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For as long as I've been an entrepreneur living in the US, I've heard about the post-Thanksgiving "holiday slowdown" in relation to venture capital and fund-raising activities in general. 

I've always wondered, does it really occur? Are entrepreneurs and investment bankers really taking it easy after Thanksgiving, or is this just a myth? 

As it turns out, the post-Thanksgiving slowdown is real.  Check out this graph (note: I originally generated this image for a blog posted earlier today on geographic clustering, but the data around the post-Thanksgiving Day dip was so noticeable that I had to call it out) :

This data shows people searching, and news items based on the search terms "venture capital".  Check out the dips.  Now, I don't know about you, but looking at those dips across five years worth of searching tells me this is not only a real phenomenom, but it's a trend that sticks around whether in good times or bad.

That said, the 2008 Thanksgiving holiday shows a tiny dip compared with the other years.  That may suggest to us that this year, for the first time in five years, entrepreneurs and business operators ignored the Thanksgiving holiday weekend in favor of spending a little time searching on Google for 'venture capital'.  It will be interesting to see if the same trend emerges over the end-of-year holidays.

I know I've blogged about it before, but you can't say too much about a good thing.  And one of my favorite things on the Internet is Google Trends.

Google Trends - located at http://www.google.com/trends - takes any entry you wish to explore (e.g. "venture capital") and returns data on how often that information is being searched for by country, city, language, and overall search volume.

This morning, I was interested to know if the trend for people seaching for venture capital is going up, relative to the downturn in the economy.  As it turns out, it doesn't appear to be, although it's possible that it's still too early to tell.  While the search term overall is down in terms of use, new items are up.

However, one trend that I did find interesting was the per-capita ranking of search volume for the term "venture capital" by country.  According to Google Trends, the top ten countries, ranked by requested searches per capital are:

1. India
2. Hong Kong
3. United States
4. Israel
5. United Kingdom
6. Canada
7. Australia
8. Switzerland
9. Germany
10. Poland

The city in which more searches for "venture capital" was made than any other was, not surprisingly, Cambridge, Mass.

I was giving a phone recommendation for an investment banking friend yesterday and while talking about the work we've done together, the interviewer touched on a VC investment that we closed fourteen years ago.

"How long did it take you to close that deal, start to finish", she asked me.

"Six weeks, start to finish", I answered.

"Wow", she said.  "Six weeks.  That's really fast."

I thought about this comment later, and realized that in the course of the tens of millions of dollars of investments that I've been involved in since, six weeks is not only at the lead edge of the bell curve, but it has yet to be repeated.  Most of the investments I"ve worked on have taken far longer - twenty weeks, on average.

I'm repeating this here for a reason - sometimes people that are looking for capital, or involved in a transaction, have extremely unrealistic expectations as to how long it will take.  A guy that I spoke to the other day, who was just starting out, was appalled that I though he should allow three to four months (and those of you that know the busines will know I was being kind, right?)

"Four months?" he exclaimed.  "Why the hell is it going to take four months?"

The best way to answer this is to break it down.  Let's assume the typical closing takes twenty weeks, and explore ways in which we can shave some of that time down. 

1. Do Your SWAT Up Front (Saving: 4 weeks) 

I'm always amazed at the poor quality of most investor presentations, and the poor prepartion of most teams when they first start the pitching process.  Very few do a great job of describing the business and the market, and few tell the story from the point of view of applying capital to value creation.  Almost no companies that present have a solid grasp of the subset (not the superset) of the market they are likely to win. 

And sometimes, entrepreneurs take some of their best assets - and bury them.  I recently saw a presentation in which the leader of the team was a recognized sales leader, in the "billion dollars of revenue per year" category.  Not many people are in this category.  The fact that he had sold billions a year in his last job wasn't even in his PowerPoint.  That is the kind of asset that rarely accompanies a new idea.

Another important point is to showcase your weaknesses alongside your strengths.  Investors need to know where the gaps are - if you point them out up-front, you will save a lot of time, and you'll be amazed at the resources many investors can bring to bear to solve these problems.  Example: Many VC firms have in-house "Recruiting Partners" whose job it is to find you a CEO, CTO, head of marketing, head of development... so don't try and hide your weaknesses.  Get them on the table and you will gain trust and respect, and save a ton of time. 

Getting the packaging right can shave weeks off the amount of time you will need to raise capital. Using up valuable meetings with intelligent people for the purpose of gaining tips on how to better present your brilliant idea - or restructure your company - is a waste, and will reflect poorly on your ability to manage your business, going forward. 

2. Target The Right Investors (Saving: 4 weeks)

Let's assume, for starters, that you've got an amazing business idea and a great team, and your packaging is superb.  While not uncommon, this combination isn't enough to win capital.  To get funded, you need to get this plan in front of the right group of investors.    

Few entrepreneurs realize how statified the investment community is, and view venture capital as a rather large homogenous pool of talent and capital.  Nothing could be more wrong - and pursuing the wrong investors will not only lose you time, it may demoralize others on your team when they hear a "no" and fail to realize that the same investor would have said "no" to Google five years ago - because they are "late stage", "geographically focused", "focused on a certain segment", or don't actually have any money available to invest.

Do your homework - and you'll save a ton of wasted time.  And by the way - though you need to target the right investors, you shoudl "speak" to everybody.  In my experience, when you call folks that are not investing in your segment and ask for help/advice, it is readily offered.  Utilize folks that are not investing in your area to reach those that are - and you'll make the most of your contacts.

3. Demonstrate Commitment (Saving: 4 weeks)

The best advice I ever got (and I've blogged about this before) was given to me more than twenty years ago, during an investment pitch in Los Angeles: put your money where your mouth is.  In that meeting, the guy I was meeting with reached out and put his hand on my arm and stopped me mid-sentence.  He asked me if I would put my own money behind this, and if not, why not?

The bottom line was, the idea wasn't yet baked, and he knew it, and, after the intervention, I knew it.  I went off, worked on the plan, then came back and he became a big fan.  Ultimately, he didn't get to invest because there were too many folks interested and he was just a small company.  But he made an investment in me that I will always remember - be prepared to put your own money/time/assets behind your idea. 

4. Dating and Due Diligence (Saving: 4 weeks)

If you know the investors you're approaching, and they know you, you can save a lot of time. If you have a track record of trust and success, you can shave several weeks off your fund-raising process.  When you hear about someone who got their money in days or weeks, think back on this point. 

