A Savvy Startup Always Builds a Great Loan Pitch

Many entrepreneurs are convinced that banks are not worth the effort for startups, especially early-stage ones that still don’t have a revenue stream, or collateral to back up their financing needs. A question I get all the time is “Can I ever expect any backing from my bank for a great opportunity?” The short answer is that some banks will help, if you do your homework.

The first thing to remember is that banks only do loans – they don’t do equity investments like angels and venture capitalists (and vice versa). To get a loan, you generally need to satisfy their 3 C’s – credibility, capacity, and collateral. That traditionally translates to at least two years of positive cash flow, with enough assets or receivables to cover at least 80% of the loan.

If you don’t have that, there are things that you can do to compensate. All banks are looking hard right now to get back in the game, and certain ones, like Silicon Valley Bank, are more focused on small businesses. I found a great discussion with Mark Horn, a former Silicon Valley Bank senior vice president, published by Jill Andresky Fraser some time ago, which outlines seven issues Mark says every startup must address when pushing the limits for a loan:

• A clear mission. You have to get past how great the product is to address clearly what your business rationale is, why it is different from the competition's, and why it will succeed. Be concise as well as complete. Show focus and your understanding that your company is something more than just a good idea.

• A winning product or service. Provide a simple yet complete description of your product or service and its competitive marketplace. Include any empirical evidence--including market research or technical analysis, if that's appropriate--in order to bolster your case about why you believe you will succeed.

• An impressive team. When we say 'team,' that's what we want to hear about: a group of people who are working with the person who had the original idea to give this company its market advantage, including salespeople and finance people. If you don't have a team on staff, then a banker is going to want to hear about outsourcing and advisors.

• Management with a strong track record. When describing each key person on your team, it's important to describe his or her employment history, with an eye toward convincing the banker that the person's experience will help your company achieve its goals. Here, too, focus on outside advisers as well as on key executives.

• Partnerships that lend credibility. Be comprehensive here. What a banker is looking for is validation of your idea. If you've succeeded in bringing savvy investors or corporate partners aboard, then that can be a pretty good sign that your idea can succeed in the marketplace.

• Money from other sources. This question gets to the heart of what bank financing is and isn't supposed to accomplish. Bankers do not contribute equity. What they're looking for is a situation in which others have already done that, so the bankers want to see the owner's money involved.

• A realistic cash plan. What any banker will want to know is, basically, how much money you've already raised and how quickly you've gone through it; how much you're currently spending; and finally, at what point you anticipate earning the revenues to sustain a positive cash flow.

Finally, remember that at almost any bank you'll need to back up your financing pitch with audited financial statements, a well-thought-out business plan, credit check, and maybe even your personal tax returns as well. That's just reality.

In case you hadn’t noticed, the items highlighted by this banker are equally important to equity investors, so you need to do the work in either case. In the long run, bank loans are considered “less expensive” than giving up equity and giving up control, so a savvy startup should never skip this alternative.

Marty Zwilling

Publish Your Website Or Customers Won’t Find You

These days, if your startup does not have an Internet web site up and running, you are not ready for business or potential investors. Customers go there to check on the details of your offerings, investors look there to check out your management and sales approach, partners go there to see how they might fit, and suppliers expect to find contact information.

There is absolutely no doubt that the Internet is the answer to the small businessman's prayer. Yet I was amazed to read a while back on the Selling To Small Businesses website that 51% of small businesses still have no website at all. These are the competitors you can beat!

In fact, you need to have at least a prototype web site published several weeks before you expect anyone to find yours, since it takes that amount of time for the web search engine “spiders” to find you and index your content. I still remember my disappointment the first time I published my website, did an immediate Google search on the name, and it said my company didn’t exist.

There are many practical reasons for going to work early on your web site. Here are a few:

1. Register domain name and set up hosting. I’ve said many times that the Internet domain name should be reserved at the same time you incorporate your company name – they need to be the same, or highly related. Yet I still hear stories of companies being well down the road on products and collateral with a given name, only to find out that everything has to be changed because of a domain name conflict or availability problem.

