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Archive for July, 2010

Angel / Venture Capital Funding Catch 22

Sunday, July 25th, 2010

What is the Angel /Venture Capital funding  catch-22? Well, startups need venture capital to start, but venture capitalists and angel investors only fund companies which already have traction (i.e., sales). This is one big reason why no one is funding you.

Part 1: The Bad News

Before Embarking on a Campaign to Raise Venture Capital Funding, You Should Look at Yourself Objectively and Honestly to Determine if You Even Qualify. Most People Don’t Stop to Do This.

Since the vast majority of venture capital hunters don’t qualify, you will, in most cases, end up wasting 6 to 12 months of your life writing a business plan which will never be read and doing “dog & pony” shows for audiences who are at best only mildly curious or at worst engaged in “brainsucking” you for ideas.

Who Qualifies for Venture Capital Today?

Industry “stars” qualify for venture capital. This means someone who has already taken a start-up from zero to 50 million in sales or better. So if you’re counted amongst the stars in your industry, you stand a good chance of attracting venture capital provided your current deal has the following elements:

* at least 2 other senior executives with experience in building wildly successful companies,
* a proprietary technology in a sector currently considered hot by the venture capital industry,
* a top-notch technical team,
* a target market at least one billion dollars in size,
* a minimum of one year of rising sales to blue chip customers.

If you don’t meet the above criteria venture capital funding won’t happen.

The Three Dirty Little Secrets About Raising Outside Capital

* First, chasing outside capital is by far the most unpleasant and drawn-out ordealexperienced by entrepreneurs. It always seems to take forever. (For this reason, veteran entrepreneurs try to avoid raising outside capital at all costs.)

* Second, based on the fact that your typical early stage venture capital firm invests in only one company out of every 500 business plans it reviews, your odds of succeeding are only 1:500. (If you are pursuing angel investors your odds improve to maybe 1:200, although no one knows the numbers for certain.)

* Third, in about 50% of instances where an early stage company actually succeeds in raising venture capital, the founder is fired within the first year and kisses most of his or her stock good-bye.
“If you ask a VC what value they add, and you get
them after a few drinks, they’ll say, ‘We replace the CEO’ “,
he said. And that, he indicated, does not vary
with the economic climate.

So your odds of being a successful venture capital-backed founder/CEO are actually only 1:1000.

The Funding Problem

Here’s what typically happens when a company needs to chase outside capital in order to commence or expand operations. After about 6 months one of three things occurs:

1. The lucky 1 in 500 finds investors.

2. Most die on the vine. In many cases, the wannabe entrepreneur simply abandons the project and moves on to something else. (As the joke goes, “That’s why God created ‘jobs’ “.)

3. A savvy and tenacious tiny minority of entrepreneurs finally gets mad at having wasted so much time. Then it begins to figure out a creative way around the funding problem by focusing on creating cashflow with the resources and opportunities at hand, instead of continuing the futile quest for outside capital.

Don’t waste money on these resources: Lesson: put very little faith in these services and never pay up-front fees.

* Matching Services: We’ll match your project with one of our many accredited angel investors. Call now! Operators are standing by! Just $199 to register.

* Business Plan Services: We’ll write a business plan for you which will attract funding. Only $999.

* Finders: I can help you raise money for a fee…and, by the way, I require a retainer up-front.

* Money-Raising Bootcamps: Attend our weekend bootcamp for $1,195, and you’ll discover that it’s not what you know but who you know that counts when it comes to raising money.

* Online Business Plan Repositories: Post your b-plan on our site for 6 months. Only $59.

* Venture Capital Directories: VC’s are waiting to fund you! For just $49 you can buy our CD directory with 12,952,734 venture capital firms listed on it. (How these can sell in the age of Internet search engines is beyond me. PT Barnum was correct about a sucker being “born every minute”.)
in a nutshell, most of these middle-man services don’t work in 99% of instances. This is also why they won’t tell you the Three Dirty Little Secrets of Raising Capital.

Part 2: The Good News

Real Entrepreneurship is About Cashflow Creation

It’s all about positive cashflow. If you can make it happen, you get respect and investors to fund you so that you can make even more.

Repeat three times daily until the delusion goes away:

With cashflow I’m a somebody; without it I’m a nobody.
With cashflow I’m a somebody; without it I’m a nobody.
With cashflow I’m a somebody; without it I’m a nobody.

Fact: Successful entrepreneurs invest the same level of time and energy into creating cashflow during the first year that wannabes invest in polishing their business plans and offering them to complete strangers.