For those of you that don't know the folks that you're going to be approaching, and don't have anyone on your team who knows them, you need to allocate several weeks just to allow the folks you're meeting with to get to know you.  A lot of times, this is jokingly called the "dating" stage, but it's not a whole lot different than the activity that is referred to.  When you start out dating someone, though interest is typically high, levels of trust and understanding are typically very low.  Dating is all about increasing trust and understanding towards rewarding ends. 

We all know what happens when you try and push the timeframe forward a little too quickly - you can very quickly find yourself back at first base, or worse.  Spend time letting people get to know you, and you'll get to the term sheet faster than not engaging - if that sounds like simple advice, ask yourself how often you picked up the phone this week and spoke to the folks interested in investing in your business.  In my experience, if you're not talking every day, the deal just isn't going to happen.

5. Negotiations, Closing and Legal (Saving: 0 weeks)

They are a lot of lawyer jokes out there, and some might view "zero weeks" as a stab at my legal friends, or simply as facitious. But the simple fact is, there is a ton of legal work associated with investing in a new company, and it takes a certain amount of time to do it.  I bought a company a few years ago, and we got the deal closed in three weeks.  Our law firm - a major East Coast firm - told us it was the fastest they had even seen a deal that complex go down.  

Also, you should not assume that once you've agreed terms, the capital is going to come in "in a few days".  If you need capital, use the term sheet to organize a bridge loan - but don't expect that process to take days either.  Legal work for putting a bridge loan in place will take you some time as well.

The bottom line: there are things you can do to save time when raising capital.  But the most important thing is to have the right expectations when it comes to capital raising - this knowledge will help keep you and your team sane and motivated while you move through the process. 

There are several lessons that entrepreneurs can take away from the auto maker CEOs' performances on Capitol Hill today.  I can think of eight:

Lesson One: Love Your Product

Imagine for a moment that you're Dean Kamen, inventor of the Segway, and you're pitching investors on a "transportation product" that offers the benefit of moving people from one place to another.  Imagine that the distance between the manufacturing plant and the investor's office can be easily covered by the Segway.  Now, try to imagine Dean Kamen turning up on a Harley to pitch John Doerr on making an investment.

The media has been criticised for focusing on the use of Gulfstreams by auto executives.  But I don't know a single entrepreneur that would make the mistake of pitching a new presentation application using PowerPoint.  I think the decision by all three to drive themselves the five hundred miles to Washington is the first thing they've done right since they started pitching.   

Lesson Two: Don't Outshine Your Audience

Every successful sales guy understands the importance of the subtle communication of status and success (i.e. a nice watch, a sports jacket, matching teeth, a haircut) when it comes to closing a deal.  Numerous studies show that people respond favorably to folks able to communicate success in this way. 

But, as almost all sales guys (and most entrepreneurs) understand, there's a limit.  I'm not sure the act of pulling a Faberge egg out of your Zegna jacket and rolling it around on the table in front of a customer ever sends a good message.  I know some folks that recently invested in a company in which the CEO had consistently displayed ostentatious behavior, including the purchase of expensive jewellery. The end of that company should not have been a surprise - he was clearly passionate about something other than inventing, coding, or selling. 

Messaging "I'm successful" is one thing.  Messaging to people that you value the shallow trappings of an outwardly succesful life above spending time with your products (rather than in your Gulfstream), is something most beginning entrepreneurs understand. 

Lesson Three: Show You've Learned From Your Mistakes

VCs see a lot of "retreads" through their doors.  There is nothing intrinsicly wrong with an executive or a company trying again with a new business idea - almost every succesful entrepreneur has a dud or two in their closet (Traf-O-Data?).  The key to succeeding in being given a second chance is to demonstrate that you know what went wrong the first time, and know how to not lose money this time.

The auto manufacturers visiting Capitol Hill this week are, to borrow our incoming President's words, "tone-deaf" to this requirement. Not one has admitted what we all know - that a sharp decline in investment in innovation over the past two decades has resulted in a migration of value away from US-made cars by an entire generation of users. Not one of them today articulated a plan for why they will be succcessful marketing to the new generation's expectations.  

Lesson Four: Don't Change The Numbers Between Meetings

During their first meeting in November 2008, the car manufucturers asked for $25 billion.  Just two weeks later, "the ask" has gone up to $34mm.   

Even a rookie entrepreneur knows that consistency matters when it comes to pitching your business plan and estimating the cost of bringing your products to market.  You cannot attend a meeting with investors and pitch them $25mm one week, and go back two weeks later with a different number - unless encouraged to do so by people that like your plan, but think you're undercapitalized.  Neither of those qualifications applies here.

Lesson Five: Create Value

The members of Congress on the Banking committee asked the manufacturers to bring their business plans with them.  In their opening remarks, none of the exceutives made more than a passing reference to the amount of value that would be created by the infusion of capital. 

Imagine making this pitch to investors: I need your money so I can continue to pay my employees so the neightborhood stores won't suffer.  That sentiment was (in paraphrased form) the key bullet point expressed by two of the CEOs pitching for $34 billion today.  Would any professional investors that you know "bite down" on this request?  Of course not.  The health of the neighborhood that your business is based in is largely irrelavent to the decision to invest.

Few customers end up getting more value from a US car than from a foreign competitor (see Lesson Seven below) - and they are more likely in many cases to lose value over the lifetime of ownership.  Every entrepreneur knows that they need to come up with a business plan that continuously improves the value of their services in the eyes of their customers before they can hope to create value for their shareholders. 

Google and Oracle and Microsoft and Sun have built very successful businesses on this premise.  The car guys could too, if they'd just go back to basics and understand that shareholders are fundamentally looking for value - or at least a shot at achieving it.

Lesson Six: Innovation is Essential to Maintaining Market Share

If you were to ask most customers to name the three innovations the US auto industry has introduced over the past twenty five years, they would probably come down to XM, OnStar and in-seat video screens for the kids. But these are mostly expensive options - basic models of European cars come fitted with safety features, such as all-wheel disc brakes and navigation units as standard.

