Category Archives: entrepreneur

“Can You Pass the Turkey … And How Much Money Did We Make Last Month?”

“Can You Pass the Turkey … And How Much Money Did We Make Last Month?” 
The Pitfalls of a Family Member Investor 

Mindy Barker | Barker Associates

Ahhh the holidays are among us again (I have no idea how!). Next week, most of us will gather to give thanks for all that we have, as we sit around a table full of turkey, stuffing, sweet potatoes, gratitude, and laughter. And if you’re an entrepreneur with a family member investor in your business, that table may also be filled with some difficult questions, uncomfortable conversations, and awkward silence. 

As an entrepreneur, starting a new business is about excitement, courage, and dreams on one hand and anxiety, uncertainty, and often, a lack of funds on the other. And when it comes time to getting those funds, some look to their inner circles first. In many instances, it’s the only viable option, and family and friends become the lifeblood of the new venture. In fact, it has been noted that over one-third of startups have raised money from friends and family – to the tune of $60 billion per year. 

Family Member Investors – Some Advantages; Some Pitfalls 

There are, of course, several advantages to having a family member invest in your business. First, he or she knows you personally and is likely investing in you more than your venture. This level of trust and familiarity is something you won’t have with other investors.  

A family member or friend will also likely be more flexible with the terms of the deal (although, as discussed below, there needs to be strict boundaries). They may agree to a lower rate on return, longer repayment terms and a lower interest rate (if debt is part of the deal), and less equity, and/or have fewer overall demands. 

While the above factors can be extremely advantageous to any start-up, issues often arise when the disruptions of an early-stage venture cause entrepreneurs to mismanage these relationships, including overpromising, undervaluing, and lacking communication overall. Additionally, the family member investor may begin to think that they are entitled to everything under the sun, including every piece of information and much more of the money. 

How to Avoid that Uncomfortable Conversation over Turkey 

You’ve decided to move forward with a family member or friend investor. So, what can you do to have a nice Thanksgiving? First, awareness of the potential pitfalls of having those closest to you invest in your business is key. Most of what you can do comes down to communication and keeping them well informed not only about the business decisions you’re making, but also about how you are allocating the money. With that in mind, here are some tips: 

  • Always treat your family member or friend just as you would any other investor.  
  • Provide a well-thought-out and strategic business plan for them to review. 
  • Stay confident, but don’t overpromise. Enthusiasm is great; overpromising is not. They need to understand the risks (hint: put them in writing). 
  • Set boundaries on both sides. Yes, they’re family and friends, but now they’re also investors. There needs to be some boundaries. Remember – keeping them informed does not mean unfettered access to you or your business. 
  • Don’t take money from those who can’t really afford it (even if they want to give it to you). This investment should never come from their life savings or retirement accounts, which will create an enormous amount of pressure on you. The question should be – What can they afford to lose? 
  • Invest yourself. Family and friends (and any investor, for that matter) want to see you have skin in the game.  
  • Don’t take money from family to invest in your business (especially a C Corporation) and then use that money to pay personal expenses.   
  • Set up a meeting to discuss the specific conditions and expectations of the investment. Some questions to consider: 
    • Is the money an investment, a loan, or a gift? 
    • Are they getting equity? If so, how much?  
    • How are you valuing the company? 
    • What rights do they have with regard to decisions and to information? 
    • How is the money going to be used – product development, marketing, salaries? 
  • Clearly agree on everything, and put it in writing (preferably drafted and/or reviewed by attorneys on both sides).  
  • Set regular meetings to keep your investor informed (at intervals decided upon in your agreement). 
  • Keep with the data and the facts. Don’t embellish. 
  • Provide them with all relevant information – they should know about the struggles, just as much as the successes. 

These practices will let your investors know you’ve thought things through, while giving them the satisfaction that they’ve helped make a real difference in your business. But, at the end of the day, before you decide to go down this road, consider if you want your investors asking you questions about business as you carve your turkey next year. 

Barker Associates has extensive experience in investor deals and management. If you need assistance, or have any other questions, please click here to schedule a 30-minute consultation at a rate of $100.  

What Getting Stuck in an Elevator Teaches You

What Getting Stuck in an Elevator Teaches You 
There are Lessons in Nearly Every Situation 

Mindy Barker | Barker Associates

I recently enjoyed a wonderful evening with some friends and family. We had a lovely dinner and then went to a show. We had purchased tickets for Hamilton years before the pandemic changed our lives, and were thrilled to finally be able to see it. 

After the show, we walked blissfully back to our cars, still glowing with the excitement and contentment of a great night out. We had all parked in a parking garage that was only accessible by an elevator. We approached the elevator and were soon joined by several other people.  As the doors to the elevator slowly opened, approximately twelve of us got in.  

Lesson 1: Communication 

We all pushed our respective parking garage levels, and continued our respective conversations. The elevator started to ascend. Suddenly, the elevator stopped, but the door did not open. My friend was next to the elevator controls and immediately hit the “open door” button. A few of us near the doors tried to nudge at the them, to no avail. We then hit the call button and reported to the person who answered that we were stuck in the elevator. He assured us that he was sending someone to help.  

What we heard in that message was that someone who was capable of fixing the elevator was in the building and on their way. After a few minutes, when no one came, we called back and asked how long it would be. The person who answered said he was not sure, as he was unable to reach the mechanic. We asked a few more clarifying questions and determined that the mechanic who was “on his way” had not even yet been contacted, and we had no idea how far away from the building this person was. 

