Monthly Archives: February 2016

All About Investors Business Tips

Unless you plan to fund your new business from your own bankroll, you most likely will need an investor at some point along the way.

Regardless of how great your business is, if you can’t get someone to invest some money to launch it or help it grow, your venture doesn’t have much chance of succeeding.

As a fund manager, investor and entrepreneur, Shereen Shermak, CEO of Launch Angels, has listened to and been a part of dozens of pitches. She said the key to making a strong impression on potential investors is being able to thoughtfully answer all of the questions they have.

Shermak said that in an investor pitch meeting, there are six questions that every entrepreneur should be prepared to answer, including:

  • What’s your complete competitive landscape look like — beyond just where you’re playing? Entrepreneurs need to demonstrate that they understand, and respect, the competitive environment they are operating in. What sets them apart from the competition? I want to see that companies understand the growth and contraction trends of their competition, especially as it relates to their product or service. As part of understanding the competitive landscape, it’s also very important to understand what areas entrepreneurs choose not to compete in and why they opted not to pursue those areas. Knowing where not to compete (because it is outside the current capabilities of the organization) demonstrates a high level of self-awareness.
  • What’s your competitive advantage? An entrepreneur must be prepared to talk about how his or her solution is better, faster or cheaper than existing solutions, as well as how much better, faster or cheaper it is. He or she should be able to quantify the customer value proposition, validate that the solution is better or provide data to indicate that such items are meaningful to the customer.
  • What are your achievements and milestones? Are goals being met or is the company tracking well to meet them? Have there been setbacks that forced a change in plans? If so, what was learned from those situations? I am also very interested in upcoming milestones and challenges. How will an investment help reach those milestones? What are the biggest challenges, weaknesses and roadblocks, and how are they being addressed and overcome? Examples include key hires, change of revenue model or sales strategy.
  • What are the risks? It’s always better when entrepreneurs let potential investors know about the risks to their venture. It builds trust and again shows self-awareness, as well as a pragmatic view of the overall forces that may impact the company.
  • What’s the exit strategy? Every investor wants to talk about exit strategies, and they want to know that their investment companies have a sophisticated understanding of the exit strategies that would likely be available to the business. As an investor, I want to invest in companies that will have a positive return in a short to moderate time frame, such as three to seven years. Startups need capital, and I need a positive return on my investment. I want to know that the company is thinking about this balance of needs and is actively developing the product, partnerships, and network, and understands the motivations behind M&As in the company’s industry that will facilitate that exit opportunity in the future.
  • Why me? I want to know how an investment from mecan add value to an organization and help meet milestones. In my opinion, a smart entrepreneur has done his or her homework on potential investors and has strategically targeted me for a specific reason.

Startup Investors Tips

Getting someone to invest in your new business takes more than a great idea.

While the idea is critical, investors take much more into consideration when deciding whether or not to hand over some of their cash to a budding entrepreneur.

Michael Mocatta, an entrepreneur mentor in residence at the London Business School and a partner at Neta Ventures, said entrepreneurs need to know what to ask for and how to ask for it when trying to pitch investors on their plan. This includes knowing how to entice investors with their idea and asking for only as much money as is truly needed.

To help entrepreneurs get the most out of their pitch meetings and ensure the relationship is a win-win for both parties, Mocatta offers five tips:

  • Don’t put your idea first the team is most important. Your team is what makes your idea happen. Potential investors are looking at the people behind the idea. Do you have a rock-solid founding team? A common mistake is a team presenting itself to a potential investor with a missing link, such as one that’s still looking for the tech guru. It’s also good to note that a startup doesn’t have to be composed of a bunch of young people in their twenties. In fact, you’ll stand out for the right reasons if the people on your team have experience as well as contacts. A diverse team with complementary strengths is what will turn an idea into reality.
  • Create a simple tagline that clearly shows the benefit of your product or service. Very often entrepreneurs who live and breathe details of innovation find it hard to distill a concept into a simple idea that grabs the imagination of investors. You need to condense the vision of the business into a clear benefit that is compelling and dramatic. While similar to the elevator pitch, a tagline is even more succinct. Have this worked out before presenting your vision to others.
  • Before you go to investors, have a plan for distribution. Having a great idea isn’t worth anything if you can’t get it into the marketplace. When you’re standing in front of investors, you will sound immeasurably more exciting and attractive if you have already taken the steps needed to have a concrete trial market. I often suggest starting with a retail channel niche and then building the product backward. In other words — where do you want to sell your product? Answer that question and then build you product specifically for that market.
  • Ask for only what you need. The vast majority of startups will come in with requests at set levels — and they’re looking for a significant chunk of change. I push startups to ask for less money, however, and change their pitch to focus on a very specific goal, such as getting past proof of concept. Later on, they can do a second round of fundraising. This helps protect their stake in the business. The smaller the amount they ask for, the smaller they give up on equity. When it comes time for a second round of fundraising, the company will be further along in the development stage and therefore worth more. That means it will cost you less in terms of business equity. Demonstrating that you understand this makes you more credible to investors.
  • Avoid the mistake of giving up too much equity too fast. This is a common mistake. An entrepreneur and any initial investors are hoping that the business will grow into something big, but as they go through multiple rounds of funding, their share of the company will really be diluted. By the time you’ve grown, we see founders left with only 5 or 10 percent of their company. In the end, the CEO doesn’t even have sufficient skin in the game to promote a brand’s success. The people driving the business forward should always maintain at least a 50 percent stake in the business. If you don’t maintain a large stake in the company, your “voice” will be diluted and other shareholders could outvote you.

