Archive for the ‘Funding’ Category
Tuesday, September 8th, 2009
by: Geoff Ficke
The world is currently fixated on the international credit crisis and the role banking has played in this debacle. We take it for granted that commerce flows quickly and accurately across borders and frontiers. A resident of Maine can purchase a tank of gas at home, or in Italy with the same credit card. The purchase will be accurately debited to their account, their credit limit will be adjusted and the merchant will receive an electronic transfer of the charge into their account almost simultaneously. This type of commerce happens many millions of times each day and we take its simplicity for granted.
The history of the rise of organized banking is a bit more plodding and evolves from a most unlikely source. Today our knowledge of the Knights Templar is garnered mostly from popular culture such as the Indiana Jones movies. The history of this iconic fighting force, and their evolution into the first international commercial group of the middle ages is as amazing a tale as can be told in any fictional movie or novel.
The Knights Templar was formed after the initial Christian victory in the First Crusade to take Jerusalem from the Muslims in 1099. Pilgrims from all over the Christian world wanted to make the pilgrimage to Jerusalem and the Holy Land. However, travel at that time was exceedingly dangerous. The Knights Templar was first organized as a monastic order to protect the pilgrims as they traveled. They took a strict vow of poverty.
Over the next 200 years the order flourished and developed into a renowned fighting force. With their sturdy mounts, white hooded tunics displaying the Red Cross, and shiny armor, they lead the way into numerous battles against the enemies of Christendom. The vow of poverty was strictly enforced, but many royal and noble families delivered their sons to the Knights Templar to curry favor with the Papacy of the Catholic Church.
The Knights Templar enjoyed favored status with popes and archbishops from all over Europe and North Africa, for their reverence, gallantry and honesty. They were often rewarded with alms, farms, lands and livestock. Their power grew as the public recognized the special relationship they enjoyed with the clerical hierarchy of the Church.
Many pilgrimage makers came to depend on the Knights Templar to hold their valuables in safekeeping as they made the difficult journey. The order created secure safe storage facilities at strategic locations along the most used routes. They developed a type of written chit that verified that they held certain monies and valuables owned by the bearer. Upon arrival in the Holy Land, the bearer could visit a Knights Templar outpost, present their receipt and receive monies, bullion or goods in kind, the equivalent of that left behind in the order’s care.
This was the first form of bank cheque and was probably the earliest form of organized international banking. The system evolved as the Knights Templar gained vast new riches, even though they were still vowing to live a life of poverty. Previous to their development of rudimentary banking products most trade was accomplished by crude barter. They became the richest entity in the world at that time and began to suffer the increased scrutiny of their historic protectors in the Catholic Church.
By the 14th century, the church moved to disband the Knights Templar and martyred many that were captured. The order became a secretive underground society and rumors of their activities and continued existence are legend to this day. The locations of the lost gold, silver, jewels, art and religious artifacts that the Knights Templar acquired and hoarded in their many adventures is also the stuff of fables and lore. The lost Holy Grail, and all of the fabulous tales attached to this famed relic from the Last Supper, is often connected to the Knights Templar.
The commercial activity that the simple, novel creation of a system for verifying bank guarantees is actually the Knights Templar’s greatest contribution to mankind. This simple transactional device has proven far more valuable historically than their military conquests and reputation for living pious lives. It is certainly not what they are best known for. But it is an invention that has positively effected commerce and productivity to this very day.
Posted in Funding
Monday, August 24th, 2009
by: Geoff Ficke
You are an entrepreneurial inventor with marvelous ideas in your area of expertise. The ability to create models, prototypes and concepts flows easily from your fertile brain. Nevertheless, all you have to show for your creative efforts is a garage full of dead end stuff, despite all of your efforts.
Many creative people have an area of knowledge in which they excel. They are in their comfort zone there and can appear to be a master of this precise universe. However, taken just a bit outside the protective lines of this tight little planet, they are lost souls. They can not communicate their brilliance, demonstrate their value and commercialize their creativity.
