The Entrepreneurial Mind

When first entering into the world of VC funding entrepreneurs often overlook in the importance of understand the local "flavor" of VCs.

VCs tend to be more geographic in their investing -- they tend to favor deals closer to home. It reduces their risk, as they know more of the players in their area and it is easier to keep an eye on things.

And VCs in each region or even each city will often focus on just a few industries or even a couple of segments within those industries that they know well. Again, it is a way of reducing risk, since they can understand, evaluate, value and forecast a deal better if they have experience and knowledge in a specific industry segment.

A case in point can be seen here in Nashville. Much of the wealth in this area came out of health care -- and specifically health care services and management. the health care giant HCA created a lot of wealth here in Nashville and spawned many deals formed and/or funded by its former executives. Wander too far from health care services or management and the money gets harder to come by. Even medical devices are harder to fund here because the money does not have experience in that segment.

And move too far away from health care and it even gets tougher. There is a great example seen in an article from Business Tennessee magazine:

Four months ago, Tim Estes stood at a podium and lamented how much further up his company—Brentwood-based Digital Reasoning Systems -- would have been on the high-tech food chain had it just been located on either of the country's coasts. The 28-year-old entrepreneur declared that the 15 or so Midstate venture capital firms are too timid or unimaginative to risk anything beyond recycling the same old health care services model over and over again. "Why not link evidence-based medicine and informatics?" he asked. "[Health care] data is essentially the crude oil. Refining data is seven times more profitable than pushing it around. This is inexcusable. We should be leading this."

So this entrepreneur is planning to pick up and move where the money is for his Web 3.0 business deal.

(Thanks to Jim Stefansic for passing this along).

Posted by Jeff Cornwall at 09:14 AM | Permalink | Comments (1)

One of the best barometers of the economy is the behavior of venture capitalists and angel investors.

The stage of investment is one key to follow. When they shift to later stage deals as they have the past few years, it generally means they are taking a more conservative approach to investing, as later stage deals tend to have less risk. During robust times, or during speculative frenzies, they tend to move to earlier stage deals.

A report by the National Venture Capital Association casts a rather dark shadow over the economy to come. From the NVCA report:

"While the exit market remains challenged, the venture industry is operating under the same long-term philosophy it has adhered to historically. Venture firms are prepared to invest for 5 to 10 years and will stick with their companies through difficult times. That said, for the remainder of the year we will be watching first-time funding levels, which declined this quarter. This dynamic could very well be the result of the closed IPO window and will become concerning if the situation is prolonged."

Rather than going to new deals, more VC money is going into already funded deals to keep them afloat until an exit strategy can be executed.

While the IPO option has dried up, that is really not news. That change goes back to Sarbanes-Oxley. What the report does not say, but I believe is now a compounding factor, is that the main exit strategy of selling to a large publicly held corporation is declining.

Keep your eye on this. If corporate America continues to get conservative due to inflation, or worse yet stagflation, it will get even tougher to find early stage funding for high growth deals.

Posted by Jeff Cornwall at 06:41 AM | Permalink

According to the latest report from the National Venture Capital Association, venture capital investments were down 8.5% during the first quarter of 2008 when compared to the last quarter of 2007. The report also found that deal flow was also down.

The decrease in new deals landing on the desk of VCs and the fewer deals being funded are both consistent with the slowdown in the economy.

"Despite the current economic downturn in the United States, venture capitalists are still putting money to work across multiple industries and stages of development," said Mark Heesen, president of the NVCA. "The continued interest in the life sciences and clean technology industries, as well as the traditional IT sectors, reflects the long term investment horizon that the venture industry has always embraced. We do not expect to see significant declines in investment levels in the coming year. However, the dollars going to later stage investments could increase if the IPO window remains closed for an extended period of time and venture capitalists have to sustain companies longer than expected."

This part of the report actually concerns me more than the slowing flow of deals. VCs had already become more cautious in 2007, pursuing more later stage deals. With angels also pursing their investments into later stage deals, there is an alarming shortage of money for seed and early stage ventures.

The drag on these shifts might be felt on the economy for years to come.

Posted by Jeff Cornwall at 05:29 AM | Permalink | Comments (1)

The federal reserve announced that bank credit has tightened. Not startling news, but the implications might catch small business owners by surprise.

The first impact is on new loans. Tighter credit standards means that banks will be even more conservative on business lending. Higher standards for cash flow, personal credit history, collateral requirements, and performance standards. Business loans that might have been approved a year ago, might no longer meet this new standards.

The second impact is on existing loans. This is where the surprise might hit hard on many small businesses. Many entrepreneurs assume that business loans work like personal loans -- you make your payments on time and the bank leaves you alone. Not true. Making payments on time is only one of several criteria that bankers will be watching. They will look hard at all of those loan covenants and performance expectations that many of us gloss over the the excitement of getting a loan for a new project.

During tight credit times, these restrictions become much more important for a bank to watch -- they are judged on how well they meet performance standards by the federal regulators. For example, a common condition is to maintain a certain debt coverage ratio, which measures how comfortably your cash flow covers your loan obligations. If you dip below the agreed upon ratio, the bank may step in and require you to improve your performance. If you don't, the bank can call your loan even if you never missed or were late with a payment.

The bank's portfolio of loans comes under tighter scrutiny during tough times like this, and they will pass that scrutiny along to their business loans.

Once a bank asks you to move your loan, you have to find another bank that will take on your loan. During good economic times, this is somewhat easier. But during times like these, all banks are under the gun to improve, so this becomes a much more difficult task.

Yet another reason to get back to basics during tough economic times. It becomes even more critical to improve cash flow and bring down debt.

Posted by Jeff Cornwall at 07:13 AM | Permalink | Comments (1)

This morning's installment for ideablob.com Week at the Entrepreneurial Mind looks at an idea to develop sportswear for women:

Vintage Blue is a vintage inspired sportswear line for women. We hold the exclusive license to the All American Girls Professional Baseball League featured in the film A League of their Own. We create t-shirts with graphics from the 1940's and 50's. Our line is environmentally friendly using non-toxic dyes and 100% organic cotton tees. We also give back to the community with our internship program encouraging young women to be positive, motivated individuals while learning the ins and outs of the fashion industry. We will also donate 5% of our profit to the Achieving Independence Center Female Mentoring which helps young women achieve self-sufficiency through mentoring relationships.

They stated that their main concern is funding, so here is my advice:

Funding for this venture is probably limited to family and friends.

Your market is probably too limited and does not offer enough growth potential for traditional equity investment (angels and VCs). Not enough growth potential, especially using a movie that is several years old as your theme. Don't feel bad about this, as they actually only fund a fraction of a percent of deals in the US.

Banks will only loan you money on your personal credit for a start-up like this. If you have homes that you can borrow against you should be able to get some help from a bank.

So that leaves friends and family. Treat their money as a true outside investment. Set up terms and conditions. Be realistic with them about potential returns and all of the risks. Thanksgiving dinner comes every year, so let's avoid creating family problems that center around unrealized expectations of any investment. Families can be complicated enough as it is!

Posted by Jeff Cornwall at 05:37 AM | Permalink

Angel investors were busy, but a bit more cautious in 2007, according to the latest study from the Center for Venture Research of the University of New Hampshire. There was little growth over the previous year in their investment activity.

They stuck to familiar ground in terms of industry sectors that they favored.

• Software 27% of total angel investments
• - Healthcare Services/Medical Devices and Equipment 19%
• Biotech 12%.
• Industrial/Energy 8% (green technologies moved this up a bit)
• Retail 6%
• Media 5%

Their conservative stance also showed up on the stage of deals that they favored. While seed and start-up capital, long the domain of angels, was 39% of angel deals, they showed more interest in later stage deals with more proven track records. The survey found that 35% went to post start-up ventures and 21% was directed toward even later stage expansion investments.

Exit activity showed that in the post Sarbanes-Oxley world mergers and acquisitions still dominate exit events -- 65%. IPOs were an anemic 4% of exits. Bankruptcies accounted for 27% of the exits.

Rates of return continue to hover in the 20-40% range.

Posted by Jeff Cornwall at 05:34 AM | Permalink

Milt Capps, a seasoned journalist, has launched a new blog called Venture Nashville. Capps says that "The purpose of The Venture Nashville Blog (VN) is to help increase the flow of accurate information about research, innovation, technological developments and investment activity in one of America's finest cities, Nashville, Tennessee."

Although the focus is on Nashville, he is building a blog that will be of interest to anyone dealing with technology entrepreneurship.

Posted by Jeff Cornwall at 09:38 AM | Permalink

Stressed about getting that "A" Round of funding closed? Have you heard "no" from one too many angel investors? Then maybe you want to let off a little steam and show up to a pitch wearing one of the shirts offered by Startup Wear.

Here is my personal favorite:

Posted by Jeff Cornwall at 09:29 AM | Permalink

I've been preaching the need for entrepreneurs to practice fiscal prudence during these uncertain economic times. Keeping debt load to a minimum is one of the more important steps a business can take, due to the inevitability of rising interest rates if inflation continues to heat up. Also, banks will be coming under more pressure to clean up their loan portfolios -- this means that even if you have made all of your payments on time the bank may call your loan simply because your credit risk is too high to fit with tighter regulatory standards.

Helen Anderson at her blog called Bankaholic also worries about entrepreneurs who take on too much debt:

As an emerging entrepreneur, it is very easy to quickly accumulate debts that are substantial enough to kill your burgeoning business before it even gets off the ground. But it does not have to be that way. Take the time to examine your business workflow and you will likely discover a number of extraneous costs that can be eliminated to improve the health of your bottom line. Here are eight common practices that lead to common results; learn to avoid them and you will be uncommonly successful.

You can read her eight avoidable causes of unnecessary business debt here.

Posted by Jeff Cornwall at 08:18 AM | Permalink

Some good news on the high growth venture financing front -- VC money is spreading out across the country.

From the New York Times (thanks to Ben Cunningham for passing this along):

Venture capital is on the move -- to New Mexico, Pittsburgh and points beyond.

A new survey shows that venture capital investment -- the stuff that fuels technology innovation -- is growing in parts of the country where it has been largely unapparent. The survey from the National Venture Capital Association, based on data provided by Thomson Financial, found that while Silicon Valley remains the hotbed of seed capital, other regions are seeing it grow more quickly.

Cities and states are pushing hard to get venture capital and angel money flowing into their economies. I am part of a planning group that is seeking to attract more high growth money to Nashville.

However, attracting venture capital is not the holy grail of entrepreneurial economic development that many people seem to assume. A few points to remember:

- Venture capital money funds only a tiny fraction of new business ventures. Most of the fuel of the entrepreneurial economy comes from small businesses that will never need nor attract venture capital. While high growth businesses are important, they are marginal players in economic growth.

- About 80-85% of start-up capital for new businesses comes from the entrepreneur and her friends and family. Most of the rest usually comes from loans.

- A typical venture capital firm receives hundreds of plans each year, considers only a handful, and usually funds only 3-5 deals a year.

- Most venture capital goes to businesses that promise very high growth, with the promise of high returns (70-100% annual return on their investment). They are looking for home-run deals.

- They tend to favor funding deals that are run by people they know from previous deals.

- Venture capital firms most often are looking for deals that need at least a $5 million investment, and most now look for $20 million deals or even larger.

Posted by Jeff Cornwall at 04:44 PM | Permalink

As an entrepreneur, I always hated the month of February. Why? Because it had 10% fewer days than many of the other months, which meant that it generated 10% less cash flow for my business.

So in honor of the extra day we get every four years, I want to wish a Happy Leap Day to all of you entrepreneurs out there!

Posted by Jeff Cornwall at 05:04 AM | Permalink | Comments (3)

The Angel Capital Association reports on their latest survey of angel investor attitudes. It seems that angels are not quite as gloomy as their VC cousins (see my post on their mood from last week).

Angel group leaders expressed optimism about the climate for investments in early-stage businesses in 2008 in a recent survey by the Angel Capital Association (ACA). This optimism comes despite recent news about the slowdown of the US economy and follows a year in which investment activity stayed level with 2006.

You can read a summary of their report here and find the summary statistics from this survey here.

Posted by Jeff Cornwall at 08:33 AM | Permalink

To those of you who deal regularly with venture capitalists you probably think this is the start of a bad joke. How do you tell when a VC is feeling pessimistic? Well, the University of San Francisco has created an index to measure the mood of VCs -- and as dour as they usually seem, their confidence plummeted during the last quarter of 2007. (I am a horrible joke teller, so if you have a punch line to offer for my hypothetical joke, please pass it along!)

"The Q4 Silicon Valley survey indicated a significant decrease in Bay Area VC confidence in the high growth entrepreneurial environment to its lowest reading in 4 years," says Mark Cannice of USF.

And the mood overseas is not much better.

"The China Q4 survey indicated a modest decrease in China VC confidence in the high growth entrepreneurial environment. This decrease was primarily attributed to a changing regulatory environment and inflated valuations."

Here is a graph that displays this sudden drop in the confidence of VCs.

So what does this mean?

- VCs will likely now look at each possible deal with even more scrutiny. They will become even more diligent in reviewing each deal and will likely be quicker to throw deals that give them any heartburn out the door.

- They will also in all probability offer less favorable terms to protect their returns. The assumptions they use to model growth will become much more cautious, leading to much lower valuations.

- And they will be quicker to pull the trigger on replacing management if the entrepreneur starts to falter.

Posted by Jeff Cornwall at 06:40 AM | Permalink | Comments (1)

The SBIR (Small Business Innovation Research Program) funding program is in jeopardy of not being renewed. From GenomeWeb Daily News:

The Federal funding program that supports small businesses that pursue innovations in biomedical and other high tech fields is in need of an overhaul, according to some industry representatives, and is set to dry up later this year if the US Congress does not agree to extend it. In an effort to press lawmakers to do something about the Small Business Innovation Research program, industry representatives held a sort of a cheering session this week on Capitol Hill that touted the value of the program to biomedical research.

One of the "cheerleaders" is Belmont alum Dr. Jim Stefansic, CTO of Pathfinder Therapeutics, Inc. (PTI). Here is part of his testimony before Congress:

Although PTI has overcome much of the technology and regulatory risk associated with bringing a new medical device to market, many other challenges remain to ensure that our technology can improve the lives of those suffering from abdominal cancer. It is important to note that these risks would not have been conquered without both the SBIR grants and the modest seed round investment in PTI. Both of these funding sources are described in more detail below.

Given that the expertise of the founders in successfully acquiring academic federal grant funding, we were encouraged by our seed round investors in the summer of 2004 to raise additional early-stage funds through the SBIR mechanism. With teamwork and considerable effort from all the founders, in early 2005 PTI was fortunate to land on our first attempt a fasttrack SBIR grant from the National Cancer Institute (NCI) to develop a commercial software and hardware platform for a variety of image-guided therapeutic applications that target cancer. As the principal investigator on this grant, I have been able to focus part of my time and energy on taking the technology from the founders in the academic setting to commercialization without being concerned about salary support and other R&D resources for my engineering staff. The $1.5MM in grant funds have been primarily used to develop the SurgiSight image-guided therapy platform and will enable PTI to grow from one specific therapeutic area (liver surgery) to the broader field of surgical oncology (kidney and colorectal) to the broadest field of general surgery (vascular/soft tissue applications throughout the body). The key to unlocking this potential is the stability and versatility of our software platform and its ability to seamlessly interact with multiple hardware configurations. This versatility will enable Pathfinder to release products that are amenable to applications that employ either an open or minimally invasive surgical approach.

Jim knows that I am not a big fan of programs like SBIR. I do not believe that it is the role of government to steer entrepreneurial activity and fund businesses. That being said, we are very proud of Jim and we are glad that he was able to leverage this funding to start what we know will be a great business.

Posted by Jeff Cornwall at 01:35 PM | Permalink | Comments (1)

The latest statistics from the National Venture Capital Association seems to suggest that the high growth sector of our entrepreneurial economy has leveled off. Venture capital firms raised just slightly more than they did in 2006 (up 2.6%). This was expected, since capital markets have tightened and many funds still have significant over hang of uninvested funds. Mergers, acquisitions, and initial public offerings were up a bit. These results are good in that we did not see a downturn in the venture backed sector. But, it is a further indication that the entrepreneurial economy is no longer showing the robust expansion we saw over the past few years.

Posted by Jeff Cornwall at 08:49 AM | Permalink

If you've ever interacted with a VC you might find it hard to imagine them feeling bullish about anything, but the latest survey released by the NCVA paints VCs as having a fairly optimistic outlook for 2008.

Venture capitalists are forecasting an active year for the industry with high growth in the CleanTech sector, an improving IPO market and fewer venture firms in 2008. These predictions are among the top line findings of the NVCA 2008 Predictions Survey. The results also show concerns about global investments in certain regions including China. Additionally, the industry believes fund sizes will become larger and returns for limited partners of venture capital funds will improve in both the short and long term horizons.

Posted by Jeff Cornwall at 02:20 PM | Permalink | Comments (1)

When you deal with something almost everyday it can become second nature to you. So it is with financial statements for those of us who pour over them in business plans, financial forecasts, and case studies. But for many entrepreneurs, even some with surprisingly large companies, financial statements are difficult to digest and interpret.

My column in this week's Tennessean offers some tips on how to begin to understand and better utilize the information contained on a monthly income statement.

It is important to look beyond the numbers presented in the income statement and examine the percentages that each of those numbers represents. Look at major expenses every month to see what percentage of sales is being used to pay for each expense. Entrepreneurs who train themselves in how to read their income statements carefully will begin to see trends that will help them make decisions and solve problems within their companies.

Posted by Jeff Cornwall at 10:00 AM | Permalink

In this week's column at the Tennessean I provide a summary of what it takes to attract investors to your business.

