We watched each team’s six minute presentation video and then did a group feedback and critique session.
Here is the video of the presentations and discussions.
| 0:00:00 | Depth Fantasy Presentation |
| 0:05:23 | Depth Fantasy Discussion |
| 0:35:27 | Team Oasis Presentation |
| 0:40:35 | Team Oasis Discussion |
| 1:04:35 | Informidable Presentation |
| 1:10:35 | Informidable Discussion |
Congratulations! You’ve done it, your product has customers and you’re generating revenue. Where can you go from here?
We discussed in earlier classes the benefits of aiming at a niche market for your launch – you can focus on solving a very specific need for a easily targetable market (like Facebook’s initial launch just for Harvard students).
Your opportunity for growth can be to grow within your niche by adding more features or specialized products, or by going for a wider audience.
Though we spoke about Vision in the first week of classes, the reality is many companies don’t have a broad vision beyond their first product when they are founded. And if they do have a bigger vision, it might change as they pivot and adapt through their founding years. With a record of some success and a deeper understanding of the market, a bigger vision may now be created for the company.
As you grow you’ll need to add new skills and assets to your company.
PDI began providing broadcast graphics to TV stations and networks. It was during that time that we set our grander vision of someday creating fully computer animated feature films. From there we expanded into commercials, a new market that was built on the same foundation. We were able to start building the tools and expertise we would need to create animated characters and tell stories. Film effects was the next market we moved into, with the specific goal of working in feature film format and building relationships with Hollywood studios. At that point, broadcast graphics had become a commoditized market and didn’t present new challenges, so we left that market. When we finally were able to produce our own films (with DreamWorks) we stayed in the commercial and film effects markets as a backup in case we needed to retreat and regroup. Once DreamWorks acquired PDI, those markets were abandoned, too.
Growth can happen either with market expansion or through vertical integration; and for larger companies by doing both. PDI grew through market expansion – by improving our product and offering it to new customers. Facebook grew through market expansion growing from Harvard, to Ivy League schools, to anyone with a .edu address, to anyone with any email address. Companies can also expand their market by adding new channels. For example, a game company may take their IP into films, TV, toys and books.
Vertical integration happens by controlling more of the channels… from design, through production, distribution, and the delivery platform. Nintendo is a vertically integrated company, creating original IP, producing games based on that IP, and distributing the IP to be played on their own platform. Movie studios are primarily distributors, paying others to produce the content, and distributing it to others’ platforms (movie theaters and streaming services). Streaming has changed the movie industry, with streaming platforms (like Netflix) vertically integrating by creating studios, and studios getting into the streaming business (Disney+).
Apple has done both, expanding it’s original market from personal computers to mobile devices and now Apple TV devices. They have vertically integrated by being the distributors of content for their devices (through iTunes and the App Store) and by now creating original content (via Apple TV original content).
Then there’s Amazon, expanding and integrating in all their markets.
Market disruption happens when new technologies or business models change how business is done. Established companies are suddenly threatened by new competitors who have radically different solutions for their customers.
Electronic Arts (EA) started as a game developer and through vertical integration quickly grew to become the largest distributor of video games. If you wanted to distribute your CD game, you needed the muscle and distribution channels of EA to get your product on the shelves. The Internet changed that model quickly, with upstarts like Valve’s Steam platform allowing anyone to distribute their content easily. It took EA many painful years to rework their business to the new digital reality.
Facebook, born of the Internet era, was threatened by mobile, with users flocking to a platform that was not friendly to the browser native website. They eventually dominated, but the shift was an expensive and difficult change for them. Arguably, Facebook’s acquisition of Oculus as motivated by FOMO of a new platform.
Not all disruption comes from startups. Apple disrupted the music industry with the iPod, the mobile industry with the iPhone, and the music industry again with iTunes.
Disruptive technologies and models create enormous opportunities for startups, and can be very painful for established companies that don’t, or can’t, react quickly.
There are two types of exits we discussed in class. One is for the investors, the other for the founder; sometimes they are the same.
