But what if you have something more complex to say — a business plan, for example? What if you’re giving a colleague a competitive analysis? Or proposing a new product? How long should that document be?

In my experience, you should follow the seatback rule. This is the time between when a pilot asks passengers to put their seatbacks up and tray tables away, and the time when it’s safe to use portable electronic devices.

I like this rule because it suggests several things:

• The document has to get to their seatback. It probably has to go through an admin, or a to-do list that says, “print this for reading on the flight to Boston.” Make that obvious, and be aware not only of the document’s contents, but also how it gets in front of the intended reader.
• The document must be short. You have roughly ten minutes of their attention — less, if they decide to watch the video explaining how to do up their seatbelt.
• What you write must be easy to consume. That means short sentences, a good up-front summary, bulleted lists, tables, and diagrams. Long prose will make them tune out. Lighting won’t be perfect, and it’ll likely be stuffed in a folder with other papers, so use good line spacing and column widths to maximize readability.
• Hide supporting material near the back, or better yet, in a separate document for a follow-up. If you have a summary of revenues, put the detailed work in a separate spreadsheet they can have someone else review. If you’re painting a picture of a market, compare competitors on a few important dimensions, then put the detailed descriptions of them in an appendix.
• Don’t assume access to online materials. While it’s tempting to embed hyperlinks in a PDF, many readers won’t follow them. I’m always astonished at how many early-adopters of technology have their assistants print out documents for them to read.
• Have a clear call to action. The perfect outcome for many documents is a scrawled, “we should do this” or “set up a meeting” on the front page, which will then be handed to an administrator. Make it easy to achieve this.
• Address the reader’s basic questions: What’s this about? Why should I care? What action is required? Why should I take it? Most time-impoverished executives have some form of personal inbox processing (borrowed loosely from Getting Things Done) that encourages them to decide, very quickly, whether something should be Done, Delegated, Deferred, or Discarded. Understanding their mindset and making it easy for them to act appropriately is priceless.

Next time you’re writing a document — whether it’s a white paper for a prospect, a business proposal, a market analysis, or any other message you need to get to a busy, time-poor audience, use the seatback test. For that matter, next time you’re on a flight, print out a few documents (such as competitors’ collateral or analyst reports) and see how fast you tune out. Most written documents are lousy. It’ll make you realize just how much of an advantage clear, concise communications can be.

I’m helping to judge and counsel the participants, and in doing so I’m remembering just how hard it can be to explain what you do from within your own company.

• You can’t hone your pitch: At an event like this, you’re speaking to investors, employees, competitors, and advisors.
• You want to explain it all: You’re convinced that you have to offer a tour of your whole product or service, which makes you rush.
• You’ve got the curse of knowledge, something Made To Stick talks about a great deal. Basically, you know your own product so well, you forget that others don’t know anything about your market or technology.

In a pinch, here’s what I usually advise people to do if they have no idea how it’ll go. You can break a presentation up into five chunks of a minute each, and use 2-4 slides for each minute, to get your point across.

Minute one: How big is the pie?

The first thing you need to do is set the stage. What industry are you in? What market are you servicing? Why is this segment of the world growing, or poised to gain attention? This part should feel like a TED presentation, telling the audience something surprising that inspires them to continue listening.

As you’re explaining this, remember that many of the people in the audience won’t know what you do. Give them analogies, or concrete examples from their daily lives. When I’m talking about cloud computing, for example, I often ask people, “do you use GMail, Hotmail, or Yahoo Mail? Where are all your mails stored?” They may not know clouds, but they grasp that concept quickly when it’s made relevant to their lives.

This is where you mention comparables — other companies that did well in an adjacent space, or who have had success in this space but aren’t competitors. Lucrative comparables make investors drool.

Minute two: Why is there still a piece of the pie left?

Now that you’ve told the audience about a huge opportunity, where’s the gap? What’s the shortcoming? Hopefully, this is a major disruption: The broad adoption of mobile devices; economic pressures changing budgets; consumer understanding of web applications; concern over healthy eating; etc.

You want to show a hard problem. If the market gap is easy to overcome, then the audience will question whether you can build any kind of sustainable competitive advantage. But if you state a hard problem that’s genuine, it’ll be interesting. Your problem doesn’t have to be technical, either: you might say that it’s hard to reach consumers, but you have a partnership that bundles your product in with something they already use.

This is where you can drop the names of competitors to show you know them, and know why you’ll beat them.

Minute three: Why will you claim that piece of the pie?

