIVE. A contagious product or service exceeds expectations,andbyexceedingexpectations,itmakesyoujoyful.ThisishowIfeelaboutourMielevacuumcleaner—I’mamazedthatitcansucksohardyetmakesolittlenoise.*DEEP.Acontagiousproductorservice“haslegs.”Themoreyouuseit, themoreyoudiscoverit iscapableof.GoingbacktoTiVo,ifyouwanttoskipthroughadvertising,enterthiskeystrokesequence:Select,Play, Select, 30, Select.Then, pressing the key that takes you to theendofa recordedprogram(––>|)willnowmakeyou jumpahead inthirty-secondintervals.INDULGENT.Purchasingacontagiousproductorservicemakesyoufeelasifyou’veindulgedyourself.Thismaybebecauseitcostsmorethan the alternatives, it’s cooler, or it’s more than you really need.Thus,itenablesyoutoescapethemundane.ThetaglineforMiele,forexample,is“Anythingelseisacompromise.”SUPPORTED. Providing exemplary service makes a product orservice contagious. I once broke amedical device that treatsmy earproblems.Themanufacturer,MedtronicXomed,sentmealoanerviaovernight delivery at no charge. It also repaired and shippedoutmyunit on the same day that the unitwas received—also at no charge.And that day was a national holiday. Finally, in a bold stroke ofaccountabilityandpersonaltouches,Medtronicprovidedthename,e-mail address, anddigital photoof the technicianwho fixed it on thepacking slip.Do you think I recommend this product to otherswithsimilarearproblems?

EXERCISEThenexttimeyougettechnicalsupportfromacompany,askthepersonforhisname,e-mailaddress,andphoto.

LOWERTHEBARRIERSTOADOPTIONAninnovation,tobeeffective,hastobesimpleandithastobefocused.Itshoulddoonlyonething,otherwise,itconfuses.Ifitisnotsimple,itwon’twork.

—PeterDrucker

Loweringthebarrierstoadoptionisathemethathasbeenrepeatedofteninthisbook.Itappliestomakingitrainaswellastobranding.Themoreprevalentyourproductorservice,themorelikelyyou’llbuildabigbrand.

AChinesepharmaceuticalcompanynamedKunmingillustrateswhatnottodo. This company was determined to make a childproof aspirin bottle, so itcreatedonethathadthirteenmovingpartsandtookthirty-ninestepstoopen.Foradded safety, thecompanychanged thedesignevery sixmonths.Theproblemwasthatitsintendedcustomerscouldn’topenthebottle.Ironically,thecompanydiscovered that adults were buying the pills and giving the bottles to kids aspuzzles.*

The most common barrier that startups erect, however unintentionally, iscomplexity.Sure,if1percentofthepeopleinChinaboughtyouraspirinbecauseofthesafetyfeatureinthebottle,you’dachievealotofsales.Butifittakestoolong to learnhowtouseyourproduct (or toopen itsbottle)orservice,you’remakingithardertobuildabrand.

Fewcompanies set out to create a complex anddifficult-to-useproduct orservice, but you have to wonder why so many products have such anincomprehensible interface. Almost anything from Japanese consumerelectronics manufacturers, for example, illustrates this point. (They thencompound the problemwith an unreadable, broken-Englishmanual printed infour-pointgraytype.)Herearewaystoreducecomplexity:

FLATTENTHELEARNINGCURVE.Acustomer shouldbe abletogetbasicfunctionalityright“outofthebox”withouthavingtoturntoamanual.Imagineifyouboughtacarandhadtoreadthemanualtoturnonitsradio,changethestation,andincreasethevolume.Mandatethis to your designers: Customers must get immediate gratificationwithoutopeningamanual.WRITE AGOODMANUALAND INDEX IT THOROUGHLY.

Typically,anunderpaidpersondowninthebowelsofanorganizationwritesaproduct’sorservice’smanualatthelastpossiblemoment.Themanual isn’t tested, and it’s laid out in a tiny font with out-of-dateillustrations.Yourmanualisamarketingopportunity.Itisawindowontothesoulofyourproductorservice!Thebetterthemanual,themorepeoplewillenjoy using your product or service. This in turn fostersmore goodword-of-mouthbranding.Ifmanualwritingisatthebottomofthetotempole,manualindexingisundertheground.Haveyouevertriedtodeterminethecorrecttirepressureforyourcar,andbeenunabletofind“tirepressure”listedinthemanual’sindex?Think of every possible thing a customerwillwant to dowith yourproductandmakesurethere’sanentryforitintheindex.Ifyouwanttoseeanexampleofagreat index, lookat theindexinTheChicagoManualofStyle.Itcontainsapproximatelyfortypagereferencestothetopic of dashes! Hold your organization to this standard. (FYI: IindexedTheArtoftheStart.)INCLUDEPICTURES.Onemorethingaboutmanuals:Addpicturesanddiagrams.Thismight increase the cost of yourmanuals, but it’swellworth it.Not every user is text-centric. Pictures do count for athousandwords.

EXERCISERun a contest asking your customers to write the best manual for yourproduct or service. You’ll have a handful of good manuals, and you’lluncoversomeevangelists.

TESTITONYOURMOTHERORFATHER.Ageist as thismay

seem, the ultimate test of a newproduct or service is seeing if yourparentscanuseit.Ifyourmotherandfatherarenolongeralive,tryitonanyoneoverforty-fiveyearsold.Do not, however, attempt this with teenagers—they can figure outanything, so their feedback is irrelevant. If you want free, word-of-mouth brand building, spend the time and energy to create a userinterfacethatameremortalcancomprehend.

Inadditiontocomplexity,ahighpriceisalsoabarriertobuildingabrand.To avoid this,whenToyota introduced its Lexus line of luxury cars, it pricedthem far lower than the German competition. Because the cars were lessexpensive,thereweremoreownersoutthere.Sincethereweremoreowners,itwaseasytofindsomeonetotalktoaboutthemandlearnhowgreattheywere.

I hate competing on price and leaving money on the table. However,squeezingeverypennyoutofyourcustomerisusuallynottherightphilosophy,either.Areasonablepricethatfostersthecreationofabrandcanproducelargerreturnslater.

EXERCISEWhichcompanywouldyouratherown:ToyotaorRolls-Royce?

Thefinalcommonbarriertoadoptionisthecostofconverting(measuredinmoney,time,oreffort)fromanexistingproductorservicetoyournewone.Yourproductorservicecanbecheap,anditcanbeeasytouse,butifit’spainfultoswitchto,you’remakingbrandingmoredifficult.

Brandingaside,itmakesgoodsensetomakeconvertingaseasyaspossible.Fewcompanieswouldmake it difficult to convert fromanexistingproduct totheir product on purpose, but few companies seem to realize that a lowerconversioncostisgoodmarketing.

Finally,youmightthinkthatmakingithardtoswitchfromyourproductisagoodidea.Thisisawaytolockinyourcustomer,butexitbarriersarealsoentrybarriers. If you make it hard to switch from your product, you’ll also scarepeoplefromtryingyourproductinthefirstplace.

RECRUITEVANGELISTSEvangelistsbelieveinyourproductorserviceasmuchasyoudo,andtheywanttocarrythebattleforwardforyouandwithyou.Recruitingevangelistscanhelpyou achieve critical mass through sustained, continuous, and low-costproselytization and branding. If you are involved in politics, not-for-profits,schools, and churches, evangelism is an especially powerful tool to achievesuccess.

Whenitcomestoevangelism,it’snottruethat“ifyoudon’task,youdon’tget.”Whenyourproduct,service,orideaiscontagiousandtherearelowbarriersaroundit,youoften“get”withoutasking.Butifyoudoask,youcangetmuchmore, much faster. However, many companies hesitate to ask because ofthinkinglikethis:

“Ifweaskforhelp,peoplewillthinkwe’reweak.AstrongcompanylikeMicrosoftneverasksitscustomersforhelp.”“Thepeopleweaskwillexpectsomethinginreturn:discounts,specialtreatment,etc.Thenwhatwillwedo?”“Ourcustomers,muchaswelovethem,can’thelpus.Weknowwhattodo,andwecandoitourselves.”“Itwill cost toomuch tomaintain special support programs.They’lldefocusourefforts.”

These reasons are bogus. When customers want to help you, you shouldrejoice, not restrain them, so stifle your paranoia and accept the help. Thecustomerswillturnintoevangelistswhospreadyourgoodnews.

Following are the keys principles of recruiting evangelists. You’ll noticeseveralsimilaritiestoconceptsinChapter6(“TheArtofRecruiting”),whichisnoaccident.Inasense,youarerecruiting“employees”—youjustdon’tneedtopaythesefolks.

ASK!Gotoyourearlyandbestcustomersandaskforhelp.Tellthem

you want to achieve critical mass, and that you need to spread theword. This isn’t a sign of weakness—it is a sign of openness andaggressiveness. You’ll be amazed at the number of people who arewillingtohelp,andwhohavebeenwaitingtobeasked.IGNORE ACADEMIC BACKGROUND AND WORKEXPERIENCE.(Very)theoretically,thebestevangelistforasoftwareproduct might be someone with a Ph.D. in computer science fromMIT. Avoid this type of thinking. Track recordsmean little when itcomestoevangelism.ThegreatestMacintoshevangelistsneverusedacomputerbeforetheyboughtone.FOCUSONWHAT’SIMPORTANT:DOTHEYBELIEVE,ANDDOTHEYWANTTOHELP?Takesomeone(me,forexample)whotwentyyearsagohadneverhadacomputerclassinhislifeandwhosethen-current job was schlepping diamonds. Would he be the idealcandidatetoevangelizeanewoperatingsystem?Lookingback,whatmatteredmostwas that I lovedMacintoshandwanted to change theworldwithit.LET A HUNDRED EVANGELISTS BLOSSOM. This is anotherrecurring theme of this book:Don’t be picky about how evangelistshelpyou.Show themyour product or service and let themwork foryou in anyway they can. Theywill show youways tomarket yourproductandservicesthatyouneverwouldhavedevelopedyourself.ASSIGNTASKSANDEXPECTTHEMTOGETDONE.* Haveyou ever volunteered to help an organization and then never beencalled to action? If there’s anything worse than being asked to dosomethingyoudon’twantto,it’snotbeingaskedtodosomethingyoudo.Ifyou’vegottenthisfarwithevangelists,they’vesignedupforthecause.Nowit’syourobligationtomakegooduseofthem.CONTINUE“FELLOWSHIP.”†Themodelforeffectiveevangelismistherelationshipbetweenagoodparentandchild.Asanyparentwilltellyou,yourkidswillalwaysbeyourkids.Theynevertrulyleavethenest,andyoucertainlydon’tpush themoutof it.Evangelistsare thesame—theyneedfrequentandperpetuallovin’.GIVETHEMTHETOOLSTOEVANGELIZE.Make it easy forbelievers to help you by providing stacks of information andpromotionalmaterial.Forexample,Boseincludesten“courtesycards”

in theBoseQuietComfort 2AcousticNoiseCancellingHeadphonescaseforownerstopassouttopeoplewhoaskthemabouttheproduct.Thecardexplainshowtofindoutmoreabouttheproduct,purchaseit,andgetmorecardsbycallingatoll-freenumber!