So what do these professional investors look for in a business when they make an investment decision?

We often hear that such investors will put money in an "A" team with a "C" idea, but not an "A" idea with a "C" team. That is, rather than investing in the next great idea, they invest in entrepreneurs with a proven track record of success in previous deals. However, the truth is that you will need straight A's to get angel or venture capital money.

Posted by Jeff Cornwall at 06:28 AM | Permalink

the Kauffman Foundation has released a study indicating that angel investment groups are now seeing returns on their investments that rival VC firms.

Angel investors participating in organized angel groups are seeing average returns -- 27 percent -- that rival those of in the VC industry. The "Returns of Angel Investors in Groups" study, released by the Kauffman Foundation and the Angel Capital Education Fund, shows that within 3.5 years from investment to exit, this group generated 2.6 times their invested capital. Seven percent even generated returns 10 times their initial investment. However, the risk inherent in angel investing also was illuminated -- just over half of the cases resulted in a negative return with some or all investment capital lost.

Posted by Jeff Cornwall at 08:20 AM | Permalink | Comments (1)

I came across a site that if you have not visited, you need to. It is called Ideablob. One recent visitor called it a place for idea junkies. Each month people submit their ideas for new businesses. Visitors to the site then get to vote on the best idea for that month. Think of it as Survivor meets the elevator pitch. Each monthly winner gets a $10,000 check to help with their business idea.

The site is funded and sponsored by Avanta. They are being very low key about their connection, however. Marketing of the site has been solely through viral means to this point, such as Facebook, blogs, etc.

Posted by Jeff Cornwall at 02:01 PM | Permalink

Although it is a week that I wish we did not need to recognize, next week is National Fraud Awareness Week. SunTrust Bank has partnered with the National Small Business Association (NSBA) to put out the "Foil Fraud" survey.

I followed up with the folks at SunTrust to get some more insight into the nature of fraud in small businesses.

Q: Is the problem of business fraud getting worse for small business owners?

A: It might be. Based on our survey we know that it certainly is a concern for small business owners and that concern is growing. A recent joint study by SunTrust and the National Small Business Association showed that 84 percent of small business owners are concerned about fraud in connection with their businesses' finances. We also know going into the next year those same small business owners say they feel more vulnerable when it comes to fraud. In the Southeast 1 in 4 small businesses have been affected by fraud and nearly half of all business owners know of some small business that has been hurt by fraud. This fear is growing as businesses become more reliant on the Internet.

Q: What is the most common type of fraud small businesses face?

A: Interestingly, our survey showed that the majority of small business owners were concerned with online identity theft, or online hackers. However, in actuality the most common types of fraud perpetrated on small businesses are credit card fraud and check fraud; and the most common perpetrators of these types of fraud are clients and employees.

Q: What are some simple steps that small businesses can take to prevent fraud?

A: First and foremost, small business owners should talk to their financial institutions to find out what types of fraud protection they offer. Our survey showed that business owners wish banks offered businesses more help in fighting against fraud. A very large percentage of business owners wish there was a way to detect business fraud to prevent or limit loss and are looking for more information about preventing fraud in their business. At SunTrust, we have listened to this and acted, and now have a product to help small business owners detect fraud. Our Online Cash Manager Plus and Premium products now feature Fraud Inspector--a feature that was designed to help small businesses identify fraud and reduce risks before businesses are impacted. The tool gives clients the ability to review paid items that have cleared against their business checking, savings or money market account(s), and request that an item be returned if it is suspected to be fraudulent.

We also encourage small business owners to focus on things like the separation of duties within their office staff and enforce other measurements such as have a fraud policy in place with a fraud hotline or suggestion box. But most importantly business owners should hire the right employees. In doing so, they should conduct background checks on employees, especially those associates that will be dealing with valuable inventory or finances. Also, take the time to call references and verify credentials--too often employers skip this step, and it could mean the difference between a star employee and an employee who could hurt your business.

Finally, get involved. Becoming a member of a national association, like the NSBA, can really help small businesses stay connected to these kinds of key issues.

Posted by Jeff Cornwall at 03:32 PM | Permalink

How do venture capitalists look at deals? Read first-hand how one VC evaluates about the proposals he receives at Gaebler Venture's blog site.

When somebody sends me a business plan or gives me their elevator pitch, I quickly run it through a mental filter to see if it's a HomeRun. If it is a HomeRun business concept, I'm interested. If not, I'll quickly move on to other things.

It usually takes me 15 to 30 seconds max to figure it out....

Posted by Jeff Cornwall at 05:46 AM | Permalink | Comments (2)

There is The National Venture Capital Association has issued two recent reports that offer mixed news from the venture capital world.

One report shows good news regarding exits for VC backed deals (mostly though mergers and acquisitions):

Sixty-seven venture-backed mergers and acquisitions were completed in the third quarter of 2007, 34 of which had disclosed values totaling $7.7 billion, according to the Exit Poll report by Thomson Financial and the National Venture Capital Association (NVCA). This dollar volume represents a 104 percent increase from the same quarter last year when 41 disclosed deals accounted for $3.8 billion in value. Additionally, the average disclosed acquisition value was at its highest level since the fourth quarter of 2000. The venture-backed IPO market had 12 offerings for $945.2 million in 3Q 2007, a slight increase from the same quarter last year when $934.2 million was raised from 8 offerings.

However, the other shows a slow down in funding to support new deals:

Fifty-nine venture capital firms raised $6.0 billion dollars in the third quarter of 2007 according to Thomson Financial and the National Venture Capital Association (NVCA). This quarter's figures represented a decline in the number of funds and dollars raised from the second quarter of 2007 when 83 funds raised $9.0 billion. In the first three quarters of 2007, venture capital firms raised $20.7 billion or approximately 79 percent of the volume raised in the same period of 2006.

Given the over-hang in funding right now this is not a disaster, but if this continues it will mean tighter money for high-growth firms for the next few years.

Posted by Jeff Cornwall at 04:57 PM | Permalink

A common question I get asked is, "Are there any grants out there for start-up businesses?"

The assumption is that the government gives out grants for businesses. While there are a few government sponsored grant programs for specific demographic groups or for specific types of businesses (for example, the SBIR program), they are not very common and not accessible to most entrepreneurs. To me, their relative obscurity is a good thing, as it is just one more step toward socialized entrepreneurship -- bureaucrats picking winning industries or using entrepreneurship to shape social policy.

We are, however, starting to see some private sources of start-up grant money. Universities are starting to set up grant funds for their student entrepreneurs. We have established a small fund here at Belmont this year. Donors like the thought of being able to help nascent student entrepreneurs as they try to start their businesses in their dorm rooms and in our hatchery program. We are able to offer our student entrepreneurs small grants that are targeted for a specific need they have in their fledgling businesses, such as a small piece of software, printing costs for things such as business cards, etc., etc. The students are not under a contractual obligation to pay us back, but agree "on their honor" to replenish the fund and help to grow it when their business becomes more successful and has the money to do so.

Micro-lending programs are growing in their popularity and success around the globe. These funds (often private) give out similar funding, usually in the form of loans. They are not grants, but are still designed to assist those who would never get a dime from a traditional bank or investor. Most recipients are in poverty and see free enterprise as the best means to gain economic independence.

Now the founders of Facebook are launching their own version of this type of program. From Rueters:

Online social networking phenomenon Facebook Inc said on Monday its backers have created an unusual $10 million fund to dole out grants to start-ups with ideas for innovative Facebook applications.

Facebook is working with its primary venture backers, Accel Capital and The Founders Fund, to create a way for people with new ideas to receive an initial funding grant of $25,000 to $250,000 that does not require the entrepreneur to give up any equity in the business they create, as venture capital does.

They fund projects that contribute to Facebook. These ventures can be for profit or non-profit.

We are also seeing more limited projects like Bang Ventures and their "You be the VC" popping up. And last year I wrote about venture capital firms holding open forums for all comers to present their ideas (I admit, I was a bit cynical about this one until I interviewed a VC running one of these events).

Although not yet widespread, these types of private efforts hold the best hope for the efficient and effective spread of free enterprise at the grassroots level. Let's keep government out of this important economic function.

(Thanks to Sarita Stewart and Natalie [I Just Got a Promotion] Wozniak for their suggestions toward this post).

Posted by Jeff Cornwall at 06:12 AM | Permalink

The National Dialogue on Entrepreneurship summarizes an interesting new report indicating that angel investors are liking the deals they see these days:

In its Confidence Report earlier this year, angel groups belonging to the Angel Capital Association predicted that the quantity and quality of entrepreneurial investment proposals in the coming year would surpass 2006 levels. A mid-year check by the ACA shows that those predictions were not just idle boasts. Fifty percent of survey respondents expressed that their group's deal flow had continued to increase in quality and quantity during the first six months of 2007, and most of the remaining respondents said that deal flow was similar to 2006.

The report also suggests that the informal system of financing, with angels usually getting in early stage and then handing off to VCs for later rounds, seems to be working more smoothly from their perspective:

Angel groups also expressed optimism regarding relationships with venture capitalists. A majority of angel group leaders (73.7) thought that the relationships between VCs and angel groups had improved in the last three years. Reasons given for the improved relationship with VCs included: market segmentation, increased understanding about their respective roles in early and later-stage financing, better deal structuring, and good company referrals, among other things. Forty-four percent of the angel groups in the survey had established partnerships with VC firms to expedite co-investments or follow-on investments.

Posted by Jeff Cornwall at 09:53 AM | Permalink

One of our alumni, Dr. Jim Stefansic, passed along an interesting article from TechJournal South on the current state of seed capital. It is not very encouraging for start-ups in need of early stage funding. The article cites high risk, too long of a time to a liquidity event, too much need for hands-on assistance, the inefficiencies of small seed capital investments, and investor pressures within the venture capital market as the reasons for VC movement away from seed round funding.

Posted by Jeff Cornwall at 08:25 AM | Permalink

The Wall Street Journal has a story about an entrepreneur who took a government grant and tax breaks to help pay for a wind turbine for his ski resort. It was a typical attempt by a governmental agency to try and manage business owners' behavior within the free enterprise system to reach a specific social goal set by politicians. The results?

"If I'd known what I know now, I would have never had done it," says Mr. Fairbank, president and chief executive of Jiminy Peak Mountain Resort Inc. in Hancock, Mass.

Read the entire story here.

Posted by Jeff Cornwall at 05:51 AM | Permalink

This story from the San Francisco Chronicle illustrates once again that you can raise too much money.

A year ago, Mark McDade, chief executive officer of PDL BioPharma in Fremont, was planning the move of his biotechnology company to a glamorous new office complex in Redwood City. PDL's operations were growing as it sought to expand its line of acute-care drugs, and it needed bigger quarters.

Now McDade, a Harvard MBA, is fending off critics who blast his real estate deal as just one example of his extravagant spending.

Too much funding in a new business can lead to over spending on overhead, wasteful spending on non-productive expenses, and even taking your eye off of what it takes to build a business. A hungry entrepreneur will out perform a fat and lazy one any day.

Given the choice of a start-up with much more money than they really need and a start-up that is slightly underfunded, I would pick the latter every time.

(Thanks to Dr. Jim Stefansic for passing this along).

Posted by Jeff Cornwall at 05:38 AM | Permalink

The Wall Street Journal has a piece on how credit card companies are targeting small businesses.

Credit-card use is soaring among small businesses. Many entrepreneurs find it's faster and simpler to sign up for a card than to apply for a bank loan. Others are turning to plastic because they don't qualify for bank loans. And they're using the cards, ones geared toward small business as well as consumer cards, to pay for just about everything -- including health insurance, energy bills, taxes and photographers.

Card spending by small businesses on tax payments and preparation alone jumped by 80% in the 12 months ended February 2007, according to a report by Visa USA, based on data about spending on Visa cards by 600 small businesses during that period.

To say that I am not a big fan of using plastic to fund small businesses is an understatement. I have seen too many small businesses forge ahead prematurely with a business idea using what seems to be easy credit to secure. It is expensive debt that is almost always personally guaranteed. So even if the business fails, the credit card debt remains for the entrepreneur. They also make spending just too easy. Most of us have experienced this at one time or other in our personal finances.

Again from the WSJ:

Experts say business owners need to remember that there is good debt and bad debt -- and to respect the difference. Good debt generates revenue; bad debt consumes it.

Furthermore, credit cards don't provide an impartial adviser on sound borrowing practices, so it's critical to build a relationship with a banker or other knowledgeable adviser outside a credit-card company.

Amen!! This is critical advice for any small business owner. If you can't get other credit for your business there is probably a good reason. Make sure you understand why they have concerns about your business.

Posted by Jeff Cornwall at 08:02 AM | Permalink | Comments (4)

My column this week at the Tennessean looks at the first rule of bootstrapping: Keep your overhead to a minimum!

Recent studies find that the average business start-up has only $6,500 to $10,000 in initial capital. So, how do entrepreneurs get businesses off the ground with such meager means? They succeed by using a variety of tools and techniques that are known collectively as "bootstrapping."

Entrepreneurs can pull themselves up by their bootstraps by finding creative ways to launch and grow a business within the limited resources available to most new ventures. They find ways to achieve what needs to get accomplished for the business by creatively getting it done for a lower cost.

The first rule of bootstrapping a business is paying attention to overhead.

Posted by Jeff Cornwall at 05:48 AM | Permalink

I have pointed out for a long time that there is a growing level of overhang (excess liquidity) in private equity markets. This has led to speculatory behavior in certain "hot" sectors, such as healthcare, as discussed in this post by Bobby Guy at a new blog by Waller Lansden law firm.

Now, it seems money is available everywhere. Many specialty lenders focusing on the healthcare sector have been birthed in the last few years, and hedge funds and private equity funds focusing on the healthcare sector have exploded. Even with interest rates rising, money continues to be available at historical levels. It was recently reported that there is enough money in hedge funds to take the entire NASDAQ market private—twice. Credit derivatives contracts (agreements that divide up risk, either by using pools or through swaps) are worth more than nine times global gross domestic product. A month ago, I talked to a fund with almost $100 million to invest in the next three months, and if it did not meet its three month deadline, all money would have to be returned to investors to chase yield elsewhere.

This is getting to be a worrisome equity market in my opinion. And Mr. Guy agrees:

For the moment then, easy money is "hip" and cool. No one knows how long the current wave will last, but it is fresh wind in the sails of the healthcare market compared to the doldrums of 2001-03. Remember that inevitably, as with all financial cycles (and bubbles), this one too must turn (burst) . . . but maybe not yet.

Posted by Jeff Cornwall at 04:08 PM | Permalink | Comments (1)

How do you value a business that has nothing to value? That is the challenge for pre-revenue ventures. They have no sales, and therefore certainly no cash flow, so how do you agree on a value that can be used to give equity in the business to investors that is fair to all parties? How do you assess a value to "potential"?

A common approach has been to basically postpone any valuation and issue convertible notes that allow early investors to convert from debt to equity when later stage investors come in once revenues start to flow. But even this method has flaws and pitfalls.

The latest collection of articles, tools and profiles from Kauffman's eVenturing examines the issue of pre-revenue valuation. What is particularly valuable is that it looks at valuation from both the entrepreneur and investor side of the negotiation. Very good material for any high potential start up to review before entering into discussions with a VC or an angel.

Posted by Jeff Cornwall at 07:27 AM | Permalink

Entrepreneur magazine has an interesting profile of three entrepreneurs who successfully navigated the path to VC funding. Finding the right VC fit -- if your business is really VC fundable -- can build a working relationship that can benefit all involved in the deal. VCs are never simply sources of money -- they almost always become an active player in the strategic growth of the business.

Posted by Jeff Cornwall at 07:39 AM | Permalink | Comments (2)

My column this week at the Tennessean examines taking business loans and investments from family:

Family members provide funding for many different reasons. Some are motivated by altruism -- they just want to help the entrepreneur get started and be successful. Others can be driven by greed -- they see the investment as a way to ride on the entrepreneur's coattails to fortune and fame.

But no matter what the reason they provide financial assistance, defined boundaries and clear expectations should be clearly established.

Posted by Jeff Cornwall at 07:02 AM | Permalink | Comments (1)

A couple of useful pieces of information on entrepreneurial financing:

- A new study released last week by the SBA Office of Advocacy finds that bank size in local markets affects the likelihood of a small firm receiving credit more than it affects the amount of debt provided. The research provides evidence of the impact of the two lending methods, relationship and standardized, on credit availability to small businesses and finds that one method is not apparently better than the other. The study concludes that entry of giant national and regional banks and bank holding companies into local markets may have increased market competition for small business loans, with the primary banks exploiting the niche in relationship lending, while large, more complex banking organizations use standardized methods to supplement supply.

- BusinessFund.com published a great financing summary titled "Top 25 Alternatives to Venture Capital."

Posted by Jeff Cornwall at 10:32 AM | Permalink

I wrote a post last month about how Web 2.0 is a new ballgame that allows for low cost, high potential start-ups. Guy Kawasaki has a great post at his blog on how he started his new Web 2.0 business Truemors for a total investment of $12,107.09.

And here are the four lessons he learned from this start-up:

1. There's really no such thing as bad PR.

2. $12,000 goes a very long way these days.

3. You can work with a team that is thousands of miles away.

4. Life is good for entrepreneurs these days.

Indeed. And it is good to be an entrepreneurship professor these days, as well.

(Thanks to Bruce Schierstedt for passing this along).

Posted by Jeff Cornwall at 05:38 AM | Permalink

I keep telling you that venture funds have raised too much money.....From MediaWeek.com:

John Byrne, BusinessWeek's executive editor and the acting editor-in-chief for Businessweek.com, said that company is looking to create a "business YouTube" essentially an online video hub for wannabe moguls to post short pitch videos for a new ventures or companies.

