Anything's Possible

Nearly all startups use the same methodology to figure out when to raise their next round of capital. The founder projects the planned burn rate and estimates the day they will run out of cash. Then they subtract a margin for fundraising approximately four months from the date the company’s bank account will be empty, and declare the difference the fundraising-process start date.

While logical, this method is highly flawed. It’s predicated on the idea that running out ofmoney is the key milestone upon which to base a fundraising. However, running out of money isn’t a milestone — it’s exactly the opposite.

Milestones should be accretive to the value of your business; they typically come from key proof points that validate important hypotheses. Milestones can be based on the product or technology (a great prototype); customer validation (a key contract); legal (overcoming a regulatory hurdle); or financial (meaningful revenue growth).

Running out of cash is the opposite of a milestone — it’s the ultimate moment of vulnerability. Running out of money is Game Over. Some investors will try to take advantage of that moment of vulnerability with very tough terms, but that worries me less than the true implication of being vulnerable. Vulnerable companies are simply unappealing to investors, and often cannot attract capital on any terms.

<h2>Let your bold vision and capable execution, not your bank account, determine what your company will become.</h2>

Investors are motivated to write checks when they feel like your company presents a great opportunity to return multiples on capital. Investors believe in the opportunity because of the narrative of the company and the evidence that the company amasses validating that narrative. Companies rarely look less likely to return to investors than when they are about to run out of money.

The cash crisis undermines the narrative. Even if other milestones in the business are positive and appear equal, it is much easier to attract capital as a company with eight months of cash than the same company with two months of remaining cash. As the company runs low on cash, it starts to smell funny to investors, who start to ask themselves questions like how did the company get into this situation? And if this is such a great opportunity, why didn’t anyone else want to write a check?

So what’s an early stage founder to do about the cash vulnerability predicament? First, I’d suggest leaving more room for error. Ideally, don’t raise 12 months of capital out of the gate, expecting to go back out raising in eight months when down to four months of cash. Instead, raise 18 months of capital and start raising again when down to nine months of capital in the bank.

When debating this with founders, I often hear two arguments for waiting until almost outof capital to raise the next round. First is that the company’s progress is so significant month after month that its valuation will be meaningfully better by waiting as late as possible to raise. We’ve been lucky enough to experience this situation several times when revenue doubled by waiting three more months and the growth resulted in a much more successful fundraising.

This is a fair reason to wait, but the founder must be very confident that the evidence will make a fundraise easy. Resist the temptation to believe that by burning cash to the brink, the company will have so much progress the valuation will appreciate despite the burden of the impending lack of cash. It rarely works out that way.

The other explanation I hear is that the milestones of the company aren’t particularly strong and the founder needs as much time as possible to prove as much as they can. In other words, had the company tried to raise with 6-9 months of capital still on the books, it would have little to show to prospective investors.

Further, they argue that even with 4-6 months of cash remaining, the company won’t have compelling milestones to share with investors. The company needs to show the progress that comes from burning until almost out of cash to have the best chance of convincing new investors to write a check.

This is usually faulty logic. Companies in this situation rarely successfully pull off the Hail Mary pass with seconds left on the clock. Instead, they face diminishing returns, while further damaging the outlook of the company by being on the edge of running out of cash.

No one wants to write checks for this type of company. If the founder had been out looking for an extension with 6-9 months of cash, it could have still raised capital with the halo of promise. In this stage, the company looks more dead than alive, and the halo has faded.

In this situation, I suggest founders consider early seed extensions. If the company is progressing extremely well, this is completely unnecessary and the company should start raising Series A early. However, without major leaps forward, it is much easier to top up a seed round when a company still has 6-9 months of capital than with modestly more business progress but 60 days of cash left and waning inside commitment.

Some people in the startup world believe that good companies succeed and bad companies fail. While rare companies find incredible success right out of the gate, I don’t agree with this view. Some companies become good companies over time because they find ways to finance their way through lots of challenges. Other companies, with great promise, become bad companies because they don’t plan their financing well and they lose the opportunity to live up to their potential.

Let your bold vision and capable execution, not your bank account, determine what your company will become.