The Solution

Once you have cashflow life becomes much simpler. Cashflow not only enables you to pay your bills but it places your company into the “stream of opportunities” that established businesses enjoy. Cashflow also earns you respect and gives you the ability to say, “No thanks!”, to those notoriously outrageous offers made by venture capitalists and private investors.

Cashflow = Respect from Investors

* Cashflow–any cashflow–earns respect from investors, lenders, customers, suppliers, and even your Aunt Mabel. Cashflow attracts equity capital from investors.

* Cashflow will place you in a stronger bargaining position with potential investors since it will allow you to walk away from a bad deal. Pre-deal cashflow equals power. Power for you.

* Cashflow will give your company a higher valuation which in turn will allow you to hold onto more of your equity if a deal is done.

If you are truly committed to building your business then do everything you can today to achieve this goal.

Don’t kid yourself.

So ask yourself, in 3 months from now do I want to:

* still be polishing my business plan and chasing investors with nothing to show for my efforts, or
* do I want to have an operating company with positive cashflow?

The decision is yours.

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Cash flow is the lifeblood of any business

Monday, July 19th, 2010

Understanding how money moves in and out of your company will help you measure the amount of cash you have on hand and prepare you for any surpluses or shortages down the road.

Projecting your cash flow is a bit like preparing your budget and balancing your checkbook at the same time. You’ll begin with a starting point—say, the first of the year—and then you’ll outline your anticipated income and expenditures for the next several months or year. Be careful about assuming too much—and don’t forget to factor in everything from insurance payments to raises in employees’ salaries.

Cash flow projections should be updated on a regular basis with the most accurate numbers. For instance, a customer who’s been reliable in the past might suddenly flake on paying. Or a vendor might decide to raise prices or tack on extra fees. Plugging in that new data will help you predict any cash crunches that might arise as a result.

Let’s take a closer look at why a cash crunch might occur in the first place. Not all are predictable, of course. When the economy hit the skids in 2008, many business owners found themselves suddenly worrying about making payroll or paying bills. Aside from the economy, here are other reasons why cash crunches happen:

 A big customer falls behind in payments
 A normally busy season is unexpectedly slow
 Manufacturing, shipping or other business costs rise
 Inventory is mismanaged
 Expansion into new space or territory is overly expensive or poorly timed

Because it’s tough to predict the circumstances your business will find itself in weeks or months down the road, it’s always smart to have a cash cushion. The next best thing is to have a line of credit to cover short-term cash shortages, which might happen if there’s a lag time in accounts receivables coming in.

If your company has forecast or found itself in an unexpected cash crunch, there are some ways to fix this cash emergency:
Get out there and sell. Jump-start cash flow by finding new customers or tending to existing ones. Even if your gut is wrenching, it’s critical to make sales calls. Keep in mind that your competitors may be waiting to steal your business—especially if word has gotten out that you’re in a bind.
Step up collection efforts. Analyze your receivables. Do your customers owe you money? If so, then it’s time to get aggressive about collecting debts. (For more on that, read related article, “Business Owners Find Creative Ways to Collect the Bills.”) You might also consider giving some customers discounts for early payment.
Review your line of credit. See if there is room to borrow, or ask your banker to increase the ceiling if you need more money to cover the deficit. While the credit crunch still lingers, the situation is not as dire as in 2009.
Ask vendors/suppliers for a favor. The people who supply your merchandise, equipment or other products or services don’t want to lose your business. Especially if you’ve been a good customer, your suppliers might extend repayment terms or issue a line of credit. If you haven’t already built a relationship with a vendor, check with industry groups, trade associations or even owners of similar businesses to see which vendors offer financing. Make sure to check a vendor’s credentials before signing up—and shop around to get the most favorable terms.
Cut costs. Downsize to a smaller space, or consider moving back home (to your garage or spare bedroom). Sell off excess furniture or office equipment. Trim principals’ salaries. Conduct layoffs, as unpleasant as that may be, if it means keeping the business alive.

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The Art of Raising Funds in this Tough Business Climate

Monday, July 12th, 2010

For a start-up company, landing that first check from an investor is a milestone.

What many start-ups don’t realize is that the seed capital they raise – often from friends and family – is just the first step in a fundraising journey that can drag on for months or even years.
Here are some of the lessons learned along the way:

• Don’t expect to raise all the money at once. While the purpose of a business plan is to show investors your company’s true potential, but don’t fold your cards if you can’t raise the money you need to execute your entire plan right away.

