Learn from the CFO who has helped take companies from idea stage to IPO, several times. No nonsense, the real information & tools you need to get your company funded!
Chris Benjamin, Rogue CFO
www.RogueCFOSeminars.com
Saturday, April 30, 2011
Top 5 Areas Businesses Need Turned Around for Success
Top 5 Areas Businesses Need Turned Around for Success
I’ve worked with several companies lately who need to be turned around. These were once successful ventures whose magic formula for success stopped working. The problem is they were not dynamic and change their business model in time, and now are hanging on by a thread. Luckily, there’s usually still hope if they are able to take a step back, reevaluate, and in dire situations hire someone like myself to be the evaluator, mentor & fixer before the business breaths its last breath.
The good news (if you can call it that) is I see the same things fail time and again. I’ve put together a list from real life examples of areas to pay attention to as a business administrator or owner. Steer clear of the pitfalls I’ve seen far too many people fall into, and hopefully you won’t need a visit from a turn around maven.
1. Evaluate your metrics monthly
I was rather surprised recently when called in to help out a company who had been in business almost 4 years now, and only recently had they taken their first look at a Profit & Loss statement. All they knew was cash always was in the bank, so things must be going okay. Suddenly, the balance was creeping downwards. With no skill set in the management team financially, even with a full set of financial reports they were lost. Spend the time to learn how to read a balance sheet, profit & loss statement and a cash flow report and you’ll be well on your way to understanding how the business is performing.
Once you graduate past learning to read financial statements, work on setting some financial and non-financial metrics to benchmark your company against. The specifics will depend on your industry and what is important to you. Revenue per customer, number of sales leads, gross margin, etc. are just a few to get you thinking.
2. Is your marketing working?
Throwing money at advertising is great as long as the advertising you are doing is properly targeted. Recently I ran into a company who had gradually increased their spending on radio advertising (their only means of advertising) over the last few years. Still though, the returns weren’t there and business was dropping off. Ever hear the saying “throwing good money after bad”? That is essentially what they were doing. As it turns out, their target market for the most part wouldn’t be listening to the radio whatsoever. Unless their mission statement was to turn an audience with no use for their product into loyal customers, they were going about things all wrong. Make sure the advertising you are doing is first the correct medium, and second evaluate the effectiveness of it.
3. Hire professionals to do professional jobs
The one trait I see different between successful and unsuccessful people is the successful peoples willingness to hire professionals to help them grow their business. No one person is a true jack of all trades. Like the person in example 1 above, if they had someone on board who knows financials and numbers, they could have easily grown the business substantially over the years. Instead it withered away.
While no one likes the idea of spending money, give it a try. Even if it’s just a trial basis, see what having someone else on board, an outsider with knowledge in their area, can do for your business. Pick the most painful area for you and let someone else do the heavy lifting, whether its marketing, financials, sales or operations.
4. Lack of goals and direction
It’s easy to settle in and accept the norm, especially when things are cruising along, everyones being paid, the business is showing some slight growth. While there’s some glory in having a self-sustaining business, you are really failing to capitalize on potential growth. Setting achievable goals for the business in all areas (some call them Key Performance Indicators), you’ll have targets to hit and hopefully a passion for reaching those targets. Don’t just set goals, that’s just the beginning. Then figure out what actions you and the company have to take to reach those goals. It’s easy to say we want a 20% increase in revenue this year and cross your fingers. It’s another thing to think about what additional work needs to happen to make a 20% increase tangible.
5. Lackluster staff
I’ve seen good businesses held back not by management but by the staff. No one likes change, and the idea of replacing someone who does a so-so job seems more painful than it’s worth. Seemingly. What is that person really costing you? I’ve seen people in all positions who should have been replaced asap. Bookkeepers who make errors, sales people whose approach is driving away more customers than it brings in, the web guy who only knows basic html. They are all okay at their jobs, but you know deep down there are far higher caliber people out there looking to make their new boss very happy.
For the most part, any turn around situation I’ve walked into involved replacing at least someone. I don’t go out looking to really shake up the staff, but the reality is it’s an often found problem. The few weeks or months of transition will be well worth it in the long run when the new bookkeeper doesn’t screw up the financial report, the new sales guy is much more liked by customers, and the web developer can launch a full online marketing campaign.
In Summary
Hopefully if you feel your business needs some help, one or more of the points above rang true. Now you can at least set out on a course to make things better. As always if you need help, don’t be shy about contacting myself to help evaluate what went wrong, where things need to go, and what plan of action needs to be put in place to make it a reality.
Chris Benjamin, Rogue CFO
chrisb@roguecfo.com
www.RogueCFO.com
I’ve worked with several companies lately who need to be turned around. These were once successful ventures whose magic formula for success stopped working. The problem is they were not dynamic and change their business model in time, and now are hanging on by a thread. Luckily, there’s usually still hope if they are able to take a step back, reevaluate, and in dire situations hire someone like myself to be the evaluator, mentor & fixer before the business breaths its last breath.
The good news (if you can call it that) is I see the same things fail time and again. I’ve put together a list from real life examples of areas to pay attention to as a business administrator or owner. Steer clear of the pitfalls I’ve seen far too many people fall into, and hopefully you won’t need a visit from a turn around maven.
1. Evaluate your metrics monthly
I was rather surprised recently when called in to help out a company who had been in business almost 4 years now, and only recently had they taken their first look at a Profit & Loss statement. All they knew was cash always was in the bank, so things must be going okay. Suddenly, the balance was creeping downwards. With no skill set in the management team financially, even with a full set of financial reports they were lost. Spend the time to learn how to read a balance sheet, profit & loss statement and a cash flow report and you’ll be well on your way to understanding how the business is performing.
Once you graduate past learning to read financial statements, work on setting some financial and non-financial metrics to benchmark your company against. The specifics will depend on your industry and what is important to you. Revenue per customer, number of sales leads, gross margin, etc. are just a few to get you thinking.
2. Is your marketing working?
Throwing money at advertising is great as long as the advertising you are doing is properly targeted. Recently I ran into a company who had gradually increased their spending on radio advertising (their only means of advertising) over the last few years. Still though, the returns weren’t there and business was dropping off. Ever hear the saying “throwing good money after bad”? That is essentially what they were doing. As it turns out, their target market for the most part wouldn’t be listening to the radio whatsoever. Unless their mission statement was to turn an audience with no use for their product into loyal customers, they were going about things all wrong. Make sure the advertising you are doing is first the correct medium, and second evaluate the effectiveness of it.
3. Hire professionals to do professional jobs
The one trait I see different between successful and unsuccessful people is the successful peoples willingness to hire professionals to help them grow their business. No one person is a true jack of all trades. Like the person in example 1 above, if they had someone on board who knows financials and numbers, they could have easily grown the business substantially over the years. Instead it withered away.
While no one likes the idea of spending money, give it a try. Even if it’s just a trial basis, see what having someone else on board, an outsider with knowledge in their area, can do for your business. Pick the most painful area for you and let someone else do the heavy lifting, whether its marketing, financials, sales or operations.
4. Lack of goals and direction
It’s easy to settle in and accept the norm, especially when things are cruising along, everyones being paid, the business is showing some slight growth. While there’s some glory in having a self-sustaining business, you are really failing to capitalize on potential growth. Setting achievable goals for the business in all areas (some call them Key Performance Indicators), you’ll have targets to hit and hopefully a passion for reaching those targets. Don’t just set goals, that’s just the beginning. Then figure out what actions you and the company have to take to reach those goals. It’s easy to say we want a 20% increase in revenue this year and cross your fingers. It’s another thing to think about what additional work needs to happen to make a 20% increase tangible.
5. Lackluster staff
I’ve seen good businesses held back not by management but by the staff. No one likes change, and the idea of replacing someone who does a so-so job seems more painful than it’s worth. Seemingly. What is that person really costing you? I’ve seen people in all positions who should have been replaced asap. Bookkeepers who make errors, sales people whose approach is driving away more customers than it brings in, the web guy who only knows basic html. They are all okay at their jobs, but you know deep down there are far higher caliber people out there looking to make their new boss very happy.
For the most part, any turn around situation I’ve walked into involved replacing at least someone. I don’t go out looking to really shake up the staff, but the reality is it’s an often found problem. The few weeks or months of transition will be well worth it in the long run when the new bookkeeper doesn’t screw up the financial report, the new sales guy is much more liked by customers, and the web developer can launch a full online marketing campaign.
In Summary
Hopefully if you feel your business needs some help, one or more of the points above rang true. Now you can at least set out on a course to make things better. As always if you need help, don’t be shy about contacting myself to help evaluate what went wrong, where things need to go, and what plan of action needs to be put in place to make it a reality.
Chris Benjamin, Rogue CFO
chrisb@roguecfo.com
www.RogueCFO.com
Friday, April 29, 2011
Break Down the VC Barrier
Break Down the VC Barrier
Landing investors takes a lot of persistence and a little luck. Here's how these entrepreneurs did it.
Two rules in venture capital: VC firms tend to give money to entrepreneurs who've gotten venture capital before. VCs also like to fund companies that already have customers and revenue. Now that the economy's in a slump, these rules are doubly true.
