Building A Startup Company On A Lean Budget

In my previous blog entries focused on early stage startup challenges I discussed the necessity for entrepreneurs to self fund their own startups. The following are some tips for how an entrepreneur can build and launch a company with minimal funds.

Open Source - We have moved away from proprietary software products to the free software world of open source. Open source products allow an early stage company to leverage the work of a team of developers and beta testers(customers) for no cost(or very low cost) to the startup. If your product or service is software based this is a great way to get product in front of consumers quickly with minimal development expenditure.

Cloud Computing - Cloud Computing has obviated the need for large and expensive hardware purchases. The concept is simple. Use someone another company's hardware to run your business. The cost is based on "usage". Usage is defined as data storage, CPU and bandwidth. This is a great way to get your business or your web site hosted for a fraction of the cost of doing it yourself or having a hosting center take care of it.

Beta/Community Programs - One of the biggest challenges for startups is to get validation and direction for their product or service. Engaging end users in a beta program is a good way to get free feedback on the product design, function and quality. Beta testers are extremely tolerant of a shaky early release product as long as their suggestions are taken seriously and they see steady improvements in the product or service over time. These same people will eventually become customers if you treat them properly and you make them feel that they are part of an elite first viewer participant group.

Leveraging The Future Value Of Equity - Although the idea and concept you start out with may have no immediate monetary value the future company based on that idea could have significant value. Savvy individuals will get this and will participate in helping you launch your company in exchange for a piece of the company.

Web Site Development - Irrespective of what your product or service is all companies should have a website that describes the product or service, acts as a launch pad into the product and provides updates for an ever curious Internet community. Putting up an initial web site these days is easy and inexpensive. There are plenty of online services that will provide you with starter templates to get your message out, accept credit card transactions and track your traffic. The most important thing a company should do is get the e-mail addresses of the visitors so you can continue to market to them in the days, weeks and years ahead.

E-mail Campaign Services - E-mail is still a great and inexpensive way to reach out to existing and new customers. There are a number of e-mail campaign platforms that will provide you with the tools to create your own e-mail campaigns and maintain mailings lists. In the initial stages of your company your email campaigns should cost you very little because your lists will be small. If your e-mail lists do grow to substantial size(100 of thousands) then this will be a great problem to have.

Corporate Programs - Many large and established companies with great products and services realize the future value of startup company. They know that if they provide startups with access to their products and services in the early stages of development they will most likely continue to use the company's products and services once the startup becomes successful. It is a shrewd strategy based on the fact that once you build your company around a product and service it is difficult to switch. Mircrosoft and Sun Mircrosystems (now Oracle) are just a few of the big guys that like startup companies. Take advantage of their somewhat self-serving offerings remembering that you may be committing to a long term relationship with the company.

Business Partnerships - Business partnership opportunities are still around and possibly growing because of the recent economic downturn. An existing business needs products and services to put into their sales channel. Developing a new product or service can be expensive for an existing company. If they can get a startup to build a product the existing business can use in their channel they may fund part of the development in exchange for a share of the market. The existing company may also see the startup as a new sales channel for its existing customers.

Social Media(blogs, Facebook, Twitter, Linkedin, YouTube etc.) - Every company despite their size can obtain a significant amount of consumer attention by using free social/viral media channels. Building a presence in these environment is not expensive. The key to successfully using these services is to use them in tandem to get the "Social Media Effect". There is no better way to put a company on the map and to acquire customers then through social media.

Search Engine Optimization (SEO) - Natural search is still a potent and powerful way to attract consumers to your business. SEO is a bit of a black art but there is some science to it. Text is better than graphics, meta tags still have value, recognizable key words in the text matter, links to your site from other sites increases the importance of your site and traffic matters. The more traffic to a property the better the ranking.

IM/Skype/Freeconference.com - Loss the traditional phone set up it is too expensive. If you want to contact someone or have a conference, etc. use a free IM service, conference with Skype or use Freeconference.com if you really need to use traditional phone lines. This is especially important of you are going to do business internationally.

Sweat Equity - Even though the items I have listed are all great ways to keep the cost of launching your startup down they all require "sweat equity". Value = sweat equity + investment. Nothing comes without a cost. This means that startup founders have a unique challenge of having to invest their time for no cost to grow the company.

