For those of you who have been following Jason Duncan as he moves toward the opening of his coffee shop in Bozeman, MT, you know that he has faced a major bump in the road with what he thought was a finalized lease.
As you can see from his latest post, he is bouncing back and moving ahead. I had the pleasure of having lunch with Jason (and his proud parents) yesterday here in Nashville. Jason is undeterred, and is of the mindset that this may be a blessing in disguise.
What a great example of an entrepreneur who has the courage of his convictions to achieve his vision.
If It Ain’t Broke (any more, that is)…..
We finally got the politics out of the SBA lending about a year ago. But, if Senator Kerry has his way, we will take a very large step backwards to the era of government meddling in this program.
Did efforts to get politics out of the appropriations of SBA lending prove to be a failure? Not according to the facts. From Inc.com:
SBA spokesman Mike Stamler, pointing to the record levels of (7)a loans taken out in the last two years, said that such changes aren’t needed. In fiscal year 2005, the program gave out $14 billion in 88,912 loans. In the previous year, the SBA gave out less than $12 billion in 73,392 loans. “This year, without facing limitations that the appropriations would place in the program, the fees in place were modest, the same as they were three, four, five years ago, and we think the program should continue to operate as it is,” Stamler said.
The socialist-leaning element in congress just doesn’t like or trust free markets. They can’t imagine that the private sector can manage the process better than government, even when presented with facts to the contrary.
Way To Go Joe!
Business Week has an article highlighting the explosion of entrepreneurship education occurring at universities across the country. They report what I am experiencing at my own university; entrepreneurs are all over campus and they are looking for help.
One of the young entrepreneurs they highlight is a young man I had the pleasure to work with when I taught at the University of St. Thomas. His name is Joe Keeley and he founded College Nannies when he was in our program. (You can read more about his story here — make sure to click on the “Slide Show >> Entrepreneurs: Cream of the Young Crop” link). He worked on his idea and then his business in the classes he took in our program.
This is the way it works today. College students view entrepreneurship as their career path. Many of you have been following one of my more recent graduates from here at Belmont, Jason Duncan, as he blogs about his start-up experiences.
There is Life Beyond Venture Capital
I often think that venture capitalists must have the best public relations machine in the world.
Only a tiny fraction of a percent of entrepreneurial ventures ever get or need venture capital financing, and yet the two most common phrases that come out of most aspiring entrepreneurs mouths are “business plan” and “venture capital.” It is as if the venture capitalists have done such a good job of branding that their product name has become common speech for financing a business (like Kleenex for tissues and Xerox for copying).
It seems, however, that the very place that is synonymous with venture capital is moving on and taking alternative roads to financing their start-ups. StartupJournal reports on the growing trend in Silicon Valley to shun venture capital.
It’s a scenario playing out all over Silicon Valley — and one with potentially big ramifications for venture capitalists. A new generation of Internet companies — many offering online photo and blogging services or downloadable software for businesses — have been built for a fraction of the cost just a few years ago. That’s mainly due to the increasing popularity of cheap “open source” software and programming tools, as well as dramatic cost reductions in computer memory, storage and Internet bandwidth.
In the past, the first step that Silicon Valley entrepreneurs would take was to raise millions in venture capital. Then they’d try to figure out how to spend it all.
The new trend is to determine can you buy topiramate over the counter what they need to do to get their product to market and then forecast how much money they actually need to execute their plans. They have discovered the beauty of self-financing and bootstrapping.
They have learned that just because their business concept has a potential valuation that could make raising $25 million in venture capital relatively easy, it does not mean that they should actually take that money. Why give up equity and control when for a $100,000 personal investment you can launch the business and reap all of the benefits for yourself?
Raising too much money can be much worse than not raising enough money. I know those of you struggling to make payroll think I am nuts for saying this, but it is true. Too much money in a new venture leads to poor decisions on unnecessary overhead, wasteful spending on non-productive assets like opulent offices and furnishings, over staffing, inflated salaries, and just plain mischief. At some point the start-up money runs out and you have created a business model that cannot sustain its lavish expenses.
