Tuesday, February 11, 2014

Formulas For Success -How To Attract Investors for Your Business IV

Financial  Strategies

In my last blog post I said that you should identify your exit strategy early because it's important to decide what you intend to do with your business so you can share this information with investors and employees.   The exit strategies we talked about were:

  • Lifestyle
  • Inheritance Bequest
  • Sell to a Larger Corporation
  • Initial Public Offering (IPO)
  • Shutdown 
In this blog we are going to talk about financial strategies.

Why have a financial strategy? 
The purpose of a financial strategy is to provide the business with the appropriate financial structure and funds to achieve its overall objectives.  In addition it examines the financial implications of options and identifies the best financial course of action.  Financial strategy attempts to maximize the financial value of the business

Financial strategies include:

  • Professional investors
  • Local investors “angels”
  • Bootstrap
  • Friends, family, customers and suppliers
  • Initial Public Offering (IPO)
Professional Investors are Venture Capital and Banks.  Venture Capital is a viable financial strategy when the business can realistically achieve $25 million revenues annually within 3 to 5 years, the business has future revenue potential to create stockholder equity, and a huge return on the original investment.  Venture Capital expectations are 40% return on their investment, 5-100 times their investment at 5 years, anticipated revenues over $50 million, all with managed risk.

Bank financing as a strategy is applicable when the business can repay principle and interest from cash flow in addition to its normal operating expenses, when there are adequate assets that can be pledged as security for any loans, and in  most situations personal guarantees are required from all significant owners.  Banks need very low risk.

Local Investors "Angels" ( High Net Worth Individuals).  Financing comes form Angels as funds for equity, funds as debt, and equity from active participation in the business as  executive or manager.  This strategy is applicable when can realistically achieve $2 million to $25 million revenues annually within 3 to 5 years.  Angels expectations are 40% per year return on their investment, and at 5 years they expect 5 times their investment (ex. $500 thousand investment must make at least $2.5 million in 5 years), all at low risk.

Bootstrap is using your personal cash, running up your credit cards, mortgaging your home and other assets to finance the business.  This strategy is applicable when your business will never achieve more than $2 million annual revenues and until you can repay principle and interest on any debt plus typical and normal operating expenses from cash flow.  It is usually applicable and preferred if annual revenues are between $2 million and$10 million.  Bootstrapping is always the way to go early on in your business because in order to use any other financing strategy there must be some operating history.

Friends, Family, Customers and Suppliers.  Friends and Family become employees as reduced or no salary, customers pre-pay for products or services, and suppliers/vendors negotiate lower price or longer pay period.  Consider leasing equipment instead of purchasing.

Initial Public Offering (IPO).  This strategy is applicable when you want to raise a large amount of money for expansion, now products, etc., and to put cash into the founders, local investors, and venture capital investors, and to establish a value for the business in the marketplace.

Determine the financial strategy applicable to your business.  Keep your eye on the exit strategy we discussed in the last blog and execute your financial strategy but also keep this question in mind  "When do I give up" because nobody will ask you to stop, and the bills will keep coming long after you stop.  Pick your end point now so that you will still have cash to pay your personal bills for a while and survive until you find a job or an investor for your next venture.

Wednesday, January 22, 2014

Formulas for Success -How To Attract Investors for Your Business III

Begin with The End in Mind

In this week's blog we are going to talk about your Exit Strategy.

Ask Yourself:

  • Why are you getting into business?
  • Do you see yourself running the company twenty years from now, or are you interested in moving on after a few years?
  • Is your goal to make a lot of money?
  • Or Running a Solid and Steadily Growing Family Business?
 It's important to think this through and decide what you intend to do with your business so you can share this information with investors. The requirement of each investor will vary in terms of return and exit strategy.

Why have an exit strategy? 
  • You will begin with the end in mind.
  •  You’ll know when to get out.
  • Makes the business more fulfilling now.
  • You’ll stay sharp on the competition and take action faster.
  • It attracts business dollars. 

 What are the types of exit strategies and their ramifications?

