Financing Your Business: Venture Capital

Venture Capitalists are both very popular and very unpopular.  They get to be popular because they have money to invest and are looking to do so.  They are unpopular because they often ask for terms that the Owners do not like nor do they want to agree to.

But let us start at the beginning.  A Venture Capitalist (VC) generally works for a VC Firm that has one or more funds.  These funds are raised prior to their usage and have some notion of what kind of companies that will be invested in and when the investment will occur.  I want the reader to take two points from this.  First, a VC will not be a generalist.  They have restrictions on the kinds of firms that they can invest in.  This can be either by geography, stage of company, industry or any combination of all of these.  Second, there is a time frame in effect.  The fund investors expect to be able to get a return (or not) within a specific window of time.  It would be rare for anyone to have a fund that was open for a very long time.  The idea would be to complete the investment, return the proceeds to the investors and move on to the next.

There is also the notion of an Investment Committee.  This will be typical of larger, more professional organizations in investing.  In this case, a VC will bring the idea of the investment to the Investment Committee, who will ask a number of questions and approve, change or dissaprove the deal.  In general, the individual VC will not make a decision.

I expect to cover Valuation as a topic next week, but as I have said that is an issue.  Generally, the VC is going to want the Owner to lose control of his firm to the new investors.  They want to have a level of control over what they consider (in most cases) a less educated and experienced professional.  But you can also expect these new investors to want to have a number of Board of Directors seats and to be compensated for being on the Board.  Management can expect to report out regularly (often monthly) to the Board with metrics that show the company progress against the plan.  These can often be problematic as most Entrepreneurs are inherently optimistic.  Thus most plans fall behind and increasing pressure is asserted to meet the original deadline.

But the reality is that Venture Capitalists are all about the Exit or the Liquidity Event.  This is when the company makes the shares that the VC holds turn into cash in some form.  This is generally through a buy-out by a bigger firm or the company entering the Public Markets through an Initial Public Offering.  This Liquidity Event is supposed to put profits from the investment back into the Venture Fund, so that when the Fund expires that the original investors make a profit.  Along the way, the VC takes a percentage of the fund to run the VC firm and pay the employees.

Well that is the basics of the Venture Capital World.  Next time, we talk about Valuation.  Have a great day!
Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Net Neutrality Thursday

This Sunday Game of Thrones starts its 7th Season.  This has reminded me of the change in tone at the FCC.  The new administration has brought a new viewpoint to the Iron Throne as it survey’s the Communications Industry Landscape.  I want to talk about a couple of the challenges along this line and then be clear about what I think should happen.

DSL, Cable and Fiber in the general case can have multiple networks running over the same medium.  They do this by using different parts of the frequency spectrum to run different services.  DSL is the simplest case of this and the spectrum from 0 – 4KHz is used for voice.  The rest of the spectrum (and it varies based on the technology) is used for Broadband Data.  This is similar to having many radio stations sharing the air to deliver different music, news and talk.  How this spectrum is used is not part of the debate.  What we will talk about is the usage of the Broadband Data part of the spectrum.  You can see immediately there are gaps in what we are going to discuss, for good or ill.

The question that really drove the Net Neutrality debate is this part about “Fast Lanes” or in Communications parlance – parts of the traffic with a Higher Quality of Service.  This is very standard throughout many networks today regardless of the technology used.  Within that Broadband Data, our current rules have that function unavailable.  That was the entire debate over the last few years.  Smaller companies argued that they might be able to deliver competent services over the network if you were allowed to pay for better service.  Note, that video in Cable and in Fiber often runs outside the Broadband Data part of the spectrum and thus can have whatever Fast Lanes it likes.  That is why you don’t see buffering from Cable offerings.

The flip side of this is whether the very high performance video – 4K and 8K TV – will actually work at scale as deployed without a “Fast Lane”.  There is no obligation for ISPs to make this work.  It will cost them a lot of money to do so at large scale so it might take a long time to get there from here.  What would be the recourse then?  We can’t make them build new networks.  It is pretty clear that nobody is about to install a 3rd or 4th competitive network (or it already would have happened).  By the way, I believe that it will be too much work to create “Fast Lanes” for it to be worth it.  Nobody is paying more without a guarantee.  And meeting a guarantee is a lot more than where we are today.

In the long run, I think the bandwidth providers will fall further and further behind their ability to apply strict rules and make them stick.  The best thing we can do on this is NOTHING.  If predatory practices happen, then crack down on them with all speed. I am much more concerned about deploying better infrastructure more broadly.

