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Money Talks - Bull Shitake Walks

This post will conclude our series on creating the best possible business plan for your start-up. Our final topic is your financial projections.

Financial projections that must be included in every business plan include cash flow, revenue, and profit and loss statements. All of the forecasts must realistic - they cannot exceed accepted norms. For example, if you are in the software business, your margins should not exceed those of Microsoft®.

Find a Comparable

A very good way to build realistic financials is to find a publicly traded company that you can use as a comparable. Go here. To find the annual and quarterly reports of publicly traded companies. Download the financials of your comparable and then customize them to fit your specific business.

The Process Itself Is the Key

The process of preparing the forecasts is just as important as the forecasts themselves. Investors want to know that you went through the process to make sure you have dealt with the real-life issues you will be facing as you try to grow your company. They want you to consider very carefully your best and worse case scenarios. Investors want to see your impressions on where your company will be in five years.

Bear in mind that your financial projections are the result of your strategic planning. You can only prepare proper financial projections after you have conducted market research, analyzed the market, determined the human resources you need, your production costs and other capital issues. Only after this exhaustive work is finished will you be able to prepare competent and realistic financial projections.

Each and every number will have to be supported with credible data. The data you use should be logical, well researched and carefully put together. It should also be based on multiple sources.

Impress Investors - Show You Know Cash Is King

If you take the time to prepare realistic cash flow projections (monthly or quarterly) you will be doing your company a great service and you will also impress investors and be in a better position to persuade them to invest in your company. Remember, it is their money you are going to be using - so show them you are prepared to guard it as if it were your own.

Your cash flow projections are the difference between the money you expect to take in, and the money you expect to spend. Never forget that cash flow involves money in the bank. It does not include orders or invoices. Cash expenditures are cash that is taken "out of the bank.". A bill is not an expenditure until your check has cleared your bank account.

Watch Our For Accepted Industry Practice

Too many start-ups fail to take into consideration the fact that in most industries, invoices are never paid upon presentation, but usually at least 1-3 months later. In addition, many start-ups fail to realize that it will take them several months to even get their first sale. Both of these standard industry practices have an obvious effect on cash flow forecasts.

Also, it is standard practice for start-ups to have negative cash flow - if you do not, something is wrong with your forecasts. The negative cash flow will give you and investors an idea of the financial support you actually need.

Projecting cash flow expenditures is easier than trying to predict cash receipts. Therefore, you must keep reviewing and updating your cash inflow. When raising money, you should ask for at least 25% more than your forecasts indicate that you need. The point here is to insure you do not run out of money - it is not a negotiation tactic for you to use with investors. Experienced investors will know when you have "padded" the numbers.

Do Not Be Too Optimistic

Your cash flow projections provide investors with insights into your common sense and your understanding of the difficulties facing you as you grow your company. Excessively optimistic projections will ruin your credibility and will turn off potential investors. The key point is to try to find out just how much money your really need and for how long. Once you have got to this point, you can prepare various scenarios. Remember, if your basic assumptions are correct - the scenarios will be helpful and realistic. If not, you are just wasting time - yours and the investors.

Our next posts will deal with helping you raise money for your startup.

Investors Bet on the Jockey - Not the Horse

Your Management Team will play a critical role in both growing your startup and in helping it raise money. Investors typcially like to "bet the jockey and not the horse" This means they will invest in an "A" team with a "B" technology and not the other way around.

However, having a great management team at an early stage is tough for a startup. Also, founders like you probably want to be the CEO - but you probably do not have a management experience.

Sophisticated Investors understand this and while they really want you to have a top notch management team already in place – they know that you probably will not have such a team yet.

To solve this dilema - you need to tell them straight that you know this and that you are doing everything in your power to attract track recorded management. Your first step in proving this is to build a very attractive advisory board. In doing so, you need to make sure that your advisory board is not just window dressing -- but is filled with experienced executives – who are track recorded and known -- who are willing to roll up their sleeves and help you.

Use your social networks to build your advisory board. Go through your contacts and their contacts and find attractive candidates. If there is a connection – even if 3rd party – use it to try and make contact.

You should also ask your service providers if they can personally introduce you to potential members of your advisory board. This is no time to be shy. You must be aggressive and use any resource possible in order to build a highly attractive board.

You need to compensate this board and this is typically done via stock options. Typically, you will have to set aside a certain amount of stock for key employees and advisors. Your attorney can help you decide on the exact amounts.

Once you have an advisory board in place, you can state in your plan that you understand the need for track recorded management and you are doing your best to build a superior team. In the interim, you will rely heavily on your advisors and directors to help you run your fledgling enterprise. You must also state that you will step aside as soon as you find an experienced CEO.

