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Showing posts with label Funding. Show all posts
Showing posts with label Funding. Show all posts

Potential Sources of Venture Funding

  1. The "Fs" ... founders, family, friends, fanatics, fools ... the starting point for most independent ventures ... generally low to moderate sophistication, low to moderate investment ...
  2. Bootstrapping ...
  3. Customers ...
  4. Suppliers ...
  5. The "Strangers with Candy" ... angels, investment clubs ... wide range of investment interest and sophistication, generally low to moderate investment ...
  6. The "Vulture Capitalists" (VCs) ... venture capital firms ... usually focused on a specific industry ... moderate to high sophistication ... a mistaken target for many new ventures, very few new ventures are funded directly by VCs ...
  7. The "Big Ugly Monsters" (BUMs) ... corporate venture capital ... usually focused on specific industries and proven ventures ... may fund internally-developed ventures ... often part of a angel/VC network of investors ...
  8. Corporations ...
  9. Bank loans ...
[4.16]

Ten Entrepreneurship Myths

  1. It takes a lot of money to finance a new business. Not true. The typical start-up only requires about $25,000 to get going. The successful entrepreneurs who don’t believe the myth design their businesses to work with little cash. They borrow instead of paying for things. They rent instead of buy. And they turn fixed costs into variable costs by, say, paying people commissions instead of salaries.
  2. Venture capitalists are a good place to go for start-up money. Not unless you start a computer or biotech company. Computer hardware and software, semiconductors, communication, and biotechnology account for 81 percent of all venture capital dollars, and seventy-two percent of the companies that got VC money over the past fifteen or so years. VCs only fund about 3,000 companies per year and only about one quarter of those companies are in the seed or start-up stage. In fact, the odds that a start-up company will get VC money are about one in 4,000. That’s worse than the odds that you will die from a fall in the shower.
  3. Most business angels are rich. If rich means being an accredited investor –a person with a net worth of more than $1 million or an annual income of $200,000 per year if single and $300,000 if married – then the answer is “no.” Almost three quarters of the people who provide capital to fund the start-ups of other people who are not friends, neighbors, co-workers, or family don’t meet SEC accreditation requirements. In fact, thirty-two percent have a household income of $40,000 per year or less and seventeen percent have a negative net worth.
  4. Start-ups can’t be financed with debt. Actually, debt is more common than equity. According to the Federal Reserve’s Survey of Small Business Finances, fifty-three percent of the financing of companies that are two years old or younger comes from debt and only forty-seven percent comes from equity. So a lot of entrepreneurs out there are using debt rather than equity to fund their companies.
  5. Banks don’t lend money to start-ups. This is another myth. Again, the Federal Reserve data shows that banks account for sixteen percent of all the financing provided to companies that are two years old or younger. While sixteen percent might not seem that high, it is three percent higher than the amount of money provided by the next highest source – trade creditors – and is higher than a bunch of other sources that everyone talks about going to: friends and family, business angels, venture capitalists, strategic investors, and government agencies.
  6. Most entrepreneurs start businesses in attractive industries. Sadly, the opposite is true. Most entrepreneurs head right for the worst industries for start-ups. The correlation between the number of entrepreneurs starting businesses in an industry and the number of companies failing in the industry is 0.77. That means that most entrepreneurs are picking industries in which they are most likely to fail.
  7. The growth of a start-up depends more on an entrepreneur’s talent than on the business he chooses. Sorry to deflate some egos here, but the industry you choose to start your company has a huge effect on the odds that it will grow. Over the past twenty years or so, about 4.2 percent of all start-ups in the computer and office equipment industry made the Inc 500 list of the fastest growing private companies in the U.S. 0.005 percent of start-ups in the hotel and motel industry and 0.007 percent of start-up eating and drinking establishments made the Inc. 500. That means the odds that you will make the Inc 500 are 840 times higher if you start a computer company than if you start a hotel or motel. There is nothing anyone has discovered about the effects of entrepreneurial talent that has a similar magnitude effect on the growth of new businesses.
  8. Most entrepreneurs are successful financially. Sorry, this is another myth. Entrepreneurship creates a lot of wealth, but it is very unevenly distributed. The typical profit of an owner-managed business is $39,000 per year. Only the top ten percent of entrepreneurs earn more money than employees. And the typical entrepreneur earns less money than he otherwise would have earned working for someone else.
  9. Many start-ups achieve the sales growth projections that equity investors are looking for. Not even close. Of the 590,000 or so new businesses with at least one employee founded in this country every year, data from the U.S. Census shows that less than 200 reach the $100 million in sales in six years that venture capitalists talk about looking for. About 500 firms reach the $50 million in sales that the sophisticated angels, like the ones at Tech Coast Angels and the Band of Angels talk about. In fact, only about 9,500 companies reach $5 million in sales in that amount of time.
  10. Starting a business is easy. Actually it isn’t, and most people who begin the process of starting a company fail to get one up and running. Seven years after beginning the process of starting a business, only one-third of people have a new company with positive cash flow greater than the salary and expenses of the owner for more than three consecutive months.
[Thank you, Scott Shane]