As the CEOs have admitted, and most rental car agency customers know, the US industry has been standing still relative to its foreign competition.  For this reason alone, congress should not invest.  You shoudl never invest in a company with a proven track record of not understanding that product cycles historically hit two low points - at the initial point of conception and innovation, and at the point at which those innovations no longer match the customer's needs.   

Lesson Seven: The Customer Interface Needs To Change With The Customer

Many of the committee members are old enough to remember when American cars ruled the world.  I certainly remember.  You can't imagine a movie star from the first half of the twentieth century *not* driving a US auto. 

However, these days, the visible trend-setters and soccer moms of Hollywood, New York, Seattle and Miami - and cities in between - don't drive US vehicles in nearly the numbers they used to.  They drive well-constructed Japanese hybrids with five year warranties or precision-engineered European sports cars, built by companies with fat balance sheets and terrific service plans. 

Although I'm sure these drivers appreciate the better fuel consumption rates referred to several dozen times today as key objectives of the carmaker business plans, when you compare the US "user interface for driving" with its competitors, you start to understand why the customer experience is a critical reason why users are migrating away from US cars to foreign competitors.

I'm not only talking about the experience of driving a car or smelling those expensive European-leather seats - I'm talking about entire lifetime experience of owning a US-made vehicle.  The consumer faces enormous pressure to *not* buy US-made vehicles.  Many foreign manufacturers create a consumer experience that is much more valuable to soccer moms than their US counterparts.  

Consider the superior warranty terms offered by some European and Asian manufacturers (five years and a 100,000 miles), the savings offered by fuel consumption rates that are almost half those of US competitive vehicles, and the experience the customer has at the end of their relationship with the vehicle, when they go to sell their vehicle into a diminishing market (take a look at Saturn resale prices and you'll understand what I'm talking about).

All of these things remove value from the products and services, relative to the competition.

Lesson Eight: You Can't Legislate Innovation

There are thirty or so *new* car companies currently receiving venture backing in the US that are building the cars we will all drive ten to twenty years from now. 

None of these guys are on Capitol Hill asking for money - because they obviously have viable business plans that address changing consumer and business needs through innovation. 

Should Congress decide it is in a lending mood, it might want to act in the interests of its shareholders and heed the remarks of George W Bush today, who said that a bailout would be "good money after bad".  They might want to consider creating a fund of billions for the true innovators in the industry, rather than "tone deaf" executives seeking to save failed, non-innovative businesses.

Three years ago, my buddy Will Adamopoulos, who heads up Forbes in Asia, invited me to their Global CEO Conference in Hong Kong.

At most conferences, the real value lies not so much in the workshops or general sessions, but in the coffee breaks and cocktail hours in between.  This conference was no exception, and Will made sure we were given ample opportunity to make new friends.

One such opportunity he created during this event was the running of the Forbes Cup, out at Happy Valley, a racetrack that sits on possibly the most expensive real estate that any racetrack occupies on Earth.  And it was at this "meet and greet" that I heard a piece of advice that has become somewhat core to my assessment of management effectiveness.

At one point in the evening, post-dinner, I found myself at a table outside on the balcony, talking with Richard Butler - not the Richard Butler that used to be Secretary General of the ITU (and my old boss), but the other Richard Butler, the UN Weapons Inspector famous for his rather brash approach to arms negotiation in Iraq.

After numerous attempts to try and steer the conversation away from the subject of arms negotiation (in two hours I think learned everything I ever wanted to know about the subject), I finally gave up and walked over to the side of the balcony to watch the next race.  Standing there was a man holding a drink and a cocktail napkin.  I introduced myself and found out that he was with a recruitment firm in Taipei - a firm that specialized in the hiring of CEOs and board directors.

"I'm not in the market", I told him, "but I'd love to know how you go about selecting your CEOs".

He looked me up and down for a minute, then held up three fingers.

"IQ, EQ, AQ", he said.

I frowned.  "I know what IQ and EQ (Emotional Intelligence Quotient) mean", I said.  "But what is AQ?"

He smiled. "AQ means Adversity Quotient.  It means the guy knows what to do if his back is up against the wall.  It means he's not going to quit when the going gets tough."

He explained that in all his years of hiring on average 12 people a year for the top job, he had found that AQ was the most important quality.  A "flighty" CEO was more likely to devastate shareholder value more than any other factor.  He said it was imperative to stand your ground and fight.

I thanked him and we went back to watching the races, but his words - and his explanation of "AQ" as an essential quality of a CEO - have stayed with me ever since. In these challenging times, it is indeed hard to think of a better measure of an executive than the ability to withstand - and conquer - adversity.

I had the great pleasure this morning of watching a rebellious CEO captivate an audience of 200 executives from the financial services industry.

The rebel was Arkadi Kuhlman, Chairman, President and CEO of ING DIRECT USA - one of the fastest-growing banks in the US, and one of the few financial institutions to maintain a sensible lending strategy during the subprime frenzy.

Known for his penchant for Harleys and cowboy boots, Arkadi appears as someone who could easily have done the opposite and dived right headlong into risk. But his words - and the slight frown he wears while talking - reveal a focused intelligence that is contrary to his dress code, and a dedication to long-term execution of a business plan he obviously has much faith in.

He answers carefully and without regard for the sensibilities of his audience. He does not care whose feelings he is hurting. He is interested in building a better financial services model. And he explained how he went about this today with care.

Upon deciding he wanted to start ING Direct, Kuhlman made a point of not studying banks, but looking at other businesses instead. "The last thing person I wanted to talk to during this process was another banker", he said.

The model with which he identified the most was the food services industry. Like banking, it is a low-margin, high-volume business. Like banking, the struggle to acquire customers is never one, nor is the struggle to retain them. And like banking, knowing your customer is critical - you need to decide if you're serving truffles or discount bulk watermelon.

Kuhlman decided he needed to listen to consumers and simplify aspects of banking. He listened to consumers and got rid of fees. He stayed true to the older model of requiring 20% down when funding a mortgage (and as a result has had less than 15 foreclosures out of 100,000 mortgages written for a total of 35 billion dollars in value).

Kuhlman decided to, in his words, "stop grovelling to the richest 30% of Americans" and offer a single rate fo deposits. When customers complained about the lack of written monthly statements or preferred rates, he told them to leave - from his office in the call center, where he would spend most of his time.

I can't do justice to everything Kuhlman spoke about this morning, so instead of trying to list it all here, I'd advise you to read "The Orange Code" - or better still, catch him live at a speaking event.

