Monday, September 24, 2012

10 top reasons First-time entrepreneurs fail

"For entrepreneurs -- especially those just starting out -- businesses succeed as much as they fail. I’ve seen this time and again as a mentor and entrepreneur. But statistics also suggest that the failure rate for new startups within the first five years is as high as 50 percent.

Of course, real entrepreneurs treat business failure as a milestone on the road to success. They count on learning from their mistakes, and use the experience to move to the next idea. But why not learn from the mistakes of others, without all the pain and suffering?

Here is my list of 10 top startup failure causes -- and how to avoid them:

1. No written plan. Don’t believe the myth that a business plan isn’t worth the effort. The discipline of writing down a plan is the best way to make sure you actually understand how to transform your idea into a business.

2. Slim or no revenue model. Even a non-profit has to generate revenue (or donations) to offset operating costs. If your product is free, or you lose money on every sale, it’s hard to make it up in volume. You may have the solution to world hunger, but if your customers have no money, your business won’t last long.

3. Limited business opportunities. Not every good idea can become a blockbuster business. Just because you passionately believe that your product or service is great, and everyone needs it, doesn’t mean that everyone will buy it. There is no substitute for market research, written by domain experts, to supplement your informal poll of friends and family.

4. Can’t execute. When young entrepreneurs come to me with that “million dollar idea,” I have to tell them that an idea alone is really worth nothing. It’s all about the execution. If you’re not comfortable making hard decisions and taking risks, you won’t do well in this role.

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To Find Your Next Great Business Idea, Narrow Your Focus

When you’re just starting out in business, narrowing your target market can be difficult for fear you’ll be excluding part of your potential customer base.

But if you can clearly define a market and its needs upfront, you can tailor your product or service offerings narrowly to meet that demand and quickly gain more wallet share than your competitors.

Related: How to Target Your Message to Find Customers

What exactly does this mean?

1. You could be like the enterprising young woman in northern California who discovered a secondhand store’s almost hidden section of distinctive children’s clothes and toys. As it turned out, the store’s owners wanted out of what they saw as a dead-end business. The woman took over the lease and reoriented the entire operation to focus only on children’s products, turning a 1,200-square-foot “dead-end business” into an 800-square-foot startup that was profitable in six months and expanded into a new downtown location.

2. You could be like the mechanic who went through the lengthy and fairly expensive process of getting his auto dealer’s license so he could go to the local car auction to make bids, specifically on older model BMWs. He didn’t want to sell the whole cars, but rather to take them apart and create a line of aftermarket parts for BMW owners and mechanics.

3. You could be like the computer repair technician who decided to strike out on his own in the highly competitive field of information-technology services, only to discover a more specialized market that offered higher rates, more loyal customers and more referral business. That narrow market turned out to be Apple computers.

These examples illustrate a general truth about business opportunity: The true opportunity may not be apparent at the outset. Niches exist in every broad category, and your job as an entrepreneur is to figure out what they are and whether they offer a profitable business opportunity. Find More:

Want Great Marketing: Follow Apple’s Example

On August 20, 2012, Apple surpassed Microsoft to become the largest public company in history. It’s a fact that makes it easy to forget that, not that long ago, Apple didn’t even exist.

What’s contributed greatly to Apple’s success is great marketing. As most people know, Steve Jobs was a big believer in great, smart, creative marketing. It’s something he believed in from the very beginning of Apple.

Back in 1976 when Apple was just starting, Steve and his two partners had some big decisions to make. One, was about marketing. Unlike other startups and small businesses who see marketing as a questionable or unaffordable expense, Steve saw it as an important investment that was absolutely necessary to get the word out and grow the business – even with limited funds.

So, just months after incorporating, Jobs hired ad agency Regis McKenna. The agency designed Apple’s logo and handled all of Apple’s early advertising, marketing, and branding. Apple took off.

A few years later, after Regis was sold to Chiat/Day, Apple continued a close relationship with Chiat to produce some of the most brilliant advertising of all time. Steve Jobs will go down as one of the greatest marketers in history.  Yet he’d be the first to tell you that most of the credit belongs to the great advertising and marketing people he hired.

