Category Archives: Finance

Why won’t investors get back with me after I pitch? by Skip Sanzeri

Having worked with a lot of angel investors, and venture firms over the years, there are a few key reasons why you don’t get timely follow-up (if not a complete lack of follow-up).

The first and foremost reason is that your deal is just not that interesting. Whether it’s your team, your product or service, or your market, an investor portfolio, criteria or focus fit (or something else), if an investor of any type does not get back with you, you can take that as a signal that they’re just not interested.

Of course there are occasions where something may have happened outside of your control such as an Angel investor really likes your deal but had to move a different direction or stop investing for the moment etc., but generally by not getting back with you they are showing you they are not interested.

Working with investors is like selling a product or service. You’re calling on your prospects (investors) pitching your product or service (company) and doing your best to have them buy (invest). However we all know that when we are selling a product or service, many of our prospects never get back with us. Think of people that have sold to you over the years. Most of us, honestly, simply do not answer emails or phone calls if we are not interested. So the behavior is the same whether it’s an investor or a sales prospect. As a result you will probably find that a few will follow up and let you know your status with them, but some will not.

The second reason you may not get a (timely) response is that they don’t want to tell you “no”.

Here’s why. It’s obvious that when betting on startups, the odds are against a startup getting to exit and monetizing for the investors, so at times, even the top-tier VC get it wrong. So if we assume that the bets they place are sometimes wrong (in some cases the numbers show that 9 out of 10 investments fail) then we have to assume that the deals they turned down could sometimes be wrong decisions as well. Let me restate: if the top-tier firms can be wrong regarding their investments, then they could be wrong about turning you down as well.

This is why they don’t want to tell you “no”. What if you got funded by one of their competitors and all of a sudden your company caught on and scaled? Nobody wants to miss out on the next best thing even if they turned it down initially. So by telling you “no”, they may close the door, or certainly limit future opportunities to work with you.

But, by not replying, the door is always open as the investor can circle back if and when you get traction.

In my experience I found some investors will tell you what you need to do to gain their investment (as long as it’s not fundamentally against their portfolio focus). “Go out and get 1 million users and then circle back”, “get to 10,000 daily active users, send me the metrics and we will talk”, “sign-up 10 customers, let me talk with them and we can take a look at that time”. These are just some of the responses I’ve had over the years.

The two words that will attract just about any investor are ‘traction’ and ‘scalability’. If you have both of these, you can bet that you’ll have great audiences and many investors will get back with you.

Now there are still some other reasons why investors won’t circle back but they are certainly less important than the reasons above. Of course investors are seeing enormous deal flow these days. So you can expect that top-tier investors may see over 1000 deals per month and even angels may see dozens of deals per month. There is simply not enough time to get back with everybody. But you can bet if you have scalability and traction, and they are interested, they will get back. So the rules still apply.

Here’s the best advice I can give when investors don’t get back with you. First, always keep things positive and keep sending them information about the company. Assume that they are a fan of yours even if they didn’t respond. Let them know about positive updates and traction. Again everybody wants in on the best deals so by keeping all of your potential investors updated, you have a great chance of them circling back later.

Don’t take it personally if they don’t respond. Again, if you’ve ever tried to sell something to someone, and they didn’t respond you know as well as I do that taking it personally is just the wrong thing to do.

Another thing you can do is ask the investor what you need to do to become more interesting. So let’s say you pitch, and the investor says that you will get back with you but they don’t. Instead of pinging them to ask their interest, just already assume they’re not interested because they didn’t get back with you. So why not call them or send them a note and ask how you can improve or progress to gain their interest. What do you need to do? In many cases they will let you know then why they did not invest and what you need to do to become interesting to them.

Make investors your friends. You never know when you may have a company they are interested in or they may have contacts which they can refer. Just because investors not interested at this time doesn’t mean that they won’t be interested in something you have later. I found in life all negotiations are circular, meaning there is a good chance you will come back around later, and sometimes you’re very surprised at how close you were to a deal.

 

 

 

Startup Surprise! Crowdfunding is Not Free

NotFree

As Milton Friedman once said, “There is no such thing as a free lunch”… and this certainly applies to Crowdfunding.

Crowdfunding has come on at such a rapid pace, many are still trying to understand how to correctly crowd-fund. The allure is for good reason: Crowdfunding grew from $16 billion in 2014 to $35 billion estimated at the end of this year. So officially, if this trend keeps up, Crowdfunding will pass VC investment which is estimated at $30 billion. Some say that Crowdfunding will double over the next few years which would mean that Crowdfunding would surpass all other forms of venture or angel funding and approach north of $75 billion in 2016.

Now before we all declare this as easy money, we need to understand what goes into a crowdfunding campaign. In this article I’m going to talk only about rewards-based Crowdfunding (versus equity, or debt), but this could apply to donations based Crowdfunding as well.

I get a few calls a week from small companies that want to use Crowdfunding as a vehicle to get their company off of the ground. Sounds fine at the outset. What most do not realize is Crowdfunding is not a “list it and they will come”, no more than “build it and they will come” (referring to websites) back in the late 90’s was true. Most crowdfunding sites require no upfront investment and take their fees out of the capital raised. So many are fooled thinking that Crowdfunding is therefore free. This could not be farther from the truth. While it is certainly true that there is very little investment in listing a crowdfunding campaign, there are dozens of activities in addition to tools and paid services that need to be deployed for an optimal campaign.

