Crowdfunding

Seedinvest involves five steps from start to completion of a successful raise.  The first step is to create an application. The application includes basic information and details about your company. There is no one type of industry Seedinvest has will accept to crowdfund. However, they are looking for early stage, high growth companies technology companies.  After your application is submitted, it will be looked at by a screening committee. The screening committee is looking for potential of your business. The screening committee will consider current customers, demonstration of the product, industry potential, and competition. If you are able to get past the screening committee, then it is time for due diligence. Due diligence includes a thorough legal and business analysis of your company. Seedinvest is looking to make certain your company is a good fit to be a part of raise and that there are no risks or liabilities that Seedinvest or their investors might risk from the transaction. The final step is to close the round. This is includes legal agreements regarding the account. 

This crowdfunding source is extremely competitive and requires a well written business plan.  They are looking for startups that are actual businesses and not just hypothetical. A product that can be demonstrated is a requirement. In addition, the company should have at least two full time team members. Seedinvest requires some history of success. This crowdfunding source only makes these stipulations because investors are looking for these attributes in a start up.

Only about one percent of applicants to Seedinvest are accepted (Neiss). However, on average, startups will raise about $435,780 (Neiss) which is more than the average crowdfunding source. According to seedinvest.com, “The companies on SeedInvest raised 89% more than the industry average in 2017.”  

Generally, it takes 45 days to receive the capital. The website states that it will take 3-6 months for a “Regulation A” raise. According to sec.gov, a Regulation A raise allows a company to sell securities to the general public.

Seedinvest is looking for start ups trying to raise between $500,000-$50,000,000 in capital. There does not seem to be any reporting requirements that Seedinvest requires. I think that would be agreed up in the profile creation step of the process. I reached out to Seedinvest to ask this question and some others, but unfortunately an associate got back to me and declined an interview.

There is a 7.5% placement fee and 5.0% equity fee when raising money with Seedinvest (seedvest.com/FAQs).  This is a value because of the successful network of investors that Seedinvest claims to have.

Ganti, A., https://www.investopedia.com/terms/p/preferredstock.asp, Retrieved on 9/24/2020

https://www.seedinvest.com/faqs, Retrieved on 9/24/2020

Neiss, S, (2018), https://venturebeat.com/2018/06/09/todays-best-crowdfunding-platforms-by-the-numbers/, Retrieved on 9/24/2020

https://www.seedinvest.com/raise, Retrieved on 9/24/2020

https://www.sec.gov/oiea/investor-alerts-bulletins/ib_regulationa.html, Retrieved on 9/25/2020

Hyatt, A., (2016), Crowd Start, ISBN 978-0-98952-101-7

Valuation (Ent 650)

Valuation

Valuation is a science and an art. There are complicated formulas as well as subjective decisions to be made. A valuation can be qualitative and a gut feeling. There is a lot involved in the valuation of a business.  

Generally, if one is selling a business, they are going to want a high valuation. In preparation for the sale, a founder would want to show a loyal customer base and excellent working capital. On the other hand, if they purchase a business, they would want to see a lower valuation.

In addition to the sale of the business, valuation is necessary when funding a business. Founders and buyers are utilizing numbers to give their best guess at the future value of the company.  Discounted cash flow considers inflation, so it is an excellent method to determine a possible investor’s equity disbursement.

Even though the valuation is quantitative, there are multiple methods for determining a final number. Because of the complexities of a business’s valuation, one would want to have a good accountant on their side. Some of the valuation methods discussed in the book “Entrepreneurial Finance (2014)” are multipliers, price/earnings ratio, free cash flow valuation, and asset valuation. Other sources list market capitalization and discounted cash flow (DCF) as methods of valuation.

There are many methods to come to the value that best benefit the party’s interest. Knowing that it is not exact science can help a founder at various stages of its maturity.

Rogers, S. (2014), Entrepreneurial Finance, McGraw-Hill Education, ISBN 978-0-07-182539-9

Hayes, A. (2020), https://www.investopedia.com/terms/b/business-valuation.asp, Retrieved on 9/18/2020

Cash Flow Project – Growing Your Business Too Quickly

Mike Weimar

Cash Flow Project

Ent 650

Growing your business too fast

Unexpected growth in revenue is a good problem to have in business. Many struggle to gain new customers and build long term business relationships. If new business is coming quickly to your start-up, that is excellent news! However, that growth needs to be profitable. Unprofitable growth can lead to cash flow problems. Without proper controls, significant and unexpected growth can seriously damage a business’s cash flow and their ability to pay the bills.