When seed capital hits the books, the outlook of every startup is one of unbridled optimism. Founders, team members and investors are inspired by a singular vision and believe it can materialize into a world-changing company.

If things go right and the product gets amazing results, optimism turns into euphoria. There are few experiences more rewarding than making big collective bets and winning together. This is the ideal of every startup that we all aspire to be out of the gate.

However, somewhere between raising money on the promise of a great vision and a unicorn valuation, almost every startup endures a challenging purgatory that requires patience. The longer this “patient stage,” the greater the natural strain on the key relationships in the startup become, eroding away the ideal that everyone hoped for at the start.

This strain comes with significant risks. Both for investors and founders, but also between co-founders and management team members that might have different solutions for how to emerge from the patient stage. How you manage this stage is often the difference between your company thriving or dying.

Recognizing You’re Stuck in the “Patient Stage”

The patient stage typically looks something like this: Your startup raises money and, after a bunch of product delays, finally gets something into the market. Everyone expects a hit and the results are somewhere between okay and disappointing.

Not to worry; the team thinks it knows what needs to be fixed. After all, this was the minimal viable product and the entire point was to learn. Albeit delayed, everyone learned a ton from the MVP, and the company needs time to make some fixes.

After more delays, a new version ships. The results are better, but still far from the aspirations of everyone involved. The process repeats, possibly shedding some team members along the way. You pass the messiah T-shirt to various new hires who suspect they know how to fix the problem, but ultimately are only another piece in a very complicated puzzle.

While this example focuses on product, the same spiral of purgatory can apply if your company is stuck trying to find the right sales approach, marketing channels, operating plan, business model or supply chain. Whatever the company’s struggles, if the progress isn’t incredibly clear, more and more patience is required to support you and the company.

Escaping the Patient Stage

Unfortunately, this is the typical path that must be overcome by even successful startups. The question for founders and their boards is how to get through the inevitable patient stage together.

Your leadership credibility is the key to success through this stage. If investors or team members lose trust in your leadership through challenging results and frequent iterations, the company can find itself in a very precarious position.

The biggest mistakes you can make in the patient stage are either denying the problem exists or pretending that ill-conceived solutions will fix everything.

Your investors are there to help and want to be supportive, but as your credibility declines with every disagreement about the problem or the next failed solution, your investors will start to doubt that there is a solution in hand or that you’re the person who will lead the company to that solution. Skeptical team members will look elsewhere for jobs. Doubt will slowly kill the company.

Below are the keys to surviving the patient stage.

Keep it short. First and most obvious, the shorter each patient stage the better. As long as there is clear forward progress, things start to get a lot easier. It’s extremely valuable to demonstrate the small wins. An overall sense of constant movement against the key challenges will build confidence that the company is getting closer and the patience is well-deserved. Having emerged from previous patient stages and achieving a new level of success, will actually make the company more resilient through the next patient stage.

Stay aligned. Second, it’s important to be precise with your board and team on what problem the company is solving. There are few things more frustrating than finally feeling that you’re making progress only to realize that investors, founders and team members had a different view of the problem to be solved, and many don’t agree that the company is progressing.

Don’t develop product myopia. Third, while sharing product progress, don’t overestimate investor reaction to product. Remember investors aren’t product experts. They’ll typically react positively to any product hypothesis that they believe will move the company forward, but be careful not to keep showing them product iteration after iteration, only to keep getting poor customer results from each new iteration.

Product iterations are hypotheses and not progress. Investors will likely be tempered in their enthusiasm until they are seeing results. At some point, seeing the next version, after many previous underperforming versions, will lead to a loss of all credibility and investors will think that your strategic product instincts are not going to get the company beyond this stage.

Don’t fundraise against patience. Avoid fundraising at all costs while in the patient stage. Your own investors will struggle to write a check and even worse they will lack the confidence to inspire new investors to write you a check. When fundraising, it is important to anticipate that things can go wrong and that you will likely find yourself in the patient stage at some point.

Plan accordingly and raise enough during periods of great optimism to fund the company through purgatory. The combination of being in the patient stage and also running out of money can be a death blow to startups.

