Realizing your concept simply isn't going to cut it in the marketplace is, by far, the most difficult part of being an entrepreneur . I've seen business plans with great ideas that were almost impossible to sell; likewise for clever devices or inventions that could be part of a larger product line, but on their own couldn't support a separate division, much less a stand-alone business.
Then there are the ideas that never should have made it past a 30-second flash but were somehow embraced. I recently encountered one of these. Even the company's founder admitted he didn't think anyone would buy the product, but he wouldn't let go because it made for such a nice dream.
There are also business ideas that make perfect sense but require more capital than can be raised or diverted from a main business. I saw one "idea company" that was based on a very good concept, but required in excess of $100 million to make it a reality. The odds of that happening today are virtually nonexistent. Dean Kamen might have raised more than $50 million for the Segue scooter, but there are few people with his credentials and, even now, the jury is still out on whether the Segue will ever live up to its business plan.
William Faulkner advised writers to "kill your darlings," those words that are so precious to the author but of no value to the prose. It is extremely difficult to do this, yet it is vital for wonderful literature.
Entrepreneurs must also kill their darlings when the darlings show no commercial viability. You have to stop, evaluate and do what must be done.
The idea or company may be precious, but if it will not succeed, kill it as soon as you know this to be true. Then mourn for a very short while, and move on to your next great, commercially viable thing.
Erwin Bruder is president of The Gordian Organization. Reach him at (216) 292-2271 or firstname.lastname@example.org.
With cash being ubiquitous, it is surprising that few people, other than those in finance and accounting, know much, if anything, about cash flows and the statement of cash position. When running a business, this statement is at least as important as your income statement because it allows you to know where your cash is coming from, where it is going and if you have enough of it.
There's a paradox many people do not understand -- a profitable company can go broke for lack of cash. At times, a sudden success kills the company. Simply put, it was profitable but didn't have the cash to pay its rent.
Several things can cause a cash shortfall for a profitable company. Its accounts receivable or inventory could be increasing faster than cash receipts. If a company makes a sale but it takes 90 days to receive payment, it could show a book profit on the sale, but would receive no cash for 90 days. So where does it get the cash to pay its rent and light bill? No cash equals no rent or electric payments, and that means going out of business.
The simplest overview is that your cash flow nets the cash (not sales) you generate minus the cash you spend. Your pro formas should absolutely track cash position. If you see a negative number approaching, you know that your company is in trouble, and you'd better take action.
For a start-up, the statement of cash position is vital to determine how much money you need to raise. I have heard so many times, "We need to raise between $3 million and $5 million." That essentially means that entrepreneurs don't know what they need. If they raise too little, they will go broke. If they raise more than they need, they will have sold more of their equity or gone deeper into debt than was necessary.
Make certain you understand your cash flows and that you prepare a very realistic statement of cash position. The viability of your company depends upon it. ERWIN BRUDER (email@example.com) is president of The Gordian Organization. Reach him at (216) 292-2271.
Shortly into the conversation, it became evident that they were total novices at finance, but smart enough to admit they needed help and accept a brief review of Finance 101.
Most experienced business owners take their understanding of financial matters for granted -- they've been doing it for years, and the balance sheet has become their accepted bedfellow. But there are many entrepreneurs whose background as engineers, scientists and inventors never prepared them to understand the difference between debt and equity. And for them, it's worth taking the time to make sure they get it right.
Most people are familiar with the concept of debt --it's money you owe and that is securitized, meaning there is some collateral that the person or entity owed can seize if you default. Typically, this is handled through a loan of some sort.
Equity is typically thought of as bringing aboard a partner -- selling a portion of your business to raise capital. You don't have to pay the money back, but you are no longer the sole owner of your business. Examples of equity are issuing common or preferred stock and selling membership or partnership interests.
To determine which method of financing to pursue, consider how the money raised will be used. If you want to buy equipment, debt is probably the way to go. Once you pay it back, you've completed your obligation.
But when you opt for the equity financing route, investors provide funds under the belief that your company will prosper and their investment will become more valuable. Investors are not merely financing the purchase equipment, but are financing the operations and growth of your company. And for that, they become partial owners.