Lesson 2: A Leader’s Attitude Can Change the Environment 

There was no air conditioning in the elevator, and with that many people, it was very hot. Between the anxiety from learning that we were stuck in the elevator and the heat, one of the people from the other group began having a panic attack.  We called the operator back and told him we had someone in distress, and to call 911.  We were informed that it is against policy for them to call 911 and if we felt that was appropriate, we had to make the call ourselves. I attempted to call 911 from my phone, unsuccessfully.  Thankfully, another person’s phone was able to get through.  

At that point, my amazing friend Sondra (one of the strongest people I know) led us all in a standing yoga class with breathing exercises. It helped calm nerves in everyone almost immediately, and we all began to have some light conversation again. We even took a few selfies, trying desperately to lighten the mood. Even the person having the panic attack was able to relax with the breathing exercises and calm, light tone my friend used.  

When the firefighters showed up, they worked diligently to get the door open. And soon, they were successful. Merely watching the doors open offered an incredible calming sensation. Unfortunately, it was short-lived. We soon discovered we were stuck in between floors. The firefighters were on the upper floor and determined they could not pull us up. They would have to close the doors to move the elevator to the lower floor.  

Some of them stayed on the upper floor, and others took the tool they were using down to the lower floor. They then attempted to open the doors on the lower floor. This did not go as well. The firefighters began hitting the elevator forcefully to try to get the tool to work.  One of them yelled with urgency to the team members that remained on the upper floor, “I can’t get it in. I cannot get the tool in.” The elevator was rocking back and forth, and the lights were flashing. It was pretty scary, and the anxiety levels were all back up to even higher than our pre-impromptu yoga class. I decided to close my eyes at that point, as it was all too much to process. The anxiety in the voices of the firemen, while we were rocking back and forth was overwhelming to us all. When they continued to yell the same thing, my friend said, “I think I’ve heard that before!” We all started laughing with that welcomed comic relief, and I remembered how important humor can be in stressful situations. 

Ultimately, they got the door open and got us all off of the elevator.   

Lesson 3: Be Grateful (and don’t forget about humor) … Always 

When I got out and was finally able to get in my car to leave my wonderful evening (and yes, it was still wonderful – just with a twist), I felt incredibly grateful to be on my way home to my family. I was in a scary situation and I was ok. I wasn’t about to forget it. I also thought to myself, it was really hot in there, but I don’t stink!  

Lessons learned from this experience –  

  1. Life is short. Make sure every day is full of what you value most. 
  2. You don’t have to be in a boardroom to learn valuable lessons … sometimes you’re in an elevator. 
  3. Communication is key in any situation. Ensure you are understanding what you are hearing and that the other person understands what you are saying. 
  4. When you are a leader, your anxiety or calmness multiplies when you communicate to others.  Maintain an authentic calm demeaner, if possible, and you will see the effects in others. 
  5. Remember gratitude (and humor) always. 
  6. Pit Liquor natural deodorant works! 
  7. Katherine Way dresses are incredibly breathable and work well when you are stuck in an elevator! 

As always, Barker Associates is here for any CFO services you may need (and is also happy to impart some words of wisdom from time to time!). If you need assistance, or have any other questions, please click here to schedule a 30-minute consultation at a rate of $100.

The Pandemic’s Larger Impacts on Financial Reporting

The Pandemic’s Larger Impacts on Financial Reporting 
It’s About Much More than a Loss of Revenue 

Mindy Barker | Barker Associates

Many people incorrectly assumed that the pandemic’s only true effect on a business’s financials was a loss (albeit often significant) of revenue. And while that assumption is not even necessarily true of every business (many did very well), Covid-19 impacted much more—not just financial performance, but also position, cashflow, and balance sheet accounts. There have been impairments to goodwill and other intangibles, effects on inventory, a change in how and when audits are conducted, and impacts to overall company strategy and goals. And these impacts are especially challenging for a company in the growth phase. 

If your company is in the growth phase, it’s crucial to think about your options, understand your needs and, more significantly, how they have changed since the pandemic, what numbers are required, and to develop a new strategy. Companies in the growth phase are experiencing positive cash flow. With this increase in cash, they have the ability to repay debt, and are in a better position to seek additional capital from investors to expand their market reach. However, if the CFO hasn’t been carefully monitoring the pandemic’s impact on all aspects of the company’s financials, they likely don’t have their reporting in order to even approach potential investors.  

Changing Financial Needs Means Increased Financial Monitoring 

We learned fairly quickly in the beginning of the pandemic that liquidity is key to keeping a business from closing its doors in a crisis. The question that plagued many was how to increase liquidity with revenue decreasing? But those CFOs were often only considering pre-pandemic needs and observations, not the changing needs of the company in the midst of the pandemic. Auditors have noted that many accounts, including sales, inventory, and bad debt have been affected, as well as production and distribution. 

First, these changing needs require a change in financial monitoring. Cash flow projections and other assumptions used to measure financial instruments pre-pandemic should be adjusted to reflect your company’s new reality. Remember that a majority of businesses have been affected in one way or another, but if that results in their lack of ability to pay you, you’re going to incur additional credit and liquidity risks, increased bad debt, and write-offs.  