Scaling Up and Scaling Down - The other challenge for entrepreneurs is the ability of the co-founders to demonstrate that they can "scale up and scale down". Many of the items described require an entrepreneur to be a CEO one day and a web developer the next. Have the suit and tie ready along with the jeans and a tee-shirt. Multitasking will keep the labor costs down.

Conclusion - There are many ways to keep the cost of your startup down enabling you to launch it with very little initial financial investment. The inexpensive startup phase does require a co-founder to be versatile taking responsibility for a number of different and unrelated tasks. Sweat equity is one of the key ways to control the cost of startup. the more you do yourself the cheaper it will be to launch your company.

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What Is The Value Of An Idea?

Many entrepreneurs are excited about their ideas and the potential for those ideas to turn into great businesses. This excitement translates into a perceived valuation of the idea. An entrepreneur may assume that the idea is extremely valuable and an investment in a business based on the idea is obvious. In many cases the entrepreneur's valuation is not consistent with the publicly perceived value of the idea.

There are cases when a pure idea does have immediate monetary value. If the idea represents a break through mathematical formula, insight into a physical law, or a new chemical process the idea may have immediate monetary value.

However, in most cases an entrepreneur has to show an investor more than an idea to entice them into investing.

This does not mean that the idea has no value. In fact, the idea stage of a company is very important and "valuable".

1. Starting Point - Everything starts somewhere and the creation of the idea that will one day power a company is usually the symbolic starting point for a business.
2. Brainstorming - The idea phase of a company is a blue sky anything possible stage. It is exhilarating and stimulates thinking around the technology, company structure, staffing, marketing and product development that will be forthcoming.
3. Intellectual Property - Although the idea itself may have no monetary value a patent does have value. If the idea is truly unique a patent process should be initiated. If a patent is granted the idea will add value to the future business.
4. Rallying - Presenting an idea to another individual or group is a great way to start a dialogue about an idea's potential. The idea discussion will help bring like minded people into a discussion about the idea and its potential merit. The idea itself may form a common bond amongst like minded individuals that will eventually take interest in the tangible manifestation of the idea.
5. Validating - Getting the idea out into a public forum will help determine the validity of the idea as it relates to its commercial potential. Be careful about confidentiality when soliciting public feedback. Isolate your public contacts to individuals you trust to keep your information confidential. Having them sign an NDA is a good idea.
   
6. Investor Introduction - At the idea stage it is very unlikely that an investor is going to invest. However, sharing the idea with investors is a good way to prime the pump for a future investment and to determine if a business built around the idea is of interest to the investor. The investor may know other people that would be interested in the business. The one caveat is confidentiality. Be careful about sharing your idea with investors that may take the idea elsewhere.

The inclination to focus on an idea as having monetary value prior to having an actual business associated with the idea is not the correct way approach to idea valuation. Vet and develop the idea from a theoretical notion into something tangible such as a product, service, etc. before you considering the idea as having monetary value. Use the idea to motivate a team around you to create the product and service that will eventually represent the real value of the idea.

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The One Skill An Entreprenuer Has To Have

I have had the opportunity to work with many entrepreneurs and startup businesses and there is a consistent theme associated with the ones that have been successful. Startup companies face a myriad of challenges and attract extremely talented, motivated and intelligent people. These individuals have preconceptions about what is really going to make the business successful and they do have great skills that will help a business succeed. However, there is a skill and talent that stands above all that is absolutely essential for the success of the business.

The ability to raise investment capital and to do it over and over again is the magic bullet skill all successful entrepreneurs have. You may argue that the business has to have great potential, that the product needs to be innovative, the market for the product or service large and growing, the business owners need to be hardworking and bright, you have to have a great marketeer, etc. Sure these are great to haves. However, many companies led by accomplished entrepreneurs with great products or services have failed because the company was missing the key ingredient.


So what are the qualities, skills etc. that make for a good fund raiser?

Pitching/Selling: Raising money is all about how you present the business, yourself and the team. Pitching an early stage company is different from pitching an existing product or service because the product or service either does not exist or is in some form of development. For this reason potential investors will be focused on the entrepreneur trying to determine if that individual is capable of creating and operating a business.

