2010 Entrepreneurship And the Realities Of Self-Funding

Entrepreneurs enter the business world with many preconceptions. My previous blog on the "Value Of An Idea" and the subsequent feedback reinforced the fact that entrepreneurs hold a diverse set of opinions about the true nature of the business environment as it relates to ideas, valuation and funding. One of the most debated topics for new ventures in the current economic climate is sources of funding for early stage companies. The climate has made it exceedingly difficult to find investment capital forcing entrepreneurs to be creative in the financing of their businesses.

The necessity to self-fund a business has become almost mandatory for startup ventures. The current economic climate exacerbates the financing challenge. However, even in relatively good economic conditions an entrepreneur will most likely have to self fund the early stage of business formation.

I have started or participated in the formation of many businesses and there has never been a time when the early stage of the business did not require some level of self funding. This is an important point because many startups believe that the current economic environment is unique in its stingy attitude towards funding early stage companies. In my experience this is not necessarily the case. It is a matter of how you define "early stage". The current economic climate is stretching the definition of what early stage means resulting in financiers expecting far more product and business development before they express interest in putting money into a business.

So how should an entrepreneur approach the early funding of a company? How does the current economy make this period of business development different than in years past?

1.) There Are No White Knights - Do not approach a business assuming that a white knight or bank is going to invest until substantial progress has been made with the business. The current economy has made this more apparent.

2.) Friends And Family - If the current economy has significantly changed one aspect of fund raising it has been friends and family as a source of early stage working capital. The economy has hit individuals more so then many institutional investors resulting in this sector of funding being an unlikely place to find funding.

3.) How Much Money Do You Need? - Do not underestimate the investment required to start a business. Make a calculated assessment on how much money you are going to need/invest. A common mistake is making an investment too small to make enough progress before external funding or profitability. Current economic conditions require a business to show much more progress than in the past before financing can be secured.

4.) Business Planning - Create a business plan even if you are self funded. The plan will help guide the business and act as a benchmark to determine if the business is viable at certain points in the business life cycle. Certainly reality very rarely tracks a plan. However, the plan is a good guide for how far you veer from your original plan and what additional funding will be required to reach you business goals.

5.) Know Your Limits - Many enthusiastic entrepreneurs will continue to invest their own funds beyond the initial planned investment. This is dangerous and potentially damaging to your family and your personal finances. Make a decision on how much you are going to invest and hold to that decision. Any investment beyond the initial plan should be thoroughly evaluated. If an additional investment is made there should be clear goals and objective associated with that investment.

6.) Early Investor Commitment - Although an institutional investor will very rarely invest in the early stage of a company they should be consulted prior to the start of a business to determine investor interest. There is no reason to invest your own personal funds in a business if there is no institutional interest in your idea or business. An important business milestone is an investor's expressed interest in investing in a business based on a set criteria. Investors are great sources of information about the business categories that investors are interested in. Your idea and company may or may not fit into one of these categories. If it does not you should reconsider and attempt to reposition the business in such a way that it fits the investor profile.

7.) Spread Financial Risk - Form a team of individuals to start a business. Do not go it alone. This approach has many benefits but for the purpose of this subject it spreads financial risk. The disbursement of risk reduces the pressure on you to carry the company on the back of just your wallet and makes for a much easier sell to your family and supporters.

8.) Get Family Buy In - Any investment of personal funds should be vetted with family members. Your decision will have a big impact on your family requiring buy in before moving forward.

9.) Live To Fight Another Day - New business ventures are tough sledding and the majority of them do not reach their intended goal. Set specific milestones that allow you to determine if the business is on the road to success. If it is not have the courage to move on. If the business does not work out you will certainly learn useful lessons that will come in handy when starting and managing future ventures. Very rarely does an entrepreneur come out of a business venture without some positive life and business experiences.

The current economic climate makes it difficult to obtain early stage funding. Some self funding is going to be required to get a business to a stage where an external investor will participate.

The funding environment for 2010 will improve but will continue to be challenging. There are key business areas that will attract "early" stage funding. Make sure you know what those are and position yourself to take advantage of the opportunity.

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Commercializing Emerging Technology

Recently, I have been working with a number of entrepreneurs interested in commercializing an emerging technology. Emerging to me means something that has been identified during research that has the potential for commercial application.

