Do you know your PEs from your VCs? An Introduction

In the next few days, I am publishing a four part blog series on Private Equity and Venture Capital and this post is by way of a brief trailer for that series.

Recent conversations with Entrepreneurs have highlighted to me that the arcane world of Private Equity and Venture Capital is not well understood.

There is consequently a steep learning curve for those seeking investment which can put them at a material disadvantage.  These posts will of course not level the playing field but hopefully will go some way to opening up an understanding of the topic.

 

I have made a short video to introduce the posts.

As can be seen from the Magic Hexagon above , I am covering six main topics in the four posts.

Monday 20th February 2012.

Part 1 covers the different Types of Venture Capital and Private Equity Firms.  The criteria here are not mutually exclusive.  I concentrate on the stage of development for VCs and the types of transaction for Private Equity.

Thursday 23rd February 2012

Part 2 of the series looks at the Key Investment Criteria that an entrepreneur will need to meet to be considered even in the intial stages by an investment firm

Monday 27th February 2012

In Part 3 I look at How to Approach an Investment Firm, discuss in more detail what they are looking for and suggest 6 Reasons Why Business Plans are Rejected.

Thursday 1st March 2012

In the final installment, Part 4, I discuss some of the Main Characteristics of the Financial Plan that will have to be prepared and conclude by trying to explain the main Six ways that the VCs and PEs make Money through their investments.

The blog posts are scheduled to be released at Noon UK Time.

I would be very interested to know what further questions and clarifications you would like me to address on this topic. Please email them to me at jbdcolley[at]aol.com or comment below.

I hope you enjoy the series as much as I enjoyed writing it for you!

What Next?

Take a look at my FREE video Tutorial “How to Turn Your Great Idea into a Business” which is all about Starting a Business and Raising Capital.

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How I CAN help your Startup Raise Capital – An Offer for UK StartUps

 

Are you a UK StartUp or Early Stage Company seeking Capital?

I know how difficult and expensive it can be when you are starting up a business and have very limited resources.

This is how I want to try to help you.

For a limited time only, I want to extend a special deal for UK based early stage businesses.  I want to offer you  very low cost, low risk access to my personal UK Venture Capital and Private Equity Investor Database containing nearly 1100 firms to help you identify some suitable investors.

Here is my Offer how it works.

You email me at jbdcolley[at]aol.com and send me a brief profile of your business.  Include with this the names of the VC firms you have already approached or already know.  This will form a “Red List” of firms that I will not feed back to you.

I have a database of over 15,000 investors globally which I have built over the last 10 years so I probably know these investors already.

If I think your business is fundable, I will send you a brief 10 minute questionaire of key criteria for you to fill out.  This requires simple very brief answers.

I will then screen your criteria against my database of investors to produce a short list.  I will then tell you how many names I have found and these are available to you at £10 a name.  

I will provide you with the name of the firm, its address, telephone number, website and the names of its executives.  If I have a personal contact there, I will also tell you that to help you with your approach.

If I do not think your business is fundable, I will email back with some brief but direct reasons why not.

You tell me how many names you want to purchase, there is no minimum and you can come back to me three times to purchase names (this is only to minimise drip feeding one name at a time).

I will also require you to sign a contract that you will pay us 1% in cash of any funds raised from these investors as any time in the next two years.

The normal cost of fund raising is 5%-10% of funds raised so I believe that is represents very low risk and exceptional value.

The period is 24 months because investments will take time to arrange and can often be staged against milestones.

Would you like more information about raising Venture Capital or Private Equity?

I am publishing a series explaining on Venture Capital and Private Equity which will cover:

  • How to identify types of Venture Capital and Private Equity Firms,
  • How to understand their investment Criteria
  • How to approach investors
  • What they are looking for
  • Six Reasons Business Plans are rejected
  • The Key aspects of a Financial Model

When these posts come out I will link to them here. The first of these will be published on Monday 20th February 2012.

Six Minute Strategist PRO

I will be making more detailed information on how to raise capital for StartUp companies through the Six Minute Strategist PRO – my membership section of my site which will provide entrepreneurs will detailed checklists and guides to help and this will be available in the near future for a low monthly fee.

Need some Consultancy Advice?

However, if you want some consultancy advice from me, I am prepared to offer a limited number of  one hour sessions at £97 per hour to help you get started in your funding process.  These consulting sessions will be conducted over Skype so there is no travelling involved.

