Business Owners Toolbox Blog Discussions and articles to help the small business owner solve the challenges they face as they grow their business.

November 21, 2012

Crowdfunding for a business venture

Filed under: Finances — Tags: , , , , — Mike Van Horn @ 10:26 am

Q. Have you used crowdfunding sites to raise money for a business project. Asked on LinkedIn by Brandon Schaefer

I see potential problems with doing this. A business project is meant to make a profit, and earn a return for the investors. If the investors are crowdfunders, how do they ever benefit other than feeling good about supporting a business they like?

I see four ways to view such a contribution:

1. It’s a gift. I don’t expect to get it back. I’m giving it to you because I believe in what you’re doing.

2. It’s a loan, with no recourse. If you do well, I’d like my money back, with interest. If you go belly up, so be it.

3. It’s prepayment for services. I’ll put money into your business in the expectation that when you get going, you’ll provide me with product or services of comparable value. Perhaps a plaque with my name on one of your cafe tables.

4. It’s an equity investment. I expect to own a piece of your business, have a share of the profits as dividends, and to benefit on the upside if you sell it later at a premium. I want oversight on how you’re running the business.

If I’m a crowdfunder for you, several things would really irritate me, perhaps to the point of lawsuits:

1. You squander the money, just out of lousy planning and management

2. You divert the money to other uses, such as fancy offices or expensive travel

3. You make a bundle and ignore me. With my $1k investment (among others) you grow your company and Google buys you out, making you rich, then you won’t take my phone calls.

How are these potential situations handled on crowdfunding sites? What are the obligations of the person receiving the funds? What are the rights and recourse of the contributors? This is why we have contracts. The crowdfunding deals I’ve heard of sound kind of loosey goosey.  Fuzzy agreements now = lawsuits later.

If it’s for a good cause–say, you’re raising money to go plant trees to restore the rain forest–then I view my contribution as a gift, and expect nothing back.

But if I’m investing in a business that expects to make a profit, then I want some contractual accountability.

So when you look at Crowdfunding sites, see how they address all these questions and others

 

August 20, 2012

Finance Without Collateral

Filed under: Finances — Tags: , , , — Mike Van Horn @ 10:42 pm

Q. How can I finance a small business project without collateral?  Asked on High Table by Shehzad Aman

A. Here are a few ways to finance without collateral.

1. Your savings. You should be as demanding on yourself as a banker would be to demonstrate the viability of your proposal.

2. Your family or friends. They may loan to you without collateral because they know and trust you. Your obligation to repay is even stronger than it is with a bank.

3. Crowd funding. It’s the latest rage. I have read a lot about it, but I’m not sure how successful people have been raising capital this way. Who can get it, for what amounts and purposes? What promises do they have to make?

4. Your own creditworthiness. If you have a good credit score and good relationship with your bank, you should  be able to get a non-recourse loan for several thousand dollars.

5. Charging it on your credit cards–the all-time worst way to fund a business, yet one that is used all the time.

To borrow money without collateral, you need strong and trusting relationships with people who have money.

Some may suggest venture capital. But VCs aren’t interested in “small.”

There may be business development grant or loan from a foundation or government agency, but this is not something to count on. None of my clients have ever gotten enough capital this way to start a business.

Perhaps you are being too restrictive by saying “with no collateral.” Ask yourself what kind of collateral you have. For example, if you purchase equipment, the equipment itself serves as collateral.

*   *   *   *

Shehzad, I answered this question as if you were in the U.S. But it looks like you are in India. I know nothing about the small business banking sector there. I suspect that personal relationships are even more important. But there may also be business development loans from some agency that wouldn’t be available here.

 

August 13, 2012

Raising Seed Capital or Licensing a Formula

Filed under: Entrepreneurship,Finances,Innovation — Tags: , , , , — Mike Van Horn @ 10:33 pm

Question on HighTable.com from Amar S. How do we find partners to help fund and license our concept? I am part of a two physician team that has a formula for an appetite-suppressing meal replacement bar. The concept allows us to take any soup and turn it into a bar. Our initial focus will be to produce vegan/vegetarian, allergy-free, low carb, low fat, high protein and kosher bars. We have a great idea, but we are having trouble finding established companies to partner with for development.

My answer. Amar, the farther along you can develop your idea, the easier it will be to attract interest from potential backers or licensees, and the more control you’ll be able to maintain. Very few established companies are interested in helping you develop such a product from an untested idea.

You say you have a formula, a concept. If I were an investor, I would be more interested if you had produced some initial batches, conducted tests with them, and tried them out with the kinds of people who would be your consumers. What did they like and not like? If it’s for weight loss, did they have any results? What about packaging and shelf life?

