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The Path to Launching A Successful Startup
By Chris Benjamin, Rogue CFO (www.roguecfo.com)
The Path
1. Vision
You are the visionary. You have an amazing idea, and just know it will be a huge success. Your head can't keep up with the ideas flowing through your head. Online research, building a website, marketing, how much to charge. The list goes on. So much to do, and none of it can be done fast enough.
As entrepreneurs, we've all been there. Nothing in life could be more exciting. Now is the time to take this seed idea and provide all of the ingredients to make it grow into a sustainable venture that exceeds your vision.
I am not one for quotes, although I always take this one to heart:
"Do not worry if you have built your castles in the air. They are where they should be. Now put the foundations under them." - Henry David Thoreau
Congratulations, you are among the very elite who have the gusto to turn visions into reality.
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2. Plan
Planning is everything. You need a framework as a foundation for your venture. It may all be in your head, but relaying your vision to another person is best done through a concise plan. It also forces you to answer the tough questions that maybe you've avoided. How much money do you need to launch? Who is your market, and where are they located? What is your value proposition? Convince everyone that you have an amazing idea.
Business Plans
Conceptualizing is best done through the traditional Business Plan. While there are many business plan templates and software packages available, there is one problem. They are very "fill in the blank", and it shows. No matter how much you smooth out the rough edges, a seasoned pro will take one look at your plan and know it was done through Q&A.
Why is this bad? It's too easy to avoid the questions you don't want to answer, and no one business plan should look like another. Focus on what the key points are. If the management team is what will make this ship sail, then we need to make sure that their experience is emphasized. If marketing is the key play in why this will take off, let's explore that and make sure the marketing plan is solid & thorough.
Whether you have a business plan already written and need advice, or you have nothing on paper and want to put together a plan that will showcase your idea, I can help.
Financial Projections
A requirement of any plan is a demonstration that the venture will make money. There are standard financial forecasts any plan should include, as well other financial data that not everyone else will but adds a lot of value to the reader. I am a CFO by trade, and financial projections are one of my strongest skill sets.
3. Launch
Now that the plan is set, the vision is crystal clear, and team is ready, it's time to launch. Launching can take many forms, but is defined as taking your idea to the public, and creating a mechanism for someone to purchase your good or service.
Careful management of your resources and being dynamic are key. You want to be able to grow according to the plan, and want to be fluid enough to change quickly to your results after you launch. The business plan is a guide, but not a manual. Recognizing what is working and what is not, and making the appropriate changes will result in reaching your next level.
How can I help you here? I've been in several startup environments, and there is no set operational game plan to follow. It's a very fun, energetic, and exciting time. Use my experience to help guide your decision making, so that what your business plan dictates becomes a reality.
4. Grow
You've launched your venture, and it's becoming an instant success. Now is time to manage the company so it grows in the direction you envisioned, and there are several key factors to accomplishing this task. I can help guide you in several areas, although my expertise through education & experience would be to fill the roll of contract CFO (Chief Financial Officer).
~ CFO
What does a CFO do for your company? A lot. A short list follows of potential areas I can add value as we transition into the day to day operation & growth of the company.
All Accounting - journal entries, reconciliations, meeting deadlines, tracking expenses & revenue
Financial Reporting - Profit & Loss, Balance Sheet, Cash Flow Statements, and much more
Business Intelligence - intelligent interpretation of how you are performing
Budget & Forecasting - using the drivers in your industry, develop realistic forecasts & budgets
Cash management - especially important for a start up or small business
Board of Director Reporting - if you have investors, they will want status updates & regular meetings
Guidance, Strategy & Advice Consulting. Any way I can add value I will.
5. Choose
Now is your time to choose. You can continue to grow the company, and let your vision become your life's ambition. You've succeeded and want to evolve to a new higher goal. In some senses, you begin again with the new Vision and go through the Path again.
Others may have other ventures they want to pursue. They accomplished their goal, and created a sustainable, profitable, growing company. It's now time to be rewarded for your hard work, and use the value you've created to go in another direction.
Often referred to as the Exit Strategy, if you had capital investors, now is the time to let them be rewarded as well for their investment and belief in what you have accomplished.
Determining the exact exit strategy will involve a combination of several factors.