Cash Flow 
A careful analysis of your company’s cash flow can help. Some questions to consider about revenue include: 

  • Are accounts receivable being paid? 
  • Are past due accounts being followed up on? 
  • Are late payment fees and interest being charged to customers (your money should not be free)? 
  • Do you need to offer pre-payment discounts? 
  • Should you look at retainers/deposits? 
  • Do you have the capability of setting up auto-payments? 

Of course, we can’t consider cash flow without considering expenses. And while there will be a decrease in some, there will be an increase in others. At a minimum, consider the following questions: 

  • How have your office needs changed? 
  • Do you have the ability to downsize?  
  • How much are you saving due to decreased meal and travel expenses?  
  • Where are these savings being utilized? 
  • How much more are you spending on technology expenditures to maintain communications with staff and customers/clients?  

Balance Sheet Accounts 

Additionally, other balance sheet accounts have also been affected. One issue that warrants attention if you plan to seek outside funding is inventory needs and accessibility. With productivity and supply chains being disrupted, it may be difficult to allocate costs to inventory. There is also the issue of inventory that cannot be delivered because of travel restrictions. This also plays a significant role in the larger economic impact of decreased supply and increased demand, resulting in higher prices going forward. 

Goodwill, post-retirement plans, and internal controls are other accounts/issues that require an in depth look at your financials and a pivot in business strategy, as we slowly climb out of this pandemic.  

If you’re still waiting for things to get back to “normal,” and analyzing your financials based on pre-pandemic assumptions, you are not doing your business justice. You may think you have enough cash on hand or that expenses are timely being paid, but without meticulous monitoring and a true long-term plan based on our new reality, you cannot forecast or grow to the next level. 

This can be overwhelming. But pivoting in your financial planning and forecasting is necessary. Barker Associates has extensive experience in financial statement analysis, plans, and forecasts. If you need assistance, or have any other questions, please click here to schedule a 30-minute consultation at a rate of $100.  

Getting Back to Business Basics

Getting Back to Business Basics 

Mindy Barker | Barker Associates

We have collectively experienced unprecedented times. As CEOs and CFOs, we seem to be writing the playbook as we go. Over the past eighteen months, survival mode has become the norm rather than the exception, as we navigate the turbulent waters of each day. Yet, we all realize we can’t survive in survival mode for extended periods of time. In doing so, we are only looking at our immediate requirements and needs to get by, not our long-term goals and needs to thrive. 

When we operate only in the day-to-day, as survival mode requires, we tend to overlook the basics when it comes to our businesses, and specifically, our financials. But truly getting back to basics is the only way to support the long-term strategic growth of the business. And when it comes to basics, you can’t get much more fundamental than a business plan and an annual budget.  

Basics #1: The Business Plan 

You may be thinking this is Business 101 and you’re beyond it, but you’d probably be surprised (or maybe you wouldn’t be) at the number of businesses that do not have any business plan whatsoever. A business plan is much more than something that has to be checked off your never-ending to-do list. It not only helps you create an effective strategy for growth, but also helps you determine your future financial needs, including the need for investors and/or lenders. 

According to the SBA, the importance is clear. “A good business plan guides you through each stage of starting and managing your business. You’ll use your business plan as a roadmap for how to structure, run, and grow your business. It’s a way to think through the key elements of your business.” 

Additionally, if you plan on seeking funding, business plans play a crucial role. “Business plans can help you get funding or bring on new business partners. Investors want to feel confident they’ll see a return on their investment. Your business plan is the tool you’ll use to convince people that working with you — or investing in your company — is a smart choice.” 

In thinking about the execution of a business plan, too many owners or leaders get stalled on the format itself. However, it’s important to remember there is no right or wrong way to develop a business plan. Regardless of how many pages or the font used, the most important takeaways are that it clearly lays out your product or service, identifies your target market, and details your strategy for reaching that market, including the financial needs and requirements on both a short- and long-term basis. While this past year has shown us that we cannot fathom every possible scenario that could impact our business, developing a robust plan is one way to prepare for as many contingencies as possible and help ensure the company’s success. 

Basics #2: Annual Budget 

While twelve months from now may feel like it may as well be twelve years from now, it is imperative to have a strong annual budget. The annual budget should also be able to be broken down into months for easier monitoring. At a minimum, your annual budget should include the following:  

  1. Income Statement,  
  1. Balance Sheet, and  
  1. Cash Flow Statement.  

Most businesses are familiar enough with income statements – they can clearly see the revenue coming in and the expenses going out. This is undoubtedly important, but it does not prepare you for your working capital needs. Essentially, you need to know how much you actually require to run your business. In order to truly understand those requirements, an accurate balance sheet and cash flow statement are needed. For example, if you have inventory on your balance sheet, you will need to project the use of cash to purchase that inventory. An income statement will not help you with that.

Nearly every decision you make today can impact your cash flow tomorrow. For example, I once worked with an organization that had double-digit growth each year and was very profitable. The company was getting ready to launch a second product and had offered extended payment terms to customers on their entire order if they added the new product to their order. This may have been an impactful customer service move; however, it was quite the opposite for generating the cash flow needed to pay the vendor. No one had projected the impact this decision would have to their balance sheet and cash flow, so they were unaware that the plan they had in place was going to essentially stop incoming cash. We had to react quickly and manage cash just to meet payroll and other immediate obligations. Simply, this stressful time could have been avoided entirely if the company planned appropriately with a balance sheet and cash flow statement. 

