How to Turn Your Great Idea into a Business Part 4

So far in this Video Series we have considered six topics around the subject of How to Turn Your Great Idea into a Business.

They were:

  • Market
  • Profit
  • Plan
  • Capital
  • Value
  • Investor

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How to Turn Your Great Idea into a Business Part 3

Well, here is Part Three – I hope you are enjoying my Videos so far!

In this video I want to take a look at Value and Investors!  I think its self explanatory – click Play and see for yourself!

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How to Turn Your Great Idea into a Business Part 2

In this, the second video in the series, I want to move on and take a look at the Business Plan and Capital.

I think it is true to say that nothing happens without these two things and it is important that you give them due attention.

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How to Turn Your Great Idea into a Business Part 1

This Week I want to share a short four part Video Course with you.

In this Video, I want to consider some of the key aspects of Turning Your Great Idea into a Business – that’s what Starting A Business is all about – Right?

In this first video, I am going to take a look at the Market and Profit.   I hope you enjoy it 🙂

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Raising Venture Capital? Before you do, take a look at my Course!

Optimized-Start Up Video 1 Getting Started.001

 

Are you raising Venture Capital?

If you are you might like to meet up with me and spend a couple of hours asking me lots of questions about the process and what you should do?

 

Yes, I know time is precious.

What if you could ask all those questions and not have to spend half a day coming up to London to meet with me?

Here is a brief introductory video…

You can find the Course here – https://jbdcolley.com/startup

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Should Start Ups have a CFO?

 

If you are following a lean start up philosophy, the cost of a full time CFO may seem like a luxury.

After all your focus should be to create a minimal viable product and get it out to prospective customers.

 

If you don’t have any revenues why would you want a CFO?

While there is no cut and dried answer to this question, here are six factors to consider when evaluating whether to hire a full time CFO.

Are you sleeping at night?

If you are a CEO and you do not have a firm (and detailed) grasp of your company’s financial position, you may wake up in the middle of the night worrying about it.  Remember many young businesses fail because they run out of cash when they are growing too fast – over trading.  If you are in this position, it may be time to make that CFO hire you have been putting off.

Decision making

If you do not have a detailed grasp of your financial position of the company it is very difficult to make objective and informed business decisions.  Should you invest, divest, expand or contract?  What is your profit margin? How do your fixed and variable costs break down?  Can you financially evaluate two possible options?  Making bad business decisions can cost you far more than the cost of a CFO.

Complexity

Complexity can be measured in a number of ways but none of them have anything to do with absolute levels of revenue.

  • The number of products or services you deliver
  • The number of countries in which you operate
  • The number of suppliers to your company
  • The number of customers
  • The number of employees
  • The complexity of your channels to market

These are just six examples.  As your business becomes more complex, the need for a CFO grows with the added complexity as your finance function will need proper leadership and control.  A good check is to see how long it takes for invoices to go out or how quickly the monthly finance report is produced each month.

Size

Size of course plays a role in this discussion.  As businesses grow in size they need more structure and systems and this required functional experts within key roles, including finance.  The complexities of the accounting and tax systems alone mean that such matters cannot be left to novices.  Even if you can rely on your accountants to do much of this work, there comes a time when outsourcing the problem is not the answer.

Growth

Steady state businesses have a predictability of sorts which means that you may not need a CFO.  If your business is growing quickly (or equally if you are contracting), managing the considerable day to day challenges requires an expert in control of finance. If there is any doubt in your mind about your cash position and your future cash flow forecast either way, call for the recruitment consultant and get hiring.

External investors

One of the key success factors in attracting external investment is being able to present a comprehensive and financially coherent business plan.  The preparation of a financial model is only the start and investors expect regular, monthly reports on the performance of the business and how well you are keeping to plan.

This work is best achieved by a finance director who will create confidence in the financial competence of the management team as a whole.  Just as importantly, if this work has to be done by the CEO, he (and I mean you) will not have as much time to carry out his main function of running and growing the business, particularly in client facing activities.

So, it’s down to you then.  This is a key decision for you to make for your business and it deserves careful evaluation.  Hopefully, this will help you to address the issue objectively.

Six Minute Strategist Start Up Course – Is this for you?

Are you struggling to get your Start-Up Started?

Do you need to learn more about Business and Financial Plans

Do you need to learn how to pitch to investors?

Take a look at my brief Video…

Now go and check out the Course at https://jbdcolley.com/startup

Thank you, as ever, for joining the Conversation!

The Financial Times Asks an Expert!

 

I am very grateful to Jonathan Moules, the Enterprise Correspondent of the Financial Times, for asking me to contribute to the Entrepreneurship Section in the Money Supplement of the Saturday Edition of the paper.

