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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Optimizing The Entrepreneur/Broker Fund Raising Relationship

Entrepreneurs engaged in a fund raising effort have a number of options at their disposal when seeking funding. Entrepreneurs are usually familiar with friends and family, angel investors and venture capitalists as sources of funding. Another way to obtain funding is to engage a broker. Broker/entrepreneur relationships are commonly used to bridge the gap between investors and entrepreneurs. Broker relationships come in many forms creating a need to fully understand the relationship to maximize the potential for fund raising and to decrease the possibility of misunderstanding between the entrepreneur and the broker.

The following are important pieces of information that should be known before a broker is contracted.

1. The broker's operational mode.
2. The range of services provided by the broker.
3. The compensation model of the broker.
4. The tasks expected of the entrepreneur in the broker/entrepreneur relationship.
5. The term of the contract.
6. How the entrepreneur funds will be used (if funds are being transferred).
7. References for the broker.
8. Funding sources to be contacted by the broker.

What Does A Broker Do? Brokers can provide a number of services including document preparation, consultation, deal negotiations and raising capital. The range of services provided by the broker influences the compensation that the broker receives. It also influences what is expected of the entrepreneur during the funding process. A funding broker acts in a similar manner to a mortgage broker. The funding broker usually (not always) is not the funding source. They make a connection between the entrepreneur and the funding source. There are exceptions to this rule. Brokers may decide to invest their own funds in a venture. However, this usually occurs after the broker has negotiated a relationship with the funding source. It is rare for a broker to take a primary or first mover position in a funding effort.

When Should An Entrepreneur Use A Broker? - There are a number of reasons why a business owner may use a broker.

1. Identify Funding Sources - Newly minted entrepreneurs frequently do not have contacts in the investment community. It certainly is possible to contact funding sources directly and is advisable even if you do use a broker. However, a broker will usually have long standing relationships with investors. Using a broker can give you a quick introduction to a range of investors that you would normally not encounter as a free lance entrepreneur.
2. Document Preparation - Investors frequently want to see a number of documents explaining the business in a way that allows them to evaluate the business from their vantage point. These documents can range from a reasonably brief overview summary (PowerPoint elevator pitch) to a complex business plan providing multiyear sales projections and operating budgets. If an entrepreneur is uncomfortable preparing these documents they may call upon the broker to create these documents.
3. Negotiations and Deal Closing - Raising capital is not much different from negotiating any large commitment financial transaction. Something is being exchanged for a significant amount of money. If you are unfamiliar with negotiating investment deals a broker can be a handy resource to help sort out what is best for both parties.

Sources of Capital - Brokers tap angel investors, private investors, VC's and institutional investors as sources of funding for their entrepreneur clients. Each broker will have their own collection of investors. The investors they work with will be influences by the "stage" of the company they are seeking investment for. For instance, if a company is a startup with no real revenue and still in the idea or development phase the broker is most likely to seek funding from individual or angel investors. If a company already has a customer base and a revenue history the broker may seek funding from traditional venture capitalists.

From the entrepreneur's perspective it is important to understand what funding sources are going to be tapped and why. The funding sources will have an influence on how long it will take to close a round and the viability of the funding source. The funding sources will also influence the likelihood of the business getting funding. For instance, if a broker is contacting traditional venture capital sources for a very early stage company then it is unlikely that the funding effort will be successful. The broker may not be willing to reveal the details of the funding source out of concern of revealing the funding source to another broker. However, they should be able to tell you that they are seeking funding from an individual, angel, VC or institutional investors.

Can An Entrepreneur Go Directly To Investors During The Broker Relationship? Unless the broker relationship specifically states otherwise yes you can. It is advised that you do not engage in a broker relationship that prohibits this activity. Brokers have a stable of investors that they contact. The stable has a finite amount of investors in it. An entrepreneur needs to cast a wide net out into the investor pool do not limit you investor options to just one section of the pool.
If you do decide to seek funding outside of the broker relationship inform the broker of what you are doing and who you are contacting to make sure there is not overlap of effort. An independent effort to raise funding will also have an ancillary benefit of increasing the fund raising experience level for the entrepreneur. It will also give them an appreciation for what the broker is doing for them.

How Are Brokers Compensated? - Brokers can be compensated in a number of different ways. They may receive cash, stock, stock options or a combination of stock and cash for their services. When negotiating a contract with a broker make sure you understand the compensation structure, when payment is required and specifically what the broker is being compensated for. If the broker is performing a number of functions including preparation of the executive pitch, creation of a business plan, formulation or financial projections, introduction to investors, closing funding, etc. make sure you associate compensation with each of these tasks. This makes it easier to establish the relationship of accountability and compensation.

