Littlebanc Blog

News & Tips for Entrepreneurs

April 30, 2012

Are you prepared to raise capital? (Part 2)

Filed under: Entrepreneurs & Executives,Raising Capital — @ 11:00 am

This is the last in a series of two blog posts on five key questions to answer as you prepare to raise capital. 

How will the capital infusion move your business forward? Investors want to know how their money will be used.   For example, simply stating marketing as a use of proceeds is not enough.  You need to be prepared to detail out the type of marketing initiatives, why these are the preferred initiatives and your plan to monitor their effectiveness.

  • Tip If you know you have a weakness in your current team, dedicate some of the funds to strengthening the team.  Investors generally appreciate entrepreneurs who realize their limitations in areas like operations or finance and in the end, feel more comfortable investing with someone who is able to identify and acknowledge areas where they need help.

What are the primary risk factors facing your opportunity? Risks come in all shapes and sizes.  You likely will have more control over some risk factors, and less control over others.  They key is to understand all the risks that you face (execution risk, regulatory risk, competitive risk, etc.) and have well thought out plans on what you intend to do to mitigate each risk.

  • Tip Most business owners are adept at talking about the “upside”, however just as critical is demonstrating your knowledge and plans to address the downside.  Potential capital partners will ask questions about risk factors.  Preparing to address these questions upfront will improve your chances of obtaining capital.    

What are you looking for in a capital partner?  There are various types of capital and understanding what you are looking for in a capital partner is an important part of the process.  Although your Investment Banking partner will play a key role in this process, it is important for you to understand what type of capital and capital partner best fits your future business needs.

  • Tip Do your homework before talking with prospective investor sources.  Look to see if they have a website and review what types of deals they have invested in previously.  Search the individuals you will be talking with on sites like LinkedIn to see if there are common contacts or relationships you may have with them.

 

The information contained in this blog post is intended for informational purposes only. While the information in this blog post has been obtained from sources we believe to be reliable, Littlebanc Advisors, LLC (“Littlebanc”), securities offered through Wilmington Capital Securities LLC, Member FINRA/MSRB/SIPC (“Wilmington”), makes no claim or guarantee as to its accuracy and completeness. Opinions expressed herein are subject to change without notice. The information contained in this blog post does not necessarily represent the view of Littlebanc and/or Wilmington or their respective employees. We make absolutely no recommendations to buy or sell any security in any blog post.

April 23, 2012

Are you prepared to raise capital? (Part 1)

Filed under: Entrepreneurs & Executives,Raising Capital — @ 11:00 am

This is the first in a series of two blog posts regarding five key questions to consider as you prepare to raise capital.

Often great ideas or proven concepts fail to attract quality capital partners purely based on the message delivery or lack of preparation.  If an investor has to work too hard in order to understand how your product or service answers five key questions, they often will just move on to the next deal.  You have spent all of this time, sweat and resources to build your “mouse trap,” now it is time to prepare to sell your story.

What problem do you solve and how does it differ from or improve what is currently being done? What is the market need and how does your product or service fill that need. Make certain you fully understand the competitive landscape and can clearly articulate why what you do is better than current (and future) options.  A good Investment Banking firm will get you in front of the “right” capital partners, partners who know your space and can add value to your future plans.  You need to know the space better than the potential investor.

  • Tip If your product is regulated, like a medical device product, search the FDA website for recent filings.  Often the competitive landscape encompasses products that have not yet been commercialized.

What is your revenue model (how do you make money)?  Answering this question goes beyond a simple we will charge customers “this” and it will cost us “that.”  You need to understand and be able to articulate such things as what does it  cost you to acquire new customers, what is each customer worth and what is the value proposition for the customer.  If growth or scale can significantly improve your revenue model, you have an advantage that others vying for the same capital may not have.  Prepare a financial model which captures how profitability improves with scale.  Investors will want to you to be able to talk in terms of “Once we reach this threshold (a certain level of revenue or certain number of customers, etc), each incremental dollar will drop .X dollars to the bottom line,” as an example.