 

Jonathan has written a piece on MixPixie – an online service which enables you to customise a CD which they then produce and send to the recipient of your choice. Jonathan explains how the business was set up by Buffie du Pon, Adam Goodyer and James Perkins as a result of a misdirected valentines present – a CD which was posted through Buffie’s letter box by mistake.  You can find MixPixie’s site here.

The company’s challenge is how to scale its business in a market where sales of CDs are declining and today’s conventional wisdom is that music delivery is only competitive online. In my view one of the USPs of this is the Social aspect of the business – the concept that you choose some tracks and design a bespoke CD cover for someone important to you and share that music with MixPixie’s product.

I felt that MixPixie really needs to reinforce this aspect of their business as well as working hard to find scalable opportunities. Using my Six Minute Strategist Methodology, I have set out Six Suggestions which MixPixie might consider to help Scale their business, five of which made it into the Financial Times article.

A Free Smart Phone App– customers can log in, mix and order their CDs from their Smart Phone or Tablet.  In order to make their product easier to access, MixPixie needs to have a “mobile” solution – an App optimised for both smart phone and tablet which would enable their customers to access their site and create a CD without having to go back to their desktop or laptop computer. This needs to be on all the main platforms: Apple’s iOS, Google’s Android and Microsoft.   The App itself should be simple to use but should also incorporate some of the Social Media integration discussed below.

Work Directly with Musicians and Bands – a Service to promote back catalogues or “Special Mixes” for Festivals; the Bands own the rights already.  While Bands are always promoting their latest recordings, MixPixie would enable Bands to produce limited edition releases of their back catalogue which could be sold at special events, such as Gigs or Festivals. If the Bands produced these in limited numbers and signed some of them, they would make great collectibles for their fans and offer MixPixie an entry to a new market.  As the Bands already own the rights to the tracks, the project could be cost effective for both sides.

Corporate Customers – Companies are always looking for original ways to promote themselves to their clients and, in my view, a carefully selected mix of tracks at specific events could provide a very unique and appreciated gift.  This could be volume business for MixPixie and once the relationship was initiated, the CD could either be remixed for each event or the order simply repeated.

Digital Download Bonus – While I appreciate the USP of MixPixie is the CD, the real value in my view is the personalisation of the gift.  For a small additional fee, the customer could enable a digital download so that he/she could get a copy of the tracks.  It may be that this counts as two licences and may therefore only be available to the person to whom the CD is being sent.

Social Sharing on MixPixie – Social Media was made for this. Music and Sharing.  I would suggest that MixPixie have a one click enabling button so that you can share your music selection and occasion category on their site.  When new customers come seeking music for their gift occasion, they will be able to see what other people have chosen in the past.  This could be sortable by artist, songs and most popular selections to make it more useful.  This should encourage other to use the service.

Pinterest – This new and highly visual network would be the perfect place to encourage customers to post their CD designs on Occasion based Boards on Pinterest.com.  This does not necessarily need to include the personal messages but would encourage sharing and give customers ideas for gifts and designs.  Pinterest is a highly viral site and this would also increase awareness of the service as each cover pinned can be linked back to MixPixie and encourage new customers to come over and find the site.

At present there is also a great SEO advantage to Pinterest.  If you put a link in the description this gets full Google Juice back link benefit for the site.  Pinterest is currently Page Rank 6. This is entirely white hat and as Pinterest becomes an increasingly important site in Google’s eyes, this benefit will only improve over time.

They have first mover advantage and need to capitalise on it.

Vinyl next please, Miss Pixie?

If you enjoyed this article please share it and consider subscribing to the mailing list.

Thank you for joining the Conversation!

Can you tell your PEs from your VCs? Part 3

 

In the first two parts of this series, I have discussed how to tell the different types of Venture Capital and Private Equity firms apart.

In this, Part 3, I will discuss how to approach VCs, what they are looking for in an investment and Six reasons why Business Plans are rejected.

Approaching Investors

Assuming you have now identified your short list of investors from the hundreds out there, here are some key questions to ask yourself.

  1. How should I prepare my business information to make it attractive and digestible to the investor?
  2. What do investors expect to see in a Business Plan?
  3. What can we do to ensure that our deal gets attention within the firm?
  4. What sort of deal are we promoting and what is the best way to structure the financing of the deal which will give existing shareholders the best chance of making a high return while still being attractive to the investors?
  5. What sort of deal terms are investors likely to put forward and how are these likely to compare or vary between investors?
  6. Can we handle these negotiations on our own or should we find someone to help us manage this process?

What are Investors looking for?

Management Teams

Investors invest in strong and credible management teams backed by a strong business plan (focused on a strong business proposition).  Remember that if Investors see 500 to 1000 plans a year (and they do) but they only do 5 to 10 deals a year, your odds are no better than 100-1 against.