This is all too often a loss for the economy and society at large. A great invention that does not arrive in a timely fashion to the marketplace is a huge loss on many levels. Innovation is the juice of life for a vibrant economy. To be deprived of any source of ingenuity, no matter the reason, is to limit the range of possibility so vital for discovering big, new ideas.
A relatively little used option, for inventors and entrepreneurs, with limited ability to fund or license their product, is the Strategic Alliance. A Strategic Alliance enables a product, invention or service to become absorbed within the structure of a going business. The business handles all aspects of production, sales, marketing and finance as if the item was invented in house. In return, the inventor receives an income stream for a defined share of the profits generated by the product, a consulting agreement or employment working in his area of expertise on the project.
Many successful Strategic Alliances occur when an inventor, recognizing his areas of weakness, is knowledgeable about industry conditions, patterns and networks within this universe. Software writers, engineers, chemists and technicians often utilize this narrow gauge form of networking. It is a strategy available to any inventor having specific industry experience with application to their novel product.
The Strategic Alliance approach minimizes the need to approach strangers from outside your area of expertise. You know your field, you know the players (good and bad), you know the industry trends and you, better than anyone, know the innovations craved within this area of business. Familiarity with these factors gives the creative mind a leg up in pursuing an alliance that will enable a successful commercialization of their invention. Many people are immensely more confident when speaking the language of their trade than communicating in any other arena. Take advantage of this inside baseball edge!
The successful Strategic Alliance usually occurs much quicker than funding or licensing. The parties to the alliance, typically coming from the same business category, communicate in terms that are direct, and short circuit the usual learning curve required when negotiating with outside, less than knowledgeable investors or bankers.
An added benefit to the partners is the minimization of investment funds required to ramp up a new project. The business side of the alliance usually has specific experience in the product category. Most, or all, of the infrastructure needed for successfully marketing the invention is already in-house. From secretarial help, to warehousing, to manufacture, to finance, this is a going business with a complete set of assets. The lead-time from agreement to actual shipment of the item is often greatly reduced.
Strategic Alliance can be a win/win for both parties, and in my experience is usually the result offering the best outcome for the acquirer of rights and the inventor when they come from the same business category. The shoe fits well here for both parties.
It is important for the creative, but inexperienced, inventor to seek professional assistance when negotiating terms and conditions of the Strategic Alliance Agreement. The excitement of making a deal, and working with people from within their specific industry, should not get in the way of prudence. Contracts are often complex, and it is important to circumvent disagreements later, so clearly define each parties full range of obligations and conveyance.
Posted in Funding
Tuesday, April 28th, 2009
by: Geoff Ficke
We live in perilous financial times. As the markets have imploded, home prices cratered, jobs lost and incomes uncertain many people have become very risk averse. Very understandable! Many of us are more focused on maintaining our resources than expanding them in the face of so many unknowns.
The American dream to successfully start and grow a self-owned business is always going to be with us. However, in times like these, some entrepreneur’s have become less willing to take the plunge into the ownership class. They are willing to wait until things settle; markets calm and funding sources return to prior levels. This is sound strategy for the timid, but these people are probably never going to be truly successful as business pioneers.
Recently I was in Spain and read a story about some French film students. Like so many creative artists, these young people are passionate about their art and fully committed to their dream of creating full-length films, in this case human rights documentaries. This is a very hard type of project to fund, even in the best of times. The market is brutally competitive, distribution is scarce and profits are very elusive for all but a few of the best productions. How in the world would these students find the funding they so desperately craved?
They did it the old fashioned way: they got creative. They sold vanity to investors.
Have you ever sat through and paid attention to the credits listed so fully at the end of any movie or television show? They seem to scroll on forever. Each caterer, assistant caterer, food taster, drinks coordinator or executive chef is listed, fully named and titled. Over the past 20 years the number of producers, executive producers, assistant producers, joint venture producers and specialty producers credited has grown exponentially. This gave the students a simple, brilliant idea: We will sell credits for investment.
They started with other students, family, then used the internet. Credits were sold for various levels of financial contribution to the production, some for as few as 10 euro’s. It is amazing what some people will do to see their name in lights. Money poured in and the students were sufficiently financed to complete their film, present it at European film festivals and arrange distribution deals in various European media.
