Number of Start-ups is Declining
Bill Warner Tuesday, May 19, 2009
According to the TechCrunch database, the number of start-ups in the first quarter is down considerably. Keep in mind that this is only a subset of all US start-ups. With unemployment increasing, there is an increasing number of companies overall that are starting in the US. Most of them are not seeking private equity financing.
Venture capital financing is down
This certainly tracks with the reduction of angel and venture capital investments for the first quarter. Although, the reduction in venture financing was felt less for companies needing B or subsequent rounds of financing. This too is proof that venture firms are focusing on their current portfolios by protecting those companies that have the best chances of success.
Other indicators
Their data also shows that start-ups are starting with fewer people and with less money. This can be attributed to belt tightening as well as the increasing number of web based companies that need far less money to get started. M&A is way down for the quarter, with none of the major companies announcing an acquisition.
All of this is perfectly predictable, but the reality is here. Nevertheless, if you are planning on starting a business, go for it smartly.
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The Structured Business Plan Presentation
Bill Warner Wednesday, May 06, 2009
With so many entrepreneurs trying to get their businesses launched, I thought it would be a good idea to remind them of what it takes to successfully present their businesses.
Whether you are approaching venture investors or simply trying to convince someone of the attractiveness of your company, you need to have a well thought out story that presents your business in a compelling and exciting way. Nobody is going to invest in or join your company if you cannot effectively explain why they should be spending their time and money to participate in it. The key in communicating your business plan story is to explain enough that your audience wants to spend time with you to learn more of the details about your business. There is some fundamental content your presentation should have, starting with a clear description of the opportunity you are going after and ending with why an investor, potential partner or prospective employee should join you.
There are ten major areas you need to cover in order to effectively communicate the fundamentals of your business.
The Opportunity
Every good business is founded in a compelling need that is currently not being successfully filled. Describe this need and the way you will solve it (problem or opportunity). Some business people call this the “pain” that your buyer feels, that you will cure. This part of your story validates the demand for your solution.
The Solution
Briefly explain your product or service, focusing on how it satisfies the buyer’s need, describing it from the perspective of the buyer. Highlight the benefits and value that the solution brings the buyer. Don’t dwell on “feeds and speeds,” but express your solution in results oriented language that relates to the buyer’s need.
These first two fundamental areas will make or break the interest of your audience. At this point, you will have essentially revealed what business you are in. If your audience is on the edge of their chairs wanting to hear more, you have really grabbed their interest. If not, you will probably not get any traction.
The Market
Now that you have grabbed the audience’s interest, you can start talking about the business in a little more depth. Explain some of the important aspects of the market segment that you will target, including information which profiles the characteristics and market opportunity size.
Competition
Every business has competitors. Keep in mind that it may be the status quo that you are up against or an internal solution that has its own sponsors. Typically, there will be many well entrenched competitors who address the buyer’s need in various ways. You need to portray how you are going to win.
Summarize the key competitors by portraying their strengths and weaknesses, and explain what differentiation you have that will beat them.
Product or Service Description
Briefly describe the product or service your sales team will sell to the buyer. Describe its salient features and the benefits they bring to the buyer; highlighting those that differentiate you from your competitors and sprinkle with examples.
In concluding your description, summarize the barriers to entry. There is no need to give away the intellectual property farm, but you need to explain the results of your “secret sauce” and show not everybody can easily get into your business.
Marketing Plan
Take some time to concisely explain the value your product or service brings to the buyer. This is a prelude to your marketing plan, showing that you know how to clearly explain the benefits you bring to the buyer and can quantify its value. In effect, you are explaining “why the buyer will buy.”
The Marketing Plan is all about generating sales leads. Don’t get hung up in brand management issues, corporate communications and public relations. Get right to the point about how you are specifically going to find your buyers and deliver your marketing messages. Describe your revenue model. Most companies fail because they don’t have an effective way to reach the market and close sales.
