5 Techniques to Scare Competitors Out of the Market


 

On many levels, competition is good.

For example, when you start a business, you want there to be competition. Since if there was no competition, there may not be a market or customers who want to buy what you are selling.

And once in business, competition is generally good since it forces your company to get better. It forces you to better satisfy customers (or they will choose your competitors) and it forces you to become more efficient (so you reap more profits even if you have offer more competitive pricing).

Now, while competition does provide these advantages, you clearly want to have less competition, and you'd like for fewer new competitors to enter the market. In doing so, you'll enjoy more of a monopoly in your market, which means more customers and more profits.

The best way to knock competitors out of your market and discourage new entrants is to build "business assets" that your competitors don't have. (I define "business assets" as resources you build now that will give you and your company future economic value.)

Here are five examples of business assets you can build:

1. Customers: Most mobile phone companies offer 2 year service contracts that all new customers must sign (and face penalties if they leave before the two years are up). This essentially "locks up" customers making it harder for new entrants (or existing entrants) to come in the market and take their customers. Customer agreements and contracts are one of the most powerful business assets you can build.

2. Systems: Most franchise organizations (e.g., Subway, McDonalds, etc.) have made significant investments in systems in areas such as taking orders, producing products, handling customer complaints, etc. These systems make it easier and less expensive to hire and train employees and better service customers. This makes it harder for others to compete against them. Likewise, I know many companies who have built customized software systems that allow them to perform faster, cheaper, and more consistently than their competitors.

3. PPE (Plant, Property and Equipment): When I was a teenager, I made a lot of money shoveling snow. I used that money to buy a snow blowing machine. Equipped with the snow blowing machine, I was able to remove snow ten times faster than my competitors. This allowed me to dominate my local market.

4. Product or Service Variations: A local pizza shop promotes itself as having 36 varieties of pizza. Offering this large variety makes it harder for new pizza companies to enter the market. Because a new company would have a very hard time creating 36 varieties from the start, it would be harder for them to satisfy customers.

5. Exclusive Partnerships: Creating exclusive partnerships could be a key business asset that gives you competitive advantage. For example, if you create exclusive partnerships with top organizations in your industry, they would only work with you and not your competitors. For example, let's say you and a competitor both serve the senior market. But you have an exclusive relationship with the AARP whereby they only promote you, and not your competitors. With 37 million senior members, your AARP relationship would give you considerable advantage.

What I want you to consider now is how you can build business assets that "unlevel the playing field." How can you make it so that nobody wants to compete against you?

  • Can you lock-up customers with agreements and contracts?

  • Can you build new systems to make your company more effective and efficient?

  • Can you make investments in plant, property and equipment that allow you to cut costs or increase output?

  • Can you develop new product and/or service options that better serve customer needs?

  • Can you form exclusive partnerships to help you gain new customers that your competitors can't?


Importantly, whatever answers you come up with, realize that building these business assets will take time. Often times they may take as much as a year (or even longer). And also realize that short-term profits may go down when you are building them. For example, in the AARP example above, forging such a relationship could take 6-months, during which you invest lots of time and generate no incremental revenue.

But, once the asset is built, you may profit (and profit big) for years.

So make sure to properly plan and prioritize the development of your business assets, even though they often have less short-term benefits than other activities (such as setting up a new advertising campaign).

Set a long-term goal for when you want the assets built. And make sure that you build time into your daily, weekly and monthly schedules to move the development forward. Doing so will dramatically improve your revenues and profits, and at the dismay of your competitors who will be forced to go elsewhere.

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7 Ways to Outsmart Your Competition


 

"Knowledge is power." This is a well known saying commonly attributed to Sir Francis Bacon, who was an English philosopher, statesman, scientist and author.

In business, knowledge certainly is power. For example, if you knew where your market was heading, you would have a massive leg up on your competition.

So, how can you gain more knowledge to outsmart your competition? Here are 7 ways.

1. Learn from your customers.
Marketing consultant Jay Abraham once said, "your customers are geniuses; they know exactly what they want."

Because your customers know what they want, speak to them. And don't just speak to your current customers, but speak to your competitors' customers too. Learn to listen deeply to your customers and to ask probing questions. And when you hear consistent feedback (and not just one customer saying something), take action.

2. Learn from your competitors.
Watch your competitors closely and learn from them. What do they seem to be doing well, and how can you better emulate them in this respect? What are they doing poorly that you can capitalize on?

