7 Questions Test Entrepreneur Focus Before Funding

The first question most people seem to ask when contemplating a new startup is where they will get investor money. That’s certainly a valid question, but all the money in the world won’t make your business work if you don’t have a plan to use it, or hate what you are doing. I suggest that there are several important questions before assuming that funding is the gate to your success.

In reality, the best way to assure the success of your startup is to do something you love, as opposed to something that you think will make you a lot of money. Of course, all these things and many more are critical, so it’s important that you keep your priorities straight. Here are some key questions to ask yourself, before asking others for money:

1. Do you really need investor funding to make this work? From your plan, calculate the absolute minimum amount you need to make your plan work, and then buffer it by 25%. Consider the non-cash alternatives, like offering team members equity instead of cash and bartering for services. Fundraising is stressful and difficult, which is why 90% of successful entrepreneurs do bootstrapping.

2. Do you have a viable plan? If you haven’t yet written down a business plan, you probably have no idea how much money you really need, or even if the opportunity is real. I believe the process of writing the plan is more valuable than the result, because it forces you to think through all the elements, and make sure they fit together and fit you.

3. What level of experience and training do you have for this business? Be wary of stepping into an unknown business area, just because it looks easy or promises a big return. The real secrets of any business are not in textbooks, and you can’t believe everything you read on the Internet. Experience is the best teacher.

4. Do you have real self-confidence and self-discipline? Starting a business is hard work and will require sacrifices. You will be operating independently, making all the decisions, and shouldering all the responsibility. Will you be able to persevere and build your new venture into a success?

5. Do you have passion for this idea and this business opportunity? There is no joy in starting a business, if you can’t stand the people, business climate, or the day-to-day responsibilities of the job. Some people relate to service businesses, while others are more comfortable with manufacturing or construction.

6. Do you really understand and aspire to entrepreneur lifestyle? Being a startup founder is not a job, but a lifestyle, like getting married versus staying single. In fact, it’s more like being single, since founders usually have no one to lean on, no one to make decisions for them, no one to blame, and no vision to follow but their own.

7. What type of business startup best fits your mentality? Beyond the traditional new product or service model, you can always buy an existing business, purchase a franchise, join a multi-level marketing (MLM) company, or simply go out on your own as a consultant. Each of these has their unique challenges and payback. Ask around.

If you have made it this far, it’s fair to now start asking people where and when you can find the money you need (if any). Professionals will tell you that the sequence is friends and family first, angel investors second, and only then venture capital. Each of these has a cost in time an effort.

The process for all of these is networking (not email blasts or cold-calling investors). Start with the local Chamber of Commerce, industry associations, or investor seminars. Just attending doesn't work. Use your entrepreneurial spirit to start some exchanges and relationships that can lead to your next step.

Starting a business is a marathon, so do your preparation and training before you ask for that bottle of water. Finding money is tough, but it’s not the hardest part. The hardest part is to do it all while enjoying the journey. Start slow like a snail, and make sure you enjoy the walk before you start running after money.

Marty Zwilling

You Can’t Run A Startup And Fear Speaking In Public

As a mentor for aspiring and early-stage entrepreneurs, I talk to a fair number who may have a great vision and a strong engineering background, but have a negative interest in the role of public speaking in business. In fact, they often claim to be part of the survey group that fears public speaking more than death, but I’m not sure how anyone could validate that survey.

Beyond the fear, many really don’t get the value of being willing and able to communicate effectively with team members, investors, customers, and a myriad of other support people, both one-on-one and one-to-many. I’m not suggesting that all have to be on the professional speaker circuit to succeed, but let me assure you that public speaking is a required business skill.

Thus, if you are like me, with no real background or experience in public speaking, I encourage you to start early with some traditional training, like a Dale Carnegie course, or read a good book on the subject, like a recent one by successful businesswoman and speaker Jan Yager, Ph.D., “The Fast Track Guide to Speaking in Public.” After that it’s practice, practice, practice.

Dr. Yager outlines in her book just a few of the reasons why an entrepreneur needs to overcome the fear, and master the art of speaking in public, and I’ve taken the liberty of adding a few occasions from my own business experience:

1. You need funding, and have to address a group of investors. As an investor, I sometimes see CEOs who negotiate to send their VP of Marketing to talk. Those requests will always be rejected, since investors invest in people, rather than ideas, and want to look the top decision maker in the eye and gauge their ability and conviction.