His interview this morning was one of the better conference events I have attended - and I've attended a lot.

This presentation contains useful detailed data on the current state of the global economy and projections on sectors likely to grow during the coming year.

I strongly urge you to view this presentation - few publicly-available presentations contain this level of information.

In the past few days I've caught up with several friends operating inside VC funds. I asked each what they thought the impact of the current crisis would be. The answers I go can be broadly placed into three categories:

1. LIQUIDITY:

Everyone I spoke with had the same thing to say with respect to availability to capital - with the exception of the additional capital that VCs are placing aside to ensure their existing portfolio companies make it through the coming recession, liquidity is not an issue. Capital is available - VCs have raised a lot of money over the past three years.

The exception could be angel funding for early-stage companies. Angel money - traditionally the source of the "proving" funds that create the conditions for VC firms to invest - are likely to radically slow their investment pace, according to two of the people I spoke with.

2. TARGET INVESTMENTS:

Deal flow is way up right now. VCs are seeing an awful lot of deals, due to the inabilitry of firms to find funding from banks via traditional debt sources. As in 2000 through 2003, VCs are being offered deals that are much closer to cash flow berak-even, or even profitable. Companies at an earlier stage may find themselves out of luck as more mature companies push them aside in the battle for funds.

3. EXIT POTENTIAL:

This is the real reason why VC investors aren't smiling. It doesn't matter how many great portfolio companies they have or will have, public offerings are off the table and most potential trade-sale acquirers are hunkered down and conserving cash. This translates directly into reduced incomes for VC partners, as the lack of exits eats into upside bonuses and extends fund timeframes.

There are some sectors that appear unaffected. Investments continue apace in cleantech and greentech, and there will continue to be acquisitions in cash-rich, recession-proof sectors such as security, and aerospace/defense. Several such deals have been reported in the past month.

WHAT TO DO:

Companies just starting out more than ever will need strong introductions into VC firms, solid revenue models, proof of demand, clear and concise (and highly-efficient) plans for marketing and distribution, tremendous management teams, and good advice.

Most VC partners are successful, talented people.  And in a majority of cases those talents fall within three categories:

1. Visual - emphasis on pattern creation or visual design skills
2. Verbal - emphasis on the ability to tell a story or explain a problem/soution
3. Financial - ability to communicate the value of a venture or approach using numbers/models. 

We've all seen the classic mistakes a bunch of times - slides that overflow with text, diagrams that are so dense people find them inpenetrable, financials that fail to use even basic accounting formats. 

But more common is the presentation that fails to engage a majority of the audience - because it reflects the entrepreneur's favorite mode of communication, rather than the core requirement - which is to reach everyone in the audience.

Unfortunately, many times, entrepreneurs forget that their audience is made up of people who favor one of these mediums over another.  Often, they fail to "mix it up" in a way that guarantees involvement of people via the channels that they prefer to respond to. 

You'll notice this if you pay attention in the meetings.  Some of the people in your meeting will literally not look up until you get to the numbers.  Some will not display any interest until you start showing pictures, video, or conducting a demonstration.  And some will turn off your idea if you fail to clearly and passionately verbalize your money-making venture - for some people, an inability to clearly articulate the idea will leave them cold - because they made their money on the back of an ability to clearly sell/articulate the product or service that made them successful.    

I know a lot of people who are just in love with words - the more, the better.  They can't wait to write more words on the subject of their business, and will insist on cramming just one more 8 point font sized bullet point on the page.  I've seen diagrams that were literally gorgeous-looking but failed to communicate one iota of the value of the deal.

Most commonly, we've all seen hideous examples of hockey sticks in which the basic assumptions are: lots of people will buy, and keep buying.

It doesn't take much to use all three forms of communicate to present a coherent story in the right order.  Ensuring that your slides are well-formatted and well designed will enable visually-oriented people to make it through your text and feel less pain.  Including well thought-out assumptions and footnotes, and use of the proper financial terms throughout will make it easier for your financially-oriented audience members to applaud as well.

Not good with text and/or story-telling?  Be honest with us and explain that up-front, and tell us you'll be reliant on the diagrams and financials to tell the story for you - and invite your audience to ask questions.  You'll be amazed at how well your audience members will fill in the gaps if you allow them - and at the quality of the descriptions that will come your way. 

Tip: Write them down - and use them in the next meeting. 

Remember, most of the people in your audience became successful because they are exceptional pattern-matchers in one or more of these three areas: visual design, verbal story-telling, or financial modelling.  Engage the maximum number of synapses across your entire audience, and you'll have a better pitch meeting.

The first time I heard the term "due diligence", as a budding entrepreneur, I had absolutely no idea what it meant.  None.  Nothing about the phrase informed me as to what it meant, and back in those pre-internet days, definitions involved a trip to the library.  So that's what I did.

And here's what I learned.  The term "due diligence" first entered the lexicon as part of the US Securities Act of 1933.  The idea was that broker-dealers - such as the finder you're maybe working with to get your venture funded - should be allowed some level of protection from being sued by unhappy investors in a project, provided the right level of "diligence" was applied in selling the investor the securities.

Back then, that level of applied diligence - codified as "due diligence" - was specially applicable to the sale of securities.  However, in the seventy years since, the basic concept of due diligence - that potential investments should be carefully scrutinized ahead of any money changing hands - has now spread to all aspects of business, from angel investments to product distribution deals. 

Due diligence - as the term applies to a venture investment - can be as simple as a handful of phone calls from your potential angel investor to people that know you and are willing to vouch for your honesty, work ethic, and genius intellect.  Or it can be so complex that teams of lawyers are needed for weeks, or even months, to sort through all the details.  This is particularly true of mature companies that have hundreds of ongoing contracts, several dozen patents, and complex liabilities.  

One of the things I've found over the years is that having a local investor in the deal can greatly ease the process of due diligence.  The idea of being able to walk down the road and kick the tires is very appealing to a VC - and that's something that hasn't really changed since 1933.  If you want your due diligence to move faster, consider finding a local partner first, then bring on the other guys later on.

How long does DD take?  As a rule of thumb, founders of early-stage investments should expect due diligence to take anything from two weeks for a simple, pre-revenue start-up, to two months for a post revenue company with customers, patents, and vendor relationships. 

