Category Archives: Finance

The upside & downside of crowdfunding for gaining your first professional investments

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Turns out that successful equity crowd-funding your startup may be a detriment to your gaining funding from professional investors afterward.  And, as of now (May 2013), this cannot actually be done in the U.S.

I’ve been talking with attorneys and investors about the JOBS Act (“Jumpstart our Business Startups Act), which was signed into law in April 2012, a law which has not proceeded quickly since that time.  Now, more than a year later, we have little clarity on the restrictions and structure of how we can offer early stage equity for our new ventures through public solicitation, primarily the Internet. In fact, it is not at this time lawful to do so.

We can accept cash contributions in exchange for rewards (like T-shirts or access to back-stage events) and this is working well in the arts and entertainment sectors.  But we cannot yet accept cash for an equity stake in any venture.

And it seems this may make some trouble if you need more than the crowd-funding capital to build, launch and grow your venture.  Currently the proposed cap on crowd-funded investment is $1M.  Here’s how professional investors may see it:

  • Your cap table is too complex.
  • There are already too many investors in the mix to ensure an ROI,
  • You may not be communicating with those many investors correctly, which may imply some later liability for the venture.
  • The ROI for those early stage crowd-funding investors may be questionable, implying later trouble from them.
  • The hassle of handling these many early stage investors when setting valuations and creating an ROI scenario may be too much work for the professional investors, in light of the risk of a follow-on investment.

Professional investors (angels and venture capitalists) are generally looking to say “no” to most early stage opportunities, and this may count on the negative side of their evaluation of your venture.

That said, crowd-funding for ventures needing serious equity investment in an upcoming round can use rewards-based crowd-funding to establish important benchmarks with those potential professional investors.  Here’s how:

  • Establish your product’s market viability by driving early sales through promotions and discounts offered through your crowd-funding site.
  • Show you have tested your product in various market sectors and at various price points, and share the results.
  • Prove which of your product’s target market sectors are responsive at what price point through tested online channels, and build your growth strategy on real data.
  • Validate your market traction, and projected market penetration, from early market response and sales.
  • Offer metrics to support your claims of rapid scaling.

So, while we are all waiting for the JOBS Act to become law, we can leverage crowd-funding in ways that direct our launch and growth strategies, and which investors will appreciate.

Good luck.

Current trends in capital and exit strategies 2013

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In chairing two panels on venture capital at Digital Hollywood last week, some interesting ideas on successful capital and exit strategies were brought to light.

We know that access to capital and available exits became limited beginning in 2008 at the start of the Great Recession.  Now, 5 years later, in 2013, we are watching more shifts.

  • There is plenty of capital available now for starting and growing a new business, particularly in technology and mobile.
  • Some of this capital is available because other vehicles for investing capital are still limited (or perceived as too risky).
  • This available capital is made more accessible in light of the reduced risks associated with start up tech companies, because there are so many more sources of capital:  incubators, accelerators, angels, super angels, angel groups, boutique venture funds, and large, established venture funds, and well as private equity capital.
  • Yes, there seems to be the “Series A crunch” which makes attracting professional capital difficult once your product is in the market but before it has significant market traction or share.  But that crunch has always been there.  Years ago I called it the Series B Gap.  Just as you are ready to scale, but before you can prove that scalability, you cannot find the funds for that risky period.  But this is not news. Careful capital strategy, such as initially proving market share in a more narrow market sector, or building more proof of customers earlier in your funding cycles, can overcome this gap.
  • The rash of IPOs last year (2012) seems not to have encouraged a strong IPO market, as the hype did not match the results, in many instances.
  • There are always many more exits by merger or acquisition than by IPO.  And this year (2013), with the IPO market limited, we are seeing a flood of companies ready to be sold, because all the companies that were ready at the end of 2007 (and onward for several years) and which have survived, are on the market now.  So we are facing an unusual supply and demand dilemma:  there are too many companies ready for exit for the demand of the buyers.

