Worst Place #1 – Investors! Why? it’s the most expensive money and it takes more of your time and energy to secure it. Plus they almost never tell you no so you waste a lot of energy pursuing deals that are never going to happen.
Worst Place #2 – Lenders. It’s cheaper than investor money but it’s still hard to get (almost impossible for start-ups). Not only do you have to pay it back with interest but often at the most inconvenient times that don’t account for dips and fits that all businesses (especially young ones) go through.
Worst Place #3 – Friends and Family. Why? It can be easy to get, and if you’re a success you probably won’t mind paying it back. But if you aren’t a success you can mess up some important relationships. Seriously.

THE BEST PLACE? Customers.

Not only are they the best place, customers are actually the only place to get money. Here’s why. Your business is like a car. It has to get a lot of power. Power to go, of course, but also for the power steering, power brakes (did you forget cars didn’t use to power those things?) And you need power for the windows, the AC, the audio system, even the GPS and the DVD player for the kids. All that power has to come from the engine. All of it. There are no solar panels (not yet) no gerbils or even rubber bands under the hood. Every single bit has to come from the engine.

But the engine can’t start itself. In the olden days it was started by muscle power with a crank. In my younger days I had a car that had to be started with a push down a hill. Modern cars get started with power from the battery. But that battery needs to be recharged, and the charge comes from guess where? The engine.

Your business is like that. The customers are the engine. All the money has to come from the customers. Sure you may need a jump start, and you may look to some of those worst case sources I mentioned for that jump start. But if you haven’t built a business model that shows how your customers will ultimately pay your cost of goods, plus all the costs of selling to them, plus the cost of keeping the lights on PLUS paying back the lenders, investors or friends and family your company will sputter and die. In many cases you won’t even get the jump start.

I say this as an ex-entrepreneur who is currently an angel investor. I love it when my investment can jump-start a successful company. But I don’t get to do it enough. Why? Too many entrepreneurs think getting my money is closer to the end not the beginning.

Too often I see pitches from entrepreneurs who don’t really get that my money is just a jump start – and an expensive one at that. So expensive in fact, that there are a lot of good companies who will never get going fast enough to pay me back enough to make me take the risk. Too often they waste so much time trying to pitch to people like me when they could be selling stuff to customers and actually making money.

Many would be much better off to start with a little push, and grow slower but more profitably, with customer’s money.

photo credit http://www.flickr.com/photos/neubie/2273635564/

[tags] start-up, entrepreneur, financing, investors, VC, angel investor [/tags]

Lots of things. Mostly they put too much emphasis on the outcome and not enough on the process. I’m not a big fan. Yes, I know you need them if you’re going to ask for money. And yes planning is a good idea. But planning is a verb not a noun. You should engage in planning on a regular basis. And you should compare your thoughts when planning to what actually happens. Then you should learn how to plan better.

It will be helpful to have some documents to do this. But a typical business plan is not usually the right document. The right ones capture what you thought would happen, and more importantly, why you thought it would happen that way. Then they make it easy to compare what did happen and why to what you were thinking at the time.

Here’s an example. In the marketing section, most business plans cover who the market is, how fast it’s growing etc. They often get this information from generic research reports that talk about market segments. But market segments are irrelevant to a small company (and all start-ups begin as small companies). Then the business plan makes some guess at what percentage of that market they can capture. The guess seems to be based on what number will look like they can make a lot of money, while not make investors think they are smoking crack.

But this evades the more important questions about your market: how you’re going to find them, educate them about your product and ultimately sell to them. And how much time this will all take, and how much it will cost?

Here are some better things to document about your market:

Rank your market in order of the cheapest / easiest to sell to. For each group estimate the following:

• What it would cost to sell to a customer in that group?
• How long it would take?
• What’s the average size of a purchase?
• What’s the average life-time value of a customer in that group?
• How many people there are in this group?
• Give examples of what you base this information on?