  • Tip Clearly articulating your revenue model and related projections is critical to securing capital.  If this is not your strong suit, make the investment to get the appropriate financial resources to assist with these models.   
The information contained in this blog post is intended for informational purposes only. While the information in this blog post has been obtained from sources we believe to be reliable, Littlebanc Advisors, LLC (“Littlebanc”), securities offered through Wilmington Capital Securities LLC, Member FINRA/MSRB/SIPC (“Wilmington”), makes no claim or guarantee as to its accuracy and completeness. Opinions expressed herein are subject to change without notice. The information contained in this blog post does not necessarily represent the view of Littlebanc and/or Wilmington or their respective employees. We make absolutely no recommendations to buy or sell any security in any blog post.

September 12, 2011

3 Tips for Your Business Plan Financial Projections

Financial projections are the backbone of a business plan—they support the claims made throughout the business plan, and they show the strength of the business. Financial projections are also the most complex part of a business plan. If you’re looking to raise growth capital, investors will analyze your projected financial statements alongside the rest of the business plan to determine the viability of your company—and to determine how much money they can potentially take out of your business.

Typically, a business plan should include balance sheets, income statements, and cash flow statements for up to 5 years of projections. A general rule of thumb is that the upcoming year should be broken down by month, and the second year should be broken down by quarter. Years three and beyond can be annual statements, depending on how far out your projections go. Here are three tips to consider as you build your financial forecast:

Be realistic. While all potential investors would jump at the opportunity to invest in the next Facebook, most businesses rarely see hockey-stick growth. Investors who see unrealistic growth quickly dismiss the plan. Even though projections are essentially educated guesses, you’ll establish credibility if you use numbers supported by realistic assumptions. For example, you know your current cost of goods sold and employee expenses. You can realistically estimate how these expenses will grow based on your projections for sales and new hires. Be sure to include a summary of your assumptions that explains your reasoning.

Keep it simple. Business plans should only include financial projections for a single scenario: the realistic, likely outcome. Showing multiple scenarios, like the break-even outcome or worst-case scenario, may unintentionally indicate to investors that you do not fully believe in your likely outcome. Investors will more seriously consider your company if you show sound reasoning for your financial projections.

Use the projections. Many times, financial forecasts are carefully crafted, presented to investors, and then tossed aside. If you spent time and effort crafting realistic projections, your executive team can use the numbers as a benchmark. Set time aside each quarter to compare the financial projections to your actual figures. Are you under or over your original projections? Why are the figures different? An analytical approach to comparing your forecasts with actuals will let you identify potential problem areas and make changes as necessary.

The information contained in this blog post is intended for informational purposes only. While the information in this blog post has been obtained from sources we believe to be reliable, Littlebanc Advisors, LLC (“Littlebanc”), securities offered through Wilmington Capital Securities LLC, Member FINRA/MSRB/SIPC (“Wilmington”), makes no claim or guarantee as to its accuracy and completeness. Opinions expressed herein are subject to change without notice. The information contained in this blog post does not necessarily represent the view of Littlebanc and/or Wilmington or their respective employees. We make absolutely no recommendations to buy or sell any security in any blog post.

August 24, 2011

Financing Your Early Stage Company

This is a guest blog post from Robert C. White, Jr., Esq. – Equity Shareholder, Gunster.

The information contained in this blog post is based on general principles of law and is intended for informational purposes only. I make no claim as to the comprehensiveness or accuracy of any of this information. None of this information should be considered as legal advice, and this blog post is not offered for the purpose of providing legal advice to any party. The information contained in this blog post represents my own personal views only, and does not necessarily represent the views of my law firm or any other lawyer in my law firm. My provision of the information in this blog post does not create an attorney/client or any other relationship between me or my law firm and the readers of this blog post or any other party. All readers of this blog post should consult their own legal counsel and other advisors before taking any actions or making any decisions based on any aspect of the information contained in this blog post. I am not certified by the Florida Bar as a “specialist” or “expert” in any area.

Financing is often the most important focus for an early stage company. This is usually not healthy, as it can distract the entrepreneur from the key strategic and tactical issues that he or she is facing, but it’s understandable since running out of money normally means game over. To help you get on top of this situation and alleviate some stress, I’m providing several items that may be helpful to early stage companies in the financing context.

