Archive for the 'Start-up' Category

Investor search mistakes to avoid, part 1

Small business capital comes from three primary sources:

1. Profits left in the business;
2. Debt, like a bank loan;
3. Equity investment.

For most small businesses the third source is, and has been the founder’s investment.

In recent years, this option has become more robust and multi-faceted in the form of outside investors, whether venture capital, angel investors, and even with crowdfunding. The challenge is developing a capitalization strategy that matches the right sources with the short and long-term goals of the founder.

It must be said that while many elements of finding and acquiring investor capital are similar to getting a bank loan, the former takes longer and is more complex. In his book Raising Capital, Andrew Sherman addresses this issue with a list of common mistakes entrepreneurs make searching for investor capital. This is the first of two articles where I’ll identify Sherman’s “mistakes” and follow each one with my thoughts.

Mistake: Using an investor search that’s too broad.
Each investor has an interest and related strategy. An investor that likes medical ventures won’t be a prospect for your retail idea. Qualify each investor prospect before making contact.

Mistake: Misjudging the time involved.
Part of Murphy’s Law states that everything will take longer than you think. Alas, Mr. Murphy is alive and well in the investment marketplace. It usually takes months, not weeks, to find, approach, and get an answer from investors. Even crowdfunding will take more time than you think. And remember, like prayers, sometimes the answer is “no.”

Mistake: Falling in love with your business plan.
Every mother’s baby is beautiful. But your plan is not your investor prospect’s baby. Expect that your business plan will have to be adjusted before you get funded. So be prepared to accept that changes will come with the capital.

Mistake: Taking financial projections too seriously.
First let’s establish the prime financial rule: All projections are wrong! Of course, you can show projections you believe are achievable. But also include a conservative set that shows your break-even point if things don’t go as planned.

Mistake: Confusing product development with sales.
Investors love real customers and real sales. Even sales projections based on history will be highly scrutinized. But projections based on projected sales will be highly doubted.

Mistake: Minimizing the management team.
A good management team can fix a bad plan, but a bad team can ruin a good one. Unless you’re asking investors to contribute management expertise, don’t seek investor capital without a qualified management team.

Next week, more investor search mistakes.

Write this on a rock …
Make your own mistakes, not these.

You say your business plan every day

Do you have a business plan? What? In your head? How’s that working for you?

Don’t know how to get one started? Well consider this conversation that happens many times, every day, between business owners just like you and the people they meet.

Friend: “Hi Joe. Heard you started a business. What’re you doing?”

Owner: “Oh, hi, Sue. Yeah, John and I are selling square widgets to round widget distributors.”

Friend: “What? How’re you going to do that?”

Owner: “We discovered that no one has thought to offer square widgets to these guys. Our research found that round widget companies not only need square widgets sometimes, but they’ll pay a premium for them.”

Friend: “I thought you couldn’t get new square widgets anymore?”

Owner: “Well, we discovered that round widget companies don’t need new square widgets, so we’re buying seconds, cleaning them up, repackaging and delivering them to those customers.”

Friend: “Sounds like you’ve found a niche. How many can you sell in a year?”

Owner: “We’ve identified the need for 15,000 this year, and with the trend in the market, we think we can double that within three years. Gotta go. See ya later.”

Let’s look at what just happened. Without realizing it, Joe essentially said his business plan to Sue. In two minutes Joe identified the business, management team, industry, market opportunity, customer profile, vendor profile, pricing strategy, market research results and, finally, growth plans. All that’s left is to add a few other elements, write the narrative and project the numbers.

Since you’re probably having similar conversations that means you’re saying your business plan, probably without realizing it, every day. But is that a useful form?

There are a bazillion reasons to put your plan on paper, but we only have room for the three most likely:

  • To get a bank loan
  • To attract investors
  • Because it’s an essential management tool

So now that I’ve convinced you how important this management tool is, when you do yours, don’t make these mistakes:

  • Don’t wait until you need a business plan to start one.
  • Don’t wait until you have time.
  • Don’t make it harder than it has to be.

The words of a conversation like the one above are the seeds from which you can grow your business plan. So just start writing what you already know, like Joe said.

A written business plan will help you achieve new levels of management professionalism and success. Here’s a good place to see something less than a bazillion sample plans without any commercials: www.bplans.com.

Write this on a rock … You already say your business plan every day. Now write it down.

Four factors that stopped the American startup

As the financial crisis was being resolved in December 2008 I heard someone say, “Wait ’til the startups get going – they’ll end this recession and crank up the economy again.” Of course, this maxim had caught on previously because when you start a business, you create at least one job.

But as I thought about how that entrepreneurial expectation had been true in past recoveries, I considered the environment we were entering and concluded that this recovery was going to be different. Indeed, in my 2009 predictions I reckoned that there were going to be fewer startups in this recovery cycle than ever before based on two conditions I saw coming. Unfortunately, things got even worse due to two factors I didn’t forecast.