What is best for the company
What are your goals (stay & operate the business, become a passive investor, or completely liquidate)
What are the arrangements with the capital investors
What are the future plans for the company
Depending on how the agreement was structured, there are in general only a few exit strategies.
Merger or Acquistion with/by another company (M&A)
Go Public on a stock market
Liquidate investors and continue to operate the company
Within each of these is a myriad of possibilities. We will work together to structure an exit strategy that is in everyone's best interest.
Primer on Raising Capital
Two questions I hear often: how much money should I try and raise and how easy will it be. There's no set answer to either, and it depends on a myriad of factors.
How much money should I try and raise?
It is a difficult question indeed. You are the brains behind the operation, and have images of where you are going to take your new venture. It all starts to add up though. Hiring good people, renting a space, keeping your site search engine optimized, marketing quickly you have some hurdles to tackle, and the number one issue is money.
A good starting point is your business plan & financial forecast. If you haven t done these, stop right here. You ve jumped a few steps, and worrying about funding isn t a high priority yet. If you have these done, become very familiar with the numbers.
Things to consider are:
A few examples:
Company A is a manufacturing startup. They will sell online, and not have a storefront. They plan to rent a warehouse and invest heavily in capital equipment. They need money up front, because without the warehouse & equipment, there s nothing to sell. It is an all or nothing situation.
Company A needs money, and for a specific purpose. Besides funding the capital, they need to think about the ramp up transition. Covering operational costs for a period of time until the revenues of the company can sustain the cash flow.
Company B is a dot.com service company. They run a resource online, and revenues come from ad revenue & affiliate revenue. They have a site up, receive a small amount of traffic, and are steadily growing. They have received lots of positive feedback, but need money to really market the company properly.
Company B is already operational, but needs the capital injection to get them to the next level. This one is a bit tougher. What amount is the right amount? Coming up with a solid list of the operational expenses and where the money will be spent is important. It s a bit less tangible than Company A. You could spend $250K in Marketing, or $1 Million. How do you decide? It s your company, come up with a justifiable plan.
How easy will it be?
Raising capital is not a scientific process. Nor is it the same process for all levels of funding. The general categories & where you should look are:
Under $100K
$100K - $1 million
$1 million +
All of these warrant a lengthy discussion about the pros & cons, and if they are right for your specific situation. Just know there are options, ones beyond this list as well. Determining what level you are at, and then how to go about raising the funding is a process.
So how difficult is the process? Well, depends on your definition. Certainly no one will be coming to you handing you money. Time is your friend, and the more money you want, the longer it will take. It makes sense: if you lent a friend a $1, you d just do it. But to lend them $1,000, you d want to know they can pay you back.
If you are in the Under $100K category, it should be a somewhat simple process. A home equity loan takes about a week to get, as does borrowing against your 401K. Credit cards are of course not recommended, but many an entrepreneur have gone that route and funded their startup.
When you get into investors, they will be taking a position in your company. So at this point you are giving up a bit of ownership, but for a capital injection. This process can span a month to several, and includes:
So how easy is all this? Well, it s more a test of patience and being able to take rejection than anything. No one will ever be as passionate about your new company as you, so when someone says no thank you , it can be a tough blow. Finding the right investor is key, and from there it becomes a natural flow of moving through the due diligence.
In summary, decide how much funding you really need, within that range decide what method you want to look for capital, and begin the hunt. Keep your chin up, preserver, and if your idea is great, the money will be attracted to you once people know about you.
Why You Don't Need A Full Time CFO
It seems like a natural progression. The founders have taken the company to the point where it s really time to get serious about the financial side of the house. Thoughts of going public are starting to brew. It s time to start managing the capital in place more effectively, and prepare for a pre-IPO round of funding. The obvious next step: hire a controller. Well, that's typically the route startups go, but it s not in your best interest.
It seems like a good idea, hire a full time CFO. Why would you NOT want a full time, devoted professional to guide your growing venture? Well, there are good reasons.