The founder of a start-up is passionate about their business and customers. They want to exceed their expectation, which will turn into additional sales. However, it is essential to focus on cash flow. Additional revenues do not necessarily equate to additional profits without proper management of the business. Growth is vital for a new business, but it is even more important to experience profitable growth.

A founder may complete the negotiation of a price with a client on a large contract. It might be larger than any other deal that the owner has had an opportunity to gain. So naturally, you would like to be as sharp as you can on your price offer. There is a lot to think about besides price alone. The following questions need to be considered.

1. How much time will this contract take me away from existing customers?
2. How much time will this contract take me away from pursuing new customers?
3. How quickly will this new customer pay?
4. Will I have to hire additional staff to service all of my customers, including the new customer?
5. Considering any other expenses, including extra labor, will the additional revenue make it the bottom line or just be eaten up by costs such as labor, receivables, or additional controllable expenses incurred as part of the service?

Without consideration of the above questions, a business owner could easily find themselves in the position where the revenue they are gaining is being used to pay the bills. When that happens, the path to profitability is not pretty. One might consider delaying payments to vendors. However, this could ruin your vendor’s relationship, which you have worked hard to build. Another option is you could decrease the quality of your service or product. The downfall is you may lose customers and gain a bad image. An unintended consequence of growing too quickly is poor customer service. You and your staff may not have enough time in the day to respond appropriately to customer needs. Another possibility is the lack of inventory. Not having the proper cash flow could result in having to decrease the amount of product carried in stock because the owner cannot afford to pay for extra inventory.

In most cases, profitable growth is worth the wait. An owner needs to feel confident that their product or service is worth the price they are asking. Once a deal is locked in, it isn’t easy to increase the price if it is necessary for the future.

15 Signs You are Scaling your Company Too Quickly, (2018), https://www.forbes.com/sites/forbescoachescouncil/2018/03/05/15-signs-youre-scaling-your-company-too-quickly/#3be501746611, Retrieved on 9/3/2020

Entrepreneurial Finance, Rogers, S., (2014), ISBN 978-0-07-182539-9, McGraw Hill Education

Response to Ent 650, Financial Statements

The first three chapters of Entrepreneurial Finance (2014), according to the syllabus of Ent 650, are not required. However, I would recommend reading them as they provide a lot of great information. It provides an overview of the reasons why entrepreneurs should pay attention to their financial statements. Many entrepreneurs are wholly occupied by their day to day activities and understandably so. After all, they are passionate about what they do and providing the best customer service possible. All are fundamental aspects of running a business. However, knowing your financials is not just for your accounting department.

There is the option of hiring an outside accountant, which can be expensive for a start-up company. Despite this fact, it is crucial to get an unobjective opinion from time to time. A trained accountant can spot irregularities that others that internal employees may not be able to spot.

Since hiring a CPA from an accounting firm is not possible on a day to day basis for most small businesses, many might hire an accountant or bookkeeper for the company. Financial statements need to be reconciled daily, which is a lot of work. Hiring an employee to keep up with the financial statements will allow the business owner to pursue new business and take care of current customers to the best of their ability.

The business owner is still not off the hook. They need to have a good knowledge of what the financial statements are saying and not just the net profit line. Understanding their financial information is vital for two reasons. To an owner that is not paying attention, a bookkeeper could “cook the books” and embezzle untold amounts of money. 

The second reason is managerial decisions need to be made based on financial results. If there is a problem with low margins, the cause can be discovered by reviewing the financial reports. Another example is exorbitant expenses can be identified and controlled.

Chapter 1-3 in Entrepreneurial Finance is an excellent introduction to the knowledge that anyone running a business will need to make critical financial decisions.

Rogers, S. (2014) Entrepreneurial Finance, McGraw-Hill Education, 

ISBN 978-0-07-182539-9

Week 8 Response for Ent 640, Harvesting

The final step in the life cycle of investing is harvesting. Exit plan or harvesting can be a contentious topic between investors and founders. It needs to be determined and agreed upon right from the start when to exit the business. Without this understanding, the investor could remain involved and have their capital tied up for much longer than anticipated. In one article, the author states, “But for many other companies, there are plenty of good reasons to stay private, whether that’s to maintain independence, continue to deliver on your vision, or better serve your customers. (Eghbal, 2014).” These are the reasons for keeping a company private, according to Nadia Eghbal at collaborativefund.com. There is an emotional attachment between the business and the founder. Because of the emotion involved with a founder, it can be difficult for investors to capitalize on their investment until the founder exits. In addition to the emotional attachment of the founder, “half of all companies keep going up after you sell. (Amis and Stephenson, Pg 287) .” The difficulty of deciding when to exit could delay an exit. Since most investors have minimal control of the company, they can influence the exit plan of the company, but cannot control when the exit plan occurs.