This is but one example of how serious, passionate entrepreneur’s search for alternative paths to bring their passion to markets. The opportunity has never been greater for those willing to get in the game. Is money tight? Of course it is. Has new business startups slowed down? Of course it has. Are people still trying to launch businesses, follow their dreams and present consumers with better products? Of course they are.
When business is booming, venture capital seemingly flowing endlessly and entrepreneur’s crawling out of the woodwork, well guess what, there is relatively speaking, no more opportunity that there is in soft times. In up cycles there is more activity chasing a finite number of resources. In down times, there is significantly less entrepreneurial opportunity chasing a still existing, but somewhat diminished pool of capital. It closely equals out.
The available capital necessary for funding exciting new opportunities is readily accessible if the entrepreneur is creative. The world economy will come out of this problem time. The products and services that are being prepared now will be the big winners when the pent up demand for new consumer products, technology, cosmetics, sporting goods, wellness products and a host of other categories explodes as consumers return to markets. Just remember, if it were easy to be successful everybody would be.
Venture capital and funding sources are always, especially now, seeking the best, most vibrant, creative opportunities. Make your product special, desirable and different and then, it really doesn’t make any difference what the economy is doing. You will be able to attract the resources needed to be successful.
Posted in Funding
Thursday, October 9th, 2008
by: Geoff Ficke
There is an old adage in the funding community: “Investing $1,000,000 to fail is expensive, investing $5,000,000 to succeed is cheap. Investors will respond to funding needs based on real world assumptions. They will be very cautious when assessing a venture’s real funding requirements.
Think of investment capital as fertilizer. If a farmer applies too little he harvests a poor crop or worse. Too much fertilizer and the harvest will likewise be disappointing. Experienced, successful farmers know their fields, their climate, crop planting patterns and their equipment. They will apply every pound of fertilizer needed to maximize their harvest. Investors handle their capital in exactly the same way.
I review many business plan submissions each year. It is amazing how many entrepreneurs can not identify, quantify or justify the investment requirements they describe in their business plans. This is an absolute eliminator in terms of creating investor enthusiasm for funding a project. This is one of the largest reasons so many plans never receive a thorough reading.
Often, the entrepreneur woefully understates the obvious funding level a new enterprise will require. The justification, stated or not, is usually that they are attempting to keep the needed investment number very low in order to create interest. They do not understand that there is no too high or too low investment number if the need for capital can be demonstrated, qualified and narrated. Investors want a crystal clear look at the use of funds and how they will earn an appropriate return on their invested funds.
Seeking a number in excess of the amount needed to successfully launch a startup is equally disastrous. Investors are not seeking to build a Taj Mahal before the first dollar of revenue is generated. Here are a few tips for building expense assumptions that will withstand withering investor scrutiny.
Salaries
Investors do not want entrepreneurs to starve. They also do not want to fund the lease on a BMW 745. Salaries should be based on sustenance requirements. Most investors I have worked with want their management teams to make enough salary to pay their bills and not place untoward strain on personal finance and marriages. Comfortable is fine, but they will not fund luxuries. Be very realistic.
Staffing
I often see plans with a list of proposed employees that resembles the list of animals on Noah’s Arc. Keep this area very lean. Use outside contractors, consultants, and part-timers to fill every post possible. Employees add high fixed costs to the budget. Salaries, benefits, training and equipment can be too heavy a burden for startup projects to absorb. Another no/no is a squad of vice-presidents. These are red flags that scream excess and will all but eliminate any possibility of receiving funding for a new business opportunity.
Facilities
Plan on renting needed office space on a short-term basis. If growth happens as planned it is always easy to find bigger premises. You do not want to obtain a larger space than initially needed to run the business in the most efficient manner. You will be using too much of your precious capital for an underutilized asset.
This may seem obvious, but you should read the business plans I do. Many entrepreneurs try to replicate the surroundings they enjoyed when they were corporate employees. Recently, I reviewed a cash flow projection that included an office expense for a daily delivery of flowers, and this was not a floral business. Investors are totally put off by expenditures such as this. Unless the office environment will be crucial to closing sales and making deals keep the space as Spartan as possible.
