Tag Archives: startup

5 Ways To Determine If Your Startup Idea Is A Winner

Q: I’m an entrepreneur with what I think is a great idea for a startup. But how do I know if it really makes sense to pursue?

A: The good news is there are concrete financial benchmarks that can help answer this. Nearly every industry has ratios that define the likelihood of success.

1) Begin by searching association publications and investment research specific to your enterprise. Be sure to examine the profitability metrics posted on your trade’s association websites, and study comprehensive industry overviews from reputable sources that present relevant models and statistics.

My early entrepreneurial career began in food, so here are a few examples from when I was starting my own restaurant business:

Projected revenue divided by startup costs needs to be better than 1.8%.

Fixed costs, which are recurring costs that don’t vary like rent and management salaries, divided by sales should hover around 8-12%. Of course the lower the better on that. The more sales dollars per year, the higher you can afford to be on the percentage.

Adjust this based on your market and business category, but fixed costs should not exceed a certain percent of sales. You can figure out that percentage by consulting credible resources from your industry.

Thoroughly analyze variable costs. The big two in restaurants are food and paper costs combined, and labor. You want to hold these at 60-62% of revenue. If your fixed costs run lower, the 60-62% can edge a little higher.

Picture 7

Some restaurant segments, like pizza, have costs specific to them. Pizza concepts generally run 2% lower on food and paper, but there’s an offset because of the very high outlay to acquire customers using direct marketing, like door hangers and mailers.

To project sales, multiply your predicted customer count by anticipated ticket average, less dollars spent to get people through the door. Be conservative on these estimates to insulate against unwanted cash drain.

bigstock-Portrait-of-a-very-happy-young-489079162) Decide whether your idea is a financial performer by focusing on measureable factors. You can buy comprehensive industry research that publishes data on your competitive landscape. For instance, the National Restaurant Association has data available for a membership fee.

3) Not only should you review that data, you could hire an accountant who specializes in your field to crunch those numbers and produce a model P&L.

But buying industry data can be expensive.

4) Here’s a no-cost option. Ask those who own businesses like yours to share their P&Ls. Obviously not every business owner is going to be generous like that, particularly if you’re seen as competition. You might have better luck if you drive across town and ask business owners who aren’t going to be in your trade area. If you can get this information, it will be invaluable.

5) Avoid the market share game. Chose what you see as a growing segment for your startup. Going back to the restaurant example, if you open a traditional burger joint you’re in a more mature segment because there are lots of traditional burger places. You have to steal market share from those guys, like McDonalds, if they’re in your trade area. As you can imagine, that’s hard to do. But, if your startup is in a growing segment, for example craft burgers, you can probably count on shifting demand, or even new demand. That can be true even in a down economy.

So, find a new way to offer that burger.

When I was getting my own small business off the ground, if I hadn’t taken my own advice here and figured out if the numbers made sense, it would have been one of the biggest guesses I would ever make.

What’s your entrepreneur question? Email me at RESblog@consumercp.com.

 

Need Startup Money? Meet The Top Venture Capital And Angel Investors

To get your business going you need money. Probably plenty of it. If you’re buying an existing business, you can make a cash down payment and pay off the seller over time. But when you’re starting your own business, it’s likely you’re going to need access to 100% of the startup capital needed to get going.

This may surprise you but the lion’s share of startups are funded either with the entrepreneur’s own money, or with money from friends and family. Failing that, new businesses look to SBA loans and conventional bank loans. But those loans are tough to get for startups these days, and they require significant collateral. And even if you were able to get an SBA or bank loan, likely they’d only loan you at the most 75% of what you need to get going. More likely it’d be closer to 50-60%.

So say you have $200,000 in startup costs. Then you, being a lucky person, get the go ahead for a bank loan that’s 60% of your costs. Before you can draw on that loan, you still need to show that you’ve put the remaining 40% in your business. For example by showing $80,000 worth of receipts for equipment you bought.

bigstock-Funding-White-Road-Sign-54048721Bottom line is you still need to find that $80,000. Where else can you turn? Venture capital (VC) firms.