According to another article, “There is growing concern amongst angel investors that exits have become harder to achieve since the technology crash of the early 2000s (Wadell,2013) (Mason and Botelho, 2016).” The dot com boom leads to many startups, and things were happening quickly. Since then, there is reason to believe that more entrepreneurs are not ready to let go of their startup. 

Lack of harvesting leads to additional problems in the angel investment community. According to the same article, “The low rate of exits is attributed by (Gray 2011) to the failure of the angel community to build the exit into their investment appraisals. (Mason and Botelho, 2016).” Angel groups must show a turnaround. Other entrepreneurs depend on their investments to fuel the growth of their businesses as well. Although the founder may look at the company as their “baby,” there are many other individuals that have a stake in the game. They also need to be considered.

I could certainly understand both sides of the argument. The entrepreneur has invested many hours of their life in their project. The investor would like to gain a profit and possibly move on to the next project. If I were to be considered by an investor, I would make sure to discuss their opinion on an exit plan upfront.

Amis, D. and Stevenson, H., (2001) Winning Angels the 7 fundamentals of early stage investing, Pearson Education Limited, ISBN 0 273 64916 7

Eghbal, N. (2014), Why Wouldn’t a Founder Want to Exit, collaborativefund.com, https://www.collaborativefund.com/blog/why-wouldnt-a-founder-want-to-exit/, Retrieved on 6/20/2020

Waddell, J (2013), Evidence. In: Official Report of the Scottish Parliament Economy, Energy and Tourism Committee, 35th meeting, session 4, column 3697, 11 December. 

Gray, N (2011), Present business angel thinking on exits. Unpublished report for LINC Scotland, Glasgow. 

Mason, C. and Botelho, T. (2016), The Role of the Exit in the Initial Screening: The Case of Business Angel Syndicate Gatekeepers, Sage Journals

Week 7 Response to Ent 640, Supporting Roles

Similar to the previous five steps discussed in our reading, “Winning Angel, the 7 fundamentals of early stage investing (Amis and Stevenson),” the sixth step of supporting roles of the angel investor depends on how much time the individual investor wants to spend on the company. The decision of the supporting role of the investor looks like primarily lies in the hands of the investor. The startup dynamic will determine the amount of involvement an investor will need to spend on a day-to-day basis. If the entrepreneur and investor see eye to eye, there may not need to be much involvement. Additionally, if the investor feels that the management of the company is experienced and competent, they may not see the need to be involved as frequently. After all, more time will allow them to look for the next great deal. Although the authors of the book state some investors may have a completely hands-off approach to their investments, I have to believe the majority of investors would be heavily involved in the strategies and operations of the new startup. According to an unnamed contributor to entrepreneur.com, you should heed the following advice: “Prior to starting to look for your angel investor, you must ensure that you are at ease with permitting somebody who isn’t intimately familiar with you or your business to play a role in how it is run.” An investor’s role could potentially include decisions on pricing strategy, how to approach a customer, hiring, and firing employees. They could even fire the founder from the firm! The entrepreneur needs to be humble and go in with the understanding that they are trying to create a larger enterprise than what the entrepreneur could on their own.

I do not blame the investor for wanting to be involved in the business and making it a success. After all, there is a lot of money on the line. Expectations among investors are high. They typically will have multiple failing startups. However, one successful startup needs to have exponential growth to make up for the rest. According to Murray Newlands at startup grind.com, “It isn’t unusual for an angel investor to expect a rate of return that equals 10 times their original investment inside the first 5 – 7 years (2015).” The pressure for success is immense, and all parties want it to be successful.

In many cases, angel investors have a great deal of entrepreneurial experience. An entrepreneur should gladly take advantage of that fact. Not just anyone can be an angel investor. It takes accreditation from the Securities and Exchange Commission. They need to have a net worth of at least one million dollars and have an annual income of at least two hundred thousand dollars (entrepeneur.com). The chances are good that they have success in the investing world in the past and know what it takes to create incredible growth in a short period.

To create a good working relationship with the investor, I would have an open dialog. An honest relationship fosters excellent communication. Discussing ideas and using each other’s diverse backgrounds is the best way to succeed.