The site is also exploring the launch of an online-video-based contest that would invite anyone with a idea for a new business to submit a plan on the site with the chance to land $500,000 in venture capital funding.

(Thanks to Natalie Wozniak up in Minne-so-cold for passing this along).

Posted by Jeff Cornwall at 02:00 PM | Permalink | Comments (2)

Many argue, and many whom I've heard argue this are women, that in the world of entrepreneurship we should not segment men and women. Entrepreneurs are entrepreneurs. A new study on venture funding suggests that this may not always be the case in high growth, high potential ventures.

Jeffrey Sohl addressed the recent NC Council for Entrepreneurial Development on angel investing trends about the results of a study he co-authored with and John Becker-Blease to be published in the July 2007 issue of the Journal of Business Venturing titled, "Do women-owned businesses have equal access to angel capital?"

From TechJournal South:

The results suggest that women seek angel financing at rates substantially lower than that of men, but have an equal probability of receiving investment. The authors also found that women are more likely to seek, and to a lesser extent receive, financing from women angels.

Why does this difference exist? The authors speculate, but there is no compelling evidence as to why these differences were observed. It may be inherent bias in the private equity markets, it may be social behaviors, or it may just be the nature of the choices women entrepreneurs make in terms of deals to pursue. Most likely, evidence for all of these explanations can be observed, depending on the specific situation. I have noticed that any angel investment or venture capital gathering I have been to tends to be made up mostly of male entrepreneurs and male investors. While this study confirms my observation it begs the more interesting question: Why?

(Thanks to Jim Stefansic for passing this along).

Posted by Jeff Cornwall at 01:40 PM | Permalink | Comments (2)

eVenturing has another great collection of materials for entrepreneurs. This one has a similar theme to their recent collection on Bootstrapping. This one deals specifically with Virtual Teams.

The phrase "work smarter and not harder" rings clear in the mind of every entrepreneur leading a growth company. But how can you really get there? Will streamlining operations and outsourcing niche functions help? Entrepreneurs in this Collection affirm that technology helps. Whether it's finding a vendor to manage an e-newsletter, using Web-based collaboration tools, securing online backup services, training associates through free online computer tutorials, or creating a logo via a do-it-yourself Web site, entrepreneurs can increase their manpower--virtually.

Posted by Jeff Cornwall at 11:45 AM | Permalink

It now looks like the SEC is willing to reconsider their decision not to extend the deadline for small public firm compliance with section 404 of the Sarbanes-Oxley Act. The Office of Advocacy of the SBA wrote to the commissioners in the wake of the SEC's decision not to grant postponement of deadlines for public firms with less than $75 million in market value. You can read the contents of the Office of Advocacy's letter here.

Keep in mind that this is merely an attempt to postpone the deadline. At some point compliance will probably be required of all public companies -- even the small ones. The estimated $500,000 in compliance costs per year is unfathomable for many of these smaller firms. And even worse is the fact that these rules will creep into the accounting standards for non-public firms, as well.

Posted by Jeff Cornwall at 10:14 AM | Permalink

More and more attention is being paid to the state of VC funds and Angel money these days. A story in the Nashville local paper the Tennessean just this morning talks about the flow of cash into local VC funds has slowed way down.

Some Nashville-area venture capital funds trying to raise money are facing a tougher time as investors chase promises of quicker and larger returns from a hot private equity market.

A year after setting out to raise its latest fund, Massey Burch Capital Corp. decided this week to do away with those plans after getting commitments for only a quarter of the $125 million it had sought. And Salix Ventures of Nashville is yet to announce a closing a year and a half after it said it planned to raise a $150 million fund.

Even thought the media makes this sound horrible, it is really OK. Not to worry! As long as the politicians and bureaucrats stay out of this arena, and that is sounding like a big if right now, things will be alright.

Capital markets -- if left alone -- are very efficient. There has been way too much money going into the VC markets, so what is happening is an adjustment of supply to meet demand. The money that was going into VC funds is now flowing to funds seeking to take public companies private. That is where the supply of deals is right now.

Posted by Jeff Cornwall at 08:02 AM | Permalink

Angel networks have been growing in their level of sophistication. They also have been moving up the food chain, looking for more later stage deals. From the Boston Business Journal via MSNBC:

As the market grows, angels -- especially angel investor groups -- are moving upstream, looking to dole out more money and take fewer risks. Meanwhile venture capital firms anchored by huge funds are increasingly looking to invest larger rounds of cash. Entrepreneurs say that combination has made tapping into angel capital, once fertile ground for early-stage funding, trickier in recent years.

That is what I am seeing with the entrepreneurs we work with. There is plenty of cash, but it is getting farther out of reach from the early stage entrepreneur. An additional trend is the mass of private equity money going to fund buyout deals like Chrysler. This will put additional pressures on finding seed monies.

(Thanks to Dr. Jim Stefansic, an entrepreneur in search of early stage money himself, for passing this along).

Posted by Jeff Cornwall at 10:54 AM | Permalink

A recently developed site called TheFunded has created quite a stir in the VC community. The site is for entrepreneurs -- and only entrepreneurs -- seeking information on possible VC investors. Entrepreneurs share their experiences with various VC firms they encounter on their journey for funding. From the web site:

The Founding Member experienced a bad funding situation and wanted to help others avoid a similar fate. As the idea grew, the Original Members saw real potential for TheFunded to bring some transparency to the venture funding world, which is largely governed by secrecy.

In a post on TheFunded, TechCrunch reports that the site now lets VCs "set the record straight" by posting their profile. But, this is a separate part of the site and does not allow VCs to directly respond.

This type of site gives me some concern. While I am not always a fan of how VCs do their business, this type of forum may easily stray from its objective of providing information about VCs, and instead, also spread misinformation with no chance for direct rebuttal.

Posted by Jeff Cornwall at 05:45 AM | Permalink

Small business lending may not be such a bad deal for banks after all. A new study released by the SBA Office of Advocacy investigates the contribution of relationship lending to the value of banks by estimating the market premium placed on the small business loan portfolios of banks. Small business lending was found to be a profitable market niche, especially, for small publicly traded banking organizations in the United States. This evidence suggests that at least for small banks, the added revenue associated with relationship lending exceeds the added information costs associated with evaluating and monitoring small business commercial and industrial loans.

Posted by Jeff Cornwall at 09:45 AM | Permalink

I wrote a post earlier this month about a VC firm in Raleigh, NC that opened their doors to all comers. I took a somewhat cynical take on the whole thing saying:

I knew that VCs had a lot of extra cash these days, but this sounds like it is either desperation or an unprecedented PR stunt for a VC firm. Either way it seems to indicate what many of us have suspected -- VCs have over-sold their funds.

Jason Caplain of Southern Capitol Ventures, the VC firm that had the open house, called me to tell me how it went and why they did it.

Southern Capitol Ventures is a fairly new fund started by a couple of young guys. They want to try new ways to reach entrepreneurs that might not currently see a VC firm as an option for their business.

As measured by the response to their "Calling all Entrepreneurs", the event seems to have worked. They were able to listen to 49 deals from 10 states that they probably would not have seen otherwise. A few deals were outside their areas of expertise, but overall they believe that they got to see some interesting deals and that the entrepreneurs got some valuable feedback. No deals have been funded from this group as of today, but a handful are still being evaluated.

They are now planning to do the same thing again in Atlanta on May 17.

OK, so maybe I was a little rough on these guys in my earlier post. If their goal is to shake up the VC industry a little bit, more power to them.

Posted by Jeff Cornwall at 10:40 AM | Permalink | Comments (2)

Often would-be entrepreneurs need to find a "partner" who can supply the cash they need for their business idea. The trick comes in how you value the cash of the investor compared to the sweat equity of the entrepreneur. StartupJournal has a good discussion on this topic:

What frequently happens is the working partner gets paid a regular annual salary, says Billy Ellyson, a small-business attorney in Richmond, Va. On top of that, he or she also gets a prenegotiated share of the ownership that usually hinges on how crucial the capital partner feels that person is to the business's chances of success. It could be anywhere from a 5% slice of profits to 30% or more for those partners deemed as irreplaceable.

Notice that he does not say a 50-50 deal is likely! As a start-up, you need to be ready to give up a significant share of your business if you need a significant amount of cash. The negotiations are different if you are looking at expansion capital. Having an operating business and a proven concept allows you to bring more value to the deal in the form of a successful company and hopefully positive cash flow. It also puts you in a stronger bargaining position.

Posted by Jeff Cornwall at 07:38 AM | Permalink | Comments (1)

A new report from the Angel Capital Association finds that angel investors are optimistic about the general climate for early stage investments.

In the Angel Group Confidence Report of North American angel group leaders, ACA found that angel groups forecast that the quantity and quality of entrepreneurial investment proposals will increase in 2007, that more than 80 percent of groups will continue investing in seed and early stage companies, that there is a strengthened opportunity for more positive exits, and more plans to co-invest with other sources of capital.

This follows a strong job report last week that included a big jump in self-employment. The entrepreneurial economy seems to be picking up steam....

Posted by Jeff Cornwall at 08:14 AM | Permalink | Comments (1)

Angels also have a lot of idle cash (see earlier post today on VCs) and their deal flow seems to reflect this. From the Center for Venture Research:

The angel investor market experienced steady growth in 2006, with total investments of $25.6 billion, an increase of 10.8 percent over 2005, according to the 2006 Angel Market Analysis released today by the Center for Venture Research at the University of New Hampshire.

Posted by Jeff Cornwall at 08:24 AM | Permalink

Dr. Jim Stefansic of Pathfinder Therapeutic sent me something I never thought I would ever see:

On Friday, April 20, I would like to invite ANY person that wants to meet to come by our office in Raleigh, NC. You can have just an idea all the way to a well run business doing millions in revenue. It doesn't matter. And all the typical venture capital BS that you may hear is removed - you won't be screened out in advance, you don't need to know someone to "get in" and there are no secret handshakes required. Everyone is welcome and I'll plan to be in the office all day.

This was posted by Jason Caplain of Southern Capitol Ventures at the blog site TechJournal South.

I knew that VCs had a lot of extra cash these days, but this sounds like it is either desperation or an unprecedented PR stunt for a VC firm. Either way it seems to indicate what many of us have suspected -- VCs have over-sold their funds.

Posted by Jeff Cornwall at 05:57 AM | Permalink | Comments (1)

As we have been predicting, the federal government is moving to implement legislation that moves us toward a policy of socialized entrepreneurship. The National Dialogue on Entrepreneurship reports that Access to Capital for Entrepreneurs (ACE) Act of 2007 is moving forward. Why is this bad? It sets up a system that creates the potential of government picking winners and bureaucrats using the entrepreneurial economy as a tool for social engineering. Instead, we should let markets work.

The bill gives tax credits for investment in small businesses. Simple enough as it is written now. But we all know what happens. First there almost certainly will be amendments to this bill as it progresses. Then this bill will be used as a platform over time to micro manage free enterprise for various other agendas by amending the original bill and linking it to other legislation. If you don't believe me, just look at how the definition of "small business" and various small business support programs have been politicized to offer special favors to specific industries and groups of people over time.

Posted by Jeff Cornwall at 07:26 AM | Permalink

We have seen it before. Too much money chasing one particular market segment creates unsustainable valuations that eventually come crashing down -- the medical services roll-up boom and bust of the early 1990s and the dot.com era of the late 1990s.

Medical Design Magazine posted an article earlier this month that points to another possible segment that may be suffering from overvaluation. The story says that as of 2004, 85% of market capitalization in medical device companies was supported by intangible assets. These intangible assets are the speculative part of any business valuation. It is that part of the valuation that predicts what the future might hold.

If speculation proves correct, vast fortunes can be created.

If speculation proves to be unrealistic or just plain wrong, these values can come crashing down. Physicians who sold their practices for stock in the roll-up companies of the early 1990s experienced first-hand what happens when billions of dollars in market cap vanish. So did the millions of people who bought into the intangible assets of the dot.com's. Wealth that was only on paper disappears.

We do not know if this is an overvalued market, or one that has incredible up-side, but it certainly bears watching.

(Thanks to Dr. Jim Stefansic for passing this along).

Posted by Jeff Cornwall at 08:40 AM | Permalink

The National Venture Capital Association reports that venture capital fundraising was at its highest since 2001. So what does this mean?

First, it tells us that there is a lot of idle cash in the economy. And this cash is available in part because other forms of investment are not creating adequate returns. Institutional investors and very wealthy individuals, the most common source of venture capital funding, are no longer seeing high yields in real estate. So more of this money is flowing into venture capital funds.

Second, it tells us that venture capitalists will not be able to be as selective in their investments. Over the past few years VCs have taken much of their funding into later stage deals. Now we will likely see them invest more in earlier stage ventures, and may even see them become less selective in the industries that they are willing to look investing in.

Finally, solid high-potential companies will have a slightly stronger hand during negotiations with VCs. Simple supply and demand tells us that when demand is high (excess money in VC funds), demand will be strong (for good deals). It may now become more of a sellers' market when it comes to entrepreneurial deals being peddled to the VC "road show" market.

Posted by Jeff Cornwall at 08:33 AM | Permalink

One of the best ways to bootstrap your marketing efforts is to utilize public relations (PR) for your business. In effect, PR gets the media to tell the world about your business.

There are a couple of myths about PR. First, although it is often called "free advertising," it is not exactly free. It takes time and often a little bit of money to make PR efforts effective. Although you do not always have to hire a PR firm, it can be money well spent due to their experience and media contacts. So although not free, it is still a very cost effective way to get the word out about a business.

The second myth is that PR "just happens." If you do great things the media will find you. Although that does happen on occasion, most often PR works best when it is an intentional tactic as part of your bootstrap marketing plan. PR works best when you are proactive with any media contacts.

Kauffman's eVenturing has just published a new collection on PR that offers a great array of articles, stories and how-to's.

Posted by Jeff Cornwall at 10:51 AM | Permalink | Comments (2)

If you need some tips on bootstrapping ideas for your web startup, and I mean A LOT of ideas, Aviva Directory has a post Little Known Ways to Brand on the Cheap: 99 Tips for Poor Web Startups.

Posted by Jeff Cornwall at 09:16 AM | Permalink | Comments (7)

Now that credit card companies have discovered the small business market, small business owners are taking on more debt.

The number of small business loans outstanding under $100,000 increased 25 percent between June 2004 and June 2005, according to a report released today by the Office of Advocacy of the U.S. Small Business Administration. The increase came mostly from credit card use by small business. The report also noted that the number of small business loans outstanding between $100,000 and $1 million increased 5 percent during the same period.

"Access to credit is vital for small business survival," said Dr. Chad Moutray, Chief Economist for the Office of Advocacy. "That is why we produce our annual lending report, so that trends in small business finance are made clear. One evident trend is the increase in the number of micro business loans outstanding. Coupling that increase with the small increase in the dollar amount outstanding of those loans shows that the small business credit card market continues to be quite dynamic."

The report also ranks lenders in each state by their small business lending activities, as well as ranking large national financial institutions. The report includes data on American Territories as well as the states. A complete ranking of lenders, including prior annual reports, is available. Lenders are ranked on their overall small business lending, not by lending under SBA programs.

However, with increased use of debt comes more risk should the economy slow down. Just because entrepreneurs have access to funding does not always mean that they should use it.

Posted by Jeff Cornwall at 07:57 AM | Permalink | Comments (2)

I meet many MBA students studying Entrepreneurship who tell me they are planning to have a career as a venture capitalist. Guy Kawasaki recently wrote a post at his site offering some lengthy, but very good advice to young aspiring VCs. Here is his conclusion (edited to make it "G" rated).

Here's the bottom line: You should become a venture capitalist after you've had the [expletive deleted] kicked out of you. This will yield at least two positive results: First, you’ll stand out from the full-of-[expletive deleted] artists who entered the business when they were young. Second, you'll really be able to help your portfolio companies--which is what venture capital should be all about. See you in ten or twenty years.

It is similar advice that I offer to those who aspire to teach Entrepreneurship. Go out and be one, or at least work for one. A little miles under your belt and some wear on the tires goes a long way!

(Thanks to James Shewmaker for passing this along).

Posted by Jeff Cornwall at 08:45 AM | Permalink

Kauffman's eVenturing has another outstanding collection of materials -- this month it is related to strategic partnerships.

For entrepreneurs building growth companies, engaging strategic partners tends to be par for the course. The bottom line is the right partner can drive success for your company while the wrong partner can be stifling. This collection provides entrepreneurs insights on identifying, selecting, and negotiating with prospective partners and covers ways to manage effectively the partner relationship to maximize chances for success.

Pay particular attention to the "wrong partners can be stifling" part of this collection. Getting locked in -- and by locked in I really mean locked in -- with the wrong partner is more than stifling. Strategic partnerships are most often with large, established companies in your industry. They have enough resources and enough lawyers to make your life miserable if you do not do things their way. Do your homework. Get to know their culture, talk to other companies they have done strategic partnerships with in the past, and hire a really good attorney who is experienced in such matters to make sure the deal it fair.

Go in with your eyes wide open. Don't sit down to negotiate a strategic partnership unless you are ready willing and able to walk away from the discussions if things don't look right to you.

Posted by Jeff Cornwall at 05:12 AM | Permalink

Small business owners need to start using the leverage they have with banks. And by leverage, I don't mean borrowing more money. Rather, small businesses have a growing market power that they need to use to their advantage when negotiating with their existing and with prospective new banks.