Do not load up the staff with numerous family members unless they perform an absolutely essential function. Just because cousin Myrtle has been laid off for several years, the focus of your startup is not to give her employment, unless you can defend her abilities and unique skills. Your judgement will be questioned unless you can sell Myrtle’s benefits.
The cash flows you project in your business plan will be in the red (burning cash) for a number of months. Your ability to secure investment money will be largely effected by showing how quickly the burn rate stops and the business starts throwing off cash. This is a point that you must be able to defend aggressively. Investors will be very dubious about your cash flow projections, and thus the level of investment you really need, not what you may think you need. The better job you do of vetting assumptions and supporting them with historical industry specific data, the more likely you are to win investors and their money for commitment to your project.
A business plan that does not show cash burn slowing, then stopping and then turning to cash flow positive during the first 12 months of operations will likely not be funded. Investors want to see quick sales traction. A plan that does not show growth quickly enough will increase capital risk and sour investors.
Whether you require $1,000,000 or $21,000,000 the business plan should be written to justify the needed funding level being sought. Too low, or too high, and seasoned investors will walk away. Think like a farmer fertilizing his fields during spring planting. He has so much land and needs to make every square foot produce the greatest possible crop yield. The farmer does not waste seeds, fertilizer, water, labor or fuel. He makes sure that the crop is tended with all due diligence and given everything needed to reward his efforts. Farming is hard work.
So is finding and securing investment commitments. There are thousands of projects on the street every day seeking investment capital, partners or license. The number of projects greatly exceeds the supply of available resources. Do not injure your opportunity by loading up your offering with excess, fat and dreams. Your pay out comes after you achieve success, and the investor has begun to see a return on their investment.
Posted in Funding
Thursday, October 9th, 2008
by: Geoff Ficke
Most inexperienced entrepreneurs are unaware of the many options and alternative strategies available to push a new idea or invention to market. The most common approach they seek to implement is a classic funding round. When this avenue fails, and with overwhelming frequency it does, the idea often is dropped.
Driven inventors attend invention trade fairs, venture capital conferences, small business incubators, and network at every possible opportunity in search of funding and working capital for their invention. It is commendable and a tribute to the pursuit of the American dream that such efforts are expended in this daunting effort. However, virtually all will come to a disappointing end with no funding and disappointment.
In 2005 over 500,000 new business incorporations were organized in the United States. This does not include the hundreds of thousands of sole proprietorships, partnerships, joint ventures and strategic alliances formed. From this sea on creative, new opportunities only about 1000 were funded by traditional venture capital sources. The odds are so long against a successful funding round: the wonder is that so many entrepreneurs, with so much creativity to offer, are chasing so few sources of funds.
There are other opportunities and strategies available for successfully getting a great idea to market. The bar for acquiring venture capital funding is so high, so difficult and so competitive, that it is unfortunate how many inventors quit the pursuit of their goal after receiving no traditional funding commitment. One of several alternatives to venture funding is a license campaign.
Licensing is the assignment of intellectual property or product rights to a licensee for consideration. The consideration may consist of a rights fee, royalty, options, personal service fees, minimum annual sales turnover and more. The licensee agrees to make good faith efforts to commercialize the product or intellectual property and the agreement is memorialized in a License Agreement.
There are many more companies interested in licensing a product or technology than there are conventional funding sources for startups. Having said this, there is really no difference in the requirements for success in either venue. You will just get more swings at the ball when seeking a license for your project.
Entrepreneurs read about Blackrock Capital, Harvard Capital Management or Kohlberb Kravis Roberts funding a new opportunity for $200 million dollars or more. This is exciting, motivating and for most, unrealistic. A fully fundable opportunity is a rare amalgam of huge upside, mitigated risk, unique, potentially disruptive product and REALLY strong, experienced management. Very few entrepreneurs can present such a comprehensive package.
In the world of licensing the product, upside, risk mitigation and disruption features are crucial. Management is irrelevant as the licensee presumably has the management in hand to drive the project to success. The same elements that excite venture capitalists also excite the licensee. They are keen on a strong Unique Selling Proposition detailing the niche the product will claim.