RESPONDTOTHEIRDESIRES.You should reviseyourproductor service to reflect the wishes of your evangelists for two reasons.First,theywillbeamongthemostknowledgeableaboutwhatittakestomakeitbetter.Second,andasimportant,demonstratingthatyoudolisten to them will foster even greater loyalty and enthusiasm forhelpingyou.GIVETHEMSTUFF.YouwouldbeamazedatthepowerofafreeT-shirt, coffee mug, pen, or notepad. (At one point, Apple had a $2million per year T-shirt expense.) Evangelists love these goodies. It

makes them feel like they’re part of the team and special. This ismoneywellspent,butnevergiveawayanythingthatcostsmorethan$25.AMontblancpen,forexample,isoverthelineandwillmakeyoulooklikeyou’rewastingmoney.

Let’s assume that you are successful in recruiting customers to beevangelists. What should you ask them to do? That is the topic of the nextsection.

FOSTERACOMMUNITYInthelate1990s,agroupofbusinesspeopleandcommunityleadersstartedanorganization called the Calgary FlamesAmbassadors. Theywere Flames fanswho were alarmed by the prospect that their National Hockey League teammight move to another city. According to the chairman of the group, LyleEdwards,“TheAmbassadorsranaroundCalgaryandtwistedarmssothatpeopleboughtmoretickets.”

Circa2004, thegrouphad fiftymembers, and theydon’thave tohelp sellticketsanymore.TojointheAmbassadors,youhavetobuyaseasonticketandpay $100 Canadian to the Ambassadors organization. That’s right: theseevangelistspayfortheprivilegeofproselytizingtheFlames.Theygreetfansatgames,promotecommunityoutreach,andconductsocialevents.

The goal of recruiting evangelists is to build a community around yourproduct or service. Examples of companies that enjoy well-publicizedcommunities includeApple,Harley-Davidson,MotleyFool, andSaturn.Thesecommunities provide customer service, technical support, and socialrelationships that make owning a product or utilizing a service a betterexperience—theyalsotwistarmssothatpeoplebuymoreproducts,services,ortickets.

Surprisingly,most companies react to the formation of communities aftertheyappear,andtheirreactionis:“Neverheardofthem…Youmeantosaythattherearegroupsofcustomerswhogettogetherbecauseofourproduct?”

This is suboptimal, if not downright stupid. Having seen how somecompanieshavebenefitedfromthespontaneousgenerationofcommunities,youshouldproactivelybringoneintoexistence:

IDENTIFY AND RECRUIT THE “THUNDER LIZARDS” OFYOURPRODUCTORSERVICE.Thesearethecustomerswhoarethemostenthusiasticaboutwhatyoudoandwhoarewillingtoserveinleadershippositions.HIRESOMEONEWHOSESOLEPURPOSEISTOFOSTERACOMMUNITY.This is your internal champion for theneedsof thecommunity; he evangelizes evangelists and fights for internalresources. As you achieve success, build a department around thispersontoinstitutionalizecommunitysupport.CREATEABUDGETFORCOMMUNITYSUPPORT.Youwon’tneedmuch, and the intent isnot foryou to “buy”a community.Butyou’ll still need a budget for the community to holdmeetings, printandcirculatenewsletters,andmaintainanonlinepresence.INTEGRATE THE PRESENCEOF THECOMMUNITY INTOYOUR SALES AND MARKETING EFFORTS AND YOURONLINEPRESENCE. For example, yourWeb site should provideinformationaboutthecommunity,includinginstructionsforjoiningit.HOST THE COMMUNITY’S EFFORTS. This means lettingmembers use your building to hold meetings as well as providingdigital assistance, such as operating an e-mail listserver, online chat,andbulletinboardonyourWebsite.HOLDACONFERENCE.No one loves electronic communicationmore than I do, but face-to-face meetings are important forcommunities.Attheseconferences,communitymemberscanmeetoneanotheraswellasinteractwithyourownemployees.

Per dollar, building a community of customers and evangelists is thecheapest method for creating and maintaining a brand, so don’t screw up bywaitingforacommunitytoformonitsown.

EXERCISELook at the back of this book’s dust jacket. Can you figure outwhyweprintedsomanycoverdesignentries?

ACHIEVEHUMANNESSConsider several great brands: Apple, Coca-Cola, Levi Strauss, Nike, andSaturn. They’ve all achieved humanness: the funkiness of Apple, the joy ofCoca-Cola, the youthfulness ofLevi Strauss, the gutsy determination ofNike,andthebuddy-buddyfeelingofSaturn.

To be sure, there are great brands that don’t exhibit these qualities—Microsoft,Oracle,andIBM,tonameafew.Callmearomantic,butwouldn’titbe better and more fun to have a warm brand? If you agree, here’s how toachievethis:

TARGETTHEYOUNG.Nomatterwhoactuallybuysyourproductorservice,targetingyoungpeopleforcesyoutobuildawarmbrand.Ihavenodata toback thisup,but it seems that lotsofoldpeoplearebuying products that were initially targeted to young people. Forexample,checkouthowmanybaldheadsaredrivingToyotaScions,PTCruisers,andMiniCoopers.MAKE FUN OF YOURSELF. Most companies are incapable ofhaving a sense of humor about themselves, an attitude they view assuicidal: “People won’t take us seriously if we don’t take ourselvesseriously.”Or,theyaresocaughtupintheirself-imagethatappearingto lack total control scares them. As the saying goes, “To err ishuman,”sodon’tbeafraidtoerrandtomakefunofthaterror.FEATUREYOURCUSTOMERS. Organizations that feature theircustomers in marketing materials exude humanness. For example,Saturn features the owners of its cars in its marketing materials.Saturn’sWeb site even features an area called “MyStory,” inwhichcustomersdiscusstheirSaturnexperiences.

HELP THE UNDERSERVED AND UNDERPRIVILEGED. Anorganization that supports the underserved and underprivilegedcommunicates humanness. Hallmark Cards, for example, providesmoneyandvolunteerstomanycommunityprograms.There’saneasy-to-findsectionoftheirWebsiteabouthowtoapplyforsuchresources.Thisisadoublewin:Notonlyareyoufulfillingamoralobligationtothecommunity,youarealsofurtheringtheeffectivenessofyourbrand.

EXERCISEGototheWebsitesofyourfavoritecompaniesandtrytofindinformationabouthowtoapplyforgrantsandvolunteerforthecompany.

FOCUSONPUBLICITYFor weeks before the debut of the Ikea store in East Palo Alto, California,residentsoftheareareadstoryafterstoryaboutitsgrandopening.Forexample,astorybyThaaiWalkerintheAugust14,2003,editionoftheSanJoseMercuryNewsstartedthisway:

CAR-GOHELPFORIKEASHOPPERS

CITYBRACESFOROPENINGDAYTRAFFIC

Howdoyoumove16,000shopperspackedinto8,000cars througha2.5-square-milecityonadaywhenthebiggest,blueststoretograceEastPaloAlto’shorizonopenstothepublic?

Ifyoureadanylocalnewspaper,listenedtotheradio,orwatchedtelevision,itwasimpossiblenottolearnthatIkeawasopeninganewbranchinEastPalo

Alto,anditwasgoingtobeahugeevent.BrandssuchasIkeaarenotbuiltonadvertising.Advertisingmaymaintain

and expand brands, but it’s publicity that establishes them. Here are the keyconceptsofattractingpublicityandpresscoverage:

CREATE BUZZ, GET INK. Most organizations think that presscoveragegeneratesbuzzasreadersclamortobecomecustomers.Thisisbackwardthinking.Here’showitworks:First,youcreatesomethinggrand.Thenyoulowerthebarrierstoadoptionandgetitintothehandsofpeople.They,inturn,generatebuzz.Thenthepresswillwriteaboutit.MAKEFRIENDSBEFOREYOUNEEDTHEM.When Iworkedfor Apple, the press always wanted to interview “Apple execs”becauseitwasahotcompany.Duringsuchheadyandflatteringtimes,the temptation is always to focus on the important publications:TheNewYorkTimes,TheWallStreetJournal,Forbes,etc.I gravitated instead toward helping reporters from publications thatyouwouldneverhaveheardof.Yearslater,thesereportersarenowattheimportantpublications,andtheyrememberhowIhelpedthem.Thelessonis“Makefriendsbeforeyouneedthem—andevenbeforetheycanhelpyou.”USEARIFLE,NOTASHOTGUN.Myreporterfriendstellmethatorganizations often “shotgun” their newsrooms—meaning that everyreporterinthenewsdepartmentgetsapresskitore-mailaboutsomemiraculous new product or service. This approach rarely worksbecauseyourmaterialwillbeirrelevanttoalmostalltherecipients.Instead,firstdetermineifyourstoryisappropriateforthepublication.Fascinatingasyoumightfindit,itmightnotbe.MitchBetts,featureseditor of ComputerWorld, described whom he would recommendcontact his publication: “If CIOs of General Motors, Wal-Mart,Amazon would be interested, we’d be interested.” * That’s howrelevantyouneedtobe.Second, determine which reporter covers your specific area—forexample, pitching the arts reporter about a newenterprise’s softwarepackageisn’tgoingtobearanyfruit.Third, pitch that particular reporter only if your story can pass an

importanttest:“Isitgoodandusefulforthereaders?”Thetestisnot“Isitgoodforourorganization?”Believeitornot,publicationsexistfortheirreaders,notasvehiclesforyourmarketing.BEAFOUL-WEATHERFRIEND.Many organizations kiss up tojournalistswhen things are going great and theywant coverage.Butwhenthingsturnbadorbusy,theydisappearonthembynotreturningphone calls and e-mails. No matter what the weather, you mustmaintaingoodrelationswiththepress.TELLTHETRUTH.Whenthingsgobad,there’satemptationtolieto the press to get out of a jam. Don’t do it. You establish yourcredibilityduringbadtimes,notgood.Anyonecantellthetruthwhenthingsaregoingwell.Ifyou’veestablishedarecordforbeinghonestwhentimesarebad,thepresswillbelieveyouwhentimesaregood.BEASOURCE.Sometimesyourstoryisn’tworthcovering,orthereisnoplacetomentionyourorganizationinthereporter’sstory.That’sOK.Atthesetimes,simplybeasourceandhelpthejournalistwriteagoodstory.Yourturnwillcome.

TALKTHEWALKHidden Villa is a 1,600-acre farm and wilderness preserve in Los Altos,California.TheJosephineandFrankDuveneck familygave it to thepeopleofNorthern California to foster environmental and multi-cultural awareness. Itsprograms include summer camps, environmental education, communityoutreach,hostelaccommodations,andorganicfarming.