Fact is that if you’re going to run a successful rewards-based Crowdfunding campaign, you need to deploy a massive marketing campaign. This article is not designed to go in depth into all aspects of running a crowdfunding campaign, but here are some of the things you need to think about that will take money and our resources:

Staff – you will need staff to reach out to all of your constituents across all possible mechanisms. This includes social media, email lists, friends of friends, and more. Additionally, staff will need to quickly address any and all incoming comments or questions to make sure that your crowdfunding campaign is successful. On average, successful Crowdfunding campaigns run 30 days to 45 days. So if there is any delay in your communications, you’re wasting valuable time while the project end date is coming. We recommend that you think in terms of having a minimum of 3 to 4 full-time staff members working all angles of constituent communication during Crowdfunding. While they’re not communicating, they will be posting articles and other interesting blog posts to keep the crowd engaged and active. You will need this team available for about 90 days.

Ads – when Crowdfunding, you should really prepare and launch your initial outreach 45 to 60 days before your campaign starts. Additionally, you should use advertising mechanisms to increase your reach. Statistics show that 50% of your crowdfunding constituents and dollars will come from Facebook. So running Facebook ads to find new fans, friends and likes is a smart move. You’ll probably want to have $2000-$5000 for Facebook ads to bring more people into the fold so that when your campaign starts you hit the ground running with maximum participation.

Tools – you should deploy some tools to help manage your crowdfunding campaign. These include email systems like Mailchimp, social media tools like Hootsuite, PR tools like InkyBee or PR Web (don’t forget that you will need money for press releases as well), communication tools like Aweber, and more. There are dozens of crowdfunding tools and picking the right tool for the right job is important. But nonetheless, you should budget at least $1000 for these tools and between $300-$400 per press release.

Website and Social Site Design and Build– you will need to budget for website development and social site development. You’ll need a good developer or a team to build out all of your online properties. These costs can range from under $1000 up to $10,000 depending upon the type of sites you have and the teams you use. Professional web and site development firms are more expensive than individuals but generally their more reliable.

Video Production -every great crowdfunding campaign requires a rock-solid video. It needs to be informative, interesting, and well produced. Depending upon your skill set, your staff and your associates, videos can cost a few hundred dollars all the way up to $10,000 plus. It just depends on the quality.

Contests and Sweepstakes – I was speaking with a few crowdfunding experts who recommend running contests or sweepstakes prior to launching a crowdfunding campaign. These are designed to generate more traffic and engage users beyond all of your existing constituents. If you choose to do this, you will need money for prizes that could include things like an Apple Watch, and iPhone, and/or prizes like free products. So you will need money to buy these in order to give them away.

Crowdfunding can be an amazing way to generate capital. But realize that if you’re going to run a crowdfunding campaign, you should probably budget about $10,000 to start. If your staff are all volunteers, or working for equity only, you can probably look at a smaller budget of between $5000 and $7500. Without this investment, you campaign could be suboptimal and unfortunately it is difficult to circle back and run another campaign after you’ve gone through communications with all of your constituents. So this is, for the most part, a one-time chance, and you will need to get it right the first time. When done right, Crowdfunding can generate hundreds of thousands and even millions of dollars. Think of crowdfunding like an intense marketing investment.

And as Henry Ford once said, “A man who stops advertising to save money is like a man who stops a clock to save time.”

What can be Crowdfunded?

We get asked a lot about the types of businesses that can be crowd-funded. It seems these days that nearly anything is crowd-fundable with the right set of campaigns and on the right platform.

For instance, Kickstarter, one of the most popular crowdfunding campaigns has a list of items or companies that cannot be Crowdfunding on their platform.

Of course illegal or illicit businesses cannot be Crowdfunding. Pornography, drugs, cannabis paraphernalia, weapons, and even financial or money processing businesses are usually not crowd-fundable.

Here are a list of Crowdfunding categories:

  • Art
  • Comics
  • Crafts
  • Dance
  • Design
  • Fashion
  • Film and Video
  • Food
  • Games
  • Journalism
  • Music
  • Photography
  • Publishing
  • Technology
  • Theater

If your business falls in the above, then you have a chance at Crowdfunding. Make no mistake that Crowdfunding takes an enormous amount of work as well as a little bit of capital. For instance, we recommend that you spend some money on Facebook ads to help generate more audience. Additionally you want to hit all of your social media very hard to make sure that everyone you know can help your cause.

We offer Crowdfunding consulting and execution. If you’re interested please contact us.

 

 

 

Startup Hack – Go Best of Breed

What is best-of-breed?

In business, best-of-breed is a term used mostly to describe high quality firms and relationships. For instance a best-of-breed law firm would be a larger, more established company with a brand of which many people are aware. Best-of-breed is a very important concept to consider because it will give your startup credibility. And by definition since startups are early-stage, credibility is unbelievably important as you move your company forward. However there are a trade-offs (below), which must be considered when you are deciding to go best-of-breed or not. Generally best-of-breed firms are more expensive, so you’re trading dollars for credibility.