  • Lifestyle - Enjoying the profits that fund your lifestyle
    • Ramifications 
      • No investor
      • No growth demands except to stay in business
  • Inheritance Bequest - Pass the company to your heirs
    • Ramifications
      • Taxes and tax planning
      • No Equity investor
  • Sell to a Larger Corporation - You need to pick the resources to build that would be of interest to the candidate buyer  i.e, Employees, Customers, Market, Manufacturing.
    • Ramificatoions
      • Focus on resources to build 
  •  Initial Public Offering (IPO) - Sell to the public
    • Ramifications
      • Aggressively build revenue and growth
      • Loss of personal control
  • Shut Down - Dissolve the Comany
    • Ramifications
      • No investor
      • Tax implications
      • No equity
      • Sell assets
Here are the steps to building your exit plan:

  • Review the assets currently in your business.  What's the business worth?
  • Decide what the business would be worth if you accomplish your planned goals.
  • Target the key steps to focus on and add value. What would a buyer value most?
  • Plan how to create these assets.  Break up the job into pieces or tasks that can get done.
  • Identify potential investors or buyers long before you'd ever think of selling.
Common mistakes to avoid:
  • Assuming you own a business with the potential to go public.
  • Failing to explain how your investor will specifically recoup their investment and a significant return
  • Failing to take your personal goals into account when planning your exit strategy
  • Not having an exit strategy.
 In my next blog I'll talk about financial resource strategies.

Friday, January 10, 2014

Formulas for Success - How To Attract Investors for Your Business II

In this week's blog I am going to outline how to develop a 30-Second Commercial.

A 30-Second Commercial for your business opportunity should quickly and succinctly describe what you do and why someone should work you or invest in you.  I call it a 30-Second Commercial because is the challenge of how to explain your business opportunity if circumstances have you in a place where you had only 30 seconds with a potential major customer or that perfect investor.   

You need this 30-Second commercial because people have less time today, their attention span is only 30 seconds before their mind starts wandering.  If you don't grab them now you may lose them forever. 

The elements of a good 30-Second Commercial are:
  • Concise Statement Describing Your Company (short & clear).
  • Contents: Introduction, interest generating idea, two key points, and a probe for need or opportunity.
    • Use words that create a visual image
    • A short story A good story is one where someone has a problem and finds the solution.
  • Targeted
    • One commercial for customers
    • One commercial for investors
    • One commercial for potential employees
  • Specific Desired Outcome
    • Sale
    • Investment 
    • Referral 
  • Hook
  • Request - You have to ask for something at the end of your commercial.  What is it you want?
    • Business Card
    • A Referral
    • A meeting to schedule a full presentation 
You should keep your commercial fresh.  Change it periodically.  Rehearse it so that it sounds natural.  

I like the way that Salisbury University in Maryland suggests how to craft your 30-Second commercial.   Here is what they say that you should do and I agree.

How to Craft Your Killer Elevator Pitch
  • Write down what you do. Write it several different ways. Try writing it at least 10-20 different ways. Don't edit yourself at all. You will edit later. This first step is for generating ideas. Don't hold back. Ideas can be goofy, serious, wild, funny, or conservative. It doesn't matter. The goal is to get at many ideas as possible down on paper.
  • Write a very short story that illustrates what you do for people. If necessary, the story can be long. You will boil it down later. Paint a picture with words.
  • Write down your objective or goal. Do you want to make a sale, gain a prospect, enlist support for an idea, earn a referral, or something else?
  • Write 10-20 action statements. This is a statement or question designed to spur the action associated with your goal.
  • Record yourself. You can use Jott if you don't have a recording device. Jott is a free phone based service that translates your messages into text as well as providing an online link to the original audio.
  • Let it sit. Come back to what you've written with fresh eyes and ears the next day or later on in the same day.
  • Highlight the good stuff. Listen and read through what you've recorded and written. Then either highlight or circle the phrases that hook you with clear, powerful, and visual words. Obviously not all the words will fall into these categories. You still need connector words, but you want them to be as few as possible.
  • Put the best pieces together. Again you'll want to write down several versions of this much tighter pitch. Tell us what you do and why people should want to do business with you. Include elements from your story if you can fit it in.
  • Record these new ones.
  • Do a final edit cutting as many unnecessary words as possible. Rearrange words and phrases until it sounds just right. Again, the goal is 30-60 seconds maximum.
  • Dress Rehearsal. Run it by as many people as you can get to listen to you. Get feedback from colleagues, clients you trust, friends and family.
  • Done for now. Take your final elevator pitch and write it down. Memorize and practice it until it just slides off your tongue naturally.
  • Continue to improve. Over time, always be on the listen for phrases that you think could make your elevator pitch more clear and impactful. And then test it out. Every once in a while you will probably benefit by starting from scratch because things always change: you, your business, your goals, and your clients' needs.
Next week we will talk about Exit Strategy.