So how do you land that very first round of venture capital for your startup? With persistence, a great business idea and a little luck. Here are three entrepreneurs who bucked the odds within the past year. Two of the three companies even landed funding before their product launched.
Company: Fashion Playtes
Business: Personalized clothing company for tween girls
City: Salem, Mass.
Founders: Sarah McIlroy, 38, CEO; Mary Beth Tirrell, 28, vice president of apparel
Funding: $1.5 million raised in August from VC firms including New Atlantic Ventures
Former Hasbro Interactive, Atari and Brookstone marketer McIlroy barely had her Fashion Playtes website in beta in July 2009, when she started her funding search. Just a few hundred friends and family members were using the site, which offered five apparel items visitors could customize.
McIlroy recruited apparel pro Tirrell and created a website where tween girls such as McIlroy's 10-year-old daughter Madeleine could design and purchase affordable clothing. The site's average purchase is $30.
She knew fundraising would be tough at this early stage and in this economy, but McIlroy didn't want to wait.
"The convergence of online interactive and fashion design was there," she says, "and I felt the timing was right, and somebody else would do it if I didn't."
McIlroy worked her rolodex hard. One advisor introduced her to mass-customization pioneer Sung Park, who started Custom Clothing Technology, which was bought by Levi Strauss & Co. Still, one potential funder told her companies without at least $1 million in sales and an experienced management team couldn't get funding now, period. Undaunted, McIlroy pressed on.
Eventually, McIlroy's networking brought her to New Atlantic Ventures partner Tim Rowe, who knew McIlroy's name from her Atari days. When he presented Fashion Playtes at a partner meeting, NAV managing partner Scott Johnson pricked up his ears--he had a 9-year-old daughter.
"I tried it out on my daughter and her friends, and they were just apoplectic with desire for it," Johnson says. "That got us comfortable with the fact that it was a concept-stage deal."
With the funding, Fashion Playtes has expanded to 11 apparel items from dresses to jean jackets to purses, and plans to open its site to the public shortly.
Company: PaperG
Business: Provides newspapers with virtual classified-advertising software and support
City: New Haven, Conn.
Founders: Victor Wong, 23, CEO; Ka Mo Lau, 22, CFO; Victor Cheng, 23, CTO; Roger Lee, 23, COO.
Funding: About $1 million from funders including Launch Capital in early 2009
Yale students Wong, Lau and Cheng got together in March 2007, creating a virtual bulletin board where student groups could post their event notices free, and local businesses could pay to post, too. Soon they signed up the New Haven Independent and launched their Flyerboard product, which enables papers to offer interactive, easily shareable, graphical ads for around the cost of an old-time plain-text classified ad.
"It was literally a couple of us in dorm rooms," Wong recalls, "working on the technology and calling newspaper publishers."
PaperG soon got free office space courtesy of the Yale Entrepreneurial Institute, and expanded its contacts by adding Harvard student Lee, a move which helped sign up the Harvard Courant. Then-Yale School of Management professor Steve Taylor, a former publisher of The Boston Globe, joined PaperG's advisory board and helped land the Globe as PaperG's first major customer. Media giant Hearst Corp.'s Houston Chronicle came on board next. After the Flyerboard did $100,000 in sales in its first four weeks at the Chronicle, Hearst laid plans to roll it out to additional papers.
The startup was introduced to new venture fund Launch Capital by Yale Institute director James Boyle. Launch was just setting up an office in New Haven, and Wong shed his dorm duds for a suit and made his pitch solo, amidst unpacked office furniture.
"I remember him being so nervous," says Launch managing director Elon Boms. "But two things were extraordinarily impressive--they'd come a long way with relatively nothing, and had top-notch advisors."
Now, PaperG's founders have all either graduated or withdrawn from school. The company has 10 employees and is racing to keep up with demand for its Flyerboard and the back-office support system that allows newspapers to accurately track ads and bill clients for the service.
Company: GreenRay Solar
Business: Simpler, cheaper residential rooftop solar-power components
City: Westford, Mass.
Founders: Miles Russell, 55, CEO/president; Suparna Kadam, 35, strategy officer; Ruel Little, 45, CTO; Zachary King, 30, COO
Funding: $2 million in July, from 21Ventures and Quercus Trust
GreenRay co-founder Russell would have loved to postpone raising money for a year or two. But the company had to raise matching funds immediately to keep $3.3 million in funding it had received from the U.S. Department of Energy to help develop its advanced solar-power converter.
After spending their careers at major institutions including MIT and Schott Solar, Russell and his team needed a crash course in venture capital. GreenRay made critical connections by entering the Ignite Clean Energy competition. Their third-place showing helped get them an introduction, through Sissi Liu at the state agency Massachusetts Technology Collaborative, to David Anthony at 21Ventures.
GreenRay's first meeting with Anthony in a Boston hotel room was interesting--Anthony turned out to be legally blind, and their carefully rehearsed PowerPoint presentation was useless.
"He'd say, 'Just explain it,'" Russell recalls.
Apparently, they explained it well. Anthony wanted to do a deal immediately, but Russell felt unready. (Anthony says it's only in recent years that startups in the solar-energy field have spun off of major corporations, so it wasn't unusual in the green-power sector that GreenRay's team were VC virgins.)
A few months later, GreenRay wanted the deal, but Anthony was busy and suggested perhaps one of two 21Ventures-funded startups might back them. Those companies lobbed GreenRay back to Anthony with a strong recommendation that 21Ventures invest.
"Feedback from our portfolio companies changed our minds," Anthony says, "and made us say, 'We think this is a very good play.'"
With its new funding, GreenRay's product is in the final stages of obtaining needed certifications, and Russell says the product will likely be ready for market in the second quarter of 2010.
Landing investors takes a lot of persistence and a little luck. Here's how these entrepreneurs did it.
Two rules in venture capital: VC firms tend to give money to entrepreneurs who've gotten venture capital before. VCs also like to fund companies that already have customers and revenue. Now that the economy's in a slump, these rules are doubly true.
So how do you land that very first round of venture capital for your startup? With persistence, a great business idea and a little luck. Here are three entrepreneurs who bucked the odds within the past year. Two of the three companies even landed funding before their product launched.
Company: Fashion Playtes
Business: Personalized clothing company for tween girls
City: Salem, Mass.
Founders: Sarah McIlroy, 38, CEO; Mary Beth Tirrell, 28, vice president of apparel
Funding: $1.5 million raised in August from VC firms including New Atlantic Ventures
Former Hasbro Interactive, Atari and Brookstone marketer McIlroy barely had her Fashion Playtes website in beta in July 2009, when she started her funding search. Just a few hundred friends and family members were using the site, which offered five apparel items visitors could customize.
McIlroy recruited apparel pro Tirrell and created a website where tween girls such as McIlroy's 10-year-old daughter Madeleine could design and purchase affordable clothing. The site's average purchase is $30.
She knew fundraising would be tough at this early stage and in this economy, but McIlroy didn't want to wait.
"The convergence of online interactive and fashion design was there," she says, "and I felt the timing was right, and somebody else would do it if I didn't."
McIlroy worked her rolodex hard. One advisor introduced her to mass-customization pioneer Sung Park, who started Custom Clothing Technology, which was bought by Levi Strauss & Co. Still, one potential funder told her companies without at least $1 million in sales and an experienced management team couldn't get funding now, period. Undaunted, McIlroy pressed on.
Eventually, McIlroy's networking brought her to New Atlantic Ventures partner Tim Rowe, who knew McIlroy's name from her Atari days. When he presented Fashion Playtes at a partner meeting, NAV managing partner Scott Johnson pricked up his ears--he had a 9-year-old daughter.
"I tried it out on my daughter and her friends, and they were just apoplectic with desire for it," Johnson says. "That got us comfortable with the fact that it was a concept-stage deal."
With the funding, Fashion Playtes has expanded to 11 apparel items from dresses to jean jackets to purses, and plans to open its site to the public shortly.
Company: PaperG
Business: Provides newspapers with virtual classified-advertising software and support
City: New Haven, Conn.
Founders: Victor Wong, 23, CEO; Ka Mo Lau, 22, CFO; Victor Cheng, 23, CTO; Roger Lee, 23, COO.
Funding: About $1 million from funders including Launch Capital in early 2009
Yale students Wong, Lau and Cheng got together in March 2007, creating a virtual bulletin board where student groups could post their event notices free, and local businesses could pay to post, too. Soon they signed up the New Haven Independent and launched their Flyerboard product, which enables papers to offer interactive, easily shareable, graphical ads for around the cost of an old-time plain-text classified ad.
"It was literally a couple of us in dorm rooms," Wong recalls, "working on the technology and calling newspaper publishers."
PaperG soon got free office space courtesy of the Yale Entrepreneurial Institute, and expanded its contacts by adding Harvard student Lee, a move which helped sign up the Harvard Courant. Then-Yale School of Management professor Steve Taylor, a former publisher of The Boston Globe, joined PaperG's advisory board and helped land the Globe as PaperG's first major customer. Media giant Hearst Corp.'s Houston Chronicle came on board next. After the Flyerboard did $100,000 in sales in its first four weeks at the Chronicle, Hearst laid plans to roll it out to additional papers.
