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JOE HADZIMA: OK, Good evening.
Everybody nice andwarm from the snow? Thank you for coming to Nutsand Bolts of New Ventures and Business Plans on asnowy night in Cambridge.
My name is Joe Hadzima.
And this is the firstof six evenings we're going to have for the course.
The course name is Nutsand Bolts of New Ventures and Business Plans.
First of all, it's not reallyabout the business plan itself.
Think of it as we're goingto talk about how to plan and execute a new venture.
And don't thinkof a business plan as a fixed documentin this course.
Really, it's a dynamicprocess we're going through.
It may be a document.
It may be a few slides.
But at the end ofthe day, what it ends up being is ashared vision between you and your team as to wherewe are, where we're going, and how we plan to get there.
So that's the goal of all this.
And I should alsosay, because I know some people in the audience arenot doing traditional business ventures, we're going to usethe business terms a lot, but this could equally applyto social-developmental entrepreneurship, to nonprofitseven to governmental ventures.
It's a way of thinking abouthow to organize new ideas and get them going.
Now a little bitabout the course.
This is the 25thyear– it's hard for me to believe it's been 25years– for the course.
And the founding of the coursehas an entrepreneurial lesson in it.
So here's the backstory.
I was teaching some thingshere on legal stuff.
And some studentscame up and said– I think we had oneentrepreneurship course at Sloan atthe time and they had taken that– and theysaid it's a great course, but it's not tellingus anything practical.
So could you do acourse during IAP to tell us how to dosomething practical, how to start a company? So this was back 25 yearsago before the internet.
And the IAP courses werein a fixed, printed catalog that you would get.
Shows you how far we've come.
So I said, well, I'llthink about doing a course and let me get back to you.
Well, I got tied-upwith some other things.
And then they came to me andsaid, we put it in the catalog and we dare you not to show up.
So I thought aboutit for a while and I thought, well,I should be angry, but I think I have a customer.
I think these peoplewant something.
So the first attributewas I had a customer.
I'll right, I'll playthis game for a bit.
Problem is I only hadtwo weeks to organize it.
So that wasn't enough timeto really do anything formal.
So I said– I think it wasfour nights– all right, we'll do two hours, threehours, we'll do eight topics and I'll go and find somepeople who know about those.
And how am I going to makeit easy at the last minute to get these people? I said just come into classand whatever the field is that you're in speak maybe10 minutes on the five things I wish somebody had told meabout whatever you're talking about before I got started.
Then we'll doquestions and answers.
And I said, I've got tomake it entertaining.
So I called up peopleand said, do you know somebody whocan do this talk? And if you do, you have tohave seen the person talk, they have to be entertaining,you have to vouch for them.
And so we did this ina period of two weeks.
And probably halfthe speakers that showed up for that firstsession I had never met before.
So I'm thinking this isgoing to be a disaster.
It turned out tobe a great success.
And I think thelessons for this, in an entrepreneurial way wereI had a customer for a product, they wanted something, Iwas able to clearly define the task– because I didn'thave time to do anything more; if I had done itmyself, it probably would have takenlonger and not been as good– I got great people,and I was able to communicate to them what the task was, andthen I got out of their way and they did a great job.
So there's anentrepreneurial lesson in how to start a company.
Make sure you havecustomers, get great people.
The whole business planning,new venture-type thing is really trying tofind what the task is and then to be able tocommunicate, and execute on it.
So the course really isan entrepreneur venture.
That's how we started.
And later Joostbasically figured out how we could get credit for it.
And it's justblossomed ever since.
So that's the background.
In the 25 years we'veseen all sorts of things.
We've seen bubbles–the internet bubble.
I stood here thinking Ijust read in the paper that Hotmail, backin 1997 or so, had started up and been soldin 18 months for $450 million, basically giving away email.
And I'm thinking howam I going to explain to people this isn'tthe way it usually works in periods of time.
More recently, Instagram.
So there are some things thathappen at points in time that defy direct logic.
And if you cancatch those waves, that becomes a good thing to do.
We've also seen busts afterthe internet collapsed, after the financialmarkets collapsed.
Actually, that is one of thebest times to start a company.
And many of the reallyenduring companies have been startedduring down times.
And the reason is resourcesaren't available– financing dries up– you've gotto be really focused, you have to actuallydeliver something of value.
And there's a lot of historyabout companies to get started during down times.
But through all ofthat, ups and downs, it all boils down toreally two basic thoughts, and we're going to touchon it over and over again in the course.
And that is whether it'sa business, whether it's a nonprofit, whether it'sa governmental project, the first thing you'vegot to do is create value.
So if you're not creating value,You can't really do anything.
And then having createdvalue, the question is how do you capturesome or all of that value to make what you'redoing sustainable.
And sustainable in the conceptof the traditional companies is profit and in the contextof developmental stuff it can be we can do itagain, rinse and repeat.
So when we lookat creating value, we're going to beasking questions about who do wecreate value for, how much value do we create,and how do we create it.
And then when we talkabout capturing value, the traditional way has beenfor customers somebody who will pay you for yourgoods, the product you do, or your services.
And the trick, as we'll see,in financial projections and the businessmodel parts that'll come in the next few days, isthat whole process something where you can make enoughmoney that you can continue it.
