How Can A Business Owner Fund A New Business?
How Can New Business Owners Fund Their Business?
An Interview with N. Michael Miller
Successful Businessman, Venture Capitalist and Published Author Answers Our Questions in the Second of a Four Part Interview About Funding a New Business.
Business Talk Newsletter is conducting a four part interview with N. Michael Miller. Mr. Miller is a business owner, venture capitalist and published author. Mr. Miller can be contacted at StartYourBusinessHelp.com which advises new business owners with consulting, business plan preparation and other services.
This interview will consist of four parts:
(1) Start a new business now in this economy and the outlook for starting a business in early 2011 (in the Oct 14th Edition),
(2) Funding the startup of a new business (In This Edition),
(3) Managing a new business and how to do it right (coming on Oct 28th), and
(4) Understanding how to keep a new business financially healthy (coming on Nov 4th).
Here is Part Two of our Interview with N. Michael Miller.
BTN: Last time we talked about starting a business in this economy. Now we are going to talk about funding the business that is being started. In our first interview, you stated that a business has to be well funded from the very beginning. Explain to our readers what you mean by this statement.
NMM: When I am working with an entrepreneur that has never started a business, I consistently find that their estimates for startup and operational capital is about half of what it actually will be in reality. Without some counsel, these new business owners would have started the business under-capitalized. This is a death sentence for the business.
When I say that a new business has to be well funded from the beginning, I mean that the new business owner must have in the bank all of the funds necessary for the startup and operations until the business starts producing a profit. Those funds must be in that bank account from Day One.
There is nothing that will kill the enthusiasm of starting a new business quicker than money problems. It completely diverts the business owners’ attention from running and growing the company to trying to keep the business alive. Once a business has gone on life support and looking for more money, it rarely survives.
BTN: What are new business owners experiencing when they are looking for startup money?
NMM: As in any economy, some new business owners are finding the funding they need for their business and others are not. This reason some business owners are not getting the funding they need is not because of the economy, but a result of poor business planning on their part.
BTN: What do you mean?
NMM: We talked last week about the two stages of business planning. One of those stages was the preparation of the business plan. When a business plan is used for funding, there are components of that business plan that lenders are looking for that must be constructed in a certain way. Most people that do a business plan and then use the plan for funding are just not presenting the plan properly and, as a result, the lender is rejecting the venture.
BTN: What lending options are available for new business owners?
NMM: There are a lot of options. There are commercial bank loans, government programs to guarantee the commercial bank loans, private equity partners and investors, and venture capital funding for the right business in the right industry.
We have unsecured loans available from $25,000 to $150,000. We also have the lenders and equity partner options for funding millions of dollars for the right business projects.
Most business consulting professionals will have some relationship with lending or funding sources developed to some extent.
BTN: Tell our readers how to construct the business plan in order to enhance their chances of getting money for the startup business.
NMM: When I look to fund a business and I am reviewing the business plan, I don’t want to read a 50 page document. I don’t have time and neither do lenders. New business owners do not realize that lenders want a summary of the business venture and the rest of the business plan is supporting documentation.
I look for a summary to qualify:
(1) That the business is defined and focused. I want to see a specific and detailed business concept that quickly defines and summarizes the product and/or service offered.
(2) That there is a market for the business. I want to see a specific Target Market and the demographics backing up the numbers of the existing customer base in the marketing area.
(3) That successful operation and management of the business is not in doubt. I know that no matter how much money I give to a bad businessman, they will run the business into the ground. I want to see that the business owner has the experience and knowledge in the industry, managing a business, competent staff, etc to effectively run the operation. This is a biggie!
(4) How much money is needed and for what. Here I want a clear and concise explanation of how much money is needed, what is the basis for coming to that dollar amount and how the funds will be used. Most of the time I see that new business owners underestimate the startup costs and the operational expenses while being too optimistic about the time to profitability and net revenue figures. This attempt to make the numbers more attractive to an investor only serves to demonstrate the inability of the business owner to effectively forecast and manage. This is a real turn off for funders as it creates doubt that the business owner understands the steps and mechanics of a startup business.
(5) Evidence of payback ability and risk. Creditworthiness of a client or the grantor is as critical as the ability for the business to generate cash flow to repay loans.
And I want this information in one or two pages.
BTN: So if a person does the planning right, will they get funding?