A powerful, well-structured sales model will quantify and support the sales universe available to the product or technology.
There are many successful approach strategies available when seeking to license an exciting new product. The following are some broad elements we have utilized in our consulting firm with success. Remember there is no linear, set in steel index to follow. Innovate, adapt and keep pushing and try everything necessary to get that appointment with the decision-maker.
Create a Working, Production Quality Prototype
Whether you have a new product, a service or a technology, you MUST be able to demonstrate the unique features and benefits of your offering. Some inventors have a facility to create, design and construct the necessary demonstration unit. The great majority of people do not. This is a simple hurdle to overcome.
In every city in America there are job shops, product design and development firms, engineers and software writers capable of providing professional guidance resulting in production of the prototype required.
A key by-product of this process will be the creation of 3-D, Computer Assisted Design art. This art is essential in the assembly of the product for production, in obtaining crucial and totally accurate cost of goods and filing patents.
Patent Filing – Intellectual Property Protection
Very few licensees are interested in investing significant monies in marketing a new product without the guarantee of some patent, copyright and/or trademark protection. See a Patent Attorney. Patent law is exceedingly specific and for this reason it is a legal specialty. A competent patent attorney will conduct a search and, using the results, advise the possibility of successfully receiving a utility patent (highly preferred), design patent (patent on art, easily overcome) or not being artful enough to receive any cover.
If an item has dicey patent prospects we like an alternative strategy. I have been a proponent for several of my clients of a strategy we call “patent pending forever”. Our goal is to keep a product in patent pending status for as long as possible by timing addendum to the application and art and filing these in order to keep having the filing reviewed again.
During patent pending a filing is essentially in limbo. The advantage for the inventor is that there is no publication of the details of the art, features and unique benefits of their product. Secrecy is an asset. Once a patent number is received two undesirable things happen: details of the patented product become public knowledge, and the clock starts ticking against the 20-year life of the patent.
For most entrepreneurs seeking a license, we do not push for international patent filing. International filing is very expensive and we let the licensee assume this expense.
Source of Production, Manufacturing
Depending on the product, service or technology offered for license, you MUST source production. The reason is simple: this will set you apart from the dreamer. It reflects your commitment to the opportunity. It reassures that the product can be built (we see a number of projects that are unrealistic from an assembly and economic standpoint).
Now, let’s discuss a touchy subject in the current economic climate. I love my country. America is the land of opportunity. However, I am a capitalist and the rules of capitalism are much bigger than any one individual: including you, the entrepreneur. If at all possible I prefer to assemble components, source, and manufacture here in the United States. However, it is becoming more and more difficult to be competitive here in America.
I have clients that are adamant they do not want their project assembled offshore. Do not be a Luddite. You really have two options: you can go with the flow, or you can be drowned by the overflow. In the past decade, we have not found a single project that could be produced in the United States as inexpensively as we could produce offshore, including the cost of freight, customs and duty. Not even close!
We search out four or five factories, or offshore resources, for submission of the 3-D CAD art and a Release Packet. The Release Packet contains all of the hard samples of components that will be parts of the finished product. After this is forwarded, we typically receive quotes in four to six weeks.
This quote should include all line item costs contained in the Bill of Materials for the product, plus outer packaging, costs of display (if any), shipping carton, inserts (directions for assembly, etc.), plus freight to United States port of arrival, customs, duty and inland freight to your warehousing/fulfillment point. This is a dead net cost of goods.
Use of Cost of Goods (COG)
Knowing the cost of goods is crucial! This number proves the viability of the products pricing model, confirms margin assumptions and the ability to construct an exciting sales model. If COG is too high, and there is no capacity to squeeze costs, the future license prospects for the product are not exciting. This number sets the parameters for the potential of your project and indicates to the potential licensee that they are dealing with a thoughtful, serious and skilled licensor.
