LIBRARY OF USEFUL BUSINESS ARTICLES AND LINKS

The Money People

Excerpted from Business Black Belt by Burke Franklin

Who Are You Gonna Call?

The meek shall inherit the earth, but not its mineral rights.
- J. Paul Getty, oil magnate

People will give you money for your venture provided it furthers their agendas.
Know who you are selling to if you want to speed the process of getting cash.

There are a multitude of good reasons why many business plans are never funded. Your idea has to make sense, your business model to develop, market, and sell your idea has to make sense, and you and your management team have to demonstrate that you have enough sense to succeed. Fall short anywhere and your plan goes into the trash.

Angel Investors
"Angel" is the term once used to refer to rich individuals who backed Broadway plays. Suffice it to say that today, “angels” likely to invest in your business have a different motivation than supporting the arts. Angel investors are private individuals who usually have earmarked a portion of their portfolios (savings, cash, etc.) for risky, high-return investments. Most angels have been entrepreneurs themselves, so they understand your situation, have vision and can stomach the risk. Often, these people have a personal and possibly an emotional interest in the subject of your business and therefore may put in more money, at a more favorable valuation to you. Amounts they may invest vary greatly, but you can imagine that as your requirements increase, the number of angels likely to, and capable of investing, diminishes exponentially. $50,000 to $250,000 are likely investments per individual. Statistically, they are middle-aged, well-educated white men... make your type large enough to read, use good grammar, no typos, and make sure you understand your numbers! If one angel isn't enough, you can approach one of the many angel groups. (Please visit www.jian.com for a listing.)

Venture Capitalists
Venture capitalists are expert investors who usually specialize in a few industries. They perform sophisticated analyses of your opportunity and structure the deal to cover their interests. Venture capitalists may solicit other investors and institutions to entrust portions of their portfolios to them to invest in potentially high-return opportunities like yours. Everyone who plays this game knows and accepts the risks and they use the following guidelines:

o Does your business fit into their niche? It's likely you'll get a warmer reception (and a more valuable partner) if you choose an investor who already has a portfolio with many companies in your industry or market. They already understand the common difficulties and opportunities in your industry, and they may be able to provide much synergistic assistance for your venture.

o What's your advantage? Proprietary technology-a patent, process, trade secret, or something that can be protected from competition demonstrates an advantage. Regardless, you must have a unique product, process, or something special that can make a lot of money. An improvement or product that addresses a very limited market isn't nearly as interesting as something that appeals to a broad market.

Never invest in a programmer with a tan.
- Derek Blazensky, Adobe Ventures

o Can they bet on your management's track record? Investors usually bet on the jockey, not the horse. You must assemble a proven management team. A venture capital firm usually wants to invest at least $2 to $3 million or it's not worth all the effort. Since the stakes are higher, they want to see an experienced management team capable of capitalizing on your unique situation. Venture capitalists and most investors are masters at sizing up management. Any attempt to convince them that an inexperienced manager can do the job will only damage your credibility. It's much better to describe the management competence you intend to hire. Plus, you must have a team-investors want to be assured that the business will continue should something happen to the founder.

o Will they get a ten to twenty times return? For the risk, most investors expect huge returns. Afterall, there are some stable, growing companies whose stock can be purchased which will generate respectable returns with much less risk. Are you making a better offer? Will an infusion of money make a big difference? When you project your future income, their investment should enable you to do big things that will catapult your company forward. Often they look at the "J curve," which projects the difference in growth (revenue and profits) of your business with and without their investment. The upward point on the curve in the 'J' is the point where they've written you a check and the business takes off. If it will. This means that your business must be 'scalable'-bigger is better-like rolling-out a franchise (like Starbuck's), building a factory that will enable you to manufacture a gizmo inexpensively in quantity and therefore generate huge profits...

Why do you want to be my toy?
- Ward Payne, OSCCO Ventures

o What is your (their) exit strategy? This doesn't necessarily mean that you must leave, it just means that you must sell your investors on how they will actually get their investment plus a return out of your business. When you can convince investors that your company will grow to $[20] million and go public in [four] years or sell to a larger company, investors will see that your opportunity is indeed worthwhile and that you have provided for them to make their money. (You must not resent them making a fortune from your hard work and creativity-they are providing the coveted cash without which you go nowhere... or you make very little otherwise.)