2. You have the opportunity to appear on a panel of experts. As a startup, you as the entrepreneur are the brand, the brand builder, and the major lead generator. You can’t afford to turn down the honor of being visible and showing your expertise, no matter how small the forum or indirect the role.

3. You are asked to explain your vision in a television interview. Believe me, talking in front of TV cameras requires all the skills of public speaking, and more. The implications to you and your company are also large, so be prepared. In her book, Jan devotes a whole chapter to speaking to the media, as a key aspect of public speaking.

4. As your company grows, you have to host customer seminars. You may think it’s too early to worry about this requirement, or you can hire professionals for customer user group meetings, but even meeting with your first potential customer will likely have a better outcome if you handle yourself like a professional public speaker.

5. You will be the key speaker at employee update and reward meetings. In a small startup, it may be cool to have a CEO who wears a hoodie and communicates via text messages. But it won’t be long before employees expect to hear and see their executives exercising the sensitivity and communication skills of other industry leaders.

6. Need to represent your company at industry association events. How you speak in public is even more important outside your company than inside. Your skills will be implicitly critiqued by industry analysts, potential strategic partners, your competitors, and the media. Their perception will determine the reality of your company and your career.

Dr. Yager asserts that being able to speak in public is one of the five key business skills that can make or break your company, whether you are a new startup or an entrepreneur who's been around for many years. The other four are: new product development, writing, time management, and sales/marketing. Many would argue that Steve Jobs impact at Apple came more from his public speaking ability than the other four skills put together.

Fortunately, the ability to be an effective speaker is based on communication skills that can be taught. And with practice, you may find you are not just a good, but a terrific speaker. If you used to fear speaking, you may find yourself not just tolerating it but enjoying the experience as you understand the source of your fears and how to overcome those fears.

You can’t win as an entrepreneur working alone, and without speaking in public, just like you can’t build a business from your invention without good business skills. The good news is that both are learnable, so the earlier you start, the better prepared you will be when you need them most. For an entrepreneur, the need arises as soon as you have your initial idea. Are you there yet?

Marty Zwilling

The Smartest Entrepreneurs Bootstrap Their Startup

There is so much written these days about how to attract investors that most entrepreneurs “assume” they need funding, and don’t even consider a plan for “bootstrapping,” or self-financing their startup. Yet, according to many sources, over 90 percent of all businesses are started and grown with no equity financing, and many others would have been better off without it.

According to the book, “Small Business, Big Vision,” by self-made entrepreneurs Adam and Matthew Toren, it’s really a question of need versus want. We all want to have our vision realized sooner rather than later, but it can be a big mistake to bring in investors rather than patiently building your business at a slow, steady pace (organic growth).

In fact, most of the rich entrepreneurs you know actively turned away early equity proposals. Too many founders are convinced they “need” equity financing, for the wrong reasons, as outlined in the book and supplemented with a bit of my own experience:

• Need employees and professional services. Of course, every company needs these, in due time. In today’s Internet world, enterprising entrepreneurs have found that they can find out and do almost anything they need, from incorporating the company to filing patents, without expensive consultants, or the cost to hiring and firing employees.

• Need expensive resources up front. Many people think that having a proper office and equipment somehow legitimizes their business, but unless your business requires a storefront, everything else can be done in someone’s home office, or a local coffee shop, on used or borrowed equipment. Consider all the alternatives, like lease versus buy.

• Need to spread the risk. Some entrepreneurs seem to get solace and implied prestige from convincing friends, Angels, and venture capitalists to put money into their endeavor. If nothing else, these make good excuses for failure – no freedom, wrong guidance, etc.

On the other hand, there are clearly situations where your needs call for investors. Even in these cases, all other options should be explored first:

• Sales are strong – too strong. If you are not able to keep up with demand due to lack of funds for production, and your company is too young for banks to be interested, you will find that investors love these odds, and are quick to go for a chunk of the action.

• Your company has outgrown you. Some entrepreneurs are quick with creative ideas, and even excellent at managing the chaos of initial implementation. That’s not the same as instilling discipline in a larger organization, where most the challenge is people.