A Clear Business Plan

The management team need to put together a strong, well laid out and comprehensive business plan which will be easy to read, clear, concise and compelling.  The whole management team must be involved in the preparation of the plan and know it backwards.  This ownership is key to being able to communicate the plan to investors with credibility.

Realistic and Honest

The plan should be realistic not optimistic.  At the same time don’t do yourself down too much and expect the investors to run downside scenarios against you.  Understand your market and its size, be realistic about the strengths and risks posed by your competitors.  Be honest and straightforward, don’t leave skeletons in the cupboard.  If due diligence subsequently reveals unexpected information, your potential investor will walk away.

A Compelling Business Case

Your plan should put forward a compelling business case for investment in your business.  You are competing with other potential deals here and your case must convince the investors that yours is the deal they want to do.

Three to Five Years

The Business plan should scope the current business but prepare a financial plan going out at least three and preferably five years.  I always recommend that you prepare a financial model on a 5 year monthly basis.  It is easier to summarise this into annual periods than to try to reverse engineer an annual plan into 12 monthly segments.

In operational terms you should be detailed about your plans for the first 24 months.  Don’t forget you are explaining where you are now, where you want to get to and the route from here to there.

50 Page Document

I will provide check list outlining the detailed structure of the financial plan in the Six Minute Strategist PRO when it launches but in essence you should be aiming to produce a word document of up to 50 pages.  The financial model can be bound separately, if you print it out.  Any bulky data sets should also be confined to the back of the document in apendicies.

Executive Summary

The front of the document should contain an executive summary which I always recommend you write once you have written the main plan.  I have never understood how someone expects to summarise a document that has not yet been written.  This part of the document must sell the deal as it is likely that this is the only part most of your audience will read initially when trying to select which deals to look at more closely.

Understand your Audience

Try to understand your audience.  Investors want to make a good return on their investment and minimise their risk of not getting their money back.  It can help to talk to management teams from their portfolio companies if you can reach out to them to better understand the style and approach of a particular house.

Six Reasons Business Plans are Rejected

  1. The presentation is vague, not well researched, verbose, non specific.  Use short punchy specific sentences – like this one.
  2. There are factual errors or mistakes in the financials
  3. There are specific omissions – possibly hiding negatives – which are not addressed honestly.  When preparing a SWOT analysis, make sure you are candid about the weaknesses and threats!
  4. The financial model is too optimistic – avoid hockey stick scenarios.
  5. There are too many uncertainties and risks associated with the plan.  These may be factors outside of the control of the management
  6. The returns are too low.  As a rule of thumb, Venture Investors are looking for 5x to 10x returns on early stage deals.  Private Equity investors seek to double their money in three years and treble it in five.  This equates approximately to an IRR of 30%, but remember cash multiples are key, IRRs can be flattered, particularly over shorter time scales.

In the final Part of this series, I will discuss the characteristics of a good financial plan and Six ways investors make money out of deals.

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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Can you tell your PEs from your VCs? Part 2

 

In the first Part of this series I examined the  different types of Venture Capital and Private Equity firms.

In Part 2 I am going to discuss the factors which make up their investment criteria.

 

So, having worked out the type and stage of deal you want to organise, what else do you have to think about?

Size of Funds

It is important to find out the size of the current fund that the investor firm is currently working with.  This dictates the next two factors.  As a rule of thumb, take the fund size and divide by 20.  This will give you an idea of the ideal size of “equity check” that the fund would like to be investing.  I say “Equity Check” because the investment can be increased by syndication with other investors, mezzanine and debt finance.

Minimum Investment

This is the minimum equity check.  If your deal is small than this, you are talking to the wrong investor.

Maximum Investment

There will be a limit to how much an investor will want to commit to a single deal.  Again as a rule of thumb, divide the fund size by 10 as most funds will have a formal limit preventing them from investing more than 10% of the fund in a single company.

Fund Life Cycle

This is important.  Funds typically have a 10 year life span.  In the first four years the investors work hard to invest the fund. In years 5-7 they will co-invest but probably not invest in new deals.  The final three years are years of harvest, selling the companies they have invested in and returning money to their investors.  You can see from this why these investors aim to invest in a company for three to five years.

Sectors

This of course is critical.  A Cleantech fund is not going to invest in a manufacturing business.  Find out what the investors sector preferences are.

Geographies

Funds nearly always specify which countries they set out to invest in.  This may sometimes be couched in vague language, asking for “operations in the UK”.  Often UK funds specify that the company must be headquartered and incorporated in the UK.

Office Locations

On the face of it this is not a major issue but investors do not like to invest in companies where the operations are a long way away.  Again as a rule of thumb, the smaller the company and the earlier the stage, proximity is a distinct advantage.  For a major Leveraged Buyout, distance is less of an issue.