Your decision should be based on how you want to run your company in the future rather than what you simply want to accomplish today. Erwin Bruder (firstname.lastname@example.org) is president of The Gordian Organization. Reach him at (216) 292-2271.
I have preached the doctrine of open communications by stating again and again that you must tell all the good news, for everyone likes good news. Tell all the bad news -- and there generally is bad news -- but tell it so something can be done about it. Most important, never surprise anyone in a business deal, as there is no faster way to kill a deal.
Recently, I was with a client and we were making a presentation to the highest level in this company's management team. After slightly chilly handshakes, and before we could get to the heart of the presentation, the president produced a document that brought into question the past business practices of my client.
There was nothing illegal, but there were issues I had known nothing about. I have to credit the company for doing a more thorough job in vetting my client than I did.
Since the floor was not going to swallow me -- no matter how much I would have welcomed it -- I tried to salvage as much of the opportunity as possible. It wasn't a perfect meeting, but it wasn't the total disaster that it could have been.
If, in spite of your supposedly thorough preparation, things go terribly wrong, salvaging the meeting begins with totally candor. If you were unaware of something, say so.
If there are errors in your numbers, assumptions or market evaluation, admit it. Do not deny what is fact.
If you or a member of your team have messed up, admit it and commit to pursuing whatever is needed to correct what is wrong. Do not try to bluff or use a smoke and mirrors approach. Do not argue and do not be offended that you were found lacking.
Take a deep breath, regroup and never argue against indisputable facts.
If you should, unfortunately, find yourself in one of these meetings, be completely open and honest, even contrite, and ask for the opportunity to reschedule the meeting after you have had a chance to absorb and properly respond to whatever caused the problem. It's not fun, but it is survivable, and with candor, you might get another chance.
Erwin Bruder (email@example.com) is president of the Gordian Organization. Reach him at (216) 292-2271.
Two start-up companies illustrate the difference between real world thinking and fantasy world thinking. The first has experienced executives with historic numbers on which to base their projections. They have sold product similar to what they propose to bring to market. After researching the market and determining what they felt they could accomplish, we prepared financial projections.
The numbers looked great. The gross margins were easy to verify and the net profitability was the result of honest assumptions and known costs. The numbers looked so good we were concerned no one would believe them, even though they could be defended.
The only variable of which we were not certain was the sales growth rate. Our sales just looked too good.
We did a reality check. We asked if we could achieve these results with the degree of confidence needed to present to capital. The president of the company said he "knew" he could hit the sales projection, but to satisfy our reality check, to give him two years instead of one to achieve the sales goal.
We made the change and the numbers came down but still looked great. It will be these, the reality checked numbers, that will be in the business plan.
A second company wanted me to model its financials based on nothing more than dreams. The entrepreneur had no experience in the industry, yet he wanted to raise tens of millions of dollars to enter the industry and roll up competition. And he wanted to raise funds using a nonstandard mechanism, which he'd heard one person used successfully.
After two meetings, he began to understand the reality and scaled his grandiose plan back. When he left, an assistant asked how I swung him to reality. I wasn't certain I had.
At our subsequent meeting, he was back in fantasyland. The reality check could not stand up to his dreams of glory. I wished him success, but without my participation. Maybe he will succeed. I hope so, but doubt it.
While you are dreaming, remember a few real world necessities. Start with, "Are there real people with real money who will buy my real product or service?" Add managerial experience, market size, burn rate, sales cycle and availability of capital. Then ask if this is a real opportunity. "Can it be done, and can I do it?"
The reality of money lost is no fun, so check the realty of your dreams early and often. Erwin Bruder (firstname.lastname@example.org) is vice president of Enterprise Capital and Business Development. Reach him at (216) 292-2271 or (330) 374-7828.
Prospective investors must be able to understand and have confidence in your pro forma numbers or your company has no chance of getting funded. Without good numbers, you cannot forecast revenue or profit and loss, and you cannot make a defensible case regarding sources and uses of cash.
The company of a prospective client of mine is loaded with aggressive sales and marketing people and has a technology product that could become very profitable very quickly. But its principals have no financial modeling or accounting skills, and they didn't engage anyone who had these skills to help them.