Sales Plan
Explain your sales model and process; for example, direct, indirect, OEM. Describe your near term sales objectives and status, including product readiness. If possible, explain what pipeline of customer prospects, demonstrating that you are getting market traction. The more you can demonstrate this with key account situations and next customers to close, the stronger your story will be.
Management Team
It’s important to show that the company is in the hands of a great management team that can be trusted to take it forward. This may be the most important confidence builder in your presentation, based on their credibility and experience.
Financials
You need to provide a forecast of key financial results: revenue, gross profit, net profit, cash flow and position, and significant capital needs. Explain your current financial status and show when you will be profitable and cash flow positive. Highlight the timeline for major business milestones. Many people believe this to be crystal ball kind of stuff. However, the important thing you are demonstrating is that you have a clear view of the dynamics of how revenue and profit will be made.
Investor Summary
Structure your summary to your audience and what they need to hear. Most people will want to know that this business will succeed because it satisfies compelling needs within the market. If you are looking for financing, you will also need to include the appropriate information. And last, explain the potential benefits for the investor when you achieve your objectives.
Summary
By covering these ten fundamental areas, you will provide a complete and concise view of your business that most people will understand. By focusing on the most important aspects of your business, and clearly netting it out, you will maximize your chances of your audience being interested in taking the next step with you.
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Venture Capital Pillars Are On Weak Ground
Bill Warner Thursday, April 30, 2009
At its recent annual meeting, the National Venture Capital Association (NVCA) introduced the four pillars of success for reinvigorating the venture capital markets. The trouble with many of their ideas is that they are built on assumptions that the government law makers, regulators and administration are going to make massive changes in order to save the small cap venture investing market. Given the current government posture, these changes in the near term are terribly unlikely.
Boutique investment bankers
The idea of finding new partnerships with the smaller investment banking firms is a step in the right direction. However, these firms are still going to have to make money at this. Their deals are going to have to be attractive enough while investing in companies whose post-IPO value is between $100M and $400M, the segment of the market below the “Big 4” investment banks.
This seems like a long stretch in that none of the problems that this segment faces are being solved. The burdensome regulations are still there. The tax implications are still not favorable. This pillar of success seems more like a possible outcome when the basic capital market infrastructure changes are made.
New paths to liquidity
Having new and faster paths to liquidity certainly could make a big difference. The NVCA presentation doesn’t explain how this is actually going to happen in a way that works for investors and sellers. However, this does seem like a necessary element for stream lining the investment process for boutique investment banks. But, without fundamental governmental changes, this too will run into a brick wall.
Taxation changes – not for quite awhile
In the face of a socialist administration, coupled with a far left wing dominated congress, the likelihood of getting any changes that would provide tax incentives for businesses, let alone helping those capitalistic venture capital firms and investment banks, is not in the cards. With an administration and congress that is fundamentally anti-business, the only think we have to look ahead to for awhile are tax increases.
Reduced regulation – not likely
For the same reasons we won’t see tax incentives, we will only see more stifling regulation on businesses and increased government oversight in the private sector. Sarbanes Oxley is not going to change anytime soon and volatile markets are playing into the liberal’s hands in that it gives them a reason to get more involved in the private sector. None of them is looking to really help Wall Street.
Stay with the basics
It’s not the end of the world if IPO’s remain stagnant. The goal here is not to save venture capital. It’s to save small business. Whatever we can do as business owners and financial institutions to work with the hand we are dealt is all we can expect right now. Mergers and acquisitions will continue to be the primary form of exit. Investors are going to have to accept that limitation and structure their deals accordingly. We can expect no meaningful help from the administration or congress for the foreseeable future. Most of these people don’t really understand what they have done to small business anyway.
For entrepreneurs, build high valued businesses by executing well. Be experts at the basics of growing high growth and profitable businesses. For investment institutions, build your portfolio based on smaller valuations and oriented to faster exits, without relying on IPO’s to save the day.