• You need a prototype. When you have invented a new technology, you need expensive models and testing, including samples for potential customers. If you don’t have the personal funds to make these happen, investors might be your only option.

• You need specialized equipment. If your solution depends on high-tech chips, injection molding, or medical devices, and you can’t get financing from suppliers, giving up a portion of the company to investors is a rational approach.

• General startup expenses are beyond your means. Investors are not interested in covering overhead, unless they are convinced that you have already put all your “skin in the game” (not just sweat equity), and have real contributions from friends and family.

When deciding whether and how an investor can help you, remember that finding outside investors requires a huge amount of time and work, perhaps impacting your rollout more than working with alternate approaches and slower growth. Perhaps you really need an advisor rather than an investor.

Even under the best of circumstances, working with an investor requires give and take. More likely, you now have a new boss – which may be counter to why you chose the entrepreneur route in the first place. Maybe that’s why bootstrapped startups are the norm, rather than externally funded ones. You alone get to make the big decisions on your big vision.

Marty Zwilling

10 Metrics To Drive Your Annual Business Review

Entrepreneurs have no trouble focusing on how to build a product, and the good ones know how to find and nurture those first critical customers. Many, however, don’t know how to take their small business to the next level. What I’m talking about here is a level of discipline and skill necessary to collect and analyze the relevant business data, known as metrics.

As the end of the year approaches, it’s a good time for every startup to assess the metrics, technology, and platforms they’re using to manage the business. Maybe it’s time for an upgrade to get you to the next level. For starters, here is my selection of some key metrics that every six-sigma joint like GE tracks without thinking, but that too many small businesses haven’t yet formalized:

1. Sales revenue. Sales is simply defined as income from customer purchases of goods and services, minus the cost associated with things like returned or undeliverable merchandise. Of course, everyone is happy when the numbers keep going up, but the data needs to be mined constantly for deeper meanings and trends.

   Sales data needs to be correlated to advertising campaigns, price changes, seasonal forces, competitive actions, and other costs of sales. More sophisticated metrics in this domain, like the Asset Turnover Ratio, Return on Sales, and Return on Assets, can tell you how your company’s performance stacks up against others in the same industry, or same geography. In the long run, these tell you whether you will live or die.

2. Customer loyalty and retention. Customer loyalty is all about attracting the right customer, then getting them to buy, buy often, buy in higher quantities and bring you even more customers. You build customer loyalty by treating people how they want to be treated.

   There are three common methods for measuring customer loyalty and retention: 1) customer surveys, 2) direct feedback at point of purchase, and 3) purchase analysis. All of these require a systematic and regular process, rather than ad hoc implementation. According to Fred Reichheld and other experts, a 5% improvement in customer retention will yield between a 20 to 100% increase in profits across a wide range of industries.

3. Cost of customer acquisition. This metric is a measure of the total cost associated with acquiring a new customer, including all aspects of marketing and sales. Customer acquisition cost is calculated by dividing total acquisition expenses by total new customers over a given period.

   This tells you whether your marketing and advertising investments are paying for themselves. Over time, you cost of acquisition should go down as growth and your brand image go up. Again, be sure to check industry norms for your type of business to see if you are competitive.

4. Operating productivity. Obviously, measuring staff productivity is important, and the reasons why are obvious. If you do not know how your staff is doing, how can you truly know the inner workings of your own company? Staff discontent can put your company in serious jeopardy, while on the other hand, high staff productivity can be your best company asset.

   Productivity ratios can be applied to almost any aspect of your business. For example, sales productivity is simply actual revenue divided by the number of sales people. Compare your productivity to industry norms by consulting industry statistics, or check yourself for continuous improvement by accumulating your statistics over time. The process works the same for manufacturing productivity, marketing productivity, or support productivity.

5. Size of gross margin. The gross margin is calculated as a company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. The higher the percentage, the more the company retains on each dollar of sales to service its other costs and enjoy as profits.

   Tracking margins is important for growing companies, since increased volumes should improve efficiency and lower the cost per unit (increase the margin). Improving productivity requires effort and innovation, and many companies charge ahead, not realizing that margins are going the wrong way. What you don’t measure probably won’t happen.