The startup was introduced to new venture fund Launch Capital by Yale Institute director James Boyle. Launch was just setting up an office in New Haven, and Wong shed his dorm duds for a suit and made his pitch solo, amidst unpacked office furniture.
"I remember him being so nervous," says Launch managing director Elon Boms. "But two things were extraordinarily impressive--they'd come a long way with relatively nothing, and had top-notch advisors."
Now, PaperG's founders have all either graduated or withdrawn from school. The company has 10 employees and is racing to keep up with demand for its Flyerboard and the back-office support system that allows newspapers to accurately track ads and bill clients for the service.
Company: GreenRay Solar
Business: Simpler, cheaper residential rooftop solar-power components
City: Westford, Mass.
Founders: Miles Russell, 55, CEO/president; Suparna Kadam, 35, strategy officer; Ruel Little, 45, CTO; Zachary King, 30, COO
Funding: $2 million in July, from 21Ventures and Quercus Trust
GreenRay co-founder Russell would have loved to postpone raising money for a year or two. But the company had to raise matching funds immediately to keep $3.3 million in funding it had received from the U.S. Department of Energy to help develop its advanced solar-power converter.
After spending their careers at major institutions including MIT and Schott Solar, Russell and his team needed a crash course in venture capital. GreenRay made critical connections by entering the Ignite Clean Energy competition. Their third-place showing helped get them an introduction, through Sissi Liu at the state agency Massachusetts Technology Collaborative, to David Anthony at 21Ventures.
GreenRay's first meeting with Anthony in a Boston hotel room was interesting--Anthony turned out to be legally blind, and their carefully rehearsed PowerPoint presentation was useless.
"He'd say, 'Just explain it,'" Russell recalls.
Apparently, they explained it well. Anthony wanted to do a deal immediately, but Russell felt unready. (Anthony says it's only in recent years that startups in the solar-energy field have spun off of major corporations, so it wasn't unusual in the green-power sector that GreenRay's team were VC virgins.)
A few months later, GreenRay wanted the deal, but Anthony was busy and suggested perhaps one of two 21Ventures-funded startups might back them. Those companies lobbed GreenRay back to Anthony with a strong recommendation that 21Ventures invest.
"Feedback from our portfolio companies changed our minds," Anthony says, "and made us say, 'We think this is a very good play.'"
With its new funding, GreenRay's product is in the final stages of obtaining needed certifications, and Russell says the product will likely be ready for market in the second quarter of 2010.
Thursday, April 28, 2011
Financial Model for your startup and half the going rate: the Rogue CFO Weekend Special
Financial Model for your startup and half the going rate: the Rogue CFO Weekend Special
I've got a hankering to help out an aspiring startup with their financial model. Either building a model from scratch, or taking your existing one and refining it.
Obviously I am but one man, so the first company to act on this gets my time at half the normal rate. Send an email letting me know more about your business and needs and I can give you a quote, with samples and references as well.
Looking forward to working with a great startup over the next few days and bringing you that much closer to funding!
Chris Benjamin, Rogue CFO
www.RogueCFO.com
chrisb@roguecfo.com
I've got a hankering to help out an aspiring startup with their financial model. Either building a model from scratch, or taking your existing one and refining it.
Obviously I am but one man, so the first company to act on this gets my time at half the normal rate. Send an email letting me know more about your business and needs and I can give you a quote, with samples and references as well.
Looking forward to working with a great startup over the next few days and bringing you that much closer to funding!
Chris Benjamin, Rogue CFO
www.RogueCFO.com
chrisb@roguecfo.com
Valuation - What's Your Company Worth?
The Mystery of Valuation
I get asked often either directly or indirectly "what is my company worth"? Usually it comes in the form of "I want to get $X investment. I don't want to give away more than Y%. How does it all work"? Well, it all comes down to valuation.
There's plenty of ways to back into the value of a company. Which one is right? Depends on who you ask. Each investor will have their favorite methodology. Entrepreneurs sometimes have their own favorite as well. Your goal as an entrepreneur is to present a fair, unbiased value. Why not aim for the highest value? Sure it'll boost your ego, but ultimately you'll be the only one who touts the figure, and no one else will go along with it. Instead, give a fair & accurate figure, and you'll add to your credibility, and save time justifying your inflated overvalued amount.
So what is fair? Out of all the valuations I've seen, the best way is to do several, then average them. If you can show investors that you've done your homework and shown all the angles, it's easy to reason why a weighted average is the best representation of your company.
I've used 4 methods lately.
1. Current Assets & Investment (10% weight)
2. 5 Years Projected Net Income (25% weight)
3. 5 Years Projected Sales Discounted 10X (25% weight)
4. Present Value of 5 Years Projected Cash Flows (40% weight)
Calculating the valuation based on each of the 4 metrics above, and then averaging based on the weight, you bring the high and low to a mid ground, and can justify your number as both reasonable, and possibly conservative. Being based on 5 years projections, you would need to have a financial forecast model in place, with reasonable assumptions & growth rates.
Example:
Company ABC
1. Current Assets & owner investment: $500,000
2. 5 Years Projected Net Income: $7.2M
3. 5 Years Projected Sales Discounted 10X: $8.2M
4. Present value of 5 Years Projected Cash Flows: $6.4M
If you chose just 1 valuation method, most likely you'd choose 5 Years Sales, discounted 10 fold. You could even argue that you discounted at a high multiple, so it's conservative. Yet looking at other methods, that is the highest valuation of them.
Weighting the amounts at 10/25/25/40 and doing a little math, the weighted average valuation is $6.46M. Drastically different than the stand alone $8.2M.
A note on #1. Current Assets & Investment. Why include it? It'll obviously be far less than the others. While not a fair representation of the potential of your company, it adds in a base level, current figure, and it is lightly weighted. It's all part of being conservative.
Now that you have a valuation of $X, it becomes much easier to put a value on Y%. Depending on existing investments and shares granted, a Capitalization Table can break down how everyone's investment & share holdings relate. Best of all, you've put a solid number down in writing of what your vision is worth, and can feel confident in justifying it to friends, investors and yourself.
I get asked often either directly or indirectly "what is my company worth"? Usually it comes in the form of "I want to get $X investment. I don't want to give away more than Y%. How does it all work"? Well, it all comes down to valuation.
There's plenty of ways to back into the value of a company. Which one is right? Depends on who you ask. Each investor will have their favorite methodology. Entrepreneurs sometimes have their own favorite as well. Your goal as an entrepreneur is to present a fair, unbiased value. Why not aim for the highest value? Sure it'll boost your ego, but ultimately you'll be the only one who touts the figure, and no one else will go along with it. Instead, give a fair & accurate figure, and you'll add to your credibility, and save time justifying your inflated overvalued amount.
So what is fair? Out of all the valuations I've seen, the best way is to do several, then average them. If you can show investors that you've done your homework and shown all the angles, it's easy to reason why a weighted average is the best representation of your company.
I've used 4 methods lately.
1. Current Assets & Investment (10% weight)
2. 5 Years Projected Net Income (25% weight)
3. 5 Years Projected Sales Discounted 10X (25% weight)
4. Present Value of 5 Years Projected Cash Flows (40% weight)
Calculating the valuation based on each of the 4 metrics above, and then averaging based on the weight, you bring the high and low to a mid ground, and can justify your number as both reasonable, and possibly conservative. Being based on 5 years projections, you would need to have a financial forecast model in place, with reasonable assumptions & growth rates.
Example:
Company ABC
1. Current Assets & owner investment: $500,000
2. 5 Years Projected Net Income: $7.2M
3. 5 Years Projected Sales Discounted 10X: $8.2M
4. Present value of 5 Years Projected Cash Flows: $6.4M
If you chose just 1 valuation method, most likely you'd choose 5 Years Sales, discounted 10 fold. You could even argue that you discounted at a high multiple, so it's conservative. Yet looking at other methods, that is the highest valuation of them.
Weighting the amounts at 10/25/25/40 and doing a little math, the weighted average valuation is $6.46M. Drastically different than the stand alone $8.2M.
A note on #1. Current Assets & Investment. Why include it? It'll obviously be far less than the others. While not a fair representation of the potential of your company, it adds in a base level, current figure, and it is lightly weighted. It's all part of being conservative.
Now that you have a valuation of $X, it becomes much easier to put a value on Y%. Depending on existing investments and shares granted, a Capitalization Table can break down how everyone's investment & share holdings relate. Best of all, you've put a solid number down in writing of what your vision is worth, and can feel confident in justifying it to friends, investors and yourself.
Wednesday, April 27, 2011
Why "First Mover Advantage" Isn't Always An Advantage
Why "First Mover Advantage" Isn't Always An Advantage
It's often a key buzz word to include in your pitch: Our Competitive Advantage: We're the First in the Market. Terrific. Here's why you probably just turned off your audience.
What is it about First Mover Advantage anyways?
Let's start with a definition of First Mover Advantage. FMA is defined as being the first company to enter a market segment, allowing for that company to gain control. This can be further expanded to include tying up scare resources such as a prime domain name or physical location, the ability to register patents and trademarks, creating a strong brand loyalty early on, and the cache of being the first company to do whatever it is that you do.