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Entrepreneurship Remains Strong
Bill Warner Thursday, April 23, 2009
The first full day of CED’s Venture Conference was well attended by enthusiastic entrepreneurs and investors seriously looking for good companies. We had a full plate of great companies who made their presentations to packed rooms.
Wells Fargo introduced to North Carolina
The day was started by John Stumph, President & CEO of Wells Fargo, who gave a sincere presentation about how much he is impressed with North Carolina. Believe it or not, this was his first trip here. He has met with many community leaders, including current and past governors as well as senators and congressmen.
He assured everyone that their Wachovia accounts are safe and that the transition will be carefully done to protect its Wachovia customers. Stumph gave a compelling history of Wells Fargo and related the strong culture of his organization that truly cares about its people, customers and communities in which it resides.
As for the financial crisis, he quite precisely described the fundamental causes for the crisis, but quite frankly had no crystal ball telling him when the recovery will occur. He was bullish about the fact that Wells is lending money now and is actively looking for new loans to make. The company is in a very strong cash position.
All in all, Stumph said that he would not “bet against America.” We have been through difficult times in the last few decades. He is confident that we will pull through this one too, explaining that this is what Americans are good at.
Entrepreneurs are at the heart of the recovery
Erskine Bowles, President of the University of North Carolina, started his presentation with a humorous discussion about what a lousy politician he is and now how happy he is taking on the challenges at UNC.
He too gave us a dose of reality concerning the challenges that face the education system today. Last year’s $50M budget cut is near trivial compared to this year’s $175M cut with a potential cut of another $200M next year. This will cut to the bone of classes, people and potentially education quality.
Bowles noted that we are in a rapidly changing world. What we prepare our students for today will probably be obsolete in 10 years or less. He knows that the “old NC manufacturing jobs” will never come back as we move more and more to a knowledge-based economy. He said that we have to accept that we will continue to lose jobs to foreign countries that can provide many of them at much lower costs.
He pointed to the entrepreneur as being one of the major contributors to our return to a strong economy. He cited the need for increasing innovation and the support infrastructure that fosters it as being essential to our ultimate recovery.
North Carolina University is making substantial changes in its culture, technology transfer practices and accountability for academic results. Bowles stated that we have to focus on producing students that can think, communicate, be innovative and get things done in this new economy.
GreenTech – The next industrial revolution
To close out the day, John Denniston, Partner at Kleiner Perkins Caufield & Byers, made the proposition that we are on the verge of the next industrial revolution driven by the energy crisis. The revolution will be based on new energy sources driven by green technology.
Although an exciting premise, it was a disappointing presentation void of specific descriptions of innovations and technologies that would drive this kind of change. Quite frankly, this slow moving and elementary presentation addressed the audience as if we were eighth graders and couldn’t possibly have understood the basis for the industrial revolution of the early 1800’s or even understand who Thomas Edison and Henry Ford were. Nobody likes being talked down to.
Denniston cited the crisis as first being driven by man-made climate change as unanimously verified by United Nations organized scientists. Boy that sure isn’t very biased at all, from an organization that wants to transfer our wealth throughout the world through green house gas taxation. Secondly, and more compelling was his concern about energy security in that we are far too dependent on foreign sources of energy from countries that hate us. And finally he explained the alarming advances that are being made in innovation in other countries like China, asserting that America is losing competitiveness to them.
He then made sweeping analogies based on Moore’s law, claiming that similar improvements will be made in alternate energy source technologies using 1995 data to illustrate his point. He compared the sum total of all of earth’s natural energy sources to those of the sun, concluding that we need to tap into solar energy for that reason. The presentation continued to a merciful end without much substance about today’s green technology innovation.
Kleiner Perkins is the world’s leading venture capital firm, but this presentation feel far short of showing their expertise in green technology innovation and what it will mean to the future of our economy.