Surviving due diligence - and closing your investment sooner, rather than later - is easy. The secrets of getting through the due diligence process quickly are: honesty and preparation. 

Investors hate getting exited about something only to find out you didn't tell them about that little problem you have with the patent dispute, or the million dollar parachute you agreed to pay your former partner.  Supermodels are not perfect, and investments are never perfect either - point out your flaws up front and explain why they will not impact your ability to execute.  Explain why your patent really is better than the one that looks just like it.  Talk through why it makes sense to pay your ex-founder a million bucks to get out of the way. 

As for preparation, for most of the due diligence efforts I lead, I create a password-protected portal that contains all the relevant documents, and a spreadsheet that contains all the relevant answers to questions - and links to the documents. 

For a really grown-up version of this ceoncept, I suggest you take a peek at BrainLoop - my thanks to fellow Deal Horizon member Andrew Craissati for putting me onto this service.

A couple of years ago, I decided to get better acquainted with basic software programming, as a means of better understanding the challenges faced by my developer colleagues.

This had an unexpected effect. Since then, I've become a bit of a weekend addict. As Professor Richard Dawkins has noted, there is something incredibly satisfying about stringing together a bunch of conditional statements against a set of inputs and desired outputs - and then seeing the result pop up in front of you.

When it all works, it's a lot of fun. But I'm starting to suspect that in addition to the thrills described by Dawkins, there are other benefits that occur when someone from the corporate, or 'sales and marketing' side of the house starts playing with conditional statements on the weekend.

One of them is a more tangible level of respect. I've always had a ton of respect for developers, but that respect has sharpened now. I now also have an increased level of understanding of the challenges.

One example: I used to get exasperated whenever developers would talk about not being able to find a bug that was holding up delivery.

I would say, "Why can't you find it? Why is this so hard?"

Not any more. Developers, you are forgiven. Now, I too have sat for hours some weekends staring blankly at the screen in front of me - only to have it dawn on me that I didn't close a statement properly or call the right resource, after the hundreth walk through the code.

Lesson One: Bugs happen - we're only human.

Lesson Two: Code review should be done by someone other than the guy writing the code.

I also have learned the hard way why developers often insist on writing solutions from scratch. Yes, mash-ups can be fun - but they can also be unpredictable, and pieces of seemingly stable code can interact in weird ways.

And sometimes, unexpected updates (from the developers of one side of your code mashup) can destroy everything you've written (just ask a Facebook Apps developer) and take your project into a direction you never intended to go. No, it isn't always a good idea to 'buy it'.

Lesson Three: If it's fundamental to the business, write it yourself.

Documentation? Guys and girls, please spend all the time you like documenting your code - I get it now. Those little comments are worth their weight in gold - the more the merrier. Dev wikis, toolkits and forums can expand your developer network exponentially - providing the documentation is there.

Lesson Four: Documentation is as critical as the code to success.

The other benefits are a greater understanding of the way developers work. I now understand the requirement that when you're faced with something hard, you really need to bolt yourself down for 18 hours (or 36 hours) and have someone feed you Coke and pizza - because when you're working towards the middle of two ends of a two thousand line piece of code, it can be really hard to 'pick up the thread' (that's a developer pun) if you stop.

Lesson Five: Create a workplace for coders that is free from distractions.

One other thing I've learned is that coding and rocket science are similar in that they are not necessarily difficult (having worked extensively with both rocket scientists and coders, I feel qualified to make that statement) - but they do require a ton of knowledge. The more up-to-date and extensive that knowledge the better. Fewer things will blow up.

Note: If you can find a development manager capable of winning respect based on their past experience, willing to 'manage' rather than code, and willing to share knowledge with your young team and mentor them, I suggest that you pay them very very well. There is no greater value.

Lesson Six: Experience is critical. Put a "hands off" grown-up in the room with your young wizkids.

Finally, a word on testing. Too many people think quality assurance (QA) testing is finished once you've fired up a clean VM image and tested your software. This is BSQA - if you're not testing your code in the real world, with real users, on real machines, you're fooling yourself as to its quality and value to end users.

Lesson Seven: Real coders test on real machines using real users.I should emphasize that my own coding efforts remain just a hobby (my stuff sits on an outside hosting company server, not at the company) - and my understanding remains a helicopter-level appreciation at best. But the experience has been very valuable and has given me a greater appreciation of the depth of skills we have at our company.

And as for the aphorism "a little bit of knowledge is a dangerous thing", my response is this: a little bit of knowledge is only dangerous when the person with that little bit of knowledge remains ignorant of the sheer amount of knowledge that exists outside that subset.

In my case, I believe my little bit of knowledge has led me to an enhanced understanding and greater appreciation of the scale of knowledge we have in our organization, the real time required for quality work to be done, and the kind of specialized skills that are needed to create great software.

And that's a good thing.

David Rose, a serial entrepreneur-turned-VC partner who speaks faster than just about any man on the planet, has a terrific video up at Ted.com in which he outlines in very sensible fashion the ten things you need to know before you pitch to a VC.

Like David Rose, I too have raised tens of millions of dollars from VCs.  And while I don't agree with everything he says in this presentation, I passionately agree with much of it, and especially agree with what he says about the importance of integrity, and the need to make sure your pitch follows a dramatic arc that leads up - and then out of the park.

What did I not agree with?  Rose says that in addition to integrity, which I believe is absolutley fundamental, you need to display passion and an ability to lead. I disagree - if you're not a naturally passionate or organized or experienced person, I would rather you bolster your integrity by telling me this, and tell me that you're building out your team to compensate.  Hearing about your solvable weaknesses is so much better than watching someone try to pretend they have everything in hand.

Also, I disagree that you should never do a live demo.  If your technology is unstable, takes a while to fire up, sure, you should save everyone the hearburn. But if your mobile app can instantly locate every other device on the room and lay it against a 3D map without problem, then show it off (incidentally, I once saw a live demo of something quite similar to this involving locating tagged medical devices inside a hospital - it was stunning).

But Rose has so much to offer beyond these two points.  If you're an entrepreneur, watch this video.  It will, without doubt, dramatically improve your pitch.

I love the story of Walter Hunt.  Born in 1796 in New York, Hunt was a serial entrepreneur who invented the fountain pen, a nail-making machine, a pre-Winchester repeater rifle, and America's first sewing machine, among others.  But it's an invention created out of financial necessity - and how he came up with it - that makes Hunt's story unique.