Professional investors have one goal when taking a stake in a young company: Return on Investment. They are hoping for an event (termed a “liquidation event”) where they can sell their stock at a very high profit. Running through these from best to worst:
An Initial Public Offering happens when a private company sells their stock publicly for the first time. The public can now freely buy and sell the company’s stock, and the pre-IPO investors are now “liquid” – they can sell their stock, too. (There is usually a 90-180 day lock-up period when company insiders can’t sell their stock, so the actual liquidity event may be delayed by that much.) For early investors, IPOs can offer very high ROIs. VCs will distribute their fund’s stock to their investors, while angels and company founders may sell or hold on to their equity.
Mergers and Acquisitions are the most common liquidity events for investors in startups. In this scenario, another entity is buying (or merging with) the company, and the investors are either paid in cash or stock in the new entity. Many companies grow through acquisitions (Google and Facebook buying smaller companies, or EA buying game studios, for example). Some acquisitions are very favorable for the founders and investors (Oculus and Instagram). It is quite possible (and probably more common than we know) for companies to be sold at very low profit or a loss to the investors. In this case the founders may see no upside (see “Liquidation Preferences” in your term sheet).
This is the worst case liquidation event, where the company is bankrupt, or near bankruptcy, and its parts are sold to pay off any remaining debt.
In all three of these scenarios, if the company has professional investors there is a ticking clock to make it happen. VC funds have a life span of seven to ten years, at which time the fund must distribute its holdings back to its investors (a bit simplified here, but basically the mechanics). VC investors will want to have the best liquidity event possible during that time… and if the company isn’t on track to get to an IPO they will want to either sell it or liquidate it.
Bottom line: Businesses are sold when the investors can maximize their return.
Companies without the pressure of a liquidity event for their investors can run forever if they are profitable. It may mean slower growth or riskier times, but they can provide a lifetime of work and meaning for the founders.
A personal exit is when a founder decides to leave the company. It typically does not coincide with an IPO, and not necessarily with an acquisition either.
Founders will have different reasons for leaving. They may leave by choice or by being forced out by unsatisfied investors. Or it may be to “pursue other opportunities,” which usually means the latter.
From my observations: Founders leave when they can no longer take the business forward, either by their own choice or frustration, or their investor’s choice or frustrations.
As a company leader, you are constantly pitching your company and products. The style and content of the pitch changes (obviously) based on the audience.
Investor pitches are the most difficult because they are dense with information – if you are successful, your audience should:
Easy, right?
We analyzed pitches done for CMU Swartz Center’s 2021 McGinnis Venture Competition. To begin, everyone added notes to a Miro board about topics covered in presentations they watched. The notes were then grouped by emerging topics.
We then did the same exercise with answers to the question, “What did they do to capture your attention and keep your interest?“.
And we did the same with, “What did they do that was distracting or made you lose confidence in them?“.
A pitch for investors needs to cover all this information. The order depends on how you want to tell your story, and what information you think the audience needs first.
Entertainment products aren’t necessarily solving a problem for their audience, so a pitch needs to tell this part of the story differently. The goal is the same however – help your audience understand why users will clamor to get your product.
Pitches that march through a list of topics are tedious and dull. Stories engage the audience and keep them wondering what’s next. Finding a hook at the beginning will grab their attention, but you still need a story thread to weave through the rest of the presentation.
Investors are betting on the team as much as they are the product idea. Pitches are your first chance to make an impression, so how you present yourself, your company, and your content will have an enormous impact on the outcome of your efforts.
EET’s final presentations are modeled after Demo Days that accelerators host. Historically, these events have happened in a theatre or large meeting room with a parade of startups giving live presentations in front of projected Powerpoint decks.
COVID changed all that.
In 2020 and 2021, Demo Days have gone virtual. I believe this will continue. In person events won’t disappear, but the major events will be streaming to attract a wider audience, and to support startups with geographic diversity. Online pitches will become the norm rather than the exception. In this new styling, presentations can be pre-recorded, with Q&A and virtual meetups happening live online.
This class is going to join that world. This semester, final presentations will be pre-recorded and played during class, followed by a Q&A session, discussion, and a critique.
The bar for quality is set at a Zoom recording. You can have your team do it once and record it. You can go beyond that if you want by having team members record their parts individually (using webcams, phone cameras, DSLRs, or video cameras) and edit them together. It is NOT a requirement that you make a high end video production out of this.