Examples of startup best-of-breed relationships:

  • Law firms
  • Accounting firms
  • Venture capital firms or angel investors
  • PR firms
  • Office locations (City or area within a City)
  • Suppliers/Vendors
  • Partners

To provide some real world examples, I will illustrate how a software company in Silicon Valley might look for best-of-breed relationships. This list is used just to provide some examples and is by no means complete or exhaustive. There are plenty of best-of-breed firms across every industry so the best-of-breed list below is only a small percentage of great companies out there:

Law firms

  • Cooley – https://www.cooley.com/index.aspx

Accounting firms

Venture capital firm or Angel Investors

Investment Banks

PR firms

Office locations (City or area within a City)

  • In Silicon Valley, an early stage best of breed location could be anywhere from Morgan Hill to San Francisco. Even some East Bay locations like Fremont can work. The key is if you want to go best-of-breed, you need to have an address in an area where people believe you will be able to succeed. A suggestion might be to take an office either in an area known for early-stage culture, or if there is not one available nearby, taken office in one of the larger cities. It will help for credibility. A best-of-breed example is Sand Hill Road. Most people know that the top-tier venture firms are located on that street in Menlo Park.

Suppliers/Vendors

  • This is completely industry-specific. However, if you’re choosing a supplier, if they have a brand name and are known to be the best at supplying that service or product, it will be helpful. As an example, I was working with a company that manufactured a consumer product. We chose a medium-sized manufacturing partner that had enough of a brand, people believed that the partner would be able to produce the number of units, and at the right quality and price we needed. Also the partner was in the United States so our argument was that we could go and visit the manufacturing plant to make sure that everything was on track. The choice was to stay in the US and then look at possibly off-shoring manufacturing at a later date. Investors like this strategy because they felt that we would have more control initially, even if the costs were slightly higher. We’ve all heard horror stories for startups and larger companies, where products were delayed in shipping or at the port. For an early stage company this could be a fundamental problem (see my article on “hard times” which describes how to handle fundamental problems).

Partners

  • Partners are also industry-specific. For instance if you’re going to have a database partner, you might want to think about going with Oracle or SAP. If you’re going to use cloud services, obviously Amazon is a good choice. I think you get the idea.

Best-Of-Breed Tradeoffs

Negatives

Higher Cost

As mentioned above, by choosing best-of-breed partners, you are making trade-offs. First, usually best-of-breed partners charge more. The reason is they are trying to protect their brand. So in the event that you are not satisfied, they realize that negative sentiment social media can harm the brand so they will work harder to ensure that they meet the agreed upon expectations. Therefore, theoretically best-of-breed partners should provide higher levels of service and be very responsive in the event of problem crops up. It is assumed that best-of-breed partners are larger and have grown to be that size due to the fact that they were able to provide high value and quality to a lot of other companies prior to yours.

Slower Speed

Second, sometimes best-of-breed partners may operate at a slower pace. Generally they are busy with more customers, and therefore you may or may not get the speed and attention that you may really want. However, if the relationship is “good enough”, then it’s worth staying best-of-breed. I found that working with larger best-of-breed partners sometimes can be slow, but if you work with the partner and let them know your concerns, sometimes you can speed things up. As an example, one of the larger law firms used by a startup I was advising, seem to be slow. So we brought on an additional attorney from a single office to help speed some of the work that needed to be done so that the larger firm could focus on more strategic issues (and continue to provide brand, via best-of-breed). To give you some metrics, when trying to set calls or meetings with the larger firm it would take from 3 to 5 days to accomplish the call or meeting. The smaller firm would simply pick up the phone and usually we could get the same meeting within a few hours. You will have to decide how to manage the situation to make sure you can keep your startup moving at the appropriate pace.

Delegation/Abdication

Another problem going best-of-breed is usually that you will sign with one of the brand name partners or company leaders, and then you could get delegated, relegated or abdicated to a junior. This happens a lot and you need to be very aware of it. I had a company that was going public recently and we hired a PR firm. We hired the firm specifically for the capabilities of the practice leader who was well known in the industry. It wasn’t long when the practice leader no longer joined the weekly conference calls and we were relegated to his underling. Due to our own mismanagement, we then found that over 50% of the weekly calls were then further delegated further so that we only had the junior associate participating. So we went from the practice leader through one of the directors, down to the least experienced person. Again this was our fault for not managing the situation and demanding that we stay in touch with people at the right level. Realize that any best-of-breed service firms are there to optimize their own margin while providing the highest quality service. Optimizing margin means if you can put a junior associate on an account without requiring hours from your top leaders (at higher costs), you will drive more to the bottom line. As a startup, you need to be aware of this practice and manage the situation closely to ensure that you get all of the attention you deserve.

Positives

Investors like It

By choosing a best-of-breed partner, you are establishing credibility for your company. First, investors will like the fact that you have chosen name brands assuming the costs are affordable. For example, I use Wilson Sonsini in a lot of deals because they provide top intellectual property and corporate guidance, but additionally investors really like the fact that Wilson is involved. Of course you could use some of the other firms above which are best-of-breed just the same. I use BayTech Web design for my digital properties as they are best of breed in Silicon Valley.

Realize that investors are looking to reduce risk. In any early stage company there are a variety of risks including market risk, technical risk, management risk, legal risk and more. As an investor looks towards a company, the first and foremost question is “will I lose my money?” This is a fundamental question that needs to be answered. We have all seen the scams that seem to continually occur.

