June 14th, 2010 by Karl

An article in the June 13^th Denver Post described how the lack of seed capital was killing the biotech industry in Colorado.  Biotech businesses already in motion or on the drawing board have not been able to find needed capital and are being forced to shut down.  The article did not have to limit itself to biotech – all startup businesses are facing the same shortage of seed capital.  However, biotech requires larger amounts of capital and a longer time period to get started and therefore is facing an even bleaker outlook.

Those individuals who invest and the brokers that represent them have informed me that there is a pent up desire to invest, however now just seems like the wrong time.  This uncertainty is generated by a variety of factors – none of which can be overcome with a slick prospectus or a great sales pitch.

There is no apparent end to the current ‘flat’ economy in sight.  With talk of a ‘double dip’ in the current recession remaining strong, investors simply do not see any reason to invest now.  Waiting is the rational, logical best strategy.

The current Congress and Presidential Administration seems blind to this problem.  I used to entertain thoughts of ways of gaining the attention of my local representatives and senators and obtaining their support of startup businesses, but have abandoned this effort (short of casting my ballot in upcoming elections).

Short of giving up, then what is the best strategy for obtaining needed capital?

I will share my ideas on an ‘eyes wide open’ approach to raising capital in these tough times here in this blog.  I will look at where investments are still being made, investor motivations and things that just will not work.

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June 6th, 2010 by Karl

I continue to be amazed by the number of new business wannabe’s that have no idea what it takes to run their business.  They jump beyond the launch and start assuming an ongoing business with a volume of loyal customers and a portfolio of products.  This seems to be a particular fault of Internet companies that wish to sell banner advertising.

I recommend as a first step in any business planning that a business model be constructed that represents a description of a single transaction that generates revenue: if you sell a product or service – what is every step necessary to achieve this first milestone?  If you come back with a model where you need a staff of hundreds, a new building and equipment a sophisticated custom CRM program, you are over or under thinking the challenge.

A first sale requires creating something and presenting it to a customer in a manner where the value is recognized and a purchase is completed.  At this point in building your business model, you do not want to include any unnecessary steps.  It must be as simple as possible.  A value must be assigned to each factor in the model.  Most times the value cannot be precisely determined and represents a ‘best guess’ assumption based upon the knowledge and experience of the management team.

With a model for a single transaction, you can then work on development of a multi-transaction model.  This requires scaling the business.  As the number of transactions increases, certain costs (fixed) will be spread out over all transactions reducing the cost per transaction.  Certain costs (variable) will incurred each time a transaction occurs and will climb with the number of transactions.

Using a spreadsheet, it is possible to experiment with different volumes of transactions to see what factors play the most important role as the company grows up.  Recognizing and understanding these factors is key to building the best strategy.  Specific targets include breaking even and achieving a target ROI to attract investors.

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June 1st, 2010 by Karl

After flat lining for nearly two years, there seems to be a pulse in the capital industry with regard to new businesses.  The pulse remains weak, reflecting general concerns about the U.S. and world economies.  More bad news (as if we have not had enough), may send investors back to the sidelines to wait for better times.

 I have seen several new early stage capital funds established (money in hand) and hopeful (looking for money) announced recently.  These funds state that they are willing to invest in pre-revenue businesses – the area hardest hit by the current economic crisis.

 I have noticed a common element in these funds is to declare that successful experienced startup business veterans manage them.  They declare that they will be heavy hands on involvement in the daily management of each funded business, bringing their experience to bear on operations.  Although this approach is not new, I read into these statements a claim to potential fund investors that this approach represents a competitive advantage over more classical funds.  In many cases, partners of venture funds are perceived as inexperienced and unwilling to get their hands dirty.  They are willing to make introductions to industry contacts, but not spend much time inside of a funded business.  If a business within the fund’s portfolio gets into trouble, the fund forces out the original ownership and brings in someone new rather than diving in themselves.

 I do not know if these claims of heavier operational involvement are true.  However, it has been my experience that greater involvement is better when backed by startup experience.  Decisions are made quicker and with greater agility to adapt and adjust a new business concept to better fit the target market.

 The hands on approach will require a greater commitment of time by the management of each fund.  Unfortunately, this means that funds will tend towards doing fewer investments, creating another obstacle to obtaining funding.  In addition, if the first one or two businesses within the fund’s portfolio of investments get into trouble, it will be more difficult for a fund to take the time to look at new deals.

