While money is harder to come by, there is still money out there for deals that hold promise.
Last year the Forbes America's Most Promising Companies identified twenty entrepreneurial ventures with strong promise for growth.
In a follow-up, we find that many of these firms have had success in raising money. Mind you, it has not been a flood gate of cash flow opening for these firms even with the publicity from this event. But, together they have raised about $19 million.
But, because funding is still limited, the firms in this group are being prudent with every dollar they raise, making sure they get the most bang for the buck. From Forbes:
That's not to say some on our Most Promising list didn't express a bit of
caution. Brian Javeline, founder of ServusXchange in Pompano Beach, Fla.,
anticipates shelling out to further develop his Web-based software that lets
building contractors manage invoices, create estimates, schedule work orders and
communicate with subcontractors. However, he notes: "Nothing is being spent
unless we clearly have to."
A key reason these firms have been able to raise money is that they are doing what they said they were going to do. Making promises is not enough -- you have to hit your milestones. Most investors have a much more cautious approach to funding these days. Rather than betting on a plan and a dream, they now expect entrepreneurs to show them results before investing any money. The Forbes list of growing companies are hitting many of their milestones, as can be seen in this article.
That requires more an more firms to learn the art of the bootstrapping start-up and often need to continue bootstrapping to get by between rounds. Pre-revenue financing is very rare right now, and even growing firms must be patient for any follow-up rounds of funding.
It is interesting to note that only two of the twenty have gotten outside financing and that only one of these two companies have prior entrepreneurial experience.
What is the single
most important element of any business partnership?
You will most likely spend more time with your business partners than
with anyone else - even your family. And it will be a relationship
that can be even more complicated to get out of than a marriage. Who you choose to be business partners with should be given as much consideration in a deal as what products you make or what markets you enter into.
Dysfunctional partnerships are a major source of business failure. They suck energy and time away from building the business. They can often lead to the break-up of perfectly good businesses.
That being said, I think that if I have to pick one element as the most important it would be that you and your partner(s) share the same values, aspirations, and vision for the new venture. This requires a careful and thoughtful discussion of critical business issues BEFORE the business is ever launched.
Work with your attorney to create a shareholder agreement before you officially incorporate. Just as marriages can fall apart on the honeymoon, business partnerships can fall apart before the first sale is ever made.
Here is just a sample of some of the issues you should discuss with potential business partners: • Do you share the same vision for the business? • Do you share the same aspirations for the business in terms of its size? • Are you all going to make the same level of commitment of time to the business? • What are your work habits and work ethic? • How much time off to you plan to take each day, each week, each year? • How much money will you put into the business? And how much do you expect to get out of it? • Who will be the President of the company? What roles will the other partners play? • How strong is everyone's credit rating? Can all partners 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? • How will employees, customers, suppliers, etc. all be treated?
Business partnerships can be a successful experience for everyone involved. But it takes open and honest communication and careful planning.
This week's question for Forbes magazine's America's Most Promising Companies initiative comes from Brett Nelson, Entrepreneurs Editor at Forbes:
The fear of Big Government is in the air. What are some of the most deleterious regulations hampering small business today? What would be a better approach?
I offer a modest and simple proposal to this question -- repeal a single act passed almost one hundred years ago. It reads as follows:
ARTICLE XVI. The Congress shall have power to lay and collect
taxes on incomes, from whatever source derived, without apportionment among
the several States, and without regard to any census or enumeration.
If we did away with the federal income tax by repealing the 16th amendment to the constitution, we would do away with the Internal Revenue Code as we now know it -- all 70,000 pages of it. No set of regulations hampers small business more than the red tape, cost, and complexity created by our income tax system.
How to replace it? I still favor some form of consumption tax.
This week's question for Forbes magazine's America's Most Promising Companies initiative once again comes from Brett Nelson, Entrepreneurs Editor at Forbes:
Like it or not, leading the troops means keeping them happy and motivated. How do you do that while cutting their salaries and benefits to stay alive?
We know that there are two reference points that employees use to determine if their pay and benefits are fair. First there is the internal equity of the compensation -- how it compares to people around them at work. If everyone is feeling the pain, they may not like it, but it tends to not effect motivation as much as if the cut-backs are selective. If the employees see that everyone -- hourly workers, managers, and owners -- are taking their share of the cut, the impact on morale and performance can often be minimized.
