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June 17th, 2010
Start-ups hungry for cash are often expected to pay a fee to pitch to angel investors. But some free services are cropping up to counter the so-called pay-to-pitch model.
Venture Hacks, a for-profit site that provides advice to start-ups—say they have received pitches from more than 1,000 start-ups, mostly consumer Internet companies. Of the 48 companies featured so far on AngelList, about half have received funding, they say.
The service, he says, “is good at getting worthy start-ups into the inbox of investors.”Marco Zappacosta, founder of Thumbtack Inc., a site that lets people book services like tutors and dog walkers, won three commitments from angels after pitching his company in March at an Open Angel Forum event in San Francisco. He then turned to AngelList and received three more commitments to close a funding round at $1.2 million in June.
Not all entrepreneurs have won investments. Jen Lilienstein, one of six entrepreneurs selected to pitch last month at an Open Angel forum in Los Angeles, hasn’t raised any cash for her start-up, Kidzmet.com, which helps parents enroll their kids in extracurricular activities.
Some pay-to-pitch services have changed their business models amid the criticism. In September, FundingUniverse LLC stopped charging a $125 fee for entrepreneurs to pitch at its events, attended by angels and loan providers like banks. The winners of its events receive a few thousand dollars in in-kind services, and sometimes, investments.
FundingUniverse does, however, sell products through its website, such as a $99 online “diagnostic tool” that analyzes a business’s funding prospects. “We think the services we do charge for are perfectly acceptable,” says Alexander Lawrence, a partner at the company.
Open Angel Forum, which holds free pitch events in various cities where entrepreneurs selected from a pool of applicants can pitch to about 20 to 30 angel investors. At Open Angel’s first event in Boulder, Co., in February, three of six companies found new investors.
Free service, AngelList, started in February by angels Naval Ravikant and Babak Nivi, vets dozens of deals before highlighting the best ones in emails each week sent free to a group of 200 investors.
The free services come in the wake of recent criticism of the pay-to-pitch model, which some angel investors have argued is justified because they offer advice and should be paid for their time. Mr. Calacanis, an outspoken figure in the tech industry, last fall publicly admonished angel investment groups for charging bootstrapped entrepreneurs hundreds, if not thousands, of dollars to pitch to them.
Some pay-to-pitch services have changed their business models amid the criticism. In September, FundingUniverse LLC stopped charging a $125 fee for entrepreneurs to pitch at its events, attended by angels and loan providers like banks. The winners of its events receive a few thousand dollars in in-kind services, and sometimes, investments.
FundingUniverse does, however, sell products through its website, such as a $99 online “diagnostic tool” that analyzes a business’s funding prospects.
Tags: Angel Investors, Business Investment, Start-up Funding
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June 15th, 2010
Do Your Homework
If you’re financially motivated to launch a business, you may be tempted to simply jump in. But experts strongly recommend first taking the time to do some research to determine if your venture has legs to stand on. Otherwise, you could end up in worse economic shape.
“Once you’ve started a business, you’ve already invested a lot of money and time,” says Andrew Zacharakis, professor of entrepreneurship at Babson College in Wellesley, Mass. “If you find out afterward that consumers don’t want what you’re selling, it can be very hard to make a midstream adjustment.”
One way to explore a business idea’s feasibility is to solicit the opinions and advice of experienced professionals in your target industry, even prospective competitors. Mr. Zacharakis recommends starting at trade shows, seminars and other business events if you don’t have specific contacts in mind. Ask people what they like and don’t like about your planned venture, if they foresee any obstacles to building it, and what suggestions they might have.
Also go directly to your target market and ask about their interest in your product or service and how much they’d consider paying for it, Mr. Zacharakis says. If you plan to sell a product or service to pet owners, for example, you could canvass dog parks, groomers and veterinarians’ offices.
Low-cost services like SurveyMonkey.com and Zoomerang.com let you compile a survey online. In general, you pose a question and select answer options, such as multiple choice or fill-in-the-blank. Then you receive a Web link that you can post to your Facebook page, Twitter feed, personal blog or other website.