6. Monthly profit or loss. Profit is not simply the difference between the costs of the product or service and the price being charged for it. The calculation must include the fixed and variable costs of operation that are paid regularly each month no matter what. These include such items as rent or mortgage payments, utilities, insurance, taxes, and the salary that you and your partners are not taking just yet.

   Beyond reducing your cost of operation, the biggest lever on profit is usually the price you can charge for your product or service. This amount you charge, over the base cost of an item, is called “the markup,” and the difference between cost and price is the “margin.” Investors realize that small companies with margins below 60% will likely have a tough time growing.

7. Overhead costs. In economics, overhead costs are fixed costs that are not dependent on the level of goods or services produced by the business, such as salaries or rents being paid per month. In any growing business, these can creep up and out of control if not tracked carefully.

   By tracking them on a monthly basis, you will be able to see more clearly where spending occurs in your business. Use this information when updating your business plan or when preparing yearly budgets. Because overhead costs are not influenced by how much your business earns or grows, you need to track them separately and diligently. Moving to a location that is less expensive or switching utility suppliers are ways to reduce the fixed costs of running a business.

8. Variable cost percentage. By definition, variable costs are expenses that change in proportion to the activity of a business. Fixed costs and variable costs make up the two components of total cost. These include the "cost of goods sold" and other items that increase with each sale, such as the cost of raw materials, labor, shipping and other expenses directly connected to producing and delivering your goods or services.

   The value of tracking these as a metric is to assure that they are decreasing as your volume is growing, and assure that they are consistent with industry norms and competitive offerings. If your variable costs go up, your business won’t grow, even if sales are up and the number of customers increases.

9. Inventory size. Inventory is the raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business's assets that are ready or will be ready for sale. Inventory represents one of the most important assets that most businesses possess, because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company's shareholders/owners.

   For growing companies, this is an important area to manage. You will find that you either have too much inventory (cash tied up, high storage costs, obsolescence, and spoilage costs), or not enough (lost sales, lower market share). The challenges include forecasting inventory requirements, buying in cost-effective lot sizes, and just-in-time delivery systems.

10. Hours worked per process. Beyond ratios, you need to keep metrics on total labor hours expended for various functions. Labor is likely to be your most important and most expensive raw input, especially in manufacturing, assembly, and support operations. The one constant in small business is change, so the excuse of “we have always done it that way” is not one that a growing company should ever want to hear or use.

    These days, most labor-intensive operations can be replaced with automation, and as you grow the business, you need to recognize when the cost of automation is justified. At some point, the return on investment (ROI) of more computer systems, and automated manufacturing operations, is well worth the cost and time to change.

Leveraging the latest data can uncover new opportunities and help you measure the results of your efforts. I believe every small business owner should monitor these metrics constantly, and take time to chart, review and carefully examine them at least once a month.

Tracking key business metrics is important for a bunch of reasons, but probably the most important reason is cultural. It leads to a culture of success when you see the key business metrics moving in the right direction. Don’t miss the opportunity to celebrate your successes as you reach new milestones.

Marty Zwilling

Disclosure: This blog entry sponsored by Visa Business and I received compensation for my time from Visa for sharing my views in this post, but the views expressed here are solely mine, not Visa's. Visit http://facebook.com/visasmallbiz to take a look at the reinvented Facebook Page: Well Sourced by Visa Business.

The Page serves as a space where small business owners can access educational resources, read success stories from other business owners, engage with peers, and find tips to help businesses run more efficiently.

Every month, the Page will introduce a new theme that will focus on a topic important to a small business owner's success. For additional tips and advice, and information about Visa's small business solutions, follow @VisaSmallBiz and visit http://visa.com/business.

8 Key Questions To Expect In Investor Due Diligence

If you really want to impress a startup founder as a potential employee, or you want to be a smart investor, you need to know the right questions to ask. These are the questions that get past the hype of a founder “vision to change the world,” and into the realm of real business strengths, weaknesses, and current health.

Some founders try to deflect these questions by talking incessantly, so you often need to be calm, patient, and persistent to get the answers. My advice to founders out there is to not volunteer too much, but be open and honest in the face of direct questions like the following:

1. What is your burn rate and runway today? These are investor slang terms referring to how fast money is being spent, with an implicit question of how long the startup can survive before breakeven or another cash infusion is required. You need to know this as a future employee, since it probably gates how long your new job will last. If the runway is less than six months, with no new source signed, both you and the startup are at risk.