The other reference is people with similar jobs in other companies. Is their pay equitable when looking at other people in the community or in other companies in their industry? Since times are tough all over, there may be a sense that they are just happy to have a job.
Remember that both of these references -- internal and external to where they work -- will be used by employees to determine relative fairness of their current compensation.
Small businesses have always had other means of non-salary rewards and compensation that are not always used in larger businesses. More than ever, these can be used to help increase the morale and motivation.
Small businesses have more flexibility in how they structure compensation. To leverage this entrepreneurs should listen to what the employee really wants. There may be opportunity to meet their needs in ways that do not cost money.
An example comes to mind from my days as an entrepreneur in the healthcare industry. There was a manager I wanted to hire to run a new program we were
starting, as he was one of the best in our industry. He worked for a
large, national company. I knew I could not match his salary, but I did
not give up.
I got to know him and found out what he was really looking for in
his career and in a job. He wanted to have more control over his
department. That was easy as we were small and our structure was quite
decentralized. He could run the new program like it was his own
business.
He wanted to have some real ownership in the business he worked in.
We could do that, too, as we set up separate corporations for each new
program we started and we had already planned to offer a small
ownership stake for the right manager. Equity or equity-like incentives
can be a way to defer compensation until you can afford it, and create
an incentive that gets everyone pursuing the same goals.
There was one more thing he wanted, however, and it was clear it was
a deal breaker for him. His current employer had very strict rules on
vacations and holidays. He was a Viet Nam veteran and had wanted to go
to Washington, DC each Veterans Day to remember his fallen comrades.
His current employer's rules did not make it possible to guarantee
that, and he had missed the last two Veterans Day observances. So, in
my offer I promised him that he would be guaranteed Veterans Day and
one work day on either side of it off each and every year (they were
counted as vacation days). That was all it took to convince him that we
were the best place for him to work. He came to work for us taking a
significant cut in base salary from what he had been making before.
This week's question for Forbes magazine's America's Most Promising Companies initiative comes from Brett Nelson, Entrepreneurs Editor at Forbes:
Small companies must get creative to survive the recession---even going so far as to branch into new lines of business (assuming they have the cash to do it). But mission creep comes with serious risk. What are some tangible do's and don'ts about expanding your product line?
Why should a small company change their product line? For only one compelling reason -- the market is taking them there.
Entrepreneurs typically rely heavily on their
business plans when the time comes to launch their new venture. It is a
plan that they may have agonized over for weeks, months or years. They
have done their research, creating a carefully thought-out business
that justifies their financial forecasts. But then a funny thing
happens. They assumed in their business plan that the market wanted
"A." But if they listen carefully to the customer, they often find out
that the customer really wants "B."
I call this learning to "dance with the market." And you should be ready to let your customers lead in this dance.
The need to listen to the market never really ends. Markets are dynamic, so you need to be ready to follow where they lead, particularly during times of rapid change and turmoil in the market as we are experiencing with the recession.
What should you be cautious about when it comes to adjusting your mission?
Don't move so far off of what you are known for that you lose your customer base. There may be opportunity beyond the boundaries defined by your mission, but these opportunities may end up redefining your business so much that you confuse the market.
This week's topic for Forbes magazine's America's Most Promising Companies comes from Brett Nelson, Entrepreneurs
Editor at Forbes. He asked us to comment on the following:
Health
care headlines have dominated for more than a week now. And yet the dialogue
still seems many steps removed from how all of these proposed changes will
help/hurt small, growing businesses.
This blogger has done anything but ignore the impact of socialized medicine on small business. My post yesterday stressed again the negative impact it would have on job creation due to increased costs and the healthcare mandate that would be faced by any small business with over 25 employees. I have also warned of the negative impact that higher marginal tax rates necessary to pay for national healthcare would have on entrepreneurs -- on their start-up rates, their exit plans, and their growth strategies.
The interesting thing to me is the steady chorus of small business owners who say that they want nationalized healthcare. They seem to be taking the short-sighted perspective that this will take one more hassle off their plates.
Here is my warning to them.
There is an even greater danger to supporting this plan. It is one more step to diminish our property rights. Nationalized healthcare would be yet the next step down the road to reaching the tipping point of moving from a capitalistic economy to a socialized economy. It is one more step toward moving basic property away from private ownership to becoming public goods to be doled out by bureacrats and politicians.