While the responsibilities and priorities of a CEO or CFO may vary depending on the company, the need to get out of survival mode and back to business basics is the same for everyone. The common denominator of these basics is that they require you to look ahead and make forecasts on the future of your business – the very opposite of survival mode. Barker Associates has extensive experience in developing business plans and annual budgets that are appropriate for the specific business involved. If you need assistance, or have any other questions, please click here to schedule a 30-minute consultation at a rate of $100.  

Leadership – The Importance of Leading Your Mental Health First

Leadership – The Importance of Leading Your Mental Health First 

Mindy Barker | Barker Associates

I love people. I always have. And I am sure I always will. That being said, once I became a leader of an organization, one of the most difficult things for me to grasp was that my team, made up of colleagues who previously would join me for lunch or socialize after work hours, no longer seemed to want to be with me outside of meetings or the office. I wondered what I had done wrong … until I remembered that my new title brought along more with it than met the eye, and that it can be lonely at the top

I have grown tremendously throughout my career and, through the process, have come to understand myself better.  Moving from a CFO of an organization to a consultant and business owner catapulted my self-development to a new level. I have learned more about my strengths and, even more importantly, my weaknesses. Sure, I enjoy learning more about people. I ask tons of questions, not to be intrusive, but to get to know the other person better. And yes, I am an open book, even “honest to a fault,” so I had to learn to grasp that just because another person is not an open book does not mean they don’t like me.  

Through this self-discovery, I am now someone who can better understand not only my own perspectives, but empathetically, those of others.  I understand how much “me taking care of me” is required to be the best leader for my own organization.  And I appreciate it even more after going through COVID-19. 

Leading Ourselves to Better Mental Health 

Recently, I listed to a great podcast that brought these points home for me. As I listened, I could completely relate to how the guest, Nick, talked about how hard his parents were on him (as my parents were on me).  While it bothered him (and me) greatly in our younger years, there is nothing but acceptance and appreciation now for the person they molded me to be. Nick also talked about the feelings of isolation brought about by COVID-19 and how exhilarating it was to have the first business dinner meeting post-COVID. He was right. I’ve had a few meetings that don’t require a camera and Zoom over the past few months, and always felt like a huge weight was lifted off my shoulders in doing so. After I listened to that podcast, I made sure to book more in-person business meetings, and it has already made a difference in how I feel.  

Another area of change for me has to do with my physical health. Pre-COVID, I loved group exercise. When the gyms shut down, it was incredibly difficult for me to learn how to work out on my own and to get and stay motivated. But I didn’t stay in that space. Instead, I found several sources to help me, and now I have many options to deal with stress to ensure I exercise when I travel or even when I cannot make a scheduled exercise class. 

You Don’t Have to Do it Alone 

I have come across some amazing resources that have helped me maintain my mental health through life’s (and a pandemic’s) transitions. I do not receive affiliate income from any of the links I share here. I am sharing them with you in the hopes I can help make your path to self-discovery less bumpy than my own.  

  • Calm App – This has become one of my go-to apps. And I love sleep stories. By far, my favorite is Wander with Mathew McConnaughy. I also have enjoyed the guided meditations that I can use throughout the day. The music is great with coffee in the morning and they also have a selection of music to play to help you concentrate while you work. 
  • Jill Coleman (Instagram) – I love following Jill Coleman, a business coach for fitness professionals, on Instagram.  I also listen to her podcast FITBIZU.  She offers great advice about mindset around eating and exercising.  Her fitness programs helped me make it through COVID-19 with an actual workout plan.  She also offers business advice on her podcast, including how to run a sales call. 
  • Katie Hammill (Instagram) – I follow Katie on Instagram, and work with her to review my weekly meal plans. She taught me that one of the most important aspects of a healthy lifestyle is a meal plan. We have implemented it in my household, helping to maintain calm in our daily lives. We always have a plan for dinner, rather than having a stressful conversation at 6 p.m. about what we are going to do. Another helpful hint to reduce stress around mealtime – make sure you have all the ingredients in the household when you make your meal plan! 
  • Kathy’s Table – Kathy’s Table provides individually proportioned meals that are healthy and gluten free. We include these in our weekly plan at least two nights a week. After two minutes in the microwave, you have a healthy, and delicious, well-balanced meal. And, maybe even better yet, clean-up is fast and easy, which also eliminates daily stress. 

Our mental health is impacted by much of our daily lives, especially with all that we have been through in the past fifteen months. And as leaders, we must also recognize our own impact on the mental health of our employees, who are looking to us to lead with more confidence and less stress. We must rid ourselves of the thought process that if we work harder and longer, without any care for ourselves, we will be more effective leaders. In fact, the opposite is true. Without taking care of ourselves, we will eventually burn out, leaving our team without a leader at all. 

Leadership requires accountability not only of your subordinates, but of yourself.  When you are overwhelmed with so many day-to-day responsibilities you may put self-care on the back burner.  If you need a leadership coach to help you with this important aspect, and you are serious about the accountability to do so, click  here to schedule a 30-minute consultation at a rate of $100. We will work out the right coaching plan for you, and I will apply the $100 toward the package.   