Get Real Feedback
Richard Daniels and Seth Burgett implemented this strategy before co-founding Yurbuds, a St. Louis-based maker of custom-fit earbuds, in early 2009. More than 300 survey takers provided insights into the features that matter most to them in portable listening devices and how much they’d pay for the ideal pair.
The duo—who met soon after Mr. Daniels was laid off from an executive job and while Mr. Burgett was in business school—now sell the earbuds in about 200 retail outlets. The firm is on target to be profitable by next year.
“You have to roll up your sleeves and talk to real people to find out if your business idea has value,” says Mr. Daniels. “Hope is not a strategy.”
Tags: Starting a business.
Posted in For business owners, Personal Activities | Comments Off
June 8th, 2010
If starting your own business later in life is an appealing idea, keep these tips in mind
1. Keep things lean. As with any entrepreneur, older people who start their own business would do well to keep expenses in check, particularly at the outset. Says Liz Dahl, 61, who started the travel Web site Boomeropia.com: “I first thought of starting a travel magazine for boomers, but it made more sense financially to create a Web site instead. That way, money was not really an issue.” Matthews says that sort of caution is typical among older entrepreneurs: “With their experience, they’re better at managing risk than others.”
2. Leverage networks. “Be sure to use your network of friends, family and colleagues throughout the launch and growth of the company,” says Rodrigues. “Capitalize on their assistance and collective wisdom.” Use the resources at SCORE.
3. If you lack a skill, partner with someone. “I found a partner who knew the things I didn’t — particularly the technical side,” says Dahl. “I knew [public relations], buttechnology was difficult. So by partnering with someone who had those skill sets, we put in very minimal money and relied on sweat equity to get launched.”
4. Don’t get discouraged because of your age. Although they’re starting ventures at record levels, older entrepreneurs say there’s no shortage of people who will attempt to disparage the idea of starting a business later in life, citing unnecessary risks, health concerns and other arguments. If the passion is there, stay the course. Nagamine countered naysayers by focusing on others who shared her entrepreneurial spirit: “I started to attend business classes, networking forums and surrounding myself with like-minded people.” Adds Dahl: “It’s never too late to pursue what you love. Boomers have always been rebels, so why stop now?”
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June 6th, 2010
The process of selecting, pitching and ultimately negotiating with a VC can be intimidating, especially to those not accustomed to the world of high finance. I asked Lori Hoberman, head of Chadbourne & Parke LLP’s emerging-companies/venture-capital practice in New York, to explain the various steps. Here’s what she said:
Pinpoint the ideal VC.
First, an entrepreneur must target the right venture capital investment fund to pitch. That requires some research. It’s a good idea to attend venture capital and private equity conferences. Ask an attorney or accountant for a referral. Online databases such as VentureSource (owned by Dow Jones) provide information on the latest venture deals. And most VCs host websites that describe their “sweet spot” and existing portfolio investments, Ms. Hoberman says. Don’t waste time pitching your biodiesel fuel business to a VC that only invests in software.
Prepare a “teaser” document.
This one-or two-page document that you send to VCs is your way of introducing yourself—and it’s got to be memorable. Tell the VC who you are, what need you fill in the market and how that market translates into dollars. Because most VCs are barraged with investment requests and can give each one only limited consideration, every sentence of your teaser needs to “answer the question about why an investor would ever dream of putting money into you,” Ms. Hoberman advises. “It forces you, as the entrepreneur, to think in sound bites.” She recommends incorporating text and graphics (pictures, pie charts or graphs) into the document. “The whole idea is to tease the investor into wanting to hear more,” she says.
Send financials.
If your teaser has done its job, a VC often will ask you to provide financial statements, including projections. If you’re building out your business model and are attracting paying customers, “it’s a much easier sell,” says Ms. Hoberman. Show how you’ve gotten to your current stage, whether that’s through bootstrapping, help from family and friends, or funding from angels.
Prepare your pitch.
