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Friday, December 06, 2013

INVESTMENT: You can't live with it, you can't live without it

Today's blog is the 8th in a 10 part series on the Entrepreneurial Puzzle.  Today's installment is about the TEAM that you select for your venture.  

For the first blog in the series on the IDEA, click HERE.   To read part 7 on the DREAM TEAM, click HERE.

Fair warning.  I am about to commit entrepreneurial heresy as I share the route that I am taking with my own company, Solutionz Technologies and our TripPlanz B2B travel widgets.

Today's topic is INVESTMENT - You can't live with it, you can't live without it.

Everyone knows that it takes money to make money.  And quite honestly, that has never seemed quite fair to me.

If you have an amazing idea, have done your market research, written your business plan, made sure that you are fully determined to succeed, you've fully measured the risks, ensured that you have people that will have your back, encouraging you through the process and you've put together a great team that has worked as long as they can without getting paid -- why shouldn't you be able to just get the money to get the business properly launched?

Even with all of that (which is known as the "pitch"), if you go to a bank or an angel investor needing money to make your dream a reality, I can pretty much guarantee that they won't loan it to you unless you are willing to put up your firstborn male child.  And don't even think about going to a Venture Capital (VC) company at this stage unless you have an "in" with a VC that is willing to risk with you.

I'm going to talk today about three ways to fund your venture.  Each one has pros and cons and there is no "one size fits all" option.  And I speak with experience on each one, so this is NOT just theory.

Note, I am not including Master Card and Visa as valid funding mechanisms.  Nuf said.

1.  GET A LOAN
Unfortunately, your experience and even painful learning from a prior venture is not sufficient to get you a loan.
Used by permission from Artizans.com

If you own property or have significant assets, such as stocks or insurance policies, loans against
those assets can be a valid (albeit risky) way to fund a business.  But as mentioned above, for an early stage (a.k.a. pre-revenue) venture, a bank will only give you a loan with significant collateral or a personal guarantee -- putting your personal collateral on the line.

If you go the collateral route, it can be a 2nd mortgage on your home or a boat or a second property.

I have seen that movie and trust me, they are not very forgiving when your concept hits a bump in the road, then the economy tanks and you can't pay your monthly payment.  And if you borrow against insurance and then need it, you are left empty handed.   Either way, the outcome is not pretty. 

You can also get a loan from friends or family, but be prepared for the relationship to be strained if things don't go as planned (which they rarely ever do).

You may also be able to get an angel investor that will structure their investment as a loan, but it will look very much like the bank loan, with them asking for a personal guarantee that puts your personal assets (house, car, etc.) on the line and if the business goes under, they will generally own your intellectual property (the idea, the code, the processes, etc.).    I too have seen this movie and the only thing that saved me on this front, was I made the loan "convertible" to equity once the investor had done his due diligence on the idea/market and we were in development.   But that was not the end of that story.  (see the risks for "Get an Investor")

Bottom line here is that if you go the loan route, the loan must be enough to allow you to complete a proof a concept (at least on a local or regional basis if you are building a national or international product or service) and to get revenue flowing, even if you are not yet profitable.  Only with proof of concept and some revenue can you get your business to the next phase (getting to cash flow positive).

2.  GET AN INVESTOR

All you have to do is watch one segment of ABC's Shark Tank and if you pay attention, you will walk away with the fundamentals of investment.  In fact, with my entrepreneurial clients, the first thing that I tell them is to go to their On Demand section of their cable system or ABC.com and watch every available episode.

What you will learn is this.  If you are an early stage company that has a great idea, a great team and proof of concept, but does not have significant revenues, don't expect to get the attention of an investor.

In the Shark Tank the mistake you will see over and over again is that business founders think that they can apply a valuation to their company that allows them to raise the needed capital and still hold on to a majority of the company's equity (fill in the blank with any significant percentage).  

Said in plain English:  If you put everything that you have into building your amazing, world-changing product or service, but you have sold less than what you personally invested (or worse, sold nothing), your business is NOT worth $x million (fill in the blank here too), no matter how great the idea is and how many have said they would buy it.   

So don't come into the Shark Tank asking for $100,000 for 10% of your company, just because that is what you need to get your product to market.  That implies a $1 million valuation on your company.  The chances are good that you will get shot down, embarrassed or both.

The thing to remember is that 100% of nothing is still nothing, so holding on to 100% of the ownership of your company and never being able to achieve your goals is foolhardy at best. 

While most of us don't get to choose from Mark Cuban, Lori Greiner, Barbara Corcoran, Damon John, Robert Herjavec or Kevin O'Leary as our investors, the principal of finding an investor is still the same.

Find someone that adds more than just money to your business - their network, their business acumen, specific knowledge in whatever you are doing (software, retail goods, food service business, etc.).

3.  LET YOUR IDEA AND/OR YOUR DAY JOB FUND THE COMPANY
After 18 years consulting (when I only make money while working on a client project), with my new venture, my goal is to build a product that earns money while I sleep.   With my background in online travel, I had the perfect idea and about a year ago decided to go ahead and build the product.

Having lived through both #1 and #2 in what I can only call my "spectacular failure", this time, I
decided to fund my company myself, without outside money.

This is not the fastest way, but if you (or your spouse) have a "day job" or savings that can allow you to take this route, you can get the company to cash flow positive before you even begin thinking about expanding by taking in outside money.

This approach gives you much more control.  And I'm not talking about control of equity, I'm talking purely about control of the decisions related to timing and business approach. 

In my current venture I have invested over $100k to build out the technology and I've spent some money on design and marketing, but since I still have a consulting business, I have been able to fund that work out of my day job. 

Now that my technology is ready and I have launched the pilot, if the company cannot generate enough revenue to allow me to hire at least one person to help with the marketing and customer service, I am not likely to go for external money.   The logic here is that I have to be able to prove the business model on a small scale and prove it to be self-sustaining before trying to ramp it up on a larger scale.

And this time, if the timing is not right for what I have built or I have chosen the wrong approach with B2B versus B2C for my online travel technology, I will fail fast, without owing anyone anything.  My company, my choice. 

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There are a number of other options that I haven't discussed, such as online crowd sourcing and government grants, which may be appropriate if you only need a small amount of money.

The bottom line is that you need to figure out a few things before you take a look at any source of investment.

If you have done your plan and know your expenses and projected revenues, you should know what money you need to get you to cash flow positive (revenues exceeding expenses) and breakeven (where profits cover investment and losses to date).

Once you know that, then you can look at your funding options.
  1. Are you willing to put your personal assets on the line (or more importantly, is your spouse) and would that give you enough?
  2. Do you know of anyone that would be willing to take a bet on you and your idea?
  3. Do you have a day job that can produce enough cash to get your idea off the ground (proof of concept and regular, predictable revenues)?
  4. Do you have the resources and expertise to put together the packet for investors if you do need to go externally?
Tomorrow we will look at the role that GIVING BACK plays in your business plans.  While you might think that I'm crazy for talking about giving before we address profitability, I think you will see the logic after you read what I have to say.

Stay tuned.  And if you haven't yet subscribed to this Blog, please look in the top portion of the right column and enter your information to get email notification of new blogs.

Chicke Fitzgerald 
serial entrepreneur and strategic investor





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