Acquisition Integration – After the Ink Dries

Acquisition Integration – After the Ink Dries 
The “3 Ps” of Integration 

Mindy Barker | Barker Associates

Last week, we talked about defining your corporate strategy, and that oftentimes, those strategies include acquisitions of other entities for your company to grow to the next level. Whether it’s to streamline operations, introduce new products or services, or both, many companies define their corporate development strategy within the parameters of an acquisition.  

There has been a shift in our global economy. And in that shift, acquisitions have become the norm, not the exception. Yet, according to Harvard Business Review, historically, 80% of companies that have been involved in an acquisition fall victim of the plethora of moving parts essential to the process and ultimately fail. Combining not only two companies, but two sets of stakeholders is fraught with potential landmines.  

This week, we take the acquisition strategy a step further. The inevitable questions surface after the ink dries on the legal documents … How do we increase the chances of success? What exactly happens now that we’ve acquired another business? The due diligence is complete, the documents are signed, the lawyers have left – so, what’s next?  

Acquisition integration is the process of combining the systems, process, operations, and personnel of the acquired company into your own by maximizing synergies and efficiencies. Logistically, the integration itself should be focused on what I like to call the “3 Ps” of Integration – Personnel, Plan, Practices. 

Acquisition Integration – Personnel Issues 

  • Appoint an Integration Manager and Team. The integration manager should have seniority and experience with your company, and be able to hold the team members accountable. The integration will be his or her full-time responsibility for as long as the process takes. The team should be made up of those with expertise in the various areas of integration, including information technology, operations, finance, and marketing.  
  • Communicate the Good and the Bad. Meet with those you plan on bringing onto the new team from the acquired company as soon as possible. Without some reassurances that they are staying, they will soon look elsewhere for career opportunities and may consider offers from competitors. For those who will not be moving forward, let them know quickly. This is for your own benefit, as much as their own. Indecision will lead to rumors, which inevitably paves the path to a lack of morale – no way to start a new venture. 
  • Focus on Cultural Integration. Decide how much of the acquired company’s culture you are bringing into your own. Will they mesh? Are their conflicting values? What are the priorities on each side? Culture will have a huge impact on the new relationships going forward. 

Acquisition Integration – Plan Issues 

  • Develop and Follow a Conversion Plan. The conversion plan should incorporate all of the changes that need to be effectuated, as discovered during due diligence pre-acquisition. Additionally, understand who is responsible for each task and goal, along with applicable due dates. The manager and team must be held accountable to the conversion plan. 
  • Modify the Plan as Needed. Through the integration process, additional opportunities may be discovered. Modify the plan accordingly to adjust for these opportunities, including the required resources, and communicate any changes to the team. 
  • Use Metrics Consistently to Measure the Plan’s Success. Measure everything you are doing as it relates to the integration. Compare actual results to those anticipated, including timelines. 

Acquisition Integration – Practices Issues 

  • Identify Best Practices. Determine if the acquired company had practices that worked well and could enhance your own operational practices. If they bring value, develop ways to incorporate them into your own. Then, as always, communicate these Best Practices to the rest of the team.  
  • Evaluate Practice Similarities and Differences. What services, products, and operations are the same? Which ones are different? Are there overlapping vendor practices or relationships? Which parts of the accounting and marketing are complementary? Which are contradictory? 
  • Provide and Receive Feedback. Ask yourself the following: What went well with the integration? What didn’t? What are the expectations moving forward? Provide this feedback to the team. Additionally, accept any feedback provided to you and use it for improvements going forward. 

Focusing on the “3 Ps” in acquisition integration is crucial for the long-term success of your business post-acquisition. Barker Associates has extensive experience helping companies with acquisition integrations. If you need assistance with yours, or have any other questions, we can help. Please click here to schedule a 30-minute consultation at a rate of $100.  

How Angel Investors Navigate Deals with an Investment Thesis

How Angel Investors Navigate Deals with an Investment Thesis 
Creating a Roadmap for Success 
Mindy Barker | Barker Associates

How do you know where you’re going without a navigation tool – GPS, a smartphone, or even the “ancient” map? For angel investors, that navigation tool is an investment thesis. When done correctly, it will not only guide you along your chosen investment course, it will help you identify the roadblocks and detours to avoid.  

An investment thesis is one of the most useful tools in the angel investor industry, summarizing your reasons and conditions for investing in certain types of companies. If you do not have an investment thesis or some type of investment strategy from the beginning, you may fall in love with a charismatic founder and invest in a deal you have no business investing in. This scenario happens all the time and it shouldn’t because it leads quickly to frustration and likely, the loss of the investment down the road. There is a myth that an investment thesis is only for venture capitalists—those who have a fiduciary duty to invest money in a certain way. While it’s true it is an important component to them, it is equally, if not more, valuable to all investors, especially those who are just starting out on investment roads less traveled.  

Essentially, if you invest in start-ups, founders will inevitably pitch you for money (it’s the name of the game, after all). Without an investment thesis, you may find it difficult to concentrate only on the start-ups that match your investment objectives because simply, you may not know those objectives. On the other hand, a strong thesis will guide you into sourcing the right deals, with your criteria, conditions, and requirements clearly set in advance. 

The Benefits of an Investment Thesis 

All angels should have clear, documented investment theses due to the numerous benefits they provide. And like any good roadmap, your thesis not only benefits you, it benefits others as well. Behind the driver’s seat, it keeps you disciplined on your selections and focused on where you want to go with your investments. With a deep understanding of the types of industries and businesses you want to invest in, the risks you’re willing to take (and those you’re not), and the parameters you want to see in companies, you are much better equipped to find the right fit for your money. 