Importantly, don't just copy your competitors until you know that what they are doing works. For example, if a competitor starts offering a 25% off discount for new customers, don't copy them right away. Rather, wait and see what happens. If the competitor stops offering the discount quickly, then the promotion probably didn't work. Conversely, if the competitor is still offering the discount 6 months later, it probably did work. Only copy the competitor's "winners."

Also try to figure out what competitors are saying about you. And, if criticism from a competitor gets back to you, don't become defense or dismiss it casually. Rather, engage critically with it. The criticism may prove to be quite helpful. A competitor may be aware of your weaknesses in a way a friend or customer cannot be. So don't disregard negative feedback, but rather consider it carefully, and take corrective action as appropriate. 

3. Learn from your employees.
Oftentimes your employees have a lot more information than you do. They are the ones who are interacting with customers, and they are the ones that are building your products and providing your services.

Speak to your employees and get their feedback, ideas and suggestions. As an example, nearly all new innovation at Toyota comes from front-line employees. Encourage your employees to come up with ideas and give you feedback. They may also alert you to changes in the marketplace and customer behavior that you need to understand in order to adapt.

4. Learn from your community.
This is particularly true for local businesses. Find out what is going on in your community. For example, if your community is heavily involved in recycling, or if the local high school football team just won a championship, then you need to know about it since these are things your community cares about. Importantly, leverage this information. In these two examples, you could offer a sale related to the football team's victory. Or post signs explaining how your business recycles. These actions would position you as part of the community and cause customers to flock to your business.

5. Learn from coaches and consultants.
The right coach and/or consultant will have lots of knowledge that you don't. They will have worked with other business owners and "been there, done that" - that is, they will have seen challenges and overcome them already. Because you won't have to "reinvent the wheel," these paid experts can allow you to make the right decisions, avoid mistakes, and grow more quickly. Plus, paid experts can give your business a reality check and keep you focused and accountable.

6. Learn from mentors.
The right mentor serves a similar function as a paid coach and/or consultant in that they have experience, expertise and connections that allow you to avoid mistakes and grow your business more quickly. The challenge is finding the right mentor, and setting up the appropriate structure to get ongoing feedback (this naturally happens when you pay a coach or consultant).

7. Learn from other business owners. In previous articles, I have mentioned the massive power of mastermind groups. Mastermind groups are groups of business owners who work together to grow everyone's business. Mastermind groups are incredibly powerful since other members of the group will have already overcome the challenges you face, and thus can give you the answers you need.

Likewise, in many cases, skills and knowledge that have taken other business owners months or years to learn can be transferred to you in minutes. So, you gain massive knowledge quickly, and gain a support group that all shares the common goal of building a great company.

Knowledge certainly is power. Leverage these seven ways to gain knowledge, and you will be able to outsmart and dominate your competition.

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Venture Funding Advisors: How to Find, Secure & Leverage Them


 

If you're looking for funding and/or to successfully grow your business, a little known secret is to find and leverage Advisors.    

So, who or what are Advisors? Advisors are successful people that you respect and that agree to help your company. Advisors are generally successful and/or retired executives, business owners, service providers, professors, or others that could help your business.    

Advisors generally will not cost you any money (you don't pay them), although I do recommend giving them stock options to incentivize them to contribute as much as possible.   

Getting Advisors is not a requirement for raising money, but they have multiple benefits as follows:

1. Practice: if you can't successfully pitch an advisor to invest time in your business, then you're not going to successfully pitch anyone to invest money in your business. So, practice your pitch on prospective advisors first, and use that practice to perfect it.

2. Connections to capital: as successful individuals, advisors often have the ability to invest directly in your company; and/or they tend to have large, high quality networks of individuals they can introduce you to.

3. Credibility: having quality advisors gives your company instant credibility in the eyes of lenders and investors.  For example, if you started a new hockey stick company, having Wayne Gretzky as an advisor would certainly give you great credibility (and connections). But even having much smaller names than Wayne Gretzky as advisors can build enormous credibility.

4. Operational success: In an interview I did with Dr. Basil Peters (a wonderfully successful entrepreneur, angel investor and VC), Dr. Peters said that mentors and advisors are an entrepreneur's "single most controllable success factor."  Having Advisors with whom you can discuss key business matters as you grow your venture will help ensure you make the right decisions, particularly if they have encountered and dealt with the same challenges already in their careers.