Instead, without the slightest idea of what was needed and how to do it, they prepared their own financial projections. The result was laughable.
There was no balance sheet or statement of cash position. Their attempt at an income statement misstated nearly everything, except for rent and senior executive salaries. Loans were stated as revenue, capital expenditures were expensed and a sales/lease back effort was booked in a most creative way.
Among the notables, this entrepreneur said, "I left out one revenue stream because I didn't know where I should put it, but investors will be happy when more money comes in anyway."
These entrepreneurs worked very hard on their business plan and pro forma. But they got it wrong. Worse, they are frustrated because I told them how they messed it up. It's difficult to do that diplomatically when pointing out that the numbers look as though -- and have as much veracity as if -- they were done by monkeys playing with Excel.
An entrepreneur is expected to have great expertise in his or her product, service or technology and the markets it will serve. Investors look for the unique competencies of the firm.
But they also expect the entrepreneur to present a sound business plan with bulletproof numbers. Investors are not investing in just a technology, product or service, but in a company that has the capabilities and plans to make very significant profits.
Make certain that your numbers are solid and can stand up to vigorous due diligence.
Erwin Bruder (email@example.com) is chief economist & managing director of emerging enterprises at Prim Capital Corp. Reach him at (216) 830-1111, ext.2220.
With due apologies, she said her boss could not keep the appointment and wanted to reschedule. Last minute cancellations occur, so I had no problem with this.
Two hours before the second scheduled appointment, his assistant cancelled. I accepted her explanation and rescheduled again.
Finally, about two hours before the third scheduled appointment, the assistant cancelled. Here is where "chutzpa" is defined: She said her boss would prefer "a first thing in the morning meeting, which would be more convenient to him."
I laughed. What nerve. What gall. What chutzpa.
I explained there was very little she could say to convince me to be foolish enough to schedule another meeting. She bailed out by turning me over to another assistant. I asked this second assistant what could have enough importance for me to even consider meeting after three last-minute cancellations of meetings her boss had requested.
She said she'd get back to me.
That was a month ago. I am still waiting.
This is a perfect example of how not to behave in business, and how lapses in etiquette can have significant detrimental effects.
This man's credibility is shot. He initiated contact, made three appointments, then canceled them. If I can't trust him to keep an appointment, how can I trust him on issues of importance?
Without trust, I can't be involved in a deal. There are unknowns in every deal that even thorough due diligence can't uncover. That's where trust comes into play.
Opportunities to work with good people on good deals are too precious to treat with anything less than your best efforts. I'm certain the object of my disdain is bright and accomplished. He may even have a winning opportunity. However, he lost my trust before he even presented his ideas.
I can say one thing for him, though. He does have chutzpa. Erwin Bruder (firstname.lastname@example.org) is managing director of emerging enterprises for Cleveland-based Prim Capital Corporation. He can be reached at (216) 830-1111, ext. 2220.
There are people who falsely represent themselves as early stage investors or financial intermediaries who do not have the capital, resources or qualifications to do a deal. These poseurs are extremely dangerous to your business.
The greatest peril is that you will unknowingly go through the presentation and due diligence process with the bogus funder, even to the exclusion of pursuing an opportunity with a legitimate source of funds. After expending time and resources that could have been devoted to a true capital raise, you end up with nothing.
Worse, you've exposed your company's intellectual property, business plans and finances, putting your enterprise at risk. The opportunity costs, direct expenses and psychological costs can be so great that you might not have the resources to continue.
It is both vital and surprisingly simple to determine if your potential funding source is less than legitimate. Just ask what deals they have done. Organized capital sources publicize their achievements, many to the point of taking out "tombstones," a stylized form of financial advertising, to publicize their successes.
Your attorney will prepare a subscription agreement before you accept the investors' funds, but before you become involved with them, determine if they meet the criteria. Ensure that private investors meet the standards set by the SEC for an "Accredited Investor" by checking SEC guidelines (www.sec.gov/divisions/corpfin/forms/regd.htm). If this is their first deal, be extra thorough in determining if they have the resources, resolve and commitment to consummate your transaction.