VC comes from professionally managed funds that are looking to make equity investments in emerging growth startups. They purchase a stake, anywhere from $25,000 on the very low end to upwards of $10 million, in selected industries where they have expertise.  Their plan is to sell their investment within a few years and return their outside investors’ money, with a profit.

Professional VCs have very high standards.  You need a killer business plan, a big marketplace opportunity, and a solid track record in a related industry. It isn’t easy. That means to have the best chance of attracting capital investments, you need to target the right VC firms to approach. Once you’ve considered the following factors use a search tool like Findthebest.com or Entrepreneur.com/vc100# to narrow your startup capital search.

Geography – where does the VC fund tend to invest?

Investment range – how much capital are you looking to raise? Generally, VCs have an upper and lower investment size limit.

Investment stage – VC firms often solely invest in companies that are in a specific stage of development. Only seek funding from groups that focus on your stage of growth. For startups, look for VCs that offer financing for that beginning “seed” phase. Or, if you’re just past that, find VCs that make “early stage” investments for, say, marketing or product development.

Industry focus – find firms that specialize in your industry. Tech by far has the most coverage, but most industries have some VCs in their field.

The good news is when you’re financed by a known VC, your company earns some credibility. VC investments also can bring value to your startup because these lenders have knowledge of your industry including important contacts with potential customers, suppliers, and so on.

Having said that, a venture firm will generally want 40% or more ownership of your company.  When you’re growing fast, selling equity is very expensive because all of the gain on that share of the company goes to the VC investor.

Don’t raise more than you need.

But what if you do, later down the line, find yourself needing more than you originally asked for? It happens. You can go back to your VCs and ask for more. Though you’ll need to give them something extra, like a first right of refusal.

According to data compiled by Fundable.com, VCs write big checks, with an average investment size of $2.6 million for startups. Sounds good but the reality is VCs actually funded only half a percent of all startups looking for cash in 2013. So, they don’t invest in many new businesses, but when they do, they can invest big. Like I said, it isn’t easy.

Here’s a table with the ten most active seed-stage venture capital firms last year, according to Forbes.com. Many of these firms only do seed money, ranging from individual investments of $25,000 to $250,000. Probably worth noting is that, in many cases, these VCs teamed up with each other when investing seed money in startups.

10 Most Active Seed Money VC Firms for 2013

Venture Capital Firm Find Them
500 Startups 500.co   [sic]
Andreessen Horowitz a16z.com
SV Angel Svangel.com
Lerer Ventures lererventures.com
First Round Capital firstround.com
CrunchFund crunchbase.com/financial-organization/crunchfund
Innovation Works innovationworks.org
Atlas Venture atlasventure.com
Connecticut Innovations ctinnovations.com
Founder Collective foundercollective.com

Who funds more startups than VCs? Angel investors. These are private individuals, or small groups of friends or members of angel clubs, who have enough money that they can afford to make higher risk, hopefully higher return, private investments. Did you catch the “higher risk” part? Depending on your situation, that can translate to a better chance of getting funding from angels than VCs.

bigstock-Angel-Funding-Investment-Conce-1758040But angels will need to know you or the business.

Not all angels look alike. Sometimes the entry-level investors are simply high net worth people who just dabble in private investing. They’re probably not going to have the deep pockets of a super angel, but sometimes they’re willing to accept even higher risk investments.

To find the right investors for your angel financing, run through the same list of factors, mentioned above, used to select potentially amenable VCs.

Again, according to Fundable.com, in 2013 angel investors wrote about 16 times more checks than VCs, investing in over 61,900 companies. The average amount invested per startup was just under $75,000. There are currently about 268,160 active angel investors. Angels funded nearly twice the startups that VCs funded. But still, that’s less than 1% of all startups funded.

