Jun 032017
 
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How To Create A Compelling Elevator Pitch

Are you familiar with the concept of an elevator pitch (a/k/a elevator speech)?  If you’re an entrepreneur, you really need to understand the idea of an elevator pitch and you need to formulate your own.

The name elevator pitch (or elevator speech) comes from the idea that when you get on an elevator and want to describe your business (rather than staring at the floor or the wall) to someone you just met there, you don’t have very long to do it!  How long you have depends on how many floors you’re going, how fast the elevator goes, and how soon after entering the elevator you start speaking to the other person. But regardless of the number of floors, the speed of the elevator, and how soon you start speaking, unless the elevator gets stuck for some reason, you don’t have much time!

It’s a great metaphor and a great idea, as it forces you to boil down your “pitch” to its very essence, so you can get your point across “before the elevator opens”.  The concept of elevator pitches has been around for a long time.  If you’ve not already formulated yours, I recommend you do so as soon as possible and begin using and refining it as you meet new people.  Before you take it “prime time” with potentially important prospects, partners, investors, etc, I strongly advise you to try it out on several people you know and get feedback.

So, how should you think about constructing your elevator pitch?  How long should it be?  What should it include?  Think about the scenario of just entering an elevator and realizing that, by chance, a potential investor you had wanted to get in touch with is on the same elevator.  You have an opportunity to give an elevator speech to a very important audience!   Unless you’re in a very tall building with lots of stops, you would likely have less than thirty seconds, potentially far less, to deliver your elevator speech.  What would you want to get across to this very important prospect in such a short period of time? Remember, the idea is to pique their interest and increase the probability that you can take the conversation to the next step.  Let’s look at an example.

In this example, we’ll think along the lines of being the founder and CEO an early stage technology company, getting into the elevator with an important potential investor.  We’ll look at a couple of elevator pitch examples for the same scenario, so you can see the good and the bad.

Elevator Pitch To Potential Investor – Example #1

Hello Mr. Investor.  It’s a pleasure to meet you.  I have been wanting to get in touch with you to tell you about the extraordinary technology we’ve developed.  I think it may be a great investment for your venture capital fund.  It’s based on nanotechnology and has the potential to help a lot of people and keep them from getting sicker.  I’d love to be able to get some of your time and tell you more about it.

Elevator Pitch To Potential Investor – Example #2

Hello Mr. Investor.  It’s a pleasure to meet you.  I have been wanting to meet you to tell you about the amazing technology and business model we have created, which I think is very well aligned with the types of investments your fund focuses on.  It’s based on our patented nanotechnology, which has been proven to reduce repeat heart attacks by 65%.  The addressable market is $10 billion and our team of veteran entrepreneurs and award-winning physicians has been at the forefront of many advances in this market.  Could we meet or have a call next week, so we can provide you with more details?

Ok, so which elevator pitch above do you believe is more likely to get the desired result – a meeting with the potential investor?  I’d have to say it’s pitch #2.  Do you agree?  Why?

Elevator speech #1 focuses on the entrepreneur and does not provide any specifics, particularly those specifics that would be of greatest interest to the potential investor.

Elevator speech #2 immediately shows the investor that you are thinking about their needs and what they’re looking for.  It says, “… which I think is very well aligned with the types of investments your fund focuses on…,” immediately proving to the prospective investor that you’ve done some research and are not just throwing out the same canned elevator pitch to everyone you run into.  Elevator pitch #2 also quickly gets into key points that are very relevant to most every venture capitalist, such as: “patented technology,” “proven to reduce,” “addressable market,” and “team of veteran entrepreneurs”.  With this second pitch, you are “talking their language,” as the saying goes.  Such an approach greatly increases the odds that they will listen and grant you the meeting you are seeking.

You can see how this concept of “talking their language” is relevant for any kind of elevator pitch, whether it’s to a potential customer, partner, investor, or any other important constituent.  Everyone is busy.  Everyone has a natural filter to help them ignore or “pay lip service” to those things that really are not relevant to them.  In order to get through this filter, you must be able to put your elevator speech in terms that really matter to the person with whom you are speaking.  If you do not take the time and effort to do this, you probably shouldn’t bother giving the elevator pitch, as you’ll only end up sounding irrelevant and confused.

When you are thinking about how to construct your elevator pitch, think about it the same way you would think about any marketing or sales pitch; it must be focused on the benefits you offer that solve specific problems the target is facing.  Elsewhere I’ve written about why most marketing does not work because it is focused on, and written in the language of, the seller, rather than focusing on the needs and language of the prospect.  Every prospect with which you have a “conversation,” regardless of the medium through which that communication occurs, has one thing first and foremost on their mind.  What is that one thing?  It is solving their issues and problems, particularly the most pressing ones.  That is what we as human beings focus on all day long.

If you show up on the scene with your marketing message or elevator pitch and it is not relevant to me, my problems and issues, or my future aspirations, you get filtered out.  Period.  End of story.