For the first time, JD Power has conducted a survey on small business banking satisfaction, which was measured across nine factors: relationship with primary contact; problem resolution; depository services; statements; fees; merchant services; cash management; credit services; and online services. PNC Bank, Wachovia, and SunTrust were the top three in their ranking. Interestingly, American Express, which has been advertising aggressively to small business, also ranked fairly well. The biggest banks tended to rate the lowest with small businesses. Impersonal service, high fees and frequent mergers and changes are the likely reasons.

Although they will not show up on all of these rankings, many communities are seeing growth in start-up niche banks that focus primarily on small business clients. These banks can offer a real alternative to the large regional and national banks for many business owners.

Small business is big business for banks these days, providing a growing source of revenues (for many banks more than their retail accounts). Small businesses need to use information to make better decisions on their banking relationships. They should no longer feel intimidated in their relationship with a bank, passively putting up with poor service and high fees. This new JD Power survey, the SBA's report on small business lending, and talking with other small business owners can provide insight into what you can and should expect from your bank.

If you are not satisfied with your bank, make sure to let them know. It also may be time to shop around. As we saw in the recent NFIB survey on small business banking, service and credit are the top reasons small businesses change banks. And while changing banks is not an easy process, your new bank can help make the process run smoothly with a little planning.

Posted by Jeff Cornwall at 05:17 AM | Permalink

Ben Cunningham passed along an interesting site, PE Hub, that focuses on private equity financing. It is intended to be for investors, venture capitalists, entrepreneurs, attorneys and other professionals. It is an interesting site with a rich array of information.

Posted by Jeff Cornwall at 06:27 AM | Permalink

To label the current financing market for high growth firms dynamic might be an understatement. VCs and angel investors seem to be constantly shifting their criteria for investments. Sarbanes-Oxley has forever changed the IPOs as a strategy. As a result, many entrepreneurs with high potential ventures are getting creative in finding alternative sources of funds.

eVenturing has put together an excellent collection of materials on the latest trends in alternative financing:

Entrepreneurs go public on NASDAQ and other exchanges to raise money and provide investor liquidity. A variety of restraints, including Sarbanes-Oxley regulations and NASDAQ's desire to serve large companies, have greatly reduced IPO's on NASDAQ. But some enterprising entrepreneurs are pursuing alternatives for raising money using reverse mergers, direct public offerings, and by going public on foreign exchanges. These options, as summarized in the Going Public Comparison Chart in this Collection, facilitate raising money but do little to provide liquidity to investors.

This collection of articles includes how to's, entrepreneur's stories, and tools/templates on this emerging area of entrepreneurial financing.

Posted by Jeff Cornwall at 06:12 AM | Permalink | Comments (1)

A common practice in writing business plans is to offer three scenarios: most-likely, best case and worst case.

When I see worst cases presented in most business plans, they are almost always not the worst case scenario. They are most often a less optimistic variation of what the entrepreneur thinks will actually happen. The real worst case should be this: if things don't go as planned and the deal fails, what is the outcome for investors and lenders?

Entrepreneurs seem to operate under the assumption that if they don't plan for failure, it can't happen. If they don't ever address the real worst case, investors and lenders won't think about it.

I get push back on thinking and planning for worst case from my students. "Don't you think my idea is any good?" That is not the issue here. Even good ideas can fail, as most opportunities come from a dynamic, changing environment.

All of this came to mind after a conversation yesterday with my father. We were talking about a potential deal, and he made the statement that he wants "protection" in a deal. That was an interesting word to me. After all, we aren't a bank that can get a personal guarantee on debt. Any investment would be at risk.

But, he meant something else. He simply looks at every deal and imagines what it will look like if it goes bad. What can he hope to take away from it? He thinks this way because his generation saw the ultimate worst case -- they lived through the depression. It is not that he is risk averse as a result -- to the contrary. Rather, he is always soberly realistic that deals go bad, and we should understand where that will leave everyone involved. That is a perspective that we seem to be losing in our society.

Failure is real, and it can happen to even the best among us. So plan for it. Just in case it does happen, and hopefully the odds of that are slim if you have done your homework, you will be ready to move on to the next opportunity. You will have created a deal in which you have actually planned the worst case and have created a business where the worst case is not the end of the world for you -- just for that deal.

And just so you don't go in the wrong direction with this, your outcome in the worst case should not be to declare bankruptcy for the deal. That is a reputational scar you do not want in your background as an entrepreneur if you can avoid it. To plan for bankruptcy is in my opinion, unethical. Once in a while it unavoidable, but that should not be the predetermined plan.

Don't be in denial about the worst case. Understand it. Plan for it. Make it an outcome you can move on from.

Posted by Jeff Cornwall at 09:14 AM | Permalink | Comments (2)

Once again this semester I had Charles Hagood, co-founder of the Access Group and Healthcare Performance Partners, come into my class to close out our unit on bootstrapping. (Here is an overview of his talk from last semester that offers several great tips on creating a bootstrapping mentality). Charles and his partner are great examples of what bootstrapping can accomplish building a highly successful business.

This semester he added a new point to his talk that is often overlooked by entrepreneurs once they get beyond the start-up phase. They get out of their bootstrapping habits, get a little lazy, and start spending cash on things that are not going to create sales or take care of customers.

Something like this happens with a golf swing. We start scoring well, and soon forget all of the subtle little things that got our swing to that point in the first place. We assume it is now natural and get a little lazy. That is why professional golfers never stop working on their swing. They hit thousands of golf balls every day. They know that without constant attention to the details of their swing it will not hold up. The same is true in how we manage the scarce resources of our businesses.

Being prudent stewards of the cash we have in our business takes the same concentration and attention to details. Once the cash starts coming in, we relax and think we can go on cruise control. But just like with a golf swing, bad habits and laziness can creep in to take you off of peak performance. And then when your business hits a tough patch or a crisis hits, you are not as ready to meet it as you thought you were.

For Charles this was 9-11. They had gotten out of their bootstrapping ways -- not completely, but enough so that when the economic aftermath hit their business, they could see all of the ways in which unnecessary costs and lazy habits had evolved int their business. Luckily, they got back to their bootstrapping roots, and eventually came back stronger than ever.

Never lose that bootstrapping edge. Every dollar you can save while still achieving the desired result makes you more competitive, strengthens your business for the future, and builds your wealth.

Posted by Jeff Cornwall at 06:03 AM | Permalink

StartupJournal reports on a study from the Center for Venture Research at the University of New Hampshire that reaffirms a trend that we have been observing for a while now. Angel investors seem to be shifting to later stage deals. Rather than providing seed funding, which has been their bread and butter investment, angels are now doing deals that were once the focus of VCs. And VCs are shifting to even later stage deals.

A few years back 75% of angel money was seed investments in start-ups. in 2005 it had dropped to 48%. It is now around 40%, according to this report.

But before we panic and predict the end of the entrepreneurial economy we need to step back and look at the context of all of this.

- There are more angel investors than ever with lots of cash. There are only so many seed deals to go around that meet their requirements for investment.

- Some angels are gathering in packs, called angel networks, that are mimicking venture capital firms in many ways, including more pooling of funds on deals and professional management. It is not surprising that this also includes developing investment strategies that look a lot like those of venture capital firms.

- Angels that do smaller deals are off the radar. They are hard to get data on in the first place because there is no formal reporting mechanism. Add to that their intense desire for privacy, and it is no surprise that we are seeing mostly the larger deal angels working in networks.

- Our entrepreneurial economy is dynamic. As the percent of GDP that is created by smaller companies surpasses 50%, we can expect that there are more deals that have grown to need more capital. Supply follows demand. We must also take into account that it is beginning to look like success rates are climbing for new ventures, due to both a favorable economy and better education for the entrepreneurs.

Here is my fear from this report. Policy makers and politicians eager to get their claws into the entrepreneurial part of the economy will use this to say, "We have a crisis!! We need to develop programs for government seed capital funds or the economy will stumble." Or how about this one: "We need to get control of this to make sure we understand what it going on so we can enact effective legislation. It is time to call for registration of private equity placements so we can track all of this."

Mark my words -- we are moving toward socialized entrepreneurship. Our government is no longer ignoring our entrepreneurial economy and once they pay attention to it, can not leave it alone.

Posted by Jeff Cornwall at 05:53 AM | Permalink | Comments (1)

A graduate student from Norway e-mailed me about how high-potential businesses are valued during seed financing, since there is nothing really to base a valuation on -- no sales and no cash flow. He suggested that any valuation seemed like holding a wet finger up to measure wind speed. The truth is, valuing a business during seed round is more like assessing wind speed by holding up dry finger in the air!

They answer to his question is this: they don't really even try to value the business.

The most common approach these days for seed financing is to use a convertible promissory note. It really delays any need to value the business until there is clearer information to use for valuation. It is convertible at the time that Series A money comes in, usually from VCs, at some multiple over the share value at the time Series A money is secured. Series A round financing usually occurs when sales have begun, or at least a clearer picture of market potential is evident.

For example, let's assume a start-up needs $1 million in seed funding. The investors issue a convertible promissory note with a 10% interest and with a 1.25 conversion multiple. So in effect, they give them a loan that can be converted to stock. At the time of the Series A round investment, which in this simple example is a $5 million VC investment one year later, the conversion occurs and they get shares that were equivalent to the $1 million seed money they originally put in the business times 1.25 plus accrued interest. So a year later the seed investors get shares that would be the same as if they invested $1,000,000 * 1.25 * 1.10 = $1,375,000. The logic is that by the time they are ready for Series A investment (in this case another $5 million) there is a clearer basis for valuation. They have begun to sell product, or they have a better idea on the size and scope of the market, they have time lines to product sale, etc. etc.

Seed money is most likely going to come from angel investors, angel networks, or small, boutique VC firms. The big boy VC firms will join in at the point of Series A or even Series B funding.

Posted by Jeff Cornwall at 05:58 AM | Permalink | Comments (2) | TrackBacks (1)

Clearly, the owner of a small business must take a different route to financing than the high potential, high growth entrepreneur. The myth is that they finance it all by credit card. While this may be true for many start-ups, USNews reports on a survey by Visa and SCORE that finds that only 21% of small businesses use business credit cards. The truth is that credit cards have not always been very convenient for small businesses. Traditionally the business cards issued to small businesses are really not very different from consumer cards.

Small-business owners don't use their cards as consumers do, but they also don't have access to capital as larger companies do. They may need credit, but many suppliers don't accept cards, forcing business owners to pay with checks.

Credit card companies are finally beginning to understand the needs of small business and are responding by issuing cards that better meet their needs for access to working capital. I guess the 23 million small businesses finally got their attention.

Posted by Jeff Cornwall at 05:34 AM | Permalink

In the most recent NFIB poll, small business owners were feeling rather grumpy. They were not planning to add to inventories as inventories were already too high. And they were not in the mood to invest in capital expenditures right now. So when the news came out this week from the SBA that they had set a record for making loans, I was curious. What could all those loans be going for if small business is not in a growth mode right now?

The SBA backed a net 100,197 loans totaling $19.1 billion under its two primary small business loan programs during the 12 months ending on Sept. 30, 2006. Both the number of loans and the dollar amount is a single-year record for the agency. The previous records were set last year, when SBA provided a net 94,554 loans worth $18.1 billion.

I have three possible theories.

Theory One

The answer may be found in another question in the NFIB survey. Small Business owners report that credit is harder to come by.

While the SBA trumpets 100,000 loans, what may be beneath those record loans is weaker financial statements combined with a nervous banking industry that is tightening its credit standards as the economy weakens. These two factors could be what has led more small business owners to seek SBA guarantees. Let's face it. Getting a loan with SBA backing is more complex than a straightforward business loan. It requires a significant amount of paperwork. Entrepreneurs will only go the SBA route if they are told to. And they are told to when they do not meet normal bank standards for business loans.

So Theory One would conclude that times are getting tougher for small business and they need help getting bank credit to keep afloat. After all, the biggest loan program from the SBA is their 7(a) program for working capital.

Theory Two

The SBA has gotten a lot of bad press and is under increasing political pressures to perform. Backing more loans is one way for the SBA to show success and justify its existence. The SBA may simply have been more effective in marketing their programs.

Theory Three

We are seeing a record number of small business start-ups each and every year as our economy continues in its current transformation from the old economy of the 1900s to whatever new economy awaits us after this period of transition ends.

Perhaps the record number of loans backed by the SBA are simply at artifact of the growing number of small businesses in America. The SBA may be just hitching a ride on the current economic wave.

Posted by Jeff Cornwall at 05:58 AM | Permalink

A new study released by the University of New Hampshire reports that total angel funded deals are up 15% in the first half of 2006 when compared to the same period from 2005 even though the economy seems to be slowing down a bit. This is because the slowdown is thought to be short-lived. Angel investors look three to five years out, and in this time frame they see a strong economy returning.

Here are a few details from the study:

- Although there are more deals being made this year, they are making smaller investments. This could be a slight hedging of their investments using diversification due to the current soft conditions.

- If you are not in healthcare services/medical devices/equipment (27% of investments), software (18%), biotech (10%), retail (10%), media (10%), or IT services (10%), you are facing tough odds on finding angel investors. Those six sectors soaked up about 75% of all investment dollars so far in 2006. Although this is a much broader list than has been seen in the past, which is also a good sign for the future.

- Angels are not as early into the dance as they used to be with only 40% of their money going to seed or start-up financing. This percentage used to be much higher. What we don't know is if this is a true shift to later stage funding or simply more money being invested and some of it going into later stage deals. Anecdotal evidence suggests that they have shifted at least somewhat out of seed investing.

(via National Dialogue on Entrepreneurship)

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Posted by Jeff Cornwall at 06:39 AM | Permalink

From time to time I have written about myths that I see when dealing with aspiring entrepreneurs. Entrepreneur.com has put together their own Top 10 list of Small business Myths that are worth a read for anyone thinking about starting a business.

Several of their myths dealing with financing issues:

Myth No. 1: "The government has grants for startups."

Generally this is not true. There are a few instances where local governments set up programs for disadvantaged people looking to use free enterprise to improve their lives, but they are not that common.

Myth No. 2: "The SBA loans money directly to small businesses."

Another financing myth busted. You still must go to a bank. Some banks work with the SBA program to get small business loans guaranteed by the SBA.

Myth No. 3: "Venture capitalists loan money to startups."

VCs fund less than 0.5% of entrepreneurial ventures, and of those, only rarely do they fund a start-up.

Myth No. 5: "I'll be able to write everything off."

Actually you can, but you will face interest and penalties from the IRS, so I don't recommend it either.

Myth No 6: "I can pay myself whatever I want."

Again, you can, but you'll be out of business in a few weeks. You can only pay yourself what is left after everything else gets paid. You are last in line if you want to make your business work.

Myth No. 8: "I should be profitable after six months, because I'm an expert at what I do."

The article states that most businesses take 2-3 years to make a profit. That is also kind of a myth. I have owned businesses that make profit within a few months, and I have had some that took years. It all depends on the business model and the market. That is why a plan is so important to help you understand what you are getting into. Which brings us to another of their myths:

Myth No. 10: "If I'm not getting funding, I don't need a business plan."

See my comments above...

They also have a couple of marketing myths:

Myth No. 7: "If I create a website, I'll get traffic (or the more popular 'If I build it, they will come.')"

Myth No. 9: "I don't need a marketing plan or marketing materials. This product/service sells itself."

I tell entrepreneurs that they should be prepared to spend 80% of their time selling and marketing early on. Nothing sells itself and no website creates its own traffic.

Finally, one of their myths deals with lifestyle:

Myth No. 4: "I'll have more time to do what I want."

You should assume you'll have some long hours early on. But, if time is important, make sure to build that into your business plans. Plan for slower growth or less ambitious goals if you want to structure time for other things. Also understand that some businesses just demand more of our time by their very nature. For example, if you want to start a restaurant, plan on very few days off, long hours, and no vacations for a LONG time. Know what you are getting into before you start any business and make sure it fits your non-financial and lifestyle goals.

Make sure to go the the Entrepreneur.com article, as it has some great links to more information on all of these topics.

Posted by Jeff Cornwall at 05:35 AM | Permalink | Comments (1)

Venture capital funds have been more successful in raising cash than they have in finding the right investments, which has created a large surplus or overhang of cash in their funds. This is consistent with the capital markets in general.

An article in Fortune Small Business argues that this makes it a good time to think about selling your business. The law of supply and demand tells us that excess cash creates a seller's market.

[N]ow is a particularly good time to sell a business. The economy is, by many measures, in its best shape since the dot-com bubble burst in 2001. Banks are aggressively lending money for all kinds of acquisitions. Increasingly, corporate America views the purchase of small firms as a shortcut to growth and innovation. As a result, a small-business feeding frenzy is in progress. According to FactSet Mergerstat, there were 8,115 small-company acquisitions (deals valued at $100 million or less) in 2005, almost a 20% increase from 2002.

The FSB article goes on to offer four good pieces of advice for anyone thinking about selling.

1. Staging a Business for Sale

Think about all you go through before you sell your house. You add some paint, spruce up the yard, declutter the living room, clear out your closets, and clean, clean, clean. The same logic applies to your business. But in the case of selling a business, curb appeal is much less important than income statement appeal. Business valuation is based on mostly one thing: what the buyer believes your future cash flow will be. The higher you can get your free cash flow and the more growth it looks like it can have in that cash flow, the higher the selling price.

2. Getting the Right Price

Again, just like selling your house, setting the right price at the beginning is crucial. Bidding wars are very rare events. The only direction the price will go is down once negotiations begin. So work hard to make sure you have the right price in mind from the beginning. And for goodness sakes, bring in experts -- never do this by yourself or with attorneys who have little experience in selling a business. You may pay a hefty fee to M&A experts, but it is usually worth every penny.