You need 20 hours, not 40+ per week of time
The biggest fallacy I see in startups was that everyone has to work 80 hour weeks. The reality is some people thrive on that environment, while others quickly lose productivity. Not only that, in the first few years of operation, there is only so much a controller can accomplish. Once the budget & forecast are set, the reporting standardized, the audit completed, the accounting system up graded, there isn t that much left to do other than routine accounting. The better mix of staff would be a part time bookkeeper who can increase to full time, and a part time controller who can increase to full time. Taking the job and splitting it into 2 part time jobs is a terrific strategy. Otherwise the controller job does become an 80 hour job, because they are doing routine accounting, and then doing the entire CFO work. A sure fire way to make someone not interested in their position.
By using a consultant, you gain flexibility. If you need 80 hours in one week of CFO time for a special project, you got it. The person isn t burdened with routine accounting. If the next week you need 10 hours, then you get 10 hours. There is also the added benefit that hourly paid professionals typically work harder. They are there to do a job, and they are being paid to create specific deliverables.
Cost Savings
Startup s have the tightest purse strings of any venture. Typically limited resources are available, with many demands for those resources. Trying to spread your limited capital to all areas without ignoring any one is a challenge when trying to make the wisest decisions, in a changing unknown environment.
Payroll with inevitably be your largest ongoing expense. Adding head count before the right time can be a large burden. Hiring just the right person costs money in itself. The job posting, the interviews, the investment in computer equipment, desks, and time of other employees to train alone can add up quick. One startup estimated it cost approximately $8,000 to add a new employee.
From a mathematical perspective, compare the 2 situations:
A full time CFO/Controller would make at a minimum $100,000 per year. Benefits and payroll taxes typically end up being 20-25% of the salary, ending with a number somewhere around $120,000 per year. Also remember this is the lowest potential cost, you won t find many quality CFO s for $100K a year.
Instead if you used a $75/hour consultant 20 hours a week on average the first year, that translates into 1,000 hours and $75,000 for the year. The company saves a substantial amount of money, enough to hire a full time bookkeeper if need be, and have the contract CFO focus exclusively on important issues.
Limited Candidates with the Experience Needed for a Full Time Position
Startup companies have different needs than a public company. Startups thrive on creative, energetic people with fresh ideas. Finding a seasoned pro that still has the entrepreneurial zest is a difficult proposition. While someone with 20 years of experience brings an unbeatable background, they tend to have difficulty adapting to the startup atmosphere. Creating 5 year plans, waterfall reports, adjusting quickly to strategy change aren t engrained in someone with big corporate America thinking. 5 years from now is when you need that person.
Hiring a consultant, you are hiring a person who does this for a career. Working with startup companies is their passion, and they have exposure to several. A controller/CFO in a startup is focused on the numbers and how to make tweaks to operations to help improve. Working with the board of directors who is typically made up of venture capitalists, whose money you are spending by the day, is a different skill than a board of directors meeting for a public company.
To conclude, is this the case for every company? Of course not. At the same time, it should not be assumed that every company needs to hire on full time staff and then work them senseless with tasks that are better handled by an administrative person, solely for the purpose of getting your 40+ hours out of them. Using an outside contractor until it makes sense to bring on full time staff is a very effective method of managing the largest expense to a company, bringing on experience you most likely wouldn t find in a more expensive full time person.
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.
Financial Projections - Bring out the crystal ball.
Financial projections, the backbone of any new venture. When all is said and done, the business plan polished, the website up, the office space rented, what most investors and outsiders will focus on is the numbers. Will the company make money? Are the projections realistic? When does it break even?
So how do you put together a reasonable, yet conservative, yet attainable, yet attractive 5 year financial forecast? Seems like an impossible feat to balance all the requirements. With reasonable assumptions, a straight forward model that captures all of the moving pieces of the company, and easy to change inputs that flow through the model, you will be well on your way to demonstrating the potential of your venture.
Assumptions - where it all happens
The use of an assumptions tab, one central location for all inputs into the model, will make your model dynamic, easy to change, professional, and understandable. Someone can look at one page, see all the inputs and how they relate to the final numbers, and quickly decide if everything looks reasonable.
When the assumptions are built properly, you will have put thought into every line on the P&L and Balance Sheet, as well as have some sense as to any investment funding needed, what amount of the equity you are willing to sacrafice, how long it would last, and what the future funding requirements will be. All going to plan of course.
Common Modeling Mistakes
Below is a list of things I see time and again in others models. Not that everyone should be an Excel expert, but avoiding these pitfalls will add to the credibility of your model, and ease of use.
