How Angel Investors Navigate Deals with an Investment Thesis Creating a Roadmap for Success
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.
Angel Investors and the Upcoming Seattle Angel Conference
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:
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.
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.
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 The Questions You Need to Ask Yourself
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.
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.
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 Receivable. This 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 Margin. This 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.
Leadership: If it’s Lonely at the Top, it’s Time to Make a Change
“It’s lonely at the top!” We’ve heard that phrase circulated amidst leadership conversations for years. But what exactly does it mean? Is the perception different from the reality? And, more importantly, what does it say about our own leadership styles?
Clearly, it’s not a literal statement. As leaders, we are surrounded by other people (often more so than we may like). Rather, it is a statement born out of one’s personality, emotions, and ability to shift perspective. Loneliness in these terms is not referring to physical isolation, but from an inability to make connections at work due to the position itself. Maybe you’re not invited to lunch anymore. Maybe you’re not on the inside track of the office jokes that everyone else seems to get. But that’s okay. Ultimately, you’re not there to make friends.
Some leadership aspects lend themselves to justifying the phrase. Whether you’re the CEO, the CFO, or in another management position, leaders are the ones who bear much of the responsibilities in a constant attempt to balance the ever-increasing demands from both sides – higher management and staff. There are deadlines, operational issues, risk management issues, financials to be filed, and problems to be solved. This is particularly true for women leaders, who often struggle to find support from like-minded women who have the same abilities and the same challenges. It is also particularly true for financial leaders.
Financial leaders often struggle with discovering the right combination of leadership responsibilities and deadline based tactical responsibilities. They find it difficult to stay engaged with the professionals they lead, because, well, some deadline is usually fast-approaching. Yet, they understand that it is no longer possible to focus solely on the tactical aspects of their jobs. If they want to move up to the CFO level, they cannot do it alone. Rather, they must engage with those whom they lead.
Are We Doing Something Wrong?
Despite the reasons, the idea of being lonely as a leader still doesn’t sit right. In fact, John Maxwell has noted, “If you are lonely at the top, then you are doing something wrong.”
Consider this: if you are alone, it could be concluded that no one is following you. And if no one is following you, how can you lead effectively? Our job, as leaders, is to build relationships, build trust, and make those we lead better at what they do, helping them ascend, as we have. Once we fully accept those responsibilities, we understand that in order to achieve our goals, we must connect to those we lead in more impactful ways, including coaching and collaboration (with little time to be lonely).
The most obvious impacts of loneliness as a leader are on those we are leading, who may feel abandoned. However, it may also affect our own ability to do our jobs effectively. For example, good decisions never arise out of negative emotions, including loneliness. As such, decision-making, a crucial component of leadership, could also be affected when we shut ourselves off.
Lonely at the Top No More
While some of the physical circumstance may be unavoidable – you do have a separate office, you’re not privy to some of the same conversations, you may struggle to find support, strategies to stay engaged with your team abound. In their implementation, not only will you be less isolated, you’ll ultimately be leading in more effective ways.
Top Five Tips to Staying Engaged (and to not being lonely):
1. Be Visible. Your team needs to know you are there and accessible. Have an open-door policy and encourage others to use it.
2. Collaborate. No leader operates alone. You don’t have all the answers. None of us do. Increasing collaboration among the team not only increases creativity, it also increases the value placed on relationships and productivity.
3. Coach. Much of your responsibility as a leader rests with the development of others. Embrace that responsibility. Remember that in order for you to move up, others must do so as well.
4. Actively listen. Your team is valuable and so are their voices, whether they are in consensus or have diverse points of view, show them that you care about what they have to say.
5. Accept Change. Understand and accept that relationships will shift based on your leadership position, but those relationships still need cultivation.
Leaders shouldn’t sit in detached isolation at the top of the organizational chart. Rather, we should immerse ourselves into the organization’s culture and people. With bonding comes energy and with energy comes relationships. And only through those relationships can we bring out the best in others. Loneliness dissipates because we are highly engaged with those around us, not sitting alone behind the closed doors of a corner office.
Barker Associates has extensive experience with collaborative management styles, assisting organizations as they achieve increased productivity and efficiency. Use this link to my calendar to choose the best time for your free 30-minute consultation.