3. Do Your Homework

The FSB article rightly points our that you need to know ahead of time what they will discover in due diligence. And be prepared for the emotional ride of a life time. Half of all deals that get to due diligence never make it through to the sale.

4. Buyer's Bag of Tricks

The devil is in the details in a business sale. Listen to your M&A attorney when she tells you that some minor wording is important. The buyer will likely try many tricks to reduce their risk and devalue the deal, often in ways that a non-expert would never even see coming. Don't get ahead of yourself. Half the deals that get near closing also fail.

Posted by Jeff Cornwall at 07:29 AM | Permalink | Comments (1)

Findings from a new study on start-up businesses released by Wells Fargo indicate that you really don't need a lot of money to start most businesses.

The Wells Fargo report found that the average start-up financing for the new businesses they surveyed was $10,000. The study also finds that 73% of start-ups were fully self-funded. These findings are consistent with previous surveys that generally find that start-ups began with about $7,000 - $10,000, and that self-financing was used by 70-85% of all start-ups.

Posted by Jeff Cornwall at 06:04 AM | Permalink | Comments (1)

There is a government funding program through the SBA called SBIR. The "IR" stands for Innovative Research. The SB is supposed to stand for Small Business, which the SBA has traditionally defined as 500 employees. Now for many of us, defining a company with that many employees as a small business is a stretch.

These grants were set up to help small businesses that were engaged in cutting edge research. And they are grants -- this is not a loan or an investment. Once the money is granted it never gets repaid.

From the SBA website:

SBIR is a highly competitive program that encourages small business to explore their technological potential and provides the incentive to profit from its commercialization. By including qualified small businesses in the nation's R&D arena, high-tech innovation is stimulated and the United States gains entrepreneurial spirit as it meets its specific research and development needs.

SBIR targets the entrepreneurial sector because that is where most innovation and innovators thrive. However, the risk and expense of conducting serious R&D efforts are often beyond the means of many small businesses. By reserving a specific percentage of federal R&D funds for small business, SBIR protects the small business and enables it to compete on the same level as larger businesses. SBIR funds the critical startup and development stages and it encourages the commercialization of the technology, product, or service, which, in turn, stimulates the U.S. economy.

If the Senate Committee that oversees the SBA has its way, these monies will now be available to much larger "small businesses." In fact, businesses with up to 1500 employees will now become defined as "small" for the purposes of SBIR grants.

This grant program was set up to help make innovation in small business more feasible and to help small firms be more competitive with larger technology firms that have access to large pools of their own and VC monies. While I fear that this is one more step toward socialized entrepreneurship in this country, it is a program that at one level I can see might have some merit. But given where this is now headed, truly small companies will likely have an even more difficult time competing for these grants.

That is why socialized entrepreneurship never works. Politics and greed will take over even the most well intentioned government program.

Posted by Jeff Cornwall at 09:16 AM | Permalink | Comments (1)

There are a couple of web sites out there that are marketing to entrepreneurs who need money. They are creating what are known as peer lending networks. It is an attempt to hook up those who need money with those who have money.

The basic concept behind the business model is nothing new. They found what seems to be an inefficient market and tried to link it together with a better process. The notion is that there are markets out there where there is supply and demand, but not a good way to connect the two sides. A good example of this business model is a job placement agency. There are workers seeking jobs and there are companies looking to hire. But, for some reason they have a hard time connecting. The business model of an employment agency is to bring the two sides to the table so they can connect on a transaction -- in this example, hiring a needed employee who needs the job. For this service, the employment agency gets a fee.

Prosper.com in the US and Zopa.com in the UK both work on this type of business model, but in this case it is to connect those who need money (often, but not always, start-up entrepreneurs) with those who have some money. The sources of money are really not the lenders in this business model. A company like Prosper.com actually makes the loan, and then turns around and sells it to an individual or a group of individuals who are brought together at their site. The borrower tells how much they need (prosper.com has a $25K max), why they need it, and what the maximum interest is they are willing to pay. It then enters a bidding process like other web sites do for hotels, airline tickets, etc., etc. Sometimes you get a hit, but if often takes several tries. From inc.com:

If a loan isn't fully funded within the auction time frame, the borrower is free to try again. Townshend, who had an A credit rating despite $15,000 in credit card debt, struck out twice before landing a loan. Initially she offered an attractive interest rate, 12.5 percent, but asked for too much money: $25,000. On her second try, she requested $9,900, but at a less appealing rate of 11 percent. Finally, she struck the right balance, asking for $9,500 at 13 percent interest. She also made her loan description more appealing by arranging key ideas into bullet points and providing a detailed breakdown of how she planned to use the money. In three days, she received 77 bids from an array of lenders, including an engineer and a Web entrepreneur, and the loan was fully funded.

A common problem that entrepreneurs suffer from is the "If I only had the money" myth. They are sure that if they just get some money, everything will be OK. Sometimes that don't exactly know if they really need it, or how much they need. Sometimes they really aren't sure what they need it for. Often they have no clue how they will pay it back. But, if they just got a loan or an investment, all their problems would be solved. As the example from inc.com shows, this is no magic bullet. You still have to be realistic and have a good proposal to get money. And even with the help of sites like these, it still takes time.

The truth is that most deals are just not ready for financing, and many never will be. But, when they are, or should I say if they ever are, there is plenty of money out there these days. All that sites like these can offer is the possibility of a more efficient way to find that money.

(Thanks to Sigrid Catanzaro for passing this post idea along).

Posted by Jeff Cornwall at 05:52 AM | Permalink | Comments (4) | TrackBacks (1)

The NFIB just released findings from its second poll related to small business and banking. I wrote a post on the first poll last week. This new poll finds that American bankers are stepping up their competition for small-business accounts.

First, a note of caution to all you hungry young commercial loan officers out there. Entrepreneurs don't like to change banks. It is disruptive and a hassle, and can be expensive if there are loans involved. Only one in 10 small-business owners have switched principal banks in the last three years, according to this survey.

But, bankers don't give up easily. To progress through the ranks of Vice Presidents of "this" and "that," they have to expand their portfolios. Slightly more than 40 percent of the owners surveyed said they have seen an increase in banks courting their business. Nearly three-fourths of those owners cited a noticeable increase in mail solicitations and advertising and an almost similar share were aware of the appearance of more places to bank. Nearly two-thirds of those with fewer than 10 employees got phone calls from bank telemarketers, 65 percent were made aware of financial products and services targeted to their sector and 57 percent reported in-person contacts.

Sometimes it is the entrepreneur who goes shopping for a new bank. My experience is that it is usually when we are unhappy with an answer we just got on a loan request. The NFIB survey found that twenty-one percent of small business owners shopped for a new principal financial institution in the past three years. But, entrepreneurs need to remember that all bankers basically think the same way. Of those entrepreneurs who went shopping, only one-third actually switched.

Incredibly, 5 percent of small business owners said there were too few alternatives to attract their business. Those folks really need to get out more. The old saying "There is a bank on every corner" needs to be modified a bit. It seems that now there is a bank on every corner and a half a dozen in between each of them.

Among those who did find a new principal bank, service and credit issues were the key motivators driving them. Sixty-four percent changed to obtain better service quality; 47 percent pointed to the number and type of services available elsewhere. Half noted the expectation that they could more easily satisfy their credit needs at a new bank and slightly more, 53 percent, said they believed the new institution being considered would give them better loan terms and rates.

In the past, owners have expressed consternation about the considerable merger and acquisition activity in the banking industry, but less than one-fourth of those who switched banks cited that as a reason for the change. While a merger may not directly motivate someone to change banks, the outcomes of mergers can be the issues they do cite as reasons for changing. Service can get worse, loan officer turnover increases, and terms can get tighter as banks get bigger and more bureaucratic in their practices.

Slightly more than 41 percent said they use a small bank, one with assets of $1 billion or less, while the share reporting banking at very large institutions -- those with more than $10 billion in assets -- was just a few points less, 38 percent. Only 15 percent had their accounts handled by very small banks holding less than $100 million in assets. Nearly half, 47 percent, said they still use only one financial institution exclusively. These results are a bit surprising, as the common wisdom is that smaller community banks work better with small businesses.

Posted by Jeff Cornwall at 12:50 PM | Permalink | TrackBacks (1)

U.S. venture capital investing reached its highest point in 4 1/2 years with $6.73 billion directed to 619 deals, according to the Quarterly Venture Capital Report released by Ernst & Young LLP and VentureOne. Overall deal count increased 3% from the second quarter of 2005, and the capital was 5% higher than a year ago, representing the most venture capital invested in a single quarter since the fourth quarter of 2001. Health care led the way in these investments.

Two things to keep in mind. First, this is very good news as venture capital investment tends to be a leading economic indicator. VCs see better days ahead, even if we are in a soft economic period in the short-run.

Second, these new ventures represent only a small sliver of business start-up activities in the US. Using recent data, we can estimate that there are over 1,600 new business with employees created every day. The tendency is to only focus on the deals with the big money behind them. While they matter, they are about 0.4% of business start-ups with employees; a point reinforced by Glenn Reynolds (of Instapundit) the other day at TCS Daily:

It seems to me that while big enterprises will always be with us, we're going to see a much more vibrant small-business (and even micro-business) sector over the next decade or so. I also suspect that neither the culture, nor the people who purport to measure and manage the economy, are really up to understanding the impact of this trend.

Posted by Jeff Cornwall at 10:51 AM | Permalink | Comments (1)

I used to get teased by my managers, bankers, lawyers, and CPAs about how long I would drag my feet on new technologies. They complained that we were among the last businesses to buy a fax machine (OK, I am dating myself a bit here) and PC work stations. Everybody else had voice mail and e-mail long before we did, so they claimed. But a new study released by the NFIB shows I am not alone in my conservative approach to new technology (access the report via this page at NFIB's site).

Bank web sites with lots of bells and whistles may appeal to some, but they are just window-dressing as far as the nation's small-business owners are concerned. Only half do any Internet banking, according to a NFIB National Small-Business Poll. The study found that over the past three years, slightly more than half--54 percent--found technology at their principal bank increasingly helpful. But more than one-third asserted that technology had no impact on them at all, and 11 percent complained that technology is getting in the way. Now those are my kind of people!

So what matters most to small business owners? A convenient location is the most important bank characteristic for conducting their firm's banking business (62%), followed by a bank whose personnel know the owner and the business (57%), and a reliable source of credit (57%). Who needs fancy technology when you have a banker nearby who knows you and your business and is ready to loan you money when you need it?

One of the biggest complaints small-business owners lodge against banks is staff turnover. Only half of those surveyed have been served by the same account manager over the past three years. Twenty percent said they had two, 13 percent had three, and 7 percent report having no manager at all to help them. This is not a new problem. It really accelerated back when banks were deregulated in the 1980s. You would think banks would have solved this problem by now.

The NFIB survey found that small-business owners are generally happy with their banks and they are slowly moving toward electronic banking that will bring greater efficiencies and lower relative costs over the longer term. The key word here is slowly. We eventually got that fax machine, but not until the prices came down and I was convinced that it would actually help our business perform better.

Maybe we are not really Luddites. We are just prudent when it comes to our money.

Posted by Jeff Cornwall at 07:37 AM | Permalink | Comments (2)

I must admit that I am one of the few people who have never been to MySpace or FaceBook. I have nothing against such sites. It just must be the Luddite in me that keeps me from wanting to try anything new.

StartupJournal has a story about how social-network sites are proving to be a great place to engage in very targeted marketing. And it is free...at least for now.

For start-ups on a shoe-string budget, the opportunity to gain widespread exposure at no cost may seem too good to be true. But networking sites like MySpace, purchased by News Corp. last year, allow groups -- including businesses -- to create online communities for free. As a result, new ventures eager to establish an initial customer base can benefit by creating a network on MySpace and inviting "friends."

Time to update my bootstrapping lecture for this fall!

Posted by Jeff Cornwall at 07:35 AM | Permalink | Comments (1)

A study recently released by the SBA's Office of Advocacy has some interesting findings related to entrepreneurship, income and wealth. The study finds that in 2001 small business-owning households were more than twice as likely as non-owning households (57.1 percent to 25.5 percent) to be high income (defined as at least $50,000 in family income).

The study also found that small business owners were over eight times more likely (21.2 percent to 2.5 percent) to be high wealth households. High wealth is defined as having at least $1 million in family net worth.

Posted by Jeff Cornwall at 05:55 AM | Permalink | Comments (1)

One of the keys to success in raising money for a venture it to really understand how the various sources of funding think, what their expectations are, and how they make decisions. This is true for bankers and investors.

There is a good article that was just posted at Wharton's web site, based on a panel discussion they hosted, that gives some insight into the perspective of venture capital investors.

Risk is part of the landscape when investing in start-up firms, and venture capitalists need to approach this peril across a range of dimensions, including geography, industry and the timing of investments in the product development cycle.

There is an old adage that says, "There is a bank on every corner." I remind entrepreneurs that each bank is different, and even though one is not a good fit, the next one might be. The same is true about investors. In reading the article about this panel discussion, one starts to see how just like bankers, each VC has different criteria, objectives, preferences, and biases.

(Thanks to John Russell for passing this along).

Posted by Jeff Cornwall at 08:51 AM | Permalink

Every angel investor has to start somewhere, so with that in mind Jeanne Lee at Fortune Small Business offers a few tips for first time angel investing.

- Don't go it alone.

..."[A] single investor or a small group of four or five can get too emotional about deals."

Angle networks, which either informally or sometimes more formally join together a group of angel investors, have become quite common in cities across the US. These networks help the angels create more structure to their deals and allow them to invest smaller amounts in more deals, thus reducing their overall risk.

- Follow your passion

"When you combine investing with your passion, you get a great sense of satisfaction."

Just because you are now on the other side of the table, it does not mean that you have to give up things that your are passionate about. If you care about fighting cancer because your personal experience, for example, you may want to focus some of your investment money in that market space. It does not mean that you throw caution to the wind and invest with your heart. You still need to search for the right deal. But having a focus may help limit the deals you want to look at.

Passion can also go along with your past experience from when you were an entrepreneur. If you believed in your industry as an entrepreneur, don't give up that passion when you become an investor. That industry was good to you once, and it can be good to you again.

- Locate the exit

"Some entrepreneurs think that angels are banks, that the angel will give them the money, then wait around for years until the entrepreneur returns it to you with interest."

Only invest in a deal that has a clear exit plan in mind. Your should not plan to park your money in a deal for more than three to seven years. Some deals may end up being longer term, but you should never go into a deal with that in mind. You and the entrepreneur must clearly have the same aspirations for growth and exit. Study the industry to make sure that the exit plan the entrepreneur presents makes sense.

- Befriend the vultures

"Make sure the term sheet is user-friendly to the VCs who will come later."

In today's world of high growth venture investing, angels most often provide the seed or early stage money. Know the likelihood that the deal will need future rounds of financing, and if there is even a remote chance that it will, structure the deal in a way that will make in attractive to future investments by VCs. Some angels try to protect their investment from possible future dilution only to block any VC interest in providing needed Series A financing later. That can actually limit possible returns for the angel by limiting the upside potential of the deal.

By the way, knowing how angel investors work is also important for the entrepreneur. Making sure you understand the deal from their perspective increases your chances of gaining angel money and working well with them once that money is invested in your business.

Posted by Jeff Cornwall at 07:11 AM | Permalink

"I don't want a bunch of snot-nosed, twenty-five year old stock analysts with Harvard MBAs determining the future of our business."

I am not sure that is an exact quote, but that was close to what I said to my partners after we had looked into taking our business public. And my father warned us that we would not like our life in a fish bowl, having our every move and most of our decisions in the public record. Add to that today's cost and hassle of Sarbanes-Oxley and you have quite a list of reasons not to go public with your venture.

But, now here is another reason from Red Herring:

Psychologists from Princeton University said Tuesday they’ve found a strong relationship between the short-term success of an initial public offering and how fluently investors can pronounce the name of a company and its ticker symbol....

So strong was this effect that if an investor started out with $1,000 and invested it in companies with the 10 easiest-to-pronounce tickers on the market--those similar to GOOG (Google)--she would earn $333 more than if she had invested in the 10 hardest-to-pronounce tickers, similar to VYYO (Vyyo Inc).

"This research shows that people take mental shortcuts, even when it comes to their investments, when it would seem that they would want to be most rational," said Danny Oppenheimer, assistant professor of psychology at Princeton University.

Ah, yes. The rational decision making process of the public stock market. Another good reason to stay private!

Posted by Jeff Cornwall at 06:53 AM | Permalink | Comments (1)

You've got to love a good bootstrapper!

StartupJournal has a story about an entrepreneur who took over a former competitor's phone number when they went out of business.

While leafing through the Yellow Pages last fall, entrepreneur Mark Bright saw an ad for a recently dissolved competitor listing an out-of-service phone number. On a hunch that readers would continue dialing the number for some time, he arranged for the line's outstanding calls to be rerouted to his company. Since then, he says, he's turned many unsuspecting callers into customers, thereby boosting sales....

Mr. Bright adopted his former competitor's digits in October, and says his company...now receives about 40 calls a day, double the number of calls from before he added the number. As a result, monthly sales...have increased by an average of $1,400, he says.

The average business line costs about $50 a month. His $1,400 in increased sales is a pretty darn good return on that investment!

(Thanks to Scott Pafford for passing this along).

Posted by Jeff Cornwall at 06:51 AM | Permalink

I am in Dallas for a few days with a group of students from Belmont. They are attending Delta Epsilon Chi (collegiate version of DECA) and competing in various business competitions.

The kick-off speaker for the entrepreneurship competition was Kelly Perdew (former winner of The Apprentice). He did a presentation based off of his book, Take Command.

