Tag Archives: business plan

Want to Have Your Cake and Equity Too? Consider Non-dilutive Funding

By Karen Utgoff

2016-08-24 Non-dilutive fundingRather than taking a piece of your pie, non-dilutive funding sources offer outside funding and/or in-kind resources that let you have your cake and equity too. While it will never take the place of equity investment, secured debt, or bootstrapping, the right non-dilutive resource can be a great precursor, gap filler, supplement, or complement at critical stages. It’s easy to overlook this category of funding but it’s worth considering whether and how it can add value your new or established business.

The right non-dilutive funding at the right time can help finish a product, validate a market, prepare employees for new challenges, or otherwise advance your efforts.

Non-dilutive resources include:

  • Highly competitive grants programs for technology-driven ventures;
  • Small grants open to any business located in a specific state, city or business district;
  • Crowdfunding to build an initial customer-base complete with pre-orders;
  • Training or internship grants to strengthen the workforce;
  • Innovative foundations with grant programs open to for-profit companies with (or occasionally without) non-profit partners;
  • Accelerators, incubators, and competitions; and
  • In-kind resources that provide expertise, tools or connections that would have otherwise required funding.

Non-dilutive resources aren’t free and come with non-financial burdens similar to equity and debt financing.

  • Resources that don’t meet your needs can take your business seriously off course.
  • Non-financial obligations such as administrative, performance, recognition, audit or reporting requirements may apply.
  • Non-dilutive funding takes time and effort to find and use effectively.

Non-dilutive sources offer benefits beyond immediate support.

  • Success with competitive grants or crowdfunding can help you build the technical and business credibility necessary to secure the right investors.
  • Crowdfunding can prime the pump for future interest in your products.
  • Participation may position you for other opportunities in the future.

This post was inspired by my recent MassChallenge talk on the subject. A big thank you to the MC team for inviting me! See the slides from this talk for web links and additional ideas.

© Copyright Karen Utgoff. All rights reserved.

Keep Your Business on Track and Growing: Measure What Matters

By Laurie Breitner and Karen Utgoff

There is more to keeping your business going in the right direction than looking at standard reports from QuickBooks or other accounting tools on a regular basis. While these reports can give you numbers, determining and appropriately tracking what matters — which numbers are important, how they are derived and what else you need to watch — is an essential responsibility of the owner(s) and management team.

In assessing current operations, it’s often useful to compare today’s results with past performance — prior period (year, quarter, month, or week) or effort (job run, project, or program) depending on your industry and particulars of your business. While this isn’t always possible for newer ventures, be assured that if you are diligent, ultimately these measurements will help reveal your company’s strengths and weaknesses, opportunities and threats, as well as performance.

For example, after one year in business you can only guess how seasonal factors will affect your cash flow. However, if you keep track, with five years experience you will be confident in anticipating how seasonal ups and downs might impact your business. When you hire a second employee in a particular role, you have some idea of how long it will take them to come up to speed; by the time you make your fifth such hire, you have a much better idea of how long it should take, as well as what it takes, to be productive.

For new initiatives, measuring is tied closely to looking forward (planning) for likely and intended outcomes. What will initial success look like? What events (milestones) are critical to track progress? How much will it likely cost? Are there gaps in your capabilities or resources that need to be filled before you can realize the potential of the new initiative? How much revenue and/or profit is the project expected to add and when?

What initial operational measures should be monitored? Here’s where it’s helpful to look at assumptions you made in making predictions. Did you assume that if you opened a second location in a nearby town that your strong positive reputation would automatically give a boost to the new site? Did your plan hinge on getting speedy municipal approval for a larger parking lot at the next planning board meeting? What key assumptions do you need to track?

Add to the standard routine of just reviewing (daily, weekly, monthly, quarterly, and annual) results with the following specific approaches that are critically important to measuring what matters:

Assess profitability and the fully allocated cost of goods sold from an operational perspective: For background review pages 8 and 9 of Laurie’s Thriving: Get and keep your business on track. Also, check out Karen’s Succeeding in Small Business post on Four tips for putting your business plan to work for your small business.

Project results for new initiatives with limited or no experience: For background, read Four steps to help small business owners evaluate the financial wisdom of new business-building initiatives and Small business management and entrepreneurship: Two key ingredients for sustaining success.