Exits tend occur between 6 to 8 years following launch.  Venture capitalists need to create an ROI on each of their Funds in a similar time frame.  Companies need time to launch, scale and fully realize their potential to scale, to drive up their valuation at exit.  Predicting the conditions of the exit market that far into the future is difficult.

Still, it is wise for entrepreneurs to develop an exit strategy in their early days of creating their new ventures, and track that strategy just as they track their other business planning issues, adapting to market shifts as necessary.  Many venture capitalists tell them, “Just build your company for value and don’t worry about when and how to exit.”  But I urge my clients to watch for their exits, and plan their growth strategies with a clear eye on the end game.

Good luck.

 

Sometimes it is all about the deal, by Megan Lisa Jones

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Megan Lisa Jones

Over the years and working as an investment banker I periodically hear the dig about my profession, that all we care about is “the deal”. Implied in that statement is: that we only value the deal because that’s how we get paid and we only care about the fee not the client; the deal means only the financial components ($$$) and not the big picture; we care about the deal at the expense of what terms might be better for the client; and that we ignore common sense to focus on deal terms or fancy capital structures. And, very often the slur comes from either a private equity or venture capital investor (who is generally on the other side of our client in “the deal” and presumably cares about their own deal terms).

What a joke.

I’m not going to say it doesn’t happen. Investment bankers get paid if a deal closes and very often only then, beyond a token retainer and expenses. Thus, we’re incented to close a deal, and the more time we’ve sunk in to one the more we want to get paid and may even feel entitled (otherwise, we’ve worked really hard and not gotten paid). But the fee structure is like this for a reason: we are paid to make sure a deal happens thus the downside of not succeeding is built in. Any transaction, be it fundraising, a company sale, or a company purchase sucks an amazing amount of management time, taking them away from actively running the business. The company also must pay for lawyers, accountants and the like typically on either a per hour or retainer basis and it adds up fast. Our clients generally either really want the deal to close or they want us to keep someone at bay. Badly.

Raising money can be a make or break proposition for a company, as can a merger or sale. Our clients want investment bankers to work hard and rarely care if we’re eating, sleeping or missing holidays. I once spent two hours in an airport on a cell phone conference call with two small kids in tow on Christmas day. That deal closed (and made my two founder clients very rich).

And deal terms are crucial. Putting together a detailed assessment of possible bad deal terms in a blog post is impossible…there are just too many. One investment banker even wrote a book called Deals From Hell which details some especially unpleasant and never-ending deals. Exploding warrants (miss financial milestones and quickly lose control of your company), poorly drafted indemnifications (lose all) and imprecise earnouts (work hard; don’t get paid) are good example of why sometimes it is all about the deal. Then there is litigation, non-competes and a buyer or funder who goes bankrupt. If “the deal” isn’t well structured it will haunt you for years to come and drain your resources, if it closes.

A busted or bad deal can also taint a company’s reputation.

Sophisticated investors, such as venture capitalists or private equity investors, range from those who want a happy and incented management team to those who really just want to yank control of your company away, no matter what you’ve personally poured into it. At the very least, all want to get a good deal because that’s their job and their obligation to their own investors. The management teams of other companies often want to sell their vision and don’t want it cluttered with the realities of practical deal terms and downside projection. Investment bankers can make their objectives harder to attain by adding a sounding board, push back and insight.

All about the deal? Absolutely. No one should commit to a deal that isn’t in their best interest, especially when their life’s work is at stake. Every time I hear the dig about investment bankers being “all about the deal” I must admit that I inwardly smile and think “absolutely and that’s why our clients hire us”. Advisors look out for their clients’ interests and deliver the tough messages, aiming to strike the optimal deal (for their client).

And, “the deal” isn’t about money alone. Very often I’ve advised clients to chose a partner that offers less money but a better overall package. Cultural fit, relationships, synergies, reputation and long term vision are often better than the best cash package.

Any deal that succeeds in the long term benefits both sides. Deal terms matter, as does clarity and pre-thinking through what can go wrong before it does. A clear and well articulated contract means that both sides understand to what they’ve committed and what actions constitute performance. Sometimes it’s all about the deal? Do I even need to mention some high profile flops in which a poorly structured deal made headlines for years, costing money, jobs and reputation?

