Time To Market in Technology

A lot of entreprenuers want to raise several million dollars to create the next social media, or web based business. I don’t know any angels, who continue to grow their wealth, that invest in these companies. There is a reason. Normally a technology, or web based platform should be cheap to test for market traction. You should be able to see if you can get customers and generate revenue. Your revenue may be ad based {cringe}, but you have to show the cost to delivery now, the revs earned, and how that ratio will improve with scale.

So raise small capital. Raise 50K or so, and use that to build out a test system that can go live and do these basic market condition checks. Investors will see you are being responsible and, even if they stay out of this round, they will be MUCH more likely to invest in follow up rounds.

By the way, ad revenue doesn’t work 90% of the time. Facebook looses money hand over fist. You tube loses money hand over fist. They are worth so much because of the perceived and not actual cash flow potentials.

Advertisements

Down Cycle Investment (Recession Fund Raising)

Down cycles bring a very interesting time for entreprenuers. With all the current economic issues, the Bernard Madoff scandal, the layoffs and the bailouts I figured it would be a good time to look at this economic time for entreprenuers.

Bailouts are bad for entreprenuers, most of the time. The financial bailout could be beneficial if it were to open credit but I have serious doubts that the money will cause that result. Bailouts allow existing companies with an existing model to last longer. That isn’t as good as it may sound. By letting these companies last longer, new businesses with new models are put at a deadly disadvantage. There are plenty of new automotive companies, such as Tesla Motors who are being put into a financial whole that may keep them from attempting scale and growth to profitability.

Bernard Madoff created a recent scandal. Google him… You will see. He basically was lieing about the return his fund was able to provide to investors. He built up a name in the market as a golden return guaranteeing money back for investors at a very healthy rate. He was able to keep building up because he would payout the investors at the return promised, but would cover that loss by new investment capital. This was creating a cash hole that built upon itself and made recovery impossible. This all fell apart when there was a large enough run by investors and no new money.

There is a very important lesson here for entreprenuers. Do not lie to investors. You may stretch the truth with outside entities or organizations as part of your sales and partnering endeavors, but be honest with the investors. They should have known the risks and potential rewards, and if you lose money, they know that is part of growth. VC’s, for example, know that the company will not go right to success but will suffer, burn capital, and lose value many many many times before they boom. They bank on it in the terms they will try and put into the contracts for follow up investing. If you lie to investors, they will catch you eventually, and they will not put any cash into your company, or any company you are involved with again. If you are honest, they will see the steps and process, and though you fail or falter, they will probably be willing to re-invest or boost capital.

Layoffs are AWESOME for startups. Talent gets CHEAP! Right now top quality people are available for almost ridiculously low amounts of money. People often look for businesses that require no talent, with the web being the key. I used to do that exact same thing. I have the advantage of being a coder by trade, so I could handle the technology aspect, but more and more I bring in coders to handle that. Quality people are a requirement. I don’t care if you are an e-commerce company, an affiliate business or a financial services firm, the people make the business. Doing software development cheaply overseas is a viable option, but you are banking that THEY recruited the right people, or you had better have a project manager that is capable of handling the issues that come with outsourcing.

You can look for mergers with down cycle valuations that make them really attractive and you can position yourself well for the upcoming growth cycle. I have found there are very good, complimentary businesses to purchase in the down cycle. If you are an affiliate marketing company, such as one of my holdings, now is a great time to find an e-commerce front, technology platforms, and other such businesses. Now is also a great time to argue commission rates as an FYI. If you are like another holding company of mine, an AI system, then now becomes a great time to actually acquire end user points. We are looking at some assets that could be direct revenue streams and growth points for our system with integration and then in the up-cycle we would be able to re-sell the assets and keep a smaller stream throw a license for our systems.

But there is a hitch to down cycle investments and entrepreneurship. CUT THE EXPENSES. You want to last through the cycle while growing. This means working out of an apartment. This means no company outings. This means no wasted PENNIES. I know you are thinking that you are frugal and penny pinching, but why are you taking cabs instead of walking or buses or trains? Why are you flying to see family? Why are you going to a bar for drinks with your friends?

Pitch Suggestions (take with salt).