Amis, D. and Stevenson, H., (2001) Winning Angels the 7 fundamentals of early stage investing, Pearson Education Limited, ISBN 0 273 64916 7

Newlands, M. (2015), Pros and Cons of Using an Angel Investor to Fund a Startup, startupgrind.com, https://www.startupgrind.com/blog/pros-and-cons-of-using-an-angel-investor-to-fund-a-startup/, Retrieved on June 13, 2020

Getting Started with Angel Investing, entrepreneur.com, https://www.entrepreneur.com/article/52742, Retrieved on June 13, 2020

Week 6 Response for Ent 640, Negotiation

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Week 5 Response for Ent 640, Structure

If there is one thing I could take away from learning about the structure of a deal, if I ever were so fortunate to have an angel investor looking at my business, I would hire a lawyer. The variations of the structure are incredibly complex. Most investors will want what will give them a higher rate of return, which is convertible preferred stock. This option allows them to retain a fixed dividend at the beginning of the investment. When they see the capital start to rise and feel good about where it is going, they can convert to common stock. Converting their share to common stock allows them to realize profits from gains in the stock. An investor also takes on the risk of the stock’s declining value at that point, so hopefully, they see some indicators that make their decision to convert more certain. The preferred stock will mitigate the investor’s risk, but not allow for a high return on investment if it starts to gain momentum. Common stock provides limited risk for the entrepreneur. If the value of the company decreases, then so too does the investor’s equity. The investor would probably feel very strongly that a company is a winner if they agreed to common shares in exchange for their investment.

It is essential to get it right for the first time. Negotiation is one of Amis and Stevenson’s “Seven Fundamentals of Early Stage Investing,” but it seems clear that the deal would fall through without a consensus early in the process. The author state, “many angels think that negotiating to change the structure of the price is not a good start to their relationship with the entrepreneur (Pg 181).” An inexperienced entrepreneur would be wise to have an experienced attorney or accountant on their side to make sure they are getting the best deal possible.

“New firms with pioneering ideas and a flexible structure can often react to customers’ needs more appropriately than older, more established enterprises. (Tykvoka)” Although it is essential to have a structure in place that both the angel investor and entrepreneur can agree upon, both parties must possess a degree of flexibility. Ultimately it comes down to relationships as many things do in business. A trusting relationship between the entrepreneur and the angel investor will go a long way. If both parties recognize the idea is marketable and are motivated to make a deal, it will happen. Some investors are less concerned with the structure of the transaction than others. It takes a lot of time to review how the makeup of the deal. Keeping the agreement simple will help an investor to determine if investing in the entrepreneur’s company is worthwhile.

Similar to other aspects of early stage investing, there is no exact science to it. There are many variables based on the opinions of your investors, partners, advisory board members, and management staff. Faced with an angel investor’s decision as to whether or not to invest, I would keep my offer simple and consider the needs of the investor. Ultimately, it is the team and the idea that will guide their decision.

Amis, D. and Stevenson, H., (2001) Winning Angels the 7 fundamentals of early stage investing, Pearson Education Limited, ISBN 0 273 64916 7

Tykvoka, T. (2007), What do Economist tell us about Venture Capital Contracts?, Journal of Economic Surveys

Mitchell, C. (2019), Investopedia, https://www.investopedia.com/terms/c/convertiblepreferredstock.asp, Retrieved on 6/6/2020

Valuation, Week 4 Response for Ent 640

Determining the value of a new startup is subjective. Many models can try to predict where the company will be in five years, but it is just guesswork at the end of the day. All parties involved are interested in the valuation of the startup, and big stakes are to be gained or lost in the negotiation. Investors want to keep the valuation low so that their potential stake in the company can be a higher percentage down the road. The entrepreneur has the same desire to maintain a higher stake in the future. A more significant proportion of equity in the future requires a high valuation for the entrepreneur. What are some of the factors that can influence such decisions? What makes them correct in their assertion? At the beginning stage of an early startup, there are no clear answers.  That is unless you can accurately predict the future, of course.

As an entrepreneur, there are methods to try to get a high valuation.  Every entrepreneur is eager to demonstrate how their idea is the next big thing. Most investors will take their pro forma projections with a grain of salt. To justify their high evaluation, the founder of the new startup needs to have some facts to back up their claims as evidence.  The best proof is the current customers. If the newly started company already has customers purchasing their product, then the prospective angel could project out five years of sales and profit. It is important to note that with this observation, angel investors are not looking for profits at this early stage in the game. They merely want to see that people are interested in the product or service of the start up company. A solid business plan needs to be in place. The business plan will need to include market analysis and research. An investor wants to see evidence that the market is ready for your product or service.  They also desire to see a lack of saturation of competitors. A quality team with backgrounds that demonstrate experience in your field will contribute toward a high valuation. Having a great plan and untapped market potential is not good enough. Proper execution is the only way a startup will be successful.  Executing the plan cannot be done without a passionate, experienced, high-quality team.

