Want Sequoia Funding? Submit a Business Plan: Here’s How
Who needs a business plan? Venture capitalists Fred Wilson and Paul Kedrosky have famously rated them overrated, and so has Paul Graham.
Graham’s YCombinator, a “new kind of venutre firm” declares it “never reads business plans” in making funding decisions.
An investor wants to give you money for a certain percentage of your startup. Should you take it?
The equation–1/(1 - n)–Graham offers projects funding decisions as almost irrefutable mathematical formulas. A formula, though, is only as certain as its inputs.
Graham uses Sequoia Capital as an example:
One of the things the equity equation shows us is that, financially at least, taking money from a top VC firm can be a really good deal. Greg Mcadoo from Sequoia recently said at a YC dinner that when Sequoia invests alone they like to take about 30% of a company. 1/.7 = 1.43, meaning that deal is worth taking if they can improve your outcome by more than 43%. For the average startup, that would be an extraordinary bargain. It would improve the average startup’s prospects by more than 43% just to be able to say they were funded by Sequoia, even if they never actually got the money.
BUT, how will Sequoia improve outcomes by 43%? THAT is the key question that a startup must get to the bottom of.
HOW can entrepreneurs evaluate if Sequoia involvement WOULD be sufficently beneficial? By submitting a business plan to Sequoia to see how Sequoia capital and strategic support would enhance and accelerate achievement of desired financial objectives.
Graham’s asessment of a Sequoia involvement, however, is nonsensical: “It would improve the average startup’s prospects by more than 43% just to be able to say they were funded by Sequoia, even if they never actually got the money.”
Contrary to Graham’s YCombinator, though, Sequoia does not only read business plans, they require them, in detail. Want Sequoia funding? Submit a business plan, as follows:
Company Purpose
- Define the company/business in a single declarative sentence.
Problem
- Describe the pain of the customer (or the customer’s customer).
- Outline how the customer addresses the issue today.
Solution
- Demonstrate your company’s value proposition to make the customer’s life better.
- Show where your product physically sits.
- Provide use cases.
Why Now
- Set-up the historical evolution of your category.
- Define recent trends that make your solution possible.
Market Size
- Identify/profile the customer you cater to.
- Calculate the TAM (top down), SAM (bottoms up) and SOM.
Competition
- List competitors
- List competitive advantages
Product
- Product line-up (form factor, functionality, features, architecture, intellectual property).
- Development roadmap.
Business Model
- Revenue model
- Pricing
- Average account size and/or lifetime value
- Sales & distribution model
- Customer/pipeline list
Team
- Founders & Management
- Board of Directors/Board of Advisors
Financials
- P&L
- Balance sheet
- Cash flow
- Cap table
- The deal
Paul Kedrosky assisted Graham with his “equity equation.” Contrary to Infectious Greed’s “no business plan please” VC lesson re: Wilson’s Twitter funding, Kedrosky’s own VC firm, Ventures West, does indeed require business plans for funding consideration, same as Sequoia, as I noted earlier this week in: Dabble DB Kedrosky VC Lesson: Business Model Required.
Startup cool apps may be cool, but nothing beats cold hard cash, the kind that entrepreneurial business planning targets.
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