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April 22nd, 2010 by Karl

I am part of a team that officially launched International Wellness Resorts today.  This startup business represents a unique combination of short and long term revenue streams working in a complementary fashion: medical tourism, hospitality and land development with the theme of ultimate personal wellness.

 It is planned to build and operate a number of wellness centers at resort locations around the world that will provide common and proprietary healthcare treatments.  The treatments will be offered in combination with travel within the new industry of medical tourism.

 Medical tourism (also called medical travel, health tourism or global healthcare) is a term initially coined by travel agencies and the mass media to describe the rapidly-growing practice of traveling across international borders to obtain health care.  A forecast by Deloitte Consulting projected medical tourism originating in the U.S. and Canada could jump by a factor of ten over the next decade. The report estimated 1.6 million North Americans will travel overseas for health care in 2010, spending billions of dollars.  Steve Forbes stated “Medical tourism is a fast growing phenomenon which will be a $40 Billion industry [worldwide] in 2010.”

 Initially, we will participate in medical tourism through the provision of a proprietary treatment for relief from migraine headache pain at a newly constructed temporary medical facility in the resort destination of Placencia, Belize.  We will secure necessary permits from the government of Belize; recruit doctors to participate and conduct treatments with a minimally invasive surgical procedure.  Patients will be provided resort accommodations during their stay in Belize.  This stage of operations will continue until such time as we can demonstrate positive cash flow. 

 Placencia, Belize has been selected as the site of the initial wellness center because of its growing popularity as a Caribbean tourism destination by United States and Canadian residents.  A former British colony, citizens speak English and the country accepts the U.S. dollar as a currency.

 Additional proprietary healthcare treatments will be secured or licensed to differentiate our wellness centers from all other competitors.  A variety of wellness, cosmetic and other spa products and services will also be offered.  Our services will be directly marketed and promoted through established tourism businesses within the United States, Canada, Europe and Belize. 

 Upon successfully attaining full scale operations in Belize, we plan to replicate its business model at numerous locations across the globe to serve large population centers.  These locations will match Belize in maintaining high health standards without overly burdensome regulations.

 If you would like to know more, contact me.

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April 22nd, 2010 by Karl

From your perspective of a new business owner, your business may appear unique and different from all other businesses.  However, this is not true from the perspective of the investor.

 When an investor has a couple of hundred business plans sitting on their desk or computer, they all start looking alike.  This is particularly true when the business plans are generated by software packages and the visual presentations all use static PowerPoint slides.  They all become a blur from the sheer volume of information.

 So, what can you do to make yourself look different?

 First, talk about the investor exit and how the success of your business will help the investor achieve their goals (this means that you need to treat the investor as a customer and that you have completed an analysis of their investment goals and are prepared to speak to why they should be talking to you – not about you).  Treat your presentation as an interview of the investor to determine if they are right for you.

 Second, think about how to convey the reason why your business needs to succeed in a single visual element – a picture, better yet a video (better yet with sound) that tells your story right now.  I once presented at a medical device venture capital conference (one of 40 presentations).  Instead of pictures of our product or hockey stick graphs of revenue projections, I played a video of a patient who had been treated with our technology professing that it had literally changed her life.  I simply stated that our stuff worked, it was important and we would do more with funding.

 Third – be different.  Not crazy different, but a legitimate perception of you, your team, your product/service or your customers that is different.  Using the Metaphor of the Seed, remember that when seeds are sold, the seller puts them in a package that depicts the outcome – a fully grown plant or just the flower or fruit that is grown.

 Fourth – avoid cattle calls where you line up and present with no ability to control the time and location of your presentation.  These situations immediately cause the investor to think that you are ‘just another’ business seeking money.  Seek one on one time where you are the sole focus of the meeting.

 Fifth, demonstrate that you respect the investor’s time in listening to your pitch.  Tailor your presentation to the investor – special cover pages, references about similarities to other investments by that investor, etc.

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April 20th, 2010 by Karl

A common critique of many new businesses is that there is only a single product or service.  Sometimes, referred to as a ‘one trick pony’, this label refers to the risk associated with a company that has to make or break it with a single innovation.  If the company fails on this highly focused position, it has no fall back and there is no second chance.  The investor is going to have to ‘bet the farm’ – an undesirable situation that often causes investors to walk away.

 Sometimes there is simply no cure for this problem.  You may have a great idea, but it does not lend itself to a string of products or support multiple market applications.  Typically, in such a situation, the better strategy is to move the innovation as far down the product life cycle as possible, including the formation of a business around the product, and then to place the innovation by license or merger in the hands of a larger business.  This recognizes that the cost of bringing this solo opportunity to market by itself may so burden it with overhead costs that it may not be commercially viable.