I think the Silicon Valley entrepreneurs have finally gotten it right. Build a sound business model, minimize your need for external funding, and build a business with real and sustainable value.
I think it is time for us to hire a p.r. firm to help make bootstrapping the new synonym for financing rather than venture capital.
To Partner, or Not to Partner?
A practicing physician who is in the early stages of planning the start-up of a new venture serving the medical field recently asked me about one of the most important issues an entrepreneur can face. While he has medical expertise, he believes that he will need some help from someone with more business and start-up expertise. How and where does he go about finding someone to team up with?
The specific questions you need to address in this type of situation involve the “Why?”, “What?”, “How?”, and “Who?” issues for building your team.
First the “Why?” question.
Self-assessment is a critical part of pre-venture planning. The entrepreneur needs to know what she is good at and what her weaknesses are. This includes skills, knowledge and experience, but also things like temperament. My last set of start-up ventures worked well because my partners and I balanced each other’s personalities. One of us was the aggressor; one was the worrier; one was the analyst. We always kept each other in check. This helped us to generally be fairly prudent in our decision making. Also work habits, personal goals and so forth are all important factors to consider. Here are a few questions to think about in self-assessment beyond those dealing with technical skills:
– What are the major reasons you want to start a business?
– How many hours are you willing and able to put into your new venture?
– How would you describe your tolerance for uncertainty and risk?
– Do you easily trust other people working with you on a common activity? Why or why not?
– How much financial risk are you willing to take with your new venture (personal assets, personal debt, etc.)?
– What are the non-financial risks for you in starting a new business?
– How do you react to failure?
– How do you react in times of personal stress? How do you deal with stress in your life?
– How much income do you need with your current lifestyle?
– How long could you survive without a paycheck?
– How much money do you have available to start your business?
– Which of your personal assets would you be willing to borrow against, or sell, to start your business?
– Whose support (non-financial) is important for you to have before starting your business (family, spouse, etc.)?
Second is the “What?” question.
During the pre-venture stage of your business, one of the first challenges is to assess the specific needs of your new venture. Is there specific business expertise that you need in your particular start-up? If you will need access to a significant amount of capital, that is millions of dollars, then you will want to have someone on your team who has experience in securing such funding. I often see entrepreneurs suffer from either over kill in hiring or from under estimating the skill set needed on the team. If the venture is only going to need limited funding, say $200,000, it would be over kill to bring in a business person whose experience is in moving venture through multiple rounds of venture capital financing. On the other hand if you do need multiple rounds of VC money it is best to have that skill set somewhere in your team. Before you start adding people to your start-up, have a clear enough vision for the business to begin to know what you really need in terms of help. In fact, I might even go so far as having at least a rough idea of your business plan in place.
Next is the “How?” question.
Just because you need help on your team does not mean the person needs to be a partner. You can often hire high level talent and offer them a limited equity stake in the deal that does not make them your equal in the venture. Business partnerships are usually more complex than marriage and more difficult to get out of if things go bad. Never be casual about going into a partnership unless you think that good marriage preparation is meeting your new bride on Friday night and flying the next day to Vegas to get married. If you decide that adding a business partner is the right way to go, make sure you find someone through your network of friends and associates and take a great deal of time to get to know the person. This is not just a casual joint investment.
This then leads us to the “Who?” question.
Here are some issues you need to explore before “tying the knot”:
– Do your share the same vision for the business?
– Do you share the same aspirations for the business? Does one want to build an empire while the other create a simple lifestyle kind of business?
– What are your work habits and work ethic? Are they compatible enough to keep the partnership feeling fair to all the partners?
– How much time off to you plan to take each day, each week, each year?
– How much money will you put into the business?
– How much do you expect to get out of it?
– Who will be the President of the company? What roles will the other friends play?
– How will decisions be made?
– What is everyone’s credit rating? Can all help to guarantee a loan, if necessary?
– What if one of you gets married and the new spouse gets a job offer in another city? Would you move away?