It’s a matter of survival. I’ve seen companies stay in the patient stage for a few years and others that cannot survive through this stage for more than a few months. The patient stage is inevitable, and it is the riskiest phase in terms of how the relationship between investors, founders and team members can impact the success or failure of a business.

Erode credibility during this phase and investors and team members will lose patience and throw in the towel. Collaborate well, be clear on the problems and the planned solutions, show steady progress and you will sustain through the patient stage for however long is necessary.

Conventional wisdom is that startups are bought, not sold. The logic follows that no matter how much an entrepreneur wants to sell a company, there needs to be an eager buyer and no amount of seller desire can manufacture one. Some people interpret this wisdom to mean that they should spend no time getting to know buyers and when a large company is ready to buy their startup, they’ll come knocking.

I understand this advice, but had very different experience selling Brontes Technologies, a company I co-founded with Micah Rosenbloom that brought mass-customization to the dental industry. The process started without a buyer and ended with five.

Strategic Fundraising Can Test the M&A Market

We were starting the process of raising our Series B financing with a beta product and no revenues. Micah and I believed that we had a game-changing technology for dentists, but that the venture capital community would undervalue it, because we didn’t fit into an easily defined category, like enterprise software. No matter how much we tried to convince VCs that enabling mass customization in dentistry was a big economic opportunity, even the most excited investors would put a discount on a market that they didn’t know well.

Micah and I decided to seek out strategic financing for two reasons. First, we thought a strategic investor could help financial investors understand the potential value of the business. Second, I commented to Micah, and truly believed, that “if only we could get someone to fire a shot, there would be a war to buy the company.”

We had no specific intention to sell the company at that moment, but we saw eager acquirers as offering the company meaningful optionality on valuation, and we wanted to build momentum around potentially being purchased at some point.

Get to Know Potential Buyers Early and Often

We had invested time over the previous two years getting to know key industry players. The head of corporate development at each of the companies in dental tech had likely told their CEOs that they were staying close to Brontes and would get a look if we were interested in selling. I think this was one of the most important investments we made when it came to selling the company.

Companies may be bought in a moment, but they are sold over time.
These industry players knew us reasonably well. We weren’t calling them cold to offer them an opportunity to invest in a company that they never heard of. While we were somewhat coy with senior folks from the industry, we had done a good job creating a positive reputation as a team building something that could be important to the future of the industry.

When we approached three industry players to offer an opportunity to invest in our round, all three wanted to pursue diligence and ultimately all three offered to invest. While we weren’t certain we wanted strategic investment at the start, we became convinced over time that one of the strategies offered great upside of having an industry investor with minimal downside.

Incite a (Bidding) War

Coming to agreement with that strategic investor to lead our Series B was the shot that started the war. When we told the other two strategic candidates that we decided to take capital from a competitor, they were both very upset.

One flew up that same week to meet us for dinner to convince us not to take the deal. He looked me in the eye and said “what can we do to get you to walk away from the other deal and take money from us. We can definitely beat anyone on valuation.”

I responded “It isn’t about valuation. We are afraid that a strategic investment from you could hurt our opportunities to work with others in the future and are convinced this isn’t true of the investor that we’re accepting. Absent an offer to buy the company for more money than has ever been paid in this industry for a pre-revenue company, I don’t really think there are alternative ways for us to work together right now.”

They made an unprecedented offer to buy the company the following week.

Sell Without Selling Out

Getting to know all the big players in the industry over the past two years was paying off. So we took that first offer and immediately called the other potential buyers to tell them that we had an offer to sell and didn’t want to do so without speaking to them first. We’d need to know quickly whether they were serious about buying the company and what they could offer as a price.

Two weeks later, we had the war for the company that we imagined. Five buyers bid to purchase Brontes. While 3M wasn’t our first choice when the process started, they did an amazing job helping us see the potential to build Brontes on their platform. By the end of the process our management team was unanimously convinced that we wanted to be part of 3M and an offer for $95 million sealed the deal. The price war had driven up the value of the company nearly 50 percent from the first bid.