Getting your plan on top of the heap
Investors, especially active venture capitalists, see a foot-high pile of business plans every day. To get yours directly into the right person's hands, the best way is to have someone who knows the investor personally introduce or recommend your plan to them. When venture capitalists do their triage on the deals that come in their door, the ones recommended by someone they know are read first and get the highest consideration.

You can take NO for an answer
Even though you usually only get one chance to make a favorable impression, "No" often means "not now." Come back in 6 months... when the market conditions are more favorable... when your product is further developed... No may mean that the investor just isn't the right one for your deal. Ask if they know another investor who might be a better fit.

A couple of things to consider before looking for investors
Often, when starting a business, many people think they need investors. I always wonder how much you can do without investors. Instead of spending your time trying to sell a portion of your business to investors, what if you invested your energy in selling your product or service to customers? Obviously, if you need expensive capital equipment to get going, you'll need cash, but what if you could get the equipment or to use it without cash? Having no money compels you to be creative. I'm in favor of exercising my creative talents as far as possible before taking on investors.

I'm also in favor of starting small to experiment with what works with customers. We often create simple desktop published brochures, photocopy them, and use these as sales tools with real customers before we commit to a run of 10,000 to 100,000 expensive full-color brochures. It never ceases to amaze me how many changes and improvements we make after we start showing customers our materials and then answer their questions. Other ideas include renting space in a customer's building in trade for your services. You may even win their business with an offer like this. A friend of mine runs his graphics business in the spare offices of a public relations firm in downtown San Jose, California. And, he gets a nice location, extra business and the occasional services of a competent staff.

Big bucks can mean big mistakes

With a lot of money in your pocket, you can make big mistakes. Unless you've tested your marketing materials, refined your business model, and know how your customers will respond to your product or service, you may be tempted to put a lot of money behind some invalid assumptions.


You really want to know what's working and what's going to work before getting money to expand. If your business doesn't work out, the investors will own your business, you'll still not have enough money to make the necessary corrections, and if you need to ask for more money, your position is weak. You don't want to go out whole hog and mail 500,000 mailing pieces without testing. If you have no money, you can mail only 5,000. Then, if you lose it, you've only lost 5,000 mailing pieces, not half a million. Keep testing everything in your business on a small scale. Then when everything is working, you can build on it with a big investment. You'll also be able to promote your business to investors with greater confidence and come from a very strong position.

To be successful,
keep looking tanned,
live in an elegant building
(even if you're in the cellar),
be seen in the smart restaurants
(even if you nurse one drink)
and, if you borrow, borrow big.
- Aristotle Onassis, Greek shipping tycoon>

Bankers
If you're looking for a loan or line of credit over $100,000 or SBA-backed financing, you'll need a business plan. Bankers are almost the opposite of investors. They loan the money deposited from people who've been guaranteed to get it back with a little interest. The money was deposited with the idea that there's little risk, so bankers won't risk it. Bankers use the five Cs: Credit, Character, Cash flow, Collateral and Capacity-when evaluating a loan. They also look at a company from a deliberately pessimistic point of view to minimize the risk, so you must have good answers to their questions to demonstrate that you understand the issues.

Zen and banking
The old saying is that bankers will give you the money when you don't need it. This echoes the Zen philosophy: When you really want something, you don't get it. (And you can't not want something in order to get it either!) When you completely let go of something, it comes to you and you have it. When you don't need money, bankers seem to want to give you money. That's the way the world works. Nobody wants anyone who's desperate. So, the more you try to get bankers to give you money, the more they don't want to give it to you. (The more you throw yourself at investors, the more they turn away.) Let's look behind the scenes.