Inshort,HiddenVilla“walksthetalk”—thatis,itmakesenormousmeaningfor the community and delivers on its goals. (This contrasts sharply to thebehavior of many organizations, which talk a good game but do not deliverresults.) However, the organization noticed that its employees and directorsdidn’thavethetoolstopromoteitinaconciseandcompellingway.

To fix this problem, the organization created a program called “Talk theWalk,”whichinvolveddevelopingone-linersthatexplainHiddenVilla.Then,atan offsite, members of the Hidden Villa staff and directors role-played using

theseone-liners.Nowtheyareallableto“talkthewalk”whethertheyareataHiddenVillaeventorbumpingintoafriendinthesupermarket.

Thestartingpointforbrandingisinsideyourorganization,somakesurethatevery employee can “talk the walk” and enthusiastically proselytize theorganization.

MINICHAPTER:THEARTOFSPEAKINGWhyisitthatthosewhohavesomethingtosaycan’tsayit,whilethosewhohavenothingtosaykeepsayingit?

—anonymous

“Pitching” typically refers to making a presentation to potential investors,customers,andpartnersinasmall,informalmeetingattheprospect’soffice.Inaddition to pitching, there will be opportunities to give speeches and toparticipate on panels at conferences, seminars, and industry events. These areusefulvehiclestobuildawarenessforyourorganization.

The purpose of these appearances is not to raise money (though a goodspeech can generate interest in investing) but to increase awareness of theorganizationandbuildabrand.I’veseendozensofexecutivesgivespeechesandparticipateonpanels,and,withrareexceptions,theysuck.Thishappensforthefollowingreasons:

Executivesaresurroundedbyminionswhodon’thavetheknowledge,courage,orcompetencetotelltheemperorthathehasnoclothes.Executives are egomaniacs. They have lofty self-images, so theycannot believe that they are not dynamite speakers right out of thewomb.Executivesarebusypeoplewhohavelittletimetopractice—or,moreaccurately, who allocate little time to practice. The combination ofdenyingtheneedtopracticeandnothavingthetimetodoitisthekissofdeath.

First, let’s cover the principles of giving an effective speech. Thisopportunityisapowerfulweaponbecauseyouhavethepodiumalltoyourself.Youcan,forthemostpart,controltheentireblockoftime.

SAYSOMETHINGINTERESTING.Thisisanobviousbutwidelyignored point. If you don’t have something interesting to say, don’tspeak.Ifyoudon’tspeak,peoplewon’tknowyou’realoser.Ifyoudospeak,you’llleavenodoubt.Bettertheformerthanthelatter.OVERDRESS. Incontrast towhenmakingapitch, it isbetter tobeoverdressedthanunderdressed.Anaudienceinterpretscasualdressasyoursaying,“You’renotimportantenoughtomakeanyeffort.”Ifyouoverdress,theworst-casescenarioisthatyou’lllooktooprofessional.CUTTHESALESPROPAGANDA.Peopleattendaspeechbecausetheywantinformation,nottogetablatantsalespitch.Logicalornot,anaudiencetendstothinkthatgoodspeakershavegoodproductsandservices.Ifyouinformthemwithahigh-contentandrelevantspeech,theymightbuy.Ifyousales-pitchthem,theywon’t.TELLSTORIES. For somepeople,making an interesting speech isharder than upgrading Microsoft Windows. Great speakers don’tsimplymakeassertions,theytellstories.Makeapoint,tellastorytoillustrateit,makeanotherpoint,andtellastorytoillustrateit.CIRCULATE WITH THE CROWD BEFORE YOU SPEAK. Igive fiftykeynotesayear, and I find it tremendouslyencouraging tosee people in the audience whom I’ve already met. A few friendlyfacesgivemetheconfidencetomakeabolderspeech.Thegoalistorecruitsomefriendswhowillbethefirsttolaughatyourjokes,nodinagreementwithyourinsights,andapplaudyourperformance.TALKABOUTKIDS.Ifthere’sasurefirewaytoendearyourselftoanaudience, it’s to talkaboutyourkids. Ifyoudon’thavekids, talkaboutyourrelative’skids,yourfriend’skids,orwhenyouwereakid.I’veneverseenanaudiencethatdoesn’tappreciateagoodkidstory.SELF-DEPRECATE.Anothergoodway towinoveranaudience isto make fun of yourself. If you’re nervous, mention that you’re

nervous.Most people in the crowdwill empathize with you. If youcan’tfindonethingtomakefunofaboutyourself,you’reeitheratotalboreoratotalorifice.SPEAKATTHESTARTOFANEVENT.Ifyou’regivenachoice,speakon thefirstdayof theconference.That’swhenattendanceandenergyareattheirhighest,andthereforeit’stheeasiestatmosphereinwhichtogiveagoodspeech.Bythelastday,manypeoplewillhavedeparted,andthosewhoremainareprobablyoutofgas,whichmeansyou have to devote some of your time to lifting them out of theirlethargy. Giving a good speech is hard enough without this addedpressure.ASKFORASMALLROOM.Ifyoucan,speakinasmall,crowdedroom.Audienceenergyisafunctionofhowfull theroomis,not theabsolutenumberofpeopleintheaudience.Forexample,250peopleina 250-capacity room is much better than 500 people in a 1,000-capacity room. If you can’t get a small room, try asking for aclassroom-style layout (tables and chairs) rather than theater-stylelayout(chairsonly).FIND OUT WHAT HAPPENED EARLIER AT THE EVENT.Thisisanotherreasonwhyit’sgoodtogoonfirst:Youdon’thavetolearnwhathappenedbeforeyou. In fact,youcanbe the“event” thatotherspeakershavetocopewith.However,ifyou’renotthefirstspeaker,trytoattendthesessionsthatprecedeyou,oratleastaskyourhostsifanythingdramaticallygood,bad,orfunnyhasalreadyoccurred.Thenweavethisincidentintoyourspeech.Thisaccomplishestwothings:First,itincreasestheperceptionthatyoucustomizedyourtalk;second,itshowsthatyoucareenoughabouttheeventthatyou’vebeenthereforawhile.DON’TDENIGRATETHECOMPETITION. It is aprivilege andan honor to give a speech.Your duty is to inform and entertain theaudience. This is not an opportunity to slash and burn yourcompetition. Doing so will reflect poorly on you, not on yourcompetition,andwillcreatetheoppositeeffectofwhatyouintended.PRACTICE. As a rule of thumb, the twenty-fifth time you give aspeechiswhenitgetsgood.Fewpeoplewillpracticeorgivethesamespeechtwenty-fivetimes.That’swhytherearesofewgoodspeakers.Ironically,themoreyoupractice,themoreyou’llsoundspontaneous.

USEATOP-TENLISTFORMAT.Iuseatop-tenlistformatsothatan audience can track progress through my speeches. Few expertsagreewiththis,butIurgeyoutotryit.Ifyoucan’tcomeupwithteninterestingthingstosayaboutasubject,thendon’tspeak.

Next,let’sdiscussappearancesonpanels.Panelsareexcellentopportunitiestobuildabrandbecause theyallowyou topositionagainstothers—frequentlycompetitors—onthepanel.Here’showtobeagreatpanelist.

CONTROLYOURINTRODUCTION.Bringacopyofyourbioandhand it to the moderator who will introduce you. Don’t depend onwhatthemoderatorcomesupwith.And,asinspeeches,cutthesalespitchaboutyourorganization.Tomakeyourorganization lookgood,beaninformativepanelist,notaloudmouthbraggart.ENTERTAIN,DON’TJUSTINFORM.Answeringthemoderator’sor audience’s questions is only half the job of a panelist. Themoreimportant task is to entertain the audience. You can do this withpenetratingnew insight,humor,orcontroversy.Alwaysaskyourself,AmIbeingentertaining?TELL THE TRUTH—ESPECIALLY WHEN THE TRUTH ISOBVIOUS.Mostpeopleexpectpaneliststoliewhentheyencounteratoughquestion, so if youdon’t lie, you establish credibility for yourotheranswers.ERRONTHESIDEOFBEINGPLAINANDSIMPLE. Often amoderatorwillaskatechnicalquestion,sothetemptationistorespondwitha technical answer.This isusually amistake.Keep it plain andsimple:enoughtoshowthatyouknowwhatyou’retalkingaboutbutnotsomuchthat itmakesyouincomprehensible to80percentof theaudience.NEVERLOOKBORED.Youcanlookhappy,sad,angry(atwhat’sbeingsaid,not thatyouhave tobeon thepanel),or incredulous,butnever lookbored.Someone in theaudiencewillbe lookingatyou,aphotographerwillsnapapicture,oravideocameramanwill focuson

you. Unfortunately, you are most likely to be bored when otherpanelistsaretalking,solearnhowtofakeinterest.DON’TLOOKATTHEMODERATOR.Play to theaudience,notthemoderator;theaudiencewantstoseethefrontofyourface,notitsside.Agoodmoderatorwillpurposelynot lookatyouordrawyoureyecontact.MAKECASUALCONVERSATION.You’re onstage, but act as ifyou’re not. Simplymake conversationwith themoderator and otherpanelists.Don’tpontificate anddon’t “makea speech.” Interactwitheveryone(eventheaudience)inacasualway.ANSWER THE QUESTION POSED, BUT NEVER LIMITYOURSELFTOTHEQUESTIONPOSED.Forexample,ifyou’reasked,“Isfileintrusiondetectionanimportanttechnology?,”don’tjustsayno.Say,“No,butletmetellyouwhatisreallyhot.”Mostpanelistsgo tooneof twoextremes:answeringonly thequestionorprovidingananswerthathadnothingtodowiththequestion.NEVER SAY, “I AGREE WITH WHAT THE OTHERPANELISTSHAVESAID.” Just say somethingdifferentornew. Ifthe other panelists have said everything you want to say (which isunlikely),begracious:“Everythinghasbeensaid.Let’smoveonoutof respect for the audience.” It’s usually better to appear considerateratherthanstupid.

MINI-MINICHAPTER:THEARTOFDESIGNINGT-SHIRTSThepersonwhoiswaitingforsomethingtoturnupmightstartwiththeirshirtsleeves.

—GarthHenrichs

Making T-shirts to announce a product or company is a fine Silicon Valleytradition,perfectedbyApplebackinthemid-eighties.We’dprintanddistribute

theT-shirts,thenannouncetheproduct,andthenstartdevelopment.WhenwelaunchedGaragein1997,ourfirstproductwasaT-shirtforkids

thatsaid,“I’malittleentrepreneur.MyfavoritelettersareI,P,andO.”Wesoldhundredsofthem—beingthee-commercepioneersthatwewere.

In an attempt to build a brand and create a desirable tchotchke, manyorganizationsprintT-shirts.Unfortunately,manyaredownrightuglyandscream,“We’redweebswithnosenseofdesign!”Honestly,T-shirtsaren’tabigpartofbuildingabrand,butifyou’regoingtodoit,doitright.