As a potential investor, I would want to see what processes you used, what equipment, how it would scale up, what sets it apart from similar products. How would the production costs pencil out against the likely retail price point, after backing out all the distribution channel costs? Does it require testing and approval from any regulatory agencies? How are the processes and products protectable? Are there pieces you can patent?

Where and how would it be sold? Would it be a grocery item? Health food or natural food stores? Sold online? How would it be marketed initially?

You’ve been in a service and consulting business. Now you’re looking at a manufacturing and distribution business. It takes a different mindset and skill set. You might say, “We just want to sell or license the concept to a big player, then wash our hands of it.” But even if you find a taker, you’ll realize the least return from this approach. You’ll lose control, and somebody else will make most of the money.

I’d look for three things first:

1. Raise some seed capital to do the things I outlined above. At the earliest stage, this money usually comes from your savings, family, or a true believer. (For example, a client of mine who produces gluten-free products has been approached by a VC who has celiac disease. BUT, she has been in operation for several years, and has a track record of growth.)

2. Partner with a person experienced in taking such products to market, with operational, marketing, fund raising experience. Not that he/she is an expert in all three areas, but has been there in the trenches

3. Find an attorney who can advise you how to protect your formulations and processes through patents, trademarks, etc.

February 28, 2012

Is Lack of Capital #1 Cause of Business Failure?

Filed under: Entrepreneurship,Finances,Small business myths and dilemmas — Tags: , , , , — Mike Van Horn @ 11:32 am

What things do people believe about small businesses that just aren’t true?

Small Business Growth Myth #1: Lack of capital is the #1 cause of small business failure.

In my experience, lack of capital is a symptom of other problems in the business. This myth is like saying that heart attacks are a leading cause of death, but forgetting that most heart attacks occur to people who haven’t been taking care of themselves for years.

Same with business. Running out of money is often the endpoint of years of bad decisions. For example:

• Not watching the numbers closely. Not having financial statements you can understand, and not getting or reviewing statements in time. You should tell your bookkeeper/accountant exactly what numbers you need to track, when, and how you want them displayed. If they don’t give you what you want, replace them.

• Not controlling costs. Keeping unnecessary payroll and other expenses. Some owners borrow money to avoid laying people off. During tough times, if you’re not ruthless with expenditures, you won’t have the reserves to take advantage of later opportunities.

• Focusing on revenue instead of profitability, therefore not paying attention to the margin of jobs or sales. Taking any work. “I’ll make it up on volume.” “Maybe they’ll grow to be a big customer.” Don’t bet your business on these beliefs. Insist that every job must make a profit. Make sure you have systems that allow you to allocate costs to profit centers, so you can know the profitability of each thing you sell.

• Under-pricing. Many small businesses try to meet the prices of large, well-capitalized competitors, rather than competing on unique services and features that set them apart and command higher prices. Set your prices to include your desired profit margin.

• Not anticipating needed growth capital, so that a growth spurt causes a cash flow squeeze. It’s very difficult to grow relying on current cash flow. People criticize companies like Apple for amassing a huge cash hoard, without realizing that this is necessary to fund growth, innovation, and keeping options open.

• Having the wrong kind of financing. Financing growth with a short-term line of credit that must be paid off each year, rather than with a 5- to 7-year term loan. And how many of us have financed growth on our credit card, thus saddling ourselves with interest payments that eat up the profit needed to repay the loan?

• Not saving during good times, so that you have a fund for tough times. Too many owners would rather spend than save because they don’t want to pay taxes on the profits.

• Not being “bankable.” For example, if you run your business to minimize taxable income, you’ll never get a bank loan. Try telling your banker that you really do have a profitable business, despite what your tax returns show. Take your banker to lunch, and ask what the bank will need from you in order to approve the loan you will need.

• Not refining your business model to stay competitive and to meet the emerging needs of your customers. Just staying the same because it’s the easy thing to do. The old cliché, “Work on your business, not just in your business,” means that you as owner need to keep looking at opportunities, challenges, alliances, and strategies.

• Ineffective marketing. If you don’t keep looking at what works, refining your offering and outreach, and dumping the rest, your business will slowly decline. Where can you get the most bang for your marketing buck? What ineffective things should you drop? How can you leverage your effort?

I’m sure you can think of others. If you address these problems in your business, you’ll never have to use “I ran out of money” as an excuse.

 

February 14, 2012

What’s a Typical Growth Rate?

Filed under: Entrepreneurship,Finances,Overcome growth barriers — Tags: , , , , — Mike Van Horn @ 9:23 am

From a question asked at my plan workshop

MC. “What’s a typical rate of growth?”

MVH. There’s no typical rate.  It is better to ask what growth rate could you handle? Also, what is the right size for you to grow to? How big do you want to grow and why?
Your rate of growth will depend on several factors:
• How you finance–self, bank, investors
• How scalable your business concept is
• Quality of your top people. Your growth team
• Your systems. Can your systems be easily scaled up?
• Ease of bringing in new customers
• Your ability to manage growth or to hire managers who can do so for you
• Outside variables. Economic climate. Amount of competition. Laws and regulations that impact you.