The top 5 angel investors of 2013 were busy making more than 165 combined investments. See the table below. The angel list was pulled together according to data compiled by the equity crowdfunding platform Fundable, and the entrepreneurship advocate Empact.

Top 5 Angel Investors of 2013

Who Investments in 2013 Investment Range Famous Investments
Aydin Senkut 12 $100,000-$950,000 Shopify
Weebly
David Lee 13 $100,000-$950,000 Twitter
Foursquare
Ron Conway 10 $50,000-$200,000 Google
Facebook
Zappos
Airbnb
Dropbox
Dave McClure 125 $25,000-$250,000 SendGrid
Bit.ly
Esther Dyson 5-10 $25,000-$250,000 Evernote
Flickr

Remember, even though these are the top venture capital and angel investors, carefully explore the startup capital options that might be right for you.

If you have an entrepreneur question, email me at RESblog@consumercp.com.

 

 

 

 

Money For Your Startup With The SBA Top 10

Q: I’ve gone to my local bank for a loan to fund my small business. They flatly turned me down. I know my idea has teeth, but is it worth applying at another bank?

A: I can relate to this. In the early years of my career I had an idea for a startup. After building what I thought was a solid business plan, I pitched the idea and was turned down flat.

Not once, but by five different banks.

Not ready to hit the brakes, I sought advice. A CPA friend offered a valuable tip. Now I’m giving it to you.

Banks are not created equal.

Each has a different lending focus. He gave me a new list of banks that specialized in the U.S. government’s Small Business Administration (SBA) loans. These loans are made by SBA lending partners and then the SBA guarantees a portion of the loan that they will repay to the lender if you default.

The top 10 SBA lenders in 2013, according to the National Association of Government Guaranteed Lenders, are:

CURRENT TOP 10 SBA LENDERS

Lender

Address

City State
The Huntington National Bank 17 S High St Columbus OH
Wells Fargo Bank 101 N Philips Ave Sioux Falls SD
JP Morgan Chase Bank 1111 Polaris Pkwy Columbus OH
U.S. Bank National Association 425 Walnut St Cincinnati OH
Compass Bank 15 S 20th St Birmingham AL
Manufacturers and Traders Trust One M & T Plaza, 15th Fl Buffalo NY
Eastern Bank 265 Franklin St Boston MA
Zions First National Bank 1 S Main St Salt Lake City UT
Banco Popular de Puerto Rico 209 Munoz Rivera Ave San Juan PR
First Bank Financial Centre 155 W Wisconsin Ave Oconomowoc WI

Keep in mind that, while you aren’t limited to SBA lenders in your state, many banks do prefer to lend startup capital in their own business region. It’s also to your advantage to find a local bank to fund your small business because it’s easier to create and maintain relationships with bankers you can meet face to face. Call your local bank to see if they can point you to your best local SBA option.

If you’re not finding a local bank that wants to move forward with an SBA loan, I have two suggestions.

First, some banks do have a national lending scope. Have a look at Manufacturers and Traders Trust, and Banco Popular de Puerto Rico.

Second, do some homework at www.sba.gov to find the bank that does want your loan.

bigstock-In-The-Money-2713420In today’s market, banks often only want to lend money to people who don’t need it. Bottom line, if you think your concept is financially sound, don’t stop at the first no.

A few years ago I saw a business opportunity to further the growth of bike racing. Most people I shared my idea with didn’t get it, and many advised against going for it.

But that’s the thing about entrepreneurs. We get a great idea and it doesn’t matter if others don’t have the vision. We do. That’s how big things get done.

Three years later the USA Pro Challenge is an internationally recognized brand. Watch an analysis on the business of endurance sports at Bloomberg TV www.bloomberg.com/video/messick-schaden-wittenberg-on-endurance-sports-XiI3z5O_S56vUTKjHxHLZQ.html.

If it doesn’t look like an SBA loan is for you, check back with me soon. I’ll give you answers on where to look for venture capital and angel investors.

What’s your entrepreneur question? Email me at RESblog@consumercp.com.