2. How much “skin” is already in the game? The intent of this question is to determine the level of commitment of founders, both cash and “sweat equity,” and how much others have already invested into this plan. Implicit in the analysis of the answers is how much progress has been made for the investment, and how stable the business is now.

3. What’s the total history of this company? Gaps in the history of a startup are big red flags, just like gaps in your resume. If the company was incorporated five years ago, and is still in early stages, with the same founding team, chances are slim that it will suddenly get back on track with you as an employee, or you as an investor.

4. How well do the founders get along with each other, and with the team? The smartest people are often the most eccentric, so some conflict in the ranks is normal. Excessive conflict, lack of communication, or lack of mutual respect is indicative of a dysfunctional team, and eventual failure of the startup. You won’t get this answer from the founder, but it’s not hard to get it by talking to other team members.

5. What’s in this deal for me? Investing in a startup, or joining a startup, is always a very big risk, so the potential return better be large. As an employee, you salary will likely be low, your job security low, so the job title better be large, and the stock options better be large. As an investor, look for an ROI that is 10x your initial investment, based on something more than a dream from the founder. What traction can be measured today?

6. Who do you have as outside board members? The only true outside board or advisory members are not family members, not current investors, but are experienced entrepreneurs with deep knowledge and connections in the relevant business area. They should be asking to speak to you if you are a potential investor or a superstar hire. If you talk to them, they better know the answers to the previous questions.

7. Who is a real customer that I can talk to? Real customers are ones who have paid full price for the product, have it installed and in use, and are still satisfied. Free trials don’t count, betas don’t count, and “excited about the potential” doesn’t count. If there are no customers yet, when will the product ship, and how many times has the date been set?

8. How solid is the intellectual property? Provisional patents, or lawsuits pending, don’t add up to a strong sustainable competitive advantage. You need to know these things before you put your money on the table, or bet your career and your family’s future on this startup.

Again, I’m not suggesting that you go on the attack to get answers to these questions. But don’t let management divert you with comments on your failure to understand “the vision and the big picture.” If you are a potential employee, it probably makes sense to get the job offer first before you tackle some of these, always staying calm and assertive.

In the parlance of an investor, asking these questions and getting answers is the heart of that mysterious “due diligence” process. Now you know. If you are a potential employee, you need to do the same due diligence before you sign on. Every good founder will have done the same on you, before they make you an offer.

Marty Zwilling

Corporate Perks Will Doom Your Entrepreneur Dreams

I hear many executives and professionals in large corporations talking about their dream of jumping ship, and starting their own company. What they don’t realize is that the longer they wait, the more big-company habits they are acquiring, which will make their eventual decision harder and entrepreneurial efforts less and less likely to succeed.

Certainly, the longer they wait, the greater the variety of excuses they will find for why now is not the time. Common examples include; need to work on my resume, broaden my experience, enhance my skills, save my income, and maintain a stable family life until my children are gone. Most will then NEVER make the step, and remain unsatisfied through much of their career.

The reasons for waiting have merit, but they need to be balanced against the non-entrepreneurial habits that every professional picks up in a large corporation. These include:

• Managers delegate real work. Executives in an enterprise usually don’t write their own memos, contracts, and certainly don’t schedule their own meetings. It’s easy to grow accustomed to having your staff do the “real work” (my assistant will call your assistant to work out the details). In a startup, that luxury isn’t possible, so the work suffers.

• Executives have perks. By the time many big-company executives are ready to go out on their own as an entrepreneur, they have forgotten what it’s like to fly in coach class, buy their own health insurance, or having to deal with running out of money. The result is a startup with an exorbitant burn rate, and a very unhappy entrepreneur.

• Manage a team rather than work with a team. There is a difference. In a startup you have to be an integral contributor to your small team, taking your share of the workload, and leading by example. That’s a whole different mindset and skill set from your experience and training in an enterprise.

• Highly specialized focus. In a big company, you get used to having an IT team around configure your computer, a personnel specialist for hiring and firing, and a marketing team for strategy. You forget or even disdain any ability to be that jack-of-all-trades a new startup requires.