Now the audience is ready. There’s a change coming, and there’s an opportunity. At this point, you need to prove that you can fill the need. This is the only part of the presentation that should include a demonstration, and it should demonstrate only that you can overcome the big challenge. Don’t bother showing me the login page, or the account administration screen, if your key feature is a dashboard.

Also, if your value is the viral loop or the process, show that. Make it personal. If your target customer is a small business owner, for example, then give her a name and follow her through a day in her life. Making your product concrete will help others put themselves in your customer’s shoes and understand the benefit you offer.

Minute four: How will you make money from it?

Now that you’ve shown value, explain how you make money. This is simple accounting:

• What are your initial costs?
• What are your marginal costs (i.e. how much does it cost to deliver product or service to one more customer)?
• What are your revenues? Are they recurring or one-time?
• How do people find out about you? How will they spread the word? How much does this cost you to encourage?

Remember Sergio Zyman’s definition of marketing: Selling more things to more people more often for more money. How do you do that?

Don’t get into financial projections here. You’re not expected to use real numbers; instead, you’re helping the audience to think about the fundamental equation that drives your business. Revealing your business model happens in stages.

If you were Netflix (or in Canada, Zip.ca), for example:

• For a broad audience, you’d offer, “we have a monthly subscription model, and delivery is done via post initially. As networking becomes cheaper, we’ll switch to a download model that will slash our costs dramatically.”
• For your first meeting, you’d say, “customers pay us a monthly fee to ship them movies from a list. Our analysis of the cost of DVD purchase and the frequency of rentals shows we make money because people don’t watch as many movies as they think they do, and because ground-shipped mail is cheap.
• In a one-on-one discussion with an investor you might explain, “the average person watches 6 movies a month. We can rent out a DVD that costs us $50 fifty times, and shipping is $1. If someone pays us $25 a month, we make $13 a month.” It costs $0.06 to download a movie today, and that’s dropping by 50% a year; and a digital copy of a movie won’t get destroyed in the mail, so our margins will increase as costs go down and re-use increases.”

Don’t get into this kind of detail in an open forum unless you’re directly asked. But when you are asked, answer quickly, clearly, and without hesitation. Prospective investors are testing to see whether you really know your market. Also, if you have a convincing way to get the word out or drive down costs, emphasize it here. Remember — this is about your business model, not your technology.

Minute five: What do you want from the audience?

There’s always an ask. If you just present without a goal, you’re wasting your time. Some examples include:

• I want customers, beta testers, or referrals
• I’m looking for investors
• I want to recruit new talent
• I’m looking for service providers (lawyers, ISPs, etc.)
• I want feedback, criticism, and suggestions

Know which of these you’re after and leave the audience with a clear call to action. This conveys the impression that you’re confident, and you know what you want to achieve, which is a good thing.

I’m really looking forward to next week’s event, and to hearing what marketing veterans like Chris and Tara take away from it. Let’s hope the participants have a short, pithy explanation of their companies so we can understand them quickly and provoke some healthy, challenging discourse.

In the wake of economic collapse, founders and CEOs are being told to reel in spending and prepare for the worst. There are two obvious reasons to do this: Less funding and lower revenues. But it’s the third, less talked-about reason that should really make you worry.

Update: Stacey at GigaOm has a great piece on this, looking at some hard numbers.

The obvious reasons

First, it’s harder to get capital to fund your business. Interest is the cost of money—and with less money floating around, the cost just went up. That means your business is now competing with other possible investments. Unless your startup has a tremendously promising proposition, it’s unlikely to get more money; and if it does, it will come with onerous, highly dilutive terms.

Second, revenues are at risk. Many startups bank on ad revenue, and that’s in decline. Paid search is the only form of advertising that seems to work, and Google’s sharing less of that with its partners. If you’re smart enough to have a real business (after all, sales is the missing piece of most tech startups’ business plans) then you face customers who will be pinching their own pennies.

That means the money you have now, plus the revenues you can bring in, is what you’re going to have to live on for the foreseeable future. And since neither of these is easy to grow, it’s time to cut costs.

The third reason

But the really scary part of all this is the third reason: A delayed exit. When I started working in tech startups, I thought all that mattered was cost, investment, and revenue. But I quickly realized that investors care just as much about exit strategy.

The ideal exit, of course, is an IPO—a long shot at best, fraught with risk but full of rewards for the right company. For the time being, let’s just say: Don’t go there. The markets are too volatile, and investment has fled to more predictable instruments like precious metals, bonds, and treasury bills.