The nature of the banking business
For example: You ask for a $100,000 loan. The way the banking system works is that they mark up the money they pay depositors by about 2% (the spread). In the backs of their minds, they're looking at you and considering, "What if you can't pay this $100,000 loan back?" Remember, in business you have to make up any losses from profits, not sales. So, how much profit is lost if they lose your loan? Two percent at $100,000 is all the profit from five million dollars worth of loans. So if your loan goes bad, that means they lose the equivalent of all the profit they would make on five million dollars worth of loans they've made elsewhere.

They need your first born
Now you can imagine why they scrutinize every loan. They look at how much business they would throw away if something went wrong with yours. That's why they're going to look at everything about you, including your character. Your credit
history plays a big part here. They want to be sure you're the kind of person who's going to pay back the loan. They don't want to get left holding the bag because they'll lose all their profit. That makes it even more imperative that you know what you're doing in your business. So what do you do? You've got to show them a track record. You need to prove that you can pay your loan back no matter what. That's also why they want collateral-it's insurance so they won't have to take it out of their slim profit.

Prerequisites for a bank loan
A bank wants to see a track record of profit for the past three years which also means you have to have been in business for at least three years.

Banks are looking to finance growth, not cover for inefficiencies. Show them how you'll use the loan to improve efficiencies in your operation. For example, buying a printing press will save money over buying printing if you spend a fortune on printing. Then the loan would make sense. However, if cash is short because you're slow to collect receivables, then the loan doesn't make sense. If you could collect your receivables faster, you wouldn't need the loan.
They prefer a debt-to-equity ratio of less than 3 to 1. This is one of a banker's measures of risk. Bankers hate risk! The debt-to-equity ratio compares the amount of
what you owe to what you own. Banks expect that you will repay your loan out of cash flow-show that you'll generate enough cash (not just profit on paper) to repay your loan. If you can show that the loan improves cash flow, so much the better.

Sandbag your projections by just enough
to assure that you hit your numbers.
- An anonymous banker

If you can hit your projections then apparently you understand your business and have it under control. You should have solid financials based upon conservative assumptions. Future projections should be conservative and show steady growth with profits over the next five years. Too much hype and too much projected growth equals too much risk.

Part of your financing package should always include a reasonable explanation of anything unusual in your credit report. I recommend including this explanation up front in your financing package because inevitably they will ask you about this unusual item on your credit report and you'll have to address it. If you want to speed the process of your financing, have this answer prepared in advance and include it with your package. If nothing else, at least a half page explaining the situation. For example, right now my TRW report has grown to about seven pages since I started my business. It got that way because bankers, investment firms, and finance firms have looked into my TRW report over the years for credit cards, limit increases, leasing, equipment purchases, and a number of other things. Every one of those inquiries appears on my credit history.

Many years ago, I had a pager that I rented from Pacific Bell, and one month I missed a payment on that pager. I thought I turned it in and made my final payment, but because the phone number was wrong, they added to my TRW a debt of $27 that they say went to collections. I stubbed my toe on the $27 in the process of buying my house. It came up when we got our credit line, it came up when we got our SBA loan, it reared its head again when we got our credit increase. Every single time, I needed to explain why this $27 in collections on a simple pager was on my TRW report. The banks questioned nothing else. (Seven pages worth of TRW and the only thing that really disturbs anybody is the fact that a $27 pager payment was on there for collections!) Obviously, when I first heard about this debt, I immediately sent $27 because that was infinitely cheaper and easier than trying to argue with the company. Nevertheless, for all future lenders, I prepared a half page explanation of why my $27 pager payment is on there.

Use your business plan as a brochure, a tool to coach the loan rep to sell your company internally. Believe it or not, bankers want to know about your market, so include a strong analysis of your market as well as a sensible marketing plan. Back up your sales projections by demonstrating the demand for your product or service and your ability to reach and sell to customers who will ultimately provide the cash to repay your loan.

When you talk to your banker, remember to remain calm and sane. Too much entrepreneurial enthusiasm frightens bankers. This is a matter-of-fact deal, business as usual.