What Is The Entrepreneur Responsible For? In many ways the entrepreneur is responsible for making the broker successful in closing funding for the entrepreneur. The fact that an entrepreneur is using a broker to raise funds does not exonerate the entrepreneur from assisting in the fund raising process. The entrepreneur has to make their business viable and marketable.

1. Business Plan - Even if the broker is creating the documentation for the business plan the business owner has to create the content for the plan. This plan may be massaged and reformatted for an investor by the broker. The broker may provide input to the plan. However, the business owner needs to understand the business plan and drive the business plan development process.
2. Team - A team should be assembled that demonstrates that the company cam execute on the plan when funds are raised.
3. Executive Summary - Perhaps the most important document in the fund raising process is the executive summary or elevator pitch. It is the first impression that a potential investor will get of a company. The details for this pitch will be provided by the business owner. The broker my change the format and ask for additional information.
   
4. Pitching The Company - The broker will introduce the business owner to investors and describe the business to investors. However, the investors will want to meet the business owner and the team and they will want the business owner to pitch the company. The business owner will sell the investors on the company the broker's responsibility is to establish the contact.
5. Self Assessment - The entrepreneur should conduct a self assessment as to their preparedness for the funding road. Many entrepreneurs under estimate the commitment associated with starting a business and raising funding. The funding road can long, frustrating and expensive. Only a very small percentage of companies seeking funding receive it. In many cases the initial funding is lower then expected. Ideas are seldom funded. A demonstration of the viability of the business is required before an investor will engage. The entrepreneur will most likely have to fund the first stage of funding. Make sure you are ready for the show before you jump into the pool!!

Managing The Broker Relationship - Managing the relationship with a broker is key to the success of the funding effort. In many ways managing the broker relationship is no different than managing direct funding sources. However, there are some important difference.

1. Legal Advice -It is suggested that an entrepreneur engage legal counsel to review a broker contract. Carve out what each party is responsible for and when control actually passes over to the investor.
2. References - The broker should be willing to provide the client with references. This should include entrepreneurs that have used the broker service and possibly a funding source that has worked with the broker.
3. Time Lines - Establish a start and finish time for the relationship. The funding road can be long with no guarantees that the broker can claose funding. Give the broker a period of time to close. If it does not work out move on to another source or extend the contract with a new set of objectives.
4. Exclusivity - Is is advised that a relationship with a broker be non-exclusive. An entrepreneur should be continuously looking for funding from a number of different sources.
5. Clarity of Tasks - the broker my perform many tasks for the entrepreneur. Make sure you are both clear what these tasks are and what the entrepreneur and broker are responsible for.
6. Compensation - Put a price tag on each task the broker is going to perform and what constitutes a completed task and acknowledged payment.
7. Ending The Relationship - There should be a term to the contract and a clarification of what rights the entrepreneur has to the materials created and relationships established during the funding process after the contract is terminated.
   

In conclusion, the broker relationship can be a useful option for an entrepreneur during the fund raising process. Broker relationships come in many forms requiring a clear understanding of the responsibilities and compensation associated with broker executed tasks. Clarity of responsibility and compensation reduces the likelihood of misunderstandings.

The entrepreneur is in control of their destiny and is the party responsible for getting the business funded. A broker is a "facilitator" and will only be as successful as the entrepreneur and business warrants.

The 2009 Get Funded Challenge!!!

Get your company funded in 2009! Show investors that you are ready for the business challenges facing all businesses in the coming months. Does your team have the right stuff?

There is no doubt that getting funding in 2009 is going to be more difficult than in previous years. The VC's have decreased their investment outlook and individual investors are tightening their belts. This environment increases the competition for funding. Entrepreneurs need to work harder to get their companies funded.

To assist in helping aspiring startup companies to get funding in 2009 I am running a challenge through the month of February. The objectives of this challenge are as follows:

1.) Conduct A Company Self Assessment - Is your company ready for the funding expedition? There are a number of items that are critical for success in getting funding. The challenge will help you to determine if you are ready to go or if more work is required before you go out into the market.

2.) Organization - The challenge will force you to think objectively about how best to structure your company and pitch to improve your chances of getting funding. The discipline of organizing your information and asking yourself key questions well be good preparation for the inevitable investor pitch.

3.) Presentation - Appearance, articulation, command of the facts and the ability to captivate an audience matter. You may have the best idea and company imaginable but without an excellent presentation it could easily be overlooked or misunderstood.

4.) Exposure - My blog receives traffic from 47 countries. This traffic includes many investors looking to fund the next big opportunity and entrepreneurs looking for funds. When I publish the results of the competition investors will see your company and will reach out to you if they are interested.

All plans must be submitted to me by February 28. I will post the top plans on my blog on March 15^th.

I will select no less than 1 and no more than 3 companies.