For additional information read Josh Patrick’s article on Every Business Has a Special Number, or Metric. Do You Know Yours? in the NY Times’ “You’re the Boss” blog and A Winning Culture Keeps Score by John Case and Bill Fotsch in the HBR Blog Network.

Here’s how to get started: On a single page, document the (up to) five most important measures, metrics, milestones, and/or numbers that you follow (or plan to track) to gauge whether you are on the right road, moving into the fast lane, or facing an unwanted detour. Review these metrics with your management team, board of advisers, mentors, and/or appropriate professional services providers. Evaluate them regularly to make sure they remain relevant guides for growing your business. Plan to fine tune them over time as your needs and business landscape change and you learn more.

© 2015 Laurie Breitner and Karen Utgoff. All rights reserved.

Find Funding That Fits Your Needs

By Karen Utgoff

2014-09-01 Bags on MoneyDoes external funding appear to be an attractive approach for fueling the growth of your business? Before you leap to a particular funding option, consider four possible types — debt, equity, grants, and crowdfunding. I have written about the first three here and the last here. Each of these can come from a number of sources — for example banks, venture capitalists, or family — and, of course, you may want to mix and match.

In addition to considering which types and sources of funding are accessible given your situation, it’s important to take into account the risks associated with each. Below are some general thoughts; be sure to evaluate terms and conditions associated with each specific deal that you may be offered.

What financial risks are you willing to accept? Debt and equity — borrowing or sharing ownership — have different uses, benefits, and risks.

Banks and other commercial lenders may expect you to commit personal assets (homes, possessions and savings) in addition to company assets as collateral. If your business fails, the obligation to repay lives on. Even when businesses do well, they are often subject to unpredictable cash flows that may interfere with the ability to service debt. Using debt to purchase equipment, finance inventory, or bridge the gap between making a sale and collecting the revenue can work well unless there is concern about slow inventory turnover and/or customers stretching the time they take to pay — both common occurrences in a weakened economy or in the face of intensifying competition.

Angel and venture capital investors put their money at risk for the opportunity to financially benefit from ownership of part of your business, which they hope will significantly increase in value. Their initial investment may be in the form of convertible debt. To protect their position, investors may expect to participate in key decisions and serve on your board of directors. It’s important to understand the obligations that will result if the business fails; ideally investors will agree to take cash and remaining assets but not expect to get their original investment back. Be sure you understand when investors will want to realize a return on their investment. They may expect you to sell the company or to raise the cash to buy them out.

The risks associated with grants and crowdfunding are usually less daunting but can require some specific result such as delivery of a product, recognition of the funder, execution of a proposed project, and/or a report. Grant givers may also have specific accounting requirements or other standard terms you will need to satisfy.

What personal risks are you willing to take on? Even (or especially) when your friends and families are enthusiastic to help your business and spare you financial risks that come with borrowing from a bank or alternative lender, don’t underestimate possible damage to friendships, marriages, and parent-child relationships that could result. Whether you take a loan or offer them equity, they may have naïve and overconfident assumptions about future success.

Consider how you and they would get along if the business falls short of their expectations. Even if you were not obligated to repay in the event of a business failure, how would you feel if your parents or siblings lost their retirement funds?

Even when the business thrives, dealing with family/friend investors/lenders can become awkward. Some may want to help even when they lack the expertise to do so. Others may feel entitled to participate in operating decisions, suggest potential employees or drop in to “see how things are going.” What’s the plan to provide a return on their investment? To avoid awkwardness, or complicating future rounds of funding, clarify expectations and boundaries in advance. A sophisticated investor will welcome this too and may even take the lead on designing an arrangement that makes sense from both business and personal perspectives.

Can you mitigate the risks of and/or reduce your need for funding? While risks associated with external financing are significant, rewards can be substantial. Be sure you are ready to put the funds to work effectively and to make the most of every dollar. Will your team be prepared to make the most of the new opportunities to which the funding will be directed? Could you improve your cash flow to minimize the risk of problematic surprises? Is it possible to reduce the cash tied up in inventory? Is there a contingency plan to manage setbacks and unexpected obstacles?

Do you have evidence, or merely hope, that you will succeed? Whether the funding you seek is to purchase equipment that will increase the efficiency and profitability, to support the launch of a new product/service/location, or to provide stability over a tough period, you should do your homework. Since all forms of funding come with real costs, it’s important that you have evidence that the expected results will be worth the added burden. Will the changes you anticipate make your business stronger? Will they increase its value?