Celebrating International Women’s Day The Past, Present, and Future of Women Leaders and Founders
“We need women at all levels, including the top, to challenge the dynamic, reshape the conversation, to make sure women’s voices are heard and heeded, not overlooked and ignored.” – Sheryl Sandberg
Yesterday, we celebrated International Women’s Day, highlighting the accomplishments of social, economic, and political achievements of women around the world. It’s no coincidence that we celebrate this day as a part of Women’s History Month. How can we celebrate the achievements of today and look forward to the progress of tomorrow, without acknowledging the determination and sacrifices of the past? While there is no shortage of influential women leaders today, they stand on the shoulders of hundreds of others who paved the way.
A Look into the Past
Unfortunately, we cannot list every courageous woman leader from the past (not to mention those we each have within our own families and friends), but here is a celebration of a few, intended to honor all:
Sojourner Truth, after being born into slavery and escaping with her infant, became an abolitionist and women’s rights activist. She later became known for her “Ain’t I a Woman?” speech regarding racial inequalities in the year 1851.
As a young girl, Louisa May Alcott worked in the mid-1800s to support her family financially, something unheard of at the time. She later wrote “Little Women,” one of the most treasured novels in American history.
In the mid-1900s, Marguerite Higgins became the first woman to win a Pulitzer Prize for Foreign Correspondence after working as a war correspondent for the New York Herald Tribune during WWII, The Korean War, and the Vietnam War.
Rosa Parks became one of the most famous, influential women of the civil rights movement when, in 1955, she refused to give up her seat on the bus to a white man. Today, she’s known as the “Mother of the Freedom Movement.”
Sandra Day O’Connor was the first female justice on the Unites States Supreme Court (1981-2006).
The list, of course, goes on in all government and private sectors, industries, and facets of life. These women and thousands more played prominent roles in advancing women to where they are today. And, as we celebrate women this month, we share in our gratitude for them all.
The Here and Now
There is no doubt that progress continues for women leaders and founders. There have been great successes in the government, sports, finance, and corporate worlds. Women are breaking records every day, but there is still a long way to go. In 2019, the proportion of women in senior management roles globally grew to 29%, the highest number ever recorded (same percentage in 2020). On the one hand, we love breaking records. On the other, at only 29%, there is much room for improvement and many more glass ceilings to crack.
The gap doesn’t just exist within the boardroom. It is also very apparent in female founders and funding. We need improvement in women led companies locating and securing the funding they need to scale their companies.
While there was already a significant gap in funding, according to Crunchbase, global venture funding to female-founded companies fell further in 2020. Whether this is the result of COVID-19 is unclear; however, there is data that suggests the pandemic has disproportionately impacted women in the workforce.
Through mid-December, 800 female-founded startups globally had received a total of $4.9 billion in venture funding in 2020, representing a 27% decrease over the same period in 2019.
Optimistically, early 2021 Crunchbase data shows improvement. In fact, 30% of investments in U.S. companies at Series A and B stage between January and mid-February went to teams with female or Black founders. While it is a brief study period, this trend is worth watching over the coming months.
Overall, while female entrepreneurs are still far underrepresented in startup funding tallies, at least there are some signs of, and initiatives to, continue that progress. In fact, there is a new target set by All Raise (an organization that advocates for female investors and founders) of growing seed and early-stage funding amounts from the current 11% to 23% by 2030 for U.S. companies with a female founder.
So much has been accomplished, yet, it’s clear we still have a long way to go. According to the World Economic Forum, global gender equality is not estimated to be achieved until 2133. So, as we celebrate the great women leaders of yesterday and today, we do so with an understanding that thousands more women will be standing on our shoulders tomorrow. And the forward momentum that is women’s leadership continues on.
Are you a woman founder looking for funding? Are you ready to be a part of that 23% target? Schedule a free 30-minute consultation with this link to my calendar to talk about how we can work toward getting you the investment money you need.
There were more firsts this year than any of us care to count. Some issues, however, have been around for a very long time and aren’t going anywhere. In fact, many are more important than ever before. Financial strategies and solutions, infrastructure, investor relations, and negotiations simply do not quarantine themselves, even during a global pandemic. Rather, the pandemic forced us to be even more diligent when it comes not only to our physical health, but also to our financial health.