Make sure your elevator pitch quickly gets to the point, which should be about how what you have to offer is highly relevant to helping the person with whom you’re speaking solve their issues, problems, and aspirations.  Keep it under thirty seconds.  Have a couple of versions prepared, so you can change it up a bit, based on relevancy to the particular person with whom you’re speaking.  Keep refining your pitch based on the feedback you receive and results you achieve.  Remember, you’re not giving your whole pitch in the elevator; you’re just trying to “open the door,” so they’ll be intrigued enough to be willing to listen to a more detailed version of your pitch.  If you do those few things, you should end up with an elevator pitch, or several audience-customized elevator pitches, that allow you get your message across to key constituencies quickly and effectively.

I look forward to your thoughts and questions.

Paul Morin

paul@companyfounder.com

www.companyfounder.com

 

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Jun 022017
 
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How To Get A Small Business Loan

So, you need some capital to get your business started or to grow your existing business and you want to know how to get a small business loan.

First, let’s be clear: a big part of a lender’s decision to give you a small business loan is based on your personal credit history. Unless you are an established business with a long credit history and sizable revenues and cash flows that can clearly support debt repayment, the lender assumes that the loan is as much to you as it is to your small business.

What are the implications of the lender believing that they are lending to you as much as they’re lending to your small business?

Most importantly, the lender will look to see that you have a good credit score and credit history. Before giving you a small business loan of any size, they want to see that you have a history of responsible borrowing and repayment.

Also important though, is that you understand that the lender is likely to want you to provide not just your personal guarantee on the loan, but they will also want you to promise as collateral specific assets that you own outright or have substantial equity in. This could, and often does, include putting your home up as collateral for your small business loan.

Next, you need to understand that by lending you money, typically the lender’s only real upside is that you pay them back the principal that you borrowed, plus the interest that you owe over the period of the loan. Since they’re not equity investors in your business, unless there is some kind of equity “kicker” on your loan (such as warrants to purchase shares of stock in your company at a certain price), the interest you pay to the lender on your small business loan is the only “profit” they’ll see from the deal.

So, if the lender is not going to see any upside other than the interest you pay, and your startup or otherwise “small” business is considered a fairly (or very, depending on the situation) risky investment, you can assume that you will be paying a relatively high interest rate to borrow money. That said, if you can obtain an SBA loan (a loan that is largely — usually 80% — guaranteed by the Small Business Administration), which greatly reduces the risk to the lender should your business default on the loan, you will typically enjoy significantly lower interest rates.

Finally, for now, realize that going to a large bank, such as the one where you likely have your checking account and possibly your mortgage loan, is not necessarily the best route to go to obtain a small business loan. While it may work out fine for you, you will likely go through a much more stringent and time-consuming underwriting process, with a lower probability of success in obtaining the loan. The situation may improve a bit if you are seeking an SBA loan, as some of the larger banks tend to be big players in that space and for certain SBA loan programs may even have a streamlined application process.

Often though, it may be more efficient and effective to make the initial foray on seeking your small business loan by looking to online lenders. Such an approach may lead to higher interest rates, so be careful to completely understand what all the costs of your loan will be (origination fees, closing fees, interest, collateral at risk, etc.) before you sign on the dotted line. That said, the requirements of online lenders are sometimes not quite as stringent as those of the larger “brick and mortar” banks, so if your credit or other underwriting factors are not as strong as they could be, an online lender may be your only choice. The list of such potential lenders for small business loans is long. At present, it includes the following lenders, among many others:

www.kabbage.com

www.credibilitycapital.com

www.lendingclub.com

www.ondeck.com

For more information on SBA small business loan programs, check out:

https://www.sba.gov/starting-business/finance-your-business/loans/sba-loans

Whatever loan programs you consider and whichever lenders you investigate, make sure you do your homework and make sure you very clearly understand the terms and conditions of the loan fees and repayment schedule and costs you are committing to! This is a very important decision for the future of your business and for your financial future, so you don’t want to overlook key details in a rush to get the loan funds in the door.

Also, realize that there are other ways to fund your startup or existing business, besides small business loans, so before you commit yourself to a particular funding source, make sure you have explored and understand all your options for raising capital.

 

Paul Morin

paul@companyfounder.com

www.companyfounder.com

 

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Sep 122011
 
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How to write a bad business plan

How To Write A Bad Business Plan

You’ve heard you need to have a business plan, so you figure you’ll throw one together and get it over with, right?  This article talks about how to write a “bad” business plan.  It also explains how to avoid these common errors.  Well, it explains a bit.  Really, it would be best if you’re good with irony and inference, as this article is mainly about what’s to be found in bad business plans.  Note: for anyone thinking about quoting from this article or following its advice verbatim, as I point out below, hopefully you’ll pick up on the irony and can infer what to do from what not to do.  For everyone else, see Business Plan Basics – The Essential Elements of a Good Plan.