So traditional capture ofvalue is through customers.
There are other waysto capture value in the area of theadvertising or monetization that we'll talk about also.
And you think about things likewhere third parties provide that payment.
So think of the UShealth care system where historically the patient,the person who the value is delivered to– as in you'regoing to get treated– isn't really payingdirectly the cost of that.
So sometimes figuringout how that works can be the challenging part.
So at the end of the day,to make all this happy, we're going to need people–that's the number one thing you're going toneed for a venture– resources of some sort– eithercash or partnerships– skills– some of them you'll learnin this class, some of them you'll learn on the job–and then that one that's the hardest one to figureout, but if you can get it it's the best, andthat's called luck.
I'll always, go with some luck.
So our goal for thecourse is basically to make sure you get infectedwith the entrepreneurial thinking virus.
And it really is a virusthat can be infectious.
The good news is it'snot known to be fatal.
It's highly contagious.
It is a lifelong affliction, soyou'll have to get used to it.
But at the end of the day,I think if you catch it you'll be in best shape.
This is what we're goingto be doing tonight.
We're going to tell you a littlebit about who you are, we're going to introducethe teaching team, we'll introduce the casestudy and business plan basics tonight, and thenwe'll take a small break, and then we'll get onwith Steve Pearse, who's come all the way fromFlorida today to talk to us.
He's thinking maybe thatwasn't such a good idea.
So who is in the class? Some of you signed up– many ofyou signed up– at the website.
We had 160 signed up.
And the organizationsthat you're from are– and I'll just readthem alphabetically– Boston University, BroadInstitute, Columbia University, the Department of Defense,Harvard College, Harvard Kennedy School, andHarvard Business School, Mass General Hospital,University of Massachusetts, University of Macedonia,University of Michigan, Toronto, Wellesley College,several private companies that I won't say your names toprotect you, and of course MIT.
Now the areas that yousaid you were interested in are all over the place.
We have consumer devices,foreign language learning, financial technology,social enterprise related to health care,educational technology, medical devices.
One of the reasonsI'm going through this is that we hope that inthe period of this course you'll actually form some teams.
So if you find some ofthese topics interesting, or if you're someof these people, then at least I'mshouting you out a bit.
We have nuclear energy–for those of you into that– specialty biotechchemicals, a sleep product, oncology drug delivery,biotechnology, 3D printing, eyeglasses in West Africa,independent film industry, lab testing process and equipment,big data, data privacy, B2B information technology,energy technology, aerospace, crowd-funding, and e-commerce.
So hopefully you'll finda kindred spirit in those.
Now what about thebackground of the people? We have some people this isthe first course they've ever taken in entrepreneurship.
We've had people thathave taken a bunch of other entrepreneurialcourses at MIT or at other universities.
In fact, we have acouple of people who have taken Nuts and Bolts before.
They did pass before, butthey're back for more.
Several start-ups, somebody whohas always been in government, and a couple people in 15 plusyears in large organizations.
And some members of theventure mentoring service are actually in the audience.
So we have undergraduates,grad students, post-docs, visiting faculty, and staff.
So it's a prettydiverse audience and we've got a lot to cover.
So a little advice to thepeople that are first timers.
I would say soak it all in.
And as you goforward, try to think about the kind of thingswe talk about when you approach entrepreneurialthings for the first time.
More experienced people, now usethis to refine your thinking.
I've been in this coursefor, as I said, 25 years.
And every single year Icome up with some refinement of my thinking listeningnot only the speakers but to the questions that come.
So I hope you enjoy the course.
We do have to calibratebefore we get going, though.
It is MIT, so we haveour first formula.
And it is H equalsR divided by E.
So I've got an audience with awhole bunch of different people and we're trying tosolve this equation.
And we're tryingto maximize H.
So for those of youthat can't see, H equals R divided by E.
Anybody want to take a guess what these symbols are? Yeah, the snow has got to you.
I'll give you a hint.
H is happiness.
OK, let's see.
AUDIENCE: Realityover Expectations.
JOE HADZIMA: Oh, hejumped right to it.
Reality over expectations.
Last year somebody saidrevenue divided by expenses, which is equally good I guess.
[LAUGHTER] So this is ageneralizable formula.
And for those of you who haveeven slight idea of math, if I lower yourexpectations to zero, I can make you infinitely happy.
But I think I'm never goingto be able to do that.
But the point is this worksboth for teaching here and for everything you do.
If you over-deliveron what you promise, you'll have people happy–your investors will be happy, your customers.
So happiness is realitydivided by expectation, with the fact that you can neverquite get expectations to zero.
So lower your expectations–I want you to all be happy as we move through the course.
So who are we? We have Joe Hadzima,Joost, Gino, Yonald Chery, and some highlypaid volunteer speakers I'll introduce.
A little bit aboutmy background.
Senior lecturer at Sloan.
Was a partner in a law firmin Boston for many years.
Was one of the foundingjudges of what's now the 100K competition.
Former global chairman ofthe MIT Enterprise Forum.
Managing director at MainStreet Partners, where we do technology commercialization.
And co-founder andpresident of IPVision that does intellectualproperty analysis.
I should say this isthe first course at MIT that we're aware of that broughtboth sides of campus together, the engineering, science,architecture side of campus to the Sloan side.