So why is it not a positive thing?
It's not a bad thing. Someone has to be the first mover, or no one would ever enter a market. So why am I writing this at all then? If it's not so bad, why put down those pioneering first movers? Because Second Mover Advantage is where it's at.
There's 2 obvious problems with being the first mover: Cost & Risk.
Cost
The cost of entering a new market can be substantial. R&D does not come cheap, and it is a big risk to spend your initial capital (whether it's your money or an investors) on proving a concept before even thinking about generating the first dollar of revenue.
Risk
With no history to look to, there are huge risks in being the first mover. What if there really isn't a demand for your product or service? Maybe you've done your homework, but the homework just wasn't good enough.
One Other Problem with touting your FMA:
It's become cliche. Whenever I talk to an entrepreneur and I hear lots of buzzwords, including how substantial of a FMA they have, I start to lose hope that there is any steak beyond the sizzle of a trumped up pitch. Being a first mover is one thing, calling it an advantage is another, and banking your success on it is a huge red flag.
Don't be ashamed to be 2nd.
There are several pros to being a late entrant to a market. Remember: You don't have to use the buzzwords to impress investors. Impress them instead with your honesty and business model. Focus on the positives of being a second entrant:
Free Rider Effects
The ground work is done for you. Let the first mover spend their capital on R&D, and piggy back off of their hard work, their successes and their failures. Being first can be a painful and long process, let someone else take on that burden.
Minimal Market Education Needed
First movers will have to educate the market on the products availability, how it fits a market need, pricing expectations, where to purchase, etc. All of this adds up to further spending and time spent on ramp up. Let the first mover lay the ground work again, then jump in and capitalize on their hard work. If they did a great job educating the market, it's an easy entry.
Learn from the First Movers Mistakes
First movers will stumble, guaranteed. Even if they are small problems, learn from the first mover. Maybe the marketing method was off. Possibly the pricing was just a little too high. The publics perception of the product was completely different than anticipated. All of these can be hurdles the first mover can tackle while you watch from the sidelines, learning from their mistakes.
I encourage all startups to not be ashamed to be a 2nd mover and stout the advantages of being so.
It's often a key buzz word to include in your pitch: Our Competitive Advantage: We're the First in the Market. Terrific. Here's why you probably just turned off your audience.
What is it about First Mover Advantage anyways?
Let's start with a definition of First Mover Advantage. FMA is defined as being the first company to enter a market segment, allowing for that company to gain control. This can be further expanded to include tying up scare resources such as a prime domain name or physical location, the ability to register patents and trademarks, creating a strong brand loyalty early on, and the cache of being the first company to do whatever it is that you do.
So why is it not a positive thing?
It's not a bad thing. Someone has to be the first mover, or no one would ever enter a market. So why am I writing this at all then? If it's not so bad, why put down those pioneering first movers? Because Second Mover Advantage is where it's at.
There's 2 obvious problems with being the first mover: Cost & Risk.
Cost
The cost of entering a new market can be substantial. R&D does not come cheap, and it is a big risk to spend your initial capital (whether it's your money or an investors) on proving a concept before even thinking about generating the first dollar of revenue.
Risk
With no history to look to, there are huge risks in being the first mover. What if there really isn't a demand for your product or service? Maybe you've done your homework, but the homework just wasn't good enough.
One Other Problem with touting your FMA:
It's become cliche. Whenever I talk to an entrepreneur and I hear lots of buzzwords, including how substantial of a FMA they have, I start to lose hope that there is any steak beyond the sizzle of a trumped up pitch. Being a first mover is one thing, calling it an advantage is another, and banking your success on it is a huge red flag.
Don't be ashamed to be 2nd.
There are several pros to being a late entrant to a market. Remember: You don't have to use the buzzwords to impress investors. Impress them instead with your honesty and business model. Focus on the positives of being a second entrant:
Free Rider Effects
The ground work is done for you. Let the first mover spend their capital on R&D, and piggy back off of their hard work, their successes and their failures. Being first can be a painful and long process, let someone else take on that burden.
Minimal Market Education Needed
First movers will have to educate the market on the products availability, how it fits a market need, pricing expectations, where to purchase, etc. All of this adds up to further spending and time spent on ramp up. Let the first mover lay the ground work again, then jump in and capitalize on their hard work. If they did a great job educating the market, it's an easy entry.
Learn from the First Movers Mistakes
First movers will stumble, guaranteed. Even if they are small problems, learn from the first mover. Maybe the marketing method was off. Possibly the pricing was just a little too high. The publics perception of the product was completely different than anticipated. All of these can be hurdles the first mover can tackle while you watch from the sidelines, learning from their mistakes.
I encourage all startups to not be ashamed to be a 2nd mover and stout the advantages of being so.
Tuesday, April 26, 2011
Ten Lies Venture Capitalists Know You Are Telling
In the quest for capital, many entrepreneurs stretch the truth. One venture capitalist calls them out.
As a venture capitalist, I get pitched dozens of times every year, and every pitch contains at least three or four of the lies below. Are you guilty?
1. “Our projections are conservative.” An entrepreneur’s projections are never conservative. If they were, they would be $0. I have never seen an entrepreneur achieve even their most conservative projections. As a rule of thumb, when I see a projection, I add one year to delivery time and multiply by 0.1.
2. “(Big-name research firm) says our market will be $50 billion in 2010.” Even if the product is bar mitzvah planning software, every entrepreneur claims the market potential is tens of billions. Do yourself a favor: Remove any reference to market size estimates.
3. “(Big-name company) is going to sign our purchase order next week.” Only play this card after the purchase order is signed, because no investor will fall for this one.
4. “Key employees are set to join us as soon as we get funded.” When a venture capitalist calls these key employees, he usually gets the following response: “I recall meeting him, but I certainly didn’t say I would leave my $250,000-a-year job to join his company.” If key employees are ready to rock ’n’ roll, have them call the venture capitalist and confirm it.
5. “No one else is doing what we’re doing.” Well, either there’s no market for it, or you’re so clueless that you can’t use Google to figure out you have competition. Neither a lack of a market nor cluelessness is conducive to securing an investment.
6. “No one else can do what we’re doing.” The only thing worse than cluelessness and the lack of a market is arrogance.
7. “Hurry, because several other vc firms are interested.” There are maybe 100 entrepreneurs in the world who can make this claim. The fact that you’re reading this article means you’re not one of them.
8. “Oracle is too big/dumb/slow to be a threat to us.” There’s a reason Larry Ellison is where he is, and it’s not that he’s big, dumb and slow. Entrepreneurs who utter this lie look naive at best, stupid at worst.
9. “We have a proven management team.” If you were that proven, you wouldn’t be asking for money. A better strategy: State that you have relevant experience, you’ll do whatever it takes to succeed, you’ll surround yourself with proven advisors and you’ll step aside whenever it becomes necessary.
10. “All we have to do is get 1 percent of the market.” First, no venture capitalist is interested in a company that wants just 1 percent of a market. Second, it’s not easy to get even 1 percent, so you look silly pretending it is. Instead, show an appreciation of the difficulty of building a successful company.
As a venture capitalist, I get pitched dozens of times every year, and every pitch contains at least three or four of the lies below. Are you guilty?
1. “Our projections are conservative.” An entrepreneur’s projections are never conservative. If they were, they would be $0. I have never seen an entrepreneur achieve even their most conservative projections. As a rule of thumb, when I see a projection, I add one year to delivery time and multiply by 0.1.
2. “(Big-name research firm) says our market will be $50 billion in 2010.” Even if the product is bar mitzvah planning software, every entrepreneur claims the market potential is tens of billions. Do yourself a favor: Remove any reference to market size estimates.
3. “(Big-name company) is going to sign our purchase order next week.” Only play this card after the purchase order is signed, because no investor will fall for this one.
4. “Key employees are set to join us as soon as we get funded.” When a venture capitalist calls these key employees, he usually gets the following response: “I recall meeting him, but I certainly didn’t say I would leave my $250,000-a-year job to join his company.” If key employees are ready to rock ’n’ roll, have them call the venture capitalist and confirm it.
5. “No one else is doing what we’re doing.” Well, either there’s no market for it, or you’re so clueless that you can’t use Google to figure out you have competition. Neither a lack of a market nor cluelessness is conducive to securing an investment.
6. “No one else can do what we’re doing.” The only thing worse than cluelessness and the lack of a market is arrogance.
7. “Hurry, because several other vc firms are interested.” There are maybe 100 entrepreneurs in the world who can make this claim. The fact that you’re reading this article means you’re not one of them.
8. “Oracle is too big/dumb/slow to be a threat to us.” There’s a reason Larry Ellison is where he is, and it’s not that he’s big, dumb and slow. Entrepreneurs who utter this lie look naive at best, stupid at worst.
9. “We have a proven management team.” If you were that proven, you wouldn’t be asking for money. A better strategy: State that you have relevant experience, you’ll do whatever it takes to succeed, you’ll surround yourself with proven advisors and you’ll step aside whenever it becomes necessary.