DON’TUSEWHITESHIRTS.Whitequicklyturnstograybecausepeopledon’tsegregatetheirlaundryliketheyshould.Ifyouusewhite,you’ll significantly reduce the chest life of the T-shirt because fewpeopleliketoweardingyclothes.MINIMIZETEXT.ThinkofaT-shirtasamovingbillboard.Peopledon’tputparagraphsoftextonabillboard.FollowthesamerulesforT-shirts.Usenomorethansix to tenwords.AtGarage,weprintedashirtthatsaid,“Startup,kickbutt,cashout.”USEABIG(SIXTY-POINT)FONT.ThepurposeofacompanyT-shirtistopublicizesomething.Ifyouuseatwelve-pointfont,noonewill be able to read the text. If you can’t read aT-shirt from twentyfeet,thedesigniswrong.SPENDAFEWBUCKSONDESIGN.T-shirtsareanartform.Ifallyou’re going to do is slap on some text, don’t even bother. This isespecially true ifyouwantwomen towear them.MakeyourT-shirtsboldandbeautiful—goforit.It’sonlyashirt,afterall.MAKETHEMINKID’SSIZES.Someadultswon’twearT-shirts—it’s beneath their fashion standards (thoughyou sure couldn’t tell bylookingat them).However, theydon’tcarewhat theirkidswear,andkidspreferthem,anyway.

FAQ

Q.ShouldIadvertiseordependexclusivelyonevangelism,buzz,andword-of-mouth?

A. In his book The Anatomy of Buzz, Emanuel Rosen provides a fineexplanation of the relationship between advertising and guerillamarketingtechniques.Heunequivocallybelievesthatadvertisingisanimportant part of branding. His reasons include jump-starting theprocessofbuzz,reachinghubsofopinionleaders,reassuringcustomers,and providing the facts.* He goes on to discuss how advertising canbothstimulatebuzzandkillit.Hisbookiswellworthbuying.Ifyouhavetopickonlyonesetoftechniques,usetheguerillaones.But

ifyouhavetheresources,doboth.Q.DoIneedaPRfirm?OraPRdepartment?A.Theanswer is the same for aPR firmandan internalPRdepartment.

Here’swhattheycando:forceyoutocreateasolidbrandingmessage;open the door for you with members of the press via preexistingrelationships; schedule meetings and interviews and make sure thatyou’re presentable; provide postinterview feedback; and help youimproveyourmeetingandpresentationskills.Here’swhattheycannotdo: take second-rate products and services and generate countlessarticlesaboutthem;makethecompanyalwayslookgood;andpreventthecompanyfromeverlookingbad.Here’swhat theyshouldneverdo:become the thoughtpolice through

whichexternalcommunicationsandbrandingmustpassfor“approval.”Q.ShouldIpayevangelistsfortheirhelp?A. No. They’re not evangelizing your product or service for the money.

They’redoingitasawaytomaketheworldabetterplace.Youmight,in fact, insult them by trying to pay them. The three best forms ofcompensation you can provide are to make your product or servicebetter, tooffer stacksof informationanddocumentation,and tohonorthempublicly.

Q. Is it important to build a brand in our local area or startimmediatelywithinternationalexposure?

A.Generally,youshouldestablishyourproductandservice—andthereforeyour brand—locally before you venture forth. It’s much better toestablish your brand solidly in a small area than to have it almostestablishedinmanyareas.

However,youmayhavethetypeofproductorservicewherecustomersarespreadoutaroundtheworld,andtheircommonalityisn’tgeographicbutbasedonotherparameters.ThisisOK,too.Thepointistogodeepbeforeyougobroad—alongwhateverparameter“deep”appears.Q.Whatifwerealizethatwehaveastinkerofabrandingconcept,or

we want to change our direction in the middle of a brandingcampaign?

A. Here are several thoughts, perhaps conflicting, for you. First, I don’tbelievein“brandingcampaigns,”atermthatimpliesthatbrandingisashort-termproject.It’snot.Brandingiscontinuousandperpetual.Second, how did you decide it’s a stinker? Do you want to change

because you’re tired of your logo, look and feel, tag line, mantra…whatever?Becausetypicallyit’saboutthetimethatyouaregettingtiredofthesethingsthatthepublicisjustgettingthemintotheirskulls.

Third, if you’re not achieving revenues, the problem is probablysomethingmorefundamental,suchasaninferiorproductorservice.

Fourth,ifyourproductorserviceisfundamentallygood,andyoutrulyhave amispositioned brand, domake a change. Ask the people who arebuyingyour product or servicewhat it stands for—this is usually a greatstartforeffectivebranding.

RECOMMENDEDREADINGAaker,David.Managing Brand Equity: Capitalizing on the Value of a Brand

Name.NewYork:FreePress,1991.Bedbury, Scott. A New Brand World: 8 Principles for Achieving Brand

Leadershipinthe21stCentury.NewYork:Viking,2002.Borden,Richard.Public Speaking—asListenersLike It!NewYork:Harper&

Brothers, 1935. (Thisbook is seriouslyout ofprint, but I founda copy atAmazon.com.)

Gladwell, Malcolm. The Tipping Point: How Little Things Can Make a BigDifference.Boston:Little,Brown,2000.

Nielsen, Jacob, et al. E-Commerce User Experience. Fremont, CA: NielsenNormanGroup,2001.

Norman, Donald. The Design of Everyday Things. New York:Doubleday/Currency,1988.

Ries,Al,andLauraRies.The22ImmutableLawsofBranding:HowtoBuildaProductorService intoaWorld-ClassBrand.NewYork:HarperBusiness,2002.

Rosen, Emanuel. The Anatomy of Buzz: How to Create Word-of-MouthMarketing.NewYork:Doubleday/Currency,2000.

CHAPTER10

TheArtofRainmaking

Stopgoingfortheeasybuckandstartproducingsomethingwithyourlife.Create,insteadoflivingoffthebuyingandsellingofothers.

—CarlFox(inthemovieWallStreet)

GIST

A Native American rainmaker is a medicine man who uses rituals andincantationstomakeitrain.Forstartups,arainmakerisapersonwhogenerateslargequantitiesofbusiness.Likemedicinemen,entrepreneurshavecreatedtheirownritualsandincantationstomakeitrain.

Two factors make rainmaking difficult for startups. First, althoughentrepreneurs design a product or service for a specific purpose, theyhavenowayofknowingwhowillactuallybuyitandwhatitwillbeusedfor.Thus,thefirst stepof rainmaking is togetversion1.0of theproductor service into themarketplace to find outwhere it blossoms.Keep your eyes open because youmayfindyourselfinthemidstofagorillamarket.

Second,theproductsandservicesofstartupsarerarelyjustbought.Instead,they must be sold because few customers want to take a chance on a newproductorservicefromasmall,undercapitalizedorganization.Thus,thesecondstepofrainmakingistoovercomethisresistance.

Before we begin, here’s a story that illustrates how an entrepreneur bothfoundoutwhowouldbuyherproductandovercameresistancetostockingit.AParisian store once rejected the newest fragrance of Estée Lauder, the famedpurveyorofperfume. In anger,Lauderpoured the fragrance all over the floor,andsomanycustomersaskedaboutit thatthestorehadtocarryit.Sometimeswhenitpours,itrains.*

LETONEHUNDREDFLOWERSBLOSSOMIstolethisconceptfromMaoTse-tung,althoughhedidn’texactlyimplementitduringtheCulturalRevolution.Inthecontextofstartups,theconceptmeans

Sowmany seeds. See what takes root and then blossoms. Nurture thosemarkets.

Many companies freakoutwhen theynotice that unintended flowers havestartedblossoming.Theyreactbytryingtorepositiontheirproductorservicesothattheintendedcustomersuseitinintendedways.Thisisdownrightstupid—onatacticallevel,takethemoney!Whenflowersareblossoming,yourtaskistoseewhereandwhytheyareblossomingandthenadjustyourbusinesstoreflectthisinformation.

Here are three eye-opening examples of blossoming flowers cited by thedeanofentrepreneurialwriting,PeterF.Drucker:

The inventor of Novocain intended it as a replacement for generalanesthesia for doctors. Doctors, however, refused to use it andcontinued to rely upon traditional methods. Dentists, by contrast,quicklyadoptedit,sotheinventorfocusedonthisunforeseenmarket.Univac was the early leader in computers. However, it consideredcomputersthetoolofscientists,soithesitatedtosellitsproducttothe

business market. IBM, by contrast, wasn’t fixated on scientists andthusletitsproductsblossomasbusinesscomputers.ThisiswhyIBMisahouseholdname,andyoucanonly readaboutUnivac inhistorybooks.An Indian company bought the license to manufacture a Europeanbicycle with an auxiliary engine. The bicycle wasn’t successful, butthe company noticedmany orders for only the engine. Investigatingthisstrangedevelopment,thecompanyfoundoutthattheenginewasbeing used to replace hand-operated pumps to irrigate fields. Thecompanywentontosellmillionsofirrigationpumps.*

The followingmatrix shows a usefulway to think of blossoming flowers.Most companies want to occupy the top left corner. The real action is in thebottom right corner, so be flexible and be open to unforeseen customers anduses.

INTENDEDCUSTOMER

UNINTENDEDCUSTOMER

IntendedUse

Expected Delightful(Example:cardealers—notonlyprivateowners—sellingusedcarsoneBay)

UnintendedUse

Delightful(Example:womenusingAvon’sSkinSoSoftasaninsectrepellent)

Astounding(Example:computernovicescreatingnewsletters,magazines,andformswithMacintoshes)

SEETHEGORILLADaniel J. Simons of the University of Illinois and Christopher F. Chabris ofHarvard University ran an interesting experiment that has rainmaking

implications. They asked students to watch a video of two teams of playersthrowingbasketballstooneanother.Thestudents’taskwastocounthowmanypassesoneteammadetotheirteammates.

Photo credit: A single frame from a video by Daniel Simons andChristopher Chabris. The video is available as a part of the SurprisingStudies of Visual Awareness DVD from Viscog Productions, Inc.(www.viscog.com). Copyright 2003 by Daniel J. Simons. Used withpermission.

Thirty-fivesecondsintothevideo,anactordressedasagorillaenteredtheroom the players were in, thumped his chest, and remained in the video foranothernine seconds.Whenasked, fiftypercentof the studentsdidnotnoticethe gorilla!* Apparently, theywere attending to the assigned task of countingpassesandwereperceptuallyblindtoextraneousevents.

Thesamephenomenonoccursinorganizations:Everyoneisfocusedontheintendedcustomersandintendeduses,andtheyfailtoseeflowersblossominginunexpected ways. Univac, in the example cited previously, focused on thescientificmarketandfailedtoseethebusinessmarket—unlikeIBM.Youmustlet a hundred flowers blossom and pick the unexpected ones—the gorillamarketsinthemidst,sotospeak—tomakeitrain.