Because Steve was such a dynamic front man for Apple, it’s easy to think he deserves all the marketing and advertising credit. He was involved with all of it, and he had the final say, but he didn’t create it. Steve came up with the Apple name and that’s about it. The iconic “1984” and “Think Different” campaigns were created by the agency. The name “iMac” was created by the agency. All the advertising and marketing for the Mac, iMac, iPod, iPhone, including the brilliant “Mac vs PC” campaign was created by the agency. Read More:

Want to Launch a Successful Startup?

It’s easy to see the benefits of being an entrepreneur in the Silicon Valleys and the Seattles of America, but in the midst of those metropolises, the benefits of starting in a smaller town are overlooked. Cozier, entrepreneurially-focused communities provide ecosystems that help startup companies thrive.

Here are three of the attributes small towns boast that help startups find their footing.

The best resources are the ones that can actually be tapped. In a larger community, there are plenty of brilliant individuals, but because the city scale is much wider, it’s not easy to locate or access their expertise. Smaller communities have the advantage of establishing more known resources. People know who to connect (or not connect) with in order to surround a startup with the best possible support. Resources surrounding a startup will increase the likelihood of the business starting on a path of success.

In my town of Columbia, Missouri, there are brilliant entrepreneurs (such as Brant Bukowsky of Veterans United) who have grown thriving businesses, but these individuals have remained accessible to other startups in the area. They are engaged in the process and are present at the “small” victories along the way, knowing that success for others ultimately leads to success for them as well. When area expertise is known and accessible, it surrounds a startup with the knowledge it needs to excel.

Recognize the strengths of the region you find yourself in, and choose to work with those strengths. Just as Tom Rath’s StrengthsFinder has taught people to focus on their strengths while managing their weaknesses, startups should look for the same thing within a community. No community is going to be perfect, but each region comes with its own unique set of strengths that should be recognized and taken advantage of.

Use the strengths of the region you find yourself in to propel you and your business forward.

Thursday, September 20, 2012

The Venture Capital Secret: 3 Out of 4 Start-Ups Fail

It looks so easy from the outside. An entrepreneur with a hot technology and venture-capital funding becomes a billionaire in his 20s. But now there is evidence that venture-backed start-ups fail at far higher numbers than the rate the industry usually cites. About three-quarters of venture-backed firms in the U.S. don't return investors' capital, according to recent research by Shikhar Ghosh, a senior lecturer at Harvard Business School.

Compare that with the figures that venture capitalists toss around. The common rule of thumb is that of 10 start-ups, only three or four fail completely. Another three or four return the original investment, and one or two produce substantial returns. The National Venture Capital Association estimates that 25% to 30% of venture-backed businesses fail.

Mr. Ghosh chalks up the discrepancy in part to a dearth of in-depth research into failures. "We're just getting more light on the entrepreneurial process," he says.His findings are based on data from more than 2,000 companies that received venture funding, generally at least $1 million, from 2004 through 2010. He also combed the portfolios of VC firms and talked to people at start-ups, he says. The results were similar when he examined data for companies funded from 2000 to 2010, he says. 

Venture capitalists "bury their dead very quietly," Mr. Ghosh says. "They emphasize the successes but they don't talk about the failures at all." There are also different definitions of failure. If failure means...continue

Wednesday, September 19, 2012

Confessions Of A VC Who Raised Money During Financial Armageddon

We started to plan for our fundraising for Greycroft II, our second fund, around Christmas 2008. This was a few months after Lehman Brothers collapsed.

Our team of four partners agreed among ourselves that we wanted to raise a fund of $125 million.  Because we were not yet 60% invested in Greycroft I, we knew we had plenty of lead time to complete our fund raising and commence investing in the 4th quarter of 2009 or at the latest, 1st quarter 2010. 

The general partner allocation in the new fund was set in advance, so as to avoid greed or dissension which often times sets in when you get close to the goal. The management company and its structure were also set.  Since everyone had been working for below norm compensation in the first fund (a $75 million fund raised entirely from high net worth investors, operating in 2 cities with 4 partners, a senior associate and 2 administrative assistants), the second fund would be an opportunity to be more competitive, especially as we planned to bring new people on board.  We were a team and everyone was bought in to our long range plans including our assistants.