You must verify all claims, for a claim is only a claim until it is substantiated. If you wanted to fool someone, you could create a Web site using all the right buzz words and list a history of deals with corresponding tombstones.
There are some excellent small investment banking shops, but if you're thinking of engaging one previously unknown to you, verify it is licensed. You can verify licenses and check broker histories at www.nasdr.com/2000.asp.
Don't let knowledgeable speech, slick Web sites or flattery about your firm's prospects deter you from asking for qualifications. True investors will have no problem providing you with answers, but phony ones will have a million reasons why they can't provide answers.
Entrepreneurs work hard to develop a technology or service and to form a business around it. Don't let a bogus capital source ruin your efforts. Erwin Bruder (email@example.com) is chief economist and managing director of emerging enterprises at Prim Capital Corp. Reach him at (216) 830-1111, ext. 2220.
Beyond discussing their technology, service or product, and their potential for success in the marketplace, I also try to determine if I find the prospective client to be a jerk. Likewise, I try to make certain the potential client does the same jerk evaluation of me.
The jerk determination is important, for if we decide to work together, there will be times of frustration and aggravation which can be difficult even when working with a compatible person, but which become insufferable when working with a jerk.
Part of my mandate when working with an early stage company is to model and produce as bulletproof a business plan as possible, so we can present a very attractive deal to capital. This is exciting and rewarding, but it entails a discovery and construction process in which I must challenge and question all assumptions and data.
The entrepreneur generally has spent time and effort, and is emotionally invested in the work, and I have to challenge all of it. Few people enjoy this due diligence process, yet it is part of the planning and funding effort. The process is never confrontational, but it is also rarely diplomatic.
The path to funding is an emotional roller coaster. You can be exhilarated and excited one day, crushed the next, then rise again. The business plans you have in mind might have to be modified to reflect new data and constantly changing markets.
Unknown competition can emerge, beta technology can fail and key personnel can leave. Add in time pressure and the demand for more data, more research, more of everything, and nerves can become frayed.
Putting together an early stage company is thrilling, and if your professionals are doing their jobs, they're not just telling you what you already know or want to hear. This candor is bound to cause bumps, but by avoiding engaging jerks, you'll be able to work through the rough spots. Erwin Bruder (firstname.lastname@example.org) is chief economist & managing director of emerging enterprises at Prim Capital Corp. Reach him at (216) 830-1111, ext.2220.
These questions were not asked by people from struggling start-up firms, but by the head of a significant venture capital fund and by an attorney highly regarded as a deal-maker.
Each was disappointed at not finding outstanding investment opportunities, and was looking for deals in which they could become involved. These conversations in Cleveland were indicative of the national surplus of venture money as capital searches for worthy deals.
This imbalance of more VC dollars than suitable investment opportunities has many venture capital funds returning money to their investors. This doesn't mean it's easy for entrepreneurs to get money, as investors are particular when assessing opportunities, but capital is available for outstanding deals.
Some excellent start-ups are having difficulty finding funds. However, I have seen incredible actions by entrepreneurs who, rather than attracting investment funds, have induced MEGO (Mine Eyes Glaze Over). I am certain these entrepreneurs blame the economy, the gods or capital's not getting it for their lack of funding success, yet each found a unique way of scaring off funding.
The first brought me a finished business plan that forecasted a negative internal rate of return. His numbers shouted, "Keep away." It's possible he didn't know what an IRR was. In any case, his business plan made an extremely strong case against investing in his company.
The next told me his product might not work, but that wasn't important because his competitors' products didn't work either, and success was, therefore, only predicated on better marketing. On that one, in addition to MEGO, my jaw went slack.
The last was a physicist whose documents might have been well-received at a learned symposium, but somehow failed to incorporate anything about making money. He was annoyed with me when I asked him about the business aspect of his optical technology, reacting as if having a profit motive in some way sullied his elegant science.
Funding sources are actively seeking great deals, so craft your business plan, numbers and presentation to get you money rather than induce MEGO. Erwin Bruder (email@example.com) is chief economist & managing director of emerging enterprises at Prim Capital Corp. Reach him at (216) 830-1111, ext. 2220.