Before we start crunching the numbers of 2021, we thought it was a good time to reflect back on the topics we found most crucial in 2020. Click below for some refreshers, as you prepare for the new year:
Getting to Day Zero: The importance of “Day Zero” being top of mind at the beginning of each month for proactive organizations.
Help Investors Spend Their Money: How the amount of money in the hands of Private Equity and Venture Capital firms substantially increased over recent years – the total money raised in 2008 was $392 billion as compared to $740 billion raised in 2019.
Essential Infrastructure: The right infrastructure is critical to generate data about your business during the due diligence process with potential investors.
Negotiate from a Position of Knowledge: Valuation is the value an investor would place on your company if you were to seek investment funding. Your company can be valued based on what someone will pay for it or what the market will bear.
Times Have Changed, or Have They?: With all of the year’s changes, one thing that hasn’t changed is the core fundamentals of business. In order to survive (pre- or post-pandemic), a business must have a product or service that solves a problem and can financially make a profit.
Oh No Not Again: The importance of having a clear vision and financial roadmap for your business through having the right infrastructure in place, including an Enterprise Resource Plan, CRM, General Ledger, Cash, HR System, and Payments.
Stay Safe: Leaders must set priorities that have measurable results with employees, even if the employee is working from home or transitioning back to the office.
If you have any questions about these topics or how to start your new year on the right financial foot, we can help. Let’s set up a time to talk! Use this link to my calendar to choose the best time for your free 30-minute consultation.
Many entrepreneurs who launch a business are focused on selling and bringing in revenue so much they are not thinking about the type of infrastructure needed to efficiently operate their business. I have to admit that some of this even happened to me when I first began my consulting practice. All of the support I received in my role as a corporate CFO was nonexistent. That saying about building the airplane while flying it applies here.
You bet I am – because it’s that important to the success of your business.
In an ideal world, your infrastructure can be represented by this graphic:
(* ERP – Enterprise Resource Planning – is the conductor that manages all of your business’s processes to integrate them into a cohesive database for reporting purposes).
Small businesses starting out often prioritize going after the work to generate revenue while building a “just-in-time” infrastructure. No thought is behind how all of the pieces should work together with the end result in mind. With a computer and a phone, you can run many types of businesses by the seat of your pants in the beginning.
For a business to grow to the next level, a business owner needs a vision and a roadmap that includes the evolution of their company infrastructure.
Understanding the basics of what your infrastructure should be able to do for you is critical when selecting the right tools to operate. Here are two of the most fundamental components: Cash and your General Ledger.
Knowing your cash burn rate – the rate at which you spend cash over time – is the most basic component for a business owner to know. Without cash you cannot operate. Maintaining a cash ledger, even if it’s in Excel or a tool such as QuickBooks, is critical. Select a tool that provides download capabilities for future integration needs. Forecasting cash needs over the next few weeks or months will help you decide the timing of critical versus discretionary spending. I advise my clients to know at least a 12-week forecast of cash needs.
You may be saying at this point that you already have a tool – your online banking site. Anyone who has heard me speak on this topic knows my position on this – you MUST have a checkbook that is reconciled each month to maintain history. The information gained from this piece of your infrastructure can be used to diagnose issues and strategically to plan for future growth. The online account is only a moment in time and does not serve your future.
Setting up your general ledger with the end goal of financial reporting in mind provides you with the insights you will need to answer questions such as, “How much did I spend in Marketing last year?” and “Am I making or losing money in my Hoboken location?”
Whether or not your future includes seeking investment funding, you must have the infrastructure in place to answer these types of questions when planning for the future. Potential investors will require you have data to back up projections for future sales. If you cannot rely on your general ledger and reporting tools to produce answers, perhaps it’s time to revisit your current infrastructure to support future needs.
Wondering where to start to build the right infrastructure? Let’s start with your General Ledger. Structuring your GL in order to generate reports from various perspectives is critical to daily decisions, budgeting, and financial reporting.