Investors want to know that their risks are mitigated (as much as possible)  and for example, legal risk is significantly reduced by a firm like Wilson Sonsini. Wilson will ensure all of the investment paperwork, intellectual property, and corporate structure is locked down and in place. Now, you could choose a small firm, or maybe an individual attorney who could be excellent. Their work might be outstanding, fast and less expensive. However they don’t carry the brand. I have also used strategies where I have used specific individual attorneys in combination with larger best-of-breed firms. This way you can offload a lot of the more inexpensive, more mundane legal work to the individual attorney, and save the more important strategic legal work (such as intellectual property), for the brand based firm.

Best-Of-Breed – Breeds Best-Of-Breed (sorry, I just had to say that)

In many cases it’s hard for an early stage company to attract best-of-breed firms. Just because you are willing to pay a best-of-breed firm, does not mean they will take on your case. I recently had an experience with an enterprise software firm that was white hot as a startup. In other words they were becoming a “Silicon Valley darling.” However, when we approached some of the top Silicon Valley or San Francisco offices of a variety of PR firms, four out of the five of them either said they were too busy or not interested in taking on the project based on the company’s early stage status. I’m sure they questioned whether or not the startup was willing to pay their fees, and whether or not the startup would eventually succeed. So, startups are risky so in some cases best-of-breed firms may be less interested in associating with the firm in that early stage and would be happy to jump on the opportunity once the company has seen more success.

The point here is that if you have a best-of-breed partner, the other partners will realize and also believe that you must have something good or important if the other best-of-breed firm signed on. For example, if you sign a top law firm, and you let your potential venture investors know about it, they will be more comfortable that you have made some initial, right moves. Also, if you sign top venture, then the PR firms might be more interested in working with your firm. I think you get the point here. The more best-of-breed partners you attract, the more credibility you have, and thus it’s easier to attract the best-of-breed outliers that may not otherwise have been interested in you at that moment.

High Cost Should Generally Equal High Quality

When you go best-of-breed, you expect the highest quality and you also expect to pay for it. Now, there are plenty of exceptions where this does not occur, however if you manage the relationship correctly you should get the results you deserve. Note that just because a firm is best-of-breed, it’s not “automatic”. With any good relationship, it requires solid management and expectation setting on both sides.

Best-Of-Breed Has Your Back

Again, if you manage the situation correctly, and you’re utilizing all of the right people, processes and systems from your best-of-breed partner, the cost-benefit trade-off should be positive. You may find that best-of-breed partners actually begin to think strategically for you. They bring you solutions and strategies that you may not have thought of, or they may improve your existing solutions and strategies. A top partner should be an expert in their area and therefore you are getting the best advice possible. They should be able to predict landmines ahead, and optimize your resources for the best result. Startups are by definition, resource constrained. Therefore any partner that can help you ensure that your resources and assets are deployed correctly and optimally is valuable.

How to Run an Equity Crowdfunding Campaign

Crowdfunding

While it seems easy and simple, running an equity crowdfunding campaign requires a company to be very well organized and articulated. These days, online sites seem to reduce the amount of preparation necessary, but don’t be fooled by the appearance of simply filling in online forms.

In order to run a successful equity crowdfunding campaign, you must have a strong grasp on how much money you need to raise, what the money will be used for, and its associated milestones you intend to hit with the capital raised.

Note – equity crowdfunding is different from rewards based crowdfunding. With a quick search I found over 60 different equity crowdfunding sites. Here are some examples:

https://www.crowdfunder.com/

https://www.equitynet.com/

https://angel.co/

https://www.earlyshares.com/

Raising equity crowdfunding capital is really no different than raising standard equity capital. We recommend that you start with the following:

A five-year financial model that details revenue, expenses, cash flow and a balance sheet. Again, you need to know how much money is necessary to fuel your company, and if you will need further rounds of capital. The last thing any investor wants is to under-fund the company only to find it short of capital when it needs to grow. The last thing any entrepreneur or board wants is to give up too much equity via dilution early on by raising more than is necessary to hit the next milestone.

Executive summary – has 10 to 15 sections on the company including the problem you are solving, your business model, your management team, market size, competition, financials in the form of an income statement and more.

PowerPoint deck – a 10 to 15 slide PowerPoint deck that has bullet points outlining the executive summary above.

Once all of this articulation is complete, you will need need to make some choices as to which equity crowdfunding site you will use. Just because one is the most popular, or has raised the most money, does not necessarily make it the best for your company. There are crowdfunding sites for many industries, and some have investor types that are different than others. If you need help choosing a crowdfunding site, please contact us.

Additionally you will need to be very well organized legally. When raising capital, generally companies have a private placement memorandum (PPM), subscription documents, and term sheets. Having good securities and/or corporate counsel is essential.

After you have chosen the correct equity crowdfunding site, then you will need to sign up for an account and begin to enter your information. If you did your work above, with the five-year financial model, PowerPoint deck, and executive summary, you will probably be in good shape. Note that additionally you will need to come up with the company valuation that is reasonable. Investors want to know if they give you $5000, or $50,000, how much of the company they expect to get in equity.

Each equity crowdfunding site has different terms, conditions and rules and fees. Be sure you understand how much the crowdfunding site will get from your capital raise, and the associated rules to be on their platform.