2. Websites are a big job and take time. I’ve also known startups who have worked for months on the infrastructure of their business – front office, manufacturing, product design, marketing, personnel, and sales – then started work on a web site in parallel with their “grand opening.” Two months later they still didn’t have a web site, and didn’t have a customer. You should allow three months and at least $10,000 for the design, building, and rollout of your first site, unless you can build it yourself.

3. Finalizing the web site validates your product plan and sales strategy. Many founders find that building the web site forced them to commit on the product design, set final pricing, define ordering and delivery procedures, and actually schedule and staff the marketing events that they had in mind.

4. Viral marketing needs a website. Everyone knows that word-of-mouth advertising is an effective and important part of any small business. But word-of-mouth and viral marketing doesn’t work without a web site. On the other hand, don’t assume that viral marketing is the only marketing you will need.

5. The website can be a source of revenue. If your business and product are as attractive as you believe, the traffic to your web site will build quickly. Now you should monetize that aspect of your business through the use of Google AdSense to display ads for related products and businesses, and get paid for the “click-throughs.”

6. Your web site will promote your business 24 hours a day, 7 days a week. Like you probably do, many people search for products and services on the weekends and in the evening. They are busy business people and very often this is the best time for them to concentrate on researching a new product or service. As a business owner, there is nothing more satisfying than having several orders and email inquiries waiting for you when you get up in the morning!

For the first time you have at your disposal the whole world market for whatever product or service you happen to provide. Building the right website should drive the rest of your business, not be an afterthought. Don’t let yours be another startup that can’t be found.

Marty Zwilling

You Don’t Need Delaware to Start Your Company

It used to be true that “everyone” incorporated in Delaware due to its more favorable terms, but many of these terms simply don’t apply to startups, or the differences don’t exist anymore. Most business professionals now recommend that your first choice should be your home state, or the state where your startup resides.

I live in Arizona, so I’ll use that state as an example. If your home state is Arizona, and you plan to do business there, following is a list of five key advantages of incorporating your business in Arizona:

• Incorporation fees are low.
• The process is simple, including the convenience of geographical proximity.
• Local attorneys, if required, are more familiar with Arizona laws.
• Your startup automatically gets an intrastate securities law exemption.
• No need to register as a "foreign" corporation in the state of operation.

There are still business considerations which might override low cost and simplicity. For example, if your business is likely to get venture capital soon, have a large number of shareholders, or you have a high probability of going public, it might still be a good idea to incorporate in Delaware or Nevada due to these two states more size-friendly laws. The same applies if you are a foreign startup which needs to incorporate in the US to operate with American customers.

For the rest of us, there are distinct advantages to staying close to home. Let’s take a closer look at some of these advantages:

1. Arizona incorporation fees are low. Filing fees vary from state to state, but will fall anywhere from $50 in Mississippi to $410 in Nevada, including administration fees. Arizona is close to the bottom, with statutory fees of only $60. Even if you choose to add the expedite fee of $35, and consider another $100 for publication requirements, the costs to incorporate in Arizona are very reasonable.

2. The process is simple, including the convenience of geographical proximity. To incorporate a corporation in Arizona requires that you file Articles of Incorporation with the Arizona Corporation Commission, publish the incorporation filing in a newspaper of general circulation three times, and submit an affidavit of publication back to the Commission. Visit their offices in Phoenix or Tucson for personal service.

3. Local attorneys, if required, are more familiar with Arizona laws. If your company needs a complex structure, organizationally or financially, the assistance of a local attorney may be required. He will be familiar with any unique Arizona requirements for organizational structures, record keeping, capitalization, debt financing, role of shareholders, distributions, personal liability, and state tax considerations.

4. Your startup automatically gets an intrastate securities law exemption. To qualify for the intrastate offering exemption, a company must be incorporated in the same state where it is offering the securities and carry out a very significant amount of its business in that state. If you incorporate and do business in Arizona, this item alone can save you a significant amount of management time, paperwork, and legal fees.