Note this example:
When a GL is structured with these various categories you can examine your business from multiple angles to determine if a location, product, or department are serving the business as needed. If you cannot produce financial reports to support tactical and strategic decision-making, perhaps the GL structure is the problem.
Mindy’s Money Tips contains in-depth, free advice for new entrepreneurs and mature business owners, alike. Find out when new articles are published by following me on your favorite social media platform – the links are shown at the end of this article.
If you would like to discuss how to structure your general ledger to work for you or other specific areas of concern, I would love to speak with you. Click here to schedule a 30-minute free consultation to discuss your unique situation.
Since March nearly everyone in the world has experienced change in their lives beyond our average experience. Some of the changes have been stressful and devastating; some have been positive. Most people with whom I have spoken have found times of joy in spending more time with their loved ones, having the time to cook, play games and just talk.
However, the negative impact on so many businesses seems almost unbelievable. Eight months ago no one would have predicted that restaurants, retail stores and gyms would have to completely shut down.
What has not changed are the core fundamentals of business. In order to survive, a business must have a product or service that solves a problem and can financially make a profit. From what I have seen, many businesses that will not survive until the end of 2020 were not sustainable prior to the pandemic because they did not understand which products or services were making money and which products were losers.
The core metrics and accountability required to run a profitable business were overshadowed by the exuberance of the economy and the unrealistic valuations private equity and venture capital firms were paying for investments. These valuations stemmed from the limited supply of investment-worthy companies and the requirement for investors to invest in order to stay in business.
The firms being capitalized had the Seven Essential Tools® – and knew how to use them to attract investors.
Check out my Seven Essential Tools Road Map®, which shows the steps to preparing to pitch to investors. Along with the Seven Essential Tools® details, you can position your company for growth or simply gain a better understanding of where your company stands financially.
Investors are focused more than ever on the core attributes of a business when evaluating it for investment. The good news is that the information they want to know is the same information that is critical for you to run your business successfully.
If you are a founder or a C-suite executive of a fast-paced, growing entrepreneurial company, are you confident you have the Seven Essential Tools® you need to pitch to investors?
How would you respond if someone made a legitimate offer for your business? Would you know if the amount is what the market would pay? Even if the offer sounds like more, or less than you imagined, you want to respond from a position of knowledge, not sticker shock.
Valuation is the value an investor would place on your company if you were to seek investment funding. From a negotiating standpoint, it’s better for the prospective buyer to say a number first so you have an indicator of how serious they are. Prepare yourself – arm yourself with the knowledge of a realistic valuation so you can effectively negotiate.
One measure of the value of your business is what someone will pay for it. Enterprise Value is a real number that investors calculate using your historical financial statements to arrive at a multiple of revenue, or EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). Other factors influence the value that could actually be paid for the business.
For example, are you loading your books with personal expenses and other tactics to avoid paying taxes? When investors value your business, such expenses can lower your EBITDA and affect the sale of your company.
On the other hand, EBITDA can be higher when you keep personal and business expenses and bank accounts separate and run your business as a true entrepreneur. Large and small organizations alike are guilty of combining personal and business expenses. C Suite executives in large organizations without governance over their expense account can significantly impact the value of the business by deflating the run rate of profit. Smaller businesses sometimes pay their family members a salary without the family member ever doing any work for the organization. Neither of these examples are proper stewardship over the financial governance of the organization.
Then there is the value that the market will bear. Factors that can influence the actual value paid for your business include how scalable your infrastructure is – the people, processes, and technology. If a new owner wants to focus on growth, is the right infrastructure in place to support that or will the new owner have to invest in infrastructure first? How much debt are you carrying? Someone has to pay off debt when the business changes owners.
On the other hand, your approach to acquiring new capabilities – buy, versus build, versus lease – in some cases can raise the value that the market is willing to pay.
Your role as an entrepreneurial leader can also influence the market value of your business. Employing a strong team who lead and run your company with an eye to the future is much more attractive than a business operating with old, inefficient processes and no new product launches.
My goal with this post is to help you understand the importance of knowing the value of your business. You never know when someone is going to reach out to you with an offer you cannot refuse. Be ready by knowing the valuation of your company so you can speak intelligently – before you get on the emotional roller coaster of discussing a transaction.