NMM: They will certainly enhance their prospects of getting the funding. Obviously, even if they do everything right, this is will not guarantee funding. However, doing it wrong guarantees they will not get funding.
They have to remember that they are competing for funding dollars with other startup businesses. The best opportunity for the lender gets the funding.
BTN: Are banks lending money for business startups?
NMM: Yes, banks are lending and SBA has had a 21% increase this year on loans that are guaranteed. Angel investors are organizing area and statewide groups or networks. Venture Capitalists have increased their funding, although certain industry sectors have the edge over others.
The new business owner must align their particular venture with the right funding mechanism. If a person has good credit, good business history and some capital of their own, bank funding is certainly an option. If that business owner is short on capital or has some credit problems, then they must think in terms of a partner. Most of those partners are going to be equity partners. That means that someone puts up the money and owns a piece of the business. An equity partner may or may not be involved in the day to day business operations.
BTN: How does someone starting a new business know how to get the funding they need?
NMM: Experienced business owners know. If they need help with a particular project, they know that a business consultant is the person to turn to for help. New business owners often see that help is available, but reject that assistance.
BTN: Why would someone reject help in funding a business?
NMM: For the most part, help is not free. Inexperienced new business owners are usually working with a limited amount of capital and would rather put the money to use elsewhere. I often see a person approach me for assistance, but decide not proceed when they learn the cost. By the time that person has blown through the available money they have, there is nothing left to hire the help they need, so they have to stop or turn to some of the free assistance that is available.
BTN: What kind of free or low cost help is available for new business owners?
NMM: There are a lot of resources out there for the new business owner. SCORE (Service Corps of Retired Executives) is one option. SCORE provides free online and face-to-face business counseling, mentoring, training, business, and advice for small businesses just starting out. Colleges offer assistance through the business development programs. There are many state and local agencies that provide help, assistance, trading or education.
BTN: So the new business owner has options for getting help. You are a paid consultant so I suppose you would say that paid consultants are better than the free options.
NMM: Not necessarily. The assistance that is no or low cost has a definite use. It is extremely valuable to those that have no where else to turn or those that are not in a big hurry to get the business started.
The paid consultant option has several advantages with the cost being only drawback. The advantages include a sense of urgency, total commitment and unique application of solutions. I am not suggesting that free assistance tends to use a cookie cutter approach to business problems, but there is a limit to how in-depth and involved free assistance can go.
BTN: That makes sense. So let’s talk about what a new business owner can do on his/her own. How can they do things right and get the funding they need?
NMM: When that person is sitting down preparing what to show and say to a lender, they need to put themselves in the lender’s shoes. This is hard to do because they must step back and look at their own project with a critical eye. Most new business owners see nothing or very little wrong with their own business deal, ideas and management style. They have thought and thought about their business venture until they are convinced that they have figured everything out.
So somehow, the new business owner must look at the venture in the most negative and pessimistic ways possible. They need to see everyway that this business venture can fail and plan for all of the challenges. By doing this, the new business owner will be ready to discuss with the lender not only the positive things about the venture, but the risks, the problems and the challenges. They will be able to confront the objections and concerns with knowledge, solutions and a plan.
BTN: That is a big task for the new business owners to do on their own.
NMM: I agree. That is why it is important for the new business owner to seek out someone that they can trust that will assist them. I think that it comes back to that saying “If you are the smartest person on the team, then your team is in trouble”. A new business owner that has never started or operated a business, absolutely needs someone to assist and guide them though the process.
BTN: Now let’s say that a business owner has gotten the planning process done, the business plan is ready and they are ready to look for funding. Where do they look and how do they approach the lender?
NMM: If the business owner can qualify for a bank loan, then they just have to talk to their banker. The banker will walk them through the process.
If the project is not bankable, then they have to consider some options.
If someone called me on the phone and asked me “How do I get funded?”, I would ask them how much capital do they need, how much do they have to put into the deal and how creditworthy are they. The answers would tell me if they would be able to approach a venture capital group or an angel investor. The only other route would be to bring in a partner. The partner would either be a limited partner with an exit strategy, a permanent equity partner or a grantor.
BTN: No need to go into the bankable projects; let’s concentrate on helping our readers that need to go another route to funding their business. Exactly what is a venture capital group or an angel investor?