So watch Game of Thrones whether it is on your OTT service like Sling TV or on your Cox Cable and have a great day!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Financing Your Business: Angels

Just like anything else, Media attention gives a view to something that is simpler and more interesting than it is in real life.  In this case, I mean the program Shark Tank.  What we see are very cute face to face presentations and immediate answers from the investors.  If you think this will work in the real world, you are about to be in for a rude shock.  Remember, Shark Tank is a TV show.  It is Entertainment set up to get ratings.  For real investments to happen, a whole lot more information is required than is exchanged.

For most people, Angel Investors are the first group they might consider after Friends and Family.  In most cases, these are High Net Worth Accredited Investors.  In other words, they have lots of money.  The US Government is greatly concerned about scams and hustlers taking advantage of people so there is a minimum level of sophistication that is desired.  This means that you are not facing celebrities as on Shark Tank, but you are facing experienced investors who want details.  Just as in my last post, it will often turn out that Valuation will be the biggest issue.  I want to get to that in some more detail in a later post.  Today, I want to talk about the process of addressing Angels.

There are often groups of Angel investors who meet as a group to review possible investments, have live presentations, and question and answer with the principals of the company.  The presentation consists really of two parts.  The first part is a business review.  This is an outline of the business plan and the idea behind the company.  One very important part of this will be a biography of the principals involved.  Remember, the investors are going to be interested in both what the idea is as well as who will be executing it.  Investors will be greatly impressed if you have a background in the field you are investing in and management experience within it.  They will be more impressed if you can show a successful sale of a previous company.

The second part of the presentation will be the request for investment.  In most presentations, this will be pretty simple from the legal documents to come later.  But you need to have a specific request for money and tell the investors what it will be used for.  On top of that, the percentage of the company that is up for sale as well as the pre-money and post-money valuations involved.  If there are multiple owners, they will also need to know the capitalization structure or who owns what.

Decisions can take weeks or months and are not likely to be the full amount required.  For example, I know of a company that raised $5M from Angels and it required around 75 investors.  This is an average investment of about $65K per investor.  In general, you need to expect $100K or less from each investor.  They know that most new ventures fail so they are expecting a high risk/high reward situation.  So, they are not going to give anyone a large amount of their Net Worth.  It is a a great way to lose that money.

So, that is the starting point with Angels!
Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Is Selling Immoral?

When I talk to many Small Business Owners and Business Executives they turn their nose up at Sales and Selling.  They know they have to Sell and they believe in their Products and Services.  So, why the bad taste for Sales?

I think there are two basic challenges:  Marketing and Manipulation.  Let me address the second one first.  Everybody can picture an old fashioned Used Car Salesman in their mind.  When they do, they don’t want to be associated with this person.  This is the personification of Sales and the Salesperson in many.  But modern selling is all about matching needs with Products and Services.  There are plenty of potential customers out there.  If you are talking to a Prospect, they are in the market for the kind of goods that you offer.  There are only two questions left at this point:  Does your offer meet or exceed their needs? AND Does the Value and Trust you represent meet their Price?  If you do, then Closing a Sale is like falling off a log.  If you don’t then you probably don’t have a Sale.  Again, it is that second question that is most key – Value and Trust.  Have you been able to present your Value in a way that builds Trust?  If not, then you may have a Sales Process or Brand issue.  Those are both things that can be developed and improved over time.

So why is Marketing a problem?  Well, some modern Marketing techniques (E-mail and Telemarketing in particular) can be intrusive.  People confuse this type of Marketing with Selling.  The goal of these techniques is to produce a Prospect, not to turn a Prospect into a Customer.  People don’t like these techniques used indiscriminately.  The thing is that this is not Sales it is Marketing.  These techniques work so they will continue.  These techniques have attracted the Criminal Element and thus you have Scammers and Hackers trying to obtain your information for nefarious purposes.  So, don’t blame Sales for a Marketing Challenge.

Modern Selling is not Immoral.  It presents you as a choice and provides information about your offer. If you are just down to Price versus Value, then we are talking about a Negotiation.  That is another topic for another day.

Have a great day!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Financing Your Business:  Friends and Family

Last week I talked a bit about the SBA loan.  This week I want to talk about one of the other early stage funding options – Friends and Family.  It is exactly what it says.  You get money from either Friends or Family or both.  Sometimes this can be Debt, but I want to talk about it as Equity.  This will give us a view into one of the biggest issues in Equity transactions:  Valuation.

Valuation is pretty simple.  How much is the company worth?  The younger the company is the less likely there are lots of good ways of determining Valuation.  But to start with there are 2 numbers that you need to understand: Pre-Money and Post-Money.  This is pretty simple.  A Pre-Money Valuation is the worth of the company before their is an investment.  A Post-Money Valuation is the value after the investment.  Think of it this way.  If you created a company with 1,000 shares of stock and had invested $1,000.  You then sell 100 shares of stock at $1 per share to a friend.  The Pre-Money Valuation is $1,000 and Post-Money is $1,100.  The Friend now own 100 out of 1,100 shares or about 9% of the company.