The right financing at the right time can fuel success. The above points are not intended to discourage you from seeking external funding. If they have, ask yourself why? Resolving those concerns can make for a stronger future business.

 

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© Copyright Karen Utgoff. All rights reserved.

Look Before You Leap

By Laurie Breitner

Public domain. U.S. Air Force photo by Tech. Sgt. Jeremy T. Lock

U.S. Air Force photo by Tech. Sgt. Jeremy T. Lock. Public domain.

Too many entrepreneurs believe raising funds to finance their idea is a first step when starting a new business or expanding an existing one. Some create business plans — often only to satisfy lending guidelines — and head off to shop their ideas at banks or other funding sources. I have known people who depleted their retirement savings, put their homes at risk, and/or tapped friends and relatives with promises of great returns only to discover that they had not done their homework.

While starting or growing a business always involves some risk, none of us wants to take on more than is necessary. Before taking a financial leap, be certain that you can answer these questions thoroughly and with confidence — that is, you have some empirical evidence and/or analysis to back up your passion:

Does your plan have legs? Have you tested your idea to determine that you know and can reach your target market and that your planned offering meets their needs? Please don’t assume that if you “build a better mousetrap” that people will flock to your door to buy one. Instead, talk to potential customers; gauge their interest and learn more about their needs and some obstacles you will likely have to overcome. Also, consider the competition — there is always competition — for your target market’s dollars. How would your business woo customers?

What resources do you have/will you need to be successful? It is essential to have as full an understanding as possible of what resources (expertise, suppliers, location, marketing collateral, forms/contracts, etc.) you have and will need to be successful. If you plan a foray into a new business or market, find someone to help you better detail what’s needed. Consider visiting a library to access industry surveys and statistics (UMass Business Library), getting how-to information from industry associations, talking to business owners in a similar business that serve different geographical markets, and checking out industry discussions on LinkedIn and other web sources.

How long will it be before your plan starts generating revenue? Is your product/service well understood, or will you need to mount an educational effort to explain its uses and benefits? Consider your sales cycle (the elapsed time from initial contact to receiving payment). Do customers make buying decisions immediately, or is there a delay to get approvals, consider alternatives, etc. Typically, how quickly does your target market pay? If you plan to open a retail store, you could realistically expect payment at purchase. If, however, you plan to sell to government agencies, expect significant delays.

Can you start smaller? Many entrepreneurs are so bullish on their products/services and excited by their potential that they seek to fulfill the needs of multiple markets with a range of offerings. What is your low-hanging fruit? Is there a niche market that you could enter to build a satisfied/loyal customer base? Consider starting small to learn what works — and doesn’t — before making a larger investment.

How much will it really take to get your plan off the ground? It’s generally safer to be conservative; no one goes out of business by having too much cash. Before you head off to borrow money, consider whether you could fund your initial foray with cash from on-going operations? For a new venture, is it possible to keep your current job (and income) while building your new business on the side? Many couples/partners who want to open a joint business do so by having one work in the new business and the other stay in their current job to keep the financial boat afloat until the new venture starts to make enough money to support both. Typically it takes about 3 years for a new business to be able to support its owner.

How will you measure success? Some entrepreneurs wait until they start generating P&Ls (profit and loss statements) before looking at results. Instead, put together a project plan (with measurable milestones) as early as possible. This is difficult to do, especially without a history of operating results, but the process will help you think through the business challenges ahead. The information you need for your guesstimates will help you with early steps for the business itself — e.g., identify/vet suppliers, develop a sales plan and marketing materials, etc. — and become one yardstick to measure your progress. Adjust revenue projections and planned expenses as you learn. By having a documented plan to help you monitor progress, you will be more nimble and able to uncover small speed bumps before they become major obstacles.

If you learn that you will need outside funding, most banks and other funding sources will appreciate your diligence. And, you will have more confidence during the inevitable tough times when you are doing all the essential pre-work before your earn that satisfying first dollar from your new venture.

© Copyright Laurie Breitner. All rights reserved.

What’s So Special about You?

I could not have anticipated that a taunt I first heard in grammar school would be a question I’d later ask business owners in all seriousness. Businesses are most successful when they build upon their unique strengths and take appropriate steps to mitigate critical weaknesses.  But recognizing your strengths and weaknesses is easier said than done. Here is an overview.