Business Plan Guidelines

Here's an outline for a venture plan. It does a good job of identifying the key information that the venture team needs address.

A typical first-round investor-grade business plan is usually about 20 - 25 pages, plus separate appendices.

There are many possible outlines for a business plan ... remember, a key purpose of a business plan is to mitigate risk ... we are selling our venture concept here and need to show the reader that we know our stuff!

A. Cover Page ... Company name, company location, contact information, legal statements (proprietary information, copyright, etc.) ...

B. Executive Summary ... independent one page document ... the exact same executive summary that you used to entice the prospective investor or corporate executive to want to read this plan

C. Table of Contents ... one page.

D. Opportunity ... tell a story here!  Engage the reader!  Two to four pages. 
  1. Problem / Opportunity: The problem your venture will solve, the significance of the problem, the opportunity this offers your venture, quality of the opportunity, growth potential ...
  2. Product and/or Service Solution Description: Essential product/service idea, category of product/service, proprietary protection, entry strategies ...
  3. Customers and Target Markets: Target market characteristics, size, why this market is the best for your venture, market validation research ...
E. Environment and Competition ... three to five pages.
  1. Environment and Context: Industry overview, research results and analysis, major competitors, benchmark ventures, timeliness, regulations ...
  2. Innovation: what your venture does that is new and better
  3. Competitive Advantages: Market focus, value proposition, core competencies, barriers to entry, competitive validation, how your venture will position itself to meet the competition, ...
F. Goals and Strategies ... critical and key information as appropriate to your venture ... three to five pages.
  1. Goals, vision, mission.
  2. Value Proposition.
  3. Business Model: How your venture will earn a profit, expected margins, sources of recurring revenue ...
  4. Organization: Management team, relevant domain knowledge of the team, commitment, advisers, directors, management to be added, culture, talent ...
  5. Product Development Strategies
  6. Marketing and Sales Strategies: Pricing strategies, distribution model, partnering, promotional strategies ...
  7. Technology Strategies: Technology, product development ...
  8. Operational Strategies: Production methodologies, manpower requirements, equipment requirements, material management, flow diagram of key processes ...
  9. Intellectual Property and Legal Issues Strategies: Patents, trademarks, trade names, copyrights, trade secrets, operating and other agreements, legal structure ...
  10. Development Plan: Current company status, number of employees, development stage, early revenue, number of customers, relevant historical information, long-term venture goals, growth strategies, timeline ...
  11. Risks and Contingencies: Downside risks and contingency plans, upside risks and expansion plans ...
G. Financial Projections ... Key assumptions, historical financial statements (if available), pro forma statements ... four or five pages.

H. Funding Proposal ... independent one or two page document.
  1. Resource Requirements: Short summary of financial projections; total investment funding and resources being sought, use of funds in 4 or 5 general categories, any unusual use of funds, return on investment to investors and entrepreneurs, harvest strategy ...
  2. Call to Action: What do you want the reader to do ... join your team, invest, meet with you to learn more ... ?
I. Summary ... A brief summary (sales pitch) of the opportunity, environment and competition, goals and strategies, financial projections ... The final who, what, where, when, why, and how ... one page.