The contents of the business plan typically should vary based on the expected audience for your plan.  However, given that this is how not to write a good business plan, we won’t differentiate for particular audiences.  They’re all the same, right?

Here’s what a bad business plan would include and a few suggestions to avoid being “bad”.  Please note that many experts don’t believe a business plan is necessary, so think twice before putting massive effort into writing one.  By the way, while I don’t think a full business plan is the first step you should take in launching your business, the planning process should help you to gain many insights into the venture you are considering launching.  So, even if you’re not big on the plan itself, in my experience, the process of putting it together can bring a lot of risks and opportunities to the surface.

So, here we go.  Make sure your bad business plan includes the following (remember, it’s “opposite day”):

Executive Summary:  Most people who read your plan won’t be very busy, so don’t bother with a summary.  Better yet, if you do include a summary, make it ten pages long, or somewhere around twenty-five percent of the document.

Problem Description:  Be sure not to discuss any specifics in this section.  Speak in generalities.  Talk about how there is a big problem and it’s likely to keep getting bigger, given that no one is really doing anything about it.

Overall Market Description:  Again, speak in generalities.  Be sure to use older data about the market and explain how the market really hasn’t changed that much in the last ten years, so the older data should be a pretty solid indicator of the current opportunity.  Be sure to describe the expected tremendous growth over the next several years.

Market Niche(s):  Pick a couple of market segments that you think will pique the interest of the readers of your plan.  Again, don’t get into too many details about their size, but talk about how great they are and how all the best buyers are in those segments.  Be sure to point out how those buyers are not particularly price sensitive, so the niche you’re targeting should therefore be a lot more profitable than the rest of the market.

Products/Services:  Describe how your products and services perfectly solve the problems of the market and especially of the price-insensitive segments you are targeting.  Be sure to refer to your offerings as “world beaters” and highly innovative.  It also helps to use the word “revolutionary” wherever possible.  Explain how nothing has come along like this in a long time, really since sliced bread.

Competition:   The first thing you should point out is that you really don’t have any competitors.  Not only are there no competitors, there are really no substitute solutions that do exactly what yours does for the market.  Be sure to hit this point very hard, as investors and other consumers of business plans love to hear that no one else has paid any attention to this tremendous need you’ve identified in the market.

Marketing Strategy/Tactics:  Here is where you talk about how you’ll let your target market and the rest of the world know about the great solutions you’re bringing to the marketplace.  This section won’t require a lot of work, as given the quality of your products and services, you likely won’t need to market and sell a lot.  Word should travel and “word of mouth” marketing should take over, creating a “viral” spread of praise regarding your company and its offerings.

Management Team:  It has been said many times that a potential investor cares more about having a great management team than about having the perfect product or service offering.  It’s just a saying though, right?  You’re just starting out.  Don’t worry too much about what your management team will look like.  Given all your talents, you should be able to do most everything yourself, at least at the beginning.  In this section, just include a large bio for yourself and reference a few other people who may join the business if all goes well.

Financial Summary:  This is the section of the plan that gives non-financial and non-quantitative people the most pause.  It’s not easy to put together a good financial summary, as in order to do so, you need to do a bunch of financial analysis in the background.  It’s not possible to predict the future, so why try, right?  Just include a bit about how fast you think the sales will grow and how profitable you think the company will be.

Break-even Analysis:  this is a calculation of the point at which the company covers all its fixed and variable costs.  Since you will not be doing financial analysis, don’t worry about this.

Key Assumptions:  in an ideal world, you’d try to do as much research as possible to justify your assumptions on both the cost and revenue side.  That would be a lot of work though!  Go ahead and just take some guesses based on your experience.  Don’t worry; everyone does it!

Projected Financials:  here, based on your assumptions, you may want to project the three major financial statements:  the Income Statement, the Balance Sheet, and the Cashflow Statement.  But that too would be a lot of work.   Just focus on the Income Statement.  Don’t worry about using a spreadsheet, as you won’t be using any formulas.  You can just type the info into a Word table.

Key Financial Indicators:  Don’t worry about this.  It’s too much detail.

Capital Requirements:  One of the reasons you’re creating a business plan may be to raise money from equity investors or get a loan from a bank.  While most potential investors will be very interested in what you expect to do with the investment, don’t worry about it.  That’s not your issue.  They’re professionals.  They should be able to figure it out, right?

Conclusion

So in the end, the business plan is not so complicated.  It’s particularly easy if you follow the advice in this article for how to create a bad business plan.  Whatever you do, don’t follow the advice of this article verbatim.  This article highlights everything you should not do in a business plan, or in any kind of document or presentation where you are trying to convince others that you have a compelling business opportunity and you’re the one to take advantage of it.  This article was written in this contrarian mode in the hope that it will startle some folks into reality.  Without exaggeration, I have seen thousands of business plans and investor pitches in my career.  I can tell you that a large percentage of them commit some, if not most, of the errors described above.  Don’t write the next bad business plan.  For more advice on what you should include in a business plan, see the following article on the CompanyFounder.com blog:

Business Plan Basics – The Essential Elements of a Good Plan

I look forward to your thoughts and questions.  Please leave a comment (“response”) below or in the upper right corner of this post.