NMM: Venture capital funding is provided first as seed money to early-stage, high-potential, growth companies. VC funding is provided in growth funding rounds in hopes of generating a return on investment through an event such as an IPO or trade sale of the company. This amounts to an investment firm giving money to a growing company. The growing company will then use this money to grow, promote and develop products, do research, build infrastructure etc. The investment firm is the venture capital firm and the money that it gives is called venture capital. The venture capital firm makes a return on its investment by owning a stake in the business it invests in. The businesses that a venture capital firm will invest in usually have a novel technology or business model. Venture capital investments are generally made in cash in exchange for shares in the invested company. Usually, venture capital firms identify and back companies in high technology industries, such as biotechnology and Information Technology.
Venture capital typically comes from institutional investors and high net worth individuals. It is often pooled together by dedicated investment firms. Venture capital firms typically comprise small teams with technology backgrounds or those with business training or deep industry experience.
An angel investor or angel is an affluent individual who provides capital for a business start-up. This is usually done in exchange for convertible debt or ownership equity in the business. A small but increasing number of angel investors organize themselves into angel groups, or angel networks, to share research and pool their investment capital.
BTN: How does a new business owner approach a venture capital group or an angel investor?
NMM: That is a big question. In fact I wrote an entire book on it called Stepping Your Way Through Venture Capital Funding. It is very difficult for a new business owner to do this on their own. It takes a lot of research time to find out what venture groups are lending money to startups in your industry and area. Then there are the parameters that VC groups require for submissions. You shouldn’t be surprised if the VC group wants no contact with a business owner until the business plan has been submitted and reviewed. It is more of a “we’ll call you, don’t call us” attitude.
Angel investment groups tend to be more localized in certain areas and operate in a broader arena of business funding. You just have spend time seeking out these groups or networks, finding out their investment requirements and tailoring your deal to match their requirements.
Again, professional assistance will enhance your ability and success in working with these groups.
BTN: Tell our readers more about the partner options.
NMM: You can compare it to a real estate developer that partners with an investor to build homes. The entrepreneur and the investor can be a match made in heaven. The critical factor to these relationships working out is both parties go into the deal with their eyes open and both feel that they have been adequately rewarded when it comes time to cash out.
Here are key ingredients to making deals like these work: (1) there has to be a clear understanding and relationship between the operating and investing partners, (2) there must be definable goals and a way to measure success, and (3) a well defined compensation plan that will reward the sweat equity of the business owner while delivering the anticipated return on investment to the investor.
BTN: Here is problem that some of readers might have; they already have a loan for the business outstanding, but realize that they need more capital. Can they borrow more?
NMM: Sure. There are a lot of ways to increase their borrowing ability without violating the terms of the company’s bank loan. First, they should go their banker and explain that they underestimated the company’s revenue potential. They can then ask the bank to increase the line of credit by the presentation of a solid and revised business plan. If the banker refuses, then go another bank and ask if that bank would be willing to refinance the existing loan and replace it with a loan for the higher amount that is needed.
A person can also borrow against an IRA, 401(k) or other qualified retirement plans. Credit cards can be another option, but I strongly discourage this because of potentially high interest rates.
Another option is to raise money by selling equity in the business. This is getting back to the equity partner situation we discussed earlier. The fact that the business already has an outstanding bank loan is attractive to a potential equity partner from a shared risk standpoint.
BTN: When you are working with a client, what are your goals for their business from a financial standpoint?
NMM: I am not a fan of debt of any kind. I operate businesses on a cash basis and do not borrow money unless it is an emergency. I realize that a startup rarely can be done debt free. But I work with clients to get rid of that debt as soon as reasonably possible. This frees up borrowing power for the important plans of growth of the business.
To summarize, starting a new business is exciting. But sooner or later, the reality sets in when it comes to dollars, investing and risk. But the new business owner does not have to go through this alone. I encourage them to find someone to assist them, a professional business consultant. While it might seem that they are spending more for the assistance, a good business consultant will save them thousands of dollars in waste and bad planning.
Be sure to watch for the October 28th issue of Business Talk Newsletter when our interview with Mr. Miller will continue with an in-depth discussion about managing a new business and doing it right.
You can contact Mr. Miller by calling Toll Free 877-211-6577 or email michael@StartYourBusinessHelp.com.
You can also view more information about Mr. Miller and the Company at www.StartYourBusinessHelp.com.
To get a copy of the 1st interview with Mr. Miller, call or email.