Positioning Your Company to Raise Money (or not)

February 16, 2010 Leave a comment

Sometimes, after a series of meetings with an entrepreneur who professes that he wants to raise venture money (as venture has moved further along the food chain, this is a misnomer), I just want to bang my head against the wall. This is especially true when I am dealing with a founder/entrepreneur that comes from a technology background. When will you guys realize that having the best technology means very little at the end of the day??? Really, have we all forgotten about the VHS / Beta example?

In this particular case, I will acknowledge that this Company has developed what appears to be a solid web-based publishing technology. This business does have  the potential of being the next big winner (10X) IF the business is positioned and executed properly. Unfortunately, the biggest hurdle to success is the entrepreneur himself.

Over the years, I have seen that the quality most entrepreneurs possess in greatest abundance is their ability to delude themselves into thinking that they know better. They know better how to go about raising money; they know better how to go about selling their products/services (even though this is not their area of expertise); and they know better how to make all the pieces come together, even if they have never had experience doing this.

If this is indeed true, why do money sources (smart ones, that is) focus so much time and attention in evaluating the quality of the management team? It’s all fine and good to have a great looking business model, but the trick is in execution. I would much rather see a strong management team successfully on their path to executing a “decent” business model than a less than a mediocre management team attempting to execute an “exceptional” business model.

Doubtless we have all been taught to prioritize somewhere in our lives, yet early stage entrepreneurs still go about grasping at straws, working 100 hours a week as if that is a badge of honor; quite often, they make very little progress. The saddest part of the tale is that these  they often end up running mediocre businesses (if they are lucky; or is it unlucky?) after they have let the window of opportunity pass them by.

On a practical level, entrepreneurs should create a Top 10 List for their business. List the highest priority items first (items with the potential to make greatest impact) and allocate the appropriate level of resources to this task; it’s always a good idea to pad the estimated amount of resources as you can always shift those around if you are luck enough to come under budget. Continue down the line until you get to a list of 10 “must-do” tasks in decreasing importance. Look at this list every day. Hell, look at this list 10 times a day to make sure that you stay on task.

Having said all that, you have to admire the optimism and tenacity exhibited by entrepreneurs. It’s just frustrating to see them make obvious mistakes time and time again and ultimately get in their own way of success.

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Anatomy of a Start-up: 3

February 16, 2010 Leave a comment

When I left off last time, all the pieces seemed to be coming together for a successful new business. We had the initial players in place and the market conditions appeared to be ripe:  (1) We have a market that is highly fragmented and disconnected; (2) as unfortunate as it is, the rate of Autism has been increasing exponentially from 1 of 250 to 1 in 91 (1 in 56 for boys); and (3) there is an acute shortage of qualified providers to meet the needs of the market that continues to grow, particularly pressing as there is a limited period of time in which children diagnosed with autism are highly receptive to intervention methods.

So, we have given birth a new business that is driven by a partnership / venture model with multiple parties contributing critical elements of the business model.  On the one hand, this provides the benefit of speed to market as very few of the pieces of the business model need to be created. However, the downside is the issues related to coordination. The biggest issue that Special Learning encountered to date is the timing of the deliverables. Predictably, deadlines keep slipping as unanticipated things happen and as focus ebbs and flows, depending on the needs and demands of the partners’ core business.

Luckily, we have experienced little or no conflict. As this is a “social entrepreneurship” venture, all the parties have been relatively aligned in terms of the mission of the organization. Of course we want to make money by creating a value-add business model, but there is something to be said for the fulfillment of knowing that you have the potential of making a contribution.

So, we continue to move along at a pace that is slower than one would hope for, but hopefully the end (or the intermediate) result will lead to a stronger launch.

Anatomy of a Start-up: 2

February 5, 2010 Leave a comment

To continue from the last post…

At the same time that all this activity was taking place, I was engaged by Comprehensive Care Corporation, a behavioral health network in Tampa for an equity raise project. As I was conducting my due diligence, it came to my attention that this company had developed an expertise in Autism, specifically in the area of Case Management. This is a service where one individual coordinates all services needed for the autistic client (behavioral, physical therapy, occupational therapy, speech therapy, neurology, etc.). This coordination of care is a service that can bring significant benefit to parents of autistic children, particularly those dealing with medical conditions and require a number of different services. As Comprehensive Care Corporation was primarily dealing in B2B (i.e. selling to insurance companies), here was a perfect opportunity to roll this service out to consumers.

All the pieces seemed to be coming together to create a consumer facing business providing products and services to meet the needs of children with autism.

Hence begins the journey of Special Learning, Inc.

Stay tuned…

Anatomy of a Start-up: 1

February 3, 2010 Leave a comment

People start businesses for a lot of different reasons. I cover all the usual reasons when I teach my entrepreneurial leadership class, but it dawned on me that I don’t cover the reasons behind how  someone might “fall into” being an entrepreneur.

Case in point: In 2009, I was on retainer with a Client to do  an equity raise to fund a category roll-up within the early childhood education industry. Somewhere along the process, the wheels came off the tracks (as it often happens) while the Client decided whether he wanted to sell the business to a third-party (an opportunity that seemingly came out of nowhere).  By the way, there is nothing an investment banker hates more than projects being derailed, particularly if he/she has spent significant amount of time sourcing the deal.