Never forget that a customer is a person. It’s not a company, a family, a household, or a demographic. It’s the person (or people) in that organization who actually decides to pay the money. Say you want to open a family restaurant. Yes, you need to know how many families live within a certain distance from your place. But don’t stop there. The time and cost of marketing a meal to a kid (think Chuck E. Cheese or McDonald’s happy meal) is different from marketing a meal to an overworked Mom or to a grandparent. Who is going to decide to spend money at your place and what will it cost to get them to do so?

Document your thoughts on that. Then you can regularly compare what your actual sales are, and what it actually costs to make a sale to what you were thinking. If you’ve been open a month you have enough data to start the process. The actuals won’t match up (trust me on this) but the point is to get better at projecting so that by month 6 you’re doing a better job and by month 18 you’re doing a good enough job to know if you should stay in business, close the doors or raise more funds. And if you do need to raise funds, that kind of detail will convince investors yours is a business not just a product.

Takeaway:

• The purpose of planning is not the plan – it’s to get better at predicting what the future will bring and how to be in the best position when it happens.

[tags] small business, entrepreneur, business plan, planning , CEO Skills [/tags]

In most industries probably not. But music is different (like art and a few others where commitment and commerce are closely linked). SELLABAND has developed an interesting business model to exploit this combination of passion and partnership. Details HERE.

The idea is “believers” aka investors invest $10 in a share of a new band. When the band has raised $50,000 (5,000 investors) SellABand helps them produce and promote a CD – the investors get one copy of the CD for “free”. Money is split between the band, the investors and the company. Any time before the band raises 50K an investor can get their money back or switch it to another band.

Seems to me that $10 is a really cheap way to “own” part of a band for people who like to be early adopters of new music and a way for a band to raise money but more importantly get 5,000 folks promoting their music from the get go. For the investors, it’s like paying $10 to be a promoter of an idea virus. And you get a CD for the price.

UPDATE: Slice The Pie has a similar concept.

Takeaway:

• The real power of any technology is not to do the same old stuff quicker, better, or more accurately, but to allow you to do things that could not be done before. The web is no different in that it’s real power lies in the uncharted.

[tags] entrepreneur,record label, Music Business, business model [/tags]

Wow I didn’t realize I’d taken a whole month off from blogging. We’ve been busy with the holidays (and spending time with the four of our five kids who are home from college). But also – more to your interest – trying to put together an angel investment deal. Looks like the deal is dead (but there is some slight hope so I don’t want to name names at this point).

I’m finding a huge disconnect between investors and entrepreneurs. And not just their needs – their entire outlook on the process. It seems like they both believe they’re doing the other a favor by offering them an opportunity to be in the deal. That may sound like a win-win but it’s really a situation where each won’t accept the other’s point of view. So it makes coming to an agreement difficult.

The other problem I’m seeing is that angel investors seem to believe they are just mini VCs. So they are looking for companies they can cash out in 5-7 years for 20-plus times their investments. The chances of that happening are not strong, so VCs hedge their bets by being in a lot of deals, and trying to cut their losses when things go south. But that’s not usually what the entrepreneurs want. Especially the large numbers of entrepreneurs who have viable companies that aren’t venture companies, yet need some investment. As Paul Graham has said VCs prefer a 20% shot at making 100 million over an 80% shot at making 10 million over 100% shot at making 1 million. Entrepreneurs prefer the opposite. [I can't find the exact quote, this is a paraphrase.] I found the quote: “The founders, who have nothing, would prefer a 100% chance of $1 million to a 20% chance of $10 million, while the VCs can afford to be “rational” and prefer the latter.” It’s from The Venture Capital Squeeze

Takeaway:

• I’m looking for a model where I can invest in a company (20K, 50K maybe 100K) and contribute my experience and advice in helping the owner grow the company. Then get a healthy return. Sure I’ll take a percentage if the company gets sold to Google for a billion and a half. But if it’s merely “profitable” and not saleable, I’d like a decent income stream from the profits. Some way to insure it doesn’t get wasted on fancy company cars, extravagant off-sites etc. If you know of such a model drop me a line.

[tags]Angel Investing, Finance, Raising Money, Capital,  Small Business, Entrepreneur[/tags]