By late February 2009 we had put together our track record up to that point in Fund I and prepared a 20-page Powerpoint deck.  We had to update the presentation 3 times during the process as we saw what was working and what wasn’t and to adjust for time passed.  Most important of all, we had and have a clear strategy of what we invest in, how we invest, and our overall disciplined approach to the venture capital business.  We communicated our determination to be a small fund and stay a small fund and make small investments in certain types of companies with low pre-money valuations.  

Tuesday, September 18, 2012

Six Time Management Strategies for Startups

Many startups seem to be powered solely by excitement over the new business (occasionally mixed with some Red Bull and Starbucks). Startup founders typically devote every waking moment to their companies, and probably even dream about it too. But while pure passion can propel entrepreneurs 24/7 for a while, eventually even the most committed startup teams need to learn to manage their time.

Burnout is one obvious danger of poor time management. But even more important is the risk that something important will fall through the cracks. If you fail to respond to a potential partner or prospect in a timely fashion because there’s too much on your plate, you could be blowing a make-or-break opportunity.

Time management is one of the top challenges for every entrepreneur I know. After years of experience working with entrepreneurs and business owners, I have learned a few tricks for getting more done in the 24 hours we all have.

1. Know thyself. Everyone has a natural rhythm.

some of us are morning people and some don’t become fully awake until after noon. Pinpoint your “up” times and use them for the most crucial business tasks - like meetings with investors, brainstorming sessions or putting together proposals. Feel your energy flagging? Use that time for tasks that don’t require as much brainpower, like checking email, updating your calendar or organizing your files.

2. Prioritize. 

The first step is to recognize you can’t do everything you want to do. Then you need to figure out what’s most important and work on that first. What’s most important is likely to vary from day to day, but in general, focus on the activities that generate the most money or have the potential to do so. 

That may mean concentrating on developing game-changing features or product improvements instead of day-to-day tasks.

Four Signs of a True Entrepreneur

If you don't have these four traits, maybe you weren't born to change the world after all.

People often wonder how the kid who rarely talked or wasn't particularly popular in class went on to become a start-up genius. What was it about that person that helped him or her blossom into an icon of entrepreneurship? And how can you 
                                                                                                        make sure you have what it takes?
It's a combination of factors. Start with these:


Passion is the fuel that drives the creation of dreams. This is a no-brainer. You have to wake up every day wanting your success. You have to become obsessed with the idea of achieving your goals, with attaining the grand objective that will yield meaning of great personal significance. The trick, of course, is to channel that passion into action. Sometimes the idea is so exciting that it becomes scary to try. And it's scary to fail. Successful entrepreneurs know that failure is part of the journey, and that without failure, there is no success.


Passion without conviction is like a shooting star that fizzles before you even fully realize it's there. What keeps your passion alive? Conviction streamlines your passion into a steady flow. After all, most people have innovative ideas at some point in their lives. It's conviction that determines what you do with those ideas. Do you let it die? Or do you go for it?


Let's face it: You have to be a little bit crazy to achieve extreme success. It takes a particular type of lunacy to never want to quit, to believe in something so much that it defines you. It's this lunacy that takes you to a state of euphoria in which you think you can tackle some unachievable goal that others have never attempted to tackle. If you're not defined by what you want to accomplish, you'll impose limits on your efforts. People who change the world would never do such a thing.

Need for approval

New Business Startup? Think Like a Rock Star

Launching a new business? Why not borrow ideas from your favorite rock stars to help you develop a strategic plan? Here's how.

Musicians, like business start-up geeks, begin with spending a lot of time behind the scenes working through the development stages of their products. It would be naïve for them to jump into the limelight prematurely, yet if they're smart, they'll get their feet wet whenever they can. They might perform at bars and bar mitzvahs, coffeehouses, weddings, or even on the street as buskers. All are good opportunities for testing their products in front of real audiences.