5. No need to register as a "foreign" corporation in the state of operation. Most states have laws that require entrepreneurs to re-register a Delaware company in the state where it is actually doing business, and unfortunately, re-registration involves more than a few hours of paper work.

But don’t forget that forming the new corporation is just the "tip of the iceberg" with respect to operating a business in the corporate form. Although it is relatively easy and inexpensive to incorporate a business in Arizona, I recommend that you don’t hesitate to consult an Arizona corporate attorney when incorporating for issues that may require legal advice and action.

Now is the time to get started. With a little luck, your new startup should be up and running in 30 to 60 days.

Marty Zwilling

Business Plan Writers - Know Your Audience

By Mahesh Raj Mohan

Writing a business plan can be a difficult process. Even if you know your product/service suite down cold, understand the strengths/weaknesses of the competition, and have built pro forma financials that are sane ... you still have to write the plan for a particular audience. What does that mean? A loan officer, angel investor, and venture capitalist are all looking for different things in a business plan. Your business plan’s writing style should take their preferences into account.

So what writing styles should you use for these very different audiences?

Bank Loan Officer: A business plan for bank lending should reflect a “meat and potatoes” writing style. Clarity is the name of the game. Avoid conversational, first-person writing. (“Hi, I’m writing this plan because ...” “I’ve put a lot of blood, sweat, and tears into this idea ...” “Funding is important to me because ...”) Avoid personal pronouns like, “my, our, we, and us,” in general.

The Executive Summary for a bank lending plan should be a literal summary of the entire business plan, with a paragraph roughly devoted to the product/service, market, industry, marketing, and management. Make the repayment terms as clear as possible at either the beginning or end of the Executive Summary. Keep in mind that a Small Business Administration-backed loan requires certain sections for a business plan. (You can read more about that here.)

Angel Investor: Writing a business plan for angel investors can be tricky. If you’re pitching your plan to Aunt Mary or Uncle Butch, then a conversational tone is probably okay. If you’re pitching to a member of an organized angel group, then a business-like tone is in order. For many angel investors, letting them know “What’s In It For Me” (WIIFM) is critical.

Applying a narrative approach to the problem you’re solving can also be helpful. (“According to XYZ Research, 30,000 people expressed a desire for Widget. However, there are no Widgets available. Until now.”) More stringent analyses of your competitors (through a Porter’s Five Forces model or SWOT analysis) are also helpful. They let an angel investor know why your idea is worth their hard-earned dollars.

Venture Capitalist: As you probably know, venture capitalists are extremely busy individuals. They will likely only read your plan’s Executive Summary – at first. Make it compelling, free of typos, compelling, concise, and, oh yes ... compelling. As with angel investment plans, it’s important to “lead with the need” in the opening paragraphs, stating the problem you are intending to solve. Alternatively, a strong opening that focuses on the “total addressable market” in clear and concise language is also appropriate.

Make sure the venture capitalist understands you’ve done your homework, but avoid making grandstanding statements (“The Widget will revolutionize the world.”) The latest market research is crucial – but choose carefully. A report projecting a sector will achieve $70 billion in revenue by 2014 will make you look like an amateur. Focus on your designated market area instead.

Always keep in mind that a business plan is a “living document.” The content and financials within can change as you see fit. Conversely, you may want to keep the fundamentals of the plan, but focus on a different audience. For example, if you decide outside investment is more appropriate for your concept than a bank loan, then the writing style should change accordingly.

A writing style that presents your idea attractively can pay dividends in other ways. Your investor will realize you care about attention to detail. The investor will certainly appreciate the effort you put into creating a professionally-written business plan.

The way your plan is written can give you the edge you need when pitching your dream.

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Today’s guest blog post is by Mahesh Raj Mohan, a freelance writer and editor based in Portland, Oregon. He possesses 15 years of experience as a professional writer. He has written or edited thousands of business plans and served as a business plan consultant for numerous entrepreneurs. You can reach him directly by email or via his website.