On the other hand, you could always build a profitable company. This is a common “exit” for small business owners, who are happy to pay themselves a handsome dividend from their earnings rather than try to get a one-time payoff. It may work if you have a majority share of your startup and your investors can’t force your hand. But for institutional investors like VCs, this won’t work: They want to show a return on an investment so they can close out the fund that backed the company in the first place.

Which means you’re probably planning on exit by acquisition.

Why big fish eat small fish

When a big company buys a small company, it does so to acquire its products, its technology, its customers, and its employees.

When deciding to acquire a startup, the buyer asks itself four basic questions.

• The build or buy question: What’s the cost to us of building what this startup makes?
• The accretive revenues question: How long will it take, and during that time, how much will they earn?
• The IP and risk question: Will we get sued for copying them?
• The synergy question: How much additional money can we make by cross-selling their stuff with our existing products or services?

If those four questions get good answers—meaning that the accretive earnings plus synergy plus IP risk are greater than the cost of building it themselves—then you’ll get acquired.

The trouble is, the current economy changes those four answers.

Why big fish aren’t hungry right now

It’s easier to hire people in a down economy: Workers want stability, and startups can’t afford to entice star workers with high salaries or the promise of lucrative exits. So the cost of the big company building it themselves drops.

The pressure’s off: The startup won’t be making as much money. It’s not able to fund fast development. It can’t afford marketing. And lack of demand means it won’t attract rainmakers in the salesforce. So accretive revenue is lower.

Risks are smaller: The startup is unlikely to mount a legal defense, because it can’t hire lawyers; and even if it did, it would distract itself from the core task of building a business. So the risk of IP litigation goes down.

Synergies are less obvious: With customers pinching pennies, they’re unlikely to buy the additional bells and whistles that you, as a big company’s partner, have to offer. Which means it’s harder to prove synergistic revenue to a potential suitor.

The result is delayed acquisitions, or none at all, during which your resources dwindle until the big company can acquire you for a pittance.

Okay, now I’m depressed

In this situation, you need to behave like you’re building an annuity-style business that would pay dividends, and reinvest those dividends in additional growth. Don’t grow in anticipation of sales—grow because of sales. Meanwhile, partner with your potential acquirers so they get a taste of that synergy when—and if—the market recovers.

Normally, I try to keep this blog focused on startups. But I wanted to share some of what I saw while there; I believe it holds some important lessons for entrepreneurs as well as a few guidelines for how to run your businesses in the coming drought.

On my arrival last week, I walked past Lehman Brothers mid-meltdown. Town cars were parked three deep, and suited executives with confidence-inspiring grey hair fled the guarded doors into the safe embrace of stretch Lincolns.

The rank and file had a different fate, however. Bewildered middle managers, identical but for the splash of color around their necks, walked blinking into the bright sunlight. Satellite trucks from the major networks were parked across the street, their cameras trained on these now-unemployed workers, hoping for a tear, a dropped box of office supplies, or a soundbite for the evening news.

But I’m not sure the decay sank in. Every conversation I overheard that week had something to do with the meltdown, but most of them looked at its silver linings.

• At Interop, buyers seemed undeterred by the market fallout — after all, it meant record numbers of trades filling their networks, which meant bigger machines and more tools to manage them. Spikes in traffic are good news for virtualization companies, too.
• Web2Expo’s startups weren’t fazed, and finances were seldom on their minds. Web startups are valued more on aspirations and eyeballs than cold, hard dollars. Built atop pay-as-you-go cloud computing, these ventures are less dependent on large injections of capital than they were a few years ago and can often be launched from a Macbook, a coffee shop, or a dorm room.
• Buttoned-down hardware architects and pony-tailed Quants roamed the crowded halls of the Roosevelt Hotel at the High Performance on Wall Street conference. There, exhibitors like Microsoft, Cray, Rapidmind, HP, Sun, and dozens of boutique hardware companies promised to squeeze microseconds out of banks’ automated trading systems.

Ironically, these are the very systems that turned complex derivatives into a financial house of cards and allowed deregulated banks to lend many times their worth at unrealistically low rates. If there’s one thing I learned last week, it was how much banks depend on technology to make money. Here’s a quick lesson I got late one night in a bar from a colleague who should know:

For every dollar a bank has, it can lend out several dollars to others. This is based on the thinking that not everyone wants their money back at the same time. If they did, you’d have the kind of run on the bank that triggered the great depression.