Even if you are using your laptop to record on Zoom, pay attention to the video and audio quality. Make sure your scene is lit well (as simple as sitting by soft window light) to avoid silhouettes or harsh shadows on faces. Get good audio – being close to the mic makes a huge difference in reducing background noise and echo. If you have iPods or equivalent earpieces or headphones with mics they will give you much better audio than a laptop at arms distance.
Balance the text on your slides with where you want your audience to pay attention, use graphics where possible to support your point. It’s okay to go full screen on the speaker if that helps deliver your message.
Review back to what you thought worked well or poorly in the other presentations you reviewed, and take advantage of that knowledge.
Jason Mendelson was our guest via Zoom. The session was not recorded, so you will have to rely on your own notes.
(There was no Class 22 due to CMU Carnival days.)
It seems that most of the press coverage that startups receive is around funding events – seed rounds, series A/B/C, IPOs, acquisitions… But this is entirely disproportionate to the actual work done and value created by those organizations.
This class on funding your company happens late in the semester for a reason. Without understanding your product, your customers, and your business model, you can’t begin to understand what your funding needs are.
Once you understand your needs, you can strategize about the best way to fund your company. There are three primary funding sources – through profits, by borrowing money, and by selling equity in your company.
Bootstrapping is a viable option if you can reach profitability quickly and don’t need a large influx of cash or are planning to grow slowly. Debt financing is a common tool used by most companies (and individuals!), but lenders are highly risk adverse. To obtain a reasonable loan rate, you need to already have a viable business going and provide adequate collateral or guarantees.
Equity funding is commonly used to raise capital for startups, regardless of size. Even bootstrapped companies use equity financing early on by the founders investing their own money and time in the company in exchange for an ownership stake.
All forms of equity financing are heavily regulated by the government as a way to protect both the investor and the company. You may only sell unregistered securities in the US (in this situation: non-public stock) to qualified investors. Qualified investors are either accredited investors (individuals who meet a minimum qualification of net worth and/or income) or institutions. (There are exceptions for crowdfunding if you are raising less that about $1M dollars, but you will have a large number of small investors.)
Individual accredited investors are commonly referred to as “angel investors”, or angels for short. They are investing their personal money, generally in the range of tens of thousands to a million dollars per investment. They are heavily motivated by the potential upside of their early investments, but may have other motivations that you will want to understand. Angels typically are very early investors in companies, and many times will network with each other to co-invest in opportunities that need more capital than they are able to invest individually. Some angels will manage a collective fund of individuals’ money and are referred to as “super angels.”
Venture capital firms raise funds from high net worth individuals, institutions, and investment funds. Their funds typically have a seven to ten year life span in which they must invest the money and allocate the returns back to their investors. VC funds range from small funds of tens of millions of dollars up to billion dollar funds. Because of the large size of the funds, they must make large investments (they don’t want to manage hundreds of small investments).
VCs and angels take a portfolio approach to their investments. They know that most of their deals will not be profitable, but a very small percentage will be a massive home run. They just don’t know which is which up front.
An investor is a customer – you are selling them something (equity in this case), and they are expecting a benefit from it (profit!). Consider the process of raising money as a sales process and follow the five phases we have talked about before. Raising money is a very high stakes sales activity, and will take devoted attention for a long period of time; time which is not spent on developing your actual product or customers. And for many fast growth companies, there is a short gap between raising a round of funding and beginning to raise a new round.
Professional investors will look at hundreds of potential investments for each investment that they eventually make. Expect a lot of nos before you get to a yes.
Hear it from the source! In this interview done at Stanford, Sam Altman (then the president of Y Combinator) interviews Marc Andreessen (VC), Ron Conway (super angel), and Parker Conrad (CEO) about fundraising. (4:45 Ron talking about what investors want, 16:00 Ron about deal flow in particular, but watch the whole thing.)
Once you have an interested investor you’ll negotiate a term sheet. DON’T DO THIS WITHOUT A LAWYER (in case you haven’t figured that out yet!). Regardless of the FACT that you have an excellent lawyer, you will want to understand all the terms in the deal and what they mean – it is you, not your lawyer, that needs to live with them for the rest of your career with the company.
Review from Class 15: Now in its fourth edition, Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist is the most complete resource available on preparing your company for professional investors.
There are also great resources for sample term sheets at the National Venture Capital Association (NVCA), Cooley, and Wilson Sonsini (both law firms).