In the initial few minutes of the elevator pitch the investors will concentrate on the presenter. Who are you? What is your background? What successes have you had? How are you qualified to run this business and manage the initial investment. The presenter should lead by answering these questions before he or she gets into the details of the business. Establish creditability early in the exchange.

Dealing With Objections and Rejection: Investors are more likely to object or challenge the fund raiser then to agree with their suppositions. This should not be taken as a negative. It is a way for the investors to dig deeper into the business. Respond in a positive way and answer the challenges with facts and figures. If you do not have an answer be honest and indicate you can not answer the question now and will get back to the investor. Never take a challenge personally. Rejection is always a big part of the process. A good fund raiser will always learn from each rejection or challenge and build responses to them in future presentations. Politely, acknowledge the challenge at the time of the challenge and commend the potential investor for pointing out any potential deficiency in the business.


Determination: A fund raiser has to be tenacious because the fund raising effort will require endless hours and repeated calls, pitches, etc. The investment community will be looking to see how the fund raiser handles the long and difficult funding process, requests for additional information, etc. Fund raising is a sprinting marathon requiring the fund raiser to be prepared for long and challenging effort.

Success History: The fund raiser has to have a history of success in some capacity. It could be academic accomplishment, business success, startup experience, etc. The fund raiser also has to emphasis accomplishments in a way that is not perceived as self aggrandizement. The accomplishments should be noted in the interest of explaining their relevance to the business. The success background expose should be interspersed with other information about the business indicating that the information is important but not the sole reason to invest in the company.

Investor Networking: The concept of networking yourself to success is a bit of a cliche in this day and age. Networking for the purpose of fund raising is different then hanging out in social networks and letting people know you are out there. Fund raising networking requires some serious face to face time with potential investment sources. In a perfect world this form of networking should begin well before a entrepreneur decides to raise funds. This method will result in a more fundamental bond between the fund raiser and the funding source. When the time comes for actual money raising the request for funding will be coming from a person that the investor already knows and has some confidence in his or her ability to deliver on expectations.

Multiple Fund Raising Source: The law of averages requires a fund raiser to have a multiplicity of funding sources. Before heading out on the official funding road you should have a portfolio of between 10 and 20 pre-qualified investors ready to pitch to. You may find that that you have to pitch and work with an even larger amount of investors before you successfully land a round.

Research: Dig into the backgrounds and portfolios of the potential investors. What are they investing in? What was their most recent investment? Talk to an entrepreneur that has worked with the investor before? What are the most likely question the investor will ask?

Flexibility: You certainly have to be agile when it comes to raising funds. Do not get hung-up on the amount and structure of a deal. You should have an amount your are looking for and a specific purpose for the funds. However, be prepared to take a greater or lesser amount of capital. During the process you will have to be willing to change your business model, change your schedule at a moments notice and be anywhere the funding source wants you to be.

Personal Investment: It is very unlikely that anyone will invest in your business unless you have invested your own money first. Certainly time invested in the business counts for something but good old hard cash ranks much higher.

Commitment: Raising funds is a full time job. . Do not kid yourself into believing that you can effectively tend to other business needs during this period. Everything else will be secondary during the process until the deal is closed.

You Are Always Fund Raising: One common thread amongst all good fund raisers is that they are always raising funds even when the business does not need the funds. During every business meeting, customer visit, conference, family and friends gathering think about how this might be an opportunity in the fund raising process.

Trustworthiness: This is where salesmanship differs from raising money. You can be a really good sales person even if your character is somewhat in question. This is not the case for a fund raiser. You have to legitimately be above board and have a trustworthy reputation. This means you actually have to believe that you can deliver on what you are promising and you make it perfectly clear to the potential investors what the risks are. Most investors will understand that there is risk to any investment. What they do not want to deal with is risk generated by a questionable business partnership.

Sources Of Capital: Many entrepreneurs waste their time seeking investment in the wrong places. This is a difficult one to sort out if you have never been on the funding road. The right funding sources are dependent on many factors; what is the business, what is the state of the business, what is the state of the economy, geography and how much you need all dictate what sources are best for the operation.