• Training courses are required. Before stepping into a new role, you count on the company providing you with in-house or contracted training courses for the basics, like project management or people management. In a startup, these don’t exist, and you have forgotten about how to self-learn, and there are no in-house experts to lean on.

• Count on getting paid for your efforts. Big-company professionals get in the habit of expecting near-term remuneration for today’s work. The average startup founder takes no salary for the first couple of years, with a high risk of never getting any return. After too many years, that’s an unfathomable step down for most people.

So when is the best time to make the leap from a big corporation to a startup? My scan of the literature and talking to investors would indicate a few years of experience in a large organization (zero to 5 years) is a good thing, while 20 or more years before founding your own venture will stack the cards against you.

Unless you are really young at heart, if you haven’t made the leap by the time you are in your early 40s, those habits you have picked up with your experience in a big company will be evident to your team and to investors. Not to mention the fact that if you are accustomed to a big-company culture and lifestyle, you will likely not be happy or satisfied with the startup lifestyle.

So if you really want to be an entrepreneur, there is no time like the present. Old habits die hard, so the longer you wait, the harder it will be to make the jump, and your odds of success go down. Going the other way is a lot easier.

Marty Zwilling

6 Tips For Entrepreneurs Who Think They Can Dance

I’m not much of a television person, but my family loves one of the popular “reality” shows, called “So You Think You Can Dance,” so I’m sort of forced to watch it every week. Over time, I’ve concluded that even startup entrepreneurs can learn a few things from this one. Of course, you must ignore the pomp and circumstance of the TV staging.

I’m on the selection committee of our local Angels group, so I know that every CEO approaching our group for funding goes through ten minutes of creative “dancing,” to give us a basis for selecting startups that are most qualified and “ready” to proceed to the next level. If selected, they go through it again in the real meeting of 40-60 investors. It’s tough and not fun for either side.

The business “dance” obviously has different particulars than TV dancing, but there is serious business and artistry involved in both cases. Here are some observations I can offer to startup founders looking for funding, analogous to the aspiring dancers on the show, hoping to move to the next level:

1. Judges evaluate the person first. Investors want to look the CEO in the eye, and be convinced that he or she can lead the company to success – it’s more important than the creative idea. On the TV show, I’m sure you all see contenders that have lost before they start, just because they lack the enthusiasm, presence, and confidence of a winner.

2. You only get a few minutes to make the case. In fact, your case is usually won or lost in the first couple of minutes. In business, as on the show, wins can turn to a loss if you bungle or skip relevant basics in the short time allotted. Everyone wants a longer time or second chance to win you back, but it would rarely ever change anything.

3. Skip the bravado, but don’t be immobilized with fear. I subscribe to a quote from another TV show too old to mention, where the hero said “He who is not afraid – he’s a fool.” Let your adrenalin help you deliver an outstanding performance, but trying to wow investors with jokes or stories of unending success will not move you up a level.

4. Play to the audience in front of you, and adapt your message. If the panel is looking for value and return for the investor, skip the technology pitch, or customer sales pitch. Some entrepreneurs give the same talk, no matter what the audience. If you have only one dance, don’t be surprised if it wears thin quickly with the judges.

5. Dress appropriately and professionally. Under-dressed may impress on TV, but it’s better to be over-dressed in the business world. Business casual is the standard for investor presentations. Remember that most investors are from a generation where faded and torn jeans were on the wrong side of success in business.

6. Practice, practice, practice. Even if you are an experienced dancer, you practice your craft with renewed determination before a big show. Business entrepreneurs need to do the same thing, maybe in “presidential debate” style with their team of critics, until they master the timing and can handle every unanticipated slip or challenge.

Even though I’m certainly no expert on dancing (I’ve taken Beginning Ballroom Dancing three times now), most of the reviews I have seen call the TV show realistic, with the panel of judges giving reasonable critical and technical feedback. That’s a welcome relief from Donald Trump's pompous calls on "Celebrity Apprentice."

Depending on one's perspective, this economic surge is either the perfect time or an awful one to start a business. So, if you plan to face a business version of the dancing challenge soon, watch the show and check the recommendations above. Show some energy and enthusiasm, and don’t let the technical steps required overshadow your creativity. Break a leg!

Marty Zwilling