Ultimately entrepreneurship is based on a system of property rights and liberty. The move toward socialization of healthcare -- and banking, and manufacturing, and insurance, and mortgages -- is eating away at the foundations of entrepreneurship like a cancer.
How
do I balance a need for strategic focus versus diversification and expansion of
my products/services?
This question gets at the heart of a classic entrepreneurial challenge.
On one hand, it is essential to adjust the business to meet the changing needs of the market. This may take the form of expanding or altering the positioning of the business to meet these changes in the market. This may require expanding or even fundamentally changing what we offer to our customer base. It may also lead us to change how we define who are customers need to be going forward. Certainly, entrepreneurs should never allow themselves to become paralyzed within their original business model if the market is telling them that they need to evolve their concept to fit the reality of a dynamic market.
On the other hand, I see many entrepreneurs who suffer from what I call Entrepreneurial A.D.D. For these entrepreneurs I find myself saying one word over and over: Focus!
So why do entrepreneurs lose their focus? It has to do with opportunity. While opportunity in the market is what launches entrepreneurs into business, it can just as quickly become their undoing.
What happens is this -- once the entrepreneur enters the market they start to observe many other opportunities that exist in the marketplace. Entrepreneurs, especially less experienced ones, start to see new business opportunities everywhere. They feel compelled to pursue those opportunities even if it is not wise to do so. They feel a desire, even a compulsion, to start additional new businesses even while their first one is still in the start-up phase.
Sometimes the opportunity relates to expanding into new markets. The entrepreneur sees opportunities to move into additional markets that are not part of their current business operations. The problem arises when the business and/or the entrepreneur are not yet prepared for this expansion.
For example, a former student of mine had started a franchised business that provides in-home care for the elderly. During his first year in business, and even before his business had positive cash flow, he was approached about buying a distressed franchise operation of the same business in a nearby town. When he asked my opinion, I urged him keep his attention focused on the first business he had started - he did not need two businesses that were operating at a loss!
But, he could not resist what he perceived as an opportunity worth a risk and bought the second franchise. About a year later he called and admitted that it was a huge mistake. He managed to get both businesses on the road to profitability, but was working 80-100 hour weeks and going much further into debt than he had ever intended.
Even more disruptive is when entrepreneurs pursue opportunities in entirely new businesses before their initial start-up venture is profitable. I recently met with one entrepreneur who had five distinct businesses operating. But, not a single one of them had reached profitability. Luckily, we were able to develop a plan to shut down most of them so he could focus his efforts on his initial start-up business and build it to the point of positive cash flow.
The best way to avoid pursuing too many opportunities too quickly is to write down a clear mission statement and always remember one word: focus. If truth be told I believe that mission statements are most important as a tool to keep the entrepreneur on track than as a means to communicate to our team and to the outside world about what we offer.
Given a choice between strategic focus and diversification for small and medium ventures, I will choose to push for more focus almost every time.
How
can I prevent my business from being too dependent on one or two key
personalities (e.g., founders) so it can continue to grow after their
departure?
The biggest roadblock to building a team that sustain a business even after the departure of the founders is their hesitancy to delegate.
Letting go is tough for most of us. We have been with our business
all the way through its growth, through the good and the bad times. But
at some point, if we want our business to grow successfully, we have to
begin to delegate. At first it will seem that no one can do what you do
as well as you can. But just like raising a teenager, at some point you
have to begin to let go so they can learn and grow up. Your business
will go through this same difficult transition. If you don't begin to
let go, you business may never successfully move into its next stage of
development.
Out of the challenge of delegation comes a second issue -- "What exactly is the job description for a CEO, any way?"
For many entrepreneurs, this may be their first time as a CEO. That
title means very little in the early days, but as the company grows it
takes on more meaning. Defining your role and your style as the CEO of
your company takes planning and specific effort on your part. It may
even feel a bit awkward at some point, but you have to establish what
your role will be as the CEO. Play to your strengths.
This is often due to the fact that many entrepreneurs start their businesses because they like the
hands-on part of their business. Engineers like to engineer. Furniture
makers like to build stuff. As some point in the growth of the
business, the entrepreneur begins to move away from the hands-on part
of what they company does. This can be a painful and frustrating
period. Keep this in mind when you decide how far you want to grow the
business. It is OK to keep it at a size that allows you to stay in the
hands-on part of what you do.