In any case, once the project was put on hold, I encountered difficulties collecting on my retainer (surprise?). To be fair, it certainly wasn’t intentional on the part of the Company since cash flow issues were hitting even the largest of the industry giants at the time (remember the Automotive industry?).  As I tried to reconcile myself to the fact that I had yet another bad debt to write-off, I had a thought…

The Company, which had been around for over 15 years, had developed a comprehensive line of early childhood development products that were considered the best in the industry (at least according to unsolicited testimonials from moms). The base products were subject-matter oriented learning DVD’s with product extensions that included books, flash cards, puzzles, plushies, etc. Among the numerous testimonials, there were several that were submitted by parents of special needs children, particularly those with Autistic children, that spoke glowingly about the amazing benefits of these products on their children’s learning.

So, flash back to about six months ago when I attended an Autism conference in St. Charles, IL. Since it was in relative vicinity to where I lived and my Client was exhibiting, I decided to spend a few hours walking the show. During the show (incidentally, I try to avoid trade shows as much as possible) I met a Company called Spectrum Technologies. I stopped by their booth because they had an array of wooden toys that could support the creation of a comprehensive Learning Kit idea that I had been toying about for my Client. (My projects generally include a market / business development component as well).

To my surprise, Spectrum Technologies was more than a product company. It was actually a software company that was launching a new Autism Software Technology targeted to consultants, clinics and organizations that used the  ABA (Applied Behavior Analysis)  teaching methodology in working with autistic children. They were familiar with my Client’s products and were very excited about developing a partnership between the two organizations.

OK. This concludes the first installment in a series that will take us through the process of starting (and hopefully growing) an entrepreneurial venture… tune in to the next installment.

Entrepreneur Delusions During a Capital Raise

February 2, 2010 2 comments

After having been in the investment banking business for over 10 years, I suppose I have gained some knowledge in this area. First of all, there is investment money out there (lots of it), primarily in the form of equity (I mean venture capital and private equity). Unfortunately, given the current state of the banking industry, that’s all we entrepreneurs have going for us for the time being.  And the banks are posting record profits? Go figure…

Entrepreneurs are a funny breed (myself included). I don’t think that I have ever run into a true entrepreneur who didn’t believe that their product or service was the “best thing since sliced bread.” However, to be brutally honest, not all ideas deserve to get funded. The problem is that entrepreneurs gets so wrapped up in own hype that they forget to take off the “rose colored glasses.” In order to combat the “rose colored glass syndrome,” here are some things to consider:

(1) My product (or service) is going to revolutionize the world.
KC Comment – Really? How many fantastic products or services have been invented failed to gain any traction? Do you really think that there aren’t alternative or competitive products in the market? Look again before you approach any professional money source and risk embarrassing yourself (or your valuable referral source).

(2) I have the greatest Board of Directors (or Advisors).
KC Comment –  Just because you have people on your board that have big titles or PhD’s does not translate into credibility. The best Board is comprised of people that are willing to roll up their sleeves and use their connections to help you grow your business. Don’t just stack your Board with people with seemingly impressive titles and delude yourself into thinking that professionals won’t be able to see through this in 30 seconds. If your business model is so great, you shouldn’t have too much difficulties getting industry leaders to sit on your Board. Let that be a litmus test.

(3) We are going to achieve $50M in sales with $25M in operating profits within twelve months.
KC Comment – If you really believe this is true then you should do everything in your power to avoid giving up any equity in the business. The best performing companies have to strive to generate operating margins in the high 20’s. Doesn’t starting off with the premise that you can do better than industry giants seem a little wacky? However, know that you’re in good company as over 80% of the business plans I see have financial models that predict these kinds of numbers.

(4) We plan to exit in 3 years with a 10X multiple.
Hmmmm. Given that venture capital companies are currently stuck with several portfolio companies (with no exit in sight) and these people are generally thought to be the “best of the best,”  there does appear to be a little disconnect between an entrepreneur’s wishful thinking and reality.

(5) Every money source is valuable.
This is probably the most common mistake that I see entrepreneurs make. They usually get themselves in such a financial bind that they blindly chase money, without any regard to whether the investor has any appetite in the deal. They private equity market is categorized by (a) stage of investment and (b) industry/sector focus. If there isn’t a good fit on both investment stage and industry focus, all you are doing is wasting your valuable time in meetings that won’t generate the outcome that you are hoping for.

Ok. Now that I have spent a fair amount of time bashing entrepreneurs, I promise to provide a counter balance on my next post.

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Hello world!

February 2, 2010 1 comment

Welcome to WordPress.com. This is your first post. Edit or delete it and start blogging!

Well, I decided to leave the generic post above to commemorate my first post. I would imagine that for anyone over 40 blogging is a new experience??? I am “dipping my toes” in this new world because over the years, I’ve accumulated a lot of experiences, some of which might actually be helpful to someone out there. More often than not, it’s probably those mistakes that might resonate with, and hopefully stop, someone from making the same mistake. Maybe??? Wishful thinking???

Categories: Uncategorized