The ratio of money held to money lent — the leverage — is therefore key to the bank’s profits. Banks that can demonstrate that they analyze risk well are allowed more leverage, so they have tens of thousands of computers crunching numbers. Greater oversight means more strident restrictions on overlending, and as a result, more investment in risk analysis.

The TV networks weren’t helping matters, either. They could have explained deregulation, or lobbying, or the banking system. But none talked about Teapot Dome, or Eisenhower’s rant on the military-industrial complex, or the abandonment of the gold standard, or the cross-party Financial Services Modernization Act of 1999 (all of which, IMHO, are required reading for an informed electorate this year.)

Instead, many news stations furiously pointed their fingers at a political party, a natural disaster, a religion, or an industry rather than taking a step back and looking at the big picture. This is a tragedy: If any city has the media clout to explain things, it’s this one.

New York is media central, and most companies there pride themselves on their openness. Walk up to NBC, or CBS, or ESPN, and you can stroll their historic properties or watch a show being filmed.

Not so with Fox News: The windows are opaqued, affording no glimpse of goings-on to curious passersby. You can’t cross their courtyard, and a lone guard intercepts people who stray onto their property or take pictures. Rows of heavy concrete “flower pots” make the place look more like a threatened embassy than a News Corporation.

The economics of New York may be changing a little, too. Even the stratospherically wealthy are tightening their Gucci belts a little; one story talked of how a socialite was forgoing her birthday-present facelift in favor of a more modest Botox treatment.

Meanwhile, most citizens seem oblivious to how this all affects them. Frankly, I’m surprised everyone isn’t withdrawing all their money from certain banks that dabbled too much in sub-prime mortgages — but for some reason, that hasn’t happened yet. Yet venerated brands like Washington Mutual are so bereft of assets that nobody’s bidding for them, forcing bailout engineers to step in and take over bad debt and bureaucracy, turning the free-market US into what is — at least temporarily — one of the largest socialized governments in the world.

The clothing store in the front of the Lehman Brothers building said it all.

As I left the city this morning, delegates were filing in for the Clinton Global Initiative, which aims to ease the ills of the world by encouraging its leaders and captains of industry to help out. Across the city, at the UN, George W. Bush was giving his final address to the nations of the world, while Iran’s president Ahmadinejad waited to take the stage later in the day.

With Times Square thronging around us, my Iranian cab driver and I drank in the events of the week and listened to the speech. I looked up at the landmark Lehman Brothers sign to our left.

Normally, the Rednod blog is about startups. This time, it’s about shutdowns. The world’s finances are in a flat spin, and America is on the cusp of an election that will decide much of the next century (this excellent piece from Worldchanging is well worth your attention on the matter, particularly if you’re planning on selling technology to Americans.)

If you’re an entrepreneur, it’s never been more important to focus on the fundamentals: Getting to revenue quickly, finding a niche that sustains market ups and downs, being frugal with spending and questioning every dollar, avoiding debt, and waiting as long as possible before diluting your cap table or bringing on investors that aren’t in it for the long haul. IPOs are nowhere in site, and running on your own fuel indefinitely is a prudent decision.

We’re watching large public companies — indeed, entire industries, from housing to travel to finance — collapse. For startups, this is indeed the best and worst of times.

The room is expectantly quiet.

“Does anyone have a penny on them?” asks the entrepreneur. The general partner raises an eyebrow as one of the junior staff hands over a faded copper piece.

“Now watch.”

The entrepreneur inserts the coin into the top of the machine, and pulls a small lever. There is a low-pitched whirring, a pause, and then a shiny new nickel tumbles into the small shelf at the bottom of the machine.

The only sound in the room is the ventilation system, cooling the warm Palo Alto air.

“That’s a neat trick,” says the silver-haired general partner, straightening up in his seat and grinding his brown Mephistos into the new rug beneath him. “Do it again.”

He hands the entrepreneur another coin.

The entrepreneur slides the second penny into the top of the machine, and again pulls the lever. Out tumbles another nickel.

“You’ve got a bag of nickels in there,” accuses a slightly disheveled technical analyst. “Open it up.”

Wordlessly, the entrepreneur releases a small clasp on the side of the machine and swings it open. Within are a series of tubes and wires, but nowhere is big enough to conceal nickels. The analyst looks mildly offended, but the general partner is on the edge of his seat.

“How many pennies can I put in there an hour?” he asks.