Hunt was 55 years old and in debt to a friend for $15 when he sat down at his kitchen table with a piece of brass wire and resolved to come up with something valuable enough to pay back the loan.  Serial entrepreneurs will note that Hunt's lack of funds created a situation where the piece of brass wire was the only available resource.

Hunt wasn't hampered by this singular resource, however.  After a few twists and turns, the inventor realized that he could create a spring from the wire and fasten one end into a catch created from the other end. 

Three hours later, Hunt had a draft patent application written for - you guessed it - the safety pin: a patent application that he sold days later for $400 (the equivalent of $28,000 in 2008 dollars, according to Wikipedia), to the same friend he owed $15. 

Many businesses are born on the back of an idea that didn't come from the founder, but was executed brilliantly by them. H&R Block is one such business.

The original focus of H&R Block, first called the United Business Company in Kansas City, Missouri, was bookkeeping.  Tax filing assistance was seen as a "nuisance" business by founders Henry (Hank) and Richard Bloch - and at any rate, was not required back in the USA of the nineteen fifties, because back then the IRS provided free assistance to anyone needing it in the form of walk-in help centers.

But John White, a client of the United Business Company's bookeeping service and display ad salesman for the Kansas City Star, saw things differently.  With the IRS changing its policy of providing help due to cost and a lack of difference in error-rate between assisted filings and non-assisted filings, White believed there was a large potential business to be made from stepping in to provide assistance to tax filers.  He told the Bloch brothers they should create a business to focus on it.

The reaction of the brothers was tepid.  They believed that the focus of the business should remain bookkeeping. But White was a strong salesman and a client and eventually talked them into a two date display ad campaign.  The ad was published in the Kansas City Star on January 22nd, 1955.

The rest of the story is, as they say, history.  The day the ad ran, Hank, out visiting a customer, got a call from his brother telling him he'd "better get back to the office."  When Hank asked why, his brother Richard said "because we got a room full of people, that's why!" 

Of course, ideas are 5% of any successful business.  Execution is key, and the Bloch brothers executed so brilliantly on their idea, the H&R Block company went public in 1962 and is now the seventh largest retailer in the United States. 

One of the reasons behind the rapid expansion of retail stores is that the brothers were responsible for pioneering another business concept - franchising.  Several years earlier, they agreed to let two New York bookeepers buy them out for less than the business was worth - on the provision that they continue to pay them royalties for use of the name and agree to training.

Google is one of the more recent examples of a commercial model adopted and executed brilliantly.  In that example, superior search technology invented by Page and Brin was turned into a juggernaut by an advertising model invented by Bill Gross and the team at GoTo.  Page and Brin were hardly ardent supporters of the model when it was first introduced to them, any more than Hank and Richard Bloch were supporters of John White's suggestion that they should focus on tax filing as a business. 

The cost of acquiring a customer is one of those assumptions that you absolutely have to nail to the floor.  Yet I am constantly surprised by the number of people who don't deeply understand the concept, choose to ignore the importance of it, or choose to apply hope in the absence of data.

The basic concept is this: Every single business in the world, from that new florist shop down the street to an online brokerage, faces costs when it comes to acquiring a new paying customer.  Here's some examples: 

• Deli: For every customer that samples, there is a cost in terms of materials
• Tailor: For every customer that looks, but doesn't buy, there is a cost in terms of staff resources, insurance, aircon, etc
• Carrier: For every customer that buys, but doesn't stay, there can be an "activation cost" that now must be written of
• Bank: For every customer that signs up, there is a cost to deliver bills and maintain the account
• Everyone:  Every business must spend marketing dollars to create new customers

If you're a florist or a local restaurant, your marketing mix might involve flyers, advertising in local newspapers (in return for a review), the Yellow Pages, radio, and maybe cinema.  It will involve giving free meals to local celebrities and handing out cigars to late night high-paying patrons.  This form of marketing is as old as time, and understood by most of us intrinsically.

The online acquisition model is much more precise in terms of cost-effectiveness, and incredibly sophisticated. For those unfamiliar with how it works, the cost per new customer typically boils down to what you're paying Google on a "cost per click" basis, multiplied by the conversion rate, or put another way, the number of times someone buys your product, divided by the number of people who click on your Google text ad.

Example: You are selling a $50 downloadable software product.  You have found a search keyword or phrase that you think will drive traffic, so you create an AdWords account and start researching the keywords or phrase you want your ad to be associated with (i.e. "computer security"). 

Your analysis shows you that the cost per click relative to other people who want to buy this same keyword, is $1.00.  Simple math says that you need to sell the product to one in fifty people, or 2% of the people who click through to your site, in order to break even.  That sounds doable, right?

Not so fast.  This analysis is simplistic and misleading.  You're going to need more like 6%.  Marketing costs are just one part of your operating expenditure - you need to support the product, pay developers, and keep coffee in the pot.  If you assume marketing costs to be one third of your overall operating costs (a pretty typical assumption for many new businesses), that means you don't only need 2% to convert, you need 6% to convert - just to break even! 

This formula is why marketing guy expresses frustration when the CEO won't hire a Search Engine Optimization (SEO) expert - and why you should fire any marketing executive who isn't acutely aware of their importance.  SEO guys can make or break your business - if your Google bill is $200,000 a month, and you're right on the edge of break-even, can you really afford to be treating your AdWords campaign like a weekend in Vegas?

The above examples involve the simpler stuff - software-based, download-only products sold on a pre-paid subscription basis.  The real interesting stuff starts to happen when you analyze acqusition costs for stuff that includes hardware (signing up a new mobile customer), or a monthly subscription service. 

These models require close attention to the "customer lifetime value".  Many businesses, including financial insitutions, SAAS-based businesses (such as SalesForce), and telecommunication companies, often have to spend hundreds of dollars for every new customer they acquire - and they must spend this before they receive a dime in return.

For these businesses, it is critical that the customer remain a customer long enough to pay back the cost of acquiring them.  Some companies, such as SalesForce, have created wonderful business models around a high cost of acquisition that are paying off handsomely.  Other business are forced to watch as their customers either leave too early, or spend too little, to make a profit.