10. “All we have to do is get 1 percent of the market.” First, no venture capitalist is interested in a company that wants just 1 percent of a market. Second, it’s not easy to get even 1 percent, so you look silly pretending it is. Instead, show an appreciation of the difficulty of building a successful company.
Monday, April 25, 2011
What’s the role of the CFO in Growth Stage Ventures?
Depending on the stage your company is at (seed, idea, capital raising, traction, etc), the CFO role will change depending on the pressing needs of the company at the time. Learn more about how I help companies at all of these stages, taking them above and beyond the next level of growth.
Find out at:
www.RogueCFO.com
Chris Benjamin, Rogue CFO
Find out at:
www.RogueCFO.com
Chris Benjamin, Rogue CFO
Sunday, April 24, 2011
6 Ways to Land Venture Funding Today
6 Ways to Land Venture Funding Today
As the competition for funding heats up, the likelihood of winning over VCs is declining. Here's how to get their attention.
Venture capital firms remain on the prowl for new businesses, but it's more of a stroll than a hunt.
Venture capital investing fell to $3.7 billion in the second quarter, down more than 50 percent from $7.6 billion in the year-ago period, according to the latest MoneyTree Report from PricewaterhouseCoopers. Although that second-quarter sum represented a 15 percent jump over the prior quarter, the number of deals remained flat at 603, PwC said.
Many sources--including big pension funds, college endowments, and, in some cases, high-net-worth individuals--have failed to meet commitments to some funds, making this one of the most challenging environments for venture capital since the dot-com bubble burst, says Howie Schwartz, a director at the FundingPost, a networking group for venture capitalists and entrepreneurs. "No one is admitting this, but we're seeing it anecdotally," he says.
To capture funding today, entrepreneurs have to do a lot more than present a lucrative business model and pick the right management team, says Mark Davis, an associate at DFJ Gotham Ventures, a VC firm in New York. Today, VCs are increasingly attuned to a company's ability to manage the rate at which they burn through investment dollars, he says. Since it'll likely take longer for companies to make it big or get bought out, they'll be expected to make do with less for longer, Davis says.
To avoid other potential missteps, here are six "do's" and "don'ts" for capturing venture capital today:
The Do's:
1. Do look for fund changes
Although VC firms typically stick to certain investing themes and industries, those criteria may change with market conditions. For instance, RRE Ventures, a VC firm in New York and Silicon Valley, recently moved to widen its investment in financial services firms. Given the regulatory hit the financial services sector may undergo in the next couple years, this move makes sense, says James Robinson, a managing partner at RRE. "We've redoubled our efforts at investing in companies that have new takes and twists on [providing] financial services to consumers and to businesses," he says.
2. Do network
To keep abreast of changes within the venture community, start networking with likeminded entrepreneurs--especially those who've successfully landed VC funding, says Konstantine Drakonakis, a director at New Haven, Conn., VC firm Launch Capital. In addition, look at trade journals and scan new business announcements to see who's giving, he says. The National Venture Capital Association, an Arlington, Va.-based trade group, is also a reliable source of industry information.
3. Do prepare a business plan
Many VCs won't crack open your business plan. Instead, they'll base their decision to provide funding on what their gut tells them and the contents of your executive summary. "I probably will never read it, even if I back you fully," Robinson says. Still, business plans are vital, he says. "It's a dynamic document--it lives, it breaths, it changes. The discipline that goes into writing one will really help you develop and think through key issues in your business," Robinson says.
The Don'ts:
1. Don't waste VCs' time
VCs are often tasked with trolling through tens of executive summaries each day. Do them a favor; keep it simple, says Brian Hirsch, a managing director at Greenhill SAVP, a VC firm in New York. Answer the following questions in your executive summary: What problem are you trying to solve? Why are you uniquely qualified to solve it? Is it a good business? What's it going to cost? And how long is it going to take? Avoid flowery language and be as succinct as possible, Davis says. "VCs don't want to spend twenty minutes trying to parse through the language in the first couple paragraphs," he says.
2. Don't overstate the company
Present your company's addressable market, not just its total market size. Too often, entrepreneurs try to pass off the sum of revenues generated by all of the players in an industry as their addressable market, Davis says. Instead, they should cite the revenue a company could generate if it captured 100 percent of the market, he says.
Additionally, entrepreneurs tend to downplay their company's risks while exaggerating its benefits. That's a mistake, Hirsch says. "The more honest and open you are with potential investors, the more they'll respect your ability to manage the business," he says.
3. Don't rely on government stimulus
Landing stimulus funds can be a boon for businesses--and attract the gaze of some investors--but they do not typically represent a permanent revenue stream, Robinson says. "I don't value a dollar of government stimulus spending as equal to a commercial dollar," he says. "You might not get it, and if you get it, it may not last."
Chris Benjamin, Rogue CFO
chrisb@roguecfo.com
www.RogueCFO.com
As the competition for funding heats up, the likelihood of winning over VCs is declining. Here's how to get their attention.
Venture capital firms remain on the prowl for new businesses, but it's more of a stroll than a hunt.
Venture capital investing fell to $3.7 billion in the second quarter, down more than 50 percent from $7.6 billion in the year-ago period, according to the latest MoneyTree Report from PricewaterhouseCoopers. Although that second-quarter sum represented a 15 percent jump over the prior quarter, the number of deals remained flat at 603, PwC said.
Many sources--including big pension funds, college endowments, and, in some cases, high-net-worth individuals--have failed to meet commitments to some funds, making this one of the most challenging environments for venture capital since the dot-com bubble burst, says Howie Schwartz, a director at the FundingPost, a networking group for venture capitalists and entrepreneurs. "No one is admitting this, but we're seeing it anecdotally," he says.
To capture funding today, entrepreneurs have to do a lot more than present a lucrative business model and pick the right management team, says Mark Davis, an associate at DFJ Gotham Ventures, a VC firm in New York. Today, VCs are increasingly attuned to a company's ability to manage the rate at which they burn through investment dollars, he says. Since it'll likely take longer for companies to make it big or get bought out, they'll be expected to make do with less for longer, Davis says.
To avoid other potential missteps, here are six "do's" and "don'ts" for capturing venture capital today:
The Do's:
1. Do look for fund changes
Although VC firms typically stick to certain investing themes and industries, those criteria may change with market conditions. For instance, RRE Ventures, a VC firm in New York and Silicon Valley, recently moved to widen its investment in financial services firms. Given the regulatory hit the financial services sector may undergo in the next couple years, this move makes sense, says James Robinson, a managing partner at RRE. "We've redoubled our efforts at investing in companies that have new takes and twists on [providing] financial services to consumers and to businesses," he says.
2. Do network
To keep abreast of changes within the venture community, start networking with likeminded entrepreneurs--especially those who've successfully landed VC funding, says Konstantine Drakonakis, a director at New Haven, Conn., VC firm Launch Capital. In addition, look at trade journals and scan new business announcements to see who's giving, he says. The National Venture Capital Association, an Arlington, Va.-based trade group, is also a reliable source of industry information.
3. Do prepare a business plan
Many VCs won't crack open your business plan. Instead, they'll base their decision to provide funding on what their gut tells them and the contents of your executive summary. "I probably will never read it, even if I back you fully," Robinson says. Still, business plans are vital, he says. "It's a dynamic document--it lives, it breaths, it changes. The discipline that goes into writing one will really help you develop and think through key issues in your business," Robinson says.
The Don'ts:
1. Don't waste VCs' time
VCs are often tasked with trolling through tens of executive summaries each day. Do them a favor; keep it simple, says Brian Hirsch, a managing director at Greenhill SAVP, a VC firm in New York. Answer the following questions in your executive summary: What problem are you trying to solve? Why are you uniquely qualified to solve it? Is it a good business? What's it going to cost? And how long is it going to take? Avoid flowery language and be as succinct as possible, Davis says. "VCs don't want to spend twenty minutes trying to parse through the language in the first couple paragraphs," he says.
2. Don't overstate the company
Present your company's addressable market, not just its total market size. Too often, entrepreneurs try to pass off the sum of revenues generated by all of the players in an industry as their addressable market, Davis says. Instead, they should cite the revenue a company could generate if it captured 100 percent of the market, he says.
Additionally, entrepreneurs tend to downplay their company's risks while exaggerating its benefits. That's a mistake, Hirsch says. "The more honest and open you are with potential investors, the more they'll respect your ability to manage the business," he says.
3. Don't rely on government stimulus
Landing stimulus funds can be a boon for businesses--and attract the gaze of some investors--but they do not typically represent a permanent revenue stream, Robinson says. "I don't value a dollar of government stimulus spending as equal to a commercial dollar," he says. "You might not get it, and if you get it, it may not last."
Chris Benjamin, Rogue CFO
chrisb@roguecfo.com
www.RogueCFO.com
Saturday, April 23, 2011
Whether Or Not To Go Public
There are two major issues facing a start-up considering an IPO: how to do it most effectively, and, secondly, whether to do it at all. The second is the threshold question. Will the issuer be able to raise capital cheaply and more efficiently on the wings of an IPO than with any other method, taking into account the long-range consequences of becoming a public company(going public)?