Although the entrepreneur needs to prove the point that they should command the valuation they are offering, it is not good business to become too greedy. It is possible the founder may deter investment into his business both initially and in future rounds of investment. It is important to be realistic. A conversation with an investor, accountant, or attorney can bring the entrepreneur down to earth with a reality check.

Valuation of a startup is a process through which an outcome is determined by having many conversations between the investors, founders, and other stakeholders. Numbers must repeatedly run on many of the models that are available to help determine an outcome.  Market analysis is essential to understanding the customers, industry, competition, and other forces at work, such as government regulation and the economy.  If all parties are motivated, each will state their case and come to an eventual agreement on how much the company is worth by following the complicated process of early startup valuation.

Amis, D. and Stevenson, H., (2001) Winning Angels the 7 fundamentals of early stage investing, Pearson Education Limited, ISBN 0 273 64916 7

Wilson, F. (2014), The Valuation Trap, AVC, https://avc.com/2014/05/the-valuation-trap/, Retrieved on May 31, 2020

Hixon, T. When is a Lower Valuation Better, forbes.com, https://www.forbes.com/sites/toddhixon/2014/05/11/when-is-a-lower-valuation-better-a-conversation-with-an-entrepreneur/#3fd28416ae09, Retrieved on May 31, 2020

Evaluating the Deal, Week 3 Response for Ent 640

An angel investor’s evaluation of a potential deal is a complicated process.  Some angels might take two minutes, and others may take months to say no to an agreement.  Although there are many considerations to the evaluation of a deal, there is no exact science.  Many investors will rely on their instinct to evaluate the entrepreneur and his team (or lack thereof), industry, product, business plan.  Good judgment comes from experience, and experience comes from making bad judgments (Pg 75).  Never the less, Amis and Stevenson discuss in this section a roadmap to evaluating a startup.

Winning Angels (Amis and Stevenson 2001) suggest that many successful investors use The Harvard Framework.  This method of evaluation involves four considerations: people, business opportunity, context, and deal.  

People are the most critical piece of the puzzle. Execution of an idea will not happen without a good management team.  According to Mark Lamoriello of Startup Nation, Rather than focusing on your idea, there’s a good chance an investor will want to know more about you and your team.  The team’s importance to an angel investor was confirmed during one of my subject matter interviews by Kevin Meinecke of Venture South.  According to the famous Greek philosopher, Heraclitus, change is the only constant in life.  A good management team will recognize this fact and adjust to changing market conditions not considered in the original plans.  The product or service may need to change to meet the demands of the customer.

Business opportunity considers the idea and business model. If the business has customers is a consideration.  Investors will want to see that the firm has customers.  Most do not want seed-stage companies to make their investment. Since my business is hypothetical, this is the stage I am currently in.  Investors will also consider the potential for gains.  The entrepreneur needs to show the potential investor that their business has the potential for exponential growth either through market share gains or market growth.

During the context stage of consideration, the angel analyzes the industry and outside factors that might affect the business.  The methods discussed in Understanding Michael Porter (Magretta 2011) will come in handy for this step.  Porter’s five forces and Value Chain Analysis will undercover details in the industry and within the business for consideration in congruence with each other.  Competition, new entrants to the market place, technology, and government regulation are all factors that predict a new venture’s potential success.

The Deal is the final step in the framework.  Here we look at the details of the arrangement.  Consideration either ends or negotiation begins with this step.  Equity stakes might be a negotiating factor during this step.

As noted, there are many steps to examine when an angel investor is looking to make a deal.  One step that I did not mention is profit.  Early-stage investors are not looking at a profit at this point because they realize that if they have the right idea and team in place, profit will take care of itself as the business scales.  As entrepreneurs, we need to keep this in mind.  Long term planning is what big picture thinking is all about.

Amis, D. and Stevenson, H., (2001) Winning Angels the 7 fundamentals of early stage investing, Pearson Education Limited, ISBN 0 273 64916 7

Magretta, J., (2012), Understanding Michael Porter, Harvard Business Review Press, Boston, MA, ISBN 978-1-4221-6059-6

Lamoriello, M., (2018), Why Venture Capitalists Look at Teams, not Ideas, Startup Nation, https://startupnation.com/manage-your-business/venture-capitalists-teams-ideas/, Retrieved on May 25, 2020