If a VC wants a meeting after reviewing your financials, the initial face-to-face encounter will probably last less than a half hour, so use the time wisely. Don’t forget the thirty-second rule, Ms. Hoberman advises. “You have to tell the investor in the first thirty seconds who you are and how you are going to make them money,” she says. If you plan to show visuals, such as a slide show or online demonstration, keep it short so that there’s time for questions. Demonstrate your belief in the company and your knowledge of the market or industry. “The VC wants to get a sense that you know what you are talking about,” she says. When a company has more than one founder, it’s also important for partners to demonstrate that they are a strong management team. “Look at each other when you talk, and show respect,” she says.
Review the terms.
If your pitch was successful, you’ll receive a term sheet for a first or “series A” round of financing (later rounds are called series B, series C and so on). The document outlines the deal that the VC is proposing before investing in your company. At that point, you and your advisors (specifically, an attorney who specializes in venture financing) should begin negotiations. The term sheet outlines voting rights, liquidation preferences and, more important, how much equity the VC will receive.
Figure out what you’re worth.
In order to negotiate, you need to place a value on your company, which can be tough or imprecise at such a young stage. One approach is a so-called back-of-the-envelope valuation, which can be determined by deciding how much venture capital the company needs and how much equity you’re willing to sell. “You try not to give away more than one-third of the company in the series A round,” Ms. Hoberman says. For example, if you need $3 million in financing for your consumer product company but don’t want to sell more than a one-third stake, you’d value your company (prior to receiving the capital) at $6 million.
Do your due diligence.
Before signing on the dotted line, take some time to consider the ramifications of your decision. Talk to other companies in the VC’s portfolio about their experiences. Keep in mind that the VC will take board seats and expect progress reports at monthly meetings. Good VCs “understand the hills and valleys and can wait it out,” Ms. Hoberman says. “The really bad ones ream the entrepreneur every time the slightest thing goes wrong.”
Posted in For business owners | Comments Off
May 20th, 2010
Among the most intriguing career choices for business people is to become small business brokers. Many people who have burned out or retired from a corporate or even a small business position are attracted to this field because of its many benefits.
But does the reality match the myths about this work? Here’s a frank look into some of the popular claims about the profession.
1. Make a six figure income your first year.
Actually that’s true. Of course the six figures include all the numbers on both sides of the decimal point.
Sure there are small business brokers making $100k plus. Most likely they’ve been at it awhile. They have proven to the genie who sits on the bag with all the gold that they’re worthy of abundant rewards for mastering the many trials put in their way. Those include, for example, the “clients” who can’t or won’t perform as promised, and the trolls who climb out from under the bridge so they can kill deals.
2. Have complete control over the way you spend your time.
What a privilege to be able to call your day your own, with no one to tell you what to do. Unfortunately it’s not the full day, just those few hours between the 11:00 o’clock nightly news and the rooster’s announcement at dawn.
Guess when that “can’t miss” session with the landlord is going to happen–the very day you had planned to start the vacation trip you’ve long promised your family.
Prospective small business brokers eagerly anticipating the chance to get out on the golf course in the middle of the day don’t know about the owners who will require hours-long meetings about their possible interest in selling out. And there are buyers who somehow get in the mood to make offers only during those holiday weekends when everyone else is at home greeting relatives and firing up the barbecue.
3. The opportunity of working with smart and successful associates.
This is very appealing to the would-be business broker who’s spent years in the workforce dealing with dumbbells and with co-workers so slow that a sloth looks ambitious by comparison.
There are bright, energetic and professional small business brokers who get things done. But don’t expect them to want to do those things with you. And you may be justified in complaining that they’re greedy and rude.
Then, when you’ve been in the business for a while, have some good listings, motivated and qualified buyers and a solid reputation, you’ll be accused of the same things. You may switch from the “for” side to the “against” side of the “cooperation” debate the first time you find out your seller’s confidential information is circulating on twitter, and discover the other broker’s buyer doesn’t understand the meaning of the confidentiality agreement. Or when you get a letter from an attorney asking you to reimburse a buyer or seller for their losses–losses caused by misrepresentations and promises that came from the other broker you agreed to work with.