On the plus side, the culture of venture capital is heavily involved with the proposition that the terms "public company" and "rich entrepreneur" are synonymous. Indeed, the home-run payoffs for celebrated founders are usually identified with a public stock sale. A public market entails (although not for everybody) liquid securities, a classic exit strategy for founders and other shareholders. Moreover, to the extent equity is being raised for corporate purposes, the price of capital obtainable from the public will usually be cheaper because any commodity that can be freely sold is intrinsically more valuable than its illiquid counterpart.
There are collateral benefits as well, beyond price and liquidity. Thus, its customers and suppliers often purchase the company's stock and their interest in the company's profits and products is stimulated. A public company can do a broad, national public-relations job; a well-prepared prospectus projects the company's image favorably from the start. A public market helps stockholders with their estate-tax problems, it allows them to diversify, and it simplifies appraisal problems. And, the company now has so-called Chinese Currency with which to make additional acquisitions, meaning shares selling at a high multiple of earnings and, therefore, preferable to cash when buying other companies. Finally, with exceptions imposed by state securities administrators and the stock exchanges, the regulatory issues in an IPO process entail only adequacy of disclosure; ostensibly, the SEC is not authorized to delve into the merits of the offering.
There are, however, significant minuses. For example, an IPO takes time: the issuer and underwriter need sixty to ninety days to get ready, and the period between filing with the SEC and the effective date takes at least another month or so. Many an issuer undergoes the time-consuming and expensive process, only to see the process abort at the last instant because the IPO "window" has closed; if the issuer has counted on the proceeds of an IPO, the result can be a disaster. Moreover, there are significant transaction costs. Underwriters can receive up to 15 percent (more or less) of the price of the offering; legal and accounting expenses can bring the total costs up to 25 percent of the money raised. Fees and expenses involved in private placements, on the other hand, are ordinarily well under 10 percent. Moreover, once the issuer is public, a number of new legal requirements attach to the conduct of its business. Thus, a public company has to file periodic reports with the SEC (quarterly and annually) plus flash reports when significant events occur. The thrust of these documents is financial, letting the auction markets know how the company is doing on a short-term basis, in itself a potential problem for a management which is unconvinced that the market's avarice for short-term results is sensible business strategy. The annual meeting becomes a major event. Proxies are solicited with an expensive, printed information document complying with the SEC's proxy rules, the disclosure heavily oriented toward exposing management's compensation package in a manner that suggests key executive compensation is one of the principal clues for analysts to unravel in judging corporate performance (a curiously puritanical view since private analysts' reports seldom mention top-management compensation as a principal benchmark of a firm's prospects). Beyond the required reports, the public company must give daily consideration to current disclosure of important events. As yet, the courts have not required instant press releases; absent insider trading, issuers are not, explicitly at least, required to go beyond compliance with the SEC's periodic (monthly on certain issues, otherwise quarterly and annually) disclosure rules, but that position is eroding. Thus, the New York Stock Exchange lectures issuers on the desirability of instant news and special exceptions to the general rule threaten the company's ability to remain silent (e.g., a duty to correct false rumors). Further, a public company is exposed to "strike suits," litigation initiated by underemployed lawyers ostensibly on behalf of a shareholder (usually with an insignificant stake), but in fact designed to corral legal fees. The courts countenance such claims because they are thought to have therapeutic value, restraining management excesses in an era when the public shareholders are otherwise disenfranchised. Finally, a public company can be taken over by a raider in a hostile tender. It is possible to insert "shark-repellent" measures in the charter prior to the IPO - super majority provisions, staggered boards, blank-check preferred stock - but the underwriters may balk.
Difficult rules also impact individuals associated with a public company: the directors, officers, and major shareholders. They are, for example, subject to a curious rule that recaptures any profit - called "short-swing" profit - they realize on sales and purchases of the company's stock matched within a six-month period. The statute becomes hard to follow at the margin, and its consequences are severe. Moreover, the threat that an insider will be deemed to have traded on "inside information" means that insiders can safely trade only during specified window periods, that is, immediately after the annual or quarterly reports come out; in a curious sense, insiders are not more liquid than they were before the IPO. Moreover, apart from requirements, the onset of a public venue can be embarrassing. The Antar family, when it sold one million common shares of Crazy Eddie, Inc. to the public, had to disclose that the family had been virtually using the company as a private bank. Spendthrift Farms, the breeding stable owned by the Combs family, has now been liquidated. When stock was sold to the public, a number of insider dealings between the family and the stable were revealed. Apparently those practices continued after the company became public, litigation ensued, and the result has been a more or less forced liquidation.
Chris Benjamin, Rogue CFO
chrisb@roguecfo.com
www.RogueCFO.com
On the plus side, the culture of venture capital is heavily involved with the proposition that the terms "public company" and "rich entrepreneur" are synonymous. Indeed, the home-run payoffs for celebrated founders are usually identified with a public stock sale. A public market entails (although not for everybody) liquid securities, a classic exit strategy for founders and other shareholders. Moreover, to the extent equity is being raised for corporate purposes, the price of capital obtainable from the public will usually be cheaper because any commodity that can be freely sold is intrinsically more valuable than its illiquid counterpart.
There are collateral benefits as well, beyond price and liquidity. Thus, its customers and suppliers often purchase the company's stock and their interest in the company's profits and products is stimulated. A public company can do a broad, national public-relations job; a well-prepared prospectus projects the company's image favorably from the start. A public market helps stockholders with their estate-tax problems, it allows them to diversify, and it simplifies appraisal problems. And, the company now has so-called Chinese Currency with which to make additional acquisitions, meaning shares selling at a high multiple of earnings and, therefore, preferable to cash when buying other companies. Finally, with exceptions imposed by state securities administrators and the stock exchanges, the regulatory issues in an IPO process entail only adequacy of disclosure; ostensibly, the SEC is not authorized to delve into the merits of the offering.
There are, however, significant minuses. For example, an IPO takes time: the issuer and underwriter need sixty to ninety days to get ready, and the period between filing with the SEC and the effective date takes at least another month or so. Many an issuer undergoes the time-consuming and expensive process, only to see the process abort at the last instant because the IPO "window" has closed; if the issuer has counted on the proceeds of an IPO, the result can be a disaster. Moreover, there are significant transaction costs. Underwriters can receive up to 15 percent (more or less) of the price of the offering; legal and accounting expenses can bring the total costs up to 25 percent of the money raised. Fees and expenses involved in private placements, on the other hand, are ordinarily well under 10 percent. Moreover, once the issuer is public, a number of new legal requirements attach to the conduct of its business. Thus, a public company has to file periodic reports with the SEC (quarterly and annually) plus flash reports when significant events occur. The thrust of these documents is financial, letting the auction markets know how the company is doing on a short-term basis, in itself a potential problem for a management which is unconvinced that the market's avarice for short-term results is sensible business strategy. The annual meeting becomes a major event. Proxies are solicited with an expensive, printed information document complying with the SEC's proxy rules, the disclosure heavily oriented toward exposing management's compensation package in a manner that suggests key executive compensation is one of the principal clues for analysts to unravel in judging corporate performance (a curiously puritanical view since private analysts' reports seldom mention top-management compensation as a principal benchmark of a firm's prospects). Beyond the required reports, the public company must give daily consideration to current disclosure of important events. As yet, the courts have not required instant press releases; absent insider trading, issuers are not, explicitly at least, required to go beyond compliance with the SEC's periodic (monthly on certain issues, otherwise quarterly and annually) disclosure rules, but that position is eroding. Thus, the New York Stock Exchange lectures issuers on the desirability of instant news and special exceptions to the general rule threaten the company's ability to remain silent (e.g., a duty to correct false rumors). Further, a public company is exposed to "strike suits," litigation initiated by underemployed lawyers ostensibly on behalf of a shareholder (usually with an insignificant stake), but in fact designed to corral legal fees. The courts countenance such claims because they are thought to have therapeutic value, restraining management excesses in an era when the public shareholders are otherwise disenfranchised. Finally, a public company can be taken over by a raider in a hostile tender. It is possible to insert "shark-repellent" measures in the charter prior to the IPO - super majority provisions, staggered boards, blank-check preferred stock - but the underwriters may balk.
Difficult rules also impact individuals associated with a public company: the directors, officers, and major shareholders. They are, for example, subject to a curious rule that recaptures any profit - called "short-swing" profit - they realize on sales and purchases of the company's stock matched within a six-month period. The statute becomes hard to follow at the margin, and its consequences are severe. Moreover, the threat that an insider will be deemed to have traded on "inside information" means that insiders can safely trade only during specified window periods, that is, immediately after the annual or quarterly reports come out; in a curious sense, insiders are not more liquid than they were before the IPO. Moreover, apart from requirements, the onset of a public venue can be embarrassing. The Antar family, when it sold one million common shares of Crazy Eddie, Inc. to the public, had to disclose that the family had been virtually using the company as a private bank. Spendthrift Farms, the breeding stable owned by the Combs family, has now been liquidated. When stock was sold to the public, a number of insider dealings between the family and the stable were revealed. Apparently those practices continued after the company became public, litigation ensued, and the result has been a more or less forced liquidation.