My close colleague Megan Lisa Jones is an investment banker who works primarily with companies in the digital media, technology, gaming and other emerging industries (formerly with Lazard Freres, Needham & Company and Merrill Lynch). Her investment banking blog is at www.ibla.us She is also a novelist — check out her first novel, Captive, and its sequel, Escape, at www.meganlisajones.com.

Working smart # 14: Long-term care insurance: not just for the aged

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I admit I have a great aversion to paying for insurance.  That said, I have always spent a great deal of my annual expenses for lots of coverage.  As I have always been an independent consultant and entrepreneur, I have never had the (phantom) assurance of a larger corporation looking out for my welfare.  So, always insisting on self-reliance for my income, I have approached creating protection for myself and my tiny consulting practice against the catastrophic Unknown.

I know, some of you may want to rely on your husband’s or your wife’s income and coverage, or your family’s wealth, but an accident or a crippling disability may last a very long time, well beyond the tolerance of others and their resources. And besides, what if your partner loses his or her job or business or practice?   Insurance companies were created to provide exactly this kind of coverage.  If we are going to pay them for coverage, then they should provide it.

Long-term care insurance is usually considered insurance that old people get as they confront their mortality.  But we must widen our perspective.  Long term care is not an issue only for the elderly — we can encounter an accident (car?  rock climbing? skiing?) or an unexpected illness that requires extensive care at any age.

Long term care coverage is based on your inability to perform any two of six basic tasks in your own care, such as dressing, bathing, eating, toileting, continence, transferring (getting in and out of a bed or chair), and walking.  The payments cover help in your home, or in qualified facilities (assisted living, nursing homes, Alzheimer’s care facilities, etc.).  In my long-term care policy, there is a calculation that my total premiums would cover 81 days in a care facility if paid out of pocket (without the insurance).

Lots of variations to choose from, in each kind of policy:  get help

Long term care policies last as long as you pay the premiums, which are lower based on your age and health, so earlier coverage is better.  Disability insurance replaces a percentage of your established income (the insurance company determines the percentage), and lasts until you are 65.   Both kinds of policies have an exclusion period (30-90 days).  There are variations among different policies and you can design one (or a combination of both) that fits your conditions and budget with the help of a Certified Financial Planner (I particularly like Scopp & Associates for excellent knowledge and strategy).  Take your spouse or life-partner with you for a joint policy for long-term care, which will offer a discount for policies covering you both.

So, yes, I recognize the dread and the avoidance of paying for more insurance.  And I also know that these protections are needed, especially as we live longer and healthier lives, as breakthroughs in medicine keep us living beyond 100 (especially you GenXers and Millennials), and as we may well outlive our incomes, our intentions and our supportive communities.  The time to plan is now.

Working smart # 12: Disability insurance and why independents need it

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Lots of us sign up for life insurance, while few of us will pay for disability insurance, even though we are seven times more likely to be disabled for the short- or long-term, than we are to die.  As independents, consultants and entrepreneurs, we are at much greater risk of damaging our financial stability than are employees.  And, often, employers’ disability policies cover only 50% of your salary.  (Thanks to Ken Scopp for these statistics; more on disability and other insurance at his site, Scopp & Associates — highly recommended).

I was reminded of this recently when two friends of mine let me know they needed immediate treatment for different kinds of cancer.   One has disability insurance, one does not. Both are independent consultants and looking at long-term treatment that will interrupt their practices and their income.

Nearly 20 years ago, Ken Scopp (a certified financial planner) and I designed a disability policy for my practice, with lots of bells and whistles no longer available in today’s market.  Then, 10 years ago, in 2003, we converted part of that policy to another program that covered long-term care.  So now I carry both, for the same annual cost.  Why?  Because disability insurance payments, important as they are, get determined by the insurance company (are you 40% disabled for the type of work you do?  70% and so on), and end when you reach 65.  And because, long term care is not just for the elderly, but for anyone who has an injury or disability that will last longer than six months and will need assistance in the home, or in a care facility.  Long term care lasts as long as you pay the premium, which gets locked in (in most policies) at the time of purchase, so the younger you begin, the better the deal.  (Look for a separate article on long-term care, soon).

