As a reminder, here’s what we’re working on:
Part One – The Idea – It’s Not Rocket Science (unless it is)
Part Two – Plan Your Work, Work Your Plans
Part Three – Did I Mention Money, Honey?
Part Four – The Word is Like Butter – Spread It
Part One consisted of an introduction to the process of gaining an idea and what it takes to make it an actual business, whether it be something unheard of previously, or refining an existing product or service that makes it unique and in demand.
Part Two touched on planning for success, both the business plan for gathering money, as well as the tactical aspects of a business plan to actually put into action what you desire out of a successful idea conversion.
Part Three of this Four Part Series will cover the financial aspect of starting a venture, as well as the maintenance of cash flow, reserves as well as effective reporting of the numbers.
It’s All About the Benjamin’s!
Most people believe that in order to get to this phase of a start up they must provide a full blown business plan with financials, research data and a summary. Not Necessarily! Don’t misunderstand, you do and you don’t need everything to be at the very pinpoint of the process. Let me explain.
What you do need is an education in the legal aspects of gathering money, the process and language and an understanding of the basics of financial business growth from conceptualizing an idea to first round funding. There IS a way to grow and idea into a multi-million dollar enterprise without the use of a single dollar of your own money. Just remember though, unless you have some part of the risk invested into your enterprise, you may not take it as seriously as you should, nor will anyone else. You do need to have a financial investment into your idea. Your financial input is a gauge into your level of commitment and passion towards the idea. In addition to your sweat equity, you should have a financial investment in the mix, especially prior to building funding through friends, family and others.
What you don’t need at the early stages is the business plan in infinite detail; it can be sketchy and incomplete if you are raising seed capital, or early stage feasibility investment dollars. These usually come from family, friends, others. The amounts are small, with a promissory note for collateral.
Put Your Money Where Your Mouth Is.
It’s a relatively simple formula: Success equals A Great Idea PLUS Money.
Getting an idea to germinate into a successful enterprise is not cheap, and in order to ensure “compliance” (all the legal mumbo-jumbo) it will take a good amount of cash. Even a virtual business isn’t inexpensive to begin, especially if you want to create just the right look, reach just the right audience and make an impressive impact in an already crowded net. The typical belief is that interested parties such as web masters, accountants, lawyers and marketers will work for stock, but that may not be a reasonable assumption. There is a school of thought however, where I have learned how to find such providers for a piece of the pie. Unless you have the inside track to this “school” it is unrealistic to expect people to work for an interest in the new company alone.
▪ Learn some of the language that is involved with funding of endeavors, which not only make you sound more professional, but will separate you from the masses seeking money for an idea. Terms such as PPM, or private placement memorandum, Seed Capital, Founder Capital, subscription documentation, Deal Sheets, etc.
▪ Invest in your idea, so others will be able to see your financial commitment into your concept when you want to ask them to invest in you. You may want to take a look at all of your assets, including equity in your home, stocks and bonds, credit card balances, savings accounts and so forth. It’s called bootstrapping your venture. By investing in yourself, potential investors will be more comfortable knowing that you have “skin” in the game.
▪ Minimally, you should bootstrap your idea to the stage that there is something tangible to show others. This may be a preliminary drawing, a model of a product, a rough plan describing a service, or some other tangible thing to see, touch and feel. Some entrepreneurs bootstrap their idea completely, without outside investors so they maintain complete and utter control of their product or service business. They are safe and secure in the knowledge that they won’t have to share any profits should the dream turn into a reality. There is also no one to share in the burden if the idea doesn’t work out, or needs additional funds down the line.
▪ Begin the process of formulating the basics of the financial plan, the business plan and a draft of a deal sheet. These documents and others will formulate your “intellectual property” so guard it well. There are intellectual property attorneys that can advise you on what it takes to fully protect your idea and it’s potential. It always makes sense to seek the counsel of professionals along your success route.
▪ Nearly all new businesses that seek funding will require some legal foundation. Remember, when you trade money for an interest in a venture, it is the creation of a Security. The Securities Exchange Commission frowns on those that perform those transactions without the legal right to do so. Even initial funding from family and friends needs some type of legal document such as a promissory note, a guarantee and surety agreement, a private placement memorandum, etc.