Chris Benjamin, Rogue CFO
chrisb@roguecfo.com
www.RogueCFO.com
Friday, April 22, 2011
Financial Model for your startup and half the going rate: the Rogue CFO Weekend Special
I've got a hankering to help out an aspiring startup with their financial model. Either building a model from scratch, or taking your existing one and refining it.
Obviously I am but one man, so the first company to act on this gets my time at half the normal rate. Send an email letting me know more about your business and needs and I can give you a quote, with samples and references as well.
Looking forward to working with a great startup over the next few days and bringing you that much closer to funding!
Chris Benjamin, Rogue CFO
http://www.roguecfo.com
chrisb@roguecfo.com
Obviously I am but one man, so the first company to act on this gets my time at half the normal rate. Send an email letting me know more about your business and needs and I can give you a quote, with samples and references as well.
Looking forward to working with a great startup over the next few days and bringing you that much closer to funding!
Chris Benjamin, Rogue CFO
http://www.roguecfo.com
chrisb@roguecfo.com
Exit Strategies - Time to Cash in the Chips.
Congratulations! You are starting a company, now you have to think about how to end it before getting started. In the following I discuss a high level overview of why exit strategies are important, who the players are, and what the options for exit are.
What is an Exit Strategy?
Let's start with a definition of Exit Strategy. It's the method either the owner, investor or both plans to extract their investment out of the business. There's several traditional ways to exit a business, and below we'll discuss the conventional methods utlized. Exits can also be referred to as a "liquidating event" if you want to be a bit more fancy about it.
Why would I plan on how to get out of business when I'm just starting this business?
We all know the excitement of starting a business. Thinking the idea through, calculating all the money you will make, planning on being a leader to many, demonstrating to your peers your entprereneurial chops. The last thing on your mind is ending this amazing venture you are about to embark on. Why on earth would someone go through the effort, the emotional roller coaster ride, and the sleepless nights starting a company only to give up their brainchild to someone else?
Well, there's several situations to consider depending on who you are and your goals.
Owner Operator
You as an owner have a choice to make. If you are building a company which will be your life long passion, your work until you die, then by all means, don't exit. No one can force you to sell (unless you give up majority control). A good example would be the baker who worked for others their whole life and decides it's high time to open their own bakery. The "Be Your Own Boss" mentality fits in nicely here. You might not have to worry about exit, but if you have investors, they'll be worried about it... which means you have to worry about it. See how that works?
Serial Entrepreneur
The term Serial Entrepreneur comes to mind though for high flying, dot com start ups. The entrepreneur who has more ideas than time. This is the person who wants to start their company, grow it, and sell it. Repeat the process. It's not that it makes it easy to sell off a company they've built, but they have bigger aspirations than to create a company only to become a day to day employee of the company. They are looking to liquidate themselves primarily, and the investors if need be.
Investors - Angel, Venture Capital, or otherwise
Obviously, your financial backers aren't going to be hanging around forever. These are the most interested in the exit strategy. While you may have several exit possibilities in mind for yourself, the investors will want a bit more concise direction on what to expect. Investing in startups is a risky business (1 in 10 makes money on average, the other 9 fail), so if you succeed and become the 1 in 10, you have a lot of losers to more than make up for in the investors eyes.
Common Exit Strategies
Sale
Selling a business can be as straight forward as selling your car. Well with more paper work and tax implications. But in theory it's the same. Put the business up for sale, potential buyers will kick the tires, make offers, and it's your choice to let it go to them or hold out. Value of the business is always the trickiest part of the sale. You think your company is worth $100K, the buyer thinks it's worth $50K. Let the negotiations begin! See below for more information on valuation.
Merger
A solid way to liquidate investors and make large steps in progressing the business. Mergering with another company is usually a strategic move on both parts, not only to create value, but to form a synergy that can be springboarded in future years. While you can't count on a merger (you have to assume there's another company out there willing to merge with you), some industries lend themselves well to mergers. When in doubt, sell to Google.
IPO
Ah the sexy IPO (Initial Public Offering). Easier said than done of course. The most expensive way to sell your business, although with the potential biggest reward. For a company to consider themself IPO ready, they should have a decent track record, outstanding growth, and have sustainable growth. Definitely not for the short run successes. Try not to pull a rookie move of telling investors you'll go IPO in year 2, they'll only laugh behind your back.
Buyout
A buyout is more or less like a sale, except in a sale the owner is actively trying to find buyers. In a buyout, typically the buyers find the seller. There are several methods to making a buyout easier to facilitiate for the cash strapped, would be new owners (leveraged buyout). A buyout puts the owner in a stronger position than selling, as there is apparent demand for the company you've built.
A buyout can also come from the inside. You as the entrepreneur may want to hang onto your business, and the investors want out. Looks like you have a management buyout situation on your hands.
Liquidation
While an option, most likely you aren't going to write "Liquidation" as your exit strategy when writing a business plan. Liquidiation of course is fairly straight forward - sell off all the assets of the company, pay off any debts, and split what is left amongst the owners. Definitely would be an easy way out, although you'll get the least amount of money this way most likely. Try to keep Liquidation as a Plan D if all else fails.
How Much Do I Sell/Merge/IPO/Buyout at? Valuation tells the tale.
Once you've got a plan of action, you'll want to get an idea of what the market values your company at. While placing a valuation on the business early on is tricky, there are methods utilized. I encourage you to read my Valuation - What's Your Company Worth article to learn more.
Create your own future.
I've always liked the saying "Visualize the win." It can be said in lot's of ways, but basically what you focus on is where you will go. Knowing where you want your business to go will be a driving factor in taking all the steps necessary to get there.
What is an Exit Strategy?
Let's start with a definition of Exit Strategy. It's the method either the owner, investor or both plans to extract their investment out of the business. There's several traditional ways to exit a business, and below we'll discuss the conventional methods utlized. Exits can also be referred to as a "liquidating event" if you want to be a bit more fancy about it.
Why would I plan on how to get out of business when I'm just starting this business?
We all know the excitement of starting a business. Thinking the idea through, calculating all the money you will make, planning on being a leader to many, demonstrating to your peers your entprereneurial chops. The last thing on your mind is ending this amazing venture you are about to embark on. Why on earth would someone go through the effort, the emotional roller coaster ride, and the sleepless nights starting a company only to give up their brainchild to someone else?
Well, there's several situations to consider depending on who you are and your goals.
Owner Operator
You as an owner have a choice to make. If you are building a company which will be your life long passion, your work until you die, then by all means, don't exit. No one can force you to sell (unless you give up majority control). A good example would be the baker who worked for others their whole life and decides it's high time to open their own bakery. The "Be Your Own Boss" mentality fits in nicely here. You might not have to worry about exit, but if you have investors, they'll be worried about it... which means you have to worry about it. See how that works?
Serial Entrepreneur
The term Serial Entrepreneur comes to mind though for high flying, dot com start ups. The entrepreneur who has more ideas than time. This is the person who wants to start their company, grow it, and sell it. Repeat the process. It's not that it makes it easy to sell off a company they've built, but they have bigger aspirations than to create a company only to become a day to day employee of the company. They are looking to liquidate themselves primarily, and the investors if need be.
Investors - Angel, Venture Capital, or otherwise
Obviously, your financial backers aren't going to be hanging around forever. These are the most interested in the exit strategy. While you may have several exit possibilities in mind for yourself, the investors will want a bit more concise direction on what to expect. Investing in startups is a risky business (1 in 10 makes money on average, the other 9 fail), so if you succeed and become the 1 in 10, you have a lot of losers to more than make up for in the investors eyes.
Common Exit Strategies
Sale
Selling a business can be as straight forward as selling your car. Well with more paper work and tax implications. But in theory it's the same. Put the business up for sale, potential buyers will kick the tires, make offers, and it's your choice to let it go to them or hold out. Value of the business is always the trickiest part of the sale. You think your company is worth $100K, the buyer thinks it's worth $50K. Let the negotiations begin! See below for more information on valuation.
Merger
A solid way to liquidate investors and make large steps in progressing the business. Mergering with another company is usually a strategic move on both parts, not only to create value, but to form a synergy that can be springboarded in future years. While you can't count on a merger (you have to assume there's another company out there willing to merge with you), some industries lend themselves well to mergers. When in doubt, sell to Google.
IPO
Ah the sexy IPO (Initial Public Offering). Easier said than done of course. The most expensive way to sell your business, although with the potential biggest reward. For a company to consider themself IPO ready, they should have a decent track record, outstanding growth, and have sustainable growth. Definitely not for the short run successes. Try not to pull a rookie move of telling investors you'll go IPO in year 2, they'll only laugh behind your back.
Buyout
A buyout is more or less like a sale, except in a sale the owner is actively trying to find buyers. In a buyout, typically the buyers find the seller. There are several methods to making a buyout easier to facilitiate for the cash strapped, would be new owners (leveraged buyout). A buyout puts the owner in a stronger position than selling, as there is apparent demand for the company you've built.
A buyout can also come from the inside. You as the entrepreneur may want to hang onto your business, and the investors want out. Looks like you have a management buyout situation on your hands.