I have seen these four benefits first-hand for my own companies and for companies that we've helped build their own boards. Click here if you'd like to see the list and bios of Growthink's Board of Advisors.

So, how do you build your Board of Advisors?

The steps are fairly simple:

1. Create a list of people you would like to be on your Board
2. Contact and meet with them
3. Secure the best Advisors you meet with

The final step is to hold formal and informal meetings with your Board members to leverage them -- to get them to fund your company or introduce you to other funding sources; to answer key challenges that you are facing, etc.

I must admit that years ago I wasn't thrilled about investing the time to go through the steps of creating a Board of Advisors. But I can assure you; those hours spent have yielded an enormous return on investment. In fact, I should have developed my Board much sooner than I did.

So, go out there and start building your Board of Advisors today. And start reaping the enormous benefits.
   
Suggested Resource: Want advisors? Want funding for your business? Then check out our Truth About Funding program to learn how you can gain advisors and access the 41 sources of funding available to entrepreneurs like you. Click here to learn more.

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3 Little Known Reasons Why Angel Investors Fund Entrepreneurs


 

When most entrepreneurs start out and realized they need funding, they are typically presented with three options.

The first is debt financing, which is typically in the form of a loan from a bank.

The other two funding options are typically in the form of equity, and they are 1) equity from individual or "angel" investors and 2) equity from venture capitalists.

Importantly, when considering these two sources of funding it is important to understand that most venture capitalists will not invest in companies that have not achieved "proof of concept" (which generally means a working prototype and/or revenues). Also, venture capitalists generally only invest in companies that have the potential to be valued at over $100 million within five years.

These criteria make venture capital inaccessible to most entrepreneurs. Furthermore, angel funding is often a better option since it is much easier to attain.

Consider these statistics:

  • In an average year (according to the Center for Venture Research at the University of New Hampshire), 250,000 angel investors will fund 60,000 companies, giving them $20 Billion in total.

  • Conversely, in and average year (according to the National Venture Capital Association), there are only 800 active venture capital firms, who fund only 4,000 companies, also giving them $20 Billion in total.


So while venture capitalists write much larger checks, 15 times more entrepreneurs raise funding from angels.

So why do angel investors fund entrepreneurs?  The common answer is that they hope to get a solid return on their investment. Obviously, investing at the earliest stages for a company that eventually goes big can earn the investor 100X their money back or more.

However, there are three lesser known, but equally important reasons, why angel investors fund entrepreneurs:

1. They know, like and trust the entrepreneur. Like with friends and family investments, sometimes angels know and trust the entrepreneurs and want to help them succeed.

2. They feel they can add real value. Many angels have lots of relevant experience that can help the companies they fund, from experience hiring staff to connections with key potential customers or suppliers. If angels can see their involvement adding a lot of value to the company, they might be very interested in investing.

3. Sometimes the angel wants or likes the action. Simply put, angel investing is exciting. It is generally a higher risk/higher reward version of the public stock markets requiring a more entrepreneurial analysis which is highly intriguing. This is particularly the case when the angel investor is a retired entrepreneur or executive.

So, if you are an entrepreneur seeking funding, keep these motivations in mind when you identify, approach and speak with angels.

Because understanding them is often the difference between whether you will raise money or not. Finding angel investors is also easy if you know where to look.

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How to Find Great Outsourced Help Online


 

There are three main benefits I typically derive from outsourcing:

1. Cost savings. I'm often able to pay less for jobs I outsource, particularly if I outsource them to people in lower cost-of-living states or countries.

2. Reduce overhead. Usually I outsource projects that are not full-time or that I am able to easily stop if they aren't working out as planned. This reduces my overhead (and allows me to scale down as needed) since unlike a full-time employee, the outsourced people are not a fixed expense.

3. Supplemental work at night-time hours. When you outsource overseas, it often provides great timing of workflow. For instance, in one company I ran, I would create tasks during the day, give them to my outsourced team in India, and they would be done by the time I arrived in the office the next morning.

However, for outsourcing to work, you need to find the most qualified people to which you outsource.

The key to this is to start by getting the largest pool of qualified outsourced providers to apply for the project you need accomplished. Because you want to have as many people as possible to choose from.

Even if you only hire one, you can go back and contact the same pool of talent for future projects. Consider applicants as being in your "rolodex" of people to call.

To help you do this well, here are some tips to consider when finding and judging outsourced people to complete your projects.

