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| It's the Vision Thing |
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I think it was George Bush the First, who, addressing a campaign concern, stammered, "it's the vision thing." Well, for businesses, one sort of vision thing is the financial projections in a business plan — you need to have it. And, you need to stay on the right side of the line between having a vision and experiencing an hallucination.
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 If you were raising money for an Internet or telecom venture before April 2000, the sales and expense projections in your business plan were of little concern to investors — at least the sales projections were of little concern. Tales from the street have it that some investors were valuing companies based on their burn rates — the more they were spending, the more the company was worth. Forest Gump quoted his mother as having said, "Stupid is as stupid does." The capital markets' ludicrous indulgence of any business "concept" that started with an "e-" or ended with a ".com" went out with spring. It seems that investment fashions change with the seasons.
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Since the Nasdaq started its half-price sale (the after-Christmas sale came early), profitability expectations have again become the rage. We know this is so because Rafe Needleman wrote about it in a Red Herring "Catch of the Day" column. According to Needleman, every unprofitable company tells him that they will be profitable in a year — he doesn't believe it. Needlemane is thinking Internet and technology companies — and he is being a bit dramatic; he has to be, his column is short. But, there is a lot of truth to what he says for Internet companies that are already in operation. Expectations are important to everyone but, in the investment business, it's not just a big thing, it's everything.
We spend a lot of time talking to investors and a fair share of our clients are sent to us by V.C.s and investment bankers. This puts us in the interesting position of working both sides of the street: we help investors evaluate opportunities and we help companies present themselves to investors — these presentations often take the form of investor-focused business plans.
Here's what's happening: for seed-stage companies, we find the market somewhat friendly (it's not a real friendly place right now) to companies with well thought out plans that show them getting profitable in two years for Internet, three for general tech, three to four years for medical and God knows when for biotech. These projections for attaining profitability are thought by some to represent vision: an exhibition of drive and aggressiveness.
| | Reasonable Plans |
The rub today is plans — believable plans. Plans that entrepreneurs can defend without being defensive. Plans that can be openly discussed and that show a sense of vision — even that allow for a bit of fantasy. Plans that demonstrate a manager's vision, without suggesting delusion. The first test that must be applied is reasonableness; the test of reasonableness establishes the dividing line between vision and hallucination.
 First and foremost, the reasonableness test rests on the perceptions of the testers (the investors). If you are presenting numbers that don't instantly pass his test of reasonableness — a test that is based not on spreadsheets but on their frame of reference, you must know that this is the case and you must be fully prepared to deal with the situation. It is critical to know that frames of reference are created from personal knowledge and experiences. Your frame of reference is established from reality as you know it — not, necessarily, from hard facts. When investors apply their test of reasonableness — implicitly or explicitly, knowingly or unconsciously — their expectations are established and the game is on. Now, you must give immediate and appropriate defense to your claims — without being defensive.
This defense of reasonableness lives first with the management team — do they have credentials such that their mere submission of the company's projections suggests that "they must be right?" Do their credentials establish them as authorities? Are these the people that you would call to check out someone else's projections? The next defense — and, arguably, the most compelling of all possible defenses — is benchmarking.
Benchmarking — identifying and documenting comparable situations — is a simple concept and, sometimes, can be achieved simply. We benchmark key numbers — R&D spend, sales and marketing, G&A and, of course, revenues and costs of goods. When we can present comparable companies, facing similar markets and conditions, it makes for compelling arguments. While no two or twenty situations are identical, benchmarking is compelling, in part, because it demonstrates depth of industry knowledge.
Having a vision for your business is good. Differentiating vision from hallucination is required. Remember, George didn't have the vision thing and he didn't get his next round of funding (that is, he wasn't re-elected). We'll see how well his boy, George, does.
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The Trendletter team welcomes your comments.
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D. Todd Dollinger
Managing Director
The Trendlines Group
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