You will probably present to many friends, associates and others before you ever step foot in front of an Angel Investor. You may even be lucky enough to accidentally pitch an Angel here or there along the way. Everyone will give you advice on changes, tweaks and information in your presentation.

I would suggest listening, evaluating and making your own decision on the inclusion of the changes into the pitch. Remember, something one Angel loves, could be a complete turn off for others. Investors, Angel or VC, are always evaluating the Management team more than any other aspect of a business. A good plan with a bad team will fail. A bad plan with a good team, will be evolved into success. So when you start changing the presentation away from your style and mode, you will lose the charisma, and power that will be ten times more likely to get an angel to invest, than any appendix every could.

I have seen, and been a part of, many pitches that went from solid and effective, to down right embarrassing. The problem was the attempt to include ALL the feedback from professors, entreprenuers, friends, family, random members of society, and even other Angel Investors. The presentation stopped being a reflection of the management teams vision of opportunity, passion for value, and knowledge of how to proceed into a dull, uncomfortable data presentation. The angels are not stupid or fool hardy, they are going to go and do research if they are interested, there will generally be follow up conversations where deep data can be effectively shared and used to your advantage.

On the same note, if you have forgotten to include the market size, you should probably include that. If you don’t have a slide introducing the fact that Bill Gates is your Director of Marketing for your new OS, I would suggest throwing that into the presentation, unless he will be at the pitch. Then, he may be most effective in person with no introduction, whatever will make you the best possible presenter.

Investor Levels (and what they mean to you)

There are two main legal classifications of investors that entreprenuers should worry about.

  1. Unaccredited Investors

    Any person that does not have a value of $1,000,000 and an income of $200,000 / year (single) or $300,000 / year (married) with a reasonable expectation of continuing to make that income.

  2. Accredited Investors

    Any person that does have a value of $1,000,000 and an income of $200,000 / year (single) or $300,000 / year (married) with a reasonable expectation of continuing to make that income.

The SEC has set federal guidelines, and changes these guidelines on occasion, regarding the raising of capital from Unaccredited Investors. The rule we entreprenuers most generally care about is Regulation D. Basically this rule gives you a method of raising up to $1,000,000 without having to register with the SEC. But this doesn’t mean you can go out and solicit everybody on Craigslist to give you money. There are state laws that regulate fundraising as well. If you solicit someone from California, even if you live in New York, California could decide to come after you for General Solicitation (I do not know California law as I am not a lawyer and have never raised capital there).

There are rules regarding “General Solication”, the number of solicitations, the number of investors and they range from state to state. This data can be very tricky to find, and it gives the investors a huge come back clause at the entreprenuer if the company failes. Basically, if you break the rules, and the company goes under, the investor can then come and sue you. But if the company succeeds, the investor gets the benefit.

This is one of the reasons you should hire a legal professional to handle your PPM and provide counsel for your fund-raising activities. There are plenty of resources available online to find a perfectly suited attorney at a very reasonable price. The lawyers for this can be very cheap as well, if you are not raising a lot of capital. The documents and guidance tend to be straight forward, so I have never hesitated to utilize lower standard legal counsel in this area, but you should stick with what you feel comfortable doing.

10 Options to startup funding

You can fund your business through many different approaches. Much like anything else in life there are almost limitless choices and paths. Some work, some don’t. Most work some of the time, none work all of the time etc.

But lets look at some of the options on the table and then later on we can go into details of how to actually go about doing them legally (have your lawyer look at it first please) and effectively.

  1. Personal Cash

    If you are reading this, then I doubt this is an option. But you may be able to siphon money away from other things in order to support your entrepreneurial expenses. Remember starting a company is an investment. It may be long term, or it may be a short term investment, but you are looking for a return from your company. Often times, that means suffering now for the potential later reward.

  2. Friends and Family

    This is generally a preferred but very limited method of raising money. Essentially you are asking your friends or siblings, parents or others you have a personal connection with to invest in you. It is unlikely that they actually understand or care what you are doing. They should be investing because they want to help, and they hope you will succeed. You should not promise them a return. In fact, you should pretty much promise they will lose the money. There is a 90% (statistics are such crap) chance that you will start an “under-performing” company. They need to know the risks, or friendships will die, family will feud, and lawsuits may ensue.