Once you have chosen your equity crowdfunding site, and have entered in all of your information, you then need to know how to promote your company to investors. Each crowdfunding site has different methods of doing this so you’ll need to familiarize yourself with the rules and regulations. There are many different marketing and investor relations methods to promote your company and maximize your return.

Note that it is important to promote your company in every way possible. Just because you put your company up on an equity crowdfunding site does not mean that money will flow your direction and flocks of investors will find you. It is much different than that. You need to actively promote your company and provide aggressive outreach to dozens of investors. This is no small task but then again, raising capital is never easy anyway.

If you need help with an equity crowdfunding campaign please contact us. We have our own online funding site called Venture Deal and have strategies and tactics that can help.

Equity Crowdfunding

Equity-based crowdfunding  is a new way to raise capital from unaccredited and accredited investors. This type of capital raise was approved in the US through the JOBS act in 2012. Since equity crowdfunding is the offering of private company securities, it is subject to security and finance regulation.

Currently there are over 60 equity-based crowdfunding sites with a variety of opportunities and focus. Equity crowdfunding allows companies to raise capital from a variety of individuals with denominations that can go as low as a few hundred dollars per investor. Each investor will gain an appropriate share of the company based on the company valuation in reference to the amount invested.

Sometimes equity crowdfunding is called crowd fund investing, hyper funding and crowd investing. None the less, is an extremely viable way of raising capital allowing companies to access thousands of individual investors quickly and easily.

Note that equity crowdfunding still requires a company to be well organized and articulated. Many make the mistake of shortcutting traditional business plans and articulation thinking that crowdfunding does not require such diligence. The fact is that even an investor that puts $3000 into your company, still wants to see that the company has thought through its financial projections, has articulation in the form of a PowerPoint deck and an executive summary. Most equity crowdfunding sites require significant business articulation and this takes a reasonable amount of work.

Please read this article on how to run an equity crowdfunding campaign.

If you would like help with an equity crowdfunding campaign please contact us.

Live and Die by Your Assumptions – Financial Modeling for Startups

Whenever I speak with entrepreneurs, I can clearly tell the visionaries from those who can execute. Many entrepreneurs possess powerful vision and passion, 2 elements to get a company started. However execution is quickly required behind this vision and passion. We all know that strategy is important but execution is vital.

The 1st thing I recommend in starting a company is to build a 3 to 5 year financial model. The model is designed to provide a guiding light to the company and proof points to investors. A good financial model will contain all of the company assumptions and therefore make an entrepreneur think through all of the challenges. The financial model should be developed even prior to the PowerPoint deck or executive summary. The reason is that a financial model, if done correctly, will provide the entrepreneur, board and executives with the practicality of the business. In other words, is it a business that has a chance to reach the position of being cash flow positive or profitable within a reasonable period of time? How much money do you need to raise to get there?  What revenue assumptions and what expenses are expected? At the end of the exercise, the entrepreneur or company should possess a multi-tab spreadsheet with all of the information necessary to evaluate if the business idea can be executed. And, if done right, the model will have sensitivity analysis – so a best case, average case and worst case set of scenarios  – so you can plan for any and all contingencies. When building a financial model – my rule is: “everything takes twice as long and costs twice as much as you expect.”

Note that, not all business ideas should be executed. A financial model may determine that the business is not practical, and therefore should not be launched at all. It’s great to have a vision and passion, but without practical execution, the dream becomes a nightmare. Many businesses have failed due to bad planning and either should not have even started, or should have raised much more capital along the way. For example I just finished a conversation last week with an entrepreneur and team that were going to build a national brand with what they thought would be enough money. They told me they wanted to raise $2,000,000 and that would be plenty. Unfortunately, I had to break the bad news to them that to build a national brand for their online company, it would take more along the lines of $40,000,000-$50,000,000. This would be raised over a series of tranches. They are sort of a competitor to Groupon, and if you read the history of Groupon you will find that they raised $950,000,000. So far cry away from the $2,000,000 these guys thought would be enough.

Anyway, here are the elements of a good financial model:

Assumptions – you’ll need assumptions on every area of your business. Remember that your assumptions will be challenged so be sure that you can back them up, or have enough detail to prove that you know what you’re doing. I recommend building assumptions at the unit level versus the high level. For example, you might think that you’re going to sell 1000 units in month 13. How do you know? What did you sell in the prior 12 months? How are you going to get customers to buy these? What is your distribution strategy and plan? Exactly how many phone calls, ads, members, fans or viewers will it take to hit 1000 sales in month 13? What is your customer acquisition cost?

By being able to answer, denominator, unit level questions from investors, they will give you an opportunity to move forward. I have seen early-stage companies fail when they simply state that they will make 1000 unit sales in month 13 but have no idea how it’s going to get done. In good modeling, if you stay at the unit level, you will know how much it will cost to acquire those customers and therefore, that will all feed into how much capital you need to raise.

Cash flow – you definitely need a cash flow analysis by month over the 1st year, quarter by quarter over years 2 and 3, and annually in years 4 and 5. Cash flow is critical to show when you will reach a point where you no longer need investment capital. Investors will always want to know your assumptions on how quickly you get to being cash flow positive and how quickly you then reach profitability. Note that cash flow and profitability are not the same. Being cash flow positive means that you have reached the point where the incoming revenues exceed your monthly expenses. Being profitable means that your net income is greater than all expenses, costs such as cost of goods (COGS), and sales general and administrative (SG&A).