 Not to miss out on the opportunity to utilize my ‘Metaphor of the Seed’, consider how a farmer will intentionally over plant – putting more seeds in the soil than can successfully grow to maturity.  Then, when it is known which seeds have sprouted, the farmer will remove some of the seedlings, reducing the plant population to an acceptable level.  This process, called ‘thinning’, allows the farmer to leave the stronger sprouts in enough numbers to assure a full crop.  The farmer has eliminated the risk that some of the seeds may not sprout, leaving a bare spot in the field.

 Similarly, a new business may hedge its risks by advancing a number of technologies/products/services in parallel until one demonstrates that it should be a clear winner.  The remainder may be shelved for later rollout or farmed out for others to commercialize.

 Correctly presented, the investor will appreciate the strategy as a form of insurance that he or she it getting the cream of the crop.

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April 19th, 2010 by Karl

I often encounter inventors who want to sell off their invention, collect a check for millions of dollars and retire to the Caribbean.  They do not have a business and have failed to account for all of the risk, time and money that will be necessary to bring their idea to market and establish it as a successful product or service.

When addressing this issue, I refer to my growing educational collection I call the Metaphor of the Seed.  This collection draws parallels between buying and growing a pack of seeds and the role of seed capital in starting a new business.

A package of seeds is alike a bunch of ideas.  Each seed represents an opportunity.  It may grow up into a lush tomato plant and produce lots of tomatoes, it may die, or any of a number of other outcomes.

So, what does it take to grow a seed.  You don’t just open the packet and dump it on the ground.  It has to be planted (notice similarity to word ‘planning’) in the soil.  The soil has to be arable (means good for plants – not sand, not rock, not toxic). 

The environment has to be favorable (not the Arctic or the Sahara).  Timing must be right (not winter – most seed packages have climate zones telling you when threat of frost is past).

In some cases, under optimum conditions, the seed may take it from here and grow on its own to full maturity.  However, conditions are seldom optimal and further work is needed.  You may have to pull weeds, hoe up dirt around the roots, irrigate, etc.  And those are just the direct costs. 

While describing all this work which dredges up memories from my childhood, I got to thinking about a glass of cold lemonade and how I would much have preferred to be doing something else.  In a similar manner to commercializing an idea, investors in technology have other choices.  However, that subject is big enough to merit its own blog, so I will save that for later.

Even if the seed grows successfully, it is still necessary to harvest the tomatoes.  More work, more time.

And, as a last observation, this didn’t happen overnight.  There is a length of time needed for the seed to mature into a full grown plant.  For investors, this represents the time cost of money.

In conclusion, there are lots of ideas and fewer investors.  The resources required to bring a particular idea to market may be great and the profits earned may be few.  The value of the idea must take into account all of these costs and represent a fair share of the reward.

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April 15th, 2010 by Karl

Back again after a few months chasing money of several types in in several ways.  I can’t say that I learned anything new in terms of raising seed capital, but I have some perspective on the current market that I will share.

The amount of money being invested is lower than I have ever seen it.  Some people mistakenly describe the current situation by saying “There’s no money out ther”, but that is incorrect.  There is lot’s of money out there.  Not as much as two years ago or 10 years ago, but what money is out there is not moving. 

The key to raising money today is to get into the mind of your investor candidate and find out the answer to two questions: (1) Why invest? and (2) Why now?

Everybody is indecisive and bunkered down (waiting for disaster).  Banks don’t invest, but their restrictions on lending have increased the number of businesses looking for money.  Venture capitalists have pulled back to safer investments which might ordinarily have been covered by banks.  They are not doing new or early stage investments as a rule – preferring established, larger, cash flowing businesses.  Wealthy individuals don’t have to anwer to anyone except themselves when they decide not to invest and with the uncertainty in the economy – waiting till later feels right.

I have only two projects that are getting any traction at the current time – a green mining technology that is focused on precious metals and a medical tourism project that will offer healthcare treatments not available in the United States.  Both may be viewed as showing a lack of confidence in the United States economy.

To raise money today you need to profile (just like the FBI) your investor candidates and you need to use your ‘pain meter’.  This refers to a determination that a candidate has a problem that is creating so much pain (loss of face, loss of opportunity, loss of job, loss of money) that they feel compelled to do something to cure the problem.  The degree of pain must be high and it must be now.  Enough to take a risk on a solution that may or may not work.