4. The chance to do meaningful work that really helps people.
There will be times when a seller or buyer will actually say “thank you.” And you’ll feel good about having given the client smart advice and negotiating well on his or her behalf.
Just hope there are enough of those satisfying moments to balance out the frustrations and disappointments caused by those who stand you up, lie to you, change their minds and kill your deals.
So, while there are substantial joys and benefits for those working as small business brokers, it takes guts, determination and perseverance to make the career really yield those rewards. And it’s a good idea, when starting out on this adventure, to have a year’s living expenses in the bank.
Peter Siegel, MBA, is a licensed California business broker who has worked with small business buyers and sellers for more than 25 years. He is the Founder (in 1990) and President of BizBen.com, a leading online marketplace offering businesses, informative articles and blogs, information from small business brokers and services for buyers and sellers of small and mid-sized businesses.
Tags: business broker, business for sale, small business brokers
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May 19th, 2010
This is a company that manufactures bikes in Walnut Creek. Absolutely dedicated employees lead by a socially conscious man by the name of Grant Peterson work hard and have fun doing it.
Mostly SCORE helps beginning stage entrepreneurs to develop their ideas, form their business plan, offer counseling with respect to funding, insurance needs, leasing space, marketing, accounting and legal issues and more. From time to time SCORE experts help existing businesses to think through a problem and find solutions.
Rivendell is an exceptionally well run enterprise. They just needed to tweak their marketing efforts. Since Grant is a gifted writer the SCORE counselor advised the use of this gift to provide information to clients and potential clients through an improved use of their blog. Yep, the result was an uptick in sales.
Even if you aren’t in the market for a new bike you can still learn much about biking by logging See Rivendell News by logging on to www.rivebike.com.
Posted in Counseling, For business owners | Comments Off
April 29th, 2010
If you’re planning to acquire a quick printing business for sale, you probably know most of the questions to pose to sellers, so you can learn, for example, terms of the lease, whether employees are covered by union contract and value of the equipment.
But there are more probing questions to ask so you can avoid a company that looks good on the surface, covering hidden problems. Three issues to explore in depth when evaluating companies in this industry relate to:
1. Recoverability–Like most companies in the current economic environment, some or all of the quick printing business for sale offerings show a decline in revenues over the past couple of years. This industry was hit hard by the recession as customers–many of them small businesses–cut back on their printing orders or even closed their doors.
It’s critical to know which of these categories applies to the majority of clients for a business being considered as a purchase candidate. The answer to questions on this topic will reveal important clues about how quickly and effectively the company will recover as the economy gets healthier. Clearly it’s more encouraging to learn that most customers are still in business and will have more printing requirements as their fortunes improve.
2. Income or inconvenience–While a quick printing business for sale looks particularly appealing if it incorporates other enterprises like scanning and large format services, those operations don’t always generate adequate returns to justify their equipment and employee costs. The seller should be asked to separate, from company’s totals, the income and expenses associated with each “profit” center.
The statement that peripheral enterprises are profitable should be proved with the figures. And if the seller points out how associated activities attract customers for the main part of the business, further questions should be asked to determine if those claims are rooted in assumption or in fact.
3. Comparing with industry averages–The buyer evaluating businesses in this industry and armed with knowledge about some common ratios, is able to ask the right questions. If the seller shows annual earnings before interest, taxes, depreciation and amortization (the EBITDA formula widely used in analyzing business opportunities) that fall outside the range of 10% to 20% of gross revenues, some careful analysis should follow.
Certainly not all companies in the industry meet that ratio. But knowing the number makes for a good starting place to form questions about the company’s profitability.
An informed buyer knows to investigate the reason a company is, for example, showing earnings of seven-and-a-half cents for every dollar generated. Is there a fixable problem such as a bloated staff? Or does the pricing structure, necessitated by the highly competitive environment, mean the company is doomed to underperform?