All plan information will be confidential . If you want to be covered by an Advisor and Confidentiality Agreement I have posted a web version for your review.

What do I need from you? Please read my previous blog "The 10 Best Ways To Improve Your Chances Of Securing Venture Funding" to understand what it really takes to get funded. Translate those requirements into the following items.

1.) A PowerPoint presentation of no more then 10 slides that demonstrates your ability to concisely and quickly convince investors that your company can be a winner.

2.) Link to your company web site, prototype, product alpa/beta version, etc.

3.) Main contact and e-mail address.

4.) Details about your business including the following items.

a.) Company name and business organization. Is it a corporation, LC, LTD, etc?

b.) Age of the company.

c.) The country/region/state/province where your company is domiciled.

d.) What round of funding is this? Seed, A, B, etc. How much institutional or angel money has been invested in the business to date?

e.) Leadership team member details.

f.) A description of your product or service.

g.) Target customer profile.

h.) Competitors and where you line-up in relation to the competition.

i.) How much money are you asking for and how are you going to use the money.

j.) When will you be profitable?

k.) A two year operating budget that includes marketing, development, equipment, personnel and revenue projections. Please provide this in spreadsheet format.

l..) What is the cost of acquiring a customer and what is the lifetime value of a customer.

m.) What wave are you riding?

n.) What waves have you created?

o.) What makes your company different?

p.) If you have been out raising money what are investors telling you?

Please submit this information and the Advisor Confidentiality Agreements to my email address at kflood6@gmail.com.

I will review as many plans as possible during the month. I may have questions which will require your contact details. Please limit all your questions to essentials and submit them to my e-mail address only.

Good Luck!!!

Raising Seed Capital In The "Great" Recession

I have met many entrepreneurs looking to raise an initial round of funding during these challenging economic times. They are looking for an initial round of funding to get their companies going, build product, create an initial launch plan, etc. Based on their feedback and my experience working with investors I am not so sure that they are looking in the right places to find seed capital.

In my previous blog I outlines the 09 outlook for some of the high profile VC's in the Bay Area. Their commentary plus some supporting advice from my own portfolio of VC's indicate that the traditional VC's are not overwhelmingly interested in investing in seed rounds in 09. This is not to say that it is an absolute no for this round. However, they would prefer investing in companies with some "traction". Traction is defined as having a product, a web site with traffic and even some form of revenue to validate the model.

A seed round should not be confused with an A round of funding. The practical and semantic differences between these two categories are subtle and important. A traditional VC considers an A round to be the step beyond the seed round. So when you are approaching a VC you should get some clarity on what their funding strategy constraints are and what they mean by the A round of funding.

Seed round funding is also defined in terms for the amount of funding. Seed rounds are usually below 2 million and can be as low as a 1/4 million.

So where can you find sources of capital for a seed round?

There are institutions and organizations that focus on early seed round funding. The following is a list of these sources. This list is not a personal endorsement of the sources. I have used some of them and others I have not.

Tech Crunch - This is the online group that provides news and information on all kinds of technology and business activity. They run a competition that leads to a top 50 list of companies that they think will be winners. This is a great way to get your company visibility. It is not a direct funding source but can lead to visibility that then gets a seed round investor interested.

YCombinator: Partners - This group actually contradicts my previous statement about minimum investment. They provide funding of between 10 and 20K and incubate your company in their environment. This is a good way to determine if you really have something that is worthy of a seed round. I also suspect that they have connections with seed and A round investors.

Angelsoft - This is an online service that has you enter an application/business plan for review by investors. They have a pool of investors that look at your plan and indicate if they are interested. If they are interested it is great because you can start a dialogue and off you go. If not it is difficult to find out why your plan has not been well received.

National Angel Investor Forum - This organization solicits a brief overview of your business online and then arranges for a real person to contact you if they are interested. If you pass the initial screen their committee will decide if an investment is appropriate.

First Round Capital - This is a traditional VC outfit that focuses exclusively on seed round funding. They have a traditional partnership and are a well established fund.

Maples Investment - Maples is a fund that is very close to a traditional VC fund with the exception that it does not fit the traditional partner model. Mike Maples plays a big roll in determining who gets the money.

Founder Contact Group - There is a fairly well developed network of organizations that will help you raise funding for a seed round. Founder Contact Group is one. These groups are good if you need help in reaching investors and or need some help in positioning your venture and developing a pitch.

There are high net worth individuals that are also a good source of seed funding. However, they very rarely advertise their services. Some notable Silicon Valley personalities that have made serious money on their companies or on investments come to mind. Out of respect for them I will not mention their names. You either need to be "connected" or be referred to get into this circle. There are brokers that can help you locate these individuals. The brokers themselves will charge some finders fee to get an audience for your plan.

Good luck in getting your companies funded. Keep me informed of your progress.