In the same way, business start-ups can get their feet wet by participating in networking opportunities with peers and investors, and through running trials and beta tests of their ready-to-launch products. Focus groups can offer valuable market feedback, and beta tests will offer opportunities to work out glitches and to educate a group of "chosens" that could become valuable promoters of the new product or service.

Thank Your Grub Work

Well-known music veterans may not know the exact secret behind their success because many times it has been due to organic growth. Back when they started they may merely have been in the right place at the right time. There might have been less competition and less perfectionism. Even poor and mediocre singers have been able to cut and sell albums. They might say they got lucky or they might admit that they did spend a lot of time in the trenches first. They've paid their dues.

On the surface, there may have been no well-oiled unfolding plan a successful musician has followed, but if you were to ask one about his product, what songs define him, and what his setlist would include if asked to do a concert tomorrow, he could tell you. Well-seasoned musicians know who they are, where they've been, and know what their audience wants.

A business too needs to know who they are, how they want to be defined, and where they're headed. Business is fierce today, and a well-oiled plan is usually necessary if a start-up is to gain funding and launch its business well. There can be a well-crafted business-school-type business plan in place, but an entrepreneur should realize there will be also be lots of grub work to do and that fame and fortune is not quick and easy.

Musicians that have been........

The Biggest Credit Card Mistake Entrepreneurs Make

More than 80 percent of small-business owners use credit cards, according to the Federal Reserve. But some make the mistake of reaching for plastic too soon when starting up their businesses and reduce their chances for long-term success.

Nearly 60 percent of start-ups rely on credit cards for financing during their first year of business, according to a recent study from the Ewing Marion Kauffman Foundation, and for every $1,000 increase in credit card debt, a firm's chances of survival decrease by more than 2 percent.

What's so problematic about funding a start-up with a credit card?

It puts personal finances in jeopardy and increases stress. People often assume that small-business credit cards insulate the owner's personal finances from the company's. But that's just not true. Whether you use a business or consumer card, you're going to be personally liable for debt. So, relying heavily on a credit card for financing could significantly increase the pressure you feel. If things don't go as planned, you not only will default on your business debt, but you also will face serious ramifications on a personal level.

You will have limited funding. How much money you're able to glean from a credit card is largely a function of your credit standing and income. Many entrepreneurs are young and often at a disadvantage when it comes to those factors. And even if you've managed to garner high credit lines, they will likely be insufficient to cover the costs of getting a business up and running.

It's harder to weather tough times. Credit card debt is expensive: The average interest rate for a business card is about 15 percent. Given that you're unlikely to have much money in reserve, an economic downturn or lag in sales could prevent you from making even minimum monthly payments.

Given those problems, why do entrepreneurs repeatedly turn to plastic in their search for start-up funds?

Credit card funds are easier to come by. Getting approval for a credit card account usually is easier than qualifying for a bank loan, especially in the current economic climate.

Entrepreneurs are often reluctant to ask friends and family. They are too shy or proud to approach loved ones and acquaintances about investing in a budding business venture.

Entrepreneurs don't want to sacrifice equity to investors. This is perhaps the biggest reason that entrepreneurs are hesitant to bring on investors: They don't want to give up a slice of what could end up being a lucrative pie.

How can entrepreneurs avoid the perils of credit card funding?

The primary way is to seek investors early. By putting together a solid proposal -- complete with a detailed business plan and projections for both future revenue and potential return on investment -- you'll be putting your business in the best possible position to succeed.

If you fund your startup through equity rather than credit card debt, you won't have to waste crucial early-stage revenue paying down debt or the interest associated with it. More money will therefore go into making your business a success. And even if it doesn't pan out, there will be far less personal risk. You won't have to worry about catastrophic damage to your personal finances, which means you'll be able to bounce back more quickly.

Despite these caveats about using credit card debt to fund startups, it's important to remember that credit card use in and of itself is not a mistake. Not only will a credit card allow you to earn rewards on everyday expenses, but it also will help with cash flow because you'll have up to 55 days from the time you make a purchase until a payment is due. In addition, if you're a young entrepreneur, responsible use of a credit card will help you establish a positive credit history. That will be very important when your business has matured enough to move to the next level and seek a bank loan.