You would thinkthey're miles away.
Until this class, theyreally weren't together.
There have been a lot ofcompanies launched out of this class.
Some have gone public.
And it's been quitea history over time.
Then I'd like to introduceour case study next.
This is Virtual Ink, if youcan't read that logo up there.
This is a case youhave in the materials.
Is a computerperipheral company.
And let me see if Ican make this work.
I'll give you a little bitof an introduction here.
Is that appearing up there? [AUDIO PLAYBACK] [MUSIC PLAYING] -For the times when youdon't need a projector and writing on the whiteboardis the best teaching tool, there's the MimioCaptureink recording system.
Enabled by MimioStudio Software,the MimioCapture system actually sees andrecords everything you write on the board inreal time and multiple colors.
It can even converthandwriting into editable text.
The system createsdigital files that you can send to your students sonow they can focus on the lesson rather than on taking notes.
And you'll save time byusing the digital files in other classes.
The MimioCapturesystem works with you MimioTeach interactivesystem and comes complete with a magnetic chargingtray, four rechargeable marker holders, and a digital eraser.
The MimioCapture system,bringing your white board notes into the 21st century.
[END PLAYBACK] JOE HADZIMA: OK.
So that is an overview of whatVirtual Ink eventually became.
And in fact, today they have awhole bunch of other products.
Yonald, our entrepreneur, who'sgoing to come in at the end, was the founder of it.
He's got a veryinteresting story.
The reason we use VirtualInk, even though it's a little bit dated– itwas in the late 1990s– is that it's an easyconcept to understand, although there is sometechnology behind it, to be sure.
It was entered in what wasthen the 50K competition.
It's an interesting story ofthe times and the company.
And most importantly,Yonald himself comes in and he tells you stuff thatyou're not going to find.
It's so easy to get peopleinto a class like this who are successful.
Oh, I came up with thisidea in my dorm room, and I did this, we raisedsome money, went public, now I'm wealthy.
Well, you don't reallylearn anything from that.
You learn if it's luckyand everything works out.
But Yonald comes inand he'll tell you a very interesting storyof what he went through during the whole period.
Now we'll mention it from timeto time during the course.
You'll see reference to itin some of the materials as you prepare.
The entire plan isin the course reader.
Do not assume, however,that it's a model plan.
Every year we get peoplehanding in the executive summary and they follow exactlythe Virtual Ink thing.
And I don't want youto do that– I want you to think on your own about it.
But it's an interesting one.
I tried to find another planto work on and a lot of people won't give uptheir original plan or they never actually had one.
So it's a uniquesituation we have.
Now we're going to gointo business plan basics.
This is a introduction I'mgoing to give about what's in a business plan, the kind ofthings you need to think about.
And then over the course ofthe next five, six nights we'll be filling in eachof the components of it.
So think of this as ahigh-level overview.
And it's going to be a littlebit like the MIT fire hose approach.
For those of you whoaren't MIT students, they say that goingto MIT is like trying to drink water from afire house– it's just so much coming at you.
And we're going tothrow a lot at you over this period of time.
Some of it's going to stickright away and some of it you won't get for a while.
And the reason I knowthat is we get emails back constantly saying, oh, Ijust encountered this situation and I finallyfigured out what you were trying to explain to us.
So we always want feedback.
And as long as people findwhat we're doing useful, we're going to continueto do the course.
So topics in myoverview is why write a plan, what shouldbe in it, and then talk a little bit about theplan as a financing document.
So does anyone knowwho this character is? This is Dwight Eisenhower,Supreme Commander allied forcesEurope, D-day, became president of the United States.
Life magazine he's on thecover and he says plans are worthless.
So I guess we'redone with the course.
This is a guy who planned andexecuted this massive invasion.
And if you've read anyof the history of it, it's just an amazing operation.
So plans are worthless.
But planning is everything.
So we'll talk aboutbusiness plans and whether to writeone specifically.
So for example, theWall Street Journal had a big article aboutdoes a start-up really need a business plan.
And what they're talking aboutare written business plans.
And there are academicstudies showing that people wouldbe better off just to go off andlaunch the company.
And I pretty much agreewith that at one level.
I've been around the countryjudging various business plan competitions or classesthat have business plans.
It's pretty clear thatthe people doing it have no intention ofactually starting a company.
It's just an academic exercise.
At MIT, that's notwhat we're doing.
And what Joost and thepeople at the 100K did was say we're trying to buildtomorrow's leading companies.
This is about trying toactually get things going.
So a business plan, or at leastthinking about a business plan, is really what you needto do to launch a company.
So why actuallywrite a real plan? Well, you have to, youthink, because nobody's going to finance youwithout something written.
You may need it to talkto strategic partners, to explain what you'redoing to others, and to attract key people.
But the real reason youneed to write a plan or think about it is you needto understand your business.
What is the scarcest resourcethat you as an entrepreneur have out there? AUDIENCE: Money.
JOE HADZIMA: Money? We have plenty ofmoney in the world.
JOE HADZIMA: Time.
It's your time.
The reason tothink it through is you want to spend thenext three to five years– or whatever–working on something.
Is this the best idea you have? For an entrepreneur, it'salways, well, I need money.
