Have you ever prepared for your workout but realized you had not done laundry, so you had no clean clothes or you could not find your tennis shoes? Were you still motivated to go for the run after you did your laundry and found your shoes? Many of us would have lost interest due to the time delay. The same concept applies to a deal. Time kills deals when too much of it passes.
Start with the end in mind. Every business owner should begin building their business with the idea of seeking investors or selling in the future, which means laying your due diligence foundation.
Have at hand the 7 due diligence essentials. Investors will ask for them – do you know what they are? Do you have then available at all times, are you solidly prepared for due diligence, are you in a position to secure investment? Email me at [email protected] to get the list.
Then get your due diligence folder ready and keep it current.
Last October I offered advice on finding the right investor for entrepreneurial businesses. Today I am writing about trusted advisors (the theme for March) – the investor is a special kind of trusted advisor.
As with any business relationship, finding the right fit with your investor is the first step in a long and successful association. This may sound like dating advice, as there are many similarities. For example, identifying potential investors through word-of-mouth or introductions from mutual friends has a better chance of success than selecting the first name your search engine delivers.
But don’t stop there, ask your acquaintance why they recommend this or that one. Understanding your goals is critical with whomever you choose to ask for money.
With potential candidates on your list, think of a few “speed dating” questions to narrow it down. You should know yourself well enough to already know which questions/answers are deal-breakers. What do I mean by that? Let’s say you want a silent investor who is hands-off. Ask how they work with their current clients – hands-on, hands-off or somewhere in the middle.
Other filtering questions might include: who are some of their other clients (besides your referring friend); are they local; in which industries do they specialize? Are they a solo investor or in a group? What type of client do they prefer – are you that client?
By doing your due diligence you have reduced the risk of having to break up with your new investor sooner than planned.
One of your goals in securing an investor should be that once they have reached their goal with your business, they stick around as your #trustedadvisor. You just may need them again when your successful business is ready to rise to the next level of success!
Building trust takes time and an investment from both parties. At the end of a successful pitch to gain an investor, the trust clock with that investor starts ticking. You both must deliver now on the promises made during the courtship; nothing builds trust quicker than doing what you said you would do. And when you follow through, the role of trusted advisor just naturally evolves.
At Mindy Barker & Associates we help entrepreneurial businesses prepare for meeting with investors to pitch their business and obtain funding. If you think you need an investor, but don’t know where to start, contact me at [email protected] to set up a no-obligation 30 minute discovery call to discuss how we can help.
My final word of advice: this process should begin the minute you start a business – not when you need the money. If you are trying to raise money at a time you are getting ready to lose money – you lose leverage.
Countless Americans seem to have an insatiable desire for immediate gratification. This drive for gratification has led to an increase in “on-demand” start-ups, such as Uber, one that is frequently in the news these days. These start-ups address needs such as transportation, food, entertainment and beauty treatments. The short-term euphoria derived from the instant gratification meets a perceived (or even real) need, resulting in billions of dollars being available to fund these companies. Investors have bet the companies will build enough revenue and momentum to go public. With an opportunity to exit through an Initial Public Offering (IPO), they can get a great return on the investment. The IPO market has allowed some unprofitable, high-growth companies to pass through the gates and create hope for others – including Amazon and FitBit.
History often repeats itself – there were many “on-demand” start-ups during the dot.com boom in the 1990s that were unsuccessful, including Webvan, known as poster child of the dot-com “excess” bubble, according to techcrunch.com. My belief is that the initial euphoria of immediate gratification is then seized by the control freak in us who wants to choose our product. For example, when the apple from the grocery delivery shows up with a bruise or we cannot communicate with the office manicurist, the urgency for immediate gratification dies and we drive to the grocery store to pick our own perfect apple or to the spa to get the manicurist of our choosing.
The success of Uber has given the on-demand space an extra surge of enthusiasm and creativity. Many riders frequently use Uber because they appreciate the experience and the price. On the one hand, this is a great business outcome; the fact remains, the company eventually has to make money. Uber continues to struggle with growing regulatory issues that will eat into revenue, create higher operating costs and, ultimately result in higher rates. I recently landed in the New Orleans airport and requested an Uber car at the airport. An immediate and distinctive pop up on my phone alerted me that all Uber rides were $75 from the New Orleans airport due to city ordinances. This is compared to a $15 cab ride to my client’s office. I cancelled my Uber request and went to the cabstand.
The message to entrepreneurs and business owners is that we can learn from history, and basic business fundamentals are clear – you have to make money selling the product. Investors expect a return on investment, and at some point will be unwilling to continue to fund a losing proposition. Keep your books and records current to ensure all your products are making money or, by default, you could be making the decision to fund a loss leader.
Sunday began the week with the Holiday of Love – St. Valentine’s Day. How do love and emotions influence our decisions about business and investing?
Many people have used the services or read about a Unicorn or a Unicorn “wanna be” without even knowing it. Fortune.com defines a Unicorn as a once mythical, now reality, start-up business valued at more than $1 billion and includes Uber ($62.5 billion), Airbnb ($25.5 billion) and Snapchat ($12 billion)*.
Jacksonville-based Fanatics is a local Unicorn valued in excess of $3 billion that is putting Jacksonville on the start-up map according to a First Coast News report (http://fcnews.tv/1om5Exd)
Speed to market for a unique new idea is critical for start-ups. The exuberance of growing a company fast can generate more endorphins than the Boston marathon, while the adrenaline rush can lead an enthusiastic business owner to burn through huge amounts of cash in an attempt to gain market share. This cash burn must show traction – is the cash you are investing to gain market share paying off? Are the dogs eating the dog food or, in other words, are you acquiring as much of your target market as you project or need to justify continuing to increase the value of the Company and command the incredible valuations such as in the previous examples?
The basic principles of running a business, i.e. the eventual need to generate enough revenue to create a profit remain a core value of building a business. For example, if the cost of production plus acquiring market share is more than what you are selling the item for, that’s a no-win situation down the road. Using metrics and projections, founders and owners must continue to evaluate building enterprise value in order to provide a return on the investment to shareholders.
My experience serving as the Principal of a Private Equity Firm and as a CFO of small and large entities provides a depth of experience that can help with the analysis your business needs to understand if you are on the right track for building enterprise value. Please contact me to discuss your unique situation.
* http://fortune.com/unicorns/. Note these are estimates of the companies’ enterprise value based on the latest rounds of private financings. These companies are private and it is difficult to find the exact valuation.
Is your high-cost customer providing high revenue?
The entrepreneurial community tends to speak to investors and stakeholders about the value of their business based on revenue and revenue growth. When an investor begins to ask about gross profit, net profit or EBITDA, often the business owner makes a face similar to when you have caught a teenager in a fib.
Revenue produces cash flow and pays the bills. Revenue is a key goal and business owners should constantly strive to identify and close more customers to drive more sales. Besides these vital aspects of revenue, proper analysis of revenue is equally critical to identify customers, vendors and products you should walk away from.
Walking away from revenue is a bold move; however, at times it is the right move to take your company to the next level. I recently helped a client determine that a relationship with a vendor was unprofitable and to make the difficult decision to cease the relationship, which represented over 50% of the entity’s revenue. Proper cost accounting for products and services can be detailed and time consuming. My experience serving as the Principal of a Private Equity Firm and as a CFO of small and large entities provides a depth of experience and can help with the analysis your business needs to understand revenue and profitability. Please contact Mindy Barker & Associates to discuss your unique situation.