Five Sales Metrics Every Startup Should Adopt

One of the most important decisions to make while growing your company is what to measure to most effectively evaluate success. Too few metrics means you are flying blind, but too many means you are lost in data. The most logical benchmark for measuring the successes of any young company is, naturally, sales. But there are five other sales-related metrics that are worth tracking if you can do it.

The following metrics are indicators of how you and your team are doing. They can be early warning signs that tell you something needs to change. Or they can measure other aspects of your company’s growth and evolution. Introducing one or more of these metrics (and eliminating ones that are driving unproductive behavior) can generate additional benefits for your company.

But tread carefully! Complexity can be the enemy of efficiency. For every new metric you introduce, you and your team will spend significant time tracking, reporting and considering the meaning of what exactly was measured. Before you adopt any of these or other additional measurements, estimate the investment and be willing to spend double the time and effort. Then go forward and reap the benefits.

1. Touches
Whether your team is inside or outside sales, whether they’re a sales hunter or gatherer, how many times did each of them contact each prospect and customer? Calls made, voicemails left, emails sent or meetings scheduled do not count. These activities are measures of speed dialing and spamming, not sales skills. Touches are successful contacts made or meaningful conversations had with a customer or prospect that moves the opportunity along in the sales cycle. You must have effective and cost-efficient systems in place to measure phone, email and in-person touches before putting this metric on your team.

But why count Touches? You can figure out the optimum number of Touches per customer type, so you don’t waste time chasing deals unlikely to close. Hubspot (a Yesware customer) has done great work quantifying this.

Without counting Touches, the “squeaky” customer will absolutely get the grease, no matter how unprofitable they are. And counting Touches is a great way to compare salespeople. Missing a revenue target is more understandable if the number of Touches is high – we all know that cold streaks can happen to even the most experienced, most aggressive sales people. But there’s no excuse for low Touches!

2. Time-To-Close
Otherwise known as Speed or Sales-Cycle-Time, this metric tracks the various days/weeks/months that it takes a salesperson to close each deal. The importance of this metric is easy to see, although the desired result is company-specific. In some companies, a salesperson that closes a $200k deal every month might be more valuable than someone who takes twelve months to close a $2 million contract. But not if each sale requires custom development and significant deployment effort.

No matter which approach your company prefers, Time-To-Close can be a valuable sales measurement to track. As with number of Touches, you can use Time-To-Close as a way to eliminate bad leads from the sales funnel. If the opportunity is over a year old, it’s unlikely to close. For your company, the window for closing deals might be as short as a month. Time-To-Close is also a good measure to compare salespeople.

3. Time-To-Respond
This metric is tougher to reliably measure, because it’s more granular, but it can also be very effective at predicting success. After the salesperson has established interest, rapid response to a prospect’s questions, objections and proposals can mean the difference in closing or losing the deal. It’s easy to see why – in the mind of the buyer, fast response in the sales process signals an eagerness to support the partnership in the long term. In cases where products or services are evenly matched, quicker response time is a strong advantage.

4. Customer Response
Many companies track calls made or emails sent. In most companies, moving prospects up in the pipeline (and therefore assigning them a higher likelihood to buy) is tied to a salesperson’s activity. For example, you’ve sent the prospect a proposal – now you can move them from a 10 percent to a 25 percent likely to close. That approach is senseless in a number of ways, but the most obvious one is this – SENDING THE PROPOSAL DOESN’T MATTER. What does matter is the response – did the customer accept, read markup return the proposal and provide feedback?

There’s not enough space in this article to discuss this idea in depth. Let me simply propose that companies stop measuring pipeline stages as activities of a sales team, and start measuring them as activities of our prospects and customers.

5. Time-to-Cash
All other things being equal, the customer who pays fastest is best. This metric combines a salesperson’s ability to negotiate quick payment terms, and their skill in identifying customers to pursue and close. In some companies, where prices and discount schedules are fixed, speed of payment is second only to volume for influencing the salesperson’s compensation.

