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March 07, 2005

Commandment #6: Explain Your New Idea by Analogy To, or Contrast With, Old Ideas

To date, I’ve tried to couch the ideas in the “Ten Commandments” as objectively as possible.  No doubt, I’ve only partly succeeded, but in this post I’m admitting upfront that the following advice is likely to be idiosyncratic to me, and may not apply to every VC you ever pitch to.  So, use it only if it feels good in your own “voice”.

In Commandment # 5, I urged entrepreneurs to describe the “It” early (and explained why).  I suggested that a way to do this was frame the description as an answer to the question: “What problem are you trying to solve?”.  Commandment #6 is, sort of, the next step in that process of making clear to the audience how your “It” solves the problem. 

One way to describe “It” quickly and cogently, I find, is to analogize to, or contrast your “It” with, the other, existing “It’s” out there.  Sometimes (most likely, the “contrast” situation), the other “It” is a product or service that you’re going to kill off, replace, compete with, complement, or relate to in some direct way because your “It” and the other “It’s” are solving problems in the same or similar markets.

Sometimes, however, it’s useful to analogize your “It” to an “It” from an unrelated market.   This works best when the other “It” is a popular “social artifact” – such as Blog, Google, TiVo, Podcast, etc. (good way to tell this is when the “social artifact” formerly just a noun, has morphed into a verb due to its popularity).

An example:  One of my companies, Pluck (www.pluck.com) has a very interesting set of capabilities, in some ways structured around the core application of an RSS newsreader.  Among a bunch of other features and functionality, Pluck enables (I promise this advertisement will be brief) users to save, store and file web content in ways that allow groups of collaborators to access, over extended periods, the data stored in a collectively accessible place.  This, plus the other features of the product, is a complex set of capabilities to explain quickly.  When the team pitched Mayfield on their deal, they described this unique ability to “time shift” access by groups to stored web content as “Tivo for the Web”, and that phrase turned out to be a great way to initially place Pluck in an already understood mental category for my partners and me. 

Needless to say, “TiVo for the Web” is not a complete description of Pluck, and, like all figures of speech that seek to explain by emphasizing analogies between otherwise different things, you can push it too far.  Care should also be taken not to fall into, what I call, the “Hollywood trap”.  According to friends in the film business, the spoofs of Hollywood in which the principal way of pitching a new movie idea is to describe it as the mélange of two (or more) earlier films (e.g., “Son of Dracula meets Bride of Frankenstein”) is actually fairly accurate.  As the foregoing parenthetical shows, it’s easy for this to slide downhill into farce, so use discretion.

Think about this technique, however, as a potentially useful way to help you get to the point fast.  I recently met with a startup that pitched their wares as: “podcasting for cell phones”.  For a bunch of reasons, I didn’t think the business was a good one, but, nevertheless, I immediately had a sense for what they were trying to do.

Another interesting application of this that I recently saw was described as “eBay meets CNN”, a sort of “a news site (portal) for amateur (newsworthy) videos where viewers rate the videos to move them up or down in the popularity queue”.  Here, the entrepreneur (a Mayfield EIR) decided for various reasons not to pursue the idea, but it was easy to quickly see what he had in mind – and start to frame some of the due diligence questions one would want to ask.

I’d actually be interested in hearing from readers other examples of this type of thing – and whether they find it useful as either an “elevator pitch” technique (if they’re entrepreneurs) or as a quick way to categorize the new “It” (if they’re VC’s).

March 7, 2005 | Permalink

Comments

Allen,

Thanks for taking the time to write up these items, I have a couple of presentations this month and I am now busy adding an "Aha!" slide and adding an analogy.

Thinking about those things in and of themselves is usefull as like many I find it non trivial to wrap my business idea into a concise "punch line".

Posted by: Ian Wilson | Mar 8, 2005 5:04:43 PM

Allan,
I am an ex-entrepreneur, ex-associate at a VC firm and now a product manager at a tech firm in Cambridge and have been on everyside of the table... trying to raise money from vc's, trying to invest in attractive companies and then corporate vc-ism.

MY POINT - I agree almost entirely with everything you have to say in your Ten Commandments. Infact, what was truly interesting for me was your conversation with Walt and the advice he gave you :)

Promise to be a prompt reader going forward. Thanks.

Posted by: Parimal | Mar 8, 2005 10:26:38 PM

Sorry for the typo, I should have spelt your name correctly - Allen.

Posted by: Parimal | Mar 8, 2005 10:27:30 PM

Checked out Pluck. It is truly useless.

The funniest thing about VCs is their almost total lack of a technical clue.

VCs make money for no other reason than that they insert themselves in the deal flow, and eventually something sticks. And the better VCs? They get the better deal flow. But they aren't better technologists.

My advice to any aspiring entrepreneurs out there: forget the VCs and focus on making a product at a profit that people want to buy.