If the investor really believes in you – then this will satisfy her “checklist” for track recorded management – because she believes that you will be able to attract and build a high quality team. 

In my next post we conclude our section on the business plan for new companies.

Is Your Company a Purple Cow

As we continue with the 4 P's of marketing, we call upon marketing guru Seth Godin who has added an exceptionally important new P to the list: Purple Cow.

Seth came up with this new P as follows:

"While driving through France a few years ago, my family and I were enchanted by the hundreds of storybook cows grazing in lovely pastures right next to the road. For dozens of kilometers, we all gazed out the window, marveling at the beauty. Then, within a few minutes, we started ignoring the cows. The new cows were just like the old cows, and what was once amazing was now common. Worse than common: It was boring.

Cows, after you've seen them for a while, are boring. They may be well-bred cows, Six Sigma cows, cows lit by a beautiful light, but they are still boring. A Purple Cow, though: Now, that would really stand out. The essence of the Purple Cow -- the reason it would shine among a crowd of perfectly competent, even undeniably excellent cows -- is that it would be remarkable. Something remarkable is worth talking about, worth paying attention to. Boring stuff quickly becomes invisible.

The world is full of boring stuff -- brown cows -- which is why so few people pay attention. Remarkable marketing is the art of building things worth noticing right into your product or service. Not just slapping on the marketing function as a last-minute add-on, but also understanding from the outset that if your offering itself isn't remarkable, then it's invisible -- no matter how much you spend on well-crafted advertising. "

Adding the Purple Cow “P” will enable you to create and sell something remarkable. You will be able to create products and services that are worth marketing in the first place. It is a plea for originality, for passion, guts, and daring. Not just because going through life with passion and guts beats the alternative (which it does), but also because it's the only way to be successful. Today, the one sure way to fail is to be boring. Your one chance for success is to be remarkable.

You can learn much more about how to be a purple cow here.

In my next post we continue with our animal theme and focus on betting the jockey and not the horse - your management team.

Do You Know Your Business Model? 

What Is a Business Model?

Quite simply, your business model is how your company will make money. By answering the following questions in detail, you will be able to develop a viable business model for your company:
1. What is your value proposition?

2. Who are the specific customers that your value proposition addresses?

3. How will you reach these customers so you can offer them the value proposition?

4. How does your customers’ money make its way into your bank account?

5. Who are all of the members of the chain between your customers’ money and your bank account?

6. Can you follow the money from your initial contact with customers until the money reaches your bank account?

Marketing Strategy – 4Ps Plus a Purple Cow

Your marketing strategy is quite simply how you plan to market your product and get paid!

Typically, companies rely on the 4 P's of marketing in putting together their marketing strategy. The 4 P's are Product, Place, Price and Promotion. We are adding a fifth – a purple cow.

Product
In your marketing plan, you must focus on differentiating your product from other products in the industry. This is a broad issue, and there are many ways to go about it, including through:

• Features
• Fit
• Styling
• Reliability
• Packaging
• Sizes
• Service
• Brand Name

It must be stressed that the choice of any one of the above product differentiation techniques affects the entire marketing process because it lays the groundwork for all of your promotional efforts.

Place 
This section involves choosing appropriate distribution channels - making sure that each fits with the product and your intended buyers. You must focus on determining a specific distribution strategy, and the basis for choosing your distribution channels.
Commonly cited channels include OEM (original equipment manufacturers), Wholesalers, Distributors, Sales Representatives, Sales Forces, Retailers, and others.

A simple boilerplate listing of channels may fill up a page in your business plan, but it will not even pass the first skimming of your plan by an investor. You must focus on determining the channels that make the most sense for your specific market, and they must match your business model.

Choosing the exact distribution channels will depend on a lot of factors including product specifics, the need for control, and the margins you are expecting. Ask yourself the following questions:

1. What is the level of attention needed to make the sale?

2. How much will I have to motivate the channel to carry my product effectively and appropriately?

3. Where are the margins at each level in the distribution system?

Promotion

Here, you must describe in detail the program you will use to get and keep the attention of your potential customers. This includes public relations, trade show participation, trade magazine advertisements, direct mailings, and the preparation of promotional material. Try to be as specific as possible, including the exact trade shows and the exact nature of your participation. Are you simply attending the trade show, or are you going to make presentations? Do you have a booth, and if so, what special features does it have to set you apart from others at the particular event? What trade journals are you advertising in? Are you writing articles or white papers, and if so how will they be distributed?