Income Statement – your projections should include income statements by month for the 1st year, by quarters for years 2 and 3 and annually if you choose to build out years 4 and 5. I like to use the 3 or 5 year income statement for the PowerPoint deck or executive summary. The income statement will show which year you will reach profitability.

Balance sheet – a balance sheet is not as critical in the beginning since most early-stage companies don’t have a lot of assets. However after capital is raised, and expenditures begin, it will be important to keep a balance sheet.

Funding sources and uses -this is a requirement to gain investment capital. You need to be able to show investors how much money you need to raise and over what period of time, in addition to showing how you intend on spending that capital to build the business. A good financial model will back into, or show you how much money you need to raise. Rather than starting with, “I want to raise $1,000,000”, you need to be able to show that through your financial model you require $1,000,000 to cover you for the 1st 6 months and then you’re going to go for a 2nd round of $3,000,000-$4,000,000 etc. A good financial model that is well-built will dictate how much cash is necessary before the next round, or to bring you to cash flow positive or profitability.

A list of revenue and expense categories you will need to consider:

  • revenues by product or service over time
  • staffing requirements
  • gross margin via cost of goods sold (COGS)
  • marketing costs – including all marketing and product marketing
  • sales commissions or distribution and channel costs
  • web properties and online costs
  • hosting and IT infrastructure costs
  • travel
  • events
  • insurance
  • payroll taxes and benefits
  • licenses and permits
  • office expenses
  • office rental and utilities
  • outsourced and consulting projects
  • legal costs
  • telephone/Internet/wireless costs
  • capital equipment purchases including computers, furniture’s, fixtures etc.
  • working capital assumptions including Accounts Receivable, Accounts Payable, and inventory
  • Gross profit calculations
  • breakeven analysis
  • working capital assumptions

If you’d like more information on financial models, or how to build them feel free to contact us.

 

 

Startups – When Things Go Wrong…..

 

quote-Winston-Churchill-success-consists-of-going-from-failure-to-759

There are plenty of people that will help you build a company but sometimes you need help when things go drastically wrong. This post is designed to help entrepreneurs get through some of the rough times.

Decide If the Problem Is Fundamental or Not

First, determine if your problem is fundamental or not. By fundamental, we mean that it could significantly harm or kill the business. Fundamental problems come disguised a variety of ways but some are financial, others are legal, and some are product/service related. Problems that are not fundamental do not require drastic approaches but usually can be solved simply, or at a relatively small cost.

Examples of fundamental financial problems include untenable debt, cap table problems, a high burn rate without offsetting income (or access to new capital), and more. Fundamental legal problems range the gamut from product liability issues to any disclose-able or large lawsuit where your company has liability, and will most likely lose the case, have to settle for a large amount, or will take on significant legal fees that are not affordable by the business. Legal problems can also be employee related.

Examples of fundamental product related problems have to do with products that don’t work as intended, or are not satisfying customer expectations. The fact is that some of the best laid product plans sometimes do not come to fruition. Additionally, with the rapid development environments that exist today, a competitor can decimate a product in what seems like a few weeks or months. Witness what happened to MySpace once Facebook came onto the scene.

If your problem is not fundamental, then there should be easier ways to solve the situation and we won’t address those types of issues here.

Stay Calm

Regardless of the fundamental issue, the 1st order of business is to keep calm. The worst thing to do is begin rash decision-making and get crazy with your constituents in and around the company. So by remaining calm, you can make logical business decisions which could range from putting the company into bankruptcy or insolvency, all the way to selling the company in a “fire-sale” or drastically changing strategic direction.

Surround Yourself with, and Listen to, Your Advisers (You can find more on Advisers and Boards Here)

In a time of crisis, it’s very important to surround yourself with solid advisers, and to listen to your board of directors. We suggesting that you reach out to your best advisers who may have been through something like this before. You may have a variety of advisers willing to help including your existing Board of Directors, advisory board members, your investors, friends and family with strong business acumen, legal counsel, your CPA and more. Or, any of these advisors could lead you to somebody who has faced the same issue. Crisis usually demands new thinking. By bringing in more opinions, you should be able to generate more choices. Many have gone before you, and there is a 90% chance that if you talk to an advisory who has worked with more than a few businesses, they will have been through a situation like this before.

Look in the Mirror

Be realistic about your own participation in the problem. In my experience, entrepreneurs well visionary, can also be stubborn and continue supporting a problem until it becomes fundamental. The hardest thing for auditors to admit is their role in a fundamental problem. We all make mistakes, but the biggest issue is how quickly you can address the issue, not the fact that the mistake was made. In the case of a fundamental mistake, the entrepreneur may look to advisors and possibly even step aside and bring new leadership in. I have seen on more than a few occasions where new leadership comes in and gives the company another chance. Sometimes by being the sacrificial lamb, creditors, upset investors, or even customers might be patient enough for you to turn the company around These are all very hard decisions for the board and the entrepreneur. Listen to your advisers.