An investment thesis also benefits the start-ups and entrepreneurs looking for funding. It allows them to understand what you’re looking for and what you’re not, and if you’re the right fit for them. If not, they can move on to someone who is, saving time, energy, and money in the process. This can only happen when expectations are delineated clearly from the beginning.  

Finally, an investment thesis facilitates communication and dealings with other investors. Angel investors refer deals to each other frequently. What may not work for one in one instance may be perfect for another at that particular time. And no one wants to refer a deal that the person is not interested in. Not only does it waste everyone’s time, but it makes that person look as if they are ill-advised. 

Tips for Creating a Strong Investment Thesis  

Let me reiterate – an investment thesis is crucial for your success as an angel investor. A strong one will help develop a stong portfolio, while a weak one may indicate lower overall performance. Here are a few tips to help you create a strong investment thesis: 

  • Do not rush it. It should take thought, research, and time. 
  • Have a clear, simple purpose, conditions, and expectations. 
  • Choose an industry you either have experience in or in which you are passionate about. 
  • Determine how that industry’s impact influences your decision. 
  • Conduct market research with both primary and secondary sources. 
  • Analyze long-term trends and short-term events that could affect the industry. 
  • Set specific criteria for an investment. Be clear as to what you will invest in and what you will not. 
  • Remember diversification. While you should focus on a particular industry or sector, you can diversify other factors, such as geography, business model, technology, or customer segment to create a more balanced portfolio. This should also be calibrated with your personal net worth. 

Once your investment thesis is created, you will have a detailed roadmap of where you are going on your investment journey. It helps serve as a reminder of why you do what you do and what your own investment parameters and boundaries are. And it guides you toward finding the investments that fit those objectives. 

Remember, all early-stage investments are risky and can fail even with the best idea, product, and management. By investing only in companies that fall within your thesis, you are not only minimizing your risk and exposure, you will also have an increased ability to help more companies grow through your specific offerings. And ultimately, a better fit in the beginning will likely lead to a better return in the end. 

Barker Associates has extensive experience working with angel investors on their investment theses. If you would like to discuss angel investing, either as an investor or as a company that requires funding, or if you have other specific areas of concern, please click here to schedule a 30-minute consultation at a rate of $100. 

There are Angels Everywhere

Angel Investors and the Upcoming Seattle Angel Conference 

Mindy Barker | Barker Associates

I have the distinct pleasure of participating in the Seattle Angel Conference as an Angel Investor. This virtual event is May 12th, and I am thrilled to be involved. The mission of the Seattle Angel Conference is to create stronger startups and more effective angel investors with a “Learning by Doing” approach. Through this approach, the angel investors provide invaluable benefits to participating entrepreneurs. 

Angel Investors vs. Venture Capitalists 

With all of the excitement surrounding the Seattle Angel Conference, I thought it was a good time to point out some of the differences between angel investors and venture capitalists. Before a company can determine which type of investment is for them, it’s important to understand the distinction between the two. 

An angel investor provides a large cash infusion of their own money (or a group’s money) to an early-stage startup. Working with an angel investor benefits the entrepreneur through the wealth of knowledge and experience the investor possesses and is ready to share. Most have earned a substantial amount of wealth through entrepreneurship, and have experience with the exact same processes, preparation, and questions in the past. They can guide the entrepreneur through all of the bumps in the road, as they build their company and success. 

On the other hand, a venture capitalist is a professional group that invests money into high-risk startups or developed companies because the potential for rapid growth offsets the potential risk for failure. While they may still offer support and guidance, the transaction is mainly one of larger sums of money and more control over the venture going forward. 

While both angel investors and venture capitalists invest money in start-ups, here are three of the major differences between them: 

  1. How they work. Angel investors work alone (or in small groups), while venture capitalists are part of a larger company of professional investors. Angels invest their own money, while venture capitalists invest money from various funding sources. 
  2. The amount they invest. As a general rule (and there are always exceptions), angels invest less than venture capitalists. Angels will usually invest somewhere between $25,000 and $100,000 (angel groups could be much higher – up to $750,000 or even more). Venture capitalists generally invest millions of dollars per company. 
  3. The timing of their investments. Angels only invest in early-stage companies. Venture capitalists invest in both early-stage and more developed companies, as long as there is a proven track record showing strong indications for rapid growth. 

Accreditation for Angel Investors 

Many angel investors, but not all, are accredited according to guidelines established by the Securities Exchange Commission (SEC). To be accredited, the angel investor must have:  

  • annual earnings of $200,000 per year for the past two years, with a strong likelihood of similar earnings in the near future (if the angel investor files taxes jointly with their spouse, their required annual earnings increase to $300,000) or  
  • have a total net worth of at least $1 million (regardless of marriage and tax filing status). 

Seattle Angel Conference 

The Seattle Angel Conference provides education for the companies that participate, completely free of charge. The education experience alone is invaluable, allowing exposure to many professionals with a depth of knowledge to help build a company with the right attributes to move to the next level. As an investor-led event, the conference connects entrepreneurs and a collection of new and experienced angel investors, who truly are everywhere. Each investor contributes $5,500 to create a fund, estimated to be between $100,000 and $200,000. 