You apply for a slot, we agree an agenda and a time.  You transfer the fee to my PayPal Account (details of which I will provide to you) in advance and then we do the call.

Thats is – simple, direct and fair.

If you are a StartUp, particularly a Technology StartUp get in touch with me now.  jbdcolley[at]aol.com or check out my contact details on the site.

May 2012: This offer is now closed.  Thank you to all who participated.

 

 

 

 

 

6MS 36 Questions to ask a Startup Entrepreneur – Market Analysis Part 2

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6MS 36 Questions to ask a Startup Entrepreneur – Market Analysis Part 1

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36 Questions for Startup Entrepreneurs – Market Analysis Part 2

 

 

What are You Struggling with in Your Startup? 

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Welcome back for Part 2 of my Market Analysis post for Start Up Entrepreneurs.

The object of this series is to help Startup Entrepreneurs think through some of the issues in planning their venture.

If you missed Part 1 you can find it here.

In this post I am going to discuss Market Profitability, Market Size and Key Success Factors.

Market Profitability

The profitability of a market is both an issue of cause and effect.  The current competitors in a market define to a large degree the current profitability of the market but the entrepreneur has the ability to position his product/service offering to his best advantage to compete with the market encumbents.  Here are some of the factors:

  1. Market Factors.  Market profitability is defined by the relationship between market share and product quality.  If customers perceive that your product/service is of a high quality they will be prepared to pay more for it.  Equally, if you command a high market share, you will be able to dictate the price to your customers.
  2. Product/Service Characterisation.  When evaluating the profitability of the market, you should consider the characteristics of your business.  Consider the following factors; performance, durability, specifications, features, brand, reliability, quality of finish, serviceability.
  3. High Market Share/High Quality.  This is the best quadrant to be in.  You have a product/service which compares very favourably to the competition and a substantial market share.  Companies in this quadrant earn the highest ROIs.
  4. High Market Share/Low Quality.  These are undifferentiated mass market products where the overiding purchase decision is made on price and not quality.  You will benefit from being the low cost producer arising from the economies of scale which in turn come from the high market share.  Companies in this segment earn around mid-level ROIs.
  5. Low Market Share/High Quality.  Despite the low market share, the quality of products in this segment mean that customers are prepared to pay more for your product.  ROI is also in the mid-range.
  6. Low Market Share/Low Quality.  This is really where you do not want to be.  The negative combination of low quality and low market share mean that there is a low return on investment.  If you find yourself here you should consider either changing your strategy or leaving the market and reinvesting your assets and efforts elsewhere.

Market Size

The attractiveness of a market to an investor is often a matter of scale.  The bigger the bettter.  Establishing the market size can often be more of an art than a science.  Here are some factors to help you.

  1. Present and Future Sales.  The right place to start is to work out your future sales projections – how many units, at what price, to how many customers.  Without this you are unable to calculate your market share or to evaluate the reasonableness of your assumptions once the following steps have been completed.
  2. Government Data.  In most countries, there is Government data on the size of product/service markets which can be accessed.  Occasionally, this information will need to be paid for, but much of it is free.  Often however it will not give you the exact answers you are looking for so be prepared for some creative analysis.  For the UK, check out http://data.gov.uk/ for 5,400 free Government datasets.
  3. Trade Associations.  These bodies are more focused on the markets on which you may wish to compete.  As organisation funded by the market encumbents, they are keen to see their markets thrive and develop.  Both formal reports and informal conversations can prove very helpful and informative.
  4. Financial Data from Major Competitors.  If you can identify your major competitors in a market, you should be able to get sales and market data from their annual reports – both publicly and through companies house data (check out www.duedil.com for a free source of this data in very useful format).  If you compile these you can create an empirical data set which at least demonstrates the minimum market size.  If these companies are public, you may be able to obtain investment banking research on both the companies and the sector.  If you have a contact at the bank in question these can be obtained often at no cost.
  5. Customer Surveys.  Asking your customers or potential customers how much they spend in your product/service market is a good way to find out more empirical data.  You can do this inexpensively as an online poll with some form of competition or prize draw to incentivise people to contribute.  These will be subjective by their very nature.  More formal surveys can be commissioned but are expensive.
  6. Google. (Other search engines are available).  The internet is an amazing source of information which can produce some surprisingly useful results.  I would recommend trying a range of search terms to see what comes up and don’t limit yourself to the first 10 results as often lower ranked pages still have useful information.  You can use Google’s keyword tool to find terms related to your business.