An entrepreneur should first consider how much financing is required and what the company’s valuation will be. These are complicated factors with critical ramifications. Take too much money now at a low valuation and you sacrifice a percentage of equity ownership in your company. Take too little and you risk running out of money.  This is further complicated by current harsh economic conditions—there is a real risk that money may not be available on acceptable terms or at all when you need it.  Carefully balance your short- and long-term cash needs with your strategic and tactical plans (including all contingency plans) and the projected availability of financing for your company.

Early Stage Valuations: Seek an Outside Perspective

Valuation of an early stage company in an early financing round is a critical component as it will significantly affect the size of your equity interest both now and in the future. These valuations are difficult, however, as many traditional valuation metrics cannot be fully utilized with early stage companies. You need to get good professional advice in these situations.  A trusted outside accountant is often a good source for early stage valuations. Remember that entrepreneurs sometimes develop unrealistic valuation expectations.  Get objective outside advice on valuation from trusted sources and listen to it.  One key item: Always be aware of your equity ownership in the company and how it could change based on all applicable circumstances (for example, additional financing at a low valuation, exercise of options and warrants and any anti-dilution rights granted to other investors).

Don’t ever assume that adequate financing will be available just because you’ve got a great idea or business model.  In my experience financing has never been easy to obtain for an early stage company – it’s definitely been easier than it is today, but I’ve never known it to be really easy. The other thing to remember here is that even if financing is available, the terms of the financing are likely to be egregious if you wait until you’re desperate and have no bargaining power.

Sources of Early Stage Financing

 

Financing for early stage companies normally involves a combination of loans from shareholders and other parties and various types of equity financing. Most of these companies will not qualify for bank financing at this stage.  If shareholders contribute equity capital, it is critical to document the percentages of equity that they receive.  It is also quite common for professional investors to require shareholders and principals to convert prior loans to equity, so be prepared for this.

The company may then do one or more rounds of “friends and family” financing, which involve funds received from family members and preexisting friendly relationships. This type of financing often seems attractive because it comes from people who you know and feel comfortable with, but it can have a very negative downside if things go wrong.

As your company progresses, you may encounter opportunities for professional financing from sources such as angel investors, venture capital firms and private equity firms.  Your company may also have access to strategic financing from another industry participant or a party such as a vendor or customer. All of these may be good sources of financing, but you must be extremely cautious here because of the sophisticated and professional natures of these parties. They are generally smart and dispassionate about their investments.

These financing sources will attempt to impose very strict and tough terms and conditions in their transactions, and you may not have the bargaining power to avoid these terms and conditions.  It’s imperative, however, that you understand what you’re getting into and what your obligations will be, as well as the consequences of not being able to comply with such terms and conditions, some of which could be extremely negative for your company and you. On the positive side, many “smart money” financing sources can add considerable value to your company beyond just their financial investment.

Document All Terms of a Deal

It is always essential that you clearly and correctly document all of the terms and conditions of any financing. Don’t ever leave any term to be construed later, and don’t depend on friendships and relationships here. People and their perceptions and situations always change (sometimes quickly and radically), especially when money is involved.

Remember that Federal and state securities laws potentially impact every financing transaction, regardless of how small and informal.  You need to get proper legal advice from a qualified practitioner in this area. These laws can impose substantial penalties and liability on your company and its officers and directors individually.

The financing process can be complex, frustrating and painful, but it is a fact of life for most companies. Use the simple items contained in this blog post as broad principles to guide you through the process, and use your advisors for specific advice here. The end result of a successful financing transaction can be extremely rewarding and gratifying for your company.

Thank you to Robert C. White for providing the information in this blog post. Connect with him on Facebook, Twitter, and LinkedIn.

Bob is a member of Gunster’s Technology and Entrepreneurial Companies Practice Group, its Corporate Practice Group and its Securities and Corporate Governance Practice Group. He serves as the head of the Venture Capital and Private Equity Committee of the Firm’s Securities and Corporate Governance Practice Group. He represents clients in many business segments with an emphasis on technology, innovation and entrepreneurial situations. His regular practice areas include corporate strategic counseling, technology law, venture capital and private equity law, mergers and acquisitions, corporate finance law, corporate governance and general business, corporate and financial law matters. He regularly counsels business entities, entrepreneurs and executives in these areas.