Could any of this have happened if no one in the industry thought what we were doing was important and potentially of interest for acquisition? Certainly not. Having said that, the process didn’t start with a buyer and it ended with many.

Selling a business is a process that is executed with a long view and years of preparation. It’s important to get to know buyers well before a company is interested in selling and build mutual respect over time.

Companies may be bought in a moment, but they are sold over time.

Taking the leap to being an entrepreneur is really scary. Every founder that I know points to role models that made that leap possible. Some of those role models are legends like Steve Jobs or Alfred Sloan. While legends inspire us at a high level, their path also seems unattainable to most of us. We read about them in biographies, but cannot relate to them as people. Another type of role model comes from those that we directly identify with as peers and inspire us to believe that we can also be as bold as they are in aspiring to achieve our dreams.

When I was working as a strategy consultant, and miserable in my very incremental daily routine, I dreamed of starting a company, but was unsure if I was being realistic. I was inspired by the legends, but following in the footsteps of Jobs felt inaccessible to me, like trying to follow in the footsteps of Michael Jordan or Tiger Woods. Just because I admired them, didn’t mean I had any chance of becoming them. Two role models stand out in my mind as people who I related to as peers and gave me the courage to believe in myself as a founder.

One of those people, I didn’t know personally at the time. Todd Krizelman was the founder of TheGlobe.com. I first encountered Todd along with his co-founder on the cover of a major magazine in 1999, held up as a symbol of the new economy. He was approximately my age and we knew people in common. I remember staring at that magazine cover and thinking how awesome it was that someone my age, with a similar background, was betting on himself and succeeding. Fixated on that cover, I couldn’t help but question why I was sitting still and not even trying to achieve my aspirations.

The other role model that stands out in my mind was a friend, named Josh Schanker, who went to a neighboring high school. I met Josh through various high school activities and thought really highly of him. We stayed distantly in touch while at different colleges. When I heard that Josh became Editor-in-Chief of the Harvard Crimson, I wasn’t a bit surprised. I always viewed Josh as a talented and thoughtful leader. Like me, Josh also graduated and went to work for a consulting firm. He then paved the path that I was struggling to muster the courage to take and founded a company called BargainDog with a friend of his named David Beisel.

Not long after, I quit my uninspired job and founded a company myself, but I’m not sure I would have done so without Todd and Josh showing me that it was possible and giving me the courage to bet on myself.

Life has a funny way of coming full circle.

In 2007, I got the opportunity to invest in a company founded by Todd Krizelman called MediaRadar and have been a very happy investor ever since.

Today I’m proud to announce that I’m leading an investment in Josh’s company Bookbub.

Every startup plays two complementary games–the air game and the ground game. The air game is always more romantic. It is the emotional narrative of how your startup revolutionizes a market. It’s the aspirational hope that the company could become one of the great ones. It’s the buzz in the market, the great PR machine, talented people fighting to get in, and investors who can’t get enough money into the company.

The ground game is much uglier. It is the day-to-day operations in which all the blemishes are visible. It is nearly impossible to live up to the expectations set by the air game and execute to your startup’s lofty aspirations. The ground game has metrics that you are embarrassed to share with anyone. It has nasty elements, such as falling short of milestones, founder conflicts, people getting fired, and missing quarterly numbers. Even solid performance with the ground game feels under-appreciated. Achieve 70 percent of your insanely ambitious goals and everyone is disappointed. The grind of the daily operations can be so exhausting that sometimes you lose sight of why you started the company in the first place.

In the startup world, early-stage companies are largely valued–at least for a while–on the air game, which tends to be way out ahead of the ground game. However, if your ground game lags for too long, the air game can get ugly as well. Talent starts to leave, and it’s hard to attract more. Investors become disenchanted, and finding new ones is nearly impossible. At some point as your company is growing, the ground game will become the focus, for better or worse.

Though most companies are better at one game than the other, both are necessary for success. The air game gives the ground game cover. It allows time to fix the ugly details, thanks to enthusiastic capital and access to great talent. With a great narrative for your company, you’ll have more room to make mistakes. However, if the gap between the grand vision of the air game and gritty details of the ground game grows too large, don’t be surprised when your company starts to face cynicism.  