Entrepreneurs and investors enthusiastic
The entire conference was buzzing with enthusiasm and positive attitudes about what we need to do to recover from this economic downturn. New innovations are abundant. Investors are interested and engaged. Just rubbing shoulders with them all was a major pickup for me.
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Venture Capital Has Focused Optimism
Bill Warner Tuesday, April 21, 2009
CED’s Venture Conference is getting off to an optimistic but also sobering start with Tuesday night’s investor-only dinner in Pinehurst.
CED showing leadership
Joan Rose, President of CED, highlighted the evening with good news about the expected attendance at over 500 people, citing that this is extraordinary given the impact the economy has had on the companies and firms that are sending people to the conference. Actually, more individual companies will be attending this year than last year even though the overall attendance is down somewhat. In addition, CED membership is up considerably over last year, indicating that entrepreneurship is alive and well and that more and more companies want to learn about building successful businesses.
The venture capital world speaks up
The featured speaker was Mark Heesen, President of the National Venture Capital Association. He gave a very balanced update of the state of venture capital in the US. He didn’t try to sugarcoat the situation, but gave a very fair accounting of what is strong, what is weak and what we can expect in the near term.
Investing is down but still huge
With respect to the limited partners, over $4.3B was raised in the last quarter. The highlight though is that a substantial amount of the money came from Europe, Asia and the Middle East. Venture investing is down the last quarter, falling to $3.0B from $4.3B the previous quarter. He explained that most venture firms will not be raising further money this year and that we will continue to see fallout of venture firms throughout the year. He basically confirmed what we already know about the reduced chances companies have in raising venture capital money for the foreseeable future.
IPO’s may see a new dawn
On the IPO front, there has been one IPO since last August and only 26 companies are registered with the SEC. It will be unlikely that the IPO market will see much progress this year. However, Mr. Heesen cited some potential progress through new partnerships between the venture capital world and the boutique investment banking world that might open up a new avenue for IPO’s. Stay tuned.
Clean tech may save them all
Mr Heesen was bullish on “clean tech.” In his view, clean tech will be emerging as the darling of the venture capital world. He is not talking about the ill-conceived wind farms, biofuel plants and vast solar grids. He cited technological innovations in all walks of life, including building architecture, lighting, efficient air handling, fuel usage efficiency and many more. He was very excited about the innovation he is seeing and that there is increasing momentum in both the private and public sector to move this kind of innovation forward. He wasn’t talking about the near religious zealotry of sustainability gurus, but solid technology companies that bring demonstrable and profitable value to the market that improves our environment. The good news is that the venture capital world is seeing a business in clean technology innovation.
Entrepreneurship is strong
Mrs. Rose brought the evening to a close by reminding us all that more companies made applications to present at the conference this year than ever before. This again shows that although the economy is stifling, it hasn’t stifled entrepreneurship in the southeast.
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Inflation Proof Your Business
Bill Warner Tuesday, April 21, 2009
I am certainly no economist or master of the US financial system, but when I see how much money is being poured into the economy by the Treasury, red flags of inflation flash in my face.
Take a look at the trends. What I think this data says is that by early 2008, the money supply had reached $4 trillion, by the 4th quarter of 2008, it had reached $5 trillion and it is being reported as over $8 trillion. Recent news reports add another trillion in March. By the beginning of 2008, the money supply had doubled since 2002. In one year, it has more than doubled again, with $4 trillion being added in the last few months. I don’t know about you, but that is frightening to me. Yes, we are in a recession, but I am worried that in short order the devalued dollar is going to leap into the forefront as an issue causing price increases and higher interest rates, the key elements of inflation. This recession might snap like a rubber band into a period of rapid inflation.
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Creating an Attractive Business Model
Bill Warner Wednesday, March 11, 2009
Now, more than ever, investors need to see a business model that both provides an attractive return but is easy to understand and implement.