Kelly is taking his fifteen minutes of fame and leveraging it to create new opportunities in business. He part of a group that has created Angel-Led Venture Partners, which specializes in early stage investing. Angel-Led Venture Partners has built a network of eight angel networks from around the country. Their model is to bring together more money and more expertise to make angel investing more efficient and more effective.

Rather than wallowing in his own celebrity, Kelly has used his success in reality television as a stepping stone to move further ahead in business. He is no overnight wonder. Kelly was a serial entrepreneur long before he met Donald Trump. He is a great example of building an entrepreneurial career one step at a time.

Posted by Jeff Cornwall at 06:53 AM | Permalink

As most of us predicted, high-growth entrepreneurial ventures moved away from IPOs in the wake of Sarbanes-Oxley and moved into high gear with acquisition strategies to satisfy investor expectations. A new report by NVCA highlights this shift in exit strategies. Free market capitalism sure is a robust system.

Posted by Jeff Cornwall at 05:54 AM | Permalink

Angel investors have been slowly changing the types of deals that they like to invest in. As Business Week pointed out a few months ago, they seem to be "moving up the food chain."

One aspect of this change is that more angels are banding together into informal and even more formal networks for their deal making. In a talk this week at Belmont, Sid Chambless, Executive Director of the Nashville Capital Network, described how these angel networks work.

Traditionally, entrepreneurs have to find an interested angel through their own network of contacts. An intermediary, often an attorney or CPA, will usually make the introduction. Once introduced the angel will usually assess the entrepreneur and eventually evaluate the plan.

With an Angel network, the business plan first goes to the network staff. This makes the angel network more like a VC firm in how it evaluates deals. The staff will reject about 50% of business plans as soon as they arrive. They can usually tell quickly if a deal is just not suited for angel money or if the concept is just not viable.

For the remaining 50%, the network staff provide consultation and advice on how to prepare the plan and the pitch for the deal process. They help the entrepreneur get the presentation and the written plan up to standards that an experienced investor will expect to see.

About 50% of these deals get to the point that they are ready to go before an investment screening committee. This is a group of experts and angels who evaluate the deal for funding. The angels make their own individual decisions on whether or not they want in on the deal.

Only about 20% of these actually receive funding. The money normally comes from several sources, including one or more of the angels in the network. One investor usually serves as the lead or "champion" investor for the deal.

If you are keeping track, that mean for every 100 plans, 50 make it past first review, 25 get to the committee and about 5 might get funding.

On average, about 10% of the funded deals make it big, while about 45% muddle along and 45% fail. That means that an angel network may need to see 200 deals to find one that hits it big. The success rate of funded deals is about the same as we see with VCs, but venture capital funds only provide money for about 1% of the plans they see.

The changes in angel investing has also corresponded to more deal flow. Last year there was more money invested by angels that venture capitalists. Given that angle investments are often much smaller than those made by VCs, this means an significant increase in the number of entrepreneurs receiving angel financing over the past few years.

Part of the reason that angels have moved up in their criteria is that venture capitalists have also moved up. VCs continue to favor later stage financing. This has created a gap in smaller deals that need seed funding. As a result of this, more people are having to rely on their own money and investments from friends and family to get their businesses off the ground.

Posted by Jeff Cornwall at 05:58 AM | Permalink

There are those out there who believe that all real entrepreneurial activity comes to us thanks to venture capitalists and their funds. But a story from Red Herring illustrates how limited their interests, and therefore their impact, are due to the investment criteria they use to evaluate deals.

Despite the promise of cleantech like biofuels and water purification technologies, some venture capitalists say it can be tricky to invest in the field because it doesn't necessarily offer the fat and easy returns that make them drool.

The challenges aren't obvious from the numbers. Cleantech investments in North America grew 35 percent to $1.63 billion in 2005, according to the Cleantech Venture Network, the industry monitor that held the Cleantech Venture Forum conference in San Francisco last week.

But some of the most promising clean technologies just don't fit the classic VC model of a six-year exit with returns of 10 times the original investment, industry watchers said.

So while VCs do play an important role in our entrepreneurial economy, keep in mind that they only fund a fraction of a percent of new businesses formed each year, they are rather selective on the types of businesses they like, and as this story shows they can have a very near-sighted view of the world.

Posted by Jeff Cornwall at 07:35 AM | Permalink | Comments (1)

Many entrepreneurs seem to believe that the primary objective of their business is to raise investment capital. This is the wrong mentality to have in any start-up, as your focus should be on building a sustainable business. I tell my students in our Entrepreneurial Financial Management class that my primary goal is to teach them how to start a business that needs as little outside money as possible through careful cash flow management, realistic forecasting, and bootstrapping.

Seth Godin (author of Bootstrappers Bible) strongly agrees in this post at Impact Lab from last Friday.

If you fund your company, even a little, you've just sold it. Maybe not today, or tomorrow, but one day. That's because rational investors are funding your company in the expectation that you are going to sell it and make them a profit. (sure there are exceptions, but not many). So, if you don't expect that your company will be easy to sell for a big profit, or you don't ever want to sell your company, it's not a smart idea to raise money for it....[I]f you absolutely need a lot of money to do a particular business and the terms you'll need to accept to get that money are unacceptable, find a new business. Nothing wrong with that. The market might be trying to tell you something.

Posted by Jeff Cornwall at 05:40 AM | Permalink | Comments (1)

Today is a big day here at our little University. For the first time ever, our men's basketball team is in the NCAA.

GO BELMONT BRUINS!!

It is a good lesson of the power of publicity. If a small school is able to gain the kind of publicity Belmont has gotten over the past week, amazing things happen. See this piece that was front page on USA Today on the 14th as a example. (My students tell me we are getting a news piece somewhere every thirty minutes over the past two days).

Entrepreneurs can also become masters of their own P.R. and this can be a powerful way to get the word out about a business.

Learn how to write a press release and how to use it effectively:

- Be consistent and focused in your message and who you target with that message
- Do your homework on what media like what kinds of stories. Many have business sections that are constantly looking for good stories.
- Include cover letter (e-mail) or relevant article to explain why your story about your business is interesting or trendy.
- Build relationships with local reporters so they get to know you and your business. You can expect multiple stories if you do this well.
- Create your own angle for them for the story.
- Send to newspapers, magazines, radio, television that have an interest in your local market or in you product.
- Follow-up with phone call to see if they have any questions. This is sometimes where the interest gets momentum.
- Be persistent and don’t be afraid to break the rules.
- Quality counts, so write it well and write it like a real news story.

Posted by Jeff Cornwall at 09:02 AM | Permalink

I just finished several weeks of teaching about bootstrapping to my students. It is becoming a traditional that I wrap up this unit with a visit from Charles Hagood, co-founder of The Access Group and Health Performance Partners. Charles, a graduate of Belmont's Massey MBA Program, shared his advice on being a successful bootstrapper:

1. Cash is King. Enough said!

2. Sometimes Less is More. Having fewer resources can force a business to be more flexible and more resourceful. For example, Southwest Airline's business model grew out of the limited number of planes that they had to work with during their start-up. I am a firm believer that too much money early in a business creates too much mischief. The temptation is to live beyond your means. Start-ups spend money on overhead that they just cannot support once they have to rely on day-to-day cash flow.

3. Keep Your Priorities in Order. Never compromise your ethical principles, even when money it tight.

4. Enjoy the Ride. Love what you do in your business and enjoy each day. That will make the lean times easier to take.

5. Cut Costs, Not Quality. Focus your money on customers when money is scarce.

6. Impress Your Customers, Not Yourselves. Don't waste money competing internally over who has the best stuff. Invest it in your customers and in your product.

7. If You Have $1 Left in the Bank, Spend in on Marketing. Even when the market is not buying your product stay in front of them so they will remember you when things pick up. Charles tells the story of the huge hit their business took after 9/11. They decided to cut back on all spending except marketing. They kept in front of their customers. When the economy turned around, they were rewarded for this investment in marketing. They came back stronger than ever.

8. Always Look Bigger and Tougher Than You Are. A classic from NFIB.com offers tips that should be part of a good bootstrapper's tool kit. Each recommendation is relatively inexpensive, but offers good value in terms of its impact. And each of these ideas can make your business look larger and more well established to your potential customers.

- Set up a first-class voicemail system.

- Get a toll-free number.

- Send all mail on custom-designed letterhead in a designed envelope.

- (Y)our business card should be world class.

- Write articles for trade publications.

- Send out press releases whenever warranted.

- Dress the part.

9. Continuously Reassess Your Business for Wasteful Spending. As more cash flows in, the risk of wasteful spending increases as employees take their eye off the need for bootstrapping. Bootstrapping should not just be a part of your start-up. Build it into your culture and your business will build more value over time. The value of your business will ultimately be determined by the cash you can take to the bottom line. A bootstrapping culture will help maximize the amount of cash that makes it to your net profits. In this piece from Inc magazine from 1997, you can see what the ultimate bootstrapping culture looks like in even a large business.

Posted by Jeff Cornwall at 06:59 AM | Permalink | TrackBacks (1)

Buying a computer is a big deal for an entrepreneur. The average entrepreneur in the US starts his business with only about $6,800 in start up capital. A computer set-up can easily eat up a third of that. Dealhack has some money saving tips if you are planning to buy a Dell for your business.

Posted by Jeff Cornwall at 09:24 AM | Permalink

A new list of the top ten Venture Capital related blogs was recently passed along to me. Before I give you the link, I want to offer these words of caution:

- Venture capital money funds only a tiny fraction of new business ventures.

- About 80% of start-up capital for new businesses comes from the entrepreneur and her friends and family. Most of the rest usually comes from loans.

- A typical venture capitalist receives hundreds of plans each year, considers only a handful of these deals, and usually funds only 3-5 deals a year.

- Most venture capital goes to businesses that promise very high growth, with the promise of high returns (70-100% annual return on their investment). They are looking for home-run deals. For example, see this story from Red Herring on MovieBeam, which is a start-up planning to offer "video store in a box" that will sit on top of your TV.

- Venture capital firms most often are looking for deals that need at least a $5 million investment, and many now look for $20 million deals. The MovieBeam deal raised $48.5 million from VCs.

- They demand a reasonably quick exit, most often about 3 years. A venture capital fund usually has a ten year life, so the VC is looking for deals with clear "liquidation events." In the past this may have been an IPO, but since Sarbanes-Oxley most of the deals are looked at for their acquisition value.

- They will want a seat on your Board, and they will carry a loud voice in the direction of your business.

- VCs are hard-nosed business people. They will fire you from the company you founded at put in their own leader in your place if they believe it will increase the chance that your business will succeed.

If you still think you are a candidate for venture capital, here is the link.

Posted by Jeff Cornwall at 05:01 AM | Permalink | TrackBacks (1)

Kauffman's new e-Venturing site as a great new collection of articles on managing cash flow. It includes stories, how-to's and tools for managing cash and seeking external funding for day-to-day cash flow needs.

Posted by Jeff Cornwall at 12:51 PM | Permalink

Pelle at Stake Ventures posted a comment at my site and has a post at his site about my recent post on revenue forecasting.

Here is part of what he posted at his site:

The article makes the classic mistake of thinking all start-ups follow the same industrial kind of model with VC's and business plans etc. I think it is not at all relevant to web based start-ups. Where this is probably relevant are the kind of start-ups where you do need a huge upfront investment.

As all internet start-ups and sooner or later realize these revenue forecasts that you do are nothing more than a waste of time.

Here is my response:

First, you have assumed that I am talking about business plans for the outside world. In that case, you and Guy [Kawasaki] are probably right, as investors and bankers are probably not going to believe your numbers anyway. A VC friend likes to tell folks that he has one person on his staff whose only job is to rip apart the numbers in a plan that they like and reconstruct them with their own assumptions.

However, I am talking much more about planning for the entrepreneur than a plan for the investor.

By spending the time to develop forecasts that tie into the marketing plan, at the very minimum you have now identify the key assumptions that are tied to the big unknowns that create uncertainty in your forecasts.

You now know what you need to track carefully as your business grows. The assumptions become not only what you use to forecast, but become the barometers you use to assess where your new business is really going and why.

This way your forecasts, just like your plan, becomes a fluid and evolves as you learn, as your business grows, and as things change. You imply that I view a forecast as some sort of a contract. Nothing could be further from the truth. I want you to adjust your forecast with each month of experience, with each mistake you make, and with every brilliant decision you make along the way.

When you look at your plan and see how different your business actually looks after you've operated a year than it did in the original plan does not mean you should never plan. It means that your plan and your forecasts are a starting point based on the knowledge you have now and that you have learned and used that learning to get better.

When we fail to forecast we are simply setting ourselves up for a game of blind man's bluff. That is too expensive a game and too risky for me.

I like Pelle's site and plan to visit it more often. Great post and a fun discussion!

Posted by Jeff Cornwall at 02:26 PM | Permalink | TrackBacks (1)

Accurate revenue forecasting is one of the single most important steps an entrepreneur takes in planning for a new venture. And yet, we find that most entrepreneurs do not spend enough time determining how much revenue will come in their front doors. Although underestimating expenses is a common mistake in business planning, missing the mark on revenues can be catastrophic.

If sales fall way short of expectations, the business can fail due to lack of adequate cash flow. And if sales wildly exceed expectations, the business is not prepared for demand and customers will abandon the new start-up due to inability to meet their needs with products or services in a timely manner.

Some estimates indicate that entrepreneurs spend only about 20% of their time forecasting on revenues and 80% of their time on expenses, when they should spend most of their time trying to gain an accurate forecast of revenues.

Specifically accurate revenue forecasting is important for a number of critical reasons:

- Bank financing and equity investment are based in part of these forecasts. If the entrepreneurs misses the mark and as a result needs more cash than they first thought, this will cause a significant loss of confidence on the part of the banker or investor.

- Inventory assumptions are based on this forecast. Inaccurate revenue assumptions can lead to either too much or too little inventory. Both are potentially fatal errors for a start-up.

- Staffing decisions are also made in anticipation of future sales. If the forecasts are wrong, the business is either over or under staffed.

- Revenue forecasts will determine how much space is needed for the business. Again, too much or too little space are both detrimental to the new venture.

Revenue forecasting can be overwhelming for the entrepreneur. Some say they feel like they are looking into a crystal ball, and it is too cloudy to see the future. So rather than do the work to improve these forecasts, entrepreneurs take short-cuts. They simply plug in numbers into revenues that have no real basis in fact. Often they put in numbers that seem to give them the profits they hope to achieve. Expenses are easier to estimate as we can do fairly simple research to get these numbers. So we spend time getting good expense forecasts and then plug in revenues that make things look right.

There is a time tested approach to revenue forecasting that can significantly improve the odds that they will be more accurate. Revenues are a simply formula:

Revenues = Price X Number of Units Sold

A well developed marketing plan should be able to give you these numbers. Pricing is one of the questions that are answered in the marketing plan, so that will give you half the equation. Knowing what our customers want, how many customers we can likely expect, and how much of what we have to sell they will want will tell us the rest. That is why a good plan helps us to "Think Like the Customer." If we know how the customer thinks, that helps us determine how to position our product.

Knowing more about the overall market, including size and competition, can help us to begin to estimate demand. The promotion plan will tell us how we will reach these customers to tell them about our new business.

Experts on reading business plans, such as investors and bankers, usually do not read a business plan in the order it is written. They will often read the marketing plan and then go back to the revenue forecast to see if it numerically represents what is said in words in the marketing plan. That is the backbone of any good business plan. If the revenue forecast does not make sense based on the marketing plan, the investor or banker will usually read no further.

Posted by Jeff Cornwall at 06:34 AM | Permalink | TrackBacks (1)

Guy Kawasaki has a great post on "the dance" that goes on between entrepreneurs and VCs and venture capital forums and new product demos.

...entrepreneurs acting like they don't need capital, and VCs acting like they don't need entrepreneurs. (This dance is akin to acting prudish in a brothel, but I digress...)

He offers eleven great tips on what it takes to get the VC's attention at such an event. You only have a few minutes, so it is critical to make the most of it. It is worth a read for anyone raising money, hiring employees into a start-up, or trying to make a sale.

(Thanks to Bruce Schierstedt for passing this along).

Posted by Jeff Cornwall at 05:45 AM | Permalink

The time between opening the doors and the first month of positive cash flow can be harrowing for many entrepreneurs. Certainly anything you can do to keep expenses in line through bootstrapping is critical. But as this piece from StartupJournal points out, we should not ignore things we can do to boost revenues during this time.

Some experts say that smaller, lesser-known companies are particularly well-suited to buzz campaigns. While at large companies, there is more pressure from upper management to maintain control of a marketing message, "the whole point [of a buzz campaign] is to get consumers talking," says Max Kalehoff, vice president, marketing at BuzzMetrics, a New York word-of-mouth research and planning firm. "Word of mouth is the ultimate form of consumer engagement," he says.

Creating a buzz or word of mouth can start well before the doors open. This helps to increase the customer flow from the first day of operation. I call this priming the pump.

Some entrepreneurs find blogging to be a good tool for this in their businesses, such as Jason, who we have been following as he prepares to open his coffee shop in Montana. Street teams are a common tool used in the music business.

One of the keys when creating a buzz before the business opens is timing. You want to do it soon enough to actually build a buzz, but you don't want to do it so soon that people lose interest or assume you are never going to open. Keep in mind that there are inevitable road blocks to almost every business opening, so don't pull the trigger too soon on your buzz marketing.