Choose Your Outsourcing Platform

There are many sites in which you can find outsourced providers for the tasks you need done. Among many others, these include Craigslist, ODesk.com, Guru.com, Elance.com and 99designs. Some of these sites focus on certain types of outsourced projects like technology and design, while others allow you to find people for all types of tasks.

The process of posting a project is very similar on each of these sites, but there are also minor differences to get acquainted with as you go -- worry about those later and follow these basic steps.

Create a Clear Project Title

Include the work to be done, on what, and in what industry. For example, "Help Making Ebook" could mean anything from research to writing to editing to cover design. Compare that to "Writing 10,000 Word Real Estate Ebook."  The latter will be more likely to catch the eye of writers and providers with real estate knowledge.

Create a Clear Project Description


This sounds simple enough, but you should try to answer as many possible questions as you can, which means addressing certain areas, like:
 

  • The scope of the project. In the above example, requiring a 10,000-word Ebook to be written vs. 20,000 words would be helpful information for applicants to know. This helps them estimate the time it will take to complete and therefore their bid for the project. If you are paying hourly, it will help prevent misunderstandings later.

  • Software needed. Make sure they at least have Microsoft Word and Excel, if that's what you use. Other software is industry-specific, like Adobe Photoshop among graphic designers.

    You may or may not know what software is needed for things you don't specialize in, but you will soon enough. All other things equal, choose the person who already has the best software for the job, as you'll get better results.

  • Programming languages. Some website projects require that the provider knows certain programming languages besides standard html, such as PHP, AJAX, etc. In these cases, it's better to post "PHP Programmer Needed to..." than just "Programmer." You'll get fewer, but more qualified responses. If you don't know what languages are needed, either ask a friend or do a Google search beforehand, or you could post in the project that you don't know what language is needed, and ask them to make suggestions.

    Ideally, you will want to hire people who can educate you, so this sets the tone right from the beginning. I know some people who post $10 projects for 30 minutes of a programmer's time just to answer their questions and learn simple tips and tricks to quickly do yourself without having to hire someone.

  • Payment amount. First, decide if you want to pay them by the hour, or for the whole project. There are pros and cons to both. If you estimate that something will take 5-8 hours, going hourly is fine. For work that will take longer than that or that has a higher likelihood of uncertainty, I would try a project-basis.

    Sometimes you can't estimate how long something will take-in this case, hire them on an hourly basis for a little while to get started and figure things out. Sometimes applicants will claim that they can't estimate how long it will take, while others can. I would go with people who are able to give you specific information as it shows they have their act together and have done something enough times to know how long it should take.

    Often after working on something for a little while, the way ahead becomes much more clear and they can better estimate the remaining hours from there. Sometimes I will hire 2-3 people on an hourly basis to do parts of the same project, and compare their performance to decide who should finish the whole project themselves.

    Also, you may not have a clue what something will cost, so make your best guess and let the range of proposed prices confirm this assumption or bring you back to reality. It may surprise you by being higher or lower, on average, than you thought.

  • Payment terms. Do not pay more than 50% up front. Rather, you can pay up to 50% up front, but then have milestone payments.

    Also, never pay someone the final amount if there is still work left to be done...you may never see it finished if they take off to chase down new work.

  • Payment methods. Many of the sites listed above will handle the payment. If they don't, choose the one that feels most comfortable for you, or whichever the providers prefer most.


Upload samples of what you need

You can write 5 paragraphs trying to explain the final product, or you can show them something similar you have done before (or someone else's to model yours after).

Most sites will allow you to upload files to show them what they'll be working with or making. You can also insert links in the project description to files, audios, or videos showing or explaining things more vividly.

Choose the time period for bidding


You might be given options like 3 days, 5 days, 7 days, 15 days, or 30 days to accept bids. I would lean towards giving a longer time period, unless the urgency of your project means that you don't have as much time to wait.

But basically, the more time that providers have to find and respond to your project, the more qualified applicants you'll have to choose from.

Also, some of the best providers are also the busiest, so by giving a longer time frame to respond you are more likely to catch them when they're available.

This is not an exhaustive list, but covers the most important elements of a good project posting-one that will put you in a position of strength and cut down your odds of a bad experience. Cover these bases and you'll have more people applying than you can sort through.

Which then leads to the final phase: judging your applicants. In judging which applicant(s) to choose for your project, consider:

1) How they responded to your project request: were they articulate? Did their comments and/or questions make sense?

2) Their portfolio: do they have a website which shows their portfolio of work that you can judge? If so, take a close look.