PICKTHERIGHTLEADGENERATIONMETHODMany entrepreneurs, particularly ones with technical backgrounds, rely ontraditional methods of generating sales leads, such as advertising andtelemarketing. This reliance tends to be reinforced if managers with “proven

backgrounds”fromlargecompaniesjointheteam.Thesemethodsmightwork if people bought the products and services of

startups.However,recallthattheproductsandservicesofstartupsaresold,notbought.Forsellingtowork,entrepreneursneedtoestablishtheircredibilityanddevelop face-to-face,personalizedcontact—aneffort thatbeginswitheffectiveleadgeneration.

HenryDeVriesoftheNewClientMarketingInstituteinvestigatedmethodsofgeneratingleads.Hefoundthatthemosteffectivetechniquewasconductingsmall-scale seminars to introduce the product—not advertising, telemarketing,making glossy brochures, or exhibiting at trade shows. These are his top fivemethods:

1. Conductingsmall-scaleseminars2. Givingspeeches3. Gettingpublished4. Networkinginaproactiveway5. Participatinginindustryorganizations

It’sriskytogeneralizehisfindingstoeverybusiness,buttheydocontradicttraditionalthinking,andyoushouldconsiderthemwhenyou’retryingtomakeitrain.

FINDTHEKEYINFLUENCER“Data base administrator III.”This sounds like an unlikely title for a decisionmaker.Itconjuresapictureofsomeonestuffedinamessycubiclejammedfulloftechnicalmanuals,eatingSubwaysandwichesforlunch.

Lisa Nirell was a rainmaker at BMC Software. One such data baseadministrator III (DBAIII)boughtmore than$400,000worthofsoftwarefromher company. Stuck in his cubicle, phone constantly ringing, this DBAIIIinfluenced the major purchases for his company. When the executive vicepresidenthadquestionsaboutprojectsorvendors,itwasMr.DBAIIIhevisited.

Thehigheryougoinbigcompanies,thethinnertheoxygen;andthethinnertheoxygen,themoredifficultitistosupportintelligentlife.Thus,intelligenceisconcentrated in the middles and bottoms of large companies. Here is a keyinsightforrainmakers:

Ignoretitlesandfindthetruekeyinfluencers.

Logically, thenextquestion is“HowdoI findoutwho thekeypeopleareandgettothem?”Theansweristhatyouhavetoasksecretaries,administrativeaides,andreceptionists—whichleadsustothenextpoint:Suckdown.

SUCKDOWNI’vemadedozensof decisions about companies andpeopleby consulting twoterrificassistantsatAppleandatGarage:CarolBallardandHollyLory.Iwouldaskthemsuchquestionsas“Whatdoyouthinkofthatguy?”or“Whatdoyouthinkof this idea?” If theiranswerswere“He’sa jerk,”“He’s rude,”“He’sanegomaniac,”or“It’sadumbidea,”heoritwasfinishedwithus.

Youmay think it astounding that assistants had such power and influencewith me—Surely Guy is the exception to the rule. In most cases, executivescarefully consider every phone call, meeting, and e-mail and then tell anassistantwhattodo.Dreamon.WhatI’vedescribedishowtheworldworks.

Rainmaking requires access to your key influencers and decisionmakers.This includes face-to-face access, telephone access, or even e-mail access.Unfortunately,thesekindsofpeoplearebombardedbysalespeople—everyoneofthemwitha“great”productorservice.(Nooneevercalls tosellapieceofcrap.)

Hence,manykeyinfluencersanddecisionmakersemploypeople toshieldthemfromrainmakers.Let’scallthem“umbrellas.”Tomakeitrain,youhavetolearnhowtosuckdowntoumbrellas.Theyarecalledsecretaries,administrativeaides, and sometimes even data base administrators III. Sucking up is vastlyoverrated—suckingupcannotworkunlessyoufirstget throughthephalanxofumbrellas,soreadontolearnhowtoeffectivelysuckdown.

UNDERSTANDTHEM.Youmay think that their job is to prevent

you from gaining access. Don’t flatter yourself. You’re not thatimportant.Theirjobistoenabletheexecutivetodohisjob—andoneaspectof this isguardinghis time(whichmanypeople,suchasyou,mightwaste).DON’TTRYTOBUYTHEM.Noonelikestobebought—or,moreaccurately, to be thought of as someone who could be bought—sodon’tsendgifts tobribeyourway in.Theway toget in is tohaveacredible introduction and a rock-solid proposition and then to treateverycontactintheorganizationwithrespectandcivility.Afteryou’vehadaccess (whether theaccessworkedoutornot),youcanfollowupwithane-mail,handwrittennote,orgift.Sometimesthemost effective follow-up is a photocopy of an article the umbrellawould find interesting. Whatever you do, gratitude is always betterthanbribery.EMPATHIZE WITH THEM. Odds are, this person isn’t makingmuchmoney—certainlyapittancecomparedtotheexecutive.Andtheumbrella could probably run the place better than the executive.Companiespayumbrellassmallsalaries,sodon’tthinkthey“should”takeyourabuse.NEVER COMPLAIN ABOUT THEM. Even if the umbrella isstone-coldwrong,nevergooverhisheadandcomplain.Thefirstthingthatwillhappenisthatthiscomplaintwillcirclebacktotheumbrella,andyoucankissyouraccessgoodbye.Forever.

GOAFTERAGNOSTICS,NOTATHEISTS[T]hedefendersoftraditionaltheoryandprocedurecanalmostalwayspointtoproblemsthatitsnewrivalhasnotsolvedbutthatfortheirviewarenoproblemsatall.*

—ThomasKuhn

Oneoftheholygrailsofrainmakingislanding“thereferenceaccount.”Thisis

the big, prestigious account that provides wheelbarrows of money, pluscredibility,too.

Back in the mid-eighties, the reference-account software companies for anew personal computer were Ashton-Tate (dBase) and Lotus Development(Lotus 123).Oh, to have their products run onMacintosh…itwould establishMacintoshasviable.Butitwasnottobe—anditdidn’tmatter.

By definition, reference accounts are already successful and established.Usually, they benefit from the perpetuation of the status quo. Herein lies theproblem: If you have an innovative product or service, these accounts are theleast likely to embrace it. They are atheists when it comes to a new religionbecausetheyarethehighpriestsofanoldorder.

Unfortunately, many startup organizations obsess about landing thesereference accounts—as Apple did with Ashton-Tate and Lotus. They will doalmost anything to have them as customers because their presence is theequivalentofbeingblessedbythePope.

Take it from someonewhodid itwrong: Ignore atheists.Look instead foragnostics—peoplewhodon’tdenyyourreligionandwhoareatleastwillingtoconsider the existence of your product or service. If your dream referenceaccountdoesn’t“getit,”cutyourlossesandmoveon.

Agnostics, or “nonconsumers,”† typically aren’t using anythingbecauseofthehighcostorskillrequirementsofthecurrentofferings.Forexample,duringthe introductory phase of personal computers in the eighties, people couldn’taffordpersonalmainframesorminicomputers.Eveniftheycould,theseproductsweresohardtousethatconsumerswouldn’thavehadthenecessaryskilllevel.

Thus, agnostics are easier to please than atheists because you’re enablingthemtodosomethingtheysimplycouldnotdobefore—asopposedtohavingtodisplace an entrenched product or service.Apple seldomgot people to switchfromWindows(despite itsadcampaign),butforpeoplewhohadneverusedapersonalcomputerbefore,Macintoshwaslife-changing.

Nothingshouldexciteanentrepreneurmorethanpenetratingamarketfullofagnostics.

MAKEPROSPECTSTALKNature,whichgaveustwoeyestoseeandtwoearstohear,hasgivenusbutonetonguetospeak.

—JonathanSwift

Ifasalesprospectiswillingtobuyyourproductorservice,hewilloftentellyouwhatitwilltaketoclosethedeal.Allyouhavetodoisshutupsoyourprospectscantalk.

The process is simple: (a) create a comfortable environment by askingpermissiontoaskquestions,(b)askquestions,(c)listentotheanswers,(d)takenotes,and(e)explainhowyourproductorservicefillstheirneeds—butonlyifitdoes.Andyetmanypeoplefailatthis:

Theyarenotpreparedtoaskgoodquestions.Ittakesresearchbeforeameeting to understand a prospect. Furthermore, they are afraid thatasking questions makes it look as if they don’t already know theanswer.They can’t shut up because they belong to the bludgeon school ofsales:I’llkeeptalkinguntiltheprospectsubmitsandagreestobuy.Or,they may be able to shut up, but then they don’t bother listening.(Hearingisinvoluntary;listeningisnot.)They don’t take notes because they are lazy or don’t consider theinformation important. Taking notes is a good idea, asmentioned inChapter 7, “The Art of Raising Capital.” First, it will help yourememberthings.Second,it’sboundtoimpresstheprospectthatyoucareenoughaboutwhatwassaidtowriteitdown.Theydon’tknowenoughabouttheirproductorservicetoeffectivelyapplyittotheneedsofprospects.Thisisinexcusable.

Let’s say that your product offers several different benefits (not features!)suchassavingmoney,providingpeaceofmind,andenlighteningpeople.Beginbymentioningallthreebenefitsandletprospectsreact.Theywilltypicallytellyouwhichofthebenefitsareappealing.

Ifnothingresonates,asktheprospectwhatwould.Fromthatpointon,focuson what you just heard because the prospect has just offered you a valuabletidbit:“Thisishowtoselltome.”Thepointistolettheprospecttalk,tolisten,

and then to be flexible. Remember: You’re selling, they aren’t necessarilybuying.Ifacustomertellsyouhowtoselltothem,youdamnwellbetterlisten.

ENABLETESTDRIVESThemostdifficultbarrierthatstartupsfaceisrelianceonthestatusquo.Usuallypeoplethinktheoldproductsandservicesaregoodenough:IcandoeverythingI want to withmy computer with a text-based interface.Whywould I want agraphicaluserinterface?

Thisdoesn’tmean thateveryproduct inwidespreaduse isgoodenough—onlythatcustomershaveacceptedthemassuch.Thus,anentrepreneur’sjobisoftentoshowpeoplewhytheyneedsomethingnew.Thetraditionalwaytodothisistobludgeonthemwithadvertisingandpromotion.

However, countless companies have already flooded themarketplacewiththesameclaim:better,faster,cheaper!Also,asaneworganization,youprobablydon’thaveenoughmoneytoreachcriticalmassinadvertisingandpromotion.

Thus,thebestwayforastartuptoattractcustomersistoenablethemtotestdriveitsproductorservice.Basically,youaresaying

“We think you’re smart.” (This already sets you apart from mostorganizations.)“Wewon’ttrytobludgeonyouintobecomingacustomer.”“Pleasetestdriveourproductorservice.”“Thenyoudecide.”