Timing: Like many things in life timing has a big impact on the success of a venture. Raising money to fund a company is no different. The current economic environment is a classic example of a time that is sub-optimal for raising funds. Even the most accomplishment fund raisers have been challenged by the events that have occurred over the past year. Sometimes it is better to hold back and get on the funding road at a different time. A good indicator of the right time is increased deal flow represented by a growth in investor's portfolios, IPO activity, M&A activity and public attention being focused on a specific economic sector that is associated with your business. Windows of opportunity open and close quickly so continuous research is required to hit it just right.

In conclusion, closing a round of funding is a skill and talent. When you are fortunate to have an investor interested in your business it is important to close as soon as possible even of you have to modify the deal terms.

Good Luck!!

What Is Your Start Up Worth?

Establishing a valuation for an early stage company is challenging. There is little financial history to predict future earnings and the real character of the company is still forming making it difficult to find comparable references with similar financial history.

Entrepreneurs are frequently unfamiliar with traditional ways to value companies and may approach valuation as an ownership issue rather than the market's assessment of their company's worth. Conversely, savvy investors attempting to acquire an ownership stake in a company may attempt to take advantage of an entrepreneur's desperate need for working capital by artificially deflating the valuation using the current company valuation and not the future growth and earning potential of the business.

Despite these challenges investors and entrepreneurs do need to agree on valuation based on a reasonable scientific method of establishing valuation.

This will keep fund raising negotiations on track, less emotional and instill confidence in current and future owners that the valuation is real and a legitimate reference point for future rounds of funding.

To this end I have elicited the expert advice of Lucia Wallace, Senior VP at Houlihan Lokey, to help craft this blog. Lucia is familiar with negotiating valuations for companies of all sizes in various stages of maturity. She has taken an interest in early stage companies and has provided good advice on what valuation approaches are best for early stage companies.

We will start out with an overview of traditional methods used to value companies and how they do or do not fit early stage companies.

Discounted Cash Flow (DCF) - This valuation method uses an estimate of future cash flows generated by a company. A discount co-efficient (discount rate) is applied to the estimate. This discount rate is based on the level of risk associated with the estimates.

In many cases a start up has no historical reference for cash flow making the DCF method of valuation suspect. A business owner may inflate the cash flow to demonstrate the great potential of the business to please investor expectations. An investor may deflate the predicted revenue to obtain a greater percentage of the company (or would assess the business owner's expected cash flows as having a high degree of risk). With no real history of cash flow the debate over cash flow valuation can result in an uncomfortable negotiation scenario were each party is arguing for a valuation without any real basis for the argument. At the end of the day, the discount rate is supposed to reflect the appropriate level of risk - which is extremely difficult to pin-point (if you do not want an excessively wide range of values).

Book/Asset Value - There are a number of valuations based on the value of the assets of a company. For technology based start ups this may be the value of the product/technology developed to date, patents, cash on hand, etc. However, the primary asset of a start up or early stage company is the collection of intangible assets (patents, technology, workforce, management team, advisors, access to cash, etc.), which is very difficult to value. Hard assets (furniture, plant, real estate, equipment value, etc.) have an easier determinable value, however, generally make up a small portion of total value of a company. Future value is the important piece of the puzzle because early stage companies are usually growth companies with the real investment value of the company in the future not the present.

Visits/Traffic/Eyeballs - A web oriented company can predict its future value based on expected web traffic. There are good comps for this. However, not all visit/traffic business models are the same. For instance, if there is a product platform developed to support content delivery or a unique business process has been crafted to differentiate the company the visit/traffic approach does not give you the full valuation picture. In the end the traffic has to be tied to some demonstrable and supportable revenue number. Just indicating that the company is going to generate traffic is going to be challenged.

So how do you get a substantiated value for a company that makes sense to investors and to start up business owners?

The best approach is to compare your company to another similar company. Back in the day an investor made an investment in an entity with no financial history. From that point on a "comp" has existed for all future investors and entrepreneurs.

The world has become more complex, in a good way, providing all kinds companies to choose from to establish a valuation for your early stage company. A start up can establish a valuation based on Market Multiples for comparable companies.