Software is not a capital intensive business; you don't need their money. If you're smart, willing to risk your own money, willing to scrounge from the "three Fs", and willing to sweat it for a while, you'll make it. And you'll have a much healthier business for it than some overhyped, overmarketed, bloated VC-backed pile of crap.

Remember: take VC money and anything less than a 50M sale means no money for the founders. Do it yourself and anything more than a 0.5M sale is probably yours. And a good share of any profits along the way.

The VCs are managing a portfolio of companies: in a portfolio you can reduce the variance of your return by spreading your investment across many different companies. And then the optimal strategy is to push each company along a risky, but high-return strategy. Of course most of the companies in the portfolio return nothing (ie get flicked to the nearest sucker after a few years for no return to the founders), but the few that do (< 10%) make up for those that don't.

This is exactly the opposite of the optimal strategy for an entrepreneur, since the entrepreneur typically has a portfolio of just one. The entrepreneur should maximize the probability of a decent return from his one company, not the probability of a ridiculous return.


Posted by: anonymous | Mar 10, 2005 7:09:13 PM

Ten Commandments for VC’s …

(Ten different ways the VC's can remind the entrepreneurs that not only is this an uneven partnership, it is not even a true partnership)

1) Remind the entrepreneurs that VC’s provide capital while they expect entrepreneurs to provide content; Entrepreneurs should not expect VC’s to provide service; with capital, entrepreneur can buy quality service from service providers whose job is to provide service.

2) Remind the entrepreneurs that VC’s do not truly add values, for the same reason that crime does not need to be about hate; a crime is a crime and a VC is fundamentally someone who is willing to provide capital to entrepreneurs when no one else will; if a VC insists on adding values, then it could be an unnecessary overhead for both the VC and the entrepreneur.

3) Remind the entrepreneurs that while VC’s are not entrepreneurs, they are also not a banker; the optimal time for a banker to provide capital to an entrepreneur is when he/she doesn’t need capital but the optimal time for a VC to provide capital to entrepreneur is when all he/she needs is capital (in other words, VC’s do deals, they don’t “make” deals; if the entrepreneurs are not ready for funding, the VC's should simply tell them to come back when they are).

4) Remind the entrepreneurs that you are not there to help them build companies; you are there to ensure timely execution towards a financially successful exit, sooner rather than later; remind the entrepreneurs that you need these draconian terms because the only time that you would have any desire to gain control of the company is to ensure a timely exit.

5) Remind the entrepreneurs that you are an agent no different than any other agent who gets a cut on the transaction; whereas entrepreneurs invest their own body and soul and angels invest their own net worth, you are all about making use of someone else’s money; therefore your financial interest is coupled with your professional interest, i.e., your career must come before that of an entrepreneur (if you are not a partner, remind the entrepreneur that your personal goal is to make partner and you expect them to help you; and if you are not a managing partner, then your personal goal is to make managing partner, etc.).

6) Remind the entrepreneurs while you will occupy a Board seat, you have no desire to fulfill your fiduciary duty; you are not there to protect the interest of other shareholders, you are there strictly as a portfolio manager and your job is to protect the interest of your investment; in other words, remind the entrepreneurs that you already have partners, they are in your firm.

7) Remind the entrepreneurs that while your financial interest might align, they are not identical; your portfolio is much more diverse than that of the entrepreneur; therefore, it is not enough that the entrepreneur succeeds, but he/she must succeed big enough to make up for your other losses (or losses by other partners of your firm); therefore you and your firm are willing to take much greater risk then the entrepreneurs since in the eyes of your senior partners, succeeding small is as bad as failing big.

8) Remind the entrepreneurs that they shouldn’t run to you when the company is in trouble but they should inform you when there is the first sign of trouble because while there are plenty of people whom you can blame for company failures, there is no one else to blame for surprises.

9) Remind the entrepreneurs that 10% of the VC’s make 90% of the money, therefore you are competing with 90% of the dogs for 10% of the meat; since none of your general partners and limited partners expect miracles, neither should the entrepreneurs.

10) Remind the entrepreneurs that success of the company has nothing to do with success in raising VC money; tell them not to listen to anyone else except their customers and their own guts; success is about generating cash from operations, once they can do that, then they don’t have to listen to anyone else including VC’s; but if they can’t generate cash on their own, then they better listen because there is no worse source of pain for an entrepreneur than an unsupportive VC who is on their Board, which is why entrepreneurs need to learn to call their VC's their “partners”, sooner rather than later.

Posted by: Denny K Miu | Mar 12, 2005 5:26:53 PM

"Think about this technique, however, as a potentially useful way to help you get to the point fast."

In a technical presentation for a serious purpose, getting to the point fast and making analogies are easy but are also ways to consume limited time without being very useful. Instead, what is crucial is providing enough support to make the crucial core claims believable and convincing. Claims are easy to make; what is crucial is the supporting evidence.

Saying that A is good because it is like B and B is good is two chancy steps; it is usually shorter and more convincing just to say why A is good and to omit mention of B.