Test driving is different for every business. Here are some examples thatillustratewidespreadapplicability:

H.J.Heinz(2002revenuesof$9.4billion)gaveawaysamplesofhispickles at the 1893ChicagoWorld’s Fair. His boothwas stuck in alow-trafficlocation,sohehiredkidstopassoutticketsthatpromiseda

freesouvenirforvisitinghisboothtogetapickle.*GeneralMotorscreatedtheGM24-HourTestDriveprogramtoenablepeople to take cars home for the evening in order to truly test drivethem. This sure beats the usual car-dealership test drive of goingaroundtheblock.Salesforce.com enabled people to use its software for a thirty-dayperiodatnocharge.Thebeautyofthistestdriveisthatonceyouhavethiskindofinformationaboutacompany’sproduct,you’relesslikelytoswitchbecauseofthedataentryyou’vealreadydone.

Suspend your dependence on traditional and expensive methods ofmarketingyourproductorserviceandgivetestdrivingatestdrive.It’sthebestwaytoovercomethestatusquo.

PROVIDEASAFE,EASYFIRSTSTEPOne of themistakesApplemadewhenwe introducedMacintoshwas thatweasked information technology managers to throw out existing computers andreplace themwithMacintoshes.Wewere asking them to take a leap of faith.Withhindsight,itshouldnothavebeensurprisingthatfewcompaniestookusuponthisrequest.

Mixingmetaphors, ifyouwant tomakeit rain,don’t try toboil theocean.Instead, offer customers a smooth, gentle, and slippery adoption curve. Thismeans asking customers to use your product or service in small pieces of thebusiness,inalimitedandlow-riskmanner:

onegeographiclocation,suchasaregionalofficeonedepartmentorfunctiononeprojectabrieftrialperiodasimpleactofsupport

Assumingthatyoudohaveagreatproductorservice,simplygettinginthedooristhehardestpartofthebattle.Ifyou’relucky,yourproductorservicewillplease the customer, and satisfactionwill catalyze further adoption. It seldomgoesthissmoothly,however,becausewhilegettingitinishard,gettingitusedisjustashard,asisgettingitspread.Buttheprocessalwaysstartswithgettingitin.

Counterintuitiveas thismayseem,youshouldalso implementasafe,easylast step for customers—that is, to make it easy for customers to end theirrelationshipwithyou.Forexample,Netflix, theDVDsubscriptionservice,hasan easy and friendly five-minute process to end subscription to its service. Itenablespeopletohaveapositivelastexperiencewiththecompany.

It’sfarbetterforformercustomerstosay,“Netflixwasn’tformebecauseIdon’twatchthatmanyDVDs,”than“Ittookmeanhouronthephoneandthreemonthsof fightingwithmycredit cardcompanybefore I couldunsubscribe. IwillneveruseNetflixagain.”

Furthermore, because of the good feelings that Netflix’s exit proceduregenerates, former customers aremuchmorewilling to reinstate their accountswhentheyreceiveNetflix’sfriendlye-mailsafewweekslater.

LEARNFROMREJECTIONIfyou’renotpartofthesolution,you’repartoftheprecipitate.

—HenryJ.Tillman

Rainmakersgetrejected.Infact,thebestrainmakersprobablygetrejectedmoreoften because they are making more pitches than others. However, a goodrainmaker learns two lessons from rejection: first, how to improve hisrainmaking;second,whatkindofprospects toavoid.Hereisa listof themostcommonrejectionsandwhattolearnfromthem:

“YOUARENOTONEOFUS.STOPTRYINGTOBEONEOF

US.” You typically encounter this rejection when you are trying tochange fundamentally how something is done. For example, whenAppleintroducedtheMacintosh,Appleattempted(andfailed)togainacceptance by selling Macintoshes to information technologydepartments.Whenpeopletellyouthis,goaroundorunderthem.Forexample, sellingMacintoshes to the graphics departmentworked forApple.“YOU DON’T HAVE YOUR ACT TOGETHER.” One of twothingshappened:Eitheryoureallydidn’thaveyouracttogetheroryoustepped on someone’s toes. Force yourself to review your pitch andinterpersonal skills to determine if it’s the former. If you stepped onsomeone’stoes,figureouthowtomakeamends.“YOUAREINCOMPREHENSIBLE.”Youusuallyhear thiswhenyouare,infact,incomprehensible.Gobacktothebasics:Cutoutthejargon, redo your pitch from scratch, and practice your pitch. Theburden of proof is upon you—if you need to find a customerwho’s“smart enough to understand why they need our product,” you’regoingtostarvetodeath.“YOUAREASKINGUSTOCHANGE,ANDWEDON’TWANTTOHEARTHIS.”Thisisacommonresponsewhenpresentingtoasuccessful group that is living the high life and sees no reason tochange. What you’re hearing is that you’re in the right market buttalkingtothewrongcustomers,solookforcustomerswhoarefeelingpain.“YOUAREASOLUTIONLOOKINGFORAPROBLEM.”Thismeansthatyouarestillinsideyourvaluepropositionlookingout.Theappropriate response is to keep permutating your value propositionuntil you are outside the value proposition (like customers) andlooking in. If you can’t get on theoutside, let’s face it:Youmay, infact,beasolutionlookingforaproblem.“WE’VE DECIDED TO STANDARDIZE ON ANOTHERPRODUCT (ORSERVICE).”You’re probably trying to sell to thewrong person if you hear this and your product or service is truly,demonstrablybetter.Avoidthegatekeeperandfindtheuser.Dowhatyouhavetodotogetanentréetothefinalcustomer.Ifyourproductorserviceisn’ttruly,demonstrablybetter,maybethefinalcustomertoldthegatekeepertogetridofyou.

MANAGETHERAINMAKINGPROCESSRainmaking is a process, not a one-time event or an act of God. You can’tabdicateittosome“salestypes”ortosheerluck.Itisaprocess;youcanmanageit like other processes in your organization.Here are some tips for how to dothis:

ENCOURAGEEVERYONETOMAKE ITRAIN. Someday youmay reach the pointwhere your engineers and inventors can simplytoss a new product or service over the cubicle wall and have thesalespeoplepickitupandsellit.Butthatdayisn’thereyet.SETGOALSFORSPECIFICACCOUNTS:whenyouexpectthemtoclose,andhowmucheachsalewillyieldonaweekly,monthly,andquarterlybasis.TRACK LEADING INDICATORS. Everyone has trailingindicators, suchas thepreviousmonth’s andquarter’s sales.Leadingindicators, such as the number of new product ideas, cold calls, orsalesleads,areimportant,too.It’seasytoknowwhereyou’vebeen—it’sharderandmorevaluabletoknowwhereyou’regoing.RECOGNIZE AND REWARD TRUE ACHIEVEMENTS. Don’tallowrainmakerstosubmitintentionallylowforecastssothattheycaneasily beat them. Certainly don’t recognize and reward intentions—intentionsareeasy,rainmakingishard.

If you don’t manage the rainmaking process, you’ll start with “Ourprojectionsareconservative,”andsixmonthslater,you’llbesaying,“Oursalesarecominginslowerthanexpected.”Thereisnothingsadder.

FAQ

Q. Where would I find the early adopters and risk takers in largecompanies?

A. It’sdifficult toprovideageneral answer to thisquestion. It’seasier totell youwhere you probablywon’t find these types of people: at thehighestlevels.Soletahundredflowersblossominsidethesecompanies—don’tgoinwithpreconceivednotionsofwhotheearlyadoptersare.

Q. We have the opportunity to hire a rainmaker, but he wantssignificant stock options, plus $150,000 per year, plus another$75,000 inexpenseaccounts.That’s inaddition toour trade showandadvertisingbudget.He’sgotagoodreputationandaccountedfor$16millionperyearinsalesinhispreviousjobandsaysthiswillbe a big step down in terms of income.Why shouldwe hire himratherthangoingwithmanufacturers’representatives?

A.Rainmakersareexpensive,butiftheycandeliver,they’reworthit.Ifhewants theworld—and it sounds like that’s the case in this scenario—makehimearn itwith a compensationplandependent upon results. Iwouldn’tsimplygivehimeverythinghewantsatthestart.

RECOMMENDEDREADINGCialdini,Robert.Influence:ThePsychologyofPersuasion.NewYork:Morrow,

1993.Coleman,RobertE.TheMasterPlanofEvangelism.GrandRapids,MI:Spire

Books,1994.Moore, Geoffrey. Crossing the Chasm: Marketing and Selling High-Tech

ProductstoMainstreamCustomers.NewYork:HarperBusiness,1999.

Obligation

CHAPTER11

TheArtofBeingaMensch

Thetruemeasureofamanishowhetreatssomeonewhocandohimabsolutelynogood.—SamuelJohnson

GIST

Thischapterexplainshowtoachievemenschhood.MenschistheYiddishtermforapersonwhoisethical,decent,andadmirable.Itisthehighestformofpraiseonecanreceivefromthepeoplewhoseopinionsmatter.

Thistopicisincludedherefortworeasons:

Everypersonandorganizationexists in the largercontextof society.Doingthingsthatbenefityouandyourorganizationtothedetrimentoftherestofsocietydoesn’tscale.

Ifyouwanttobuildatrulygreat,lastingorganization,youneedtosetthehighestmoralandethicalstandardsforemployees.Amensch,bydefinition,providesagoodrolemodelforthis.

The three foundations of menschhood are helping lots of people, doingwhat’s right, and paying back society—simple concepts that are hard toimplement.

HELPMANYPEOPLEGettingintoHeavenmayrequirethesimpleactofacceptingGod,butaccordingto some theories, there are different “classes” in Heaven once you get there.Let’s call these tiers (for want of a better analogy) coach, business, and firstclass.(Heavenmaynotworkthisway,butwe’retalkingabouteternity,sowhytakeanychances?)

Asinairplanetravel,thesalientissueisHowdoIgetupgraded?Youhavetorackuppointsthroughyourconductduringthetimeyou’reonthisearth,andthebestwaytorackuppointsistohelppeople.

Theeasiestpeopletohelparethosewhomyouthinkyou’llneedsomeday.Unfortunately, these points are the least valuable because themotivation isn’tpure.Manypeopledon’tevenbotherdoingthis.

The big points, andwhat separates amensch from a good schemer, comefromhelpingpeoplewhocannothelpyou.Inascendingorderofkarmicpurity,therearethreereasonstohelpthesefolks:

Youneverknow—theymightbeabletohelpyousomeday.Youwanttobesuretorackupkarmicpointsjustincasemytheoriesareright.Youderiveintrinsicjoyfromhelpingyourfellowman.

Thefirstreasonwillgetyouintoanexitrowincoachclass.Thesecondwill

getyouintobusinessclass.ThethirdwillgetyouintofirstclassonSingaporeAirlines ina seat thatconverts toa fully recliningbedwithapoweroutlet foryour laptop and noise-canceling headphones on a planewith in-flight Internetaccess.

But let’snotgetcaughtup indetails.Amenschhelpspeople regardlessofwhether it’sgood for this lifeor thenextone.Thereare few joysgreater thanhelpingothers.