Applying companies participate in a company review, during which the angel investment committee sorts the documentation, looking for key components of investment. This ongoing review and due diligence strengthen the entire process. In the end, six companies are chosen to present their ten-minute pitch at the final event on May 12th to get a chance for funding and a more thorough review by the investment program. 

The participating startups not only receive a detailed review of their company, but also the opportunity for valuable feedback from the investors, who are often seasoned entrepreneurs themselves. While many entrepreneurs want to avoid the “tough questions,” it is only through those difficult questions that the company’s narrative increases in clarity and strength. In addition, these entrepreneurs get introduced to dozens of angel investors through the process. While they may only end up working with one of them, building that network is a huge benefit – you never know whose path you will cross in the future. 

For me, personally, I have loved participating as an angel investor, as it inspires me to learn about the innovative ideas of early-stage companies. I enjoy having a pulse on what is happening in various industries and what is next through these inventive entrepreneurs. All angel investors have the opportunity, and are expected, to participate in the process, including review, analysis, and due diligence. The collaboration of investors with diverse backgrounds and experiences helps bring about a better investment decision. 

Click here to purchase a ticket to this thought-provoking, inspiring virtual event and learn more about angel investing and the companies that need it. If you would like to discuss angel investing, either as an investor or as a company that requires funding, or if you have other specific areas of concern, please click here to schedule a 30-minute consultation at a rate of $100. 

Financial Literacy for Raising Money

Financial Literacy for Raising Money 
The Questions You Need to Ask Yourself 

Mindy Barker | Barker Associates

As we continue to discuss increasing our financial literacy, we must also consider the ways in which a company increases its chances for securing money for growth. The list of possible ways to obtain money to finance the growth of a company is extensive, including multiple forms of debt and equity instruments. The question of which is right for you is dependent upon your particular situation and your level of understanding of each. In order to navigate through this scenario, we have come up with a list of questions you need to be able to answer to make the best decision for you and your company overall.  

Do you really need money for growth? 

While there are many professional organizations that make endless promises to help you raise capital for your business, and while they all sound tempting, you must first understand whether or not you actually need money for growth. Contrary to popular belief, you will not always answer this in the affirmative. If you decide your organization requires capital for growth, then begin the process by speaking to your trusted advisors about their opinion on your plans. This discovery process should happen with professionals you already have a relationship with and who know about your company. Think about your attorney, CPA, outsourced CFO, or someone in a similar situation who has previously advised you in these matters. Only after this discovery and pertinent conversations can you then move forward with first designing a strategy, and then executing that strategy in a way that does not allow the fund raising process to consume the C-suite and deteriorate the business itself. These results can occur whether you are a small start-up or a large organization.  

How do you know in which direction to go?  

If you’re the decision maker and have governance over an organization, the first step is to evaluate your ethics and check your ego at the door before you begin to have the necessary conversations. Raising capital has become so sensationalized that those with decision-making authority tend to think of fund raising as a necessity. However, that is not necessarily the case. While raising funds is a common impetus to growth, it isn’t for every company.  

Start by looking at the historical and projected financial information. Ensure the use of funds you expect to raise is clear, and that the financial strategy for growth is viable. This initial step will require that you have quality up-to-date financial information.  Click here to see my blog about the need for financial infrastructure. 

How do you know who to trust?  

Many entrepreneurs tell me about situations where a third party offers to help them raise capital, but charge them a percentage of what they raised. Keep in mind, if the person who made that statement is not a broker or investment banker, that arrangement could be illegal and cause issues as the company grows. My biggest piece of advice is to ask if the person if he or she has a license to effectuate this type of arrangement.   

The other issue is that some of the investment bankers have had a difficult time getting clients in the pandemic environment. As a result, they have started consulting to assist with cash flow and to provide themselves with additional companies to move into the investment banking sales funnel. The issue with this is that these companies are signing up to be with the investment banker before they even know if that is the right fit for them or not.   

As a true professional, both of these instances are painful to witness. Before executing a contract or providing a deposit to anyone to assist with fund raising, proceed with caution. Make sure their culture and track record are consistent with your goals and strategy.  If you have partners that have different goals and ethics, it could be catastrophic to the organization.  Do your homework to make sure it is the right partner from the outset! 

Do you need debt, equity, or a combination of the two?  

Banks are conservative, and it is difficult for any size corporation to secure debt these days.  This form of capital is, of course, cheaper than equity overall as you do not have to give up ownership and the interest rates are currently so low. 

Equity partners can potentially have in-depth experience with the industry you are in and can actually help you build a larger and more robust entity. The saying is, “You can have a smaller piece of a big pie and actually have more value than a larger piece of a small pie.” If you do your homework and make sure your equity partner is aligned with your values and the right fit overall for your company, you can accomplish this goal.  

In a scenario with a combination of convertible preferred stock, it provides the investor with a liquidation preference. In the event a few unlucky events happen, this could mean the common stock investors could wind up with nothing in the end, which is exactly what happened when BlackBerry liquidated.  In that case, the company emphasized to employees that they should buy in while they could. When they were granted stock, they had to pay the taxes at the value at the time, and then when they sold the stock, it was, at time, at 1% of the value on which they paid the taxes. So, that could mean they were granted stock worth $45 per share, paid the taxes on it at their rate, let’s say 20% or $9, then they sold it for $.40, which was all the cash they received for that share, despite the taxes they paid. If they had a number of shares, that is a lot of money wasted. 