While these metrics are usually tied to compensation, they don’t have to be. It’s difficult to definitely know how accurately you’ll be able to measure your sales team against these metrics. It is even tougher to know what the desired numbers should be. Many people pay close attention to what is tracked whether or not it figures into their paycheck. For others, public recognition and shared goals are more powerful motivators.

Regardless, whether hitting goals is tied to compensation or not, introducing one or more of these metrics can help grow and increase the value of your company.

Monday, September 17, 2012

Why every entrepreneur should build a personal brand

Whether you're a lawyer, a landscaper, or a lactation consultant, if you're in business for yourself Dan Schawbel says you should be using personal branding to attract business opportunities.
Schawbel is the 28-year-old managing partner of Millennial Branding who has, by practicing his own advice, become a bestselling author, syndicated columnist, and nationally sought-after speaker on digital marketing. His target audience is his own Generation Y peers, but his followers, including 127,000 on Twitter, transcend generations. His hero and inspiration is Tom Peters, whose management book In Search of Excellence was published before Schawbel was born.

Peters himself has said that Schawbel "has taken personal branding to a dimension a million miles beyond where I was." Schawbel credits the technologies that have become available since Peters' heyday. Social networking platforms make it affordable for individuals to leverage the same strategies marketers have used for decades to build corporate brands. "Now everyone in the world can have a Facebook or LinkedIn profile or an page or their own website at no cost," Schawbel says.

What is a personal brand anyway? "You and me and Oprah and anyone in the world has a personal brand," he says. "It's what people would say about you when you're not in the room. How they describe you to other people." More and more, those exchanges are taking place in virtual networks. Carefully curating your online presence can influence the conversation.

"Developing your brand is about unearthing what's true and unique about you and communicating that to the right audience through social networks," Schawbel says. "You want a consistent brand. In person you have to be the same as you present yourself online."

He points to Alltop founder and venture capitalist Guy Kawasaki, personal finance guru Suze Orman, and "techonomic" expert and journalist David Kirkpatrick as personal branding success stories. Each carved out a specialty within a broader profession.

To be sure, those experts operate on a national scale, but Schawbel argues that personal branding is easier to do on a local level. "If you're just trying to serve the people in your community, start providing valuable resources to them," he suggests. "Hold contests, give discounts, invite them in, host live events, and give free champagne at your opening. Investing a lot in just one community won't cost much and if that works you can expand."

There's no reason for local retailers and mom and pop shops to shy away from this approach. "Store owners should brand themselves as experts relative to what the business sells. If you're an Italian restaurant you want to be branded as a guru about the culture and different dishes," Schawbel advises. "Ask, 'how do I make a niche for myself?' If you try to be everything to everyone, you'll be nothing to anyone."

What does he say to the entrepreneur who is too busy running the business to develop an online presence? "It depends on your business, but you have to make sacrifices. Block off time every day or at least weekly," he says.

For more info--

Friday, September 14, 2012

Don’t Let Fear of Failure Stop You From Starting a Small Business

"I'd like to start a small business but..."
Does this describe you at this point?
What's holding you back?

When I get the chance to ask people this question in person, often they respond that they're afraid of failing - not in so many words, mind you, but that's what it boils down to.

They say things such as “I'd like to start a small business but I don't know if enough people would be interested in buying this product.” Or “I'd like to start a small business but I’m not very good at selling.” Or even “I’d like to start a small business but I don’t know if I could make enough money to live on.”
See? The obstacle to starting a small business is not actually about products or selling or money – it's fear.
Now fear that saves you from physical harm, such as the fear you feel when you see a huge slavering dog standing in your path or the fear that prevents most of us from shooting over Niagara Falls in a barrel, is a healthy thing. But the kind of fear that prevents you from doing things that you want to do that will enrich you is not.
If fear of failure is what is preventing you from starting a small business, you have to get around it and forge ahead.
How can you break your paralysis and do this? You have to do two things:
  1. prepare to succeed
  2. change your attitude to failure
1) Prepare to Succeed

The first thing you need to do to prepare to succeed is to learn how to do it. You already know how to fail. You can fail by doing nothing or you can fail by doing stupid things. But how do you succeed? By finding out exactly what you would need to be successful and ensuring that those needs are met.