Well, the point ismoney tends to flow to where opportunity is.
So if you can create value andopportunity, you can get money.
It's harder in some partsof the country than others.
But the real scarcething is your time.
So you really need tounderstand and think about the process of planning.
The famous expressionpeople don't plan to fail, they just fail to plan.
And in the courseof this course, we're going to be askingyou to think about who are your customers or users.
Who cares about what I do? Will they buy or usewhat you're doing? What will they pay or how canyou otherwise make money or get resources, capture value? How are you going tomake and deliver it? Think about something assimple as Netflix as a concept.
Back when it wasn'tstreaming it was a DVD in a packet shipped to you.
It's not an amazing concept;it's pretty straightforward.
But their key was theycould actually deliver on it effectively and efficiently.
Or Amazon selling books online–that's how they got started.
What's so hard? Well, there's a lot thatgoes on in the background.
And what are the resources,people, and technology you'll need? And so whether it's aWeb 2.
0, or biotech, or social-developmental, I wantto just reiterate that there are really two basic things.
It's create value and thenfigure out a capture or harvest the value.
That's the key thingwe're trying to do.
So how many of you have seenthe movie The Social Network? You may remember this scene.
Let's see if thisworks, if I can do that.
So Eduardo says, it'stime to monetize the site.
And Mark says, what's that mean? And Eduardo says, it meansit's time for the website to generate revenue.
No, I know what thatmeans, but I'm asking you how you want to do it.
And he saysadvertising– remember that famous advertising.
And Mark's reaction is, no.
And Eduardo says, well, we'vegot 4,000 members– this is Facebook, 4,000 members.
And Mark says, becauseFacebook is cool.
If we start installingpop-ups for Mountain Dew, it's not going to.
And Eduardo says, well,I wasn't really thinking about Mountain Dew.
But maybe at some point.
I'm talking about the business,and the company, the site.
And Mark says, we don'teven know what it is yet.
We don't know what it is, wedon't know what it can be, we don't know what it will be.
We know that it's cool,it's a priceless asset.
I'm not giving it up.
Eduardo says, whenwill it be finished? And the famous answeris, it won't be finished.
That's the point– the wayfashion is never finished.
So here they are, these guysthat have created something that they think hasvalue, and they're trying to figure out howto harvest the value.
So I went and I lookedat the 10-K for Facebook.
10-K is the annual reportyou file with the Securities and Exchange Commission whenyou're a public company.
And in the firstpart of it you have to say what your business is.
And they say our missionis to make the world more open and connected.
And so I'm looking to tryto figure out what they say they're business is after that.
And it was very curious.
They had three majorheadings in the 10-K.
The first one was how wecreate value for users.
The second one was how wecreate value for developers through the Facebook platform.
And the third one was how dowe create value for marketers.
So here they are a publiccompany with billions of users now and they're focused onhow do they create value, and they're still strugglinga bit with what their revenue model is on the other side.
So my point is thesame things that you're going to think aboutstarting a company– how do you create value and howdo you harvest value– never goes away.
It's constant through this.
I thought I could go to the 10-Kand find some really nice story about how they harvest valueand they're still thinking about how to create value.
Now one way to think aboutwhat we're going to do here is to have a visualization.
And I think of it as a pyramid.
So at the top ofthe pyramid you can think of as yourmission statement, similar to what Facebook said.
And underneath that,supporting that, is your elevatorpitch– do people know what elevator pitches are? We did that in the 100K.
It used to be all of theventure capitalist offices were high buildings.
So you'd have maybe 20 floors.
The theory is you getinto the elevator, the person turns youand say what do you do, and you have 20 floors toexplain it in maybe 30 seconds.
A lot of the VCs have movedto two story buildings, so you have to do this as yourun up the stairs with them.
So you've got to be evencrisper today than before.
Underneath that might be theexecutive summary– we'll go into that a little bit.
Under that might be thatthe PowerPoint presentation.
Under that couldbe the full plan, if you get to thepoint of writing one.
But underneath all of thatare a set of foundations of individual topics.
We'll go through some ofthese through the course.
And the point is thatit takes a lot of effort to distill everything downup to the tip of the pyramid.
And what you'relooking for is you can describe thattop very clearly and have it supported allthe way down through it.
The mission statement mightbe a sentence or a paragraph, the elevator pitchcould be 30 seconds, the executive summarytwo to five pages, PowerPoint 10/20/30.
Do you know the 10/20/30 rule? I put a link in on the websiteto the Guy Kawasaki clip about that.
So PowerPoint– I totally don'tdo this in this presentation– he says 10 slides, 20minutes, 30 point font, that's what you're aiming for.
And then the full business plancould be anywhere from 25 to 30 pages, if you end up doing that.
The slides, by the way, formost of the presentations will be posted on thewebsite afterwards.
So that will help you out.
So now the question is, allright, I sort of get it, it's this image that Ihave to do and figure out.
Question is whoactually writes this.
Is it the founderalone, the team, or even a professionalhired writer consultant? Charlie Tillett– who willbe here on Thursday– and I stood outside this room atan MIT Enterprise forum event during the break, and I askedCharlie who had entered the 10K competition back in the day.
What are you doingthis summer, Charlie? He says, well, I'mgraduating from Sloan, I'm trying to think what to do.