In most meetings I have been in involving investment in new companies, the above math is either being explicitly discussed, or is being talking about in ways analogous to this real problem.  Because the heart of convincing investors that you have a great business plan lies in proving that your customers will ultimately pay you more than it cost to acquire them. 

Despite thousands of web pages listing advice on pitching to VCs, many world-be entrepreneurs (and some advice-givers) still fail to include two very important elements in their pitches:

1. Hands-on demo

2. Empirical evidence that the dogs are eating the dog food

Empirical research is simply research that involves human senses and observable events. If your venture involves consumer marketing, empirical research can be the difference between getting funding, and simply presenting a good idea.As an entrepreneur meeting with a VC, you're in the business of *selling* your idea. Yet it amazes me how often entrepreneurs fail to understand the effectiveness of "on the fly" empirical evidence (hands-on demo) and evidence of buzz.

Here's a thought experiment: Imagine a used car salesman pitching a user car to a room full of venture capitalists.How long would the guy stand there at the end of the table *talking* about the beautiful car he has outside in the lot, before taking the guys to see it? Do you think he'd even hesitate before handing the keys to the Managing Partner? Of course not.

If you've got a product that is potentially fun to use, hand the guys the keys/mouse. Want to get funded/invited back? Make it your goal that one of the partners in the meeting is going to go home and say to their spouse "you wouldn't believe what I did today.

"Notice I used the word "did" - not "saw", "did". Experienced.

Your second goal should be ensuring that the partners are not alone when it comes to experiencing your product and feeling excited.If the idea you're pitching involves targeting solar-powered iPod holster-chargers at teenagers for use on the ski slopes this winter, a slide displaying a picture of teenagers crowding your kiosk at an Aspen shopping mall may indeed provide some empirical evidence that "the dogs are eating the dog food".

Many (many) years ago, I spent a day hanging around with star record producer Jimmy Iovine at A&M Studios in Los Angeles, as he was putting the final touches on U2's Rattle & Hum album in the mixing and mastering studios.

I remember stopping in one studio where one of the audio engineers turned to Jimmy and asked him whether he thought the audience mike was too overpowering? The engineer demonstrated by pulling the fader down a little.

The negative effect on the "buzz" was immediately noticeable. Jimmy shook his head and motioned for the engineer to push the fader back up to the orginal level. He understood the need for listeners to "feel" the audience as much as hear the music.

Entrepreneurs should keep in mind the importance of demonstrating the "buzz" or potential buzz around their offerings. VC guys want to be jazzed - the reason they tolerate all the dumb ideas is so they can experience that (very) occasional intersection of genius, utility and excitement.  Be one of those great meetings. Take them for a test drive. Show them the buzz. Make their day.

Many years ago, after the closing of the first round of financing for my first venture-backed company, the investors and founders went out for dinner in a very nice restaurant to celebrate.

At dinner, one of the investors asked me a question. "Hey John, do you know what CEO stands for?"

Now I have to admit, I was a little surprised by the question, and a little miffed at the idea that he thought that I, the incoming CEO, might not know the answer.

"Yes," I replied. "CEO stands for Chief Executive Officer."

"You're wrong," he said, smiling. "It stands for Customers, Employees, Owners - in that order!"

As the punchline was delivered, everyone around the table laughed, perhaps understanding at a gut level the simplicity and wisdom of this advice - or, more likely, they were just bemused at the perplexed look on my face.  But I didn't laugh. Something about the advice resonated with me. I asked him to explain his thinking.

"It's very simple," my friend said. "Exit-driven companies rarely succeed, and companies that coddle their employees and allow the business to be run regardless of how people perform don't grow fast."

"Companies must focus primarily on satisfying consumers needs and desires. Customer-focused companies succeed."

Now, fans of Clay Christensen and The Innovator's Dilemma might raise a hand at this point, but let me clarify something - in talking here about Customers, we're discussing consumers as a total group, meaning all possible users of a product, not just the subgroup of legacy customers that Christensen believes want to box in your aspirations and stifle your innovations.

Let's explore the CEO Rule (Customers, Employees, Owners - in that order), using Google as an example. With Google, you have a situation where two guys focused obsessively on the Customer - the Internet consumer - as a lead priority for the entire five year initial development cycle as they attempted to develop the world's most relevant search engine.

Then, at a time when the business needed revenue to monetize that incredibly popular utility, along came Eric Schmidt, who displayed his genius by focusing on a different kind of Customer - the advertiser, and a marriage of the two models.

These three executives couldn't have and didn't achieve these objectives alone. Employees clearly needed to be Google's secondary focus, and with the singular exception of the daycare spat a couple of months back, Google has understood this and provided employees with an exceptional place to work.

So where did this focus on customers and employees leave the Owners?  Do I need to ask? The Owners of Google - its founders and shareholders - have had an unbelievable ride, and it's not about to end anytime soon. Everyone who bet on this company while risk was still a factor in the equation has profited handsomely.

By not focusing on the Owners - by focusing instead on the Customer, then the Employee, in that order - Google has produced fabulous returns for its Owners.  And because Google remains focused on innovation on behalf of its customer, the consumer (you just have to hear Page and Brin speak to know that they remain passionate about solving these complex problems), I predict that Google's Owners will benefit for years to come.

Think Steve Jobs has his owners in mind when he is approving iPod designs? No. He's solving a problem (availability of coolness) - a problem that will create value for his shareholders. But shareholder value isn't what drives this CEO -value is created by Jobs' understanding of the customer, and his ability to attract great talent to Apple.

Owners are last in the chain - but benefit mightily from this position, when the CEO obeys the CEO Rule.

So here's some advice. If you're an entrepreneur and you're in the business to make millions of dollars as a first priority, you might want to rethink your life choices. Start-ups focused on making millions as a first priority rarely achieve that aim.  I suggest you focus instead on the CEO Rule: Customers, Employees, Owners - in that order. 

Innovative people focused on solving problems for Customers, and creating a great workplace for like-minded, mission-driven Employees, are far more likely to see success - and provide their Owners with a return on their investment.

About twenty years ago, I was invited to a meeting in what was then the Philips Building in North Sydney, a building that housed offices that had a simply spectalular view of Sydney Harbour, including the famous Opera House, which was partly hidden by the perhaps even more-famous Sydney Harbour Bridge.

The meeting was going swimmingly, until about half an hour in, when someone looked out the window and remarked "My God, what is that?" 