– What are your core values and how do you want to see them play out day-to-day in the business?
– How will employees, customers, suppliers, etc. all be treated?
– What will you consider to be real success in this business?
There are probably countless other questions to talk about, but this is a start. Talk. Talk some more. Listen to your gut if you don’t like the answers you hear from potential partners. As I have said before, go into a partnership with your eyes wide open rather than with stars in your eyes.
Carnival of the Capitalists
Triple Pundit is our host for COTC this week.
Spring Time in the Music Business
There was a lot of hand wringing when the music industry consolidated, yet again, a few years ago to create three giant companies that seemed poised to dominate the market. It was 2003 and I had just moved to Nashville. Many of my friends wondered what an entrepreneurship professor was doing moving to a city dominated by such a mature industry and taking a job at a university that has one of the largest music business programs in the country.
Well, beneath the feet of the three dancing dinosaurs that dominate the current industry structure there is a whole new structure beginning to take form. The music industry has long been made up of lots of small businesses and independent contractors, as seen in this article from StartupJournal.
What has changed is that this grass roots level of music entrepreneurship is beginning to become more than self-employed artists (see the Future of Music for a discussion of these changes). Technology and consumer preferences are facilitating a restructuring of the music industry that will lead to an unprecedented shift of power. Both content and distribution have been firmly in the hands of the industry giants for the past few decades. However, the changes that are taking place in how music is made and how it is gotten into the ears of its customers are beginning to loosen the “big three’s” grip.
It would be a mistake to assume that we are simply taking a small, controlled step forward to the “next thing,” as when we moved from the 45 to albums and from albums to CDs, and that the industry giants will somehow grab control of digital distribution. Why? It is because this step in the evolution of the music industry is not being created by the market leaders as seen with the last few changes. This change is outside of their established system. It is revolution, not evolution.
I think that the iPod does not represent the “next thing” in the industry, as many are assuming, but really just one of several catalysts that will help propel entertainment into several years of entrepreneurial innovations and breakthroughs just as we witnessed in the information/computing industry in the 1980s and 1990s.
The music and entertainment industry is entering a period of new beginnings. This is spring time in the music business.
Selling Lessons for Techies
“If we build it they will come.”
Not likely.
“This thing will sell itself!”
Don’t count on it.
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To be successful, the start-up of a business should involve attention to the product/service and how to connect with customers. For some entrepreneurs selling comes easy; it even seems to come naturally. But, to others, the thought of hawking their goods is a terrifying prospect. They avoid selling by continually tinkering with their product or service.
As Forbes.com points out, this can be particularly true with techies and consultants. They offer some basic tips on successful selling that can help even the most introverted entrepreneur:
Explicitly Define The Value You Bring
The critical first step in defining the value you bring is to be able to clearly and concisely define what you do. I get worried when I ask a techie entrepreneur to tell me about their business and thirty minutes later I have to politely ask them to stop. Every entrepreneur needs to be able to describe what they do, no matter how complex the concept, in twenty-five words or less. This is the “elevator pitch” or “cocktail party answer” to the question, “Tell me about your business.” Very often you have just a few moments to communicate what you do and what value it brings before potential customers or investors make up their minds about you and what you can do for them. There will be time for details later. A first impression must be made and it must deal with value.
Manage Expectations
Don’t over-sell what you can offer or set unrealistic timelines. While it may make the initial sale, the goal is to develop a loyal customer base. If you set expectations that you cannot deliver, customers will not return. As the old adage goes, “The goal of good marketing is not only to get ’em in the front door, but to close the back door so they don’t get away.”
Price it Right
Many techies and consultants can be elusive about their pricing. Keep it as simple and clear as possible. Don’t do to your clients what so many attorneys do to theirs. Lawyers are often vague and even defensive when asked about what they will charge for something. Then when the bill arrives, the client can be shocked to see all of the charges on their invoice. The blog site the [non]billable hour offers some great insight into billing professional services fairly and effectively.
But Will He Have Pimples?
Where there is customer pain there is opportunity.