Contacts

Finally, you might have lined everything up but now you need to approach the investor.  It is a distinct advantage to either know someone or to get a warm introduction to the firm.  I have spent many years cultivating contacts in VC and PE firms for this reason.  That having been said, if you have a great track record and a brilliant business opportunity, they are not going to turn you away.

In the next part of this four part series, I will discuss the approach to investors, what they are looking for and 6 reasons why Business Plans are rejected.

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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Can you tell your PEs from your VCs? Part 1

 

Can you tell the difference between a Private Equity firm and a Venture Capital firm?

Before you start to think about trying to raise finance from Private Equity or Venture Capital providers you need to make sure that you are approaching the right type of investor.

Finding the right investor can be like looking for a needle in a haystack.  The British Venture Capital Association has over 200 investor member companies.  If you add non-members to this, which will include US and European investors there are over 1,000 investors (my database for the UK is currently at 1,093 possible sources of finance) who you have to screen in order to arrive at a short list of firms to approach.

So, how can you tell the difference between Private Equity and Venture Capital and then understand the different types of companies in each category?

Lets start by differentiating between Venture Capital and Private Equity.

Venture Capital

In theory, Venture Capital funds invest in companies at an earlier stage and with greater risk.  As a result they are seeking higher returns (as some of the companies WILL fail.)   The earliest stage they may come in is in a Seed Round, typically investing in the hundreds of thousands (pounds or dollars).

The next institutional investment rounds are lettered sequentially, Series A, Series B, Series C etc.  These rounds tend to increase in size and are normally done at increasing valuations (up rounds).     As the investee company matures, it may need some additional finance ahead of an IPO, a pre-IPO funding round would then follow.

Private Equity 

Private Equity Funds also have their market segments and specialisations.  My database of PE funds recognises the following categories.

  1. Acquisition Finance – providing capital to assist with M&A transactions
  2. Public to Private – delisting public companies from the Stock Exchange
  3. Buy and Build – initial acquisition of a “platform” to which additional companies are added in a sequence of strategic or consolidating acquisitions.
  4. Equity Release – providing capital to enable founders to put some money in the bank, to settle mortgages and school fees for instance
  5. ReCapitalisation – providing new capital for an existing deal. A company may be struggling and need additional capital to continue trading.  This requires a reorganisation of the shareholding structure, in which the original investors often lose out.
  6. Bank Refinancing – Often companies, with bank debt from an orginal deal, may struggle to meet their debt obligations and these funds put equity in to relieve the financial pressure.
  7. Spin Out – the opportunity to acquire a division of a larger company.
  8. Bridge Equity – where the investee company needs some short term finance to enable it to achieve a project/milestone or objective ahead of another round of financing.
  9. Secondary – the purchase of a company from another private equity or venture capital firm
  10. Active – inteventionist investors who come in to force boards to take a more proactive role in realising value from underperforming assets
  11. Rescue/Turnaround – investing (cheaply) in companies in financial distress and where often the only other alternative is a call to the Administrator
  12. Distressed Debt – the acquisition of debt in companies in difficulties, at a discount to face value
  13. Special Situations – a catch all term to cover situations which may be complex or where the underlying company is in difficulty.  The additional capital can unlock the problem, releasing value for shareholders
  14. LBO – Leveraged BuyOut – generally a term for larger deals where a large company is acquired using a complex blend of debt and equity
  15. MBO – Management Buy Out – acquisition of the company from original shareholders by the encumbent management
  16. MBI – Management Buy In – the same as an MBO except that the management in this case come from outside the company.  The hybrid of this is the amusingly names BIMBO – Buy In Management BuyOut
  17. Expansion/Development – Growth capital for the expansion of the business.
  18. Mezzanine – a hybrid between debt and equity.  Interest rates are often in the 12%-18% range, part paid and part rolled, often with equity warrants.  The interest cost is high but the equity dilution is low.
  19. Venture Debt – this is effectively bank lending but not from a bank, from a fund
  20. Junior Equity – a form of equity with a lower return and less rights than the normal equity. It ranks behind preference shares and ranks behind these shares on a return of equity.  When there are different ordinary share classes with different rights, those with the lesser rights will be “junior” to those “senior” classes with more rights.
  21. Listed – investments in listed companies shares as an equity investment leading to  a minority interests.  These investments have to conform to the rules of the Stock Exchange.
  22. Purchase of Quoted Shares – similar to the previous item, but more of an investment strategy than an investment in the company

Don’t forget just identifying the investor is just the start of the process, now you have to get their attention.  To do this you need to understand their investment criteria in depth and that is the subject of the next post in this series.

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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