▪ A Securities lawyer can be very helpful getting all of the compliance documents and filings done properly to keep you and your idea out of trouble. Remember, you can use feasibility funds to finance this amount, or you can invest your own cash as a portion of your personal investment.
Other Sources of Good Information
Take a look at the following sites to gain some better insight into what may be required for the capitalization of your enterprise. They are:
www.sec.gov for capitalization information
www.sba.gov for loan documents, loan advice and more
The Early Show
The very early stages of development may require you to seek initial funding of your idea, maybe as early as the napkin stage. It’s okay, but be prepared for rejection as well as acceptance. To better your success at this preliminary stage, arm yourself with some valuable tools that may better your chances of obtaining that needed early funding.
I have witnessed checks being written where the only tangible evidence of a potential venture was the actual napkin the idea was drawn on. Mind you it was only $500, but it was enough to advance the concept to the next step in the idea’s evolution. The promissory note that was written was also done in hand rather than a formal typed agreement, but it was just as legally binding. The important difference in this transaction was that the IP (intellectual property) owner agreed to accept the funds to “further investigate the feasibility of the idea’s potential.” In other words, the IP’s owner (the idea person) signed a loan document with terms and conditions in exchange for a small loan to move the idea to the next stage of development. The promissory note reflected whatever interest rate was to be charged, if any, how much time before the loan was due to be repaid, and how it was to be repaid. Simple, to the point, and legal.
When approaching friends, family and associates, it is best to have information ready for show and tell. A pocket folder with the following will work well, and is often called the Presentation Packet. On one side of the packet a deal sheet outlining the financial summary of how the proposed deal should work; the potential profit and loss so to speak. Additionally, some third party endorsement letters from those that know you personally can only help potential investors feel more reassured about you as an individual. On the other side of the packet, a copy of the business plan complete with resumes of any and all partners in the endeavor.
When the time comes for someone to say “Yes, I’ll Invest” the work is just beginning. It is at this point that any loan documents, promissory notes, guarantee and surety documents or other forms of agreement must be outlined and agreed to. If a loan, the document must specify whether the loan is secured or unsecured, that is, whether or not the lender will hold an interest in the title of your intellectual property, what the interest of the loan is and what the payments will be as well as for how long. If the transaction is for an investment in the project, it gets a lot more complicated. The joining of two or more parties must be a partnership or a corporation, what roles will each party plan, and what legal responsibilities each party will have.
Hear Ye, Hear Ye, Lend Me Your Money
Should you choose a bank to fund your idea, be prepared to know the terms and conditions a loan may entail. Your banker will determine what type of debt financing your business idea will be best suited, but you should know that in most cases; the bank will want a guarantee and surety note to be signed making you personally liable for any and all funds should the business fail. They will typically be selling you an equity line or refinance of your existing home, any other tangible goods that would serve as collateral and more. Arm yourself with the knowledge of banking terminology so that you present yourself in the best possible light when it comes to presenting your business plan and loan request documents.
The different types of loans might be a line of credit loan, an installment loan, secured and or unsecured financing. It is a good idea to search out friendly lending institutions, including community banks and credit unions. Community banks and Credit Unions have a softer approach to lending, considering today’s economic climate. Even though Congress has bailed out numerous banks, insure deposits and have placed scrutiny on the lending practices of them, most banks are stingy on loaning money to new endeavors. It’s just a fact of life in these troubling times.
The Small Business Administration has programs that can assist new ventures find the necessary funding to move their projects forward, including programs for displaced workers, women in business and offer information to obtain loans, grants and other forms of funding. Check out www.sba.gov
Money is Money, Even if on a Horse
This is an exhausting topic, and there is a significant amount written on the subject available on the internet, in books and articles. As one of the most important items in the start up mix, a significant amount of time and energy must be spent on this topic. Remember, most new businesses fail for the lack of capitalization. You will need more than you think, it will take longer than you think to gather it, and it will spend much faster than you have estimated. Use it wisely!
My Advice: Read my article on Three Rules of Entrepreneurship found on this blog site.
For additional information, visit my blog at www.theovercaffeinatedentrepreneur.wordpress.com