Pricing

This section demonstrates why all of the sections of the business plan must inter-relate, if the business plan is truly going to make sense. For example, many entrepreneurs will stress the superiority and the competitive advantages of their product in the product description and competition sections. Yet, in the pricing section, they will state that they will sell their products for less than the competitors.

This is a major "turn-off" for investors, because it demonstrates that the entrepreneurs are either stretching the real advantages of their products, and/or that they do not understand that costs are typically underestimated, and that if you start too low, it is difficult to raise prices if costs go over budget. It is always easier to cut prices than it is to raise them.
Pricing is one of the hardest decisions for entrepreneurs to make. You must brainstorm over the various pricing strategies you have until you come up with the one that is convincing both internally - and to investors.

As you brainstorm, focus on the rationale for your pricing.

1. What does your competitor charge?

2. What will the market tolerate?

3. How will you price the whole product - software license, per seat, support, fees for projects, etc.

4. Can you justify higher prices based on factors like newness, quality, faster return on investment, and user benefits? 

In my next post we will find our if your company is a Purple Cow and why it needs to be one.

Probably the Most Difficult Section of Any Business Plan 

The Market Analysis and Competition Block is probably the most difficult section of the business plan. While it is difficult, it is also crucial for several reasons. First, for internal use, you must determine your precise market, the status of the market, and how much of the market you can capture.

In addition, you must demonstrate to investors that you do indeed know your market, and that the market is large enough to absorb the unavoidable mistakes you will make along the way. Finally, this section is also crucial because the business model, choice of strategies, tactics, and financial models are all derived - in whole or in part - from the market analysis.

Therefore, you must be prepared to devote substantial time and effort to this section and to prepare it as early in the development process as possible.

Analyze the Market Top Down

You must demonstrate your thorough understanding of the market, whether the market is large and growing, and if it can accommodate your expected growth.

In preparing this section, you must identify, describe and analyze your entire market - from the top down. Specify the size of the total market in both units and dollars.

You should also segment the market and include the size of the particular niche that specifically applies to your particular product. The potential annual growth of the market must be covered and market projections for around 5 years should be included. The data should be conveyed to the reader both in text form and in easy to read, dynamic charts and graphs.

You need to make sure that the markets are clearly defined - who are the major purchasers, where are they, why do they buy? You must also address issues like the significance of price, quality, service, personal contacts, seasonality, and buying habits of potential customers.

This section must also include a discussion on the forces driving the market, current and future trends, and the major players.

You Always Have Competition

The market analysis should conclude with a detailed and realistic assessment of your competition. Analyze the market share, positioning, and strengths and weaknesses of the competing products, including the managerial and financial aspects of the competitor companies. Include a detailed comparative table.

Take great care to avoid the "no competition" statement. Serious investors are wary of companies who claim not to have any competitors. With today's information overload, it is very easy to "mine" the data and find your competition. Be sure you do it - and not the potential investor. Also, remember that the Status Quo is a major competitor of yours.

In my next post we will deal with the business model and market strategy block.

Building Blocks of Your Business Plan

Our quest for making money from your IP via creating a new company continues . . .

Our topic is creating the best possible business plan for your start up.

The focus of this post is to provide you with the basic building blocks of a business plan. We have included them for demonstration purposes and not as suggested boilerplate chapters for your plan. Your plan must be tailored to your own specific company.

Please note that the content for each should not be written in a vacuum. Each section must be self-sufficient, yet interrelate with all of the others.

Executive Summary

Technology & Products

Market Analysis And Competition

Business Model & Marketing Strategy

Management Team

Financials


I. Executive Summary Block

Guy Kawasaki says: 

"The executive summary is often your initial face to a potential investor, so it is critically important that you create the right first impression. Contrary to the advice in articles on the topic, you do not need to explain the entire business plan in 250 words. You need to convey its essence, and its energy. You have about 30 seconds to grab an investor’s interest. You want to be clear and compelling."

Guy says to forget what everyone else has been telling you. The key components that should be part of your executive summary can be found here:


II. The Technology and Product Block

This block should cover your technology, products, research and development, and manufacturing issues. Your main challenge in the technology section is to use layman's terms to inform the reader that you have superior technology that is on the leading edge. You cannot take it for granted that potential investors will have strong technological backgrounds. Moreover, the business plan should be written with all of the members of the management team in mind – including those that are not engineers.

To ensure that laymen can understand, try to use pictures and diagrams to explain the technology. Do not inundate the reader with too much material here. If you have white papers or other publications concerning your technology, you can include them as an appendix. Also be sure not to expose any proprietary information.

When you describe your product(s), you must focus on user benefits and not on the technology involved. Highlight you product and its competitive advantages in a simple, straightforward way. In doing so, consider the fact that investors look for truly market driven products, that meet an unsatisfied or emerging market need.