Key Success Factors

As a new market entrant, an Entrepreneur should be evaluating how he is going to compete successfully in a market, whatever stage of development that market is at. In my view the key factor is to do it differently, to have a unique angle which differentiates you from your competition.  A me-too clone strategy is unlikely to be successful and less likely to attract the support of investors.  Here are six factors to consider.

  1. Access to Unique Resources.  These resources can be anything in the supply chain.  It may be raw materials, cost efficient manufacturing, low cost or high quality people.  You should think through the whole product/service process and ask yourself how can I do this better, faster, cheaper, to a higher quality, more simply.
  2. Ability to achieve Economies of Scale.  This does not necessarily mean trying to take on the market leader.  If you are at a relatively early stage, ask yourself what improvements can be made to reduce costs which are associated with higher volumes.  This may involve negotiating adjusted terms with your suppliers or changing your processes to make them simpler based on the higher volumes.  Moving to a production line process from a bespoke manufacturing model is a simple example.
  3. Access to Distribution Channels.  If you can find ways to sell your products/services in ways not available to your competition you will get one step ahead of them.  The trick here is not to think how you might replicate what they do but to try to come up ideas which are new and different which can disrupt the market.  Consider markets which are parallel to yours, can you use their channels in a different way to distribute your product/service.  For that channel the opportunity for incremental sales from an existing cost base should be an attractive proposition.
  4. Access to Technology. As a new entrant or a dynamic thinker, using the latest technology to get an advantage over your competitors has never been easier.  The amount of business related tools which are now available at historically low costs has never been greater.  Existing competitors may not be aware of new technolgical developments or too slow to adopt them.  Let agility and speed be your watch words here.
  5. Product Evolution.  Nothing stands still in business but companies often convince themselves that their favourable competitive position will continue in perpetuity.  By moving your product/service forward you can make your competitors look dated very quickly and make your product/service stand out in the market place.
  6. Passion and Persistence.  This should be the greatest weapon in the armoury of the entrepreneur.  Do not become complacent or give up too easily.  Your energy and drive will create momentum which larger, less dynamic companies will find very hard to replicate.

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36 Questions for Startup Entrepreneurs – Market Analysis Part 1

 

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This series has been written for Startup Entrepreneurs and is designed to help provide some information and structure to help them with the planning of their enterprise. In this second part of this six part series, I want to look at market analysis.

One of the key questions any potential investor will ask is what is the Market opportunity.  Not only is it important to be able to answer the question but just as importantly you NEED to know whether there really is a market for your product or service.

I have split Market Analysis into two parts – in Part 1 we will cover Segmentation, Market Growth Rate and Trends.

Part 2 will cover Profitability, Market Size and Key Success factors.

Lets get started with Segmentation. Segmentation You should attempt to segment your market to try to understand where there is likely to be real demand for your product/service.  Here are some areas you should consider:

  1. B2B or B2C?  Are you selling to a business or a consumer market?  This has huge implications for your whole sales and marketing strategy.  If you can sell to both markets you need to have a clear strategy about how you will address these two markets separately.
  • SME or Enterprise?  If you are in the B2B space, is your customer a small or medium size business or a large scale enterprise?  The sales cycle will be longer for the latter but there ought to be more scope to make a sale as they will have larger budgets and cash resources.
  • Niche or Broad? Does your product/service have a narrow focus, on a particular sector for instance or are you going for a broad market?  If you are adapting a niche strategy you can emphasis the uniqueness and focus of your product and perhaps adopt a premium pricing strategy as a result.  If you are adopting a broad approach, you may have to compete on price against an established low cost market leader.
  • Geographic.  Is your solution a local solution or are you going for a national or global market?  If the latter two, you can harness the internet to reach a wider audience.  If your primary market is local, then you will need to focus on channels which are more suitable to local business which may include mobile applications and/or more traditional media routes.
  • Demographic.  Does your product/service serve a particular gender, racial, religious, generational group?  The more you can specify your target market the clearer you can focus your sales and marketing message and your channel to market strategy.
  • Product/Service Evolution?  Can you adapt your product/Service to serve more than one market?  This may mean having a consumer “lite edition” and a larger scale (and more expensive) “enterprise edition”.

Market Growth Rate It is important to evaluate whether there is a growth market for your product or service.  Even if the overall economy is stagnant or even in recession (defined by two successive periods of negative growth across the whole economy) there are always going to be winners and losers, there are always going to be growth markets.