*It starts with a solid value proposition and customer traction*
Tom Taulli talks about some of the important elements of an attractive business model. Certainly having a compelling value proposition is necessary. Its key elements are:
- Solving a compelling and important customer problem
- Offering an innovative solution to the customer’s need
- Clearly fitting into the customer’s purchasing priorities
- Having a solution that is a winner over all competitors
- Providing an attractive return on the customers investment
The more you can bring this value proposition to life by citing real customer traction will make the value proposition much more believable. Reflecting potential customer reaction resulting from your market research, describing customer satisfaction from early use of your product or service, and certainly early sales results all tell investors that you have something that buyers really want.
*More is needed to round out a business model*
Investors have to see even more than a strong value proposition. Some of the additional things they consider are:
- Is the marketing and sales approach easy to implement and can it be scaled up quickly, looking for sales cycles that are well understood and easy to navigate
- As a result, will the company be able to achieve attractive revenue growth quickly, looking for revenue streams that are easy to accomplish and also easily renewed
- Is the barrier to entry to competitors high and is their good protection of the intellectual property and know-how of the company
- Will the company achieve financial results that have the potential of providing the investors good returns in a relatively short period of time
Of course, investors always look at the management team to ultimately decide, but their story about their business model has to be compelling and convincing, and the management team has to show that they can really pull it off.
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Higher Gas Prices Will Stifle Businesses
Bill Warner Sunday, February 22, 2009
I have seen so much evidence that the proponents of global warming and the subsidization of alternate energy businesses actually want to drive up the price of gasoline and electricity. They cite the prices in other countries, asserting that we should be equivalent. the problem is that without higher prices for gas and electricity, these alternate sources of energy make no sense economically, especially solar energy, when compared to traditional sources of energy.
Expect to pay
Just look at the records of who is running our energy policies and the Department of the Interior. These people intend to make our worst fears come true.
- Eliminate off shore drilling
- Reduce or eliminate the coal shale exploitation
- Adopt cap and trade so that we can redistribute our wealth to other countries
- No nuclear plants will be built
- Regulation will further drive up the cost of traditional energy
- Further taxation to pay for subsidizes to otherwise non-economic energy sources.
The stimulus bill could have helped
We could have invested in the creation of proven energy sources like oil production, new nuclear plants, oil shale production and others, that would create lots of high value jobs. Instead, we are going into further debt to pay for energy sources that are not competitive. Sure, let’s invest in high potential technologies that hold promise, but not at the expense of eliminating our chances for rapid energy independence.
Business will feel the pain
This will be another right hook to the jaw of US businesses. High energy costs will likewise drive up the cost of goods. Some industries will be driven to their knees, like transportation and others that have a heavy dependence on energy. Higher energy costs will just put another big hurdle in the path of entrepreneurs who need to reach a positive cash flow position, and to existing businesses that need to grow their profits so they can finance further economic growth.
Do you remember what happened when the price of gas was almost $5 per gallon? Do you remember what happened to our grocery prices when corn was diverted to ethanol production, a knee jerk reaction to a false economic proposition? Well, if these new folks in the administration have their way, those remembrances will seem like a picnic.
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Stimulus Equals Zero Taxes
Bill Warner Sunday, February 22, 2009
I really don’t understand why it is so hard to understand why US business is not competitive and we are losing jobs to foreign countries. It’s because the profits on US business is taxed at the rate of 35%. It’s the second highest tax rate in the world just behind Japan. Think about it. US business has to compete with an anchor tied to its leg. Other countries can therefore produce goods resulting in lower prices because they don’t have to pay as much of their profit to their governments.
There are other anchors too, like unions that drive up wages and pension fund requirements. Government regulations also result in tremendous operating expense demands for compliance, like Sarbanes Oxley. Some of these regulations are necessary in order to assure that our goods are safe and not otherwise detrimental to the public, but many are an unnecessary burden on businesses. The reason we lose jobs to foreign countries is that we drive many industries out of the US with our tax and regulatory structures.
What if tax was zero?