Paul Morin

paul@companyfounder.com

www.companyfounder.com

 

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Apr 162011
 
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business plan basicsIf you’re starting a business, everyone knows that you have to have a business plan, right? Well, you may be surprised to hear that many of the greatest businesses we know today were started without any business plan. In fact, in my opinion, writing a business plan is not the first, but the eighth step in starting a business. That being said, I do think it’s important to have a business plan, even if it’s not a fancy 100-page document. The process of putting the plan together, if not the physical plan itself, can have great value in how you think about and grow your business. So, if it’s a good idea to develop a business plan, what should the plan contain?

The contents of a business plan are somewhat subjective and what is considered essential will vary based on the expected audience for your plan. Even so, there are some elements of a business plan that are required, regardless of whom the audience will be. Those essential components include the following:

Executive Summary: all plans should have a brief executive summary at the beginning, and given that many readers will never make it past this section, it should be concise, well-written and full of key information that will pique the interest of the reader.

Problem Description: this section must make very clear the problem that your product and/or service will solve. It should leave no doubt that you are not speculating that such a problem exists, but rather have done sufficient primary and secondary market research to confirm that there is a real need in the market, and one that people or companies are willing to pay you to solve.

Overall Market Description: here you will want to provide as much pertinent information as you can about the market. It’s key to keep the information relevant to the problem you are solving. Try to get as much current data as you can and try to size the market, both in terms of the number of potential customers and the potential dollar volume per year. Provide an indication of expected growth or decline in the market over the next five to ten years.

Market Niche(s): Now that you’ve provided an overview of the market, it’s time to talk about the various segments or niches in the market and specifically, go into greater detail regarding those you expect to target. Discuss why these segments are most relevant and attractive from your perspective and indicate how you expect to go after them. It is also important here to provide an indication of the size of these segments and how they fit into the overall market that you described above.

Products/Services: While you may have touched briefly in Problem Description on the products and services you will be offering, this is where you’ll go into greater detail, including how they will solve market needs better/cheaper/faster than the solutions currently available. Here you will want to cover the important characteristics of the offering, as well as the various versions you expect to bring to the market, based on the unique needs and desires of the particular niches you will be targeting. It is in this section that you will also cover the pricing of your offering and why your intended price points make sense in the context of the existing market and its expected evolution.

Competition: The first key point to make regarding competition is that as you think through and develop this section, remember that there is always competition. While there may be no competitors do exactly what you are expecting to do in the market, if a need exists, without a doubt there are alternative or substitute solutions being proposed to the market by other providers. There are very few situations where this is not the case. So, do yourself a favor and acknowledge that there is competition, however minimal or ineffective it may be. You will want to describe the existing competitors and their offerings, including the pricing. You will also want to point out their strengths and their deficiencies and where you think your offering will be more appealing to the market. Base your statements on primary and secondary research, not foundationless assertions. Don’t business plan “in a vacuum”.

Marketing Strategy/Tactics: What will be your marketing strategies and tactics for selling your products and services to your target market? It is in this section that you will exhibit your market knowledge and insights into the buying habits of the target market. You will discuss the typical buying process/cycle for the products and services you are introducing and you will describe any innovations you expect to bring to this process. For example, does your target market respond best to being sold through the internet, or have they never bought anything in your space unless it was sold by a salesperson face-to-face? A lot of the answers here will of course depend on the complexity and price point of your offering. If you expect to take a very innovative approach to marketing and selling to your target market, your argument will be a lot more compelling if you have done tests and primary market research to prove that the market is open to such an approach. Human behavior is not easy to change, and this is not lost on potential investors.

Management Team: It has been said many times that a potential investor cares more about having a good management team than about having the perfect product or service offering. In fact, it has been said so much, that it is largely taken as a truism by those in the entrepreneurship field. Why would this be? Well, veteran entrepreneurs and investors know that very few successful businesses end up being successful based on the exact formulation on which they were founded. Typically there are many course corrections that need to take place – the business and the offering morph as the founders and their team get more feedback from the marketplace. Given this reality, no one expects a perfect formulation of the business at the outset, but most realize that if the management team is not apt, it will have a very hard time making the ongoing adjustments necessary to become successful. So, in this section, you must describe your management team and why you believe that in this particular marketplace, you think your team is the right one to make your company a success as the business grows and evolves.