So, if you are a significant income-generator for yourself or your family, it is important to protect yourself against the unknown.  I am one who believes that any insurance is a necessary evil.  My insurance costs are a significant portion of my overall business expenses.  Because I maintain a strong cash flow, I treat insurance as protection against catastrophic events, for the most part.  But your situation may differ, which is why some strategic help from a financial adviser is useful.

In any case, it is wise to educate yourself on these kinds of protections for your income, especially if you are the one who creates the income and runs the business.

Do You Know What Drives Your Profit? by Terry Corbell

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Terry Corbell, The Biz Coach

Terry Corbell, The Biz Coach

 

Who have the toughest jobs? Well, in my experience, single moms who work outside the home, have the toughest job of all. Entrepreneurs have the second-toughest job.

For profits, entrepreneurs must learn how to manage their financials and performance, which are difficult tasks. Savvy business owners know who their ideal clients or customers are.

Entrepreneurs realize financial benefits when their revenue from business exceeds their expenses and taxes. This results in a much easier task – deciding whether to save, spend or invest the profit back into the business.

Until employees and customers actually walk a mile in an entrepreneur’s shoes, they often think a small business owner is wealthy. That may or may not be true. In recent years, the odds are that many small business owners are struggling.

Smart, hardworking business owners enhance their chances for success — by completely understanding the critical factors that drive profits and they tirelessly focus on those profit-drivers.

Profit drivers

The four basic drivers of profit:

  1. Price
  2. Variable costs (variable costs change as a result of revenue from the cost of sales)
  3. Fixed costs (also known as overhead)
  4. Sales

Which of the profit drivers have the most impact on an entrepreneur’s success Price. That’s because increases in price immediately add to any profit margin.

Many entrepreneurs make the mistake of focusing on sales volume without regard to price. Especially, in a sour economy, business owners are focused on selling to alleviate ageing issues.

The dilemma, however, is that sales increases are tied to increases in variable costs, which lead to less profit.

Conversely, decreases in variable costs increase profit margins, but total revenue will not increase.

Many business owners fail to realize that cutting fixed costs do not affect revenue, which means it has the least effect on profits.

Entrepreneur mistakes

The three biggest profit-mistakes of entrepreneurs:

  1. Business owners are so focused on developing revenue from prospective customers, they fail to concentrate on their existing customer base.
  2. They fail to build their brand image so they miss opportunities to increase prices.
  3. When they cut good marketing and lay off employees to cut costs, most often they’re cutting their investments in their business muscle not fat.

To elaborate on mistake No.2 — missing brand-building opportunities to increase prices — successful entrepreneurs determine how much they can hike prices without losing profit.

True, you will most likely lose the 18 percent of customers who only buy products at the cheapest price. But depending on the amount of a price increase, you can still make a better profit.

Price-sensitive customers who do not appreciate value, most-frequently make the most-undesirable customers. They’re high maintenance, and demand the most service. They complain the most and most-readily return products.

The moral: Build your brand to maximize prices and target the best customers. That’s what leads to long-term profits – and success.

From the Coach’s Corner, here’s more: 8 Simple Strategies to Give You Pricing Power.

“I don’t want to do business with those who don’t make a profit, because they can’t give the best service.”

-Richard Bach

 

__________

Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.

Exit Strategies: Getting ready for the sale, by Gene Siciliano

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geneiciliano What you MUST tell your donors to avoid IRS challenges, by Gene Siciliano

Gene Siciliano, your CFO for Rent®

I promised you some thought starters for those of you who want to get out of your business: retirement, diversification, bored, for whatever reason. Here’s the first list, for those of you who want to sell to someone you don’t already know today.