Research
The licensee with an exciting opportunity on offer will want to know (not guess) everything possible about the market they are about to enter. This will include; customer demographics, size of market, growth of the category, competition, and potential licensors. Cite sources of research and assemble as a portion of the Opportunity to License document you will offer. This is the knowledge that will set you apart from run of the mill tire kickers hoping to make a deal.
Professional Endorsements
Nothing resonates with buyers more than professional endorsements. I am not necessarily talking about celebrity endorsement. They are great for certain products. A pediatrician endorsing a juvenile product, or a professional association giving a positive quote on a service, or an educator endorsing a toy, are simple examples of taking a product and brandishing it with the glow of an expert. This is invaluable and a technique we utilize regularly for our projects. Include these quotes in all collateral materials.
Test Market/Focus Group
If you only have one prototype it can be difficult to assemble a focus group or test market. What we recommend is to show the product to strangers sequentially in the field where the product would typically be used. Recently, with a single prototype of a baby stroller accessory, we spent an afternoon in Central Park in Manhattan, demonstrating the unit to mothers pushing strollers. We walked away with positive quotes for attribution from 26 of 29 mothers that used the prototype. These we included as an exhibit in our product folio.
Opportunity to License Document
With all of the above in hand, you have the data and resources to assemble an approach document. We all have heard stories about the inventor sidling up to a banker in a bar, uninvited, and successfully pitching his idea over a scotch and soda. Good Luck!
You get only one chance to make a great first impression. Do not shortcut on any aspect of the initial approach. With your patent, prototype, possible endorsement, research and costs well in hand, you are ready to assemble the written document that will detail the features and benefits of your project and quantify the opportunity.
As you are not seeking funding, and are not interested in self-marketing, a classic business plan is not required. However, you will need a written synopsis of your project, written along the lines of the business plan. We call this the Opportunity to License.
This document needs to be crisp, exciting and short, eight to 10 pages, plus exhibits. The exhibits should include; patent information, list of contributors to the project, CAD art, bill of materials, cost of goods, research data.
Selling the Opportunity
Successful completion of the above now places the opportunity in position to seriously, and professionally, approach licensee targets. Your research will have identified the obvious candidates. Networking, walking trade shows and scouring appropriate industry trade publications will increase familiarity with added possible homes for placement of the item.
The target list needs to be approached with care and diligence. Large, publicly traded Companies have different, but fairly stringent standards for accepting unsolicited submissions. I find this barrier crazy, as many great opportunities are never viewed for fear of litigation. Mid-size and small companies, the really fast growers, are more open to reviewing unsolicited submissions.
Prepare mailings with care. Be sure to know the exact name and title of the decision-maker at each targeted potential licensee. Personalize each letter and assemble the mailing in a folio. The cover letter should be on top in the right pocket with the Opportunity to License document directly behind. In the left pocket place any public relations, positive user endorsements, etc.
Follow up the mailing with a phone call in 7 to 10 business days. Now the ebb and flow of making a deal begins.
Negotiations
No two deals are alike. This not a cookie cutter, fill in the blanks process. Securing that face to face meeting with Mr. Decision-Maker is crucial, and the opportunity cannot be blown. We seek to maximize every potential income stream for our clients. These include:
Rights Fee
You must receive consideration in the form of a Rights Fee in exchange for turning over all aspects of your project to the licensee. This should be paid on signing the license documents and is not returnable. The licensee should perform all due diligence prior to signing. There are no make goods here. The size of the Rights Fee will be in direct proportion to the size of the opportunity you offer.
Royalty
This is the vast bulk of income any licensor receives from a successful product placement in a licensing deal. The variables in structuring percentages are never ending. Some royalties are built to sales growth and minimum sales promotion investment. Others are tied to achievement of tiered sales goals. Many contain buyout options that automatically kick in at certain trip points.
The term (length) of the license is crucial. The licensee will want a shorter term. The licensor will want as long as possible to maximize income.
The details of each license are unique and specific to that particular deal.
Production
Another reason we are aggressive about controlling the production sources, and knowing our costs is because this often becomes another income stream for the inventor. For instance, assume a dead net cost of goods of $1.92 per unit. Assuming we can maintain production control in negotiations, and this happens often enough, we will quote the licensor $2.00 per unit COG. The difference of $.08 (4%) goes right to the licensor when peeled from the Letter of Credit that is organized to pay for the offshore inventory production. $.08 might not seem like a lot of income per unit. However, apply this number to potentially hundreds of thousands of units per year, for seven, 10 or 15 years. Do the math!