Companies that thrive on the ground game, but struggle to build buzz, face an equally uphill battle. As someone who executes really well, you probably feel slighted by the lack of enthusiasm for your company. The numbers should speak for themselves. Why doesn’t anyone (investors, talent, press) appreciate the facts? You scoff at overhyped companies and have little respect for peers who don’t put their heads down and operate. You are great at blocking and tackling but never seem to get the valuations of less-impressive competitors, which means you can’t get the cheap capital you need to expand and you lose out on the best people. Playing great on the ground without air cover feels like a Sisyphean feat. These companies rarely win. 

The challenge is to be great at the air game–by building huge enthusiasm for the long-term potential–but never oversell the near-term ground game. Inspire people with your company’s lofty long-term vision, but set near-term goals that are ambitious but achievable. Use the air game to energize your team, attract the right leaders, and raise inexpensive capital, but never forget that your success as a company will ultimately come down to how well you execute. It’s a difficult balance–underestimate either game and you’re likely to lose both.

A version of this post was originally published on Inc.com http://www.inc.com/magazine/201404/eric-paley/how-to-stay-focused-on-why-you-started-your-company.html

You’ve identified a great opportunity. Crafted a plan. Inspired talented people to join you and persuaded investors to put money into your fantasy. You are officially a visionary. Well done.

Now comes the hard part. Being a visionary is table stakes in building a great company. Vision is the license to play the startup game and the base ingredient for being a leader. The challenge that you face now isn’t easy–you have to lead. Leading is different. We’ve all met visionary thinkers who are terrible leaders. Just because you can paint an exciting picture of the future your company can create doesn’t mean that you’re able to lead the company to that vision.

So how does a founder make the transition from visionary to leader?

1. Build trust with talented people. Everyone says he or she wants to hire talented people, but founders are often intimidated by great talent. They want people who follow their vision, but true talent will challenge that vision. Perhaps you are concerned that people who have more experience and success may actually undermine your role as a leader.

The exact opposite is true. Fear of being undermined by talented people is the sure path to failure. It will either cause you to hire less-talented people or cause talented people to question your judgment. To transition from visionary to leader, you need to demonstrate your ability to attract experienced people who can bring key expertise to the company. If you can get them on board and excited by your leadership, you’re well on your way.

2. Determine what’s important. There are an infinite number of things to do at a startup. One of the hardest challenges is figuring out what’s most important and focusing your scarce resources on that topic. It can be a difficult struggle to transform your grand vision into steps that your team can act on. Nothing frustrates talented people more than working for a founder who fails to offer clear priorities and appears to shift the game plan haphazardly.

Becoming a leader means focusing your team on the key priorities. You need to build consensus on these priorities, set goals, evaluate performance against those goals, and change course when necessary. Great leaders build credibility with their team by making a plan, executing it effectively, and demonstrating that it was the right plan.

3. Be transparent (up to a point). Your team deserves the truth, and being transparent will build trust in you as a leader. Unfortunately, being a visionary means constantly being frustrated at the speed with which your vision becomes reality. This is part of the reason that being a founder is such an emotional roller coaster. Visionaries who show this frustration typically burn out their teams over time. While you are experiencing insane highs and lows, your team members cannot be whiplashed by that same level of volatility. They’re committed, but not nearly as committed as you, which is why they might run for the hills if you expose them to your every emotion.

Instead, dampen the volatility they are feeling while being honest and transparent. Not everyone needs to know every little detail of your recent rejection or of the company’s financial challenges. Don’t hide the truth, but don’t torture your team with details that are out of its control.

Vision is the reason your company was born, but leadership will be the reason it thrives. 

A version of this post was originally published on Inc.com http://preview.inc.com/magazine/201402/eric-paley/visionary-leader-rules.html

Nearly every week, I receive an email from one of our portfolio founders that reads something like: “Hey, Eric, great news! We just got out of a meeting with Dave from AwesomeVC and he loves what we’re doing. I have a good feeling he’s going to lead our Series A round.”

Not long after, a few more superenthusiastic emails follow about the high probability that other VCs are also very interested and how the founder expects to wrap up the round quickly and painlessly.