Market Multiples - Market multiples can be derived from either publicly traded companies, financing of private companies, and/or M&A transactions. Using this approach, you calculate the multiple on a financial metric (e.g., enterprise value /current value, enterprise value / future value (one or two years out) or enterprise value / current or future EBITDA) for the comparable company, and apply that multiple to your financial metric.

• The easiest way is to find publicly traded companies, as both valuation and financial information is easily available. Let's call these Public Comps. Note that the valuation in the public domain is generally for a "minority" ownership (i.e., a few shares), and not for a significant or even "controlling" ownership position. If you are selling some aspects of control, you need to account for that.
• You could also use a private company that has recently received funding, and pre-money valuation has been publicly disclosed, and you are familiar with some financial metrics (e.g. approximate revenue). You can calculate revenue multiples (or multiples on unique visitors, or EBITDA multiples) based on these Private Financing Comps. More likely than not, however, you won't have detailed financial information, so its difficult to draw detailed conclusions from this approach. If you are creative, though, you might be able to gather some information from the investor About the private companies in their portfolio - many are proud of these investments and publicly display them on their web sites, talk about them and market them to other investors and consumers.
• You can also use an M&A transaction (M&A Comps), for which both the transaction value and the target's financial information are available. Similarly, you can calculate revenue, cash flow or earnings multiples implied by the M&A transaction. Please note that an M&A transaction also reflects a premium for gaining control.

Trade of Shares For Investment - Valuation, investment and equity distribution are all tied together. I discussed equity distribution in a previous valuation Blog.

Keep in mind that the investor is investing in a very early stage company. This = risk for the investor. To mitigate the risk of the business plan not playing out exactly as planned the investor may ask for a greater percentage of the company then may be might expect. This should not be confused with conceding "control" of the company to the investor. In most cases, the last thing the investor wants is to control/manage your company. This is why they are so interested in the team running your company. You should be focused on getting the investor interested in your company, establishing measurable valuation and obtaining an amount of working capital that will conservatively allow you to focus on running the business and not remaining in perpetual fund raising mode.

In conclusion, start up valuations are hard to evaluate with traditional valuation approaches. The best way to obtain a satisfactory valuation for the business owner and the investor is to compare your company to similar companies that have public valuations. Yes, the valuation of the company may impact percentage ownership. Valuation and equity discussions will be intertwined in negotiations so make sure the basis the valuation and equity distribution are clear.

The Hands On Engineering Manager Paradox

The current economy appears to be breeding a crop of job descriptions looking for people that will program, create systems architecture, speak the business language of upper management, hire the engineering staff, manage the staff, put together an engineering budget, setup the servers, etc. To put this politely, not going to happen. Or at least not for very long.

I certainly have been in situations were I was doing all of these things. However, realistically not all of them very well. Sure, in a very early stage start up you might need to ask someone to initiate multidisciplinary tasks. However, no one is going to be good at all of these tasks. Setting an expectation that someone should be able to handle them all could have negative long term implications for the individual being asked to perform these tasks and for the organization as a whole.

There are fundamental differences between the skill sets to manage an organization and to build systems. There are a few people on the planet that are versatile enough to flip back and forth between these modes of operation. However, even for these people, the work load gets to a point where there needs to be focus to establish any real progress on any of the tasks.

I understand why a business owner would want to have all of these tasks encapsulated in a single individual. Budgetary constraints, investor pressure to control staffing, the institution of a lean and mean startup culture to name a few.

In some cases the business owners that are looking for these interdisciplinary individuals do not come from a technical background and do not fully understand the focused concentration level required to create a system that scales, is reliable and can be understood by the rank and file technical staff. The last thing you want this person to do is to be spending time managing the day to day operations of your engineering group when they are deeply involved in getting your system designed, built and up and running. Conversely, if an individual is beavering away programming, configuring servers, installing hardware, etc. and not paying attention to day to day engineering organization management the entire development process could come to a screeching stop.

The practical consequences of proceeding along with this model are as follows:

Someone Else Is Managing The Engineering Group - If you are asking a programmer or systems architect to manage your engineering group you will wind up having another person in your organization stepping in and managing the day to day operations. This could be one of the co-founders, product or project manager or an executive staff member.