When building the management team that will take over much of the running of the business, the most common mistake is to hire solely based on people's skills and experience. The technical ability of the person to perform the job should be the minimum criteria that get them to the first interview. After that, pay most of your attention to their fit with your culture and their ability to continue it into the future.
This requires that you have a clear and concrete understanding of what makes up your culture. Then use this to develop several open ended interview questions that can give you insight into how well they fit with your culture. Don't asking questions that lead them to answers. Make them vague enough so they have to use their own values to build their response.
For example, assume that bootstrapping is a key part of the culture of your business that you want to ensure will continue into the future. You might ask them the following: "Tell me about a time when you had
to accomplish a task when limited resources were available." If the
interviewee answers the question by saying that she always had more
than enough budgetary support in her old job, it might be difficult for
her to adapt to a bootstrapping environment not having worked that way
in the past. Or, if she answers by complains about the availability of
resources in her old job, or about how her old boss was always cheap,
that is a good signal that the employee is not have bootstrapping as a
part of her work ethic. On the other hand, if she speaks with
enthusiasm and pride about how she got the job done within the limited
resource available, she would more likely fit into the bootstrap
culture.
At
its core, the America's Most Promising Companies project is about getting
capital to entrepreneurs who need it. Many go wanting, especially in this
credit-starved economy. With that in mind, how does America's financial infrastructure
need to change---if at all---to make sure deserving entrepreneurs have access
to precious funding? For that matter, what are the keys to raising money, in
this or any economic environment?
I find it very worrisome that there is movement toward more government intervention in financial markets that serve entrepreneurs. Pumping more money into the SBA to prop up businesses that cannot support that debt is bad policy and a bad business decision. And now we hear that venture capitalists are trying to get their cut of government funding through the bailouts. Venture capital investment is, by definition, a high risk affair. If VCs can't raise money through private offerings it seems to me that there is a good reason -- their expected returns have become too risky. We don't need to throw tax payers' hard earned money into poorly performing funds.
Truly deserving ventures can still get funding, although it has gotten a bit more complicated and challenging.
Equity funding is still flowing. The amounts are less and the money can be harder to find, but it is still out there. Entrepreneurs need to be prepared to be able to offer more proof of concept. The giddy times of dreams and ideas getting money thrown at them are over for now. Do what it takes to prove you have a viable business -- find customers who will buy your products or services. This will take more self funding for seed money and more bootstrapping to get the business off the ground so you can demonstrate to investors that your business really works.
Debt markets for entrepreneurs are going back to basics. This is a good thing, I must say.
Traditionally, bankers have operated with a business model that tries to minimize risk. They are responsible with protecting the deposits held in their banks. Many banks strayed too far away from this in the recent past, but they are returning to their old ways of doing business.
Businesses must be able to qualify for bank credit on their own standing. This has very little to do with the things that get entrepreneurs excited about their own business, such as opportunity, upside potential, and vision. To a banker, a bankable business is one that will pay back its loans with very little chance of anything going wrong. So rather than getting excited about untapped markets or product innovations, bankers look to three main factors:
Is there adequate cash flow?
Bankers define "adequate cash flow" not as being just enough excess cash each month to cover monthly loan payments, but significantly more than enough excess cash flow. Also, bankers want see this cash flow already occurring, not projected in the future within a business plan. That is why bankers are usually not the best source of funding when you first open your business. Get a track record and some cash flow and you will find that bankers are much more receptive.
Can owners pay back the loan if the business cannot?
Personal guarantees from the entrepreneurs who have the personal net worth to pay off those loans is the second line of defense for banks.
Is there collateral?
The reality is that banks don't want to try to collect your accounts receivable, sell your inventory, or liquidate your equipment - and they certainly don't want to run your business. Don't assume that such collateral is what banks like to see in a business loan proposal. Collateral is considered the last resort for covering a loan from a banker's perspective.
The financial markets will improve for entrepreneurs as the financial prospects of their ventures improve. Private sector efforts to improve the efficiency and effectiveness of financial markets for entrepreneurs, such as angel networks, web resources, and projects like America's Most Promising Companies can help, but the wounds in this economy will take a long time to heal.
