Better ways to finance your business than investment

So you are short of working capital (cash) for you business:
Is getting an Angel Investor the best option? Most probably not.
Should you get investment ready – definitely!

In most cases, the act of preparing for investment will eliminate the need to raise money.  Companies that get investment typically will receive the capital to accelerate growth, not initiate it. 

Apart from having a realistic valuation expectation, being “investment ready” is simple, get clarity and focus around:

• Product or service value proposition
• Business model, strategy, and plans
• Having something unique and defendable in your product offering
• Building and maximising the productivity of your team, including governance
• Have customers that buy stuff

There is no rocket science around all this, but I consistently see companies going to the market to talk to investors that do not have their act sorted. Equally so, they are attempting to do too many things with mediocre results.

Now for the reality – raising capital is slow and arduous process.  Typically it will take you six to 24 months before the money appears in the bank account and will consume at least 200 hours of your time.

Many businesses seeking capital will go bust before they get there and the more fragile their current position, the more likely it is they will not attract the capital.

Without a clear strategy and go-to market model, you are unlikely to find an investor.

So if Angel Investment is not the magic answer what is?

One of the issues of technicians starting businesses, apart from those raised in my e-myth blog post, is their lack of experience in structuring deals of any type, too often playing with price as the only negotiating tool.

Other options for funding growth include:

• Selling more
• Charging more for your product – what effect would there be by increasing your sales price by 30, 50 or 100%? In many cases increasing sales price will increase sales.
• Establishing better sales channel partners – preferably ones that already have your target market as customers
• Using customers as promoters of your product
• Sharing promotion costs with distributors
• Licensing deals
• Structuring payment options eg. 50% deposit with order
• Debt finance
• Invoice factoring
• Government grants – yes there are still some available

For those who are looking to get smarter around strategy and structuring their business for growth, Debbie Humphrey and I run a four day workshop called Business Dominoes to tackle this very issue.

Running Lean – Business Canvas Variant

Running Lean (e-book) attacks the problem of how to grow web start-ups.  Ash Maurya has taken my favourite business model tool “The Business Model Generation” and tweaked it to meet his need of web SaaS companies.  For me this book was almost two books in one, peppered with some great tips on going companies:
1)      A variant on the business model generation for SaaS companies– the Lean Canvas
2)      A form of the agile development process, adapted to web companies, integrating agile development, experience design and market validation.

The “lean canvas” section was of most interest to me and I finished feeling I wanted more,“perhaps the sign of a great book” – but worth the $19.95 all the same.

The Lean Canvas:

The lean canvas is an adaption of Alex Osterwalder’s  “Business Model Canvas” which he describes in his book: “Business Model Generation”. For those who are not aware of this methodology I would strongly suggest a read of my book review.
Ash dropped – partners, key activities, key resources and customer relationships and replaced them with Problem, Solution, Key Metrics and Unfair Advantage.

I empathise with the Steve Blank’s quote:
“Business Plan: a document investors make you write, that they don’t read”.

My advice to entrepreneurs is use a business model canvas to bait discussion and debate. Hell you may not even need as business plan.

One of the key advantages of this sort of technique is that can create several business models in one afternoon rather than taking months to perfect a business plan that is out of date. Ash recommends doing one canvas per customer segment.

I am a great fan of the business model canvas tool to speed up decision-making and the communication of business plans for both investors and staff.
Of the modifications made to the original plan – I most like the focus on “unfair advantage” and will add this into my own variant inspired by this technique.

An example of the tips that Ash has on start-ups:

• If you’re going to charge for a SaaS do so from day one – Price is a key ingredient to your product test it early – if you need a new business model find out early.
• There is an “I” on Vision – create a business model in isolation but then test it  and test it.
• Plan A’s never work – so be ready to adapt and create plan B and C quick.
• Focus on activities that generate results – don’t get distracted on long-term activities as many will become redundant as you adapt
• Distinguish between users and customers – always splinter customers into smaller subgroups
• 3 must have departments Design, Development and Marketing – all of equal importance
• Getting investor funding is NOT market validation
• Have staff meeting’s in most unproductive part of day – not first thing.

Development Model:

Ash’s development model is based around three iterative stages:

1)       Problem/Solution Fit : Do I have a problem worth solving?

• Is it a must have – if you take the solution away will they mind
• Can it be solved – feasible
• Will they pay for it? If not who will?

2)       Product/ Market Fit : Have I built something people want?
3)       Scale: How do I accelerate growth

The book devotes the majority of its 200 odd pages to describing this model-process in detail.

Close, constant and controlled customer feedback is the main theme around which he builds his model to develop the product/service around similar minimum viable product (MVP) principle the 37Signals team describe in Rework. (read my review here)

If you are interested in using diagrams and visual models to speed up your business planning and improve your stakeholder communication I would suggest coming along to one of my business planning seminars .
Oh – yes have a read of this e-book along with “the business model generation” and also check out Ash’s Blog

Lighting Small Fires–When do you get investment? #MORGO Diary note 1

NZ Business Superstars Bare all at MORGO

It’s true behind every success there are near failures. Making a go of it in emerging business space is hard yards and certainly not for the faint hearted.

MORGO is an inspirational gathering of NZ Entrepreneurs sharing stories and insights of success and failure. While the real gems are reserved under Chatham House rules of the event there is plenty to share that will not embarrass or incriminate. But I have compiled a small series of blog posts to share some of the MORGO 2010 gems.