Embedding data into formulas
I've seen lots of models built by other financial types as well as entrepreeneurs. The biggest mistake that is quickly apparent is embedding data into formulas. If revenue will be $20 per unit, don't hardcode $20 into each months revenue formula. Instead an input on an Assumptions tab would be Revenue Per Unit: $20, and the sales calculations all refer to this cell. Down the road when you realize you want to charge $25 per unit, it's a lot easier to change 1 cell vs. 12 months X 5 years. Also hard coding numbers into formulas creates an inevitable error down the road when some formula doesn't get updated like it should.
Projecting over a million in Revenues Year 1
I've yet to see a startup hit over $1 million in revenues in its first year. Investors have been around the block, and the further north of $1 million your projections go for year one, the less credible they become.
The financials all have to tie together in the end
Accounting 101: Debits = Credits. Balance sheets have to balance, cash flow statements have to reflect the same cash balances that are on the balance sheet, net income needs to match the equity section, etc. A properly built model will link all financial reports together in a way that when a change is made, all financial reports reflect the change and stay in balance relative to the others.
For example, if you change an expected investment of $100,000 to $200,000, not only does the equity section change on the balance sheet, your cash position as well as your cash flow statement would also.
Presentation goes a long way
Excel is a powerful tool, make use of all the formating capabilities. It is difficult to follow spreadsheets that have inconsistent formatting tab to tab, use several colored cells, several fonts, or worse no distinguising headings. When Revenue, COGS, Operating Expenses and all the subtotals are one long list with no bolding, offsetting, subtotal lines, etc, it looks unprofessional and difficult to really grasp what the results are.
Top 10 Mistakes When Dealing with Venture Capitalists
I've talked with several Venture Capitalists in my day, and have a pretty good connection to a few. That doesn't mean they'll write a check for a company I represent any easier, but it does mean I can be a bit more laid back and communicate with them. I wanted more information on what mistakes startups constantly make, and avoiding them would at least put them ahead of the pack when approaching VC's.
1. Making ridiculous claims
Ridiculous is in the eye of the beholder, but take a step back and do your best. Do you really think you are the next Google and are going to beat the pants off of them in your first year? Making statements like the above (and I've heard them time and time again from company's) immediately labels you as not grounded in reality and probably with a flawed business model.
2. Ask the VC to sign a NDA
VC's aren't in the business of stealing your ideas and passing them onto other companys to execute. A VC firm easily see 500+ business plans a year, and it would be a full time job facilitating the NDA process. Asking them to sign one is an amateur move, everyones idea is unique and VC's aren't going to take them.
3. Pitching To VC's who don't invest in your sector
People don't realize but VC's are really just investment managers. They aren't investing their money necessarily, often times its a fund created by the VC which others invest in, with set parameters. One of the parameters will be the industries a VC will invest in. Don't pitch a VC who only does biotech on your new service firm, they won't listen.
4. Sending all your material in one blast
Working with a VC will not just be a transaction, you are creating a relationship. Sell them on your company. Sending them a business plan, financial forecast, presentation, executive summary, margin reports, industry reports, etc. all at once will overwhelm them and probably go in the trash.
5. Playing hard to get
If you act as if other VC's are interested in you and it's only a matter of time before someone else picks you up, so this current VC better act fast, you probably just bought your way out the door. This isn't a late night commercial, be honest and don't trump up the demand for your company. VC's hold the power here, it's your job to impress them.
6. Management is 1 person
It's going to be difficult to run a company with 1 person. Sure, your idea might be great and you don't want to let others in on it, but that's more of a issue to a VC than a positive. Saying that you can't afford to pay others yet won't necessarily work either, since if your company is as great as you say, others should surely see this and work for equity. Success attracts success, and when you are running solo, it speaks volumes about your idea and yourself if you can't get others to work with you.
7. Sending "Dear Sir or Madam" emails
Immediately this can be read as "I'm sending this email to a laundry list of VC''s hoping for a few bites". If you really are interested in a VC, approach them directly, not through a mass email.
8. Mail a hard copy of a business plan
If you are a startup, especially a dot.com, and send a hard copy business plan, you've wasted your time and postage. Be progressive, and follow the VC's rules for submission, you can find them on their sites. If not, email an introduction and ask what their process is. Chances are it won't say "Mail your Business Plan to ....".