3) Their ratings. On most of the outsourcing sites listed above, past clients will rate the outsourced person's work. I never use someone who hasn't completed at least 20 projects and has a rating of 4 stars or above.

Follow this advice and you can find the right outsourcers to help you grow your business and profits.

 

Suggested Resource: If you don't outsource, you can't compete. The math is simple...if your competitors are outsourcing and only pay $X to complete a task, and you pay $3X, $5X or $10X, your competitors will eat your lunch. You simply must outsource to stay competitive. Outsource the right way using Growthink's Outsourcing Formula. Learn more by clicking here.

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4 Emails That Get An Investor's Attention


 

If you were raising funding 25 years ago, you probably called prospective investors on the phone and sent them your business plan via fax or overnight delivery.

As you can imagine, things are very different today. And email is the number one way to communicate with prospective investors, particularly professional investors like venture capitalist.

The challenge, as you can imagine, is getting their attention. As most venture capitalists receive tons and tons of unsolicited email each day. So, the key is having a great subject line on your email to get them to open it.

Before giving you some subject lines that do work, let me tell you ones that don't. Subject lines such as "Unique Investment Opportunity," "Please Invest in our company," and "Great Investment Opportunity" don't catch investors' attention and turn them off.

So, don't use these. Here are some you can use:

1. Your Involvement in XYZ Company

Where XYZ company is a company that the investor has funded and which is in your general space. You would start the email with something such as "based on your investment in XYZ company, I think you will be interested in what we are doing..."

2. New in the "XYZ Space"


Where XYZ is the "space" in which you are operating in (e.g., the financial software space). The first line would tie the subject line to what you are doing.

3. Referred by XYZ


Where XYZ is a referral source that knows both you and the investor. This works extremely well, but clearly you must first get the referral.

Because referrals are so powerful, go on LinkedIn and/or other networks to see if you already have someone in your network that can refer you to the investor.

4. Comment on Your Post About XYZ


Where XYZ is a blog post that the investor recently wrote about a subject. In your opening line you explain what you agree with in their post and then tie it to your company.

Importantly, after your subject line and introductory line that ties your company with the subject line, you should NOT tell the investor everything about your company.

Rather, this first email should be a "teaser" email. A "teaser" email is an email that "teases" the investor by giving them a bite-sized amount of compelling information about your company.

The goal of the email is to see if they are interested. If they are, you will follow up with more information (maybe your Executive Summary and/or full business plan) with the goal of getting a face-to-face meeting with the investor.

There are two reasons you shouldn't send your business plan in your initial email. First, you don't want to "over-shop" your deal. Over-shopping is letting too many investors know about your company. If too many investors know about you, the law of numbers states that many investors will pass on investing in you (remember, most investors passed on the opportunity to invest in Google years ago).

So, if an investor isn't even interested in your market space or teaser email, they certainly won't invest in your company. And here's what can happen -- an interested investor asks this investor (the one who isn't interested in your space) if they've heard of your company. That investor says "yes" (since you unwittingly sent them your plan) and that they weren't interested. And then their disinterest dissuades the once interest investor from investing in you.

The second reason you don't want to send out your business plan in your initial email is for confidentiality reasons. You just don't want your business plan out there for everyone to see. Rather, wait until the investor shows that they are at least somewhat interested in your venture before sending it.

So, now that you know that you should start by sending investors a "teaser" email, the question is what to include in the teaser.

Here's the answer: the teaser email should include 5 to 6 bullets about your company and should be very short (200 words or less).  The goal, once again is simply to create a general interest in your venture so the investor commits time and energy to learning more about it (by requesting additional documents or setting up a meeting).

Your bullets should describe what space your company is in and credentials that make you uniquely qualified to succeed (e.g., credentials of management team, customers serving already or showing interest, etc.).


To summarize, send investors a teaser email instead of your business plan to start. And realizing that they receive hundreds of emails every day asking for funding, make sure your subject line stands out and seems like you're offering them value.

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The 5 Most Common Funding Sources


 

If you want to be successful in business, it is crucial to determine when, where, and how to obtain the funds you need. Whether you need $1,000 or $1 million to start or expand your business, if you can't raise this money, you can't build the business you want.

Before You Look For Funding

Before you look for funding, you need to create your business plan. In addition to explaining your business and your strategy for success, your plan must determine how much money you need and for what it will be used.

Also, it's very important for you to understand the timing of the funding. For example, do you need all the funding now (e.g., to build out a location), or can you receive your funding in stages or "tranches."