Your Early Design And Systems Have Issues - We all remember the Friendster debacle. This system could never adjust to the popularity of the service. It fundamentally lacked an architecture or any real supported systems structure. Was the engineering managers asked to do everything resulting in a lack of focus on a reliable sustainable systems architecture?

Staff Churn and Organizational Dysfunction - What a bad way to start a company. You will be facing enough challenges trying to get your business up and running the last thing you need is a bunch of frustrated engineers wanting to quit because nothing is working right and they are being mismanaged.

The stress of a struggling system and a disorganized engineering group stresses out other parts of the organization. This can lead to some serious confrontations between various individuals and groups.

So how do you avoid the downside of a single engineering manager simultaneously executing managerial and technical tasks and still stay within the budget?

Engineering Team Management Oversight - In the early stage of the business or organization establish someone with management skills to oversee the engineering group. This could be someone on the executive team or it could be an outside consultant. Have this individual work with the engineers to staff and organize the group, deal with personnel issues and act as a liaison for the engineering team to make sure their concerns and issues are voiced. Conversely, this individual will communicate management directives to the engineers in way that they can translate into concrete action.

Engineering Process - Establish a development process that is well undertood by all members of the organization. Make sure that process matches up with the business goals of the company. In a start up or small company realize that just about everyone in the organization is part of the development process

Architecture and Platform - Clearly state the business objective of the company and obtain a satisfactory systems architecture plan to achieve the objectives. Get outside advice if necessary and entertain a number of options. Once you establish your platform and architecture they are very hard to change.

Short and Long Term Objectives - You may be in a mad rush to get something up a running. This is understandable just make sure you do not fool yourself into believing that a rushed system is extensible and sustainable. It will most likely have to be replaced or significantly modified to run your business. Do not blame your engineers for getting something up and running quickly and then castigate them later when they tell you the system will have to be changed to accommodate your growth.

Engineering Organization Staff Planning - Be prepared monetarily and organizational for what it takes to run a real company. In the early stage of your company you may have a few programmers and consultants getting you going. This will be short lived if you are moderately successful. Have a good understanding of what it will take to effectively run an engineering group. Anticipate the need for an engineering manager, architect, DBA, programmers, QA, product management and IT support.

Crisis Management - Watch for signs that the engineering group is in a perpetual state of crisis management. If nothing appears to be going right or you appear to be exerting a tremendous amount of time and energy to get tasks completed you are in crisis management. Take the time to determine what organizational or technical issues are causing the problem. Address this issue immediately before you develop a perpetual crisis management culture.

Focus and Prioritization - Of all the tasks and items you want the hands-on engineering manager to perform determine the most important priority for that individual and clear the deck for them. Get the high priority items complete. Do not let the manager become distracted. This is especially important for technical and architectural tasks. Ping ponging back and forth between tasks is exhilarating but very dangerous if you are building a team and a system.

In conclusion, the current investment market places pressure on engineering organizations to consolidate functions and tasks into single individuals. This is understandable and a reality. However, do not fool yourself into believing that managing an engineering organization is not a full time responsibility requiring multidisciplinary skills not often found in a single individual. Understand the implications and compensate for the challenges an organization will face if the engineering managers is expected to be multidimensional. Prepare for the future realizing that eventually the organization has to build an engineering organization to be successful.

The Entrepreneur's Survival Kit For The Current Economy

As an entrepreneur and an adviser to many start up companies and entrepreneurs I have first hand knowledge and experience fund raising, interacting with investors and building new teams in this economy. I have seen many business plans, have spoken to scores of investors, worked closely with new companies and have shepherded aspiring business owners through the early phases of business development. I have learned a few lessons about how entrepreneurs can best position themselves to optimize their time and effort in the current climate and hopefully experience a positive outcome for themselves and their business.

Expectations - There is no secret to the fact that investment in new companies is down. One source estimates that VC's are investing 50% less then they did last year at this time. The climate has also impacted individual and angel investors. Their own portfolios have been diminished and they are not immune to the new "economic conservatism" sweeping the globe.

The first thing entrepreneurs need to do is to adjust their thinking to coincide with the impact of the new economic reality on their proposed business. This may sound obvious yet many aspiring business owners still think that they can float an idea, get funded and become successful using an outdated formula. Sorry, but this is not likely given our current economic environment. This is not to say that you should pack up your tent and give up. On the contrary this may be one of the best times to start a business if you can weather the storm and introduce a new product or service that fits into the dynamics of the new economy.