Sunday, January 5, 2014

Formulas for Success - How To Attract Investors for Your Business I

This is the first in a series of blogs taken based on Success Formulas (R), workshop developed by Consortium Innovation Centers for start-up, early stage, and emerging businesses.

Success is defined as…" The Achievement of Something Desired, Planned or Attempted". (Source: The American Heritage Dictionary)

Crucial to the success of your business is the vision and the mission that you have for it.  According to The Leadership Challenge – Kouzes & Posner:

    · Vision is an Ideal and Unique Image of the Future
    · Mission is the Purpose of or Reason for the Organization’s Existence

Referring to the ability to imagine the ideal, I prefer using the term VISION. Consider the following:

    · Vision suggests a future orientation.
    · A vision is an image, a picture of what could be.
    · Vision connotes a standard of excellence, an ideal. It implies a choice of values.
    · Vision also has the quality of uniqueness. It hints at what makes something special.

A well-conceived mission statement defines the fundamental, unique purpose that sets a company apart from other firms of its type and identifies the scope of the company’s operations in terms of products offered and markets served. It promotes a sense of shared expectations in employees and communicates a public image to important stakeholder groups.

Image is an Essential Key to the Success of Your Business. Image is a Vivid or Graphic Representation or Description. Think of  as many items as you can that make up the image of your business.  Including yourself—since you will be presenting the company some responses might be:  Innovative, unique, small/medium/large, personal,one-on-one interaction, detail-oriented, service-oriented, global, growing, start-up, creative, professional, responsive, productive, efficient, effective, technical, strategic, leader, state-of-the-art, artistic, proven, relational, strategic and successful.

In my next blog I will outline how to develop a 30-Second Commercial, Exit Strategy and Executive Summary.

Success Formulas - How To Attract Investors for Your Business

Success Formulas® is a unique and effective concept that prepares companies for equity/debt funding. In short, most organizations (both profit and non-profit) generally do not provide the appropriate underlying strategies and tactics necessary for developing a successful enterprise prior to investor financing. Consequently, they are constantly are trying to “fix” the company in both pre-finance and post-finance stages. This often results in very high failure rates. It is always best to use an aggressive and proven process to assess candidate companies as a first step, and then to to prepare or “fix” the company using Success Formulas® before funding is solicited… because for the odds of financing success, and the enterprise succeeding, increase markedly.

Success Formulas® is a mentoring system that creates “investable” high growth companies. It is effective because it:

·         Identifies the investor as its “customer” and the entrepreneurial enterprise as the “product”
·         Selects the “winners” based on what investors require in order to make an investment in each specific participating company
·         Delivers issue-specific mentoring by the professionals (accountants, attorneys,
investors, et. al.) that have the most to gain by early participation with high growth companies

The most notable difference in Success Formulas® and most other assistance programs is that this proprietary process is proven.  It filters participants rigorously, involves peer review/critique, and involves the specialty assistance of professional services providers with specific roles to assist entrepreneurs. In fact many of the traditional organizations, like an SBDC or angel mentoring groups, might be likely places to refer businesses that currently do not qualify for the Success Formulas® process.

Success Formulas® is a two phase process. The objective of Success Formulas-1 (SF-1) is to develop the following core strategies: Elevator Pitch; Exit Strategy; Resource Focus;
Market and Sales Strategies; Product and Service Strategies; Financial Strategies; and, initial investor and service provider critique of hurdles to financing.

Companies that successfully complete SF-1 may be invited to participate in Success
Formulas-2 (SF-2) if the assessment of reviewers is that there is a strong preliminary investment interest, subject to resolution of issues identified during SF-1. The objective of SF-2 is to develop the custom tactics related to the SF-1 strategies, and to address any objections/hurdles that investors identified as pre-conditions to their financing of the participating companies.

© Consortium Innovation Centers, 2008