What if the stimulus bill had done one simple thing; reduce the corporate tax rate to zero, and then brought it back in several years at a rate that is below the rate of the world’s leading economies? Businesses would not have to move offshore to be competitive, and instead hire Americans to do the work. We would see an almost immediate stimulus to the economy that represents lasting growth:
- US businesses would immediately become more profitable, making funds available for investing in new growth.
- Companies would invest in new products and services, reducing or eliminating the need for layoffs.
- Investing in the training of employees will increase because they are more likely to stay in companies that have a strong US presence.
- Worldwide prices for US products could be reduced to be more competitive with other countries, increasing sales for US companies.
- New businesses that supply US industries would be started; offering new jobs to build components and parts at competitive prices.
- Foreign companies will be more likely to open new companies in the US thus increasing the number of US jobs.
This would be great for all businesses and great for entrepreneurs who will not have to climb such a steep hill to create new businesses. Read more about taking the business tax rate to zero.
Just a dream
Unfortunately, we are not doing this, and doing things that will further stifle US business. Instead, we are going to borrow from foreign countries and print more money, increasing our debt and leading us to rampant inflation in a year or two. When the economy continues to drop and the jobs don’t appear as promised, remember that we elected these people that brought us the stimulus package. We will have another chance to get this right in 2010.
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When Wind Is Not Green
Bill Warner Friday, February 20, 2009
Although wind generated power technology has made great progress over the last decade, and comes the closest to being a cost competitive alternative to fossil fuel generated power, it is still basically a subsidized business that is inherently not profitable. This is because of the capital expense for the equipment that has only a 20 year life, construction expense to install turbines and power lines, and low utilization because the wind doesn’t always blow.
Investors are cautious
Investors are very cautious about investing in technologies that require government regulation and incentives to make them worthwhile, knowing that those regulations and incentives can be terminated at the change of an administration. I have yet to find an investor or proponent of wind power that can explain how wind generated power would ever be profitable without taxpayer money paying for it.
Investors also realize that wind generated power is a nit in the overall landscape of power generation alternatives, representing a potential of 1-2% of the overall supply of electrical power in the US. This is mainly caused by the massive amounts of land that is required to deploy wind turbines and the fact that wind doesn’t blow that much in major portions of the US. Even in areas that do have substantial wind, it doesn’t blow all the time, leaving huge gaps in turbine utilization. The killer is that another power generation facility is needed to handle peak periods when the wind is not blowing, making the investment in wind generated power a net add to the overall power generating complex of a community. Most proponents of this idea don’t like to admit that and don’t count it in their economic analysis. Wind is really not an alternate power source. It is an additional power source that provides intermittent power as the wind blows. I suggest you Google on “wind power cost” and read what people think about this. Start with Ernest Istook’s article on Hot Air About Wind Power.
Entrepreneur attitude is important
Considering other sources of power, investors shy away from solar because it is so wildly not profitable. The cost efficiency barrier has yet to be broken by technological advancements. Yet, hundreds of entrepreneurs are pursuing wind and solar power businesses. I went to an Ignite Clean Energy (ICE) meeting a few weeks ago to see what new news they had. I was floored when they presented a slide that led by saying that the wind in their face was low oil prices. These people have to cheer for high oil prices in order for their ideas to make sense. They said it with a straight and serious face. I was stunned by the unbelievable position taken by smart people in that they are in favor of high oil costs which has shown to be so detrimental to our economy. Yet, this is what the cap and trade movement is all about, so I shouldn’t be too surprised.
Investors don’t appreciate unrealistic zealots
This is the kind of attitude that makes investors nervous. Entrepreneurs that do not have a realistic view of their business and are not forthright and honest about the economic underpinnings of their business cause investors to shy away and find lower risk investments.
In this economic climate and the current state of private equity, businesses that are built on voodoo economics are going to be ignored. Businesses that have solid market need and strong value propositions, and are easy to get into and rapidly reach profitability are the ones that will get investment dollars.