• Be prepared to give investors more. Even in good times, investors in early-stage companies expect to be compensated for the risk that your company might fail and they’ll walk away with nothing but a write-off. With early-stage capital in short supply, start-ups need to be ready to give away a larger chunk of their company than they might have when times were flush and to pay higher interest on the money that they borrow. As an example a company raised $800,000 in convertible debt at 12% interest in 2008. After the market crashed, they raised another $600,000 but at 15% interest in April 2009. The new note will convert to equity upon a $5 million capital raise.

• Adapt your business plan to the funds available. If you wait to fund your entire plan before starting operations, you may never get your company off the ground. At the same time, you may need to scale back your plans if you decide to start your company with less. Reformulate the business plan in a way that will allow you to execute on a reduced scale.

• Be ready to survive on a shoe-string. Many entrepreneurs think that, once they raise capital from investors, the pressure is off and they can get back to running their company. The truth is that you’ve got to keep a laser focus on expenses – especially if your company is burning cash and you don’t know where the next check is going to come from. When you raise money in pieces rather than all at once, you have to stretch the money as far as possible, particularly tricky is managing your payables to keep your suppliers current while waiting for payments from your customers.

• Be honest with your investors. Whether your investors are friends, family, angels or VCs, nobody wants to be kept in the dark. It’s better to break the bad news about money concerns, such as missed revenue projections or cash-flow gaps, before there’s nothing left in your company’s bank account. Communicate!

With the market for small-business capital still tight and the recovery lackluster at best, start-ups looking for capital would be wise to take a page from the Score playbook. Raise money when you can, be prepared to pay a premium for your capital and scale back your plans if necessary, but do whatever it takes to get your business up and running and your product out the door.

For Help preparing Private Placement Memorandums or Angel/VC investment presentations contact SCORE.

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Free service from Mint.com Helps Savers Set Up Budget Objectives and Stick to Them

Thursday, July 1st, 2010

Now Mint.com, a website that already offers user-friendly options for studying how one’s money is spent, has introduced an easy way to set budget objectives, link them to accounts and learn specific steps on how to reach those goals. The goals can even be personalized with digital photos, like an image of the car you’re saving up to buy. And this service is FREE!

The Goals feature uses pop-up windows where users can quickly input data, like annual salary, to get estimates on how much they can afford to spend on things like a vacation, as well as how much they need to save for that vacation. Monthly savings estimates can be set to aggressive savings plans or conservative ones with just a mouse click.

Finances in One Place
Mint.com has been around for almost three years and is used by millions of people. Its proprietary algorithms encrypt data so people will feel confident enough to input their usernames and passwords for their online financial accounts, allowing them to see all of their financial activity in one place. These accounts include those tied to credit cards, banks, retirement savings and others. Mint is known for displaying colorful visuals like pie charts and graphs, so it’s easy for people to see where they’re spending their money or how it’s being invested.
Mint Goals is a new tab on the Mint.com site, and clicking on it directs users to a group of eight popular goals and one that can be customized (more will be added over time). The preset list includes goals to get out of debt, buy a home, buy a car, save for college, take a trip or save for retirement. A digital checklist in each goal called “Next Steps” gives people serious, doable tasks to complete, so they can actually make progress toward a goal in ways other than just putting money aside. This instant gratification saved me from doing a lot of calculating.

The Best Account
When you set up a goal for the first time, Mint suggests what type of account would work best for saving toward it. Examples include a 529 savings plan for people who are saving to put their kids through college or a Roth IRA for retirement savings. Mint will also tell you the provider with the best interest rate.
Each goal includes the overall amount of money intended to be saved, today’s balance, planned and projected dates for reaching the goal and how much has been saved this month (like $200 of $750). You’ll like looking at Mint’s colorful thermometers, which quickly showed how you was progressing in a particular goal.

Ads With Context
The Goals feature comes with contextual ads, which help it remain free. One checklist item suggests opening a high-yield savings account and also offers links to the Discover and American Express websites, which offer the accounts. If you’ve started a Mint Goal to save for a trip to Iceland, travel insurance is suggested, along with Web links to sites that sell trip insurance.
While these links might allow people to get started right away on a particular task, they also beg the question of whether these are the best options for users—or just the biggest advertisers on Mint. Goals can be linked to several of your accounts on Mint so they’re updated with real-time data. A long-term retirement goal can link to a 401(k), brokerage account and retirement account. If the stock market takes a dive and money is lost in an account, that loss is automatically reflected in the overall goal’s balance. If you tie a savings account to a goal to save for a house, every dollar added to that account (on the bank’s end) is automatically reflected in the goal.
Mint already gave people a visually engaging way to know more about what their money is doing, but Mint Goals give people a real reason to come back to the site more often.

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