May 7, 2021. Jeffrey Bussgang, General Partner of Flybridge Capital, just shared this slide deck about raising money from VCs. Excellent information, right from the source.
Class began with the two remaining presentations on Company Values and Culture interviews. The rest of the class was spent examining and reflecting on what we learned from the individual presentations.
We collected the 3 Rights and 3 Wrongs information (shown here without the entrepreneurs’ names).
We did the same in collecting information about company values and culture.
We put those and other companies on a CVF quadrant.
Presentations and discussion about company values and cultures. We only had time for five of the seven, so we’ll continue next week.
Individuals presented on their 3 Things Right / 3 Things Wrong interviews with entrepreneurs. This class was not recorded. We will be going deeper into lessons from this next week.
In our first week of class we talked about Vision based on Jim Collins and Jerry Porras’ work in Built to Last. We skipped over Core Values in that part and returned to it today.
The Core Values of your company are the guiding principles under which all decisions in your company are made. Even if the company values are never articulated to the employees, they are in the DNA of the company and affect every aspect of it. And like DNA they are hard to change.*
The company’s Culture is how these values manifest themselves in its daily operations – from visible aspects like office space and dress code, to invisible ways like how decisions are made and promotions are earned.
A company’s Vision and Purpose is typically aspirational, and hopefully inspirational. Values, however, need to be real, current, and practiced every day. The company’s culture and behavior will expose its real values, and employees, customers, and stakeholders will quickly see if the values are sincere.
Values must come at a cost, otherwise they’re just nice things to do. If your values never get challenged, then you don’t really need them. They are articulated and shared specifically so that when they are challenged you do the right thing. A good way to test your value is to see if it has an opposite that could also be a chosen value, and that is where your sacrifices may come in.
We brainstormed a few competing values in class. Examples include doing what is best for the community vs. doing what is best for you; being willing to make decisions based on faith (or gut feel) vs. needing certainty through research or testing; and innovation vs. stability.
That brought us to the Competing Values Framework, a quadrant for companies that classifies them by internal/external and flexibility/stability. You can read much more detail about CVF at ocai-online.com (and many other places online). We explored the quadrants by looking at a few if PDI’s values in particular, and discussing our impressions of some other companies’ values .
Here’s a nice graphic that makes clan/adhocracy/market/hierarchy easier to grok.
The consulting company NOBL has an interesting Culture Contract that can help you very explicitly describe your company values, the cost of those values, how they impact the culture, how to recognize if they are broken, and what to do about it.
Company culture is the manifestation of the company’s values. It is seen visibly as you walk through their spaces, but there are invisible cues also. How people behave towards one another, how rewards are given out and promotions determined, how decisions are made – these are all part of the company culture that has its roots in the company values.
In class we talked about examples we’ve experienced in different work environments. (The invisible examples here are generally negative cultural traits, but invisible culture is just as likely to be positive.)
*It is important to take note of the extraordinary time that we are living in. Company values and cultures are under intense pressure and scrutiny now. We are becoming more aware of the systemic problems and biases that are built into our society and the companies we work for; people are speaking up, values are being challenged, and change is beginning to happen. Changing values in a company is difficult, but not impossible. It takes leadership and commitment, and the bravery to confront uncomfortable truths.
In this video, posted in 2013, Zynga employees and top management talk about Zynga’s seven core values. These seven values were on their website until sometime in the last year (2020). I couldn’t find them there last week. Don’t know why they took them down.
I think seven core values are too many. The video begins with them making fun of the fact they couldn’t remember them all. That’s funny, but also a problem.
Valve published their employee handbook in 2012, and it remains on their website today. It doesn’t talk explicitly about the company Values, but it does a wonderful job describing their culture (and how to survive there).
Netflix has a very long post under jobs.netflix.com/culture describing their values and culture. They describe not just their values, but how those are exemplified by the company and by their expectations of their employees. Very well done.
It’s also worth reading about Riot‘s current values, the issues that got them there, and how they are trying to fix it.
Google shares “Ten things we know to be true.”
Company Values and Culture
Teams presented their financial models and their outcome from the exercise. All three teams moved put less emphasis on advertising after they played with the models, and they put more money into direct outreach (through event marketing) or other methods to increase word-of-mouth growth.
Video available for those who where in the Zoom where it happens.