The amount of funding you seek will effect the source of funding you approach. For example, if you require $250,000 in funding, angel investors are more applicable then venture capitalists. If you need $5 million, the opposite is true.

While I have identified 41 sources of funding for your business, below are the 5 most common.

The 5 Most Common Types of Funding

1. Funding from Personal Savings

 
Funding from personal savings is the most common type of funding for businesses. The two issues with this type of funding are 1) how much personal savings you have and 2) how much personal savings are you willing to risk.

In many cases, entrepreneurs and business owners prefer OPM, or "other people's money." The four funding sources below are all OPM sources.

2. Debt Financing

Debt financing is a fancy way of saying "loan." In debt financing, the lender (often a bank) gives you funding that you must repay over time with interest.

You must prove to the lender that the likelihood of you paying back the loan is high, and meet any requirements they have (e.g., having collateral in some cases).  With debt financing, you do not need to give up equity. However, once again, you will have to pay back the principal and interest.

3. Friends & Family

A big source of funding for entrepreneurs is friends and family. Friends and family members can provide funding in the form of debt (you must pay it back), equity (they get shares in your company), or even a hybrid (e.g., a royalty whereby they get paid back via a percentage of your sales).

Friends and family are a great source of funding since they generally trust you and are easier to convince than strangers. However, there is the risk of losing their money. And you must consider how your relationship with them might suffer if this happens.

4. Angel Investors

Angel Investors are individuals like friends and family members; you just don't know them (yet).  At present, there are about 250,000 private angel investors in the United States that fund more than 30,000 small businesses each year.

Most of these angel investors are not members of angel groups. Rather they are business owners, executives and/or other successful individuals that have the means and ability to fund deals that are presented to them and which they find interesting.

Networking is a great way to find these angel investors.

5. Venture Capitalists (VCs)


VC funding is a suitable option for businesses that are beyond the startup period, as well as those who need a larger amount of capital for expansion and increasing market share. Venture capitalists are usually more involved with business management, and they play a significant role in setting milestones, targets, and giving advice on how to ensure greater success.

Venture capitalists invest in companies and businesses they believe are likely to go public or be sold for a massive profit in the future. Specifically, they want to fund companies that have the ability to be valued at $100 million or more within five years. They also go through an expensive and lengthy process of deciding on the best business to invest their money. Hence, the approval process usually takes several months.

Bottom Line

As you search for the best funding source for your business, you will discover that some financing options are complicated while others may offer a very small amount.

Choosing an inappropriate type of funding can lead to unfavorable outcomes such as feuds between the lender and business owner, shift of control, waste of resources and other negative consequences.

With this in mind, you should study the benefits and drawbacks of each financing option and select the ideal one that will help you meet your business goals. Because with the right source(s) of money, the sky is the limit for your business.

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Why Your Worst Enemy Can Raise More Money Than You


 

The word "crux" is an interesting word. It's a noun that can be defined as: (1) the decisive or most important point at issue, or (2) a particular point of difficulty.

In either case, the word aptly applies to raising funding for your business, because in doing so, most entrepreneurs and business owners encounter difficulties.

I believe the crux to successfully raising money for your business lies initially in understanding that investors are essentially professional risk managers.

Let me explain. Most sources of money, like banks and institutional equity investors (defined as institutions like venture capital firms, private equity firms and corporations that invest), are essentially professional risk managers. That is, they successfully invest or lend money by managing the risk that the money will be repaid or not.

So, your job as the entrepreneur seeking capital is to reduce your investor or lender's risk.

Let me give you a simple example. Let's say that both you and your worst enemy both wished to open a new restaurant.

In this scenario, which is the riskier investment?

  • You have put together a business plan for the new restaurant.

  • Your worst enemy has also put together a business plan for the restaurant...and he/she has also put together the menu, secured a deal for leasing space, received a detailed contract with a design/build firm, signed an employment agreement with the head chef, etc.


Clearly investing in your worst enemy is less risky, because they have already accomplished some of their "risk mitigating milestones."

Establishing Your Risk Mitigating Milestones


A "risk mitigating milestone" is an event that when completed, makes your company more likely to succeed. For example, for a restaurant, some of the "risk mitigating milestones" would include:

  • Finding the location
  • Getting the permits and licenses
  • Building out the restaurant
  • Hiring and training the staff
  • Opening the restaurant
  • Reaching $20,000 in monthly sales
  • Reaching $50,000 in monthly sales

 

As you can see, each time the restaurant achieves a milestone, the risk to the investor or lender decreases significantly. There are fewer things that can go wrong. And by the time the business reaches its last milestone, it has virtually no risk of failure.