9. Focus primarily on the numbers
Yes it is an investment for the VC and you want to show that they will earn a substantial return for their investment. Realize though the process is a bit more involved than 1. Impress VC 2. Get check. The VC who does invest in your company will be working with you, will own a decent amount of equity, and will be involved. They look at management and marketing as much as the money.
10. Tell the VC they are only getting 5% of the company at most
The correct way to go about determining what you would ideally give up for an investment is to create a valuation for your business, and compare what investment you are seeking to the valuation. If your valuation is $5million and you want $1million investment, that isn't exactly 5%. Valuation will be something you and the VC will definitely negotiate, as they want a low of a valuation as possible and you as high as possible. If both parties are grounded in reality though, the 2 should not be too far off, and you can settle on a fair amount, and what amount of equity that means for their investment.
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.
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.
Globalization & The Entrepreneur
Why US based businesses need to open their eyes.
What's Going on In The World
One exciting aspect of the large web 3.0 push is the access entrepreneurs have worldwide to all the tools available online.
An interesting phenomenon though is that entrepreneurs outside of the United States have embraced the ability to expand globally much more than US based startups. This isn't to say no entrepreneurs have caught on to the globalization wave, although I think many are missing opportunities they could be capitalizing on worldwide.
I think we've forgotten the world when planning.
Thinking of the hundreds of startups I've talked with in the last year, only a handful come to mind as having a global business model. Certainly some models don't need a global perspective. A consulting firm which relies on face to face meetings is okay with a local growth strategy. Conversely, the social network looking to connect the local consumer with local businesses certainly would want to focus on proving their model in communities they are familiar with. But why not consider expanding to Canada down the road? 3 large cities are easily accessible, no language barriers, minimal cultural differences, and most important a market otherwise deprived of the overload and litany of dot com's we experience in the U.S.
Why not take the consumer luxury good auction site beyond U.S. soil? Why not appeal to aspiring writers in Africa? Certainly people in Australia could utilize an online education portal. It's a simple question of what is limiting your business model, and if there are no real barriers, would going global make sense? If not now, what about I'm a few years once you prove your business?
Maybe we are just greedy?
As well, I'm learning that many proven business models in the U.S. haven't made their way globally. This is even more mind boggling. Now we are not talking about a startup planning ahead for growth of their yet to be proven business, these are companies generating revenue, with 100% tunnel vision on a limited, albeit large U.S. market. As an example, one startup out of England is launching a much improved upon version of mint.com very soon. Features, user interface, capabilities and most important a value proposition reaching well beyond Mint's are all part of this up and coming companies model who I've been fortunate to work with. The obvious question to me was "why didn't a company like Mint.com plan ahead to tackle the global market? And why was this company out if the UK able to build something which puts a successful company to shame?" I don't claim that Mint.com is doing a bad job, or claim they didn't explore options. To a degree this also related to my theory that being the first mover isn't always best. Without a Mint.com would the UK company have had anything to springboard from and improve on?
My point instead is that there are plenty of greatly successful U.S. Companies go have somehow forgotten the rest of the world. At least consider your own continent - Canada and Mexico are very receptive to emerging businesses, and would welcome improved upon business models.
I'm proud to say only 1 startup I am CFO is U.S. based. Canada, India and Costa Rica are the home countries of 3 amazing companies I work with, not to mention the startups I've worked with on projects such as financial forecasts, business plans, investor presentations and cash forecasting. Japan, England, South Africa, China and Australia have all produced top notch entrepreneurs with business models not yet seen in the U.S.
There's money elsewhere than Silicon Valley
Along with globalization of the startup community, there is a likewise expansion of investor capital beyond Silicon Valley. As an example, the Canadian startup I am CFO for (a first year multimillion dollar revenue startup) is actually backed by an Indian investment firm. The Costa Rica firm has investors from Europe, including England and Germany. Another startup I've worked some with is funded out of Dubai. When sending out those executive summaries, expand your search worldwide and tap into investor networks anxious to find the best of the best.
In summary, set yourself apart and think, act and serve the world. You'll be amazed what it means for your startup.
As always, feel free to contact me, Chris Benjamin Rogue CFO with any questions at the below link.