Ian Taylor’s (Animation Research) opening remark at MORGO this year was “Bugger the boxing, just pour the concrete”.

When is the right time to get investment?

Grant Ryan from Yike Bike (cool ride by the way) shared the wisdom of “Do as much as you can with no or little money, then once you have the evidence to prove that you have a great business,  get investment and run as fast as you can”. 

Many NZ businesses are great at  doing lots with no or little money, it’s the second step we forget or have no experience with. Many NZ businesses are missing opportunities with lack of cash flow to fund getting the right people on board to achieve their true potential.  

If you want to find out more about how to raise capital call the Escalator Service, which  is a government funded investment ready service.

Steve Bayliss from Air New Zealand shared a great marketing philosophy of  “Lighting many small fires, watch out for the ones that people want to warm themselves with, then pour petrol on them.”

Many people had commented on bold moves Air NZ had made “bare it all campaign”,  “Automated self check in“ and like. But as Ian explained these initiatives all came from simple little trials, that were fuelled with more fuel once they were deemed to be successful. One newspaper ad was what started the bare it all campaign, it was the great positive response that went on to “body painted  safety videos” .  The advice here is not to dissimilar to Grant’s or Ian’s above. (more on this in the next blog post)

Key message here for business owners do not muck around designing and justifying big marketing initiatives, just get on with it, the money and time wasted doing all the thinking and posturing can be better utilised by doing a teaser or pilot trial – JUST DO IT!  Invest quick, and pull out quick if it doesn’t work.

Grow or Die – M&A the Answer to Export Success

Failure to get critical mass is burning out NZ exporters – adopt a M&A plan  

NZ business people have a great ability to create world-beating products and solutions, yet our track record of building long-term sustainable high growth businesses is poor, why?   We  are “failing to build companies of suitable critical mass to conquer international markets”. 

We are suffering  the curse of our own “DIY – control mentality”. This is getting in the way of our businesses attaining the critical mass required to master the real game on the global stage. The very stuff that helps us get started is getting in the way of long-term sustainability.  

Let’s take the example of a fertile niche industry like Baby products:  

• The opportunity is prime – a market where globally people are having fewer children, later in life and spending more on the children. Given this backdrop you would think business would boom. But we have numerous small players operating in the baby market in NZ (turnovers sub $5M), all with great innovation selling single products to international distribution chains.  You can just imagine a Sunday night in Auckland Koru lounge; in there we have a bunch of eager solo operators selling non competing products all heading to the same market, talking to the same distributors.
• These export road warriors are simply going to burn themselves out before they achieve success.

  

Typical day at the office for an exporter

In any other culture I would suggest that these small businesses collaborate. However kiwi business owners do not have the desire  to collaborate. Perhaps it is the fear losing control that gets in the way or the feeling that someone else will screw it up or perhaps just a plain overdose of “not invented here syndrome”.  

Another very evident cultural hang up is failure to talk to competitors or fellow industry players; learn to talk about your business without giving away the “secret sauce”.  

Looking ahead I believe that NZ has yet to feel the true impact of the global financial crisis. In order to turn our economy around we need to adopt a new game plan.  

My advice to business owners is to forget collaboration, adopt a new game plan of Merger and Acquisition (M&A). Use the leverage of the true commitment , that can only be gained by joint ownership. I often quote the bacon and eggs story: The hen is involved, the pigs committed!  

An M&A strategy is just as valid for small business as the corporate giants.  When doing these deals it’s important to focus on the long-term game and huge opportunity cost of not doing the deal. There are plenty of ways to structure deals without the need for cash now.  

Hunt down other aligned small businesses and explore the opportunities for complete integration of your businesses. The synergistic benefits of M&A for SME’s are numerous:  

• Shared commitment – no longer the need to sweat the hard stuff alone as owners.
• The volume to justify hiring of specialist skills in the business e.g. channel (distributor) management, Sales etc.
• With a broader product offering the ability to increase averages sale price with resulting lower cost of sale

Yes the M&A process will take some effort. Do not forget the important process of post deal integration, it will need careful planning and support.  The bottom line is that overall your probability of success will improve along with a M&A strategy.

Pitch Tip Book

After yet more tips for investment pitches … here is a great summary (29 slides) on pitching from Canaan Partners for entreprenuers seeking investment .

http://www.slideshare.net/canaanpartners/canaan-entrepreneur-pitchbook-presentation?type=presentation

Here is their main web site http://www.canaan.com/

Would Trade Me have sold for $750m under the new Financial Advisers Act?

Is the new proposed financial advisers act is bureaucracy gone wrong? My fear is that this sort of policy is going to slow the economy and scare off the wrong people.

Check out Andrew Simmonds take on the impact of the new act on the legendary and inspiration trademe deal 

http://bit.ly/bZ74az

Pre Money Valuation of >$1M check your logic

Escalator Angel day last week was a great chance to reset the dial for many entrepreneurs, well I hope so.

Here is one investors company valuation model – not to different to the VC model we use in our workshops:

Work out what realistic valuation you expect to get on exit. Hint more trade sales are hit at around US$30M than any other mark (NZ$40M). Then calculate valuation today.

So if you wind the clock back 5 years (to today), based on a 30x return and a exit valuation of $40M, that mean today’s valuation must be $1.5M post money … say $1M pre money plus $500K investment for 33%