Tag Archives: resources

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.

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.

Get a Fresh Perspective on Your Organization’s Culture: A (Mostly) Do-It-Yourself Approach

By Karen Utgoff

When was the last time you took a systematic look at your organization’s culture? Many owners and leaders of small-to-medium sized businesses could answer this question with one word: “Never.” Unfortunately, culture is often neglected when leaders size up their organizations even when its importance is recognized because it is difficult to measure:

  • Unlike cash flow, leads generated, cost of goods sold, defect rates, absenteeism, or other company/industry empirical measures, culture cannot be assessed strictly in terms of numbers.
  • Culture — good or bad — is so much a part of an organization’s day-to-day “normal” it can be difficult just to recognize its influences, much as individuals may be blind to their own good or bad behavior patterns.
  • Culture is very much in the eyes of its many beholders — employees, customers, suppliers, as well as the management team. Although it may be uncomfortable, it is important to consider each for their perspectives and bring the necessary objectivity to the process.
  • Convincing yourself (and staff) of its importance to find the time to do this type of assessment can be very difficult in the midst of day-to-day demands.

Nevertheless taking a fresh look at your organization’s culture is critical; while the work is difficult, the payoff could be substantial. In many ways, an organization’s culture is at the core of its ability to respond effectively to immediate difficulties as well as meet long-term challenges and seize opportunities. Culture significantly influences an organization’s ability to attract and retain employees and, of course, its customer experience.

Don’t let the desire for perfection derail getting started. Taking initial steps will allow you to build a foundation for future improvements. Here is an approach that might help you begin.

Use a general framework as a starting point. While it is tempting to start by framing your assessment around the particulars of your organization, this could introduce assumptions about your culture that skew results or interfere with insights. Instead, start with a one-size-fits-all structure to assure a fresh perspective that will help you develop an objective, inclusive view of your culture.

While there are many frameworks out there, I like the one provided in John Coleman’s “Six Components of a Great Corporate Culture” from the HBR Blog Network. This article breaks culture into more manageable pieces:

  • Vision (and/or mission)
  • Values
  • Practices
  • People
  • Narrative*
  • Place*

It’s worth noting that these are components of both great and problematic cultures; the difference being that in great cultures the elements work together to create a highly productive, effective organization.

Go beyond your talk to get at your walk. Because culture depends much more upon what an organization does than what it says, look for evidence of culture in action. Use facts to support your observations or help you to see more clearly.

Use the framework to describe your organization’s culture from your (the CEO/owner’s) perspective. Record your view of each aspect of your organization’s culture. Limit yourself to a single page that succinctly covers the six components rather than a detailed description. Once this summary is complete, if you feel the need for more information add backup pages to support the summary page. For example in the section on Narrative you may want to mention the story about when you and everyone else worked late into the night to help a customer in a crisis. This could be listed as “How we went above and beyond for XYZ Co. when they needed our help,” while backup information could include highlights of your team’s efforts and XYZ’s thank you letter.

Use the framework to see your organization’s culture from many perspectives. Eventually you may want use the template to gather the perspectives of employees, customers and others who have experience with your organization. To get started, focus on employees from the front lines to the management team. Provide a copy of the template and Coleman’s blog.  Ask each one to describe your organization’s culture as he or she sees it. Encourage backup notes to support observations on the main sheet. Anonymous returns encourage frankness, but you will not be able to follow up for more detail. Often a third party is engaged to gather and consolidate returns to help overcome this barrier.

Compare and consolidate perspectives to see with fresh eyes. As you accumulate perspectives from various individuals throughout your organization and beyond, look for points of agreement and divergence. Be mentally prepared for both delightful and disappointing discoveries. For example, you may find that employees are quietly taking the initiative to realize the mission through their day-to-day actions, or that employees are only partially aware of the organization’s values. You may also find that there are some positive aspects of your culture that you, as the leader, rarely or never see but want to encourage. In any case, your mandate is to see your culture through fresh eyes rather than to act immediately on the details.

Once you have a deeper understanding of your culture, it will become easier to find ways to strengthen and nurture its positive aspects. For example, if employees are unaware of the organization’s values, you may realize that a values statement needs to be distributed to everyone, that values need to be integrated into performance evaluations, or that you will seek opportunities to create new narratives by recognizing employees whose actions exemplify organizational values.

Improve your ability to analyze and assess organizational culture by observing others. The steps above are just a starting point. One of the joys of my work is that I am regularly exposed to a wide range of organizations. In some it’s clear that talk and walk have diverged, while in others employees are remarkably in sync. There is a lot to learn from both. To strengthen your ability to nurture the culture in your organization, try applying the framework to others. Does your supplier tell you that its people are innovative problem solvers but your experiences say otherwise?

Include organizational culture as a regular part of management review. Remember that the steps above are a beginning not the end. Along with your margins, customer-base and employees’ technical capabilities, a healthy organizational culture is an important part of your business’ strength. In addition to its internal value, it plays directly into your reputation, brand, and competitiveness. To create, nurture and sustain culture effectively, make time to assess it systematically as part of routine, ongoing management and leadership efforts.

* For more on Narrative and Place, see my post on “Using narrative and place to nurture small business culture” in Succeeding in Small Business.

© Copyright 2014 Karen Utgoff. All rights reserved.

Navigating the Innovation Trail: Canyons, Chasms and Sinkholes! Oh My!