Don’t Be Stubborn

Even if entrepreneurs did not cause a problem, sometimes they are stubborn to bring about the necessary change. If a product isn’t working, it needs to change as soon as possible. I have witnessed situations where all of the advisers were suggesting that the best route was to file bankruptcy, but the entrepreneur would have no part of that. Instead of just reorganizing to get back in the playing field, the entrepreneur tried to complete the project but really had no chance, and the situation ended up much worse. As we know with entrepreneurs sometimes they are blinded by their own vision, and cannot let go of an idea or a certain direction on which they have decided. This is one of the biggest failing points we have seen with entrepreneurs. Some of their greatest assets, which include their vision, enthusiasm and work ethic, ends up being their greatest liability when times get hard. The fact is that 90% of businesses fail. A percentage of this failure is due to entrepreneurs not willing to change direction, or restructure a company as needed.

Solutions to Fundamental Problems (a Partial List):

  • bankruptcy or insolvency – seek financial and legal counsel
  • new investment capital at a lower valuation or down–round
  • new strategic direction for the company – go to your board of directors for advice
  • new product direction – utilizing product assets in a new way to develop a product the market needs – think of other uses for the product or the assets that make up the product. Perfect example is Twitter. Designed for an internal communication mechanism, Jack Dorsey then discovered that it could be used as a major communications platform. Now it’s a multi-billion dollar company.
  • merger or acquisition -selling the company or merge it with another synergistic company – this could be a competitor or a complementary company
  • shutter the company, and sell off the assets – try to return some percentage of investment
  • significantly downsize – reducing headcount and/or salaries – possibly ask employees to work for equity until you can turn things around
  • renegotiate debt
  • use equity anywhere you can instead of cash

As a final note, and we cannot stress this enough, do everything possible to keep the entity alive. I have seen companies that have been decimated but have gone on to survive and even thrive because the corporate entity was able to continue. This is of key importance in many businesses since the entity may have an established brand but not be operationally sound. We personally sold a company that was failing to another group that purchased the entity for a very low rate but then turned it into a viable business. While not the original outcome we intended, certainly better than some of the draconian choices we faced at the time.

If we can be of assistance please contact us.

 

 

 

 

 

 

 

 

IPO Pitfalls

Going public is neither for the faint of heart, or the inexperienced. This is a major corporate strategic move which could lead to significant benefits and also could ruin your entire organization.

Pitfall one: not doing your homework

The first step to going public is to conduct a great deal of research, or get advice from someone who has experience taking companies public. Becoming a public company is like running an entire separate organization with his own constituents. Public companies are into businesses: first is their standard business delivering a product or service, and second is the business of being a public company. The amount of legal, financial, business consulting, compliance and communications activities are immense. Don’t get me wrong, I’m not trying to scare you away from becoming a public company, however you really need to commit to the process (see pitfall three, below).

Also as part of your homework, you should talk to a few public company CEOs. Understand what they go through on a daily, weekly and monthly basis. I think you will find about half of them will say they wish they would’ve never gone public and the other half are happy that they did. No doubt being a public company is much harder than being a private company. So you have to fully understand what you’re up against, and the level of communications and compliance you will need moving forward. You will spend a lot of money each year, and you will have significant personnel costs just to maintain your public status. By understanding what you will be getting into, you will be able to make the correct decision on remaining private or going public.

Pitfall two: your company is not ready or is not the right company to be public

Not all companies are designed to be public companies, and even if they are, it may not be the right time to go public. The best way to figure this out is to discuss being a public company with your team of advisers including legal, business and finance. The reason is, going public isn’t some magical path to money. Many people I talk with only focus on liquidity and forget about the actual business. There is no shortcut to creating wealth via a public company. You need to have a fundamentally great company with huge growth potential including spot-on execution. I talk with a lot of people who are just focused on how soon they can have a $10 stock trading and be worth millions. This is only the end result of a few years or more of very hard and precise effort. Sometimes we hear about companies that become very valuable more quickly, but there are an order of magnitude more companies that try to go public and fail.

Pitfall three: not committing to the process

I can’t tell you how many companies I’ve worked with that have started the process and have questioned themselves midstream after tremendous costs have been sunk into the process. Fortunately most of them have continued on with the process but a few of them cut it short throwing the money away that had been invested so far. Be sure to engage your Board of Directors and advisory boards to make sure that everyone is committed to seeing the entire process all the way through. This has worked in a variety of cases where entrepreneurs have freaked out midstream, but the board or others brought them back around to understand why they ever started the process of going public in the first place.

Pitfall four: not engaging all of the entities that can help

Once you have done your research, or have spoken with experts, then you need to look at the types of businesses and individuals whom with you need to surround yourself. I have an entire section you can view here. Of course by engaging all of these experts this will help you to avoid pitfall two above, committing to the process.

Pitfall five: every deal is custom which = difficult

In my experience, every single going public process is custom. While many of the processes and tasks are the same, undoubtedly there are a variety of significant differences, which can cause delays, cost extra, or even sometimes ruin the entire process. Again, be sure to get all of the top advisers to help you through all of these issues.

For instance, I had a recent public process where two highly experienced securities attorneys, two highly experienced chief financial officers, and two other very experienced C level executives all had different opinions on how to handle a very specific an accredited investor question. In this exact instance, the company had some unaccredited investors that had to be either paid off in cash, or they needed to sign specific unaccredited investor questionnaires along with strategic advisors in order to meet the SEC requirements. One group of New York attorneys recommended a certain direction which initially agreed to by the group, then was later refuted due to the process being inaccurate. This is a perfect example of how even with a great group of experts, there still can be varying opinions and doubt. Again, my best advice is to surround yourself with the highest quality entities and individuals to reduce as much risk as possible.