I said, well, I'm workingwith some entrepreneurs.
I've been working withthem for a couple years and they really could usesomeone to help write a plan.
They need to get some funding.
And Charlie was game.
We hopped in his truck,drove up to a strip mall up in Tewksbury, I think itwas, a room with 10 engineers.
And ended up joining thecompany to write the plan and stayed with them throughwhen they went public.
But at the end of the day,it was the entrepreneurs that needed to own the plan.
These guys were greatengineers, but they couldn't write a plan if youpaid them a million dollars.
They just couldn'tarticulate it well.
So that's one of the reasonswe try to put teams together.
Because if you have a great ideabut you're missing some skills, you've got to figure out a wayof getting people with skills together.
And those entrepreneurswould never have gotten anywherenear where they are today if Charlie hadn't joined them.
And Charlie wouldn't have beenable to take a company public if he hadn't hookedup with the idea.
So the point iswhoever writes it, the team has to own the plan,by which I mean they really have to be able to defend it.
Sometimes the issue is,well what do they look like.
Don't put it in a big binder.
It doesn't really matterhow you put it together.
It should just look somewhatprofessional, but not overly slick.
You're an unknown character.
If Bill Gates came upto me and threw a napkin on the table with some ideason it, he'd have my attention.
But if you do the same thing,you're not quite there yet.
So it's the firststep towards it.
You've got to havesomething that says this is a serious teamor person that are going to do some serious things.
Now the thing toremember is the plan is really a selling documentat the end of the day.
If you're going tobe an entrepreneur, you better getcomfortable with selling, because you're always selling.
You're selling customers,you're selling financing people trying to convince them.
By selling I mean you'retrying to convince somebody that's whatyou want them to do is something they should do.
Convincing people to dosomething is quite a skill and you should get good at it.
You really should work at it.
It's selling customers,financing sources, partners, recruiting people.
So you're always selling asan entrepreneur at some level.
You may not be the best, butyou should really practice that.
So this plan, the first partit's a selling document.
And whatever it is, it'snot a hype document.
At the end of the day,it's got to be defensible.
The elements of a full plan–these are the topic areas, whether or not you put themin a written document or not, you need to startto think about.
And during the course we'lltouch on a number of these.
There's executive summary ina traditional plan, something it says what's theopportunity you're looking at, what's the marketyou're going after, what are the economicsof the business, all of these things we'll gointo a little more detail.
For the technologistsin the audience, note then there's noparticular section here that says technology.
And the reason is people byand large don't buy technology.
Technology is something weuse to accomplish things.
And so the plan reallyisn't fundamentally about the technology, it'swhat the technology enables.
And when Bob Jonescomes in tomorrow, he'll talk a littlebit more about that from a "what peopleactually buy" viewpoint.
Now a little bit more intothe nuts and bolts here.
Cover page– you shouldhave one in a plan.
It should have some informationthat you can figure out who this plan is.
How to reach people,confidentiality legend, and the securitieslaw legend, we're going to cover thatin detail on the night we do the legal stuff.
Here is the Virtual Inkcover page as an example.
They've got somecontact info there.
It always frustrated me, whenI actually got a written plan if I liked it, often Iwouldn't be able to figure out how to contact the people.
So put the address on it.
And they at they put alittle confidentiality legend on it– it looks somethinglike that, initially.
And, as we'll seein the night when we do the legal stuff, whenthe lawyers get ahold of this, the legend changes a little bit.
[LAUGHTER] So I'm not saying don'tget the lawyers early on, but realize that you've gotto manage them a little bit.
But we'll go intothat in more detail.
Now if you actuallyhave a written document, it should have atable of contents so people can figureout what's in it.
And it should have page numbersand all that sort of thing.
So my question to you is whatdo you think people read first in a business plan? What's the firstthing you would read if someone gave you a plan? AUDIENCE: Executive summary.
JOE HADZIMA: Executive summary,because, as you'll see here, that explains what's going on.
What's the secondthing people look at? Probably most importantbeyond when they figure out what the heck this is about.
It's the people.
Who are these people? So if you've got actualdocument and they're trying to figure itout, they're going to get a little frustratedif they can't figure out where the information is.
So not to overdo it, buthave a table of contents.
So if the first thing theyread is an executive summary, what is it really? Well, it's the first thinginvestors read, as I said.
Think of it as a resumefor your full plan.
So the goal is toget the interview.
When you have a resume,it goes out there, you want to get the interviewso you can explain yourself and hopefully get the job.
In the case of a businessplan, the executive summary or the elevator pitch isreally to get a chance to explain more fullywhat it is you're doing.
And then when they lookat the executive summary, I like to think about whatinvestors are looking for.
And they're the three Ws.
First one is why this.
Why is what these peopleare proposing to do, why is it something Ishould be interested in? Why are they interested in it? Is it a big problem? It could be a bigmarket opportunity or a big problem in the world.
Amy Smith, who wasa MacArthur fellow, teaches over at the EdgertonCenter, was in the 100K.
And I remember quitedistinctly when she got up to give her pitchat the judging competition.
She said somethingthat went like this.
She said 1.
9 billionpeople in the world don't have accessto clean water.
Well, I didn't know that.