J. List of Available Appendices ... Variety of support information ... resumes, product data sheet, marketing brochure, research data, etc.

Calibrating Financial Objectives

1]  Start with a "Use of Funds" list with three key figures: minimum funding to get your venture off the ground and test the waters, nominal to hit stability (self-funded, break-even?), and optimal (move fast to grab market share before others can do so).  In the example below, this company nominal number is $140K.  You DO need a chart that clearly explains your use of funds. Yes, you should include salaries to the key employees.  And you should know how long it will take to get to stable ... the money will come from a combination of sales revenue and your start-up funds.

2] When you know your optimal start-up funding number, subtract the amount that the founders will contribute. This does NOT have to be a big number, but should show some level of commitment from the founders, albeit modest.  In the case below, the founders are committing $40K, so the company needs to raise $100K from investors.

3] Early stage investors are typically looking to acquire 20 to 30% of the company.  In the example below, this company is proposing selling 25% of their venture for $100K from investors.  So if everything goes their way, this startup will have $140K cash committed. The $100K from the investors is 25% of the company,  the company needs to be worth $400K total. Therefore, the business plan (AND the team that goes with it) must be worth $260K.  Will your plan be worth $260K.  YES, it CAN be ... no joke.  Is it easy. No, it's not. Takes a lot of work, but you and your team CAN do it.

4] To attract investors to this venture, they want a significant return on their investment to compensate for the very high risk they are taking putting money into something that at this point does not exist.  It is a startup, NOT a done deal!  So they are typically looking for a return on their investment in about 5 years of 10x to 20x ... Yes, 10 to 20 TIMES their investment. That is roughy 50% to 80% ANNUALIZED!  A whole lot more than what the no-risk bank would give them, or the typical 10% annualized return from Wall Street.  Where does this return come from?  The value of your venture in 5 years will be greater than what it is today.  How much greater ... 10 to 20 times!  In the example below, the venture valuation goal in year 5 is 20 times startup ... $8 million.  That is a GOAL for the company, but the company has 5 YEARS to make it happen.  YES, it CAN be done.

5] Rough estimate, if this company needs to be worth $8M in 5 years, its revenue for that 5th year should be in the ballpark of $8 million.  Yes, valuation of the company AND revenue are both about the same.  ROUGH estimate, but a reasonable one to use to CALIBRATE your financials.  If this company is going to generate $8M of revenue in year 5, how many "cookies" will it have to sell?  A lot!  A whole lot!  But it also has 5 YEARS to make it happen.

6] Suggest you use this process to APPROXIMATE and "CALIBRATE" your financials.  Now ... this process has a lot of assumptions. A WHOLE lot of assumptions. The most fundamental assumptions is that this company has been managed well during this 5 year period. No funny business. Good cash flow, good balance sheet, no major down-side issues like getting sued for patent infringement, et al. GOOD management.  Legal, moral, ethical.  YES, that IS how you will manage your venture.

7] The numbers below favor the INVESTOR.  A 20x return is on the high end of expectations for a good, solid business plan and a good, solid team.  Less than 20x is more favorable to the startup team. Less than 10x is minimizing the risk of your startup and prospective investors will think you're getting cocky.  More that 20x and the startup team is telling potential investors that they think risks are REALLY high.  The range to target is 10x to 20x ... the risk-return multiplier.  "Calculate" (an estimate, really) this number LAST.  If it's between 10 and 20, nice!!

8] Everything here is subject to change, and likely to have "exceptions" for this or that. Every investor looks at things a little differently. And every venture IS different, even if they are similar.  So get used to investors and judges and mentors and advisors giving you different advice and perspectives.  There are multiple paths to success. Be careful not to stray too far from your chosen highway!  The biggest money issues I've seen are 1] the numbers don't "fit" together, and 2] the numbers are way outside the "rational ballpark".