A former student of mine from Minne-so-cold, Natalie, sent along a profile from seattlepi.com of a business that may deal with not only the pain of the customer, but a pain experienced by retailers who try to serve these customers. The common source of these pains? Teenage retail employees.
Experticity, which recently landed $1.2 million in angel financing, is testing a technology for in-store computer kiosks that would allow shoppers to touch a flat-panel screen and then get questions answered from a customer service agent — one who may be located thousands of miles away. With a broadband connection transmitting data and voice, the customer service agent could advise a shopper on the benefits of certain products, pull up pricing information on eBay or show diagrams of how products work. The system also could be designed to allow shoppers to speak with agents in Spanish, Russian or other languages.
One of the questions I always ask those who are considering starting many types of retail operations is this: “Do you want your financial future left in the hands of a bunch of high school kids?!”
While this may solve part of that problem, the Luddite in me cringes at the thought of another computer to interact with. You see, I still get yelled at by the woman’s voice in the computerized self check-out for messing something up every time I try to buy a few groceries at Publix …..
Determining Business Value
What does a buyer really “buy” when they buy your business? Is it your assets? Your reputation? Your team? Your customer base? The answer to all of these is yes, and no. The only reason any of these have value is if they will continue to create cash flow profits for the years to come for the new owner. After all, what good are a building, machines, or customers if they do not generate profits?
As we know, accountants have come up with about 17 different measures of profits (another full employment ploy on their part, no doubt). The one that matters here is EBITDA (Earnings Before Interest Taxes Depreciation and Amortization). That is the best measure of cash profits of a going concern for most businesses. Using EBITDA makes comparing businesses possible as it controls for financing, corporate form and accounting practices related to assets which all can vary.
So what does a buyer look do with EBITDA? In the simplest sense they use a multiple of EBITDA to give the business a value. The higher the multiple, the stronger they expect earnings to be going into the future. In most cases, the multiple they use on EBITDA ranges from 3 – 8. Now that is a huge swing in possible values. A company with EBITDA of $1 million could be worth anywhere between $3 million and $8 million!
The multiple varies based on any number of factors. The Christman Group LLC (a firm that specializes in exit planning for entrepreneurs) offers their top ten factors that have an impact on the size of multiple you can expect when your sell your business:
Number 10: Industry Outlook
If the outlook for the industry is bright, the price goes up. Buyers look hard at the outlook for a company’s gross margins, future growth projections, international economic factors, etc.
Number 9: Depth of Management and of the Sales Team
If an owner wears all of the hats, including generating most of the sales, the price will go down. A strong and experienced management team to operate the business is key value driver.
Number 8: Customer Base
If a company has limited customer concentration with no single customer representing more that 5-10% of revenues the price goes up. If the customer base is made up of “blue chip” companies, the price goes up too.
Number 7: A Good Story to Tell
Telling a company’s story is critical in helping the buyer recognize the full value of a business. An extensive confidential offering memorandum that describes the business operation, the marketing and sales programs, its organizational structure, its facilities and equipment, its financial performance, and provides a financial analysis including a believable 5 year financial forecast.
Number 6: Stage of Industry Consolidation
If a company’s industry is experiencing consolidating with the big companies getting bigger through acquisition, prices for smaller companies will rise.
Number 5: Company Track Record
If a company can show a track record of consistently growing profits and sales, buyers will pay more.
Number 4: Type of Business
A manufacturing company with a proprietary product will sell for more than a job-shop manufacturer. A distributor that adds value by offering installation, repair, and/or engineering/design will sell for more money than a non-value-added distributor. A service company with a special expertise will sell for more than a similar service company without this expertise.
Number 3: Revenue Size
The larger a company’s revenues, generally the higher the price. A business with $25 million of annual sales will sell for more than a company with $5 million in sales.
Number 2: Market Position
A company that dominates its market or has a unique niche in the market will sell for a premium over other companies that do not dominate their markets.
Number 1: Having Multiple Buyers
When there are multiple buyers bidding on a business, the price of the business will exceed the price paid for a business that is sold without competitive bids.