Financial Summary: This is the section of the plan that gives non-financial and non-quantitative people the most pause. In fact, in my observation, this is the section that causes many to not even bother starting the business plan. They don’t understand it and they realize that it will not be an easy road to understand it. That said, if you are starting a business, you must have a basic understanding of break-even, profitability, and financial statements if you want to increase your probability of having a successful business. You don’t need to become a “numbers person” or a “quant jock” overnight, but you do need to be willing to step outside your comfort zone a bit, so you can understand how the world keeps score in business, which is by use of financial information. There are programs to help you put the financials together and there are also people out there who will help you put them together quite affordably. However you decide to approach it, make sure that you are not simply handing it off to someone else, without developing at least a basic understanding of the subject matter yourself. It is very difficult to effectively run an enterprise, if you do not at least understand the basics of how to “keep score”.

The essential elements that you’ll want to include in your Financial Summary include the following:

Break-even Analysis: a calculation of the point at which the company covers all its fixed and variable costs. Although it may look and sound daunting, it is a very simple calculation, especially when you’re just “thumbnailing” it. You’d do yourself and the readers of your plan an injustice if you didn’t do this calculation.

Key Assumptions: a description and quantification of those elements about which you don’t have certainty that will play a role in your financial model. Unless you possess supernatural powers to know the unknown and predict the future, you will not be certain about the values of all the variables that will go into your financial projections. For example, you will not know with certainty at what price or rate your offerings will sell in the marketplace, so you’ll need to make estimates or assumptions. You will have many assumptions, with some having a very important impact on your projections and others having a minimal impact. In this section you will want to focus on the important assumptions and describe them in as much detail as practical, to give yourself and the readers of your plan an indication of their variability and their importance in your financial projections.

Projected Financials: here, based on your assumptions, you will project the three major financial statements: the Income Statement, the Balance Sheet, and the Cashflow Statement. The Income Statement provides the reader with a window into the expected revenues, costs and profitability of the company. The Balance Sheet provides a snapshot of the company’s assets, liabilities and equity at a particular point in time. The Cashflow Statement does exactly what its name implies – it provides the reader with a window into the cashflows based on the company’s operating, investing and financing activities. The three financial statements are inextricably linked and you’ll need to project all three to provide a full understanding of the expected financial performance of the venture.

Key Financial Indicators: Based on the projected financial statements, in this section you will provide the reader with financial ratios that can yield insights into the potential financial strengths and weaknesses of the venture. These ratios indicate such things as liquidity, profitability, return on equity and asset utilization, among others, and are important for gaining an understanding of the likely financial attractiveness of the venture.

Capital Requirements: One of the reasons you’re creating a business plan may be to raise money from equity investors or get a loan from a bank. Any potential investor will be very interested in the projected finanical statements you created above. They will also want to see a more specific breakdown of the capital requirements you see for the venture, into the future. The relevant time horizon will vary, but you’ll want to project this for at least five years. These capital requirements can result from several potential factors, but the largest chunks are likely related to expenditures on equipment and facilities, startup costs, including the hiring of key senior and technical staff beyond the founders, and working capital.

Conclusion

So in the end, the business plan is not so complicated. It will however take a significant amount of time and effort to complete to a reasonable standard. Sure, you could take shortcuts and put a lot of guesswork into your plan, but that would serve neither you nor the readers of the plan. Particularly in the area of understanding the needs and behavior of the market, put the time in to do sufficient primary and secondary market research to establish that there is actually going to be demand at a profitable pricepoint for your offering. If there is no demand for what you bring to market, nothing else will matter and you will have wasted a great deal of time, effort and money.

We’d love to hear your comments and question about developing your business plan. Leave a comment below or in the top right hand corner of this post.

Paul Morin
CompanyFounder.com
paul@companyfounder.com
Twitter: @companyfounder.

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Apr 042011
 
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If you are like many entrepreneurs, you probably have at least ten ideas each day for potential businesses, products and services. You’re constantly seeing things and processes that can be improved and you’re probably very interested in and aware of trends in a variety of marketplaces. So are you rich yet? Has your ability to come up with ideas gotten you where you want to be?

Unless you constantly force yourself to differentiate between ideas and opportunities, chances are that your ability to brainstorm new solutions for just about anything has not yet made you as wealthy as you’d like to be. So what is the difference between ideas and opportunities? How can you determine whether this one is just another idea, or a real opportunity that can be turned into a profitable business?

In another article I wrote on a similar topic – idea screening – I provided a series of criteria to help you determine whether a particular idea could provide you with a business that suited you well. Those criteria included:

Does the business have high gross margins?

Are there a lot of employee headaches associated with the business?

What potential does the business have to reach break-even cash flow within 12 months?

What is the startup capital investment required relative to what you are able/prepared to spend?

Do the strengths necessary to be successful in the business suit those of the founder(s)?

What is the founder(s)’ level of enthusiasm for the industry?

What is the founder(s)’ level of enthusiasm for the idea?

Does the business have potential for residual income?

What is the market growth rate for the market/niche you want to go after? How is it expected to behave in the future?

What is the number and strength of the competitors you’ll be going up against? Competition is not necessarily bad, but you’ll want to understand what you’l l be up against.

What will be your ability to take a vacation in this business? Retail, for example, can be tough.