Then the balloon deflates. One by one, the VCs pass on the round, and the founder has to break the news to the co-founders, employees, and existing investors. He’s completely dejected, his team is now concerned about running out of money, and his initial investors fear they may have funded a dud. How could he have been so wrong about the interest level of the VCs? They seemed genuinely excited; what went wrong?

The problem is that venture capitalists often give off signals that are inconsistent with the real probabilities of their actually making an investment. Venture capitalists are not just buyers of companies; they’re also sellers of capital–meaning that because the best deals are competitive, investors use enthusiasm to increase their chances of winning (should they ultimately decide to invest). That’s not to say their enthusiasm isn’t genuine; it just doesn’t necessarily reflect their likelihood of investing.

Every VC is different, but here’s a breakdown of a few steps in the investment process to illustrate how a founder’s expectation of closing a deal differs from that of a VC’s. This is far from a scientific analysis, just a general sense of the numbers from my experience.

The VC Invites You to Pitch
Likelihood You’ll Get Funded:
In your mind-10% In reality-<1%
Most VCs take a few hundred meetings a year and fund one to three investments a year. Founders typically get in the door with a strong personal introduction from a mutual contact, which can lead to the assumption of real interest from the VC. Don’t get excited about getting a meeting; VCs are paid to listen to you pitch.

The VC Invites You to a Second Meeting
Likelihood You’ll Get Funded:
In your mind-50% In reality-10%
Being invited back happens right away, and
it can make you feel that momentum is building. Unfortunately, I’d estimate that the
typical VC quickly invites back 20 to 40 companies a year after a great first meeting.

The VC Invites You to a Partner Meeting
Likelihood You’ll Get Funded:
In your mind-90% In reality-50%
After multiple meetings and due diligence, a VC will often invite you to pitch the partnership. Although some firms really do rubber stamp investments at partner meetings, I’d estimate that about half of these investment discussions vaporize at this point. Frequently, the partner leading the deal loses enthusiasm after facing the crucible of his colleagues.

The VC Offers You a Term Sheet
Likelihood You’ll Get Funded:
In your mind-100% In reality-90%
This is often the most painful disconnect between founders and investors. Most founders consider a term sheet to be a 100 percent guarantee of financing. Unfortunately, my experience is that 1 in 10 term sheets self-destructs. When the term sheet comes, you shouldn’t take closing for granted.

Why does any of this matter? Raising money is like any other sales process, only the
consequences of failure are usually much more significant. Qualify your prospects accurately, make contingency plans, and don’t appear naive by overestimating the odds of a close. Once the deal is done, then you can celebrate.

A version of this post was originally published on Inc.com http://www.inc.com/eric-paley/what-to-expect-when-expecting-funding.html

Most of the business advice you’ll receive as a start-up CEO seems obvious. In fact, it’s rare that an investor or adviser makes a suggestion that you have never considered. More often than not, the suggestion is, in fact, probably already being implemented at some level.

Your company isn’t scaling as quickly as planned, and a board member says you need to boost sales. “No kidding? Thanks for letting us know,” you sarcastically think to yourself. Even the more concrete suggestions from experienced advisers or team members often seem either painfully obvious or just a regurgitation of things the company is already doing or has tried before. From your viewpoint, it can feel demeaning, because it suggests that your job is so easy that people think they can do it by giving generic advice while sitting in the cheap seats.

At times, real life can resemble that TV commercial in which a bunch of businessmen in suits sit around a conference room making insanely obvious statements and the tag line is something like, “If business were this easy, you wouldn’t need us.”

No matter how obvious these suggestions may seem, take a minute to really consider the magnitude of your efforts. When it comes to operational issues, your start-up often succeeds or fails in accordance with the degree to which your company embraces these seemingly obvious ideas or suggestions. The advice may not seem earth shattering, but very often it is the successful companies that embrace that advice and put forward a serious effort in following it.

Take, for example, an exchange between you, the founder, and an investor. The investor is concerned about the quality of your customer development and advises you to get your hands dirty spending time with customers. That’s completely obvious to you, and you respond that you’ve done so and will continue to do so.