Changes are Inevitable, But Don’t Lose Your Focus

By Ernst Gemassmer

As an entrepreneur, you know the world changes constantly, and you know the value of being able to adapt quickly. But changes to your startup need to be done for cause, well thought out, and communicated effectively to all impacted parties. Don’t lose your focus, or allow your operation to descend into chaos.

Here are a few principles that I recommend to guide you in the change process, and keep you on track and focused:

• Customers and competition must be the driving force. Too many founders make costly changes to their product and operation based on random comments from friends, family, and potential investors. Stay focused on solving a specific customer problem, and don’t get whiplashed by the whims of informal advisors.

• Listen to the team, but drive the vision yourself. Your challenge is to be able to separate the ideas that hone your vision from those that redirect it. Of course, all ideas need to be evaluated for relevance to the plan, cost to implement, and impact on the overall potential. There is a big difference between a plan adjustment and a new vision.

• Carefully evaluate and measure impact before adopting changes. Use data to evaluate alternatives whenever possible, rather than gut-level decisions, emotions, and personal agendas. Good questions you should ask yourself would include:

  1)  What amount of time, money and human resources are needed to implement the additions/modifications?

  2)  Are the changes essential from a competitive point of view?

  3)  What is the financial effect of not carrying out these additions/modifications?

  4)  What is the overall benefit if the additions/modifications are made?

• Change is not always about product and features. The primary issues are often not building the right product, but getting the attention of the right customers. Focus is critical here. By focusing on the needs of a small subset of the potential market and specific customers, change decisions become much easier.

• If investors funded your plan, include them in change discussions. All outside investors need to be included in plan change discussions. Remember that they funded a specific plan, with specific financial projections, and specific milestones. Changes to these without consultation will jeopardize your relationship and future funding.

• Obtain Board approval before implementing changes. Do your assessment of alternatives, but don’t act without approval by the Board of Directors. In addition, you should ensure that the entire senior management team is fully supporting your recommendations. This may seem like a burden, but it’s really a good reality check.

• Closely monitor plan execution. You and funding partners have a vested interest in the success of your startup. In most cases, the financial commitment is not allocated in a single amount, but rather in tranches based on meeting specific quantifiable milestones. For your own decision making, and to maintain an open and constructive relationship with funding partners, there should be no surprises.

Too many startups try to enter the market with an end-to-end product, which is the large company approach, and obviously ideal from some customers perspective. But startups should focus on innovation and breakthrough offerings, not end-to-end solutions. After some initial traction, you can always add features. Change should not mean adding more, but tuning the entry product and the entry process, with the full support of your team and your investors. Keep your eye on the target.

Today’s article is presented by one of the founders of our Startup Professionals team, Ernst H. Gemassmer. He resides on the West Coast, and has long helped entrepreneurs there, as well as providing turn-around assistance as interim CEO, and International coaching. You can contact him directly at ernst@startupprofessionals.com .

Startups Wait For the ‘Super Angels’ to Descend

It is no secret that the world of venture capital (VCs) has been turned upside down by the recession, and the many other changes in the marketplace. I see now emerging a new wave of investors, popularly known as “super angels,” micro-VCs, or “super-seed” investors. Every early-stage startup should explore this new funding alternative.

Business Week ran a more thorough analysis of this movement a while back, which I am summarizing here. I conclude that the genesis of this trend seems to come from several forces, including the following:

1. Less investment capital available due to the recession. Venture capital dispensed quarterly to startups continues to decline, down to about $3 billion in the first quarter, which is the lowest level since 1997. Due to the economy as well, traditional individual angel investors haven’t been able to fill the gap.

2. New “up-and-comer” VCs focus on early-stage companies. VCs are finding that they don’t need the “large” funds of $100M to $500M to support a portfolio, if they focus on early-stage startups. It’s higher risk, but higher return, to pick the big winners early, before angels have set unreasonable valuations and restrictive terms.