Liquidation
While an option, most likely you aren't going to write "Liquidation" as your exit strategy when writing a business plan. Liquidiation of course is fairly straight forward - sell off all the assets of the company, pay off any debts, and split what is left amongst the owners. Definitely would be an easy way out, although you'll get the least amount of money this way most likely. Try to keep Liquidation as a Plan D if all else fails.
How Much Do I Sell/Merge/IPO/Buyout at? Valuation tells the tale.
Once you've got a plan of action, you'll want to get an idea of what the market values your company at. While placing a valuation on the business early on is tricky, there are methods utilized. I encourage you to read my Valuation - What's Your Company Worth article to learn more.
Create your own future.
I've always liked the saying "Visualize the win." It can be said in lot's of ways, but basically what you focus on is where you will go. Knowing where you want your business to go will be a driving factor in taking all the steps necessary to get there.
Thursday, April 21, 2011
Rogue CFO Speaks Out about Start-ups and Entrepreneurs – Interview on Cynthia Kocialski Blog
Rogue CFO Speaks Out about Start-ups and Entrepreneurs – Interview on Cynthia Kocialski Blog
Rogue CFO Interview on Cynthia Kocialski Blog
Rogue CFO Interview on Cynthia Kocialski Blog
Wednesday, April 20, 2011
Learn more about the Rogue CFO – Interview on 2Indya.com
I was recently interviewed by Vivek Kumar of 2indya.com, a great blog for all entrepreneurs and startups. If you’d like to learn more about the Rogue CFO – my business model, how it all started, tips for entrepreneurs, etc. – give it a read.
Interview on 2Indya.com
Chris Benjamin, Rogue CFO
chrisb@roguecfo.com
http://www.roguecfo.com
Interview on 2Indya.com
Chris Benjamin, Rogue CFO
chrisb@roguecfo.com
http://www.roguecfo.com
Outsourcing Executives – Why It’s A Smart Idea
As an outsourced executive, I’ve been asked what are some of the benefits of using someone like myself to fill an executive role compared to bringing someone on full time, in house.
Cost – A full time CFO who is worth having on board (not a startup rookie, you want a seasoned professional) will command a 6 figure salary, benefits, options, etc. Chances are you don’t have the cash flow or the need for a full time, 40 hour a week executive. On average, my startup clients need CFO services 20 hours/month. Far more affordable.
Expertise – an outsourced executive is experienced with working with several clients and gaining the knowledge of different industries. Rather than hiring the full time executive whose maybe worked at 1 or 2 other companies and has a limited scope of information & experience, hire someone who has been around the block with multiple startups and industries. The mistakes other companies made and the lessons learned from those can be invaluable in helping your company.
Commitment – While it’s not against the law to hire and fire employees in most states, lets be honest. It’s much more difficult to be flexible and adjust your staffing model with full time employees. It doesn’t look good to the other employees if you have to let a few go. Of course we’d all like to assume your startup will be as wildly successful as you are hoping, but in reality very few experience the growth boom they anticipate. It’s much easier to have a an outside consultant under contract on board, where that contract can be modified to fit your needs vs. the full time employee you have to fire because you can no longer afford them, and their benefits.
Availability – I can’t say this will apply to all outside contractors, but speaking for myself, you have a 7 day a week, 24 hour a day executive at your disposal. Fire drills happen in the startup world (urgent investor request, change in the revenue model, responding to competition, etc), and I’m on board to make your company a success, weekends, evenings and all.
The biggest hang up’s I’ve typically experienced about an outsourced team is the lack of face to face time, and how that will affect the efficiencies. Guys, it’s a technology age. Skype, email, phone, online virtual drives – there’s really no excuse. Certainly in some circumstances I can see the need for a complete in-house team, but think outside the box a little and determine if the benefits outweigh any small perceived downfalls.
If you’d like to discuss further or see some case studies of clients of mine and how I’ve helped them succeed, reach out and get in touch.
Chris Benjamin, Rogue CFO
http://www.roguecfo.com
chrisb@roguecfo.com
Cost – A full time CFO who is worth having on board (not a startup rookie, you want a seasoned professional) will command a 6 figure salary, benefits, options, etc. Chances are you don’t have the cash flow or the need for a full time, 40 hour a week executive. On average, my startup clients need CFO services 20 hours/month. Far more affordable.
Expertise – an outsourced executive is experienced with working with several clients and gaining the knowledge of different industries. Rather than hiring the full time executive whose maybe worked at 1 or 2 other companies and has a limited scope of information & experience, hire someone who has been around the block with multiple startups and industries. The mistakes other companies made and the lessons learned from those can be invaluable in helping your company.
Commitment – While it’s not against the law to hire and fire employees in most states, lets be honest. It’s much more difficult to be flexible and adjust your staffing model with full time employees. It doesn’t look good to the other employees if you have to let a few go. Of course we’d all like to assume your startup will be as wildly successful as you are hoping, but in reality very few experience the growth boom they anticipate. It’s much easier to have a an outside consultant under contract on board, where that contract can be modified to fit your needs vs. the full time employee you have to fire because you can no longer afford them, and their benefits.
Availability – I can’t say this will apply to all outside contractors, but speaking for myself, you have a 7 day a week, 24 hour a day executive at your disposal. Fire drills happen in the startup world (urgent investor request, change in the revenue model, responding to competition, etc), and I’m on board to make your company a success, weekends, evenings and all.
The biggest hang up’s I’ve typically experienced about an outsourced team is the lack of face to face time, and how that will affect the efficiencies. Guys, it’s a technology age. Skype, email, phone, online virtual drives – there’s really no excuse. Certainly in some circumstances I can see the need for a complete in-house team, but think outside the box a little and determine if the benefits outweigh any small perceived downfalls.
If you’d like to discuss further or see some case studies of clients of mine and how I’ve helped them succeed, reach out and get in touch.
Chris Benjamin, Rogue CFO
http://www.roguecfo.com
chrisb@roguecfo.com
Monday, April 18, 2011
CFO for Growth Stage Companies, plain and simple.
CFO for Growth Stage Companies, plain and simple.
Here's Who I Am:
A seasoned CFO, have brought companies from idea stage to IPO. I come on board as an interim, outsourced, part-time CFO to help grow your company. Having spent 10 years in the corporate world and now 5 in the startup/growth stage company, I know what it takes to bring your growing company to the next level, and beyond.
Here's What I'll Do For You:
Depending on the stage your company is at, I can add value in multiple ways:
* Creation of investor packages
* Investor relations
* Financial forecasting & budgeting
* Accounting review & correction
* Cash flow maximization
* Expense reduction strategies
* Growth strategy
* Management consulting
* Exit strategies
* M&A
* All things accounting & finance related, I've done it all.
Here's What I Want You To Do:
Click on the link below to visit my site, learn more about who I am and what I do. Then, hit the contact page, send me and email with more info about your company, what pain you are feeling, and how you think I might help. Lets start a conversation.
http://www.roguecfo.com/services
Chris Benjamin, Rogue CFO
chrisb@roguecfo.com
Here's Who I Am:
A seasoned CFO, have brought companies from idea stage to IPO. I come on board as an interim, outsourced, part-time CFO to help grow your company. Having spent 10 years in the corporate world and now 5 in the startup/growth stage company, I know what it takes to bring your growing company to the next level, and beyond.
Here's What I'll Do For You:
Depending on the stage your company is at, I can add value in multiple ways:
* Creation of investor packages
* Investor relations
* Financial forecasting & budgeting
* Accounting review & correction
* Cash flow maximization
* Expense reduction strategies
* Growth strategy
* Management consulting
* Exit strategies
* M&A
* All things accounting & finance related, I've done it all.
Here's What I Want You To Do:
Click on the link below to visit my site, learn more about who I am and what I do. Then, hit the contact page, send me and email with more info about your company, what pain you are feeling, and how you think I might help. Lets start a conversation.
http://www.roguecfo.com/services
Chris Benjamin, Rogue CFO
chrisb@roguecfo.com
Tuesday, April 12, 2011
Business plan not getting attention from investors?
Over the years I've seen business plans and investor packages of all shapes and sizes. 9 times out of 10 when someone sends me their material to review there is plenty of reasons I spot immediately why your company is not getting any attention from investors. Reasons can be anywhere from cosmetic, a lack of information, blatant hole in your business model, too wordy, or plenty of other reasons and combination's of problems.
Luckily, the Rogue CFO is here to help! I've been in the startup game for 15 years, been on both sides of the investor table, helped companies get funded, helped others realize why they won't get funded, built and sold companies, etc. If you want a seasoned professional to give you the 110% honest, painful feedback on what needs help with your plan, then you found the right guy. If you want a yes-man, that's not me.
If you need help turning your presentation into investor level quality, check out my business plan review package:
http://www.roguecfo.com/businessplanreviews
Luckily, the Rogue CFO is here to help! I've been in the startup game for 15 years, been on both sides of the investor table, helped companies get funded, helped others realize why they won't get funded, built and sold companies, etc. If you want a seasoned professional to give you the 110% honest, painful feedback on what needs help with your plan, then you found the right guy. If you want a yes-man, that's not me.
If you need help turning your presentation into investor level quality, check out my business plan review package:
http://www.roguecfo.com/businessplanreviews
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