If you can identify one or more investment candidates that meet this profile, you need to sit down with them and be ready to be creative.  One size does not fit all and you need to be ready to craft a deal that puts cash in your pocket whether it looks like an equity investment, a loan, a prepayment on sale of a product or service, a royalty/revenue share or anything else.

When teaching techniques for raising seed capital, I alway focus on the competition: anything else that the investor candidate might do with the same money – invest in something else (not necessarily a competitor), buy a new car, take a vacation.  At this time, the competition includes the option to do nothing – to hold their money against the possibility of needing it later.

Because there are fewer investor candidates, you need to quickly identify them and qualify them.  Get to a quick yes – no slow maybe’s.  If they aren’t ready to close quickly, move on.

When you pitch – be clear and be confident.  Each pitch must be tailored to each candidate.  One size does not fit all.

Any cash flow you can generate from operations, be it research, selling of testing services, or sale of prototypes, will give you longevity that may keep you going until you raise the money you need.  Keep your day job.

I don’t see things getting better in the short term – within the next year.  The current situation may get worse and it certainly can last longer than one year.  Be as conservative as you can for someone starting a new business in the middle of a recession.

Good luck and good hunting.

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October 6th, 2009 by Karl

You can obtain a free copy of Just Another Emperor by Michael Edwards by going to this website: http://www.justanotheremperor.org/ where you can obtain an electronic download.

This book presents Edwards perspective on how large companies can contribute to charitable causes.  In his preface he states:

“A new movement is afoot that promises to save the world by revolutionizing philanthropy, making non-profit organizations operate like business, and creating new markets for goods and services that benefit society. Nick-named “philanthrocapitalism” for short, its supporters believe that business principles can be successfully combined with the search for social transformation.”

However, he concludes that the subject is overhyped, the aggregation of wealth is undemocratic and that failure of the rich to use their money wisely may create a backlash.

Edwards approach to the subject is different than that of Michael Bishop who takes a more positive position in his book that bears the title of “Philantrocapitalism”.  Nonetheless, good reading on an important subject.

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October 5th, 2009 by Karl

The most common thread of conversation and presentation at SoCap09 was metrics – the ability to measure everything.  From a 30,000 foot perspective, metrics are needed to attract money into social enterprises.  Social enterprises must demonstrate both mission and profits.  If not profits, must demonstrate sustainability.  If not sustainability, must demonstrate must efficient use of funds received.

It is hard to say whether the greater challenge is establishing metrics for ‘doing good’ or balancing the metrics of ‘doing good’ with the metrics of profit.

“Doing good’ is inevitably a measure of quality of life.  Is a person thriving or just surviving?  Are they in good health or okay health?  Are they in a ‘good paying’ job or minimum wage or any wage at all?  Do they have a house or just a roof over their head?  Is life ‘good’ or just bearable?

Too often, social causes take shortcuts and measure things that can be quantified: how many people did I help, how many bags of rice did I deliver, how many surgeries were performed, etc?  In the nonprofit world, these are called ‘outputs’.  True metrics must measure the consequences of the outputs in terms of benefits.

You may ask why this important.  In a perfect world with unlimited resources, there is enough money to provide a house, a meal, healthcare, and a job all in a secure and safe environment.  Since this is not a perfect world, everything is a compromise.  Decisions must be made as to how to best use what money is available.  Is it better to spend $1 on a book, a teacher, a goat, a car, a doctor, a computer, etc?

With recognition that money is scarce and therefore so is everything that you can buy with it, an investor in a social cause must also ask the question of ‘Who is making better decisions?’  If Social Enterprise #1 is spending 50% of its time raising the same amount of money as Social Enterprise #2 spending 25% of its time, the choice would be to go with Charity #2 who is spending more time on its mission.  However, if Social Enterprise #2 is good at raising money, but poor at its mission (Social Enterprise #1 delivers 500 books to needy school while Social Enterprise #2 delivers only 100 books to needy school), it may still be better to go with the Social Enterprise #1.

There are some people who are convinced that profits are bad and that charities are good without regard as to outcomes.  However it makes no sense to declare a charity the winner in awarding resources if for the same dollar investment a for profit social enterprise achieves a greater outcome while distributing profits.  Therefore, it is still not clear to me about the battle of mission vs. profits.  Are for profit social enterprises to be held to a higher standard of outcomes just because they make a profit?  Or are there other metrics that need to be taken into consideration?

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