Meanwhile, the seller who reports keeping 25 cents of every dollar generated, may be “forgetting” to mention that, for example, the business has a special rent deal from the seller’s mother-in-law, or that relatives are “employed” in the company but not paid.
Alternatively, the quick printing business for sale you’re investigating might enjoy better-than-average earnings because it has developed just the right menu of services offered at high profit-generating prices to a loyal following of affluent customers.
Why are the company’s earnings above average? It’s the buyer’s job to find that out.
And the seller of a particularly profitable company might be justified in setting an asking price higher than 50% of annual gross revenues–the rule-of-thumb valuation for this business.
One such justification can be the seller’s willingness to finance 25% to 35% of the price.
In any event, if you understand what a buyer typically pays for a quick printing business for sale, what the P&L should look like, and what are potential problems that may not be obvious to the uninformed purchaser, you are well equipped to identify a desirable business and know what it’s worth.
About The Author: Peter Siegel is a SCORE Counselor specializing in consulting those selling or buying a small business. He is the Founder of BizBen.com – Businesses For Sale In California and has written three books on how to buy & sell small businesses. If you have questions about the buying or selling a business process please feel free to phone Peter Siegel at: 866-270-6278.
Tags: printing business for sale
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April 17th, 2010
Most people interested in purchasing a yogurt business can anticipate many of the things they need to know about the shops under consideration. The right choice among these offerings should be a business that has a busy location, is well maintained and shows a profit on a consistent basis. But there are additional guidelines the prospective buyer needs to understand, in order to determine not only whether an establishment is really worth owning, but also how much it is worth.
Here are a few guidelines to help prepare prospective buyers in this industry during the search and the purchase.
Rental Cost
The problem with some great locations is that paying the monthly rental leaves the owner with little to show for his or her work and investment. And it can be difficult to figure out what the rent should be because there are a number of factors involved in setting appropriate rates. A large and active shop might come with thousands per month in rental expenses. Alternatively, the owner of a yogurt business operating out of a kiosk may struggle to cover the few hundred due to the landlord each month.
By analyzing the books of a number of franchised and independent yogurt shops, many analysts, bankers and due diligence professionals conclude that an owner paying out over 20% of gross sales in rent, is providing great benefit for the land owner, but not taking care of him or herself adequately. In fact, total occupancy costs, including insurance and utilities, should not creep much over 20% if the proprietor wants the business to be successful.
Product Cost
Like rent amounts, there can be a wide variation in the cost of goods among yogurt retailers. And determining what is an appropriate amount to pay the supplier for the frozen dessert that will go into cones, cups and cartons, depends on the type of business.
Lower product costs, in the range of 20% to 25% of gross sales, are usually associated with yogurt companies that offer a wide variety of flavors scooped by hand for customers who tend to be a bit discriminating and who pay top prices for their treats. Another yogurt business model relies largely on machines that extrude the product. It is likely to be doing a large volume with lower prices and smaller margins compared to the other model. It’s not unusual for the owner of a company in this category to incur product costs at or above 30% of gross sales.
The Bottom Line
The buyer interested in this industry should be aware that typical owner earnings before interest, taxes, depreciation and amortization (EBITDA) range between 12% and 17% of gross revenues. That’s a useful guide, because a purchaser who encounters a business for sale that generates less than this range will know that there is likely something wrong in the way the company is structured or operated. It may not represent a desirable purchase.
Meanwhile, the enterprise showing earnings approaching 20% should prompt quick action on the part of any interested buyer. If priced right, and if other factors are sound, this yogurt business will probably sell without delay.
Business Pricing
The general valuation rule of thumb that applies to small retail businesses–2.5 times seller’s annual EBITDA–offers a reasonable approach for valuing a yogurt business. The factors that might influence this figure, up or down, include condition of the equipment and facility, the level of risk involved and the ease of purchase. Contributing to a business opportunity’s value is a deal in which the seller is willing to carry back 25% or more of the purchase price. Seller participation in financing gives the buyer more confidence in the future of the company, and makes it easier for him or her to arrange a purchase.