In the situation with a SAFE combination, there is a debt instrument that converts to equity at the next round of investment. This is a great instrument when companies are at an early stage and the discussion over valuation is difficult. When valuations increase quickly for successful companies, this can actually turn into an uncomfortable conversation that can hold up an exit transaction under certain circumstances.   

Just as with our previous financial literacy articles, it’s not just about improving your financial knowledge of the present, but about strengthening that knowledge to predict a brighter future, especially as it pertains to the growth of your company. If you would like to discuss various growth strategies and what makes the most sense for your business, or if you have other specific areas of concern, please click here to schedule a 30-minute free consultation. NOTE: beginning May 1, 2021 consultations will no longer be free. 

Grow Your Financial Knowledge, Grow Your Business

This week, we continue our month-long discussion on financial literacy, including best practices to increase your financial knowledge. While there are numerous reasons business owners do not have an adequate level of financial knowledge (some people are just not good with numbers, guidance from GAAP has gotten so complicated it makes it even more difficult to understand, and business owners are just “too busy” to get into it), this knowledge is crucial to having effective conversations about your business.  

Mindy Barker | Barker Associates

Can You Stand Your Financial Ground? 

If the right investor came along tomorrow, how confident are you that you are prepared with accurate historical and projected financials? Can you demonstrate thorough knowledge of your company’s financials, cash flow, burn rate, and return on investment?  Are you prepared to get drilled on each number you provide and have the ability to accurately explain where it came from? If you are not prepared, it will feel like the longest half hour of your life.  

So, how confident are you? 

If your answer is, “Not confident,” or “Somewhat confident,” it is time to make an investment in yourself. Here are a few tips to increase your financial knowledge: 

  • Prioritize your financial education. We know how busy you are, but think of it as the investment it truly is. 
  • Develop a financial advisory team. Ask these trusted individuals questions and encourage them to do the same.  
  • Make the cash flow statement your new best friend. This is the lifeblood of business and you should understand everything on it at all times. 
  • Take some basic accounting courses. It’s never been easier to take a class online. 
  • Connect with a CFO firm. Not everyone has all of the required resources at their fingertips. Allow the right CFO firm to become that resource as a trusted partner. 
  • Get a better understanding of key financial terms. We’re including some right here to help get you started. 

Terms to Help You Stand Stronger 

When an investor begins to ask about gross profit, net profit, or EBITDA, often the business owner’s face says it all – like when you’ve caught a teenager in a lie. Knowing these financial terms helps you not only have a more constructive conversation with potential bankers and investors, but also to truly have a better understanding of your business. Some of the basics (there are many more) include:  

Aged Accounts ReceivableThis is a report that categorizes a company’s accounts receivable according to how long invoices have been outstanding. This report is used as a benchmark in measuring the financial health (or lack thereof) of a company’s customers. 

Burn Rate. Burn Rate refers to how much money it takes to operate your business for a period of time (generally, a month). Knowing your burn rate helps to ensure that you have enough available cash to adequately run your business. Experts advise being able to cover your burn rate for at least six months. 

Cost of Goods Sold (COGS)This refers to the total cost of all labor and materials required to provide the products or services that your customers ultimately purchase. 

Debt-Service Coverage Ratio (DSCR)A ratio calculated by dividing your business’s net operating income by your debt payments. This compares cash flow to debt obligations. With the information, you can determine if you can cover debts due within one year.  

EBITDA. Earnings before interest, taxes, depreciation, and amortization. To calculate EBITA, take the gross margin and subtract total operating expenses, plus depreciation and amortization. Keep in mind the difference between EBITDA and EBIT. EBITDA subtracts all expenses, whereas EBIT subtracts everything except depreciation and amortization. 

Gross Profit Percentage or Gross MarginThis refers to the percentage of total revenue that remains after subtracting the direct costs of producing the product or service.  For example, if your company’s revenue is $400,000 in one year and your gross margin is 25%, then your gross profit is $100,000.  

Profit Margin. Profit margin is the percentage of your total revenue that you retain as profit. This metric is most often analyzed on a per unit basis. To calculate profit margin, subtract overhead expenses (along with direct costs) from your sales and then divide it by your total revenue. While it may take some time for a business to start generating profit, it is ultimately what makes it valuable … and a priority for investors. It is imperative that you are confident that your revenue you are charging for the product will cover the overall cost of the organization.  When you are in growth mode, this may not be the case – which is why the Cash Burn rate (referred to earlier) is so important. 

Working Capital. Working capital is cash plus other current assets, less current liabilities.  

Whether it’s understanding these terms (and the many others), using the tips to increase your financial knowledge, or tightening up financial reporting, successful leaders ensure these characteristics are not contained within the walls of their accounting departments, but instead, are a part of their entire company culture. With financial clarity, you can maintain stability to carry out the company’s mission. 

Simply, when you understand the financial terms and their effects on your business, it not only helps your bottom line, but also helps you have a more constructive (and potentially profitable) conversation with potential bankers and investors. 

Let Mindy Barker & Associates show you how to raise your knowledge and be prepared for that next big conversation. We can help you improve your financial brilliance and empower you with the tools and financial information you need to improve your company value, cash flow, and profitability. Schedule a 30-minute free consultation here to learn how.