I would be glad to help you assess these things for yourself. This is an issue we work with all the time in our Business Groups.

August 8, 2011

Alternatives to Bootstrap Financing

Filed under: Entrepreneurship — Tags: , , , , — Mike Van Horn @ 11:03 am

Bootstrap financing may be unavoidable initially, but it’s a huge barrier to healthy growth, and you should get outside growth capital as soon as possible. Besides bank loans, what other sources are there?

• Borrow from yourself, even from your retirement fund. To do this, you must be as hard on yourself as any banker would be. You’ve got to demonstrate to yourself just as you would to  a banker that your business plan is sound and profitable and will pay back this loan in a timely fashion.

• Friends and family. Same thing goes. Before taking your rich uncle’s money, be able to demonstrate convincingly that this is a good business to invest in. He won’t give it to you otherwise.

• Leasing equipment and fixtures. Leasing can be very expensive but it’s worthwhile to shop different options to see where you can get the best deal. It’s best to have the advice of someone who is familiar with this type of financing.

• Vendor financing. Companies that want to do business with you and are convinced you are a good credit risk will extend you terms that will allow you to purchase goods from them. Use them to make money and then pay for these goods out of the resulting sales revenue.

As a last resort . . .

• Credit card. Financing via our credit card is an expensive trap. You’re playing with fire–or dynamite. Yet, sometimes we must do it. There’s a way to make it work if you are an excellent manager. If you have a good credit score, you will get offers for low cost balance transfers into a new account. Sometimes at 0% for a time. If you manage very well, you can replace one loan with another loan before the interest rate increases to a higher level. This is a dangerous game to play but it can be done successfully.

Downsides of Bootstrap Financing

Filed under: Entrepreneurship — Tags: , , , — Mike Van Horn @ 10:57 am

Bootstrap financing means to fund your business launch or growth without outside capital, relying on internal savings or cash flow generated by operations. This severely limits their rate of growth.

Some entrepreneurs bootstrap out of necessity: they have access to no capital. But many rely on internal resources even when they could obtain capital. I see two main reasons:

• Fear of debt, perhaps out of prior bad experience. They don’t trust their own resolve to repay debt so that it doesn’t just pile up.

• Lack of trust in their own business model and acumen. They’re just not convinced they can make their business succeed so that it is a good investment.

Owners achieve a major leap in business maturity when they overcome these fears and become willing to invest in their own company—via loans or equity investors.

Many small companies that self-finance their launch or growth are chronically under-capitalized. They are always running on empty. This can lead to some very bad habits in the way you run your business.

• You take any work that comes along because you are so cash starved. Thus you take unprofitable work that can actually put you deeper in the hole.

• You’re more worried about revenue than about making a profit.

• You work all the time. If you bill by the hour, anything that is not billable is suspect, such as planning, marketing, developing strategic relationships. When you make commitments to yourself, to develop new products or service for example, you are always willing to break these commitments to take paying client work. You always bump your commitments to yourself—or your family.

• You operate as the “lone ranger.” You are reluctant to get outside advice and expertise because of the time and money it requires.

• You wear all the hats. You do everything yourself. You are reluctant to spend on outside services, even if it would allow you to use your own time more effectively.

• Thus, you use your time poorly.

No plan. No strategy. Just work. This is the route to burnout or bankruptcy. And staying tiny.

“Alternatives to bootstrap financing” are described in my next post.

April 27, 2010

How entrepreneurs get started

Filed under: Not yet categorized — Tags: , , , , — Mike Van Horn @ 12:15 am

From a question on LinkedIn by Robert Saric: “Do you agree — first build the product everyone wants, then raise enough money to build the business?”

I agree, Robert. If you don’t have a workable product, then you cannot demonstrate that everybody wants it. Without this evidence, nobody will invest in you.

Creativity and innovation are hard; building a business around these is much easier (though still difficult). Creativity and innovation are rare, business skills are much more common, investment capital is plentiful. But investors want strong evidence that you can give them a 5x return.

Thus most businesses are initially self-funded, or rely on “3F funding”: family, friends, and fools. You go into hock to build your prototype and see if you can generate some market buzz. Then you go after angel or VC backers. You get some seed capital, do more marketing, produce more results, then go after 2nd round financing.

You build stepwise in this manner. You hire only those who are essential to get your product to the next level.

Pre-dot-bomb and pre-“great recession” rules were much different, but this is 2010, and investors hold their cash with an iron fist.

*   *   *   *

If you’re in this situation, and don’t see where the capital is going to come from, let me know. I’ll be glad to talk you through it.

Powered by WordPress