What is the potential for “significant” (to you, based on what you consider “significant”) upside in the business, if you are successful?

Will there be a lot of liability risk in the business? Anything that deals with products or services for young children, for example, can carry a high level of liability risk.

This is certainly not an exhaustive list to measure your potential venture against, however looking at it against these criteria will help you determine whether it’s “just another idea” or a true opportunity that you would like to pursue. Also, and very importantly, what may look like just another idea to some people, may look like a great opportunity to others. It depends very much on your perspective and where you’re coming from. It also depends on what type of business you are trying to create. In another article, I described five broad categories of businesses that you could consider pursuing. These categories included:

Hobby Businesses: for example, if you were to try to turn your love for collecting antique toy trains into a business.

Lifestyle Businesses: an example here would be if you were trying to capitalize on specialized knowledge you had developed and use it to become an independent consultant to businesses on that topic. Rather than a career, you’d be seeking a business that allowed you time and geographic flexibility, while at the same time allowing you to earn a comfortable living.

Franchise Businesses: This would be where, for example, you’d open up a Subway or McDonald’s franchise, with the desire to take advantage of the strong brands and systems they have created and provide to their franchisees.

Self-Funded Growth Businesses: In this category, you invest your own financial resources and “blood, sweat, and tears,” with the objective of creating a growth business. Here you’re not looking at hobbies usually and you’re not just looking at creating a comfortable lifestyle with time and geographic flexibility. Rather, you are “putting the pedal to the medal” and trying to build a “real” growth business, with multi-millions in sales and most likely, a decent number of employees.

Outside-funded Growth Businesses: Here is where you try to do pretty much the same thing as in the Self-Funded Growth Business model, but you try to do it more quickly and/or on a greater scale. In this case, you would typically take equity investment from “angel” and/or venture capital investors.

There is no wrong type of business to start, of course – it is an individual and personal decision, based on your biases and where you happen to be in life when you decide to start a business. Even though there is no wrong type of business to start though, as you can see, your mentality with regard to which type of business you’re trying to create will have a significant impact on how much weight you put on the various screening criteria discussed above. If you’re trying to start a Hobby or Lifestyle Business for example and you determine that the startup costs will be $10 million, that may be an extreme negative. If you’re looking to start an Outside-funded Growth Business, on the other hand, then startup costs of $10 million may be very much in the realm of reason.

So, in conclusion, work hard first to understand what type of business you would like to create. This doesn’t need to be cast in stone, but depending on where you are in life, you may gravitate strongly toward one of the categories mentioned above. Once you’ve thought that through, when you get your normal flow of business/service/product ideas, likely on a daily basis, consider them in light of the type of business you’d like to create.

Once you’ve considered your ideas in the context of the type of business you are trying to create, and discarded those that don’t match with your objectives and vision, you are now in a position to apply the idea screening criteria mentioned above, as well as any others you may like to add. You can find an Excel (or PDF, if you’d prefer) screening worksheet here to help you with this process.

I hope you have found this post helpful as you work to differentiate between ideas and true opportunities, in the context of the type of business you’re trying to create. If you have questions or comments, don’t hesitate to contact us or to leave a question or comment below or in the top right corner of this post. Either way, we’d love to hear from you as you look to turn your ideas into opportunities and profitable businesses.

Paul Morin
CompanyFounder.com
paul@companyfounder.com.

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Apr 032011
 
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If you are starting or already have an early-stage business, you may have come up with an idea and just decided to go for it. While that works for some, I have found that it is always a good idea to get very clear in your head the objectives you have for a business, before you start it, or at the very least, before you try to grow it too much.

There’s probably an infinite number of categories of businesses you could create, particularly if you want to get very specific about the venture’s characteristics. Rather than try to take on the world here, we’re going to focus on five broader categories of businesses that I have found encompass the vast majority of companies out there.

1.) The first category is what I call Hobby Businesses. An example of a business that falls into this category would be one where you collect antique trains, so you decide to go into business buying and selling them. The beauty of a business like this is that typically you won’t lack for passion for the subject matter, as it’s something that you’re already willing to do in your spare time for free. Another positive about this type of business is that no matter how much time and resources you invest, within reason, with deference to your relationship with your family, you can hardly lose. You love the subject matter and would probably be spending money on it anyway. The downside to a business like this is that it’s hard to keep your hobby and love of the merchandise separate from the commercial interests of the enterprise. In the end therefore, while there are exceptions, a business such as this typically remains in the hobby realm and does not develop into a larger, more profitable enterprise.

2.) The second category is Lifestyle Businesses. This is the kind of business that allows you to have flexible hours and maybe even flexible geography, yet pays you well enough to make it worth doing. An example of a lifestyle business would be working as a business coach. There’s no doubt that there are some coaching businesses that are large, have several partners and various administrative staff and are extremely profitable, but on average, these are one- or two-person Lifestyle Businesses. They take advantage of the background and capabilities of the owner and allow that owner to make a good wage with a lot of flexibility; however they are highly unlikely to become fast growth companies with many employees. There is nothing wrong with Lifestyle Businesses, in fact, they can be great! It is important though that you understand their limitations and realize that if you are trying to create a fast growth business, then that is a different animal, with different lifestyle, investment, risk and upside expectations.