Box checked and issue resolved, right? Not at all.

Yes, technically you are talking to customers, but are you doing enough of it? Because you are already talking to customers, it’s very easy to shrug off the advice and move on. However, that advice typically reflects the investor’s concern about the scale of your efforts. In this instance, the investor is trying to tell you that whatever amount of customer development you’re doing, you need to do much more.

When I read Delivering Happiness, by Zappos CEO Tony Hsieh, I found the book both incredibly insightful and incredibly obvious. The book explains Zappos’s formula for success–putting the customer first and offering delightful customer service. Most of what Hsieh writes about probably seems familiar to any founder. What business doesn’t want to put the customer first and offer delightful service? The difference between Zappos and most other companies is one of magnitude. Zappos manages to do so at a completely different level than almost everyone else.

As a CEO, you should never blindly follow the advice of anyone–be it a team member, a board member, or an adviser. After all, whatever the outcome, it ultimately belongs to you. But you do need to seek out the best advice to figure out the right answer. Sometimes, the right answer comes from someone in a way that initially seems painfully obvious.

A version of this blog was originally published in the November issue of Inc. Magazine http://www.inc.com/magazine/201311/eric-paley/why-you-should-listen-to-obvious-advice.html.

I read a good number of blogs. I still like magazines. I love books, and I wish I could find time every day to read the newspaper from front to back. I also have great respect for academic writing.

Formal prose, however, has no place in a start-up. While I was working on Brontes Technologies during my second year in business school, our team entered both the Harvard and MIT business-plan competitions. Both contests required the submission of a written business plan. Our plan was 42 pages. It was obsolete before it was even completed.

The judges seemed to have skimmed it, as did our academic adviser, but I don’t think they really read it. Even if they didn’t read it closely, they read more of it than anyone else ever did. We shared it with some investors, but it was clear they never read it. We never referenced it again ourselves. We never gave it to new staff members to help them understand our business. We never edited it as our business changed. We never really used it in any way. It was little more than academic.

No matter how gifted a writer you are, slide presentations, or decks, are a better way to get your message across. Quick to read and easy to edit collaboratively, slide decks are a much more concise way to express an idea for discussion and decision making. Prose is great for one-way conversations, but it
falls short for any type of engagement in a group. Ultimately, prose is not agile enough for start-ups.

Start-ups need to move fast, organize their goals succinctly, and edit on the fly. I’ve never seen a start-up go back to rewrite the marketing section of its business plan after rethinking its marketing strategy. I have, however, seen many start-ups in the same situation rip up the marketing slides in their slide deck and insert the updated ones.

This concern doesn’t apply just to business plans, either. Prose should be used sparingly in all types of business communications–annual plans, formal specifications, etc. As an investor, I’ve noticed that I have a very strong bias against teams that send me executive summaries. I rarely read them when they are one page long, and, unfortunately, most are four pages. This is your opportunity to make your company’s narrative inspiring and compelling–don’t waste it by submitting the equivalent of War and Peace. When I get an executive summary, I immediately ask for a deck, which I find much more energizing (when well executed) and digestible.

I think the formal business plan is a relic of the start-up business-plan competitions that originated at academic institutions. If you apply the academic mindset to a start-up, then it probably does make sense to start with a written thesis on the opportunity. Unfortunately, it took me a full year to write my undergraduate thesis, and I don’t remember anyone ever reading it outside of the professors responsible for grading it. I would encourage academic institutions to replace the traditional business-plan competitions in favor of pitch-deck competitions.

As for entrepreneurs, my advice is to discourage your team from writing prose whenever possible. If you want to tell a story, tell it in a compelling and concise narrative slide deck. If you have an argument to make, do it live in a team meeting. If you want to codify what has been agreed to on any aspect of the business, build concise slides that are easily digested, shared, debated, and edited as a group. If you want to slow your business down, stifle real-time discussion, and prioritize the argument over the outcome, write prose.

A version of this blog was originally published in Inc. Magazine http://www.inc.com/magazine/201310/eric-paley/writing-advice-for-start-ups-and-entrepreneurs.html-