By Karen Utgoff

Death Valley (© Dan VanHassel. All rights reserved)

Death Valley (© Dan VanHassel. All rights reserved)

For both innovation-driven new ventures and intrapreneurs in well-established businesses, the road to new business success is frequently rocky and interrupted by gaps large and small. Often the team needs to build the road as it creates the product.  In addition to the significant canyons and chasms along the way, there are many smaller sinkholes that can swallow you and deceptively promising blind alleys that can take you off course. If you decide to blaze an innovation trail, here are some of the challenges you can expect to encounter.

Death Valley (© Dan VanHassel. All rights reserved)

Death Valley (© Dan VanHassel. All rights reserved)

The long, dry valley of death (pdf) between idea and fundable business is treacherous. Your team (and your idea) can die of thirst! Can you convince an angel, venture capitalist, funding agency, your company, or bank to invest, allocate, grant or lend your team what it needs? Can you make your current cash last long enough to see you through or are you counting on “rain” before your checking account runs dry? Be sure to consider carefully what you will need to make it across.

The labyrinth to the first customer is filled with blind alleys that can easily disorient even savvy navigators. Some will never find their way back to the main road. The biggest danger is potential customers who never say “no” but never decide to buy. The sale feels so close. You keep thinking one more meeting will do the trick, making all the time and effort you have invested suddenly worthwhile. It’s so hard to tell the difference between sincere interest from a future customer and someone who simply doesn’t want to offend by saying “no.”

The chasm between first customers and the main market was made famous by Geoffrey Moore in his landmark book Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers, which analyzed the challenges of growing beyond the first few, true-believing customers to achieve mass market adoption. It can be uncomfortable to move beyond your base of support but to achieve significant growth it must be done.

Cash flow sinkholes often develop on short notice. Even well-funded companies fall into them. There are many causes — for example, a new employee who isn’t productive or an unexpectedly problematic feature of the product — that can undermine your cash flow. It’s easy to spin your wheels in a futile effort to move forward but that only digs a deeper hole. The sooner you realize the underlying problem and fix it, the better.

The high growth grand prix comes just as you think you are home free. Suddenly your Gap Files 2business is growing faster than you thought possible and continuing to accelerate. You can’t take your eyes off the road for a second. Threats and opportunities are coming from all directions and with greater speed. You need to develop habits, processes, systems, and instincts to keep you alive and growing. The good news is that, for those who are brave and persistent enough to navigate through, success can be very sweet.

© Copyright 2013 Karen Utgoff. All rights reserved.

Nature and Nurture Make Innovators and Entrepreneurs

By Karen Utgoff

I am always perplexed by discussions of whether innovators and entrepreneurs are born to the roles (nature) or can be taught (nurture). Most complex capabilities are a mix of talent and learning the tools of the trade, and there is no particular reason to think innovation and entrepreneurship are exceptions. Some individuals with enormous potential never progress and others — seemingly less talented — get ahead by relentlessly pursuing goals and learning from experience. It’s a bit like learning a musical instrument; it’s great to have a good ear and nimble fingers but dedication and practice are essential.

The assumption that one either is or isn’t an innovator or entrepreneur from birth — you’ve either got it or you don’t — is dangerous in two ways. Those with an abundance of confidence in their innate abilities may believe that little or nothing need be done to improve, which can result in unnecessary risk and wasted effort. Those with great ideas, but little confidence, may forgo important opportunities.

This is especially unfortunate at a time when there is a refreshing expansion of programs and resources that support innovators and entrepreneurs in building upon their natural talents, often while developing a new venture.  Some of these are aimed at individuals who are considering starting an innovation-driven venture while others help teams already in the process of starting up or accelerating a new business.

It is easier than ever before for individuals with a great idea, substantial subject matter expertise and minimal business experience to learn the basics. In addition to local resources, intensive introductory courses are available through the Stanford Venture Lab or MIT Open Courseware for free. If you prefer a completely self-guided approach, here is a wonderful list of books (the Startup Nuts & Bolts section is a good starting point), many of which are also useful references for individuals and teams already in the trenches.

For hands-on programs, consider local and national accelerators and incubators that work with pre-venture and new venture teams. The iterative learning and doing that takes place in some of these is remarkable.  Here are three programs with which I have firsthand experience:

  • The National Science Foundation I-Corps program provides an intensive experience through which university-based teams learn new skills while exploring commercialization opportunities for a promising technology. As a mentor on one such team it was inspiring to share the experience with similar groups, all committed to improving their abilities as innovators and entrepreneurs.
  • The MassChallenge is an industry-agnostic accelerator program that draws new ventures to Boston (MA) for four intense months. The program includes exceptional office space, a wide array of seminars, ongoing mentoring, access to experts, and facilitated exposure to the Boston/Route 128 innovation ecosystem. I help out as a volunteer mentor.
  • The CleanTech Open is a sector-focused accelerator with regional programs together scale to a national program. I mentor for the Northeast CTO. Its decentralized structure allows it to serve the needs of innovators and entrepreneurs regardless of location while giving them access to specialized information and resources.

Of course, there are many other programs throughout the US and globally. Look for one that fits well with your situation and needs. Beyond such programs, seek out informal opportunities to learn as you make progress and build your network.

Innovation-driven entrepreneurs who are able to be constructively self-critical about their progress and skill sets relative to an objective framework are at a big advantage over the long-term. Having such a perspective allows for continuous improvement of themselves, their team, and their businesses. I will write more about this in a future post.