3. Technology costs are plummeting, meaning you can do more with less. Twenty years ago, it cost $5 million to really launch a high-tech startup, when the same thing can be done today for $500 thousand. So, in effect, VCs need to come in at what was formerly the angel stage to grab the gems and hold them.

4. Many old-line VC firms have grown too big and unwieldy. More are realizing that they have forgotten how to build innovative companies, so they are going back to their roots, when firms were smaller and more nimble. They can plant more seeds, and place less dependency on the big win.

5. Being “lifecycle investment partners” has a downside. As venture funds grew bigger during the dotcom bubble, and sized themselves to invest in every round of selected startups, they found it was very hard to stop investing in the underperforming companies. That model doesn’t seem to work any more.

6. Great companies are made, not born. Conventional wisdom is changing from startups being born a winner (execution doesn’t matter), to being made a winner (more chances and more help early on). This means smaller amounts given to more entrepreneurs who get a chance to prove that they can build great businesses.

Of course there a couple of potential down sides to this movement:

• As more startups are funded, without the big VCs on the other end, more companies will be looking for growth dollars and may languish trying to differentiate themselves in a crowded, but slow spending, consumer marketplace.

• More sources of funding for early-stage startups may drive up valuations on these deals, which will lower the returns for the angels and super-angels willing to do these deals. That could cause this bubble to burst and hurt everyone.

I applaud the direction of investors who want to re-invigorate venture capital by taking it back to the real entrepreneur who needs help getting his venture off the ground. Too many founders today face the conundrum that they need capital to get started, and even angels defer until after you have your product built, business model proven, and a real revenue stream.

Examples of some leaders in this super-angel space include First Round Capital, Baseline Venture, Maples Investments, and Felicis Ventures. Check them out, and find others, so maybe you too can be super-blessed by a super-angel.

Marty Zwilling

The Need For Software Localization Still Prevails

By Ernst Gemassmer

With the pervasiveness of the Internet, the world is smaller. The good news is that the reach of your new software application is instantly worldwide, and the bad news is that most people still prefer to work in their own native language. That means that you need to face the issues of translation and localization sooner rather than later.

Despite all the hype and free tools, there still is not ‘an app for that.’ Whether your new software is ‘in the cloud,’ an online download, or distributed on a CD through various direct and indirect distribution channels, the process of localization is still a time consuming, manually intensive, and expensive effort.

In case you think that American English is sufficient, remember that the command of the English language differs widely from country to country. Irrespective of fluency in English, most people still prefer to work in their own native language. Thus, localization is not only desirable, but essential to gain and keep market share in specific countries.

In my experience, there are many considerations which are critical to the productivity and success of this effort. These include the following:

1. Plan for international from the beginning. Even though it usually makes sense from a marketing perspective for a startup to stage software rollout to various locales, it makes no sense to design and implement your application that way. All implementation should be done in Unicode, with user interface, currency, date formats, and database considerations for all the languages required.

2. Begin parallel translation early. It may seem less expensive to wait until all your screen layouts, online help, and written manuals are ‘final’ before arranging for translation, but the reality is just the opposite. Late translation will uncover design issues that are expensive to fix, and the inherent time delays and testing can set back delivery up to six months. Even though this process might require some re-work, a sizeable reduction in localization time can be expected. Note that this will require close and trusted cooperation between engineering/development and each localization group.

3. Optimize the costs of localization. The cost of localization can vary widely, depending on the approach taken. Assuming that your company has an internal localization coordinator, who has personal contacts with localization firms in different countries, the direct cost of localizing into a single language could still be up to $50,000. However, if you utilize an outside firm to handle the entire process, the cost will be significantly higher. My advice is to select and work directly with a localization group in each selected country, avoiding middlemen.

4. Prior experience is critical. For a startup, find an international partner, or hire a new team member who has don it before. As your company grows, this person should reside at corporate headquarters and report solid line to the head of international operations. In addition this person should report, dotted line, to product development or engineering. Ensure that the localization person is a good and patient communicator and is fully accepted by the engineering/development group.