In order to testwhether water is clean, the traditionalway of doing it is to incubate the water to see ifanything bad is growing in it– she said it a little morearticulately than I did.
And she said all theexisting incubators are powered by electricity.
If you look where the1.
9 billion people without clean water live and youlook where the electricity is, they're not in the same place.
Our invention is away to test water without using electricity.
Let me explain how you did it.
So from an initial viewpoint,well this is a big problem.
So why this? Big problem.
So that's the firstthing– why is what you're proposing something important? Why are you spendingyour time on it? The second is why now.
Why it is now theright time to do it? I've been on the bleeding edgeof technology for many years.
I had somebody come up to meat an investment conference last year and hesaid, you're at MIT, and he said, well, tell me aboutthis new 3D printing thing, it's really hot.
And I said that's beenaround for 20 plus years.
Now it's getting interestingfor a variety of reasons, but I can showyou '20 years ago.
So sometimes rightnow is the right time.
And I'll give you someexamples down the road.
The third is why this team.
Big problem,something important, there's a goodreason why it's now– why are these peopleright people to do it? Those are the thingspeople are really trying to glean when they readyour plan or hear your pitch.
To which I asked, ifthey get the first three, there's a fourthone they get, which is– want to guesswhat the fourth one is? Why won't this work? So in a sellingprocess when they get the potential customerpushes back and is starting to ask questions about will itwork for this or work for that, you've sort of got them hooked.
And Steve willprobably talk to you about how to set the hooka little bit later tonight.
So the three whys– whythis, why now, why this team.
That's what should come up.
And the why won't thiswork, part of the task is to figure outhow to lead people to the right conclusion on that.
And I'll talk about it ina little moment on that.
So the executive summary,two to five pages max.
It's got to be clear.
It's like a resume.
And the object is atthe end of the day someone could really articulatewhat you're going to do.
The elevator speech is tothe executive summary– the elevator speechmight get you an invite to submit an executive summary,which might give you an invite to do the whole plan or a pitch.
It's going to try in two tofive pages to say who you are, what are you doing, what isa market, how many dollars do you need, what resources,what is your sustainable advantage if you do this,why you're going to succeed.
You've got to pullall of that together in a very short period of time.
It's a difficultdocument to write.
And you may end up writingit over and over again, because you've got to distillthat whole thing down to it.
Let me give you an exampleof two executive summaries.
And since the font is sosmall, I'll read it from here.
The first one is calledelectronic components.
And let me read it to you, ifyou can't see it on the screen.
Electronic ComponentsInc is a start-up company that will make a varietyof electronic components beginning with a new typeof aluminum base capacitor.
The unique product, coupledwith an excessive demand for capacitor devices,will provide us with an ample share ofthe capacitor market and numerous opportunitiesfor expansion into relatedelectronic components.
Everybody on board? This is a real one.
The founders arededicated and determined to make the venture a successfuland profitable entity.
That's good to know.
[LAUGHTER] I thought they werejust doing this for fun.
Technical expertiseis provided by James F Lynch, who's been involvedin designing capacitors for 11 years.
He attained abachelor of science in electronic engineeringfrom Massachusetts Institute of Technology.
That alone isprobably going to get him– the experienceand the fact that he's MIT– will overcomeall the other deficiencies here, which is I don't thinkmost people would understand what it is he's proposing to do.
Do you know whatthey propose to do? What its excessivedemand for capacitors? Why is there excessive demand? How big is the market? And if you read therest of it, which I suggest you do whenyou get the slides, it reads a bit likea grant proposal.
There is a goodthing in here that says that they've actuallyput their own money in, so the guy is committed.
Now this is anexample of something where, given the natureof the person involved, there's probably a lotof substance underneath.
But it's not doing a very goodservice in trying to convey it.
So that's a shame,because there's so many plans you read which don'thave any substance behind them and yet they read a lot better.
So we've got to figure outhow to make things better.
Now the other one, by way ofcontrast, is People Express.
Well, let me read it.
The eastern seaboardof the United States is ripe for the entry of a new,super-efficient, low cost air carrier to provide quick,reliable, intercity air transportation.
Such an entity wouldbring to the Northeast the same benefitsthat have accrued to other areas ofthe United States.
Chief among these arefrequent jet commuter service between major cities,prices competitive with privateautomobiles, fulfillment of the congressional goalsin enacting the Airline Deregulation Act.
The new company willbe able to achieve these goals for the followingreasons– aggressive innovative management that'sbeen tested in the field; equipment and facilitiesdesigned specifically for low cost productionof air transportation; manpower selected,trained, and motivated to be efficient andprofit-oriented– read between the lines,non-union, probably; and new systems to be appliedto the entire business.
Now if you look at thosetwo executive summaries, I think most people thinkthat the People Express, which was the early version ofwhat we now call JetBlue, is a lot clearer tounderstand what it is.
You could pretty muchsee what they're doing.
They're experienced guys, theythought about how to design it.
And you could start havinga discussion around this in a lot more detailthan you would with the electronic components.
So the trick is to end up havingan executive summary looks more like the People Express than onethat just wastes a lot of words and doesn't get to whatthey're supposed to be doing.
This is the VirtualInk executive summary, which you'll see.
And again, it's not exactlythe model, but look at it.