Focus heavily on user benefits and the needs your product will serve. Explain how your product differs from and is better than its competition. Include a section on product features and their advantages and disadvantages. Discuss the product's price, quality, and reliability. A chart summarizing the user benefits could also be included.

If the product is already on the market, or if it is being used at Beta Sites, include customer recommendations and references. For development stage products, provide a discussion of current status, and development schedules and milestones.

In the Research & Development section you need to focus on both on-going R&D projects, and future plans. Key points that investors look for include: the relationship of R&D to your market, how your R&D relates to product upgrades and new releases, and whether the development schedules and timetables make sense. You should also include information on the R&D team.

In developing your time tables, keep in mind all regulatory approvals – they can cause major headaches and delay product launches if they are not factored in at the earliest possible date. For example, medical companies need to pay close attention to sequential timetables, and the completion dates of clinical trials required for FDA approvals – if not, US sales may be delayed.

In the Manufacturing section, you should discuss the manufacturing facility, equipment needs and recruitment issues. Quality assurance standards and similar issues also need to be addressed. Do not simply state that manufacturing will be done by "best of breed" subcontractors. Try to be as specific as possible. 

In my next post, I will cover the rest of the blocks in more detail.

Starting a New Company - Step One a Proper Business Plan

If you think you can be a successful entrepreneur and want to create your own company from scratch, the first thing you need is a business plan.

Why?

In today's highly competitive, fast-paced, global business arena, if you fail to plan you are planning to fail. Successful companies grow and prosper because they know where they should be going and have a specific, fine-tuned plan for getting there. A plan that exists in your mind is not enough; the plan should be put in writing. The best place to put your mental plan in writing is in a business plan.

Two Key Functions of Your Business Plan

A business plan has two principal functions: Strategic Planning and a Tool for Capital Raising.

Strategic Planning

As you develop your plan, you must force yourself to think through all of the aspects of your venture. The discipline involved in putting your plans into a structured document will enable you to organize your thinking and make fundamental strategic decisions. You are not only forced to deal with business realities, but you may save the time, energy and resources you would have consumed through trial and error.

Once completed, a proper business plan enables you to know where your company is heading and measure progress. To properly monitor your business, you will have to determine the reasons for deviations from your plan, and then correct them. Early detection of such deviations will also impact scheduled financing and help identify potential cash flow problems.

Capital Raising Tool

A business plan is the first step in the investment process. A well-written, hard-hitting business plan will encourage serious investors to meet with you. The plan is your company's ambassador to potential investors, and it should speak to them in the language that they understand.

You only have one chance to make a good first impression, so your plan should be highly professional and customized to show your company's unique advantages and abilities. Investors look at myriads of business plans; yours will have to stand-out and be flawless if you want to get and keep their attention.

Moreover, your business plan is your company knocking on the door of potential investors. In addition to the business and financial information it contains, the plan will also convey to investors your:

• Organizational Abilities
• Thoroughness
• Analytical Skills
• Perceptiveness
• Realism
• Ability to See the Big Picture

In my next post, I will list 12 questions you need to ask yourself before you prepare your business plan.

How to Make Money from Your Intellectual Property

Greetings. Today we begin a series of posts that will teach you how to make money from your Intellectual Property (IP).

There are numerus ways for you to make money from your IP - ranging from selling you patent to creating a new company from scratch.

We start our series on making money with the hardest route - creating a new company from scratch around your IP.

Creating a new company from scratch based on your IP has both the highest risks and highest rewards. Company building takes a lot of money and a lot of time. You are responsible for everything – from idea to market and everything in between. If you pull it off, you will have both made a difference in the world and created a lot of wealth for you and many others.

However, be aware that if you choose this route then you are in essence becoming an entrepreneur. You will have to quickly become very proficient in everything from capital raising and human resources, to manufacturing, marketing and distribution.

So, before going any further, lets look at some of the characteristics of successful entrepreneurs.

• Drive and energy level: Entrepreneurs have the ability to work long hours for long periods of time with less sleep than normal.

• Self-confidence: Entrepreneurs really believe in themselves and their ability to achieve their goals. They also believe that you they can control their own destiny.

• Long-term commitment: Entrepreneurs dedicate themselves to projects that could take up to 10 years to complete.

• Risk Taking: Entrepreneurs take risks and make the difficult decisions involved in doing so.

• Learn from failure: Entrepreneurs fail a lot, but they learn from their failures and then succeed in a big way.

Now, to find out if you really have what it takes to be an entrepreneur click here. 

In our next post we will cover company creation and why you need a super start business plan.