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MONEY

Why You Need a Reverse Roadmap
 

The short answer: Because otherwise, when it comes time to negotiate, you'll end up with a bunch of nothing.

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Most young entrepreneurs don’t spend anywhere near enough time doing the fundamental math necessary to answer a very simple question: How much am I going to end up with when this deal is done?  

This isn’t about being greedy. It’s about setting reasonable metrics for success and aligning, to the greatest extent possible, your interests with those of your investors. If you spend some time addressing these issues early on, you can save yourself a lot of stress and ugly surprises later.

I’ve been working with several small teams of young guys with big plans and big ideas and a pretty clear and realistic view of what it’s going to take to succeed. In terms of effort and commitment, they’re prepared to do whatever it takes. But they have only the vaguest idea of how to even think three to five years ahead, and of how to try to understand the economics that will obtain at that time. That’s what’s really going to determine the value of their interests in the business. They need help in a hurry.

There is some good news: It's just not that complicated.

The very best negotiators go into battle with a range of expected outcomes. They may not always achieve the highest and best results, but at least they understand the various possibilities and they can prepare for them.

Young entrepreneurs are so focused on the short run--get the money and get the business started--that they don’t sit down and do the math. They don't envision the likely financial outcomes given the required funding and the time frames involved.

As a result, they often accept deals that doom them to a bunch of nothing. They work their butts off, they get the funding they need, and they create jobs and a great company, but when they finally focus on their own finances, they discover that they end up with other peoples’ gratitude and a pocket full of rocks.

You’ve got to look out for your own bacon. No board of directors will do it for you. Your buddies have their own agendas and their own families' mouths to feed.

So, as someone sitting across the table from a team of smart, seasoned negotiators, how do you--the relative novice--develop a strategy, a rationale, and an attitude to carry you successfully through the multiple negotiations you'll need to build and fund your business?

You need to build a roadmap in reverse. It's not that hard, but it's absolutely essential. It may not always work, but if it's rational and realistic, it's at least a decent framework.

So what exactly is a reverse roadmap? Think of it as a realistic analysis, a set of often-reduced expectations, and a target set of rational  results. If you know where you want to end up, and you've developed several reasonable routes to get there, you're that much more likely to avoid detours, distractions, and nasty dilution.

This is not your business plan. This is a fiscal projection for your future pocketbook. A tiny little cheat sheet that keeps you on track. You can keep it in your wallet, paste it on your forehead, or write it down on the back of your business card. The numbers may change over time, but this little tool will help keep you focused on the ultimate goal line.

Because you will now have a plan, every conversation you have on the subject will be clearer and more convincing. The guys on the other side will be winging it, or worse, making it up as they go.

What you need is a piece of paper with three columns and a few rows (one for each round of expected financing) on it. It might help to have two or three basic business metrics on the page as well, but it’s not critical. This is all about funding. Here is the entire matrix:
 
                                                  Year One                Year Two              Year Three

Business Metrics
Revenues
Headcount
 
Current Round
Financial investors
Strategic investors
Post-money valuation
    Management stake (%)
    Management Value ($)

Next Round (date?)
Follow-on investors
New investors
Post-money valuation
   Management stake (%)
   Management value ($)

Next Round (date?)
Follow-on investors
New investors
Post-money valuation
   Management stake (%)
   Management value ($)

Don’t have all the answers at your fingertips? Not to worry. No one else does either. But start filling in the blanks, and slowly you’ll develop some level of comfort with the process and put some real numbers on the board. Some may be wishful thinking, but wishful thinking beats not thinking by a mile. You don't get that many bites at the apple. Make each one count.

Last updated: Jun 4, 2013

HOWARD A. TULLMAN is the CEO of 1871 – Where Digital Startups Get Their Start and the General Managing Partner of G2T3V, LLC and of Chicago High Tech Investment Partners. He is a member of the Chicago NEXT & Cultural Affairs Councils and the Illinois Innovation & Arts Councils; an adjunct professor at Kellogg; and an advisor to many start-ups. He is the former Chairman and CEO of Tribeca Flashpoint Media Arts Academy. Over the last 45 years, he has successfully founded more than a dozen high-tech companies. @tullman
@tullman




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