We dropped the subject at hand - I believe it was a Loreal television commerical - and rushed over to take a look, just in time to see a massive banner unfold from the top of the Harbour Bridge.  On the banner was a slogan, something anti-nuclear, above a massive Greenpeace logo.

Someone turned on a television in the corner of the room.  The media were already there, of course, and for the next hour we watched as the climbers were pulled down from the bridge by the police and loaded into vans. As one of the activists was being loaded into the vans, a camera got a clear shot at his face.

Much to the amusement of my fellow capitalists in the meeting, it was my brother, Cameron.

I caught up with Cameron a few days ago and we talked about some of the projects he is working on, and I told him about some of the CleanTech and green capital dollar projects that I'm working on or near. 

It was clear from the conversation that things have come rather a long way in 20 years.  It's taken a while, but the most enlightened venture capitalists are becoming undistinguishable from the activists of old.  Many are now engaged on projects that will have a large impact on life in qualitative ways - several of the most interesting recent pitches I've heard have been about water recapture and new clearner ways to manufacture traditionally "dirty" things, like paper.

In any case, it is nice to be closer to my brother in spirit, and to see the world's capitalists moving slowly closer to the world's environmental activists in an effort to improve the overall quality of life.

We were about an hour into a board meeting the other day when the management team laid an extremely impressive year over year growth figure on the table for the first two quarters of 2008. One of the investors present in the meeting reacted by saying:"That's incredible. You guys should have put that on slide one!"

He's absolutely right. What you put in the starting and ending slides of a presentation - the initial impact and the lasting impression - is important when you're presenting your deck to investors.

What you put in the middle is there merely to explain and validate your business idea and approach to market, and cement your claim to eventual market dominance. If you want to read the best advice ever, check out Guy Kawasaki's classic 10/20/30 post about presenting to VCs - after you finish this, of course.

My personal view is that you need to lead with credibility, and close with opportunity. Because the investors need to believe not only in your idea, they need to believe in you. And the earlier you are able to establish evidence as to why you will take their money and create a success, the more interest they will have in your idea.

I've seen a number of presentations, in investor meetings and at conferences, where the presentation had clearly been discussed too many times (or too few) prior to the pitch. The entrepreneur didn't grab me (or anyone else) at slide one, and then waded through a long presentation to an indecipherable appendix of tables filled with 8pt data.

When presenting to a VC, your first slide needs to good enough to force the investor to put down their BlackBerry/iPhone. Which means it needs to have these three things going for it:

1. An opportunity so good you're ready to mortgage your grandmother's house

2. Glowing reviews from several large alpha/beta reference customers

3. A team comprised of at least one person that has scaled a large business

I'm not kidding re the first point. Back in 1985, I was pitching a media company in LA on a joint venture, when, about fifteen minutes in, the guy held up his hand and said "how much money are you prepared to invest in this yourself?"

My hesitation was all he needed. He smiled and put out his hand and said, "Come back and see me when you're ready to stick your neck on the line."The bottom line is, if you're not ready to risk your own money or time, you are not ready for venture investment.

Point two is something that engineer-types struggle with - and often the reason they get lousy initial pre-money valuations. But you're not going to get funding without some evidence that the market is ready for your idea, or better still, gagging for it.

Note: If you don't like going out and finding customers, you'd better find someone that enjoys this - I once hired a sales person who couldn't bear not to be on the phone selling. Find a person like that and bring them in as your co-founder.

The final point is important. When you're trying to get a return on an investment, execution is everything - and having someone on the team that has delivered an idea to market before and turned it into accounts receivable is critical.  I know what you're thinking: my idea isn't jaw-dropping yet, I don't have any customers trying it yet, and I have never executed a venture-backed business plan before.

None of that matters - all of those issues are solvable. The point of this blog is to simply say, please solve them first - before you pitch for investment.  Act on these tips - polish your idea, sell some customers, recruit some co-founders - and make sure your slide one is everything it can be when you go for the gold. We want to see you succeed!

When venture-backed companies are acquired, the valuation is usually stated as a multiple of revenue, rather than P/E. My non-venture-backed friends often ask me why.

As many entrepreneurs know, there's a very simple reason.  Though gross margins can sometimes be extremely high at technology companies (in many cases, higher than 90%), most venture-backed entrepreneurs are extremely impatient about achieving success. These entrepreneurs will use every cent they can get their hands on to achieve it - reducing or eradicating net profit in the process.

This is exactly the right approach, but it needs to be viewed in context of the challenges that the entrepreneur faces.  Some folks who work at large dividend-producing companies with huge brands, long-established channels, mature products, and a reliable infrastructure, often fail to grasp the breadth of the problems the entrepreneur must face in bringing his product to market.  And they are not the only ones - many entrepreneurs sail into their first start-up business not fully realizing that they have (or are about to have):

1. No known brand

2. No market access

3. No reliable operations

4. No trained suppor

t5. Buggy or incomplete technology

6. No legal, HR, corp governance

7. Rapidly depleting capital reserves

8. No life

In my experience, the maximum application of resources is necessary if these issues are to be overcome. Relative to friends working at mature companies, the entrepreneur will never get to take time off - he will need to use every cent and every available resource to the max if he is to push their company across the gap and up that "S" curve of product adoption.

When the company finally makes it to the top of the adoption curve, there will probably be little profit to speak of, but hopefully, fast-growing revenues. At which point a mature company will hopefully call the entrepreneur, and say "Interesting company you got there. What multiple do you want for your revenue?"

So, ultimately, it is on this hill - the S curve of product adoption - that the battle is won, or lost, and the core factor comes down to patience.Too much patience on behalf of the entrepreneur and the company will ramp too slow and the market will be lost to faster-paced competitors. Too little patience on behalf of the investor, and the company will die before it reaches the top.Impatience + patience = success.

Luckily, experienced venture investors, by nature, are among the most patient investors in the world*. Venture investors typically expect no returns until the company exits (often years), and typically will endure the occasional "oil slick" along the way and stick with their fast-peddling entrepreneur until he makes it to the top.

*Note: I had a meeting with Investor Growth Capital a couple of years ago in the Valley, at which one of the partners talked about the length of some of their investments. He said they had been an investor in one company - Ericsson - since its incorporation in 1918.

Now that's patience!