Typically, the founding of most Main Street startups are funded initially with access to the personal credit and home equity of the founders. I saw problems coming for both of these sources because:

1.   One morning in February 2008 – months before the financial crisis but with storm clouds on the horizon – millions of credit card holders woke up to discover their card issuers had withdrawn any available credit they had the day before.

2.   Then, over the next year, the bursting of the real estate/mortgage bubble – the prime cause of the 2008 financial crisis – resulted in wiping out or significantly reducing the home equity of millions of U.S. households.

The two factors I did not forecast are:

3.  The youngest – and largest – of marketplace participant groups, Gen Y and Gen X, age 20-44, apparently are not as entrepreneurial as their Baby Boomer parents were at that age. According to the Kauffman Foundation, since 2009 startup activity for those two demographics has been declining.

4.  In my half-century career, and my study of the history of the American marketplace, prospective founders of new businesses have never been subjected to the level of anti-business rhetoric and policies from the federal government as they have in the past seven years.

One of the seminal findings of the Global Entrepreneurship Monitor (GEM) is a direct connection between a country’s entrepreneurial vitality and its economic growth. The Great Recession ended in June 2009. But the subsequent U.S. recovery, now well into its sixth year of moribund performance (2% annual average GDP growth), has been stuck in a kind of circular reference: expansion-creating startups aren’t happening because of the four entrepreneurship-repressing factors.

Write this on a rock …Real economic expansion – more than 3% growth – will require a return to favorable entrepreneurial conditions lost since 2008.

Next week my column will reveal counter-intuitive ways the lack of startups since 2008 have been positive.

Video: When buying a business, consider these business principles

In this weeks video I list a few points to consider before owning your small business.

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A business is not a Chia Pet

When I have talked with would-be entrepreneurs who want to start their own business, I often observe more urgency than understanding. I continue to be amazed at how many people disregard the fact that being a business owner is a profession.

If you decided to become a surgeon, would you expect to operate on someone the day after you made that decision? If your bent was toward the ministry, wouldn’t you expect to get appropriate education and training before you would be qualified to shepherd a congregation? Or let’s say you longed to be an automobile mechanic. That desire alone wouldn’t give you the ability to diagnose a mechanical problem and successfully make the repairs, would it?

So what makes anyone think they know how to run a business just because they . . .

. . . have always wanted to?
. . . can’t stand to work for someone else another day?
. . . have this great idea that no one else has ever thought of?

A business is not a Chia Pet. It takes more than adding a little water and waiting a few minutes for green stuff to pop into your life. Successful business ownership is at the least more like growing strawberry plants, which don’t produce berries until the second year. But it’s often more like growing apple trees, which only bear fruit after several years.

Too many so-called “experts” have learned the hard and expensive way that, just because they know a lot about a product, service or industry, doesn’t mean they know how to run the business that successfully makes those things available in the marketplace.

If you want to start a business you certainly need to know your product and industry. But you also need to know the profession of business ownership. And like a surgeon, minister, auto mechanic and farmer, being a successful business owner takes education, training and time.

Before you turn in your time-card, minimize your urgency and maximize your understanding about the profession of business ownership.

Consider these four factors when buying a business

Continuing my series on buying a business, here are summaries of four more critical factors to consider when acquiring a small business.

Old sellers are the best sellers
One of the best opportunities to acquire an existing business is when you can buy one from an owner who wants to retire from a business that’s still viable. Two good reasons are: they’re less likely to change their mind before the transaction is complete, and they’re more likely to finance a larger part of the sale price to get monthly income.

But notice I said, “still viable.” Sometimes the end of the current owner’s career coincides with the end of the life of the business. Don’t buy a business that should also be retiring.

Assume skeletons in the closet
Every business has baggage. Every business! If your due diligence doesn’t find any, you didn’t look hard enough. Or even more dangerous, you want the deal so much you rationalize what you found as “not so bad.”

When you find the bad news, let the seller explain why it’s there. If you think you can live with it, try to turn it into negotiating leverage. If you can’t, walk away.

Cold feet at closing
After no small investment of time and money putting a small business acquisition together, many deals derail before consummation—sometimes literally at the closing table. Last minute reluctance doesn’t have to kill the deal if you’re prepared. The key is to anticipate this possibility and be prepared to take appropriate communication, negotiation, and contractual steps along the way to protect yourself.

Oh, by the way, you might be the one with cold feet.

When to stop negotiating
Once both parties have signed the purchase contract, what’s left is to execute the transfer. There are many steps in this process, including legal, financial, physical, and organizational hand-off. What should not be done is any further negotiation.

The signed contract stipulating the terms of the deal is now a legally binding document. Any subsequent negotiation will likely corrupt the work that has gone before. Don’t sign the purchase contract until you have no more deal points to negotiate.

Finally, buying a business is likely the most important transaction you’ll ever make. Do it for the right reasons, be patient, resist the urgency of others, conduct proper due diligence, negotiate the best deal for yourself, and be prepared to operate what you’re buying.

Just like in marriage, no one should enter into the state of business ownership inadvisably.

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Check out my latest segment below on The Small Business Advocate Show® where I talk more in-depth about the four factors of buying a business.

Four factors to keep in mind when buying a business




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