Several points to make here.
Do not be a hog. Hog’s get slaughtered. A good deal is a deal where every party feels fairly treated! This is an area where we see too many deals go south. Every party should profit handsomely, according to their level of participation.
Second, do not attempt to license a product without undertaking the steps detailed above (or some variant of the process). I have mentioned this before. This is just an outline. There are endless variables that apply to different industries, styles and categories of offerings. Do your homework and do not attempt to take shortcuts. You will be wasting your time and resources.
Finally, do not, EVER; utilize the services of an invention mill. These firms typically advertise on late night infomercials and they prey on the inexperienced, naïve and desperate. These firms are little more than boiler rooms with a goal of separating the weak from their cash. Check with your Better Business Bureau and State Attorney General for history on one of these houses. Even then proceed with caution.
Licensing is a real, viable option for inventors having opportunities that offer fresh, definable features and benefits. The Unique Selling Proposition contained in these inventions may have real value to licensees, while venture capital may not be able to overcome one or more shortcomings inherent in the project. Funding sources are often seeking a different deal parameter. Licensees are simply seeking the opportunity to bring in house a product, service or invention that compliments their array of assets. This makes licensing the best choice for entrepreneurs hobbled in one area or another: they simply have a great product to offer.
Posted in Funding
Wednesday, October 8th, 2008
by: Geoff Ficke
Fact: In 2005 over 500,000 new business incorporations were organized in the United States.
Fact: Of these 500,000 new businesses less than 1,000 received venture capital funding.
There are vastly more entrepreneurs seeking start-up funding than there are available funding sources and investment pools. This is a fact. And yet, 499,000 incorporations occurred in 2005 without the cover of an investment funding commitment. Many of these new businesses will fail. Nevertheless, the urge to seek the fulfillment, financial security, freedom and the satisfaction of overcoming the odds still drives us to try.
The lingering doubt, and hurdle each of these new entrepreneurs confront is this, “where does the money come from”? We look at, on average, 600 submissions per year in my consulting business. The absolutely, number one reason, most of these presentations will not ever make it beyond the idea stage is an unrealistic understanding on the role of investment and sources of available start-up funds.
My first assessment of an opportunity is always the idea itself. Assuming the submission passes our layered analysis, the next hurdle is the inventor or prospective entrepreneur. Is he a dreamer, or a doer? And the first disqualifying trip wire for a dreamer is the expectation that they can have someone incur all of the financial risk, 100%, while they commit nothing. When I say nothing, I mean no patent filings, no production quality prototypes, no qualified research, no testing, etc. They have only an idea.
Angel investors do exist, but even they do not very often consider investment in dreams, cocktail napkin designs or untested theory. And yet we eliminate 60% of the product opportunities we view, many with interesting commercial potential, simply because the submitter can not, or will not invest in their own opportunity. If you do not believe in yourself, your opportunity, why would anyone else?
The development monies for patent and trademark filing, design, research, creating working models is what the funding world calls 3-F money. 3-F money comes from friends, families or fools. This is very high risk and usually very small amounts are needed. Most of the products we see require from $12,000 to $20,000 to put in a professional presentation that could be of interest to investors, licensees or partners. Most of the people that submit to firms like ours have jobs, homes, and investments. Many love to chat about their boat, second home or recent safari vacation. But they claim to have no money to invest in a project that they state is an absolute winner, and will make millions for everyone involved.
This is an absolute deal killer, a non-starter. We are constantly solicited to become the inventor’s partner, hundreds of times per year. Investors must see passion, commitment, confidence and an inventor with skin (dollars) in the game. The lack of personal commitment one brings to a project is proof that a dreamer is impersonating an entrepreneur.