While it would be impossible to enumerate all attributes an organization might have, the following list will get you started.  As you consider your organization’s strengths and weaknesses, please be absolutely honest.  It’s easy to think only in positive terms, to see only potential or to obsess over weaknesses. However, giving in to one-sided thinking will not result in actionable information. Better to recognize any areas that need attention as soon as possible so that you can address them before they negatively impact your bottom line. On the flip side, don’t fail to recognize where your organization shines. This may lead to discovery of competitive advantages that will help your business to leap ahead.

Expertise/industry savvy and contacts

  • Unique capabilities – what can your organization can do/supply that is not available from competitors?
  • Experience/knowledge of principals and staff – do you offer customers an extraordinary level of expertise or experience?
  • Industry ties – do you belong to and actively participate in industry associations?
  • Influencers – do you regularly engage in two-way communication with industry influencers?
  • Media – would it be likely for the media to contact you were there to be a breaking story in your industry?

Customer base

  • Customer satisfaction/fans – do your customers refer or recommend you to potential new customers?
  • Loyalty – do you receive repeat orders from customers?
  • Diversification – do you have multiple customers in a variety of industries?
  • Are your customers financially stable?
  • Do your customers expect you to compete on price alone?

People

  • Leadership and top managers – is your leadership team complete, respected, knowledgeable and well connected?
  • Overall, do employees have all the skills and qualifications they need?
    • Skill level – does your organization ensure that staff is well trained, up-to-date and knowledgeable?
    • Dedication to quality and customer service – is your organization’s definition of quality and customer service measurable, clear to all members of your staff and considered in every customer interaction?
    • Licenses, insurance and certifications – do you/your staff have all relevant licenses, insurance and certifications?
  • Succession plan/pipeline – do you have a clear succession plan and the means to find and attract sufficient new employees?

Suppliers/raw materials

  • Stable – are your suppliers financially stable?
  • Raw materials – is it likely there will be an adequate supply of raw materials available at a reasonable price?
  • Bench strength – do you have multiple suppliers of key goods or raw materials?

Products/services

  • Are your products and services distinct from those of your competitors?
  • Do you have exclusive agreements to sell products and services in your market?
  • Do you offer a complementary mix of products and services not found at the competition?
  • Is demand for your products and services seasonal and/or tied to events beyond your control? (Weather, subsidies, tax incentives, etc.)

Intellectual property

  • Patents/trademarks – do you own and protect patents and trademarks?
  • Marketing collateral – does your marketing collateral engage and inform your customers base?

Infrastructure

  • Convenience to customers/suppliers – are your organization’s locations accessible to both customers and suppliers?
  • Traffic – if it’s relevant, are you located in a space (either physical or virtual) where your customers are likely to congregate?
  • Visibility – is your organization easy and convenient to find both physically and virtually?
  • Processes and procedures – do you have efficient, documented processes and procedures?
  • Systems – do your systems (computer, telephone, forms, inventory management, etc.) effectively support customers and staff?
  • Technology – do you have all of the industry-specific tools and technology you need to compete for business?
  • Overhead – is your operation efficient?

Financial

  • Financial strength – is your organization on sound financial footing?
  • Banking relationships/access to credit – do you have on-going positive relationships with one or more banks that would be willing to extend credit?
  • Positive cash flow – overall, is your cash flow positive?
  • Terms – are you offered and do you take advantage of suppliers’ best possible terms?

Culture

Culture significantly influences an organization’s ability to attract and retain employees, respond to problems, and to provide a great customer experience. For more on this, read Karen Utgoff’s recent post on looking at your organization’s culture with fresh eyes.

It is often illuminating to involve customers, suppliers and staff in exploring many of the questions above. You can learn a lot by understanding their views. Also, what might have been accurate in the past may not always be true. Support your assessment with facts whenever you can. Refresh this information periodically, more often if your circumstances (market, customers, etc.) are in flux.

Understanding your organization’s strengths and weaknesses will give you a better understanding of internal capabilities. To formulate a strategy, these need to be considered in the context of the external environment. For more on doing so, see this post by Karen Utgoff on sorting out opportunities and threats.

© Copyright 2014 Laurie Breitner. All rights reserved.