DOWHAT’SRIGHTDoingwhat’srightisthesecondcornerstoneofmenschhood.Thismeanstakingthehigh,andsometimesdifficult,road.Herearethreeexamples:

OBSERVETHESPIRITOFAGREEMENTS.Aninvestmentbankfinds a buyer for your company, helps you negotiate an acceptableprice,andfinalizesthedeal.However,thedealclosesamonthaftertheengagementagreementexpires,andthefeethatyouwouldreceiveis$500,000.Youpaythebankanyway.Gladly.PAYFORWHATYOUGET.You’rea jewelryretailer,andyou’vereceived a shipmentof rings fromamanufacturer.Themanufacturerbilled you for fourteen-carat gold, but they are eighteen-karat rings.Youcallthemanufacturerandreportthediscrepancy.FOCUSONWHAT’SIMPORTANT.You’reinabeginner’shockeyleague.Atmidseason,yourteamis8–0.Thenext-bestteamis4–4;theworstteamis0–8.Someofyourbestplayersoffertoswapplaceswithplayers on the last-place team.*What’s important is for everyone tohavefun,notwinningthechampionship.

Amenschdoestherightthing—nottheeasything,theexpedientthing,themoney-saving thing, or the I-can-get-away-with-it thing. Right is right, andwrongiswrong.Thereabsolutelyareabsolutesinlife,andmenschesheedandexemplifythistruth.

PAYBACKSOCIETYThethirdcornerstoneofmenschhoodispayingbacksociety.Youcoulddefineamenschasaninvestorwhodoesn’tcareaboutcapitalgains.Thekindofgainsamenschdoesseekispayingbacksociety,notreapingadditionalmoney.

Thisdoesn’tmeanthatamenschhastobewealthy.Infact,moneyusuallyrenders a person unmenschionable. (If you everwant to understandwhatGodthinksofmoney,lookatwhoHegivesitto.)

Amenschwantstopaybacksocietyforthefollowingkindsofgifts:

familyandfriendsspiritualfulfillmentgoodhealthbeautifulsurroundingseconomicsuccessahattrickeveryonceinawhile

There aremany “currencies” to use to pay back society.Givingmoney isonlyoneofthem—othersincludegivingtime,expertise,andemotionalsupport.Menschesjoyfullyprovidethesecurrenciestoothers.Thekeyconceptisthatamenschpaysback—thatis,forgoodnessalreadyreceived—asopposedtopaysforwardinexpectationofreturn.

EXERCISEIt is theendofyour life.Writedown the three thingsyouwantpeople torememberaboutyou:1.2.3.

FAQ

Q.HowcanIpreventsuccessfromgoingtomyhead?A. Death and illness have had a profound effect on me in this regard.

Neither cares whether you’re rich, famous, or powerful. And all theriches, fame, andpowerdon’tmatter if you’re sickordead.Sowhenyou’re feeling invincible, just remember that you could be gone in asplitsecond,and“richestpersoninthehospital”and“richestpersoninthecemetery”arelousypositioningstatements.

Q.HowcanImakesalescallsandclosebusinessdealswithoutalwaysfeelinglikeI“pulledoneoveron”thecustomer?

A. If you’re selling something that the customerneeds,you shouldneverfeelthisway.Ifyoudofeelthisway,stopsellingwhatyou’reselling—orsellittopeoplewhoneedit.

Q.Isn’tthinkingofothersandbeingcharitableantitheticaltothegoalofbusiness—thatis,tomakemoney?Won’tapotentialinvestorseethisasa signof someonewho is softorweakorotherwisenotaneffectivebusiness-person?

A.Ifapotentialinvestorfeelsthisway,itsaysmoreabouttheinvestorthanitsaysaboutyou.It’sentirelypossibletodogoodandmakegood.Thetwo are not mutually exclusive. However, don’t assume that yourcharitable causes are the same as your investors’.And you should becharitablewithyourownresources,notsomeoneelse’s.

Q.Whatifotherwisehelpfulandpositivemereallyneedstolashoutatsomeone?

A.Thisiswhatanicerinkisfor—althoughI’vebeenknowntolashoutoff(andon)theiceafewtimesmyself.(Itmadethesituationsworse.)AsI’vegottenolder, I’ve learned to shutup (ornot send thee-mail) andwalkaway.

Q. People are always asking me for my expert advice, but it’sinterferingwithmyabilitytogetmycurrentjobdone.WhatshouldIdo?

A.Writeabookandtelleveryonetobuyit.

RECOMMENDEDREADINGHalberstam,Joshua.EverydayEthics:InspiredSolutionstoReal-LifeDilemmas.

NewYork:Viking,1993.

Afterword

Booksaregoodenoughintheirownway,buttheyareamightybloodlesssubstituteforliving.

—RobertLouisStevenson

Thankyouforreadingmybook.Thistookaninvestmentofbothyourtimeandyourmoney. In return, I hope that you have gained insight into how tomakemeaningandchangetheworld.

Ialsohope tomeetyousomeday. Ifyouhave thebookwithyou,youcanshowmehowyoutooknotes,dog-earedpages,andunderlinedtext.Nothingismoreflatteringtoanauthorthantoseethathisbookisseverely“used.”

From time to time, please check www.artofthestart.com, because I willuploadexamples,templates,andotherresourcesforyouruse.

Now I’ve kept you too long. Cast away the microscopes, focus thetelescopes,andgetgoing.

GuyKawasakiPaloAlto,California

[email protected]

Index

Invariably,thebestscholarlyindexesaremadebyauthorswhohavetheabilitytobeobjectiveabouttheirwork,whounderstandwhatagoodindex

is,andwhohavemasteredthemechanicsoftheindexingcraft.—TheChicagoManualofStyle

A-10WarthogAbrams,JeffreyAccentureadvisors,boardof

movingpartnerorfoundertoinpitches

AeronchairagnosticsAldusCorporationalliance,definitionofAmazon.comAmericaOnline(AOL)AnatomyofBuzz,TheangelinvestorsanswerthelittlemanAplayersAppleComputer,Inc.

AppleIIascashcow

bigcorporations,sellingtobootstrapping,exampleofbrandwithhumannesscommunity,fosteringanddesktoppublishingandGuyhiringinfectedpeopleinternalchampions,exampleofinternalentrepreneurship,exampleofpositioningofpartnerships:AldusCorporation;DigitalEquipmentCorporationpressrelationsofreference-accountsellingexperienceT-shirtsof

AppleIIAshton-Tateaspirinbottles,unintendeduseofassumptionsAudiAutoCADAutomaticDataProcessing,Inc.(ADP)auto-persuasiveproductsandservicesAvisAvon

B-1BLancerBaldwin,JohnBallard,CarolBASICbeachheadmarketBezos,Jeffbigorganization,skillstoworkatBMCSoftwareBMWBootstrapper’sBible,Thebootstrapping

bigcompanyversusstartupbuildingaboard

cashflowversusprofitabilityexamplesofbottom-upforecastingexecutionversusMorpheusroleoutsourcing,roleofpickingtherightbattlespositioningagainstmarketleadersprovenpeople,nothiringservicebusiness,startingassellingdirecttopreservemarginsshippingbeforetestingsweatingthebigstuffunderstaffing,roleof

Boseheadphonesbottom-upforecastingbranding

barrierstoadoption,loweringbigcompanyversusstartupbuzz,roleofcontagiousness,roleofevangelism,roleoffosteringacommunityhumanness,achievingofMacintoshpublicity,roleoftalkingthewalktestingnewproductonparents

Branson,RichardBreitlingBrin,Sergeibullets,inPowerPointbusinessmodel

creationofdefinitionofinpitcheswomen’sopinionof

businessplansbigcompanyversusstartup

consultants,useoftowriteexecutivesummaryfinancialprojectionspitchingbeforewritingqualitiesofeffectivereasontowritereviewing,frequencyofwritingdeliberate,actingemergent

buzz

CalgaryFlamesAmbassadorsCalgaryInternationalAirportcars,designofCase,Stevecashflowaffectingshippingcash-on-cashreturncellularphonesChabris,Christopher,E.ChicagoManualofStyle,TheChicagoWorld’sFairChinesesodalieChristensen,ClaytonCoca-ColaCommodorecompetition:

pitches,discussioninpositioningagainst

contagiousnessconversioncostsCPM

DarwinAwards,ThedBaseDell,Inc.Dell,MichaeldesignphilosophiesdesktoppublishingDeVries,Henry

DigitalEquipmentCorporationDilbertmissionstatementgeneratordirectors,boardof

buildingwhilebootstrappingcompensationofmanagementofmovingpartnerorfoundertopitches,discussioninpositioning,understandingrecruiting,assistancetypesof

DisneyCompany,TheWaltDisneylandDoerr,JohnDraper,Fisher,JurvetsonDrucker,PeterF.Duveneck,FrankandJosephine

eBay

businessmodelseizinghighground

Edison,ThomasEdwards,LyleEinstein,AlbertEllison,Larrye-mailevangelismandevangelists

andadvertisingandbrandingCalgaryFlamesAmbassadorscommunity,fosteringofMacintoshpaying,necessityofrecruiting

executionexecutivesummaryexercises:

AeronchairsoneBay

backgroundoffamousentrepreneurscan’tlivewithoutsomethingcommunitybuilding,printingcoverdesignsandcustomerexperienceemployees,knowingwhatyoudoexecutivesummary,focusonexplaininginfirstminutefirstjob,qualificationsforfonts,smallsizesinpitchesliesofentrepreneurs,inyourpitchMacintosh,shortcomingsof1984modelmantra,what’syourmanualwritingmeaning,ifyouneverexistedmeaning,ifyourorganizationneverexistedmilestonesreplacingmissionstatementpartnership,changingfinancialprojectionspositioning,reviewofpositioningstatement,simplifyingreceptionist,knowingwhatyoudosocialeffortsofcompaniestechnicalsupportexperienceToyotaversusRolls-Royce,owningverbpotentialofnamesvideotapingyourpitchwomen,analyzingbusinessmodel

exitstrategies

FairchildSemiconductorfavorsfear,ofstartingnewcompanyFilo,Davidfinancialprojections

inbusinessplansconsultants,useoftomakelie#1ofentrepreneursandpartnering

first-moveradvantagelie

Fishburne,LawrenceFlushmediaForbesFord,HenryFordMotorCompanyformversusfunctionForresterFrogandthePrince,The

GarageTechnologyVentures

insufficientdisclosurebyportfoliocompanyinvestmentbankerquittinglayoffsmantra,takingthe“FU”outnamingofpatentforfindinginvestorsT-shirts

GartnerGates,BillGeneralMotorsgetgoinggodfathersGodin,SethGooglegorillamarketsGreen,HuntGreenBayPackersGrigoryev,GeorgeGuy’sGoldenTouch

HallmarkCardsHarley-DavidsonHawaiianIslandsMinistryHermanMillerHertzHewlett-PackardHiddenVillahierarchyofneeds

hierarchyoftractionH.J.HeinzHolyGrail,businessplanasHummer

IBM

brand,lackinghumannessgorillamarkets,seizingmantraofpositioningof

IDGIkeaindexing,roleinbrandingInfinitiFxinternalchampionsinternalentrepreneuringinternalrateofreturn(IRR)intrapreneurs.Seeinternalentrepreneuringintuition,double-checkingiPodirrigationpumpsIsraeliDefenseForces