Let me give you another example. For a new software company the risk mitigating milestones might be:

  • Designing a prototype
  • Getting successful beta testing results
  • Getting the product to a point where it is market-ready
  • Getting customers to purchase the product
  • Securing distribution partnerships
  • Reaching monthly revenue milestones


The key point when it comes to raising money is this: you generally do NOT raise ALL the money you need for your venture upfront. You merely raise enough money to achieve your initial milestones. Then, you raise
more money later to accomplish more milestones.

Yes, you are always raising money to get your company to the next level. Even Fortune 100 companies do this - they raise money by issuing more stock in order to launch new initiatives. It's an ongoing process-not something you do just once.

Creating Your Milestone Chart & Funding Requirements


The key is to first create your detailed risk mitigating milestone chart. Not only is this helpful for funding, but it will serve as a great "To Do" list for you and make sure you continue to achieve goals each day, week and month that progress your business.

Shoot for listing approximately six big milestones to achieve in the next year, five milestones to achieve next year, and so on for up to 5 years (so include two milestones to achieve in year 5). And alongside the milestones, include the time (expected completion date) and the amount of funding you will need to attain them.

After you create your milestone chart, you need to prioritize. Determine the milestones that you absolutely must accomplish with the initial funding. Ideally, these milestones will get you to point where you are generating revenues (if you are not already generating revenues). This is because the ability to generate revenues significantly reduces the risk of your venture; as it proves to lenders and investors that customers want what you are offering.

By setting up your milestones, you will figure out what you can accomplish for less money. And the fact is, the less money you need to raise, the easier it generally is to raise it (mainly because the easiest to raise money sources offer lower dollar amounts).

The other good news is that if you raise less money now, you will give up less equity and incur less debt, which will eventually lead to more dollars in your pocket.

Finally, when you eventually raise more money later (in a future funding round), because you have already achieved numerous milestones, you will raise it easier and secure better terms (e.g., higher valuation, lower interest rate, etc.).

It might surprise you what you can accomplish with less money! So write up your list of risk mitigating milestones and determine which must be done now and which can wait for later, focusing first on what is most likely to generate revenues.

 

Suggested Resource: Want funding for your business? Then check out our Truth About Funding program to learn how you can access the 41 sources of funding available to entrepreneurs like you. Click here to learn more.

 

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The Big Secret to Raising Venture Capital


 

Years ago I served on a funding panel with Tom Clancy. At the time, Tom was a partner at Enterprise Partners Venture Capital in San Diego.

At the time (around 2003), many venture capital firms were licking their wounds. They had funded a ton of companies during the tech bubble phase, and most of them had failed.
 
This led Clancy to make an important decision. He said that going forward, Enterprise Partners would wait at least six months before funding any new company they met.

The rationale was solid. During the six months, he would see what the entrepreneur was able to accomplish. If the entrepreneur accomplished the milestones set forth in their business plan, than they were deemed worthy and would receive funding. If not, they would not.

So what is the entrepreneur to do during the six months in order to get the investor to write them a check?

Obviously they need to achieve milestones... But what else?

Before I give you an answer, I want you to know how crucially important this is, not only in raising capital, but in securing key partnership and gaining key customers.

Let me give you an example of an entrepreneur who successfully used this technique in order to get a key partner. This entrepreneur’s name was Chet Holmes. And one of the key reasons that Mr. Holmes achieved success was through his partnership with marketing guru Jay Abraham.

How did Holmes get the partnership with Abraham? Like many people, he tried to reach him by phone, fax and mail. But Holmes did it every other week...

...FOR TWO YEARS!!!

Then, he finally got a call from Abraham's business manager for a lunch appointment, flew to Los Angeles for lunch, and established a very profitable partnership.

So, what's the answer to the question of how to woo investors, customers, partners, advisors, key hires, and more over six months?

Effective and persistent communications. In other words...

FOLLOW UP.

You must consistently, over a period of time, hammer home your message to investors, key customers and others.

What exactly does this mean? For investors, once you meet them, you should follow-up with them at least twice per month to update them on your progress. For prospective customers, you should contact them on an ongoing basis to continually give them value and convince them of the benefits of working with you. And of course, don't forget to follow-up with your existing customers.