My advice to this group has been to encourage them and at the same time make sure that they are careful about the expectations associated with such an endeavor. I have first hand experience taking a research project and turning it into a product/service. The time to market, technical challenges and distance between the promise of the research and the actual practical commercial application was more then expected.

There are a number of steps that need to occur before a piece of research can reach its full commercial potential.

1.) Practical Research Application - In the lab the research needs to be applied to an actual business problem. This could be a small example of a larger problem or a piece of a larger business challenge. The goal of this step is to determine if a technology transfer is possible. Frequently, researchers work with focused canonical problems to prove a theory. This is not enough for moving things to the stage of technology transfer. Something more relevant to a day to day business problem is required.

2.) Product/Service - Can the research lead to a product or service that can be leveraged over a large audience? Even though the research can solve a business problem does not mean it has real commercial potential. A product that solves one company's problem does not qualify it for the commercial marketplace.

A product has to be easy to use and understood by non research personnel. If the product or service requires the expertise of a small group of highly trained individuals to use or implement then the research needs more incubation. Spend time creating tools that will allow the product to be used outside the lab. Think of ways the product could be simplified to fit into a known commercial environment. Scale back the product to solve a simpler problem. The simpler problem may have a wider commercial impact.

3.) Business Formation - A product or service requires a business to be built around it. This is an area that engineers and scientists find the most challenging. Even if you have an identified service or product does not mean you have a business. A business involves marketing, sales, support, development, business development, funding, etc. The promise of many a research and technology project has not come to be because of the lack or business acumen of the early founders. Bring real business people into the mix early in the process to help you understand and launch the business.

This process can take time. Much more time then you expect. Plan for this personally and financially. At each stage in the process there are risks. Geoffrey Moore's book "Crossing The Chasm" remains relevant today. I suggest that any aspiring entrepreneur that is contemplating moving a research based project into the commercial realm read this book. The book will help you understand where and when the biggest risks will present themselves.

To shorten the time to market and to decrease business risk I recommend that you pick an interesting piece of research that has already passed through the initial stages of technology transfer. The rewards for being first to market with a product or service are great if you can quickly get a meaningful pool of customers to adopt the product or service.

Good Luck!!!

Raising Seed Capital In A Recession

Yes, you can raise capital in this economy. Individuals and institutions are investing. Yes, the environment has created some unique challenges and advantages.

So what is different about the current state of the affairs?

1.) The VC's may not be your first stop on your way to raising money. Are the VC's still investing? Yes they are but they are also preoccupied with managing there current portfolio of companies through these tough times. They are a bit more conservative with new investments and are going to have a wait and see tendency. There are certainly exceptions. If you are in one of those domains where even a turkey can fly then perhaps your first stop is a VC. VC's are herding creatures and they feel most comfortable in areas where a number of other VC's are also invested. This is perceived as the perfect storm scenario where enough intelligent and savvy investors have decided that a certain domain is most likely to capture the imagination and pocketbooks of a very large number of consumers. The iPhone application space is a classic example. This could be a big market that can support a number of successful companies.

2.) If your idea is not in the perfect storm sweet spot then the individual investor route is a better approach. High net worth individuals are in an interesting position right now. Where are you going to invest your money? Certainly the stock market appears very risky and volatile. High yielding bonds maybe. However, an investor has to have confidence that the principal will be still there at the end of the term. Also, you might get a 10% return. Is that really an investment? Where might you get a 100% return or better on your investment? A startup company might be a very good alternative investment.

Startups are transparent allowing an investor to really understand what is going on with the business. An individual invested in a small startup really gets to know the people, processes and economics of the business.

Many high net worth individuals are or were entrepreneurs and they got rich being entrepreneurs. It is their money and they are usually not beholden to an investment group. They can make decisions about their money. They are also usually very good at picking winners because they know what a winner looks and feels like. They can also move faster then a VC or an investment group. They can bring expertise and advice to your team. They usually have relevant business expertise that you might be able to take advantage of.

Overall, I am heavily weighted in the individual investor camp for raising funds in this environment. It appears to be a good way to get a seed round and a good start in a relatively short period of time. Certainly VC's should not be discounted given the right circumstances.

No matter what route you pursue to raise capital there are certain ways to have a higher likelihood of being successful at securing funding. Also finding individual investors or open minded VC's is a skill in an of itself. This is a subject for a future blog entry.

Stay Tuned and Good Luck!!!