Jobs,Steve

Aplayers,hiringofbackgroundofinternalentrepreneur,off-the-scaleexampleofsolitaryentrepreneur,notbeingastrengthversusweaknessof

Joos,BillJupiterJurvetson,Steve

kamikazesKawasaki,Guy:

ApplehiringApple-DECpartnershipconsternationassistantsof

backgroundofmeaningofhislifetinnitusof

Kawasaki,RockyKawasaki’sLawofPremoneyValuationkeyinfluencerskeymetricsKindredPartnersKleiner,EugeneKleinerPerkinsCaufield&ByersKrispyKremeKumming

leadgenerationmethodslettingahundredflowersblossomLeviStraussLexuslies:

Chinesesodaentrepreneurs,toptenliesoffirst-moveradvantageofjobcandidatesofpotentialpartners

liquidityLombardi,VinceLory,HollyLotusLotusDevelopmentCorporation

Macintosh

andAppleIIApplehiringinfectedpeoplebranding,easeofcatalyzingadoptionofdesktoppublishingGuy’sinterestinJobs,Steve,andMicrosoftapplicationsoftware

rejectionbybigcompanies,learningfromshortcomingsof1984model

MacintoshDivisionMcKinsey&CompanyMailBoxes,Etc.managementteam:

Aplayers,hiringofandpartnershipspitchesroleinandraisingcapital

mantrahypotheticalversusreallongevityoftagline,versus

manuals,roleinbrandingMarchofDimesMaslow,AbrahamMason,HeidiMAT(Milestones,Assumptions,andTasks)Matrix,TheMeade,Billmeaning,making

attractingboardmembersandbusinessmodelpitch,roleofinandraisingventureandangelcapitalandrecruitingandredpillshippingearly

Medtronicmen,stupidityofMénièresdisease.Seetinnitusmensch

bigcompanyversusstartupdoingwhat’srighthelpingmanypeoplepayingbacksociety

mentor

MercedesmicroscopephaseMicrosoft

bootstrapping,exampleofbrandwithouthumannessdominanceofmultiplesectorsGuywantingtodefeatliquiditypathforstartupsMacintoshDivisionwantingtodefeatpositioning(foolhardy)asold,big,dumb,andslowSunMicrosystemswantingtokillunbeatableincourt

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namingproductsandcompanies

NationalCashRegister(NCR)NavySealsNeoNeoterisNetFlixNewClientMarketingInstituteNewYorker,TheNewYorkTimes,Theniches,market

bigcompanyversusstartupnichethyself

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Page,LarryPageMakerpanels,speakingonparanoiaofinexperiencedentrepreneursParker,Dorothypartnering

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pitchformatforpotentialpartnersschmoozingandspreadsheetreasonstopartnerstrengthsversusweaknesseswin-windealswrittenproposals,and

patentsPayChexpitching

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sales.SeerainmakingSalesforce.comSanJoseMercuryNewsSaturnScull,JohnSculley,Johnseizingthehighgroundsellingdirect,bootstrappingtechniqueSequoiaCapitalservicebusiness,startingas7UPsexism,defeatingShaffer,Gary

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businessmodelgettinggoinginternalentrepreneuringmakingmantramakingmeaningMilestones,Assumptions,andTasks(MAT)

startuporganizationskillsstrawmanjoboffersuckingdownSunMicrosystemsSymantec

tagline,versionmantraTalktheWalktaskstchotchkestectonicshiftsTeledynetelescopephasetestdrives

tinnitusTiVotop-tenlistformattotaladdressablemarketToyotatractionTse-tung,MaoT-shirts

umbrellasunintendedcustomersandusesUnit8200(IsraeliDefenseForces)UnitedParcelService(UPS)UnitedStatesAirForceUnitedWay,HawaiiUnivacunprovenpeopleU.S.DepartmentofJusticeuserinterface,roleinbranding

valuationventurecapital

angelcapitalbuildingabusinesscleaningupcompanydisclosingeverythingEinstein’strainticketenemy,acknowledgeorcreateanherdingcatsintroduction,gettinginvestorpitchformatliestoinvestorsshowingtractiontrickquestionsofventurecapitalistsunderstandingwhatacceptingmoneymeansvaluation

venturecapitalists:entitlement,senseof

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Walker,ThaaiWallStreetJournal,TheWendy’sWindowsoperatingsystemWinfrey,Oprahwomen,smartnessofWoolworth,F.W.

Xomed

Yang,JerryYankeeGroup

*Ifonlydefeatingsexismwereassimpleasthrowinginanoccasionalhe/she,she,her,orhers.Iusethemasculine pronounsmerely as a shortcut. Successful entrepreneurship is blind to gender.Don’t look forsexismwherenoneexists.

*If you insist on creating a mission statement, go to www.artofthestart.com and click on the missionstatement generator link (http://www.unitedmedia.com/comics/dilbert/career/bin/ms2.cgi.). Thiswill takeyoutotheDilbertmissionstatementgeneratorandsaveyouthousandsofdollars.

*JeffreyAbrams,TheMissionStatementBook(Berkeley:TenSpeedPress,1999),25–26.

†TheAmericanHeritageDictionaryoftheEnglishLanguage,4thed.,s.v.mantra.

‡ScottBedbury,ANewBrandWorld: 8 Principles for AchievingBrand Leadership in the 21stCentury(NewYork:Viking,2002),51.

?Ibid.,52.

||Ibid.,53.

*Actually, itcould.Backin theearlydays,wetoyedwith“Wetake theFUoutoffunding”forGarage’smantra,butwerejecteditbecauseitwastoolong.:-)

*ForbesFYI(Winter2003):21.

*Thisisn’thowwepositionedthefirstMacintosh,butit’saprettyaccuratedescriptionofwhatwehad.

*InspiredbyMichaelShermer,WhyPeopleBelieveWeirdThings(NewYork:A.W.H.Freeman,2002),49.

*WendyNorthcutt,TheDarwinAwardsII(NewYork:Dutton,2001),2.

†Ibid.,70.

*TheAmericanHeritageDictionaryoftheEnglishLanguage,4thed.,s.v.mat.

†Inspired by Rita Gunther McGrath and Ian C. MacMillan, “Discovery-Driven Planning,” HarvardBusinessReview(July–August1995).

*PeterF.Drucker,InnovationandEntrepreneurship:PracticeandPrinciples (NewYork:Harper&Row,1985),162.

*AndrewHargadon,HowBreakthroughsHappen:TheSurprisingTruthAboutHowCompanies Innovate(Boston:HarvardBusinessSchoolPress,2003),116–17.

*IBM is the acronym for International Business Machines. While IBM sells more than “businessmachines,”itdidn’tcubbyholeitselfintothecashregistermarket.

*Abeachhead, in this context, means a market that is small enough so that larger competitors are notalready going after it, and big enough so that if you’re successful, you can reach critical mass andprofitabilitywithit.

*RichardC.Borden,PublicSpeaking—asListenersLikeIt!(NewYork:Harper&Brothers,1935),53.

*Foundathttp://www.bl.uk/whatson/exhibitions/grail.html.

*ClaytonChristensenandMichaelE.Raynor,TheInnovator’sSolution(Boston:HarvardBusinessSchoolPress,2003),214.

†Ibid.,215

*PeterHay,TheBookofBusinessAnecdotes(NewYork:WingsBooks,1988),149.

*MichaelSchrage,“LettingBuyersSellThemselves,”TechnologyReview(October2003):17.

*OmMalik,“TheRiseoftheInstantCompany,”Business2.0(December2003):99.

*I’veheardtheargumentsaboutwhycompaniesshoulddotheirsoftwareprogramminginRussiaandIndia.Maybe this is a good strategywhen theprogramming is just spittingout linesof code, butwhenyou’reworkingonversion1.0ofaproduct,Idisagree.Programmingatthisstageofacompanyismoreartthancontract labor. Leonardo da Vinci surely would not have outsourced the table in The Last Supper andfocusedonthehumans—althoughhavingreadTheDaVinciCode,I’mnotsurewhattobelieveabouthimanymore.

*Plus,theBuffaloSabresneedallthehelptheycanget.

*ThisisaninsidejokeforpeoplefromHawaii.SufficeittosaythatIwenttoIolani.

†AndrewHargadon,HowBreakthroughsHappen:TheSurprisingTruthAboutHowCompanies Innovate(Boston:HarvardBusinessSchoolPress,2003),42–43.

*“A StrawMan has two features: it is easy to knock down, and it is a poor substitute for a real man”(http://c2.com/cgi/wiki?StrawMan).

*InspiredbyDavidG.Meyers,Intuition: ItsPowersandPerils (NewHaven,CT:YaleUniversityPress,2002),196.

*EveryventurecapitalistsecretlywishestofundacompanywhosegreatestthreatisanantitrustlawsuitbytheU.S.DepartmentofJusticeandtheEuropeanUnion.

*GeorgeGendron,“ASweetDeal,”Inc.,March1991.

*Darcy Rezac,The Frog and the Prince: Secrets of Positive Networking (Vancouver: Frog and PrinceNetworkingCorporation,2003),14.

*SusanRoAne,TheSecretsofSavvyNetworking(NewYork:WarnerBooks,1993),56.

*PeterF.Drucker,InnovationandEntrepreneurship:PracticeandPrinciples (NewYork:Harper&Row,1985),152.

*Asopposedtopeople—theoneswhosuckthemostarethenoisiest.

*Brad Schreiber, Weird Wonders and Bizarre Blunders: The Official Book of Ridiculous Records(Deephaven,MN:MeadowbrookPress,1989),17.

*Brad Schreiber, Weird Wonders and Bizarre Blunders: The Official Book of Ridiculous Records(Deephaven,MN:MeadowbrookPress,1989,)92–93.

†Ibid.,47.

*Foundathttp://www.marketingsherpa.com/sample.cfm?contentID=2420.

*Emanuel Rosen, The Anatomy of Buzz: How to Create Word-of-Mouth Marketing (New York:Doubleday/Currency,2000),206–9.

*Foundathttp://www.anecdotage.com/index.php?aid=14700.

*PeterF.Drucker,InnovationandEntrepreneurship:PracticeandPrinciples (NewYork:Harper&Row,1985),190–91.

*MichaelShermer,“NoneSoBlind,”ScientificAmerican(March2004).

*ThomasKuhn,TheStructureofScientificRevolutions(Chicago:UniversityofChicagoPress,1962),157.

†ClaytonChristensenandMichaelE.Raynor,TheInnovator’sSolution(Boston:HarvardBusinessSchoolPress,2003),110–11.

*MaggieOverfelt,“AWorld(Fair)ofInvention,”FortuneSmallBusiness(April2003):31.

*Andjusttoshowyouhowthekarmicscoreboardworks,thelast-placeteamwinsthechampionshipattheendoftheseason.

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