  1. Historical Data.  This is a simple, but not necessarily reliable method of evaluating a growth market.  Take the historical growth rates in the market over the past years – as many as you can get data for – and extrapolate them into the future.  The risk here is of course that past performance per se is no guarantee of future performance.
  • Growth Drivers.  In any product/service market it is possible to evaluate what drives the growth and therefore use these drivers as an indication of future sales.  For example, a population with a high growth rate will become within the next 10-20 years a population skewed towards the younger generations.  For a second example, the Baby Boom generation is a demographic bubble passing through the western nations’ demographics.  If you can provide products and services for these demographic groups, you can out grow the average growth of the market.  These indicators are not all generational.  For another example you could track the growth of complementary products as a proxy for your own market.
  • Product Adoption Curve.  It is possible to be too early into a market as well as too late.  If you are too early, while you may have the best product or service, you will be unable to sell many units as there will only be a few early adopters and there may not be the necessary infrastructure to support your business. This is particularly true in the technology sectors where early video sites and solutions were hampered by the lack of band width to cope with their offerings.  Smart phones needed a 3G network to be able to make the most of their data services.
  • Product Lifecycle.  While the adoption curve looks at market factors, the product lifecycle looks at factors specific to the product.  This has a series of phases starting with early adoption, mass adoption, maturity and decline.  Seen as a curve, the highest growth comes when the product moves into the mass adoption phase.
  • Price Pressures.  Sales growth is important but if your profit per item sold is declining then you are likely to struggle to grow your business.  One of the most significant factors is the level of competition.  Other factors include market saturation, the existence of substitute products and a decrease in brand loyalty.  Michael Porter’s Five Forces model provides a structure for evaluating the profitability of the market assessing, buyer power, supplier power, barriers to entry, threat of subsitute products and rivalry among firms in the industry.
  • Lack of Growth Drivers.  You may need to face up to the fact that there are no growth factors in your market.  In this case you have done well to establish this before spending a huge amount of money setting up your business to serve such a market.  Remember, if you build it, they will come….does not apply in business.

Trends It is worth taking a closer look at Trends as these can be broken down into several factors and should be analysed separately and in specific relation to your product or service.

  1. Industry Dependent Trends.  This needs to be understood in detail and will be by your more experienced competition.  A good example of this applies to computing where the application of Moore’s Law – that computing power doubles every 18 months has been a staple factor of doing business in the sector for 40 years.
  •  Regional Trends.  These can be international regions (Europe, North America), intra-national regions (South Eastern US Seaboard, North East of England) or they may be on an even smaller scale within a US State or an English county.  The answer can only be determined by the nature and scale of your business.
  • Macro Economic Trends.  The credit crunch affected all businesses because it impacted companies ablility to access capital from banks and market confidence.  Governmental interest rates have affected different countries in Europe in different ways – the same interest rate was seen as too low in high growth Germany and too high in low growth Spain for example.  While it is possible to work through these factors, you need to consider them nonetheless.
  • Changes in Price Sensitivity.  Customer behaviour within a market can change over time.  At an early stage in a market’s development, the demand for an innovative product or service can lead to sales with a high price point and profit margin.  As the market matures, the readiness of customers to pay a high price will erode and prices will fall.  The initial high price also encourages competition to enter the market which itself leads to changes in market pricing (Michael Porter’s Five Forces).
  • Demand for Variety.  Products and services evolve over time and customers continually demand such evolution.  The variety within a product/service market will define its complexity and unit cost.  Higher variety means greater unit cost – lower variety means greater standardisation and lower unity cost.  Such variety also impacts the stability and predicability of demand and utilisation of resources.  All these impact profitability.  It may be in a standardised market, a new entrant can offer greater variety and consequently take market share from the complacent encumbents.  This is not static and the trending element of this is crucial – is the market becoming more or less standardised.  Understanding this factor of the market is an important aspect of market analysis and deciding whether to enter a particular market.
  • Service and Support.  The after sales element of a market can either be a cost and drag on profits or can be a substantial business opportunity which may or may not be part of the product/service offerings of encumbents.  Any market analysis should evaluate this and the entrepreneur should decide how this is likely to impact his business.  Do not miss the opportunity to learn from other markets and bring in best practice into your market.  This also often has the advantage of being recurring annual income – another business advantage not to be missed.

 

That is the first three factors for Market Analysis.  In the next post, Part 2, I will cover Profitability, Market Size and Key Success factors

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6MS How to beat Venture Capitalists at their own Game Part 6

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What Next?