If you want to sell your business in the next year and expect to get top dollar for it – you’re already too late. Virtually every business needs some preparation to get the best price. The time to start planning is 2 to 5 years ahead of time. So you can:

  1. Beef up your balance sheet that has probably been ignored if the business is running smoothly. This is the first place a prospective buyer will look, because it’s a snapshot of the estimated value of your business.
  2. Strengthen your margins and create a trend that shows stability or improvement that can reasonably be counted on to continue for the new owners.
  3. Develop a management team that doesn’t depend on you to fill in the management gaps, unless you want to work for the new buyers.
  4. Show promise of future growth in top line revenues, unless you plan on selling only to a life style buyer who simply wants to make a steady living with what you‘ve built. Not the highest potential buyer, but still an option.
  5. Decide whether or not to engage outside help to prepare the business for sale – a consultant like me to improve the metrics, an investment banker or business broker to actually help you in marketing the business, etc.

That may not be good news for the over-anxious or under-prepared, but there’s a silver lining. The opportunities should continue for a couple years, so if you start now you could be just fine. If you wait a couple years before you start, good luck. You’ll need it.

My close colleague, Gene Siciliano, CMC, CPA (our “CFO for rent®” ) is financial consultant, (and author and speaker) who works with CEOs and managers to achieve greater financial success in a dramatically changing economy.  His website is filled with resources and articles, and you can sign up for his newsletter and his blog.

Zombie startups – a position statement on living your life (re-post of Danielle Morrill)

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Over my long years as a shadow-CEO,I have watched and supported several tech entrepreneurs in denial of (what I called) “dead man walking” — the year or more in which a company was dead but the executive team persisted.  And many of these start-ups preceded the more recent notion of the pivot.

Most recently, I convinced an experienced entrepreneur to close his Year 2 venture, prior to outside funding, by showing the market shifts that would prevent its scaling (and a list of other troubles embedded in the company).  We moved on to other ventures that have already succeeded much more quickly.

This week I saw Danielle Morrill’s blog post following the announcement of her pivot (in Year 4) of her company, Referly.  I admire Danielle’s rare clarity:  She sees her larger life and the focus of her energies in a context that does not allow a single venture to define her.

A few excerpts, and then I will leave you to read the entire post.  Be sure to click on the accompanying musical soundtrack by Handel (Zadok the Priest/EMI).

“My greatest fear as a startup founder isn’t to fail, it is to become a zombie startup. Kind of like in the 6th Sense when Bruce Willis doesn’t realize he is dead and tries to have a nice dinner with his wife, there are startups out there who are still “operating” but might as well not be.”

“Sometimes I feel caught between two mindsets, one that encourages me to be a cockroach and survive no matter what and another that inspires me to overcome my fear of flying and take it to the next level circumstances be damned.”

“The biggest reason to charge ahead is that I don’t want to waste a single moment of my life in denial, in deadlock, in zombie mode waiting for something I can’t control change or expecting magic to happen. It goes beyond not wanting to. I simply can’t, won’t, would never give up precious days, weeks, months, years. And it’s not that I don’t have endurance for the schlep, but I can only summon that super-human power to fight for the right thing.”

And, look at the comments — they show our community in all its variations, as well as many comments on the “mafia” of accepting venture capital.

Full blogpost:  http://www.daniellemorrill.com/2013/03/zombie-startups/

 

How to Protect Yourself from Skyrocketing Trend – Tax Identity Theft, by Terry Corbell

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Terry Corbell, The Biz Coach

 Terry Corbell, the Biz Coach

Tax identity theft is increasingly victimizing Americans, according to the Internal Revenue Service.

IRS data shows 641,690 cases of tax identity theft in the first nine months of 2012. That compares to 242,142 the year before. In 2008, there were 47,730 cases of criminals falsifying tax returns to grab refund checks. All of this was indicated in an Equifax press release.

“The best defense against identity theft of any kind is to be vigilant in the protection of your personal information,” said Trey Loughran, president of the Personal Solutions unit at Equifax. “It can take many months for a victim of tax identity theft to finally get his or her rightfully owed refund check.”

Perpetrators are stealing Social Security numbers from the victims and using fake addresses to garner tax returns.