It was put this way intothe 50K at the time.
And you decideyourself whether you think it's a goodexecutive summary as part of your assignment.
So let's move intothe body of the plan.
And when I say the plan, I meanin your planning process also.
So the question is, what is theopportunity you're going after; what is the problemyou're trying to solve? How big is it, what'sthe opportunity now, what's going tohappen over time, and why is this the right timefor the product or service? This reminds me in the 100K–when it was the 50K back one year we had asemifinal award saying here are the semifinal teams.
And one team cameup and said, I guess you guys didn't like our plan.
Now back in those days,we didn't actually know who the people were.
That was part of it–they were all no names, we just looked at the ideas.
And I said, well, I don'tactually know what yours was.
And they said, well, we werethe guys with the air traffic control system improvement.
And it was a fascinating plan.
They had figured out howto make it more efficient.
And I learned a lot of thingsabout air traffic control systems.
And I said, theproblem is none of us could see how thatcould be a business.
You would have to change theentire air traffic control system it appearedin the United States.
It looked like a greatsolution, but is it a business? And they said,well, did you know that the FederalAeronautics Administration– FAA– has put out arequest for proposal for changing the air trafficcontrol system in the United States? No.
Why would I know that? They had assumedeveryone knew that.
That would have changedat the whole complexion.
That meant at thattime the convergence of a driver for thebusiness was there and they didn't tell us that.
So they didn't getanother opportunity.
In the health carearea for many years we'd see really interestingtechnologies that could improve outcomes for patients.
And the question was, well,who was going to pay for it.
And a couple yearsago Medicare put in some rules that saidthat hospitals get penalized if patients get readmitted.
That's opened upa huge opportunity for things like home monitoringor other kinds of things that before it'd be very hard tosee how that was going to work.
So there are a lot of newcompanies trying to figure out how they can dothings to finally help patients for better outcomes.
There wouldn't be a marketfor that five years ago– it'd be a long, hard, uphill climb.
So why is this the right time? As I said, I'vebeen on the bleeding edge of some of the stuff.
The body of theplan, it should talk about the market, who's there.
We'll go into moredetail with Bob about talking about customers.
Investors have these differentways of thinking of things.
And one of the questionsthat surprised me early on in my career was aVC that's said, OK, I get it, you've got a great idea.
But let's say you do everythingthat you said and you win.
Who loses and what arethey going to do about it? And we hadn'tthought about that.
So you've got to think aboutyou're disrupting a market, for example– what's theresponse going to be? The incumbents are justgoing to sit there.
So what's your plan forthinking it through? That's an example ofthe planning process.
These are the kindof questions– again, with BobJones tomorrow night we'll go into pricing,and distribution, and sales tactics.
And another VC expression iswill the dogs eat the dog food.
So it sounds like a greatthing, you convinced me it's a great thing,but what evidence do you have that anyone wants it? That's customers– willthe dogs eat the dog food? Now the developmentplan is how do you piece the differentcomponents together in order to make somethingthat can work within the time constraint youhave as a start-up.
You don't want nuclear fusion.
Nuclear fusion we'vebeen working on for 50, 70 years now.
And the problem is, ifyou've got a nuclear fusion kind of project, is untilit completely works, nothing works.
So there's reallynot a business.
Is there a way you can take aportion of it and make it work? I looked at Zipcar early on.
Everyone's familiar with Zipcar? Fascinating concept– it'srevolutionized a whole bunch of transportation things.
But there were somany moving parts that you had to put togetherin order to make that work.
At a place likeMIT, where the joke is– if you're recruitinga faculty member, you can have oneof three things, you can have tenure, theNobel Prize, or parking.
So parking is whateveryone picks.
So here's a companyZipcar that's got to figure out howto get parking places.
There are a lot of things thatwere out of their control.
And at the end ofthe day, it may not have been a good investment.
It may have changedthings, but I don't think a lot of peoplemade a lot of money in Zipcar.
So you want to tryto think through do you have to change theworld totally in order to make a dent in the world.
Because again, limited time.
The action plan–this is part of what I like to think of as theidentification of credibility testers.
As engineers, ifyou said I've got to build a bridgeacross the Golden Gate, there's a lot of things youhave to do to make that work.
And engineering is verymuch a think everything through kind of thing andoften is very sequential in its process.
The credibility testers, adifferent way of thinking of it is are there some thingsthat will make this project extremely difficultthat if I can show I can solve I cande-risk the situation.
So thinking abouta project from how do I convince somebodythis is doable is an important part of it.
Maybe in the case ofthe Golden Gate Bridge, it would be securingaccess right to an on-ramp.
Or if you think the issueis a technical issue, doing are sounding to figure outhow deep the bedrock was.
I was sitting outon Cape Cod beach one weekend withsome house-guests.
And one guys told me he'sworking on this project.
It was very windy out there andhe said it's really windy here.
I said, yeah, it'salways windy here.
And he says we're workingon something involving that.
And it turned out he was oneof the guys from Cape Wind.
And what they were doingwas securing access rights to land the cables on it.
Because if theydidn't do that, they couldn't get to the next level.
So that first thing is can youidentify credibility testers to reduce the risk.
And if you reduce the risk,both for you and for investors, you have a higherprobability of success.