Friends, family and fools assist in funding, investing or partnering most of the 499,000 new incorporations filed in 2005. This does not include the huge number of sole proprietorships established each year. Most new businesses do not require the involvement of venture capital funding sources, blind pools or investment banks. Their scale is too small for consideration by firms seeking larger investment opportunities with huge harvest (cash out) potential.
Many entrepreneurs have used credit cards, personal savings, a home equity loan, sell that antique car, tap a retirement account, or utilize an inheritance to fund their new enterprise. Just remember however, this is high risk and more business start-ups fail than succeed. Nevertheless, securing the initial development funds in this way shows commitment and can advance a project to the point where deal placement is a real possibility.
During the 1990’s a gold rush mentality occurred that distorted the financial markets. Money for many investment types was readily available. Due diligence was morphed by theory and new age abstract business models. The sky was the limit.
Well the sky was not the limit. The bubble burst and in the first decade of the 21st century we are now in an investment cycle where cynicism rules. Every deal is thoroughly vetted and re-vetted. Terms are very strident. A submission must be absolutely professionally researched and presented. The market allows for no shortcuts or errors in assumptions made.
With this reality in hand, and the knowledge that self-funding, or 3-F funding are the most prevalent options for startup monies, are there any other options? What are they? There are several, and I will be writing specifically in more detail on each. Consider:
My personal favorite, as I successfully started my first business by bootstrapping. What is bootstrapping? Simply stated, this is an avenue to start your business without borrowing, giving up any equity, total self-reliance on yourself. Sell your product or service before you have inventory. If no one buys you have lost nothing. If you receive orders you know you have a winner. More entrepreneurs successfully can start the road to success by bootstrapping than by any other method.
Since the bubble burst in 2000, we have done far more product licensing campaigns than any other deal style. Licensing requires a thorough foundation of intellectual property protection. First to market advantage, a strong Unique Selling Proposition, lowest possible of goods (while maintaining highest possible quality standards) and verifiable sales model.
There are so-called angel funds, so named because like fairies they sprinkle a little dust on potential deals of interest, just seed money basically. Angel funds tend to stick to specific fields (technology, wellness, software, etc.) where they have great experience and contacts.
They typically take an oversized piece of equity, as first money in is most at risk. In addition, angels are few and far between, hard to find. Look at local Chamber of Commerce fairs and regional government incubators as a source for networking angels.
Once a deal has shown market potential, sales are growing, the market is responding and the risk factor has been mitigated, mezzanine financing becomes an option. Usually the mezzanine round is for far more investment money than the angel-round, and the equity percentage is not as dear. Many banks now have mezzanine arms to service growing, but not yet mature opportunities.
Investment Banks are very difficult to work with unless a project is typically past the angel and mezzanine funding stage. They want to see sales traction, even if in a limited test market. Investment Banks have exceedingly aggressive Harvest Goals, recognizing that even with the most heavily vetted deals, only 2 in 10 or so will succeed and pay-out.
Also, Investment Banks are not interested in small loan amounts. It is a reality that it is easier to secure several million dollars than several thousand for a new project. They will not be interested in a local bakery.
A strong, experienced management team is always a top priority for Investment Banks.
The SBA is an excellent avenue for the first time startup, minorities and women to utilize as a funding source. The SBA is government subsidized. That said; it is very slow, bureaucratic and risk averse. A good source of funds for traditional types of businesses, such as retail, local service and light manufacturing.
Again, this is a personal favorite, as I have used receivable factoring to fund several of my startups. Basically, a factor is a financial institution that will buy the firms purchase orders, if the orders are from top grade companies. For instance, the entrepreneur receives a purchase order for his widgets from Walgreen in the amount of $200,000. The order becomes a form of collateral and a pre-negotiated percentage is advanced to the vendor. This is used for working capital, often for completing inventory production. The open balance, less factoring fees, is credited when Walgreen pays the invoice amount. Virtually every dry goods manufacturer factors invoices.
In summary there are many funding options available depending on the size, scalability and current status of the new business opportunity, no entrepreneur should ever attempt to approach funding sources without a customized business plan, exciting presentation materials and strong financial projections. The most likely source of funding for 99% of all new ventures will be personal resources, friends, family and fools.
Posted in Funding
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