And a key here is that this follow-up should NEVER END unless or until the costs of the follow-up clearly outweigh the benefits.

Remember that people invest in, buy from, and partner with other people. So, who would you rather work with? Someone who has been contacting you for two years with quality messages regarding why you should partner with them, buy their product or invest in them? Or someone who you just met yesterday and tells you how great they are?

The answer is clear.

Don't stop at the first contact. Choose the appropriate frequency (i.e., you don't want to be perceived as too obnoxious or pushy to potential investors), craft quality messages, achieve your milestones, and convince investors and others to work with you over time.

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The One Thing Every Venture Capitalist Wants


 

A venture capital firm is a financial institution that focuses on providing capital, in the form of equity, to companies who offer them the prospects of significant growth. 

The partners and associates at venture capital firms are known as venture capitalists. The term "VC" or "VCs" applies to both venture capital firms and venture capitalists. 

Unlike angel investors, who invest their own money, VCs are professional institutions that invest other people's money. VC firms raise capital for their own funds from sources which primarily include pension funds, financial and insurance companies, endowments and foundations, individuals and families, and corporations.

The VCs are then charged with providing a solid return on investment on this money. This is the one thing that every VC wants. By providing a solid ROI to their investors, VCs earn bonuses and raise more funds so they can stay in business.

VCs earn returns for their investors by finding high growth companies, making investments in them at favorable terms, guiding and nurturing them, and enacting a liquidity event (e.g., selling the company or having it complete an initial public offering).

Because they are utilizing other people's money, and are judged and compensated by the performance of their investments, venture capitalists are extremely rigorous in their investment decision-making process.

Importantly, VCs tend to only invest in companies with significant market potential of $50 million, $100 million or more. This is because even with all their relevant experience, the average venture capital firm will lose money on half the companies they invest in and only break even on a third.

Where VCs make their money is on the approximately 20% of companies they invest in that see explosive growth and provide remarkable returns of 10 times to 100 times or more on their investment.

Industry insiders sometimes refer to the 2:6:2 rule. This rule is that an average portfolio of ten VC investments will include two losses (e.g., companies go bankrupt), six moderately performing companies (may break-even on the investment or lose a little) and two very successful returns.

In fact, an analysis by Bygrave and Timmons of VC funding found that just 6.8% of investments returned ten times or more on the invested capital (these "home runs" are what give VCs high overall returns). Conversely over 60% of investments lost money or failed to exceed the amount of money earned if the capital had been put in an interest-bearing bank account.

The result of this analysis is that typically a venture capitalist will want to see the ability to get 10X their money back or more from investing in your company (they are seeking "home run" investments which compensate for the 60% of their investments that don't pan out) . As such, for every $1 million you are seeking from VCs, you must show them a realistic scenario where you can turn it into $10 million.

So, importantly, when approaching venture capitalists, remember 1) their primary goal is to make significant money from investing in you; and 2) you need to show them how they can earn a 10X return.

Now, if your company can potentially give VCs a 10X return, then seeking venture capital might be right for you. However, raising it is virtually impossible if you don't know what you're doing and haven't done it before. So follow this plan:

1. Develop a list of VC firms.

Start by creating a list of venture capital firms.

2. Narrow your list.

Each venture capital firm invests based on particular characteristics (e.g., some only invest in software firms), so you need to make sure your list only includes VCs that are interested in your type of venture.

3. Make sure the VC is active.

Many VC firms that have websites aren't active. That is, they aren't making new investments. You don't want to waste your time contacting and talking with these firms.

4. Find the appropriate person to contact.

This is critical. Venture capital firms are comprised of individual partners and associates. If you contact the wrong one, you'll be dead in the water.

5. Send the VC partner or associate a "teaser" email.

You don't want to send the VC a full business plan or executive summary initially. Rather, you need to send them a "teaser" email to see if they are interested. You don't want to "over shop" your deal.

Once the VC "bites" on your teaser email, the next step is generally to send them your business plan. Following that you'll do an in-person presentation(s), receive and negotiate a term sheet, and then sign a formal agreement and receive your funding check.

The process is a lot of work, but once you receive their multi-million check with which you can dramatically grow your company, you'll agree it's worth the effort.

Suggested Resource: In Venture Capital Pitch Formula, you'll learn exactly how to find and contact venture capitalists, exactly what information to include in your presentations, and how to secure your financing. This video explains more.

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