Take a look at my FREE video Tutorial “How to Turn Your Great Idea into a Business” which is all about Starting a Business and Raising Capital.

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6MS Eye Piece 19 Dec 2011 – How lean is your Startup?

With the tightening of markets comes an inevitable tightening of financing and the Startup market is not immune.

Hence the rise and rise of the Lean Startup Movement which just at the moment I do not seem to be able to get away from.

Last week I went to a fascinating lunch and met Francine Hardaway and Ed Nussbaum from Stealthmode Partners, an Arizona based mentor and incubator of young technology companies.  Their window on what is going on in Silcon Valley was largely counter intuitive and absolutely fascinating, but that will all have to keep for another day.

One thing was clear and that was venture financing is getting more difficult to raise and, what is more, if you can avoid early and heavily dilutive rounds of financing early on, you the founder are more likely to end up with a meaningful equity interest in your company.

This brings me to a book that I think is a must read – I am half way through it – Eric Ries is the author – The Lean Startup – How Constant Innovation Creates Radically Successful Businesses. (Affiliate Link to Amazon) Eric focuses on finding out early what customers really want and encourages constant trial an innovation to continually refine the business to meet that need.  In this process he advocates a capital “lite” approach which cuts down waste and speeds up time to market with a minimally viable product.  Waste less money by not making things people do not want.  This book shelf should be every business persons bookshelf or iPad.  You can learn more about Eric at his website dedicated to all thing Lean! (not an affiliate link)

I have included an Amazon (affiliate) link below.  Of course, feel free to just go directly to Amazon if you prefer not to use the link.

I am meeting up with Ed Nussbaum again next week and hope to be able to share some of his and Francine’s thoughts with you in future posts.

Please do leave some comments or if you have topics relating to this or anything else to do with the Corporate LifeCycle, please drop me an email – jbdcolley[at]aol[dot]com.

If you like this post and you would like to get more from The Six Minute Strategistclick here and subscribe to my mailing list.  You will get sent a six part video course on Technology M&A.  Then, please go over to Twitter and Retweet to your followers. Until the next time, thank you for joining in the Conversation.

6MS How to beat Venture Capitalists at their own Game Part 5

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How to beat Venture Capitalists at their own Game Part 6

This is the final Part of my Six Part Series, How to Beat Venture Capitalists at their own Game.

We have covered Fund Profile, Investment Style, Deal Flow, Deal Process, Deal Structure and in this post I am going to discuss the Value Added by the Venture Capitalist.

 

Value Added

Why is this important ?- Bringing new (financial) investors into your company is an opportunity to leverage considerable experience and expertise.   You should make sure that your VC investor is not just bringing money to the table.

Its not all about the Money

The VCs will appoint at least one board member and possibly two.  You want these individuals to bring relevant experience and energy to the business and apply these to help the whole board grow the business.

Minimalist Approach

VCs can be lazy – turn up once a month for the board meeting, check the KPIs, ensure the business plan is on track and have lunch. This is not good enough and you should expect them to have read the board papers and contribute meaningfully to the board discussion.

Board Responsibility

They have a board seat and often the right of appointment of the Chairman – these must be put  to good use.  If the VC has the right to appoint the Chairman, make sure that you have some right to vet potential candidates and work hard to try to get an appointee with relevant experience.

Leverage

You should push your VCs to leverage their network to help you grow the business.  One way they can do this is to enable you to network with their other existing investee companies.  You may be able to provide products and services to these companies or simply be able to tap into the experience of the senior management in these companies.

Experience

Experienced VCs have been involved in a series of companies and have valuable insights to share on management strategies and decisions.  This represents a source of good advice.  If you are facing some difficult decisions or having a management offsite to discuss strategy, don’t miss the opportunity to invite your VCs to these events so that you can pick their brains. 

Again – Its not just about the money!

You should ensure that your potential investors understand that this is your expectation and you will expect them to contribute more than just cash to the growth of the business.  If they are not up for this, they may not be the best investor for your company.

Thank you for coming over and joining the Conversation.  I hope you found this series of interest and it has helped you with your understanding of how Venture Capitalists think.  Please do leave some comments or if you have topics relating to this or anything else to do with the Corporate LifeCycle, please drop me an email – jbdcolley[at]aol[dot]com.

What Next?

Take a look at my FREE video Tutorial “How to Turn Your Great Idea into a Business” which is all about Starting a Business and Raising Capital.

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