August 10, 2011

Serial Entrepreneur Says Keys to Success are Persistence and Flexibility

Some people are bit by the entrepreneurial bug early in their career: once they’re involved in the start-up process, it’s hard to go back to a regular job. One such person is Dr. Zee Aganovic. Dr. Aganovic is the founder of Hiconversion, a conversion rate optimization (CRO) software that lets both small and large internet retailers convert a higher percentage of existing web traffic to more leads and online sales.

Dr. Aganovic is a true serial entrepreneur: Hiconversion is his third start-up; his previous start-ups sold to Microsoft and Ricoh, and he’s raised more than $20 million in venture capital throughout his career. Here, Dr. Aganovic draws from his entrepreneurial background to give us insight about running a business and raising capital.

What key skills and personality traits do you believe contribute to the success of entrepreneurs?

  • Persistence: Before becoming an overnight success, most businesses had to go through a prolonged incubation process ridden with adversities; most businesses fail because people quit too early.
  • Optimism: Positive thinking and belief in your own vision is the essential part of success.
  • Openness and Flexibility: Success is not a destination but rather a process during which one needs to be able to listen, learn, and adapt to reality.

How do you manage the (at times) overwhelming day-to-day details and tasks of running a growing business as a CEO?
There are always more things to do than time to do them. People think that the solution is to establish priorities. In reality the right approach is to establish posteriorities: a list of things that you will not do. This clears your mind and helps you focus the limited resources on top priorities.

As a leader and company founder, what drives you to succeed?
The ultimate driver of success is the realization that the well-being of many people depends on the success of this business: employees, family, partners, investors…

What is the hardest thing about raising growth capital?
To find the time to do it. This is a long and grueling process that takes you away from building the business.

What do you think is the most important part of your presentation when you’re pitching to a potential investor/venture capitalist?
It is about new value that your company will create in the marketplace.

To learn more about Dr. Aganovic and Hiconversion, check out this case study or visit Hiconversion.co.

 

 

August 4, 2011

Entrepreneurs: You’re Your Own Worst Enemy (Part 2)

Filed under: Entrepreneurs & Executives,Raising Capital — @ 11:35 am

Part 1 of this two-part blog post covered the idea that understanding his or her limitations is the most difficult part of being a CEO. Now, we take a look at how CEOs can try to better understand the capital raising process from a venture capitalist’s perspective.

Before approaching a venture capitalist, know what Michael Margolies, Littlebanc CEO, says they all look for: “We look for businesses that solve problems, businesses that address clear inefficiencies in the marketplace. We look for businesses that have paying customers. We look for experienced management teams.”

The major point of dissension between an entrepreneur and a venture capitalist is often a company’s valuation. Entrepreneurs want to believe they have a certain valuation and get that figure stuck in their head. This is an example of an attachment that can hinder a CEO and his company—it can also be their biggest obstacle when sourcing financing.

Mr. Margolies points out in the video above that many start-ups do not understand pricing models from a venture capitalist’s perspective. Here are three key ideas to remember:

  • First, entrepreneurs must understand that they’re part of a large pot of companies the venture capitalists are stirring. VCs expect the majority of their investments to be donuts: big, fat zeros. They will not hold a start-up in as high esteem as the founders.
  • Second, the VC’s money is rented out—entrepreneurs are going to have to pay for the money they get.
  • Third, start-ups have no clue how much money, if any, they will need to raise in the future. The VCs do not know how diluted their investment will become.

These are several of the primary reasons for the disparity between a VC’s valuation and a CEO’s valuation. These reasons are why a VC will slash projected financials and drastically reduce multiples. But, as Mr. Margolies points out, one way to smooth the process is to let go of your attachments, whether it’s a valuation you spent days coming up with, your experience with a previous financing, or an executive who slows the team down. Don’t let limitations or a narrow view turn you into your company’s worst enemy.

Getting rid of attachments that hinder your business will put you one step ahead in the capital-raising process. That, and understanding everything about your target VC:  “Know your enemy like you know yourself. If you are going to be asking people for financing, understand who they are, what they want, and what their goals are. Otherwise, you are not going to get anywhere with them. You are going to be fighting a battle that’s lost before you start.”