3.) The next category is Franchise Businesses. This one does not require too much explanation, since as consumers, we’re all familiar with a large number of very successful food franchises, such as Subway, McDonalds, etc. Franchise Businesses do not appeal to all entrepreneurs, but they do appeal to a good number, particularly those who have come from jobs in corporate America and are accustomed to a structured environment. Franchises can be great businesses, with excellent profitability. Also, on average, given the proven system they usually provide to their franchisees, Franchise Businesses fail at a much lower rate than the overall startup population. On the downside, Franchise Businesses can require a significant initial investment that is outside the reach of many entrepreneurs. They also require ongoing royalty payments to the Franchisor. That said, they can be an excellent alternative for the aspiring entrepreneur who has very little experience in startups and who has some funds available to dedicate to the franchise startup costs.

4.) The fourth category is Self-funded Growth Businesses. These are not hobbies, they are not Lifestyle Businesses and they are not Franchises. Rather, they are businesses that you start with the intention of growing them into large enterprises with many employees and many millions of dollars in revenues. In this category, you are funding the startup costs yourself, from your own assets and available credit. You are not seeking outside investors, most likely because you want to retain control of the business and you do not want to have to answer to equity investors, whether they be friends and family, angel investors, or venture capitalists. Since you typically need significant funds to start a growth business (let’s say $250k plus), this type of business is usually started by someone who is either independently wealthy from other sources, or has started and been successful with other businesses and wants to pursue their next great idea. Just because businesses in this category are self-funded at the outset, does not mean that they will not take growth funding down the road, rather it means that in the startup phase, the company founder(s) do not want the complications of having outside investors. Businesses in this category can fall into a number of industries and business types, depending on the background of the founder(s).

5.) The fifth and final category on this list is Outside-funded Growth Businesses. Such businesses often fall in the technology space, as this is an area of great interest for angel and venture capital investors, two of the most common types of equity investors in early-stage companies. Because they are “Outside-funded” does not mean that none of the founder(s)’ money goes into the business; it just means that a significant portion of the funding comes from outside sources and a good portion of the control of the venture is ceded to those outside investors. For many types of true growth companies, given the startup costs required relative to the net worth of the company founders, there is no choice but to take outside capital [investor pitch template, here]. This is not all negative, of course, as having the participation of the right investors can help the founders accomplish many of the early partnering and customer seeking activities necessary to achieve success. On the other hand, most any entrepreneur who has worked with outside investors will tell you that they would much rather be able to drive the business in the direction they want, without having to answer to outsiders. So taking equity investment from outsiders is a doubled-edged sword, but the reality is that, particularly in the tech space, very few of the great companies that you would know by name were started and grown without the benefit of outside equity capital.

This list of startup business types is not exhaustive, but it gives you an idea of the five broad categories of businesses that you may consider starting. Before you invest the first dime in your business, I strongly suggest that you come to terms with the type of business you are trying to start. If you find that you want to start a business that you simply cannot afford to fund from the resources of the founder(s), you will need to seek outside capital. In that case, there’s a wide variety of funding sources that you can consider. In any case, you will want to make sure you do a good job of screening your ideas to ensure that they truly represent the types of opportunities you want to spend your time, money and other resources pursuing.

I hope you have found this helpful in gaining perspective on the types of ventures you may start up and grow. If you have any questions with regard to how to apply these ideas to your particular venture, don’t hesitate to contact us. In any case, we’d love to hear your thoughts/comments/questions/ideas. Please enter them below or in the top right corner of this post.

Paul Morin
CompanyFounder.com
paul@CompanyFounder.com.

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Mar 312011
 
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Raising Capital – 7 Potential Funding Sources and What They Look For

Raising capital for your business?  Here are seven potential sources of capital you should consider.

# 1 Self-Funding

Self-funding is where you either fund from savings or from ongoing cash flow that perhaps you have from another venture.

In terms of what you are looking for as the sole investor in the business, I’d say the most common motivation is control. You do not want to give up equity ownership in your business, so you decide it’s better to risk you own capital, or to take on debt, than have other equity players in the business. This is typically the approach taken when the amount of capital required is not too large (relative to your resources) and you have a relatively high confidence level in the success of the venture.

# 2 Friends and Family

This is where your friends and family hear that you’re getting a new venture off the ground and want to get in on the action. It could also be the case that you go to them with your idea and convince them that it would be a good idea to invest.