The key is to set an expectation that raising funds is going to be harder and take longer then it has in the past. Get yourself ready for some creative thinking on how to bootstrap your company and sustain it on a lean budget until you have concrete evidence of customer adoption and sustainable revenue per customer.

What Is Being Funded? - Before you go to far down the road of building a company you should determine what investors are investing in. Before you commit money and time in a venture check to see if your idea fits into a category that investors recognize as an area that has potential for significant upside. I call this "Riding A Wave" and have referred to it in previous blogs. Your idea or business may seem to you as revolutionary with great potential. However, if investors are not interested in your space it may never get funded. You need to position your company in a way that is aligned with current funding trends.

To find out what investors are interested in go to VC web sites and look at the recent investments they have made. This will be found in the portfolio section of the web site. Investors are very concerned about investing in areas that other investors are interested in. The net effect is that the herding investment strategy creates a higher level of investment in a sector which in turn helps to fuel the market for that sector.

There is a delicate balance between investor interest and investment saturation. You want to see investors investing in your sector but not too much investment. If a majority of the investors already have representation in a sector it may be too late for you to participate. This is what I call "The Cresting Wave". Unless you have a unique spin to your business that represents an element that can enhance the initial wave investors will pass on your investment if they already have representation in their portfolio.

If you find that some investors have made investments in your area and others do not have portfolio representation you are in a good place. Just like a surfer get your board waxed and get out there. Timing is everything and in this economy even more so!! You want to catch the investment wave at the precise point that gives you maximum investment opportunity. You can not be too late or too early.

Friends And Family - Traditionally friends and family members have been looked upon as an early source of seed funding for a business. This may not be the case anymore. Your friends and family are also feeling the effects of the economy and may not have the money or the inclination to part with the funds they have. However, they are still a great support group and may be able to contribute in other ways.

Family members may have more time on their hands because they are out of work or working shorter hours. Many of your friends and family will have skill sets that you can use in getting your business off the ground. Instead of asking them for money ask them if they can help with bookkeeping, sales, programming, document preparation, investor led generation and general business advice. They may also have some extra space, computer equipment, phone, fax machines, etc that you can use to setup and run your business.

Your friends and family do want to help you. Asking them to invest their time in something that may help their own careers and broaden their skill sets will be welcome. It also fosters a better relationship. Your are communicating that you value their expertise and skills not just their cash. The long term implications of this will be invaluable.

Stage Your Business And Product Development - Seed round of funding is really hard to find these days. Generally speaking investors are not investing in ideas or very early rounds. This leaves entrepreneurs in a bit of a dilemma. So how do I get my business started with no external initial working capital?

The best way to deal with this situation is to break you product or business down into segments that get you to a point were you can fund a prototype or alpha version of you product without external funding and grow the business recognizing the uncertainty in the investment market.

• The Initial Product or Service -It is highly likely that you will personally have to fund the first iteration of your product or service. The goal for this phase is to create something that demonstrates what it is and what it can do. It does not have to be fancy or pretty but it does need to work.
• Taking On Customers - In the web world this is a bit easier then in some domains. Investors today want to see how consumers react to the product or service. Drive some traffic to your web property and get a hint of the economics of your business and customers reaction to your product. If you do not have a web based product try to get people or companies to try out the product on a trial basis. If it is a capital intensive product identify a potential business partner that will work with you to create a prototype and have them introduce it to their customer base.
• Investment Round - In the first two phases you should have been contacting potential investors making them aware of what you were doing and providing them with progress updates. Be prepared to send them an executive pitch. Your experience in the first two phases will provide you with good hard evidence and facts about the dynamics and potential for your business.
  

Preparing The Investor Pitch - I am a great believer that your first impression matters a great deal in increasing your likelihood of getting funded. It is also the one area that entrepreneurs continue to struggle with. In this day and age if you are lucky to get an investor to look at your business you will only get a minute or two of their time to skim the presentation.