How to avoid tax identity theft

Equifax provides these tips:

  • Keep your personal information safe. Keep documents like your Social Security card, Medicare card and birth certificate in a secure place. Only carry these documents with you when absolutely necessary.
  • File your tax return as soon as possible to beat a potential scammer to the punch. If you file with the IRS first, the thief will be denied when trying to use your Social Security number for a fake return.
  • If filing by mail, take your tax return directly to the post office. Do not leave it in your mailbox where it can easily be stolen.
  • Be especially aware of those who prepare your tax report. Only seek tax preparation services from reputable businesses. Check with the Better Business Bureau.
  • If you wouldn’t normally file a tax return because, for example, you are a full-time student with no income, be wary of anyone offering to prepare your taxes so you can receive a refund or “free money.”
  • Never sign a blank form that someone else will complete for you.
  • Don’t fall for a spam scam. The IRS never initiates contact through email to ask for personal information.
  • Check your credit report regularly. If your personal information has been compromised for tax fraud, it’s possible that identity thieves will commit other types of identity fraud with this information, such as opening credit card accounts in your name. Consumers can request a free credit report from each of the three credit reporting agencies each year at www.annualcreditreport.com.

Beware — phony tax preparers

“Don’t fall for the promise of big refunds,” said Erin Rodriguez of the Better Business Bureau (BBB). “Be wary of anyone that’s promising, ‘I can get you something larger than the competition.’”

Annually, phony businesses open up to steal your money. They want your tax refund, a phony tax preparation fee, your Social Security number and your sensitive bank information.

Even if you’re victimized, it’s still your responsibility in the eyes of the IRS.

“What consumers are reporting is that they’ve been receiving emails that appear to be from the IRS, but in fact that is a scam,” warned Ms. Rodriguez. “The IRS does not initiate communication through emails.”

If you use a tax preparer, consider these BBB tips:

  • Avoid preparers who base their fee on a percentage of the amount of the refund.
  • Use a reputable tax professional who signs your tax return and provides you with a copy for your records.
  • Have you physically seen the business in years past? Will it be around to answer tax questions months, or years, after filing the return?
  • Review your return before you sign it and ask questions on entries you don’t understand.
  • Never sign a blank tax form.
  • Find out the preparer’s credentials. Is he/she an Accredited Tax Preparer, Enrolled Agent, Certified Public Accountant (CPA), Licensed Public Account or Tax Attorney?
  • Only attorneys, CPAs and enrolled agents can represent taxpayers before the IRS in all matters including audits, collection and appeals.

What to do if you’re victimized:

  • First, file a report with the police.
  • File a report with the IRS Identity Protection Specialized Unit by calling 1-800-908-4490, and sign an identity theft affidavit.

From the Coach’s Corner, related tax tips:

Money isn’t everything, but it sure keeps the kids in touch.

 __________

Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.

What you MUST tell your donors to avoid IRS challenges, by Gene Siciliano

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Gene Siciliano, your CFO for Rent®

“No good or services were received in exchange for this contribution.”

Nice, clear language. Often provided in receipts to donors by many nonprofits. IRS

The problem is in the words “often” and “many.” Because now they are absolutely required in order for the IRS to allow your donor to take a deduction for that donation. In 2012 there were two US Tax Court cases that challenged that requirement, offering things like thank you notes and paid checks as evidence of the donation. Not good enough, said the court in both cases, to prove there was not a benefit to the donor. A nice hand-written thank you note is very often sent to large donors by a grateful executive director, and nothing more is said about it. But if the thank you stops there, if there is no formal receipt with the magic words first offered in this post, the IRS can, and has already been able to, deny the deduction on tax returns.

So keep your donors happy. Send them that hand-written thank you note if it will make them happy, but include the magic words to avoid making them really unhappy come tax time.

<P.S. from Joey:   If you are the donor, make sure those magic words are available for your upcoming taxes.>

My close colleague, Gene Siciliano, CMC, CPA (our “CFO for rent®” ) is financial consultant, (and author and speaker) who works with CEOs and managers to achieve greater financial success in a dramatically changing economy.  His website is filled with resources and articles, and you can sign up for his newsletter and his blog.