“It takes five seconds to cool down, so you can insert 720 pennies an hour. That’s $36 in nickels for a profit of $28.08 an hour, with a margin of 80 percent.”

The general partner leans back in his Aeron chair and gazes out across 280, into the Woodside hills. He pauses for a minute. “Can I put nickels into it?” he inquires.

“I’ve tried it with dimes. It works. Produces neatly folded dollar bills. I haven’t tried anything more than that yet, but I’m hoping it will handle fives,” replies the entrepreneur.

“How many can you make and run at once?” asks the partner, oblivious to the rest of the room.

“I think we can have five hundred machines running around the clock.”

“One more question,” says the partner, “and I think we have a deal. Why can’t someone else build one?”

“I have intellectual property protection on the core mechanism, and I’ve signed an exclusive agreement with the US mint to be the only producer of legal currency.”

Of course, this isn’t a real VC pitch. But it’s as close to perfect as one can get. We can learn a lot from the penny machine, and it’s a metaphor I use a lot to get startup CEOs thinking like investors.

The penny machine has an obvious money-making ability. You put in money, and more comes out. People are familiar with what a penny is. While no business is that clear-cut, the CEO needs to be obsessed with making it as straightforward as possible why the venture will yield revenues.

The entrepreneur had reasonable answers to key questions: How big can the business grow, how good can the margins get, and what kinds of barriers to entry does it have.

The presenter engaged the audience, and let them help him tell the story. They were smart people that asked the questions he wanted, and he showed them that he’d anticipated their questions by providing slightly more detail than they asked for without going into too much depth.

There was no need for a detailed technical explanation at this stage. Later, the investors would certainly go over the technology carefully to ensure that it wasn’t illegal, immoral, or outright trickery. But this meeting wasn’t about that. Opening the machine up served as a simple proof that everyone in the room understood well enough.

The entrepreneur didn’t set a valuation. He gave the investors all the details they needed to form one of their own, based on revenue potential, margin, costs, and so on.

Startup CEOs seeking venture capital would do well to remember the penny machine. It’s a good way to ensure they’re thinking like a VC. Every time your pitch strays from the simplicity of this meeting, it’s a warning sign that you need to go back and tighten it up.

There’s always an overview slide up front. According to common wisdom, this is supposed to “tell them what you’re going to tell them.” But I have a slightly different take on it.

Sure, you have to say what industry you’re in, how much you’ll make, how you’ll make it, and why you’re the one to make it happen. And do all that in a couple of sentences. But your first slide has a different, more important purpose.

The purpose of the first slide is to change their mindset from “I have to sit through this” to “I get to sit through this.”

That’s it. The audience, likely VCs, are short on attention and flooded with mails. They have probably already heard your idea, spun several ways, and figured out many reasons why it might not work. They’re already aware of competitors, or legislation, or technical issues, that can kill you fast.

They’re also social creatures. Deal flow is a social thing, the passing of ideas and sound-bites at golf clubs and whiskey bars. Sure, that’s a stereotype, and I know several investors who are quiet, contemplative people with a tremendously open mind. But remember that whether they like it or not, VCs are paraded in front of the firm’s LPs and have to be “in play” to get the juciest deals. So they’re hungry for things they can share and discuss.

When you get in the room, they see your first slide and often wonder how quickly they can pull their blackberry out without being rude. The default assumption is that they “have to” sit through the presentation. At best, they’ll learn more about the industry or the team and it will be useful elsewhere.

If you use your first slide to change that to “I get to hear this,” you’ve won. Because now, they feel like they’re being let in on a secret. They’re going to find out about a new market, a new way of doing things, or something that changes the game. It will probably make them revise their mental model of your market. And give them something to talk about.

How do you do this? The good news is there are two simple ways. The bad news is that they’re hard to find.

• The first way is to tell them you’ve found an unfair advantage. That could be an exclusive partnership, some defensible technology, access to a channel nobody else has, legislation, or something else. Whatever the case, it gives you an unfair advantage in an existing business.
• The second (and often more exciting) way is to have discovered an inefficient market. Investors love inefficiencies, because the market rewards those who make things efficient with a share of the savings. Travelocity and Expedia did this for travel; Zillow and Hotpad are doing it for real estate.

So when you present, that first slide better change their mindset. If they’re on the edge of their seat, thinking, “I get to hear about this market or discovery” then they’re much more engaged, and much more likely to invest the mental energy in understanding your business.

If not, maybe now’s the time for them to check that mail about the cigar bar.