Posted by Jeff Cornwall at 05:39 AM | Permalink

Many of us thought that venture capitalists were getting as unrealistic as many of the entrepreneurs' plans that come across their desks. They had gotten to the point where they would only look at a "home run" plan that had the potential for 100% plus annual returns. But that is beginning to change. They are now willing to realize lower returns in exchange for fewer bad deals as seen today at Red Herring:

The percentage of projects that finished in the red, with the VCs getting back less than they invested, dropped. Of the 154 deals done during 2005, VCs were left holding the short end of the stick on 48, down from 62 investment failures out of the 183 deals done in 2004, according to the study by the National Venture Capital Association and Thomson Venture Economics.

Posted by Jeff Cornwall at 01:03 PM | Permalink

Here is a link to one of the better explanations I have read on the nuts and bolts of the AMT that is about to hit millions of middle class Americans.

Posted by Jeff Cornwall at 05:32 AM | Permalink

Since real tax reform may never come, we have to live with the current system. So here are some year end tax strategies from the Arizona Republic:

"(A)ccelerate expenses, delay income." The concept is that it's always better to pay taxes later rather than sooner. In essence, you delay taxes for an entire year on income you've put off receiving until January and get the benefit of deductions a whole year earlier for December expenses.

The easiest way to "accelerate expenses, delay income" is to send out invoices at the end of the month and prepay January bills. Of course, if you've had a bad year - you have no profits or will be in a low tax bracket - reverse this and accelerate income and delay expenses.

They also offer several specific year end tips, but as always, check with your CPA.

Posted by Jeff Cornwall at 06:22 AM | Permalink | TrackBacks (1)

The National Dialogue on Entrepreneurship reports that the SEC is considering reform of Sarbanes-Oxley.

In an effort to ease this burden, the Security and Exchange Commission's Small Business Advisory Group is recommending that the law's rules be eased for smaller public companies. Specifically, they recommend that firms with market capitalization below $750 million and revenues below $250 million should not be required to have an outside auditor test their internal control systems.

If these changes move forward they will ease requirements on over 7.000 small companies and possibly open up public offerings again as an option for emerging businesses.

Posted by Jeff Cornwall at 07:21 AM | Permalink

Every semester I have Stuart McWhorter, Co-Founder and Managing Partner of Nashville-based venture capital firm Clayton Associates, come to class to talk about the venture capital process. One of the points he always drives home to my students is that most venture capital firms tend to prefer investing in industries that they have experience in from previous deals. He also says that they prefer to work with deals that are more local.

It seems that a study by Junfu Zhang available at the Kauffman Foundation web site supports this, particularly when it comes to Silicon Valley.

This paper shows that Silicon Valley received a large proportion of the nation's total venture capital investment during 1992-2001 and that start-ups in Silicon Valley appear to have easier access to venture capital: They receive the first round of venture capital at a younger age, raise more money in each round of financing, and complete more rounds of financing. This easier access to capital significantly affects start-up performance in Silicon Valley. While the easier access may simply be a result of the higher supply of monetary capital in Silicon Valley, it is also consistent with the view that venture capital in Silicon Valley comes with more human and social capital.

This last point is also driven home by most venture capitalists that I know. Most will tell you that they often do multiple deals over time with the same entrepreneurs. The odds of you getting funded go way up if you have been funded by them in the past.

As the old saying goes, "If given a choice between an "A" deal and a "C" team, or an "A" team with a "C" deal, venture capitalists will take the "A" team every time."

And the chances are even higher if they have worked with that "A" team before and if that team is right around the corner.

Posted by Jeff Cornwall at 06:11 AM | Permalink

A nice feature of Kauffman's new eVenturing site, which I first mentioned last week, is how it organizes resources. For example, they have pulled together a nice collection of sources addressing angel financing.

Posted by Jeff Cornwall at 05:48 AM | Permalink

The Milken Institutute has released a report titled "The Best Markets for Entrepreneurial Finance." While this is an interesting study to consider, it is not the complete picture. The measure of access to capital that is used in this study to compare the financial climate around the globe really measures external financing and is too heavily weighted toward equity financing to accurately measure the real nature of entrepreneurial financing.

Almost four out of five start-ups in the US use some combination of self-financing and/or friends and family. The next largest source is debt financing. Less than one percent use equity financing. I do not know if this reflects entrepreneurial financing in the rest of the world, however. That would be an interesting study that might better explain why the US can lead the world in entrepreneurial activity, and yet ranks only fourth on this index.

Posted by Jeff Cornwall at 06:21 AM | Permalink | TrackBacks (1)

It is not uncommon for entrepreneurs to use creative, non-salary means to attract good talent. After all, cash is a precious resource in any start-up. One common way is to offer key employees some form of equity in lieu of salary.

Red Herring reports on a new twist to this strategy. More and more experienced executives, including middle managers, are actively seeking opportunities to work for less than market pay if they can get a "piece of the action." They are becoming known of as angel employees.

While this is a great way to save cash and lower the breakeven point, it does have the potential to make things complicated. All of these managers are now shareholders and have legal rights. The more partners in the deal, the more complex things can become. I would only recommend this strategy for businesses with a clear and relatively quick exit plan. I would not recommend this for entrepreneurs who plan to build and hold their business. It is a recipe for too many headaches with so many added equity holders.

Posted by Jeff Cornwall at 06:12 AM | Permalink | TrackBacks (1)

Small business loans outstanding by commercial banks increased by 5.5 percent between June 2003 and June 2004, according to a study released today by the Office of Advocacy of the U.S. Small Business Administration. A summary of the study can be found here, the introduction with links to specific state information can be found here, and the full 106 page report can be found here.

"Increased access to credit is essential for the survival and growth of American small business," said Dr. Chad Moutray, Chief Economist for the Office of Advocacy. "The information contained in this report helps small business owners find banks providing that access, and it helps banks understand how they compare to their competitors in commitment to small business lending."

As one of my business partners used to remind me, "There is a bank on every corner." This type of data helps entrepreneurs get a road map of small business lending by banks.

The report, Small Business and Micro Business Lending in the United States, for Data Years 2003-2004, includes rankings of the top state lenders for loans under $1 million (small business) and $100,000 (micro business), based on the Reports of Condition and Income (Call Report) and Community Reinvestment Act (CRA) data. Four sets of tables rank large Bank Holding Companies (BHC) and commercial banks nationally and by state. Findings also include:

- Small business loans outstanding (loans under $1 million) totaled $522 billion as of June 2004, an increase of $27 billion or 5.5 percent between June 2003 and June 2004. This compared with an increase of 2.3 percent during the previous period, according to the Call Report data.

- Large multi-billion-dollar banks made 67 percent of micro business loans in the year ending June 30, 2004 compared to 64 percent in 2003. This increased share appears related to the increased promotion of small business credit cards.

Posted by Jeff Cornwall at 05:10 AM | Permalink

The StartupJournal offers some additional insight into a trend that I have been documenting here for some time: venture capitalists are more than ever shifting to later stage, more mature companies for their investments.

Such trends are a sign that many venture-funded companies, particularly those in industries like wireless and pharmaceuticals, still need significant cash to ramp up operations. But it also indicates a problem for venture firms: Their funds, which raised tens of billions of dollars during the dot-com boom and never spent it all, are now scrambling to find places to put their remaining cash before the fund's life, usually 10 years, runs out.

As a result, venture capitalists are opting for bigger investments in more mature companies, since those firms might go public or get bought more quickly than newer firms. The goal of any venture-capital investment is an "exit," usually in the form of an IPO or an acquisition.

They highlight the trend using this graphic from the National Venture Capital Association:

An additional factor in all of this is the unintended consequences of Sarbanes-Oxley. Very few smaller companies are able to use an IPO as a liquidation event due to the costs of compliance with Sarbanes-Oxley. Start-ups have to find funding with more "patient money," typically from angel investors.

Posted by Jeff Cornwall at 05:52 AM | Permalink

So do you want to be your customer's banker? That is exactly what you become when you extend them credit on sales. Collecting these accounts receivable is critical to healthy cash flow, and yet many entrepreneurs simply send out the invoices and wait.....and wait......and wait.......

From Forbes.com:

Hounding delinquent customers is touchy work. On the one hand, you need the cash flow to fund your daily business operations; on the other, you don't want to seem like an overbearing ogre, especially if you know the debtors personally. Receivables are essentially unsecured loans, so a debtor is indeed what a late payer is.

The longer you wait to collect, the less likely you will be to ever get your money. And remember, it is your money.

One of the very first real "systems" that entrepreneurs who extends credit to customers need to put is place is one that allows them to track and collect accounts receivables. Here are a few things to keep in mind:

- Set up your accounting software to get an accounts receivable report. Review the report at least once a month. At first you may need to review it once a week as you get things under control.

- Set up a contact schedule. At a minimum you should send out a second invoice after 30 days. After that, you should begin regular telephone contacts -- every two weeks shows urgency without antagonizing clients -- to get updates on payments.

- Don't start out as a hard guy. Give the customer the benefit of the doubt. Be prepared to work with them on payment plans if necessary. Make sure to stay on top of any agreements to make certain that this is not just a stalling tactic by your customer.

- Don't wait too long to take action on deadbeats. Your attorney can prepare a standard letter if you have large accounts receivable. Collection agencies may need to become a strategy at some point, as well.

- Remember that sometimes you need to fire a customer. Too many times I see entrepreneurs sit back passively and watch an account grow and grow, getting older and older. They are afraid to act. But, if they do not pay, they are no good to you anyway. Sales don't matter if there is no cash!

- Watch your payer mix. The best rule of thumb is to never let any one customer represent a larger percent of your total sales than your average profit margin. That way if you need to fire a customer, you can still pay your bills.

Posted by Jeff Cornwall at 06:07 AM | Permalink | TrackBacks (1)

I often think that venture capitalists must have the best public relations machine in the world.

Only a tiny fraction of a percent of entrepreneurial ventures ever get or need venture capital financing, and yet the two most common phrases that come out of most aspiring entrepreneurs mouths are "business plan" and "venture capital." It is as if the venture capitalists have done such a good job of branding that their product name has become common speech for financing a business (like Kleenex for tissues and Xerox for copying).

It seems, however, that the very place that is synonymous with venture capital is moving on and taking alternative roads to financing their start-ups. StartupJournal reports on the growing trend in Silicon Valley to shun venture capital.

It's a scenario playing out all over Silicon Valley -- and one with potentially big ramifications for venture capitalists. A new generation of Internet companies -- many offering online photo and blogging services or downloadable software for businesses -- have been built for a fraction of the cost just a few years ago. That's mainly due to the increasing popularity of cheap "open source" software and programming tools, as well as dramatic cost reductions in computer memory, storage and Internet bandwidth.

In the past, the first step that Silicon Valley entrepreneurs would take was to raise millions in venture capital. Then they'd try to figure out how to spend it all.

The new trend is to determine what they need to do to get their product to market and then forecast how much money they actually need to execute their plans. They have discovered the beauty of self-financing and bootstrapping.

They have learned that just because their business concept has a potential valuation that could make raising $25 million in venture capital relatively easy, it does not mean that they should actually take that money. Why give up equity and control when for a $100,000 personal investment you can launch the business and reap all of the benefits for yourself?

Raising too much money can be much worse than not raising enough money. I know those of you struggling to make payroll think I am nuts for saying this, but it is true. Too much money in a new venture leads to poor decisions on unnecessary overhead, wasteful spending on non-productive assets like opulent offices and furnishings, over staffing, inflated salaries, and just plain mischief. At some point the start-up money runs out and you have created a business model that cannot sustain its lavish expenses.

I think the Silicon Valley entrepreneurs have finally gotten it right. Build a sound business model, minimize your need for external funding, and build a business with real and sustainable value.

I think it is time for us to hire a p.r. firm to help make bootstrapping the new synonym for financing rather than venture capital.

Posted by Jeff Cornwall at 05:44 AM | Permalink | TrackBacks (1)

Venture capital fundraising for the first three quarters of 2005 is already ahead of total fundraising for all of 2004 according to a new study released by the National Venture Capital Association.

For all of 2004 there was almost $17 billion raised for venture capital and $52 billion for buyout and mezzanine financing.

In just the first three quarters of 2005 there has been well over $17 billion raised for venture capital and $54 billion for buyout and mezzanine financing.

Just to put this in perspective, in 2000 there was over $106 billion raised in venture capital alone, but we all know what happened to most of that money....It vanished when the dot.com bubble burst.

The money flow has slowed down a bit since Sarbanes-Oxley has all but shut down the IPO market for small to mid-sized firms. However, the funds have had an overhang of cash for almost a year, so their coffers are getting really full of cash.

What this means to entrepreneurs looking for funding is that the already cash rich venture capitalists have even more money to invest. That makes money more plentiful and terms a little more favorable for ventures looking for equity financing.

Posted by Jeff Cornwall at 05:29 AM | Permalink

Angel investors are directing their money toward more start-up ventures, according to a study reported in Red Herring.

Angel investors are funding more early-stage startups this year than at any point since the Internet boom....Innovators who meet with angels are twice as likely to get funding this year than two years ago, a study shows. In 2005, angel investors backed 21.8 percent of the companies they investigated, up from 10.3 percent in 2003, according to a study by the Center for Venture Research. (emphasis added)

In a related story Red Herring also has a Q&A interview with fund managers from a group that invests in early stage businesses. It provides some interesting insights into their investing strategies.

We think that early-stage opportunities now are some of the best we've seen since the fund's founding 22 years ago....There are areas like semiconductors, which are continuing to change the world. There is the enterprise. There's the rise of open-source and on-demand software models like AJAX, the transfer of applications to mobile devices, and so on....We're not into trend investing. We tend as a fund to be into the picks and shovels, and looking at applications that are less sexy, but high growth.

More money that is being targeted toward clear and simple business models. Let the good times roll!

Posted by Jeff Cornwall at 05:12 AM | Permalink

We hear all of the horror stories about lottery winners who end up broke and miserable. Large windfalls of money can be difficult to manage if we are not prepared. I see some entrepreneurs face similar challenges as their businesses suddenly create drastic increases in monthly cash to the owner or windfalls of wealth from a sale.

I met with a former student who is facing the possibility of winning one of life's lotteries with his business. A sudden opportunity is creating the possibility of significant profits over a very short time. But, he seems to have his head on straight. He is already planning to use this influx of capital to help build his business.

So why are some people better able to handle situations like this? I believe most of them were brought up with an understanding of how to manage money. I also believe that they were raised with values that were not as materialistic as others. To them money is not the end, but rather a by-product of working hard and living a good life.

Scott Burns (free registration required for this site) suggests that we look to a popular book, Getting Rich in America, for some answers on how to put wealth in its proper perspective.

Here are the eight rules from that book and my thoughts on them (for what they are worth):

1. Think of America as the land of choices.

Each choice we make can affect our character. What kind of business we do we choose to start? Who do we choose as our business partners? How will we treat our customers and our suppliers? How will running our business have an impact on our family? Virtues are simply habits we form by doing what is right.

2. Take the power of compound interest seriously.

Start saving when you are young. A dollar saved when you are twenty will be worth so much more when you retire than a dollar you save when you are fifty. As I wrote about recently, many baby boomers did not learn that lesson and are trying now to make up for lost time.

3. Resist temptation.

As may father always says, "Pigs get fat and hogs get slaughtered." Don't spend money until you have it, and don't waste it on things that cost a lot but have very little value. Be frugal.

4. Get a good education.

If you are an entrepreneur, learning about the process of entrepreneurship will almost double your odds of success. But beyond that and more importantly, a good education will make you a more interesting person and a better citizen.

5. Get married and stay married.

Amen.

6. Take care of yourself.

I began to have some health issues as our business grew very rapidly and we began to look at options to sell. Stress takes its toll on you. My brother says I aged in entrepreneur years during that time, which he says are about like dog years.

7. Take prudent risks.

Successful entrepreneurs are not gamblers, but they will take risks that are well thought through and well planned for.

8. Strive for balance.

If you follow rule #5 you will only be married once. You only have one chance to be a good parent. Good friends take work.

You can and you should be so much more than an entrepreneur in your life.

Posted by Jeff Cornwall at 06:04 AM | Permalink

Where there is an action there is an equal and opposite reaction.

The action in this case was Sarbanes-Oxley and its onerous reporting requirements for small public companies, which basically killed the small IPOs in the US. The reaction, as predicted at this site earlier, was an increase in mergers and acquisitions as an alternative exit strategy for equity investors in start-up deals. Red Herring reports that M&A activity is up 23% for techie businesses.

IT service companies saw a large jump in transaction activity, rising 50 percent during the first half of the year. Acquisitions in the service sector are considered to be a leading indicator of IT investment. Valuations in the sector went up 37.5 percent....

The reaction to the reaction is a sharp increase in VC investments during the same quarter. VCs are flush with cash and looking for deals that can provide a large, relatively quick return. If they cannot get them from IPOs, M&As work just as well. Higher valuations for these acquisitions seem to have the VCs licking their chops.

Do not expect this current pattern of exit through acquisition to end any time soon. Sarbanes-Oxley is here to stay without any changes for smaller firms. The accounting industry is gearing up a public relations campaign to illustrate how important it is to keep a close eye on even the smallest public company.

Also, it is important to keep in minds that Sarbanes-Oxley created a new agency (imagine that) called the Public Company Accounting Oversight Board (PCAOB). The PCAOB board is appointed by the five members of the Security and Exchange Commission. In addition to being a clear constitutional problem this also assures that the lawyers and accountants who control the SEC will keep Sarbanes-Oxley a cash cow for their brothers and sisters in the big private law and accountings firms.

Posted by Jeff Cornwall at 06:28 AM | Permalink

While it has gotten so much easier to get monthly financial statements using off-the-shelf accounting software, these numbers are not all that is needed to effectively manage a business.

First, the income statement, balance sheet and cash flow statement are all based on historic data. They tell you where you have been, but not necessarily where you are headed. A professor from the east coast tells of an exercise he uses to bring this point home. He takes his students to a big open parking lot, where an old car sits with all of its windows blackened out with paper except the rear window.