How much money that you need for your business

If you’re thinking about launching a new business, you may not know where to start with your finances. Of course, you’ll need a decent amount of cash flow to maintain your company. However, if you are organized and thorough, you can plan out your financing and keep your startup budget on track.

Here’s how to figure out approximately how much you’ll need to launch your business.

Start small

You most likely have high expectations for your company. However, blind optimism may cause you to invest too much money too quickly. At the very beginning, it’s smart to keep an open mind and prepare for issues that may arise, experts say.

“A prospective business owner should start planning a small business by simply understanding the potential of the business idea,” McCahon told Business News Daily. “What this means is not assuming your idea will be successful.”

The best approach is to test your idea in a small, inexpensive way that gives you a good indication of whether customers actually need your product and how much they’re willing to pay for it, McCahon said. If the test seems successful, then you can start planning your business based on what you learned. [See Related Story: Creative Financing Methods for Startups]

Estimate your costs

While every type of business has its own financing needs, there are some tips that can help you figure out how much cash you’ll require. Entrepreneur Drew Gerber, who started a technology company, a publicity firm and a financial planning company, estimates that an entrepreneur will need six months’ worth of fixed costs on hand at startup.

“Have a plan to cover your expenses in the first month,” Gerber said. “Identify your customers before you open the door so you can have a way to start covering those expenses.”

When planning your costs, don’t underestimate the expenses, and remember that they can rise as the business grows, Gerber said. It’s easy to overlook costs when you’re thinking about the big picture, but you should be more precise when planning for your fixed expenses, he added.

Indeed, underestimating costs can decimate your company, McCahon said.

“One of the main reasons most small businesses fail is that they simply run out of cash,” she said. “Writing a business plan without basing your forecasts on reality often leads to an unfortunate, and often unnecessary, business failure. Without the benefit of experience or actual historical financials, it’s easy to overestimate a new company’s revenue and underestimate costs.”

Understand what types of costs you’ll have

According to the U.S. Small Business Administration, there are various types of expenses to consider when starting your business. It’s important to differentiate these types of costs, in order to properly manage your business’s cash flow for the short and long term, said Eyal Shinar, CEO of Fundbox, a cash flow management company. Here are a few types of costs for new business owners to consider:

1. One-time versus ongoing costs. One-time expenses will be relevant mostly in the startup process, such as the expenses for incorporating a company. If there’s a month when you have to make a one-time equipment purchase, your money going out will likely be greater than the money coming in, Shinar said. This means your cash flow will be disrupted that month, and you will need to make up for it the following month. Ongoing costs, by contrast, are paid on a regular basis, and include expenses such as utilities. These generally do not fluctuate as much from month to month.

2. Essential versus optional costs. Essential costs are expenses that are absolutely necessary for the company’s growth and development. Optional purchases should be made only if the budget allows. “If you have an optional and nonurgent cost, it may be best to wait until you have enough cash reserves for that purchase,” Shinar said.

3. Fixed versus variable costs. Fixed expenses, such as rent, are consistent from month to month, whereas variable expenses depend on the direct sale of products or services. Shinar noted that fixed costs may eat up a high percentage of revenue in the early days, but as you scale up, their relative burden becomes negligible.

Project your cash flow

Another important aspect of a startup’s financial planning is to project the business’s cash flow. Bill Brigham, director at the New York State Small Business Development Center in Albany, New York, advised new business owners to project their cash flows for at least the first three months of the business’s life. Brigham said to add up not only fixed costs but also the estimated costs of goods and best- and worst-case revenues.

If you borrow money, make sure you know not only how much you borrowed but also the interest you owe, Brigham said. Calculating these costs puts a floor on the revenues needed to keep the business viable and provides a good picture of the cash necessary to start it up.

Gerber recommended starting a business without borrowing at all, if possible. Borrowing puts a lot of pressure on any business and its owners, as it leaves less room for error, he said.

Once you get your business going, use QuickBooks or FreshBooks, which can connect directly to a bank account, to track expenses throughout each month and during tax season, Shinar advised.