While analogies can be good for first intuitive views of simple subjects in an informal context, in fact, it is easy to see that in serious presentations of technical material analogies are rare and appropriately so.

Posted by: Norm Waite | Mar 13, 2005 4:25:22 PM

Denny (March 13, 2005 01:26 AM), Your 10 commandments are very good. I think you should start your own blog if you haven't already done so.

And I tend to agree with both your and Allen's points. They are all from the same place I believe. Cold hard home truths.

No one wants their time wasted and you shouldn't believe everything anyone says - even if that person is giving you money.
Your Momma always told you not to take candy from strangers didn't she? She did didn't she??

On Anonymous' point (March 11, 2005 03:09 AM) - yes Pluck is totally useless but then again so is JotSpot. JotSpot must be above and beyond useless if Allen Morgan chose not to use it to create a collaborative wiki style blog which would enable his VC friends to create a 'master plan' for the entrepreneurs and VC's as such.

Also, you do make some far-out claims as to money returned - where did you get these figures from? Was it completely heuristic?

Posted by: Wayne Connolly | Mar 13, 2005 4:54:52 PM

Two responses. 1) the analogy should FOLLOW the description, not lead into it. Example, eBay meets CNN. Not clear what that means initially until its explained, and the last thing you want to do is confuse someone before you even get started. So close with the analogy, dont lead with it. 2) Set clear parameters on your analogy, because any analogy extrapolated far enough becomes invalid, and pseudo intellectuals (ie associates) love to show off how smart they are by trying to disprove someone in the room in front of their boss. And being forced to admit later that your analogy lacks overall consistency makes you look like your ideas are half-baked and not thought through enough, even if the inconsistencies aren't relevant. Best to frame the analogy before some young jerk does it for you.

Posted by: Gator | Apr 23, 2005 2:08:28 PM

It's clear analogies are critical to assist understanding, especially for new ideas (contrary to what might seem obvious.) Check out the latest HBR:
How Strategists Really Think:Tapping the Power of Analogy
"Much of the time, executives use analogies to make strategic choices. The best strategists know both the power and peril of such comparisons."
http://harvardbusinessonline.hbsp.harvard.edu/b02/en/hbr/hbrsa/current/0504/article/R0504C.jhtml
The advice in this article could be applied just as well to entrapreneurial thinking as to strategic thinking.

Posted by: Christina Wodtke | Apr 24, 2005 8:21:06 AM

Coming late to the party, I know, but...

I'm finding your advice invaluable, as I've recently gotten involved with two organizations that promote entrepeneurial development. The whole world of raising capital - VC's and angel investors - is totally new to me, so I'm glomming onto anything I can find that gives me some insight into the process. I'm even finding value in the otherwise unproductive comments of the jerks, so resist the urge to delete them. They're (unfortunately) part of the landscape too.

I wanted to comment specificially on your advice regarding analogies. Not only is this a good technique to convey the "It" of your business idea, but also elements of your business plan. For instance, if you say that you're going to employ a "Wal-Mart" marketing strategy, it can immediately convey the idea of quietly penetrating and dominating an under-served market to gain strength before making a move on larger and more competitive markets.

Anyway, thanks for sharing your insights with us!

Posted by: Steve Sawyer | Jun 14, 2005 7:28:00 AM

Kudos to you for not only taking the time to share some of the knowledge that you have gained over your 25 years in the industry, but for having the fortitude to leave the naysayers comments on your site.
Personally, I would be tempted to delete the comments that I didn't appreciate but it's nice to see that you allow those with opposing views or opinions their airtime. Chances are that those with the harsh, critical view of VC's are the same frustrated entreprenuers that were repeatedly rejected by VC firms and they see this as a way to "get back at the man". I'm in the beginning stages of my entreprenuerial journey so perhaps I'll be the frustrated want-to-be business owner scouring the internet for a VC to lash out at in the future. Then again, maybe not. It's not my style. If I'm going to point the finger, it'll be at the guy in the mirror.
Nonetheless, I appreciate your generousity and your candor. Keep up the good work!

Posted by: Achuff | Feb 3, 2006 3:57:13 PM

A word of caution on analogies - sometimes it is hard for people to dissassociate themselves with analogies. For example, if you say TiVO for the web, some folks have very strong opinions on TiVO and its future. VCs tend to look at your business model with a lens that has been clouded with their perception of TiVO.

Posted by: Anil | May 10, 2006 9:32:50 PM

Early stage "startups", especially those which are technolgy related, tend to have founders with a "parent" syndrome. This makes for difficult negotiations regarding stock ownership when VC funds are solicited. I have found that recognition can often be utilized to lessen numerical demands of these type of founders.

Posted by: Lowell Nicholas | Dec 14, 2006 1:36:14 PM

What kind of angel funding is available for banking start-ups? Is it more difficult to get international funding verses intranational?

Posted by: Bankbuzz Whizz Vroom | Dec 15, 2006 10:34:37 PM

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