  3. Angel Investors

    Yes there really are angel investors out there looking to put their money to work in companies. They may even be dreaming of night about your company. But they won’t come banging on your door… normally. The angel networks that are easily accessed tend to be lies and false hope. I have never heard of any succeeding and I have been starting companies and raising money for quite some time now. There are some qualifications generally associated with Angel Investors and they are important in legal issues we will cover later.

  4. VC’s

    Venture Capital, the Green Devils, evil incarnate… whatever you may call them, they aren’t that bad. Remember they are in business and you should be fine. They rarely look to invest in seed stage companies, but maybe you will find one that wants to invest in you. These companies are experienced investors and know how to form a legal document to their advantage. They have all lost plenty of money, and every time they do they learn, adjust and make sure that the same mistake doesn’t happen again.

  5. Credit Cards

    Credit Cards can be a really effective way to get startup capital. Be CAREFUL. Understand the rules and plan for the failure. I had a simple mentality on my first company. I didn’t care what it meant, but I was going to succeed or go bankrupt. I ran up credit cards, and I was lucky it worked out for me. If you have a bankruptcy already, you probably should not use this strategy. If you don’t have a bankruptcy or any other really good reason to fear some credit damage, and serious debt… feel free. I would suggest looking into balance transfers, 0% interest cards and some of the other features that can really help delay the fee payment hell.

  6. P2P Loans

    P2P loans are a relatively new online phenomenon. Basically, it is other individuals loaning out money at set rates. The terms can be pretty appealing, but the capital levels seem to be low. Normally you can raise between $1,000 and $25,000 through these systems, which can easily be enough to get a product off of the ground. If you don’t have a FICO score of atleast 660, don’t bother. You will end up paying credit card rates for the loan so you may as well get the airline points.

  7. Pay Day Loans

    Pay Day Loans are credit cards on interest crack. I knock them and refuse to go near them myself, but I do know a couple people who have launched companies very quickly with them. I even know a company that used a pay day loan to make payroll until an acquisition was complete. But I would suggest credit cards before these loans.

  8. Government Grants

    Grants are tough. It takes a lot to get through a beaurocracy and the grant departments tend to be the worst. They are a viable option for women owned, minority owned, and non-profit companies but I have never qualified in those groups. I really can’t comment on theseĀ  so the reviews are simply links to outside resources.

  9. SBA Loans

    SBA Loans are AWESOME. They are quick, easy and I have always gotten them structured as a credit line. You will need to be incorporated, have some kind of office space and some legitimating paper work, and cash in the bank. I have seen people use pay day loans, credit cards and personal loans in order to get enough cash in the bank to get an SBA loan, and then pay back everything quickly, and run off the SBA alone.

  10. Revenue Share Consulting Agreement

    This is actually one of my favorite ways to help new entreprenuers get off the ground. Basically, find a client that wants the product, get them to cover the costs, then you sell it and they get a continued revenue share or equity stake. There isn’t enough of this in the marketplace right now. Companies are constantly building out systems and products that they will never intend to monetize, but are needed peices to continue doing business, and are needed by their competitors. Doing it in this structure can allow them to take money from their competitors, maintain a competitive advantage and really mitigate development costs.

Anyways, I hope this helps with some of the higher level options for fund raising. I am creating an ongoing list of resources in the Reviews category that should help find services and information related to funding. I am also working on a few case studies for each of these options to get down and dirty with how it works in the end.

Pay Day Loan Companies Overview

This is a pretty straightforward look at the payday loan industry players. This is a continual work in progress, and I will be updating with more details as I have the time.

I have never used a payday loan directly, and would advise you to seriously consider the repercussions of doing a loan. On the same note, there are plenty of people who have succeeded using them as startup collateral. The problem with payday loans, besides the shark side of them, is the fact that they are very low capital amounts. These are really MICRO loans, and I have only seen them succeed with straight cash plays such as funding a quick flip.

If anyone has information on the fees walk-up loans charge I would be interested in doing a comparison to the online side.

Team Quick Cash

A typical 1K loan available.

Secure Money Store

Up-to $1,500 in payday loans.

Magic Payday
Up-to 1K overnight. This one seems to be a reseller company for other brokers.

NOTE: LINKS ARE AFFILIATE LINKS. (I never turn away free money!)