Pitfall six: not budgeting enough to get through the process

Going public costs money. Pure and simple. This process can cost as little as $100,000 and as much as $1 million. Between advisors, attorneys, investment banking costs, filing costs, financial advisor or audit costs, public shell costs and more, you have to be prepared to spend a great deal of money. In addition, if you are going to really create a nice following after you are public, you will have investor relations costs.

I recommend that you raise capital privately as part of the going public process. If your business already spends off reasonable cash flow, you might be able to afford it out of operations. However, if you do not have the cash flow, you should consider raising $1 million or $2 million to cover all of the fees and staff to go public. The good news is that I have found if you are going public, you have created in imminent liquidity event which makes it easier to raise capital. Nonetheless, you need to be realistic about budget to ensure that you don’t surprise your team and the board.

Pitfall six: trying to liquidate shares too quickly

 

This pitfall is more insidious than most. Many entrepreneurs I speak with want their millions of dollars quickly and are forgetting about their investors and the SEC. Generally as a CEO or founder, you need to think about holding onto your shares and not selling them until your investors have had a chance to liquidate their holdings, and you sell your shares in compliance with SEC requirements. For example, if you own more than 10% of your company, which as a founder is likely, you are restricted as to when you can sell your shares and how much you can sell at any given time. Rule 144 usually locks up employees and insiders for six months to a year. In addition, sometimes investors like to have you locked up longer to make sure they can get their capital out. Solid securities legal counsel will help you through this process. But if you are going to be the founder or CEO of a publicly traded company, you need to think about holding your shares at least one year after you are public. Then per SEC rules you can liquidate some stock on a regular basis.

Additionally, there are rules that govern other large shareholders, as well as your employees and c- level executives. Be sure to get good counsel to understand how everyone handles their stock.

Pitfall eight: forgetting about support for your stock after you go public

This is probably one of the most important sections on this page. Many entrepreneurs think going public is tantamount to going through the process, becoming a public company, and then automatically having investors discover your small cap company and buying up the shares. If you go public on one of the larger exchanges like the New York Stock Exchange or NASDAQ, via a large investment bank like Morgan Stanley or Goldman Sachs, most likely you will be large enough to get analyst coverage, press, and generally have people hear about your company and offerings. However most companies that go public, and certainly the types of companies I am writing for here, are about small-cap offerings. In this case, you need to build in both aftermarket support for your stock, and solid investor relations. This includes a myriad of activities that you need to take on two promote your company in the appropriate and approved fashion (definitely seek securities legal counsel here) to ensure that plenty of investors are buying your stock on the open market. A good investor relations firm will help as well.

When companies forget this entire section, it’s the same as the adage that was used both for Internet websites and the movie “Field of dreams”, “build it and they will come.” So once you are trading no one is going to show up unless you go out and find them. Small-cap companies just are not well-known enough to gather a lot of public support.

Summary: all of the above information are just some of the pitfalls you face when building a public company. There are others as well. However this is not designed to dissuade you from going public but rather arm you with the information so when you make the decision you’ll understand how to get through the landmines. The upside of going public can be amazing which includes liquidity for investors, employees and other constituents, easier private capital raises due to imminent liquidity, and access to plenty of capital after your public (assuming growth). Additionally, stock becomes like cash and can be used as currency. A great way to continue to build value for your company.

 

 

 

 

Going Public – The Types of Advisers you will Need

In order to go public, you will need the following types of advisors:

Legal – hiring the right attorney or law group is critical. There is no way to successfully get through this process without having solid legal advice. Your decision will be to either hire an individual attorney, smaller firm or larger national firm. Each comes with its trade-offs. For instance, a smaller attorney will be less expensive, but may not give you the brand component you will need to raise capital. On the other hand, larger law groups are more expensive but their brands carry so much weight with investors, there is a lot of comfort there. Either way, you want to make sure that your attorney has a lot of expertise in taking companies public, and if you are in the small cap space, be sure they have experience with smaller IPOs, reverse merges etc.

Finance – you will need capital to go public or reverse merge. So you want to lineup financing, or choose an investment bank that will take your case on.

Accounting/Audit – a public company will need audits and solid financial statements. It’s best to find an auditor that is PCAOB compliant. This means they have the right processes and methodologies as well as certifications to file your public financial documents.

Business – it’s always good to have a general business advisor who has had a lot of experience with smaller companies. Find someone who is worked on reverse mergers or small IPOs who can help you along the way. This type of business advisor will look across your company and give you advice on ensuring that your company is structured and ready for the process.

Investor Relations – you will need an investor relations firm. After you are public, this firm will kick into gear and help create interest and distribution for your stock. There are a lot of choices of IR firms out there, so be sure to interview more than a few.

Specialty advisor – Be sure to find an advisor who has worked on more than a few small cap IPO’s and understands how to build a program that will keep your stock price supported. This would include going over all of your upcoming plans for the year to make sure that when you go public, you are hitting your milestones and metrics. The plan includes your product or service, marketing, finance, IT, sales/distribution and more. This is really an art. This person will help you write your SEC filings as well.