Many of the plans I see are either too long, too complicated or incomplete. To combat this I have gone to the extreme of providing my portfolio company's with an executive pitch template and two year operating plan spreadsheet to help them understand how to think about their business and structure their thoughts. The executive pitch should contain the following:

• What Is It?
• What is Different About It?
• Who Are the Competitors?
• What Other Companies In this Sector Have Been Funded And For How Much?
• How Are You Going To Make Money?
• How Much Money Do You Need?
• Who Are the Team Members?
  
• When Will You Have Your First Deliverable?
• When Will You Be Profitable?
• Where Are You?
  

There are certainly clever ways to present this information that will increase its impact. However, the essential information must be there, be accurate and well formed. The presentation should be brief and to the point. If it is a slide show it should be between 10 and 15 slides. If it is an executive summary keep it around 5 pages.

Pitch Review - Never send a pitch or document to an investor without someone you respect having reviewed the presentation. It would be best to identify a reviewer that has no idea about what you are doing and get their reaction. Adjust and change the pitch based on the feedback. If possible run through the presentation verbally with someone to understand what sections should be presented in what order and to determine the proper cadence for the presentation. Also, have some experts in your field take a look and see how you compare to the competition.

Submitting The Investor Pitch - You should still create and submit an investor pitch to funding sources even if you are in the first two stages of your business development. Investors are great sources of information and feedback. Investors need entrepreneurs and have a keen sense of what is happening in the marketplace, understand technology and will tell you what you need to do to get funded. If you are not an experienced entrepreneur with investor contacts have some one that has good contacts submit your plan for you. Investors are particular about what plans they look at. Having a known entity submit your plan will increase the chance of getting a response to your plan.

• What Are Investors Funding? - Many entrepreneurs have great ideas and products. However, this does not automatically mean that investors will invest. Submitting a plan to various VC's and individual investors will help you to understand what they care about.
  
• How Do Investors Perceive Your Business? - Investors may have a very different perception of your business then you do. It is important to get your company aligned with their thinking or find a way to convince an investor that they might consider thinking about your business in a different way.
• Relationship Building - An entrepreneur should spend time cultivating relationships with investors. Submitting your pitch and engaging an investor in a dialogue is a good way to start the relationship. Their feedback may be a short e-mail response or a sit down meeting and a run through your presentation. Either way getting to know each other is important. You may be on the funding road for the duration of your business life and have to submit multiple plans. Sincere and professional relationships with investors are important. It may make the difference between a go and no go in getting your business funded.

Iteration - Do not back yourself or your business into a corner where you can not iterate on the product or business model. The business environment is changing rapidly especially in the areas of customer monetization and technology adoption. Your business organization and or your technology platform should plan for this and be flexible. The business, product and customers you originally envisage may be very different at various stages of your company. You may have to reinvent your business several time to get funded and to adjust to ever changing consumer preferences.

Globalization - There is no such thing as a local economy anymore. Doing business has changed radically. A company or product that does not have a global offering is going to struggle and miss opportunities that could have made it successful. Study markets outside your comfort zone and understand how you can create a product or service that is attractive to them.

Research - Start up businesses require tremendous energy, time and focus from all of its members to make a business work. Despite the need to get the product and service up and running as soon as possible you always need to be looking around to see who the competitors are or might be, what technology may impact your business, what new investments are being made by investors and changes in consumers preferences. This is especially the case now when everyone is adjusting to the new economic reality. Changes are occurring at a rapid pace and require a company to react quickly these changes.

Do Not Give Up - We are all being tested in our personal and professional lives. Entrepreneurs are especially challenged. However, this is not a reason to give up and not pursue your dreams. In fact, if you can figure out how you can create a business that specifically address the new world order it may be the best time ever to establish a business. The overall business environment will get better. If you can get something going now you may be surprised at how successful you will be a year from now.

In conclusion, the current economic climate requires special tactics and techniques to increase an entrepreneur's chances of success. In many ways lessons learned from launching a business in these times will pay off as the economy improves.

For more advice on how best to succeed in the current economic environment readers may want to review the following previous blog entries:

Riding the Semantic Web Funding Wave
How Do I Establish A Valuation For My Start Up?
The Ten Best Ways To Improve Your Chances Securing Venture Funding
Raising Seed Capital In the Great Recession
How Will Web 3.0 Change Your Life?

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