About The Author: Peter Siegel is a SCORE Counselor specializing in consulting those selling or buying a small business. He is the Founder of BizBen.com – Businesses For Sale In California and has written three books on how to buy and sell small businesses. If you have questions about the buying or selling a business process please feel free to phone Peter Siegel at: 866-270-6278
Tags: business opportunity, sell a business, selling a business
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April 3rd, 2010
It is commonly understood by owners of small and mid-sized companies that when they put the business on the market, they need to follow basic practices, such as pulling together financial information for review by the buyer, and making sure the business will come with a good premises lease. And while doing some things right, owners often make serious mistakes that impact their ability to conclude a deal. Here are three of the worst mistakes made by entrepreneurs selling a business.
1. Being difficult to contact: It is not true, as some sellers believe, that buyers remain motivated and cooperative if they have to find owners and “chase them down” to get information and responses to their offers. In fact, with all of the business opportunities on the market, any buyer having trouble communicating with a seller will simply go on to other opportunities available.
Playing “hard to get” might be an effective way to attract the interest of another student in high school, but that tactic doesn’t belong in a business search in the 21st Century. The most successful sellers make sure to provide at least two phone numbers–home and mobile–to prospective buyers and various brokers, along with the assurance that they are available 24/7.
2. Playing the “open listing game”: Some business brokers, anxious to get listings, will get the seller’s agreement that the broker will earn a commission by bringing the buyer who purchases the business. But only then. And under this open listing, the seller is free to find his or her own buyer without responsibility to the broker, and can even list with other brokers on a non-exclusive basis.
From the standpoint of someone selling a business, the idea of having several brokers, all on open listings, might seem like a great strategy to expand the marketing effort. But the seller has little control over how the business is offered for sale, which can readily compromise the need for confidentiality. Besides, most brokers are not motivated to put time or advertising investment into promoting non-exclusive listings.
It might seem like a clever idea, but the seller who engages brokers with open listings, is more likely to encounter misunderstandings and problems than to achieve a successful sale.
3. Pricing based on unreported income: The seller with a secret–that some of the money coming into the business goes directly “to pocket,” never getting recorded on the books–should take care to keep that secret. It’s a mistake to reveal it to prospective buyers, with the explanation that the asking price may seem too high, but that it’s based on actual profits–including the unreported income, which total more than the figure shown on the income statement.
After demonstrating this lack of honesty, a seller will find that his or her other statements about the business are not readily accepted by prospective buyers. And anyone who destroys his or her own credibility when selling a business is very unlikely to find someone willing to make a deal.
If actual income is used as the basis for determining asking price for a business, that income should be apparent to someone examining the company’s books. All of it.
By getting fully ready with the necessary documents and commitments when offering a small or mid-sized business for sale, the owner increases the chances of finding the right buyer and completing a transaction. It’s a shame to undo that effective preparation by making major mistakes such as the three mentioned here.
About The Author: Peter Siegel is a SCORE Counselor specializing in consulting those selling or buying a small business. He is the Founder of BizBen.com – Businesses For Sale In California and has written three books on how to buy & sell small businesses. If you have questions about the buying or selling a business process please feel free to phone Peter Siegel at: 866-270-6278.
Tags: business opportunity, sell a business, selling a business
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April 1st, 2010
Anyone considering starting their own business will benefit from a recent article in The New York Times. It offers some good tips and advice on how to register your company and avoid some problems down the road. The article can be accessed on the NYT website @ www.nytimes.com/2010/04/01/business/smallbusiness/01sbiz.html?ref=business
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SBA's participation in this Co-sponsorship is not an endorsement of the views, opinions, products, or services of any Co-sponsors or other entity. All SBA programs or co-sponsored programs are extended to the public on a anondiscriminatory basis. Reasonable arrangements for persons with disabilities will be made if requested at least two weeks in advance - contact the SCORE Chapter office. |
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