He sets up a simple course to follow with orange cones. The trick is this. His students must navigate the orange cones driving forward by looking only through their rearview mirror. The cars careen all over the lot as the students try to master this almost impossible task.

The moral of this lesson is to illustrate the challenge of trying to go forward while only able to look in the past.

The challenge for the entrepreneur is to develop a set of numbers that lets them see ahead for their specific businesses. These measures tend to be unique for each situation. For example, it may be the steps that are taken in the sales cycle. If measured and used to manage, these numbers can help predict future sales and improve the steps taken to secure new business.

Here are a few key steps that can assure that you have these numbers and that they are there when you need them:

- First, identify those specific activities that, when taken together, are critical for building sales and growing profitability.
Keep number of measures to the critical few that matter most. Limit to 5-8 measures to assure that managers keep focused.

- Link compensation to these performance measures, placing emphasis on quality rather than just quantity.

- Create a list of numbers you would like to see on your desk each day, each week, each month, and each quarter that will help you see where your business is headed. Focus on those numbers that are critical to guide and navigate the company to desired sales and profits objectives.

- Sit down with your bookkeeper or accountant and see what other suggestions they might have. They can add to your list, but not delete. If you need to, upgrade your information systems and staff if needed to get these numbers. Growing profitably should easily pay for these costs.

- Be Assertive. Do not accept gaps in information or unnecessary information in reports you receive. Make sure that everyone understands the importance of these numbers for the future of the business and knows the part they play in not only providing this information, but in using it to help move the business ahead. Use the key numbers to motivate your employees, so they are working with you to grow the business.

Find the key processes that help make your business grow and find a way to measure them. Don't ever try to move your business ahead while only looking in your rearview mirror.

(Note: Some of these ideas come from a 1999 article in the Journal of Accountancy and from a 1990 article in Inc magazine).

Posted by Jeff Cornwall at 07:11 AM | Permalink

I have written in recent months about how flush with cash most venture capital funds are these days. Here is more evidence of that from an article sent to me by Dr. Jim Stefansic, COO of Patherfinder Therapeutics, Inc.

Let the good times roll. But, also keep in mind that this, too, shall pass. Availability of money comes and goes over time. For right now, there is plenty of cash for the right deals.

Posted by Jeff Cornwall at 05:03 AM | Permalink

Trying to advise entrepreneurs on the workings of venture capital firms has always been a bit of a moving target. Over time, they have moved from earlier stage to later stage firms, have gone from highly specialized to broader in their interests, and have changed their target returns from incredibly high to astonomically high.

Recently, due to the impact of various forces including Sarbanes-Oxley and a glut of capital available for investment, we have been seeing another shift in the VC industry.

The latest twist and turn is a move of investment dollars away from smaller VC firms in favor of larger, more established firms. From Red Herring:

The median size of new venture capital funds raised during the first half of the year jumped 20 percent to $192.5 million, up from a median of $160 million during 2004, according to VentureOne. The 2003 median was $100 million.

Sub-$100-million venture funds garnered 40 percent of the total capital committed during the first half of 2005. "In the pre-bubble days, that number would have been closer to 70 or 75 percent," said Joshua Grove, a researcher at VentureOne.

What this means is that start-up firms will need to look more at the angel market for money. This is a rather sharp change from less than a year ago, when we saw more money flowing into start-ups from VC funds.

The investment capital is never stable, so entrepreneurs cannot rely on "common wisdom" on where to look for outside funding. They often have to pay as much attention to the trends in the capital markets as they do to the market for their new product or service.

Posted by Jeff Cornwall at 08:17 AM | Permalink

The International Finance Corporation (IFC) has a new newsletter that highlights their efforts around the world to fight poverty through economic development. Much of this development is through small and micro enterprises. In their first issue, the IFC highlights work being done in Bangladesh through micro lending programs.

Posted by Jeff Cornwall at 06:22 AM | Permalink

For the past several years entrepreneurs with links to China have found a cool reception from most investors. The risks were perceived as too high and there was not enough understanding of doing business in and with China to get the level of comfort most investors need before jumping into a deal.

StartupJournal reports that this may be changing:

Early-stage investors are plowing money into China, and often posting permanent staff here, despite concerns about political instability, tight controls on capital and a dearth of local management talent. U.S. financiers say huge domestic demand for high-tech gadgets and sophisticated technical gear in China is hard to ignore, particularly when it spawns genuine local innovation in fields such as telecommunications and semiconductor design -- not just "me too" technologies riffing off Western products.

But all involved should still be cautious. There are political risks and very weak intellectual property rights. And if you think Kelo is scary, property rights in China really do not exist in any meaningful way.

Posted by Jeff Cornwall at 10:13 AM | Permalink

I have written recently about the change in venture capital focus due to Sarbanes-Oxley. The IPO market has dried up due to the costs associated with the new requirements imposed by this legislation, so VCs are now looking at early stage businesses including start-ups. Their exit strategy has shifted to selling out their holdings to larger public companies.

A new report by the National Venture Capital Association finds that VCs are getting a little impatient with this new approach.

From Red Herring:

Both venture capitalists and private-equity investors have seen lower short-term returns on their investments across all stages as valuations stagnated over the last year....One-year returns to venture investment slumped to 3.6 percent during the first quarter, down from 15 percent during the same period in 2004....The decrease in one-year returns points to a poor market for startups, which have been unable to create significant value for their investors during the last 12 months. "We're basically looking at a market that’s moved sideways in the last year," said John Taylor, the vice president of research at the NVCA.

But as reported in Inc.com, VC activity really hasn't slowed down that much.

Despite fluctuations in the performance of short term venture capital, venture investing totals continued to grow in the second quarter of this year, reaching a total of $5.8 billion invested in 750 companies. These figures show a rise of 19 percent over the first quarter's numbers of $4.9 billion. Venture investing for the first half of $10.6 billion is on par to match the investment totals for the full year of 2004 of $21 billion.

So what does this all mean? Really nothing over the near term. VCs still have excess cash looking for deals, which is why they are investing in earlier stages business growth. Fundraising for deals that will be made over the next two to three years is already in place.

Eventually, this may lead to slower investments into new venture funds. But not to worry. Money is a commodity that will seek the markets that give the best balance of risk and return. Money will still be available for start-ups and growing companies as a new equilibrium will be found in the capital markets. And by then, Washington may have come to its senses and fixed Sarbanes-Oxley.

Posted by Jeff Cornwall at 02:21 PM | Permalink

Put this in the "I never thought I'd see the day..." category. StartupJournal reports that VC money is flowing back into Internet deals according a survey by National Venture Capital Association, PricewaterhouseCoopers and Thomson Venture Economics.

In the first quarter, venture investments in Net-related startups rose 36% to $753.8 million from a year earlier....The jump in spending followed a 30% hike in the fourth quarter and a 17% rise in the third quarter.

While the magnitude of the spending doesn't yet compare with the Internet bubble, VCs say they are increasingly convinced big money can be made on the Net. They also claim to be seeing better thought out businesses with substantial revenue and none of the speculative ideas sketched on napkins that attracted money during the spending heyday five years ago.

Posted by Jeff Cornwall at 06:15 AM | Permalink

Red Herring reports on a new study released by the National Venture Capital Association that found that venture capital and private equity funds are raising money at a torrid pace.

Forty-three venture capital funds raised a total of $6.07 billion for investment in startups during the second quarter. Last year, during the same three-month period, venture firms raised $3.23 billion for 55 funds, according to a study by Thomson Venture Economics and the National Venture Capital Association.

Although the number of venture funds has dropped, the total amount raised has nearly doubled. The average fund size has increased to $141.3 million, up from $58.8 million a year ago.

This is remarkable given the near death of IPOs since Sarbanes-Oxley became law, making reporting requirements too costly for smaller public companies.

The outcome that venture capitalists are betting on is buy-outs of funded ventures by large, public companies.

Inc.com says that more money continues to go to earlier stage ventures.

This influx of cash has enabled VCs to put more of their money in start-up and seed capital. Over 50% of the money invested in new funds will be used for early-stage investments, which accounted for around 45% from 2002 to 2004, said Daniel Benkert, a senior analyst at Thomson.

Posted by Jeff Cornwall at 06:54 AM | Permalink

In addition to the shift to niche markets and start-ups I wrote about yesterday, Entrepreneur.com says that there is a definitive shift away from just high-tech toward more low-tech and even no-tech investments by many VC firms.

"Behind the headlines, many VCs are investing in low-tech (or no-tech) companies that offer prospects of rapid growth, job creation and excellent economic return. In fact, well-managed companies in any industry can score VC dollars if they know where to look."

They offer profiles of three examples: a supplier of "air-powered guns called "markers" for the sport of paintball", a sewing company, and a cosmetics company. An interesting read and a good lesson in what investors really want: growth potential and sound leadership.

Posted by Jeff Cornwall at 07:22 AM | Permalink | TrackBacks (1)

Red Herring reports on a new study issued by Deloitte and Touche on foreign investments by VCs.

"The vast majority of U.S. venture capitalists plan to keep their investments inside the United States....Only 20 percent of VCs planned to increase investments outside the U.S. over the next five years."

Actually, I was quite surprised to see that there are 20% of VCs who would consider overseas investments. The VCs that I know well tend to favor limiting as much extraneous risk as possible, as there is enough business risk in each deal. Therefore they tend to favor specific industries that they know well to minimize their industry risk. Many also limit the geographical reach of their investments, which allows them to keep closer watch over their stable of companies.

International investments add multiple layers of risk that most VCs just do not want to add to the mix. The fact that one in five would invest outside the US tells me that there really is a large overhang in many firms. That is, they have more cash than they can invest in their traditional profile. So we see more VCs chasing start-ups and now a significant number investing overseas.

Posted by Jeff Cornwall at 06:03 AM | Permalink

More venture capitalists are moving into new territories. The majority of VC firms still stick with established ventures looking for later stage funding, but some are starting to specialize in niche financing markets.

National Dialogue on Entrepreneurship points out that there is a shift to more VC funds going into start-ups. There are a significant number of start-up focused VCs listed in the Entrepreneur magazine Top 100 Venture Capital firms.

The challenge for start-ups getting VC money is that VCs are, by nature, very impatient. They want growth rather quickly and they expect you to hit your projections and hit them on time. If not, they will fire you and hire someone they believe can make your concept meet their expectations.

NDE also links to the web site of a VC firm that is focusing on funding businesses wanting to franchise a business model. From the web site:

"Franchising Ventures Group is comprised of a group of individuals who have extensive experience in business-building, franchising, marketing, and finance. In the course of investigating an array of possible business ventures and market opportunities, they became convinced that many companies had great potential for franchising but that most would never reach that potential.

"To us, the next step was obvious - form a venture to provide the capital and the skilled management needed to create, market and manage franchise programs in a joint effort with companies that had the potential for great success."

Franchising a business concept is a risky endeavor, with litigation rates quite high even with successful franchises. Franchisees get restless and quickly believe the fees they pay are not worth what they get in return. So if you pursue VC funding for a franchise be ready to be stuck between a rock and a hard place as the VC expects quick growth and each of your growing number of franchisees expect you to treat them with specialized attention in return for the fees they pay you every month.

Posted by Jeff Cornwall at 05:18 AM | Permalink | TrackBacks (1)

The European venture capital market has been touted recently for its success in doing deals. But now Red Herring reports that European VCs are finding that they do not have a ready public market to serve as a vehicle to exit the deals they are funding. Watch the deal flow in Europe slow to a trickle until they sort this issue out over the next year or two.

Posted by Jeff Cornwall at 02:10 PM | Permalink

When you talk to angels about venture capitalists and venture capitalists about angels you can sense a certain uneasiness about their relationships with each other. Both need each other, but they have a very different way of doing business and often very different expectations from a deal.

National Dialogue on Entrepreneurship has a link to a paper that looks at the relationship between VCs and Angels. Interestingly, both respond that they have had a negative experience with the other at a rate of 58%. This is an important finding since they tend to overlap on so many deals these days. Entrepreneurs need to understand that while they may have both angels and VCs in their deal, they are likely not going to be on the same page on every issue that comes along. Through in a banker and it can get really confusing. The entrepreneur can end up trying to mediate between several differing perspectives, while at the same time needing to please all of them.

Posted by Jeff Cornwall at 09:04 AM | Permalink

Red Herring reports that venture capital fundraising is down 44% in the US, but up in Europe. While this may sound alarming, VC activity in the US is down for a couple of reasons.

First, Sarbanes-Oxley has put a wet blanket on public offerings and this is having an impact on venture capital financing. VCs need exit options, and IPOs have slowed way down due to the reporting requirements imposed by Sarbanes-Oxley and the costs that they create for public companies (over $500,000 a year in additional accounting costs for even small public firms). Valuations of VC funded deals in the US are up. The market has become more selective in its investments, which is a positive long-term trend.

Second, there is already a large surplus of liquid assets in US venture capital firms, so there is a reluctance to pour in more money right now. It is also important to keep in mind that the US still raises over three times as much as Europe, even with the drop in US fundraising.

Posted by Jeff Cornwall at 08:52 AM | Permalink

Overhead is the enemy of entrepreneurial start-ups. Every dollar that is spent on overhead is a dollar that does not make it to the bottom line. Precious operating profits get eaten up by overhead preventing them from becoming net profits. Bootstrapping space is one of the most common and effective means to keep overhead costs down for start-up ventures. Start in your kitchen, your garage, your basement; anywhere that does not require you to pay rent.

Anita at Small Business Trends points out the power of virtual space for start-ups in this post. Entrepreneurs can literally start businesses with the founders all over the country if they plan communication correctly.

Posted by Jeff Cornwall at 07:24 AM | Permalink | Comments (2)

The National Dialogue on Entrepreneurship reports that the numbers related to VC activity may be beginning to soften. This is likely due to a variety of factors with Sarbanes-Oxley at the top of the list due to the chill it has cast on IPOs.

They are reporting on a study issued by the National Venture Capital Association.

Posted by Jeff Cornwall at 07:16 AM | Permalink

There is an increase in the use of private placements as a means for raising equity funds according to an article at Inc.com. "According to Capital Hunter, a California-based research firm, there were nearly 2,000 more Reg D filings in 2004 than the year before - accounting for a 14% increase."

Certainly the chill that Sarbanes-Oxley has put on the path of "venture capital money leads to an IPO" that many entrepreneurs in high capital start-ups is partly behind this trend. Also, the ever growing expectations for high returns among VCs have caused many entrepreneurs to look to other options such as angels, angel networks and private placements.

Private placements are highly regulated and require careful attention to the rules. Investors must be "accredited", which means they must be one of the following:

-Any national bank

-Any corporation or business trust with assets in excess of $5 million.

-Any insider of the issuing company (officer, director, or owner).

-Any individual with income over $200,000 or couple with income over $300,000 (must have two years with income at these levels and reasonable expectations on continuation of this level of income).

-Any individual with net worth in excess of $1 million.

The SEC has specific rules (504, 505, and 506) that dictate how much money can be raised in a private placement, but most stay under the $1 million threshold to keep it simple and to keep costs to a minimum.

Advertising and formal promotion of a private placement is prohibited, so potential investors are typically found through personal networking. It can be a very time consuming process. Attorney fees can add up as the information supplied must comply with all formal requirements.

Managing a business that has raised funds this way can create complexity for the entrepreneur. Since transfer of stock is usually restricted, any shareholder problems will be long-term. Also, management of the Board becomes much more formal, complex, and even become quite a political process.

Inc.com makes private placements sound simple. They are not, but they can be a good option for some new ventures.

Posted by Jeff Cornwall at 06:18 AM | Permalink

I have written quite a bit on the dramatic fall-off of IPOs among entrepreneurial ventures due in large part to Sarbanes-Oxley. Fortune Small Business has a story on this in their April issue.

"A combination of Sarbanes-Oxley's steep compliance costs, Wall Street's neglect of small caps regardless of their performance, and heightened investor distrust has turned running a public company into a far less appealing proposition. The number of private firms selling out (instead of plying the IPO seas) is near an all-time high. And many public-company CEOs are yearning for privacy: The number of public companies fleeing the stock market hit record levels during the past two years."

Where this will lead us is anybody's guess. One outcome that I hope for is that this growth in privately held firms will allow more CEOs to take ethics and values more seriously in how they grow and build their firms.

One stumbling block for public companies being more ethical has been the responsibility to the public financial markets to maximize returns. Those CEOs who do not, particularly in small cap companies can find themselves out of work if they miss quarterly financial expectations of the market.

Private businesses are in a better position to look at a broader array of criteria for what defines success, be it job creation, work environment and so forth. Entrepreneurs and the other shareholders define the rules and can set their own definitions for effectiveness in their companies. Profits remain the primary goal, but private companies can place this goal within a context of ethical and moral considerations that address other stakeholders and broader considerations.

Unintended consequences do not have to be all bad.

Posted by Jeff Cornwall at 05:28 AM | Permalink

Over the past weeks I have made a post on growing interest of angel investors in finding deals to invest in and on the overhang of funding in VC funds.

So what does all of this cash looking for deals mean to entrepreneurs? Remember Economics 101: too many dollars going after the same product makes it a sellers market. In this case, the VCs and angels chasing deals are the buyers and entrepreneurs with deals to invest in are the sellers. When money was tight we saw angels go into hiding and VCs shifted their focus into later stage ventures that had already proven their businesses in the market. But, the improving economy has changed all of that by putting lots of cash back into the investment market.

For example, Red Herring reports that Menlow Investment's newest venture fund has recently closed, raising $200 million more than the planned $1 billion. "The funds w