The other thing is tothink about– whatever you're doing– abouthow to sequence that relative to your resources.
So the ideal scenarioagain, remembering H equals R dividedby E, is you want to be able to ideally say I'mgoing to do X and actually achieve it.
And then you can askfor additional resources to do the next step.
If you don't planthat out well and you get stuck betweentasks, then you might be able to getaway with that once.
But if you do it a secondtime, people are going to say, well, I'm not sure theseguys can actually execute.
So thinking about what arethe steps I can do versus the resources in orderto achieve something that I can say, look,I've added value so you should giveme an opportunity to add even more value.
And I always like to tryto avoid dependencies on others if I can.
That's a big thing.
When you deal with a largecompany as a start-up, you're moving fast.
And what they think is fastis an eternity for a start-up, because they just havecumbersome processes.
So if you can figure out howto avoid dependency on them.
We won't cover the lean start-upconcept in the class here, but I do recommend the bookfor you to think about.
How do you test out conceptswith a minimum viable product? It's a valuable read.
And it applies beyondthe Web 2.
And then often there's somethings you need in a plan.
But this doesn't go in theplan, it goes in the appendices.
All of these thingsabout resumes, getting a business planthat has the founder with 15 pages of publicationsand stuff is just overkill.
Put it in the appendices.
If you have any ofthese other things, don't put it in the mainplan, have it available.
So now we'll talkabout the business plan as a financing document.
And think of this about threedifferent levels of reading.
The first readingis like a resume.
If you make the cut, youget the second reading, which is to figure outif this going to justify the investment.
And the third readingis to say, OK, is this a plan thatI as an investor and you as an entrepreneurialteam can commit to.
And the point is if youdon't make the first cut, you don't get thesecond two cuts.
So the question is what helpspeople make the first cut.
And these are some of thethings that occur to people.
Here's an idea there's justtoo good to ignore; god, what a brilliant idea.
Or a financial promisethat's too good to turn down, if you have that.
A team that's good enough tobelieve in– most investors will tell youthey'd rather invest in a top team, an Ateam, with a B idea than an A idea with a B team.
Because things aregoing to change.
You want to make sure you've gota team that can deliver on it when things happen.
An action plan that'scredible and focused.
Details to give assuranceof insight, commitment, and follow through.
And actually a format andstyle that says these guys are serious about achievingwhat they want to do.
Some reasons plans failto make that first cut? One is just aninsignificant market.
I've seen plans thatsay our market is going to be $100 million.
And you look at thefinancing requirements and they say we're goingto need $20 million.
Well, that's just too muchmoney for that size market.
So that's an exampleof either they have to redefine themarket or figure out how to do it cheaper.
Non-credible technology– thisis usually not an MIT problem, although the issue canbe at MIT that you're much too early along.
That is, if it's workingon the lab bench, there's a lot of steps until itactually gets into the market.
And then a failure to understandthe market can be an example.
For example, I was reading aplan that the device clearly required an FDA approval.
I mean, I just couldn'tbelieve it didn't.
And yet, they neversaid anything about it.
And the question was, well,they should've addressed that.
And if I have topull it out of them, then it gives you a negativefeeling about the team.
And then other reasons.
The plans is toooptimistic or naive.
Or maybe sometimesnot ambitious enough– I have a semiconductordevice that I'm going to double thespeed in five years.
Well, that's probably nota big enough improvement.
So these are all reasonswhy things may not get the second read.
There are cosmetic reasons.
And I hate to say it,but it's so aggravating to see a team with really goodideas screw up on the basics like misspellings, sloppy stuff.
Again, it's like a resume.
If you can't get the resumelooking professional, why would I even wantto talk you or hire you? So that's see theoverview of things tonight for the business plan.
Why write a plan orhave a planning process, what should be in the plan.
Again, at a highlevel we're going to go into each of the sectionsover the next six days.
And then a little bit ofthinking about the plan as a financing document.
And I'd like to leave you atthis point with this triangle that we're going tocome back to probably each night just to drill it inof what you're trying to do.
At the end you're trying to cometo a very clear idea of what you want to do, whatit takes to do it, and have all thesupport underneath.
And it's an iterative process.
Some people think this is alllinear– I think about this, I test that, it moves on.
It's very much like sciencecan be– we try something, it fails, we figure outwhy it fails, we go back and try it again.
But the goal is to findthat sweet spot where you can actually make a difference.
So with that, I'll ask ifthere are any questions.
Again, this is a highlevel, but if there's some things thatneed clarification, I'll do the questions now.
Otherwise, we'll take a break.
We usually say take10 or 15 minutes and meet the people next to you.
Because one of therequirements for the course, if you're doingit for credit, is you've got to put togethera written requirement, the executive summaryor a pitch deck.
We want to try to getteams formed to help you if you're somebody with anidea and you need some people to help, vice versa.
Given that it's probably ablizzard out there tonight, I think we'll defer that initialmeeting until tomorrow night, take like a fiveminute break or so.
And we'll getSteve to get stuff, who's going to tell youhow to make a pitch.
So at the end of the day,after everything you've done, you've got to comeand make that pitch.
And Steve is going to giveyou the precursors of that.
So we'll come back at about7:15, give you eight minutes.