I hope you are beginning to see why Valuation is such a big deal.  How much a company is worth is subjective, especially early on.  That is because of what would be both Intangible Assets and Sweat Equity.  Intangible Assets are the Intellectual Property that the Founders have.  In other words, their brains.  Sweat Equity is the effort that they put into the company without compensation.  So a Founder will want to get value for all the work they have put in and the value of their Business ideas.  Most investors will not be so generous about what that is and thus there is a significant amount of conflict about this topic.  So, have your ducks in a row about Comparable Companies or Comps.  This helps set the market for businesses.

I have one last thing to say about this.  Put it in writing.  I can not tell you how many people have broken relationships over business disagreements.  It is not worth it.  Put things down in writing and make sure everybody is clear.

Have a great day!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Hodgepodge

So, there is not one overriding theme to this week’s post.  I am going to write about some things that interest me around the topics I cover.

Well, as hot as it is we know that it is now Summer.  One thing I have noticed in the North Bay is that we end up with a week or so every June of very hot weather.  I think this is our “natural air conditioner” starting up.  As you know we are cooled by air coming from the Pacific to take the place of the rising air over the Central Valley.  It is almost like this week is a pre-requisite to getting that machine started.  Enough latent heat and enough temperature differential.

The fact that it is now summer means that the SMART Train will miss its opening schedule.  There is currently no defined date for starting the regular schedule while a safety review at the Federal level proceeds.  I wonder how long we will continue to support the train after it comes on.  I am a skeptic for ridership.  Riders will need to secure transport at both ends of their commute and it does not extend into SF nor connect to BART.  Given the widely dispersed places that we have employment, I am not sure the right way for a commuter to use this today.  If it continues to exist, maybe a generation from now business will have moved.  Will it be open still?  I don’t know.

The Net Neutrality writing I have done was in response to the massive outcry over a Notice of Proposed Rulemaking (NRPM) at the FCC, which asked many questions about what it should implement for residential Broadband Service.  This resulted in the “Title II Light” that we have today.  I want to note that there are many NRPMs that go on so this was not a unique thing.  For example the FCC just announced one about changing how Payphone Service payments are audited.  I doubt this one will receive much public interest.  It should be noted that the FCC is likely to change a number of rules that you care about.  As things evolve, I will try to keep you informed.

Have a great day!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Financing Your Business: The SBA Loan

SBA Loans are a form of debt that is very common in the small business world.  SBA stands for the Small Business Administration and is an agency of the US Federal Government.  The SBA Loan is, in the most common form, a standard Business Loan from a Bank or similar Financial Institution.  What the SBA does is provide some level of risk reduction to the lender.  I don’t want to provide an exhaustive detail on getting an SBA Loan.  What I will do is provide some thoughts about why this is important and when to use it.

Just so we are clear, SBA support is not free.  Think of it like when you first purchase a house and have to have Mortgage Insurance on your home.  Once you can, refinance the loan (or point out to your lender that you no longer meet the criteria for needing Mortgate Insurance) to eliminate the charge.  SBA loans like Mortgage Insurance provide value directly to the lender not to the borrower.  These programs provide indirect support for borrowers.

So, what is this indirect support.  Well, I will be blunt.  You can’t get a business loan in so many cases, that the SBA guarantee is very important.  If you recall in last week’s post, I talked about Underwriting at a Bank.  The basics with Banks that I talk to is that they want to loan money to a firm that has had a stable organization for 3 years and can show a profit over that same period.  That is BEFORE we talk about the loan and what it might be used for and how it is intended to build the business.  By stable organization, I mean that it is in the same corporate structure over that time.  So, right now if you are reading this to head to your bank to get a loan to start your business…just turn around.  You won’t get a loan that way.

What the SBA does is provide air cover for the lender.  If they see that there is a good business plan with people to support it, they want to issue the loan.  The SBA guarantee allows them to get around those pesky Underwriting Guidelines to do so.  I want to be clear that I put the words “good business plan” in that sentence.  That means a narrative and 3 years of proposed financials.  If you are thinking you won’t need to know your numbers, you are not thinking about this properly.  The Bank wants to make sure that you understand how the operation of your business will end up paying the bills – including them.  So, they are likely to have questions about both the numbers and the business that you will need to answer.  Saying, “I don’t understand the numbers” will not be comforting to them and help you secure the loan.

An SBA loan is where many businesses have started.  Have a great day!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!