Friends & Relatives
The good news is that they know you. The bad news is that they know you. When you ask those you know for a loan, the first hurdle you must overcome is your reputation and all your past sins. You might no longer do the foolish things of the past that maybe some friends and relatives have indelibly etched in their memories. Your new business plan will update your friends and relatives to the current you and prove that you are responsible with their cash. You must reposition your past as a time full of rich learning experiences from which you will now earn yourself and others a fortune.

You'll probably have to work extra hard to prove that you know what you're doing. Thorough market research will help demonstrate that your business makes sense.

I think it is important that you make it clear that you are in charge. Accepting an investment from family and friends opens you up to a variety of emotional hooks and distractions beyond that of most investors. The last thing you need is loved ones telling you how to run your business. An advantage to having friends and family invest in your business is that it keeps the money in the family or community. If it's a failure, then you run less risk of repossessions and you enjoy some slack, but you'll have to pay everyone back or make good. Otherwise you'll never hear the end of it.

Finally, you'll need to overcome any emotional entanglement as you present your plan. I was very annoyed by most of my grandmother's questions before she gave me $5,000 for my do-it-yourself used car lot. Don't be distracted by your emotional reactions. Certainly any questions are reasonable and any investor would ask them, so treat your friends and family with the professionalism you'd present to a stranger. This will be key in overcoming past indiscretions and proving your maturity to manage your friends' and family's cash well.

Senior Management
If you haven't taken the plunge to go on your own, consider the benefits of having the company you work for right now back your ideas. Management wants to know what resources you'll need. How long before payback? What's the risk? A thorough business plan helps you justify your program and gain your management's sign-off. And you can design your plan so you can collect a percentage of your
success.

The first thing you'll probably hear is, "Great idea . . . write me a proposal." This is where most good ideas die. Of course, we promote BizPlanBuilder for just such a purpose and I recommend including your name in the footer of every page lest someone else claim your ideas as theirs.

Obviously, what you must pitch is your ability to expand company sales and profitability, and your projections must show sufficient return on investment (just ask your boss how much). Management will likely want to be informed of key milestones and they'll watch you like most investors. In the next chapter, I elaborate more on the possibilities of pursuing business development within your company.

Employees
Sure, you can tell each one exactly what you want them to do, but if you want a high-performance team, you need to paint the whole picture. Many a manager has come close to the funny farm because he or she tried to wing it verbally.
Now you can take your time to write a comprehensive plan your people can buy into and follow. Plus, you won't have to explain your plan over and over. BizPlanBuilder makes it easy to engineer changes in your company and engage everyone's support.

Before asking for money... one last thing
Remember that soliciting investments for your business may actually constitute selling securities and falls under the jurisdiction of the Securities and Exchange Commission. You may be personally liable to your investors for any money they may lose as a result of their investments. (Regardless of corporate status, you sold them the stock, so you have to pay them back!) Use an applicable written Offering Circular or Prospectus for soliciting actual investments when appropriate.

Business Black Belt Notes

• What would you want to know before investing in a business?
  Be prepared to answer those questions.
  
• Venrure Capitalists compete with each other for funds.
  
• Bankers must repay their depositors--with a 2+ percent margin, they
  need a 98+ percent assurance that you will pay them back!
  
• Treat your family and friends who invest in you with the same respect
  you would a stranger.

Click here to learn more about Business Black Belt or to order a complete hard-copy version for yourself or a friend.

About the author and reprint permission
Burke Franklin is the originator of the popular BizPlanBuilder® business planning software and the founder of JIAN (jee’on -- www.jian.com), the company behind a suite of successful business development software tools for Windows & Macintosh. Burke was elected to White House Conference on Small Business and nominated for Ernst & Young’s “Entrepreneur of the Year.” Burke is also an instrument-rated pilot, and a second-degree black belt in TaeKwonDo. Burke’s highly praised book, Business Black Belt draws parallels from the martial arts and is rich in hard-won advice for building and running a business today.

Permission granted to reprint this article in its entirety with no text alterations. You must include this byline in its entirety, plus, if it's to be posted to a web site, an active hyperlink to www.JIAN.com. (However, you may become an affiliate and insert your affiliate link to JIAN.)

Return to Library of Business Information