5. Measure the return versus the investment. There are literally hundreds of interesting locales in the world for every application, but not every one is a real market opportunity. Do your homework on potential, and then track the results, both with respect to incremental sales, as well as the costs of localization and maintenance.

There are many other pitfalls of poor localization practices, including high maintenance costs and costly delays in reaching attractive markets. Also, you must remember that localization costs are up-front costs, which must be fully funded before any incremental sales revenues.

I have personally implemented the above recommendations repeatedly. The most successful project resulted in release of localized products for all the major languages in Europe a few years ago within four weeks of US product introductions.

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Today’s article is presented by one of the founders of our Startup Professionals team, Ernst H. Gemassmer. He resides on the West Coast, and has long helped entrepreneurs there, as well as providing turn-around assistance as interim CEO, and International coaching. You can contact him directly at ernst@startupprofessionals.com .

Don Estridge, IBM PC Father, Startup Role Model

My introduction to startups really came when I first worked in IBM with Philip Donald Estridge back in 1981. Known as Don Estridge, he led development of the original IBM Personal Computer, and thus is known as "father of the IBM PC". He’s gone now, but I still remember him fondly.

He and Bill Lowe somehow managed to convince then CEO Frank Cary to give them a dozen engineers, a small budget, and a few months, to set up a small skunk-works called Entry Level Systems in Boca Raton, Florida, to develop a low-cost personal computer (code name “Acorn”). This was to compete against increasingly popular offerings from the likes of Apple Computer, Commodore International, and Radio Shack.

He was an engineer, so his first act was to buy one of each of these computers, and disassemble them in his office (a practice frowned on in IBM at the time – due to lawsuits). He then brought in the engineers and challenged them to do better in each of the functional areas, or find a cheaper solution with parts off the shelf. That was pure Don Estridge – always challenging the team to push beyond their comfort zone.

IBM had traditionally done all its own vertical technology development, so this outside vendor thing broke all the rules. He went to vendors for common hardware parts, went to outside software developers for the operating system and application software, and acted as an independent business unit. This caused great consternation within IBM at the time, but ultimately set the standard against which all IBM technology had to compete.

These changes enabled his team to develop and announce the IBM PC in 12 months -- at that time faster than any other hardware product in IBM's history. Estridge also then published the specifications of the IBM PC, allowing a booming third-party aftermarket hardware business to take advantage of the machine's expansion card slots.

The startup process and the importance of founders with a vision and energy hasn’t changed much in the last 30 years, but the technology has improved by orders of magnitude. Here are a few PC-related examples:

• CPU speed was 4.77 mHz, now 3.0 GHz dual processors, a factor of at least 1000x
• Minimum memory shipped increased from 16K to 2G, a factor of 125000x
• Disk space was a floppy disk holding 160K, now hard disk of 500GB, a factor of 3000x
• Telecommunications speed of 300 bps to 1.6 Mbps, a factor of 5000x

As with many successful entrepreneurs, Don Estridge was a humble man, who was actually embarrassed by the size of his office, as his stature and rank grew in IBM. It is said that Steve Jobs offered Estridge a multi-million dollar job as president of Apple Computers, which he turned down. He had an excellent relationship with Bill Gates, who probably extended him a similar opportunity, but Don was too proud of his IBM heritage.

His leadership dramatically changed both IBM and the computer industry, resulting in a vast increase in the number of personal computers sold and bought, thus creating an entire industry of hardware manufacturers of IBM PCs. He immediately was asked by top executives to apply that leadership to the mainstream business of IBM mainframes.

Unfortunately, before very long he was killed in the tragic crash of Delta 191 at DFW airport (wind shear), along with his wife, Mary Ann, on August 2, 1985, so we will never know what additional legacies he might have left.

But like every true leader, he left a great legacy with everyone he worked with, a conviction that anything is possible in business if you believe in it and work hard. He was a role model we can all aspire to, and rare true entrepreneur.

Marty Zwilling