For instance, suppose that I want to start a small business selling herbal soaps and bath products. For this business to be successful, I need to have essentially three things:
  • enough people who want to buy the soaps and bath products I’m selling
  • a product whose quality and price is competitive enough that people want to buy it
  • a way to bring the two of these (people and product) together
So there are the basic needs. Now all I have to do is figure out how to meet these needs. The best way to do this is to work through a business plan. The Business Plan Outline will lead you through the process of writing a business plan of your own. Working through a business plan will fill in the gaps in your knowledge and provide the details of how you’re going to do what needs to be done to start and run a particular small business successfully. Your business plan will be, in effect, your blueprint for success.

2) Change Your Attitude Towards Failure

Why are you afraid of failure?

Most people fear failure for one of these two reasons:
  • Failure makes you a bad person, a “loser” that others look down on.
  • You could lose all or most of your money and/or your possessions.
Both of these are misconceptions.

Failure doesn’t change your genes or your personality. It affects some people’s actions negatively, but it’s not negative in itself. Will you be a “loser” if you fail? Only if you allow yourself to be. “It’s not being down; it’s staying down” that makes you a loser.

                                                                                                                                                                                Continue Reading-

Thursday, September 13, 2012

Forward Revenue Multiples in Venture Capital Valuations

I am frequently asked by founders during my talks and conference participations how do I value a startup.
The first method is really an art more than a science. We know what market pre-money valuations are currently prevailing. 

But more importantly, we figure out that pre-money number from a founder's ownership for the series A, but also subsequent rounds of B and C. The rule of thumb is that if a startup is raising $1.5M then the pre-money is going to be around $1.2M to $1.5M, netting the founders a 50% ownership stake on a post-money basis. The goal is for the founders, if they execute well is for them to reach an enhanced valuation by the B and C rounds, and be diluted to 25% post B-round and to 10-15% post-C when the startup would have reached run-rate revenues to be able to value it for an M&A transaction through some of the more classical methods below.

Forward revenue multiples are beneficial methods for founders and for venture capitalists. There are two basic revenue multiples that every single investor needs to be made conscious of. The 1st, and most well-known, is Price to Sales or just P/S. The next and the more solid metric of the two is the Enterprise Value to Sales or EV/S (Equity + Debt - Cash; and in most VC cases Equity-Cash, since there is rarely any debt).

Enterprise Value to Sales Ratio (EV/S)

Venture capitalists use estimations like the EV/S multiple to find a business's value. It is measured by adding its market capitalization to its debt, minority interest and preferred equity then subtracting its liquid assets. The result is a multiple that gives valuable understanding for investors. For instance, a corporation with a revenue multiple of 1.9x effectively means that other investors might be willing to pay $1.90 for every $1 of revenue produced by the corporation.

Pre-Money Valuation

Investors and the businesses might have significantly diverse views of the business’s value. Investors like low figures, so they can get a good deal. Alternatively, businesses want them excessive, so they can get additional investment money. Pre-money assessment is the agreed-upon price before any dollar is invested. Furthermore, potential buyers may possibly use a multiple of the current revenue to value the company, if the company is presently making revenue.

Post-Money Valuation

Revenue multiples can have far-reaching repercussions. Poor multiples will turn-off numerous investors. Powerful multiples enable the company to keep more equity of the business, soon after the investment is created. Venture capital equity is determined by using the capital investment figure “I” and dividing it by the pre-money value “V” and then added in to the capital investment “I” (I/V+I). Thus, a strong multiple will maximize the pre-money valuation amount.

Future Value

Start-up businesses rely intensely on forecasts. Most start-up businesses, by description, are not proven and commonly have poor sales revenue. Estimations like, revenue multiples guide to project possible larger income in upcoming days -- generally about three to five years -- to convince venture capitalists for a good investment.
A revenue multiple may be more beneficial at times comparatively to the commonly