While this is one of the most common sources of funding, it is also one of the riskiest. This is the case because you are risking more than just a business relationship; you are also risking a personal relationship. It is very important that you are completely up-front with prospective family and friend investors. You owe it to them to tell them that, while you will do everything in your power to make the venture successful, they could very easily lose all the money they’ve put in. It is also important that you have a clear, written agreement with these investors, as you would with any other investor, regarding the terms of the investment. You need to cover whether it is a debt or equity investment and the exact investment terms and conditions. There are several potential “gotchas” with these investments, from a tax and other regulatory perspective, so make sure you have competent legal counsel.

# 3 Credit Cards

This approach involves using whatever credit limit you may have on credit cards to fund your start-up and early stages of your business. This is a much more common source of capital than most realize or would be willing to admit.

The “investor” in this case is still you, as you have full responsibility for repayment of whatever credit limit you may utilize for funding.  This is the case even if you open business credit cards in the name of the business because many creditors will require a personal guarantee from the owner or company officer.  The credit card company typically will charge a higher interest rate than most other (credit, at least) funding sources. The credit card company is not looking for any equity ownership in your business, rather they just want the amount they lent you paid back with interest. This source of capital needs to be used responsibly and not on frivolous purchases. Remember that even if your business is not successful, you will need to pay back these debts, or risk ruining your credit record.

# 4 Home Equity Credit Line

This source of funding involves taking a loan, in the form of a credit line, against the equity you have in your home. This was very common at one time; it is less common in times when homeowners don’t have a lot of equity in their homes.

In this case, your home is the security for the loan you are using to buy, start, or grow your business. It starts to get a bit more serious here, as your home is the security and is directly at risk. That said, this is a very common source of capital for entrepreneurs. Again, as with the other forms of personal funding of your business, you’ll want to be very careful to make sure that you are making expenditures that will create and/or increase future earnings, not making frivolous purchases.

# 5 SBA Loan

This is a bank loan that is guaranteed by the SBA. The SBA’s guarantee of all or a portion of the loan makes it possible for the bank to lend to borrowers to whom they may not otherwise lend, or at least not with interest rates at such low levels.

This is a very common source of funding for early stage companies. In reality though, from the perspective of the entrepreneur, it is not all that different than other forms of asset-based lending. The entrepreneur still has to have a very good credit record and has to have sufficient assets to secure the loan. Do not think that by getting an SBA loan, you will not be on the hook if the business fails; you will. The main advantages for entrepreneurs of SBA loans are that they may get approved for certain projects or loan amounts that they may not otherwise, without the backing of the SBA. Also, it is likely that on an SBA loan you will have an appreciably lower interest rate than you would on a non-SBA-backed loan.

# 6 Angel Investors

This type of funding occurs when through your contacts or those you make, you manage to get in front of a group (or one) of wealthy individuals that invest in early-stage companies. Such investors are typically called “angels” or “angel investors”.

Angels tend to be relatively selective about the types of ventures they invest in. That said, there is a very wide range of sophistication among angel investors, along with which the level of selectivity varies widely. You will want to make sure you have concise investor pitch that flows. You will want to make sure that all angel investors from whom you will receive funding meet the Accredited Investor standards. For this reason, and in order to make sure the terms and conditions of the investment make sense, again you will want to make sure that you have competent legal counsel involved. Don’t even consider doing a deal with angel investors without having a good attorney watching out for your interests. Also, although in the beginning of your venture it may be tempting to take money from whoever will give it to you, do your due diligence on all prospective investors and make sure they are people you think you can work with and communicate with. This will be particularly important when all does not go exactly as planned. As you know, it hardly ever does.

# 7 Venture Capital

In order to obtain venture capital funding, you present your business plan or growth plan to professional early stage investors known as venture capitalists. This source of investment is appropriate for a relatively narrow segment of the startup company population and very few companies end up being funding by venture capital.

It is important to remember that venture capitalists are professional investors.  It is key to know what venture capital investors look for.  They raise money from what are known as limited partners, usually pension funds and other institutional money managers, then invest that money to earn as much return as possible for their investors. The venture capitalist then shares in the gains they are able to achieve. They are also paid a management fee for their efforts during the life of the fund, which is typically 7-10 years. So as you can see, venture funds are designed to invest, grow and harvest in a finite, relatively short period of time, thus they must choose their investments very carefully. For this reason, venture capitalists are typically interested in companies that are further along, that are already on a reasonable growth trajectory and need money for expansion and further growth. They usually like technology companies that have a proprietary (patented or patentable) product or business process. Unless you have something truly exceptional in the techology space that’s a bit further along, other than with a few venture capitalists that are willing to look at seed deals and deals outside the technology space, you are not likely to find success seeking funding from these investors.

Conclusion

While this list of seven potential funding sources for startup and early-stage companies is by no means exhaustive, it gives you an idea of several of the most common funding sources and what they’re looking for in their investment targets.

Let us know your thoughts, comments and questions, which you can enter below or in the top right corner of this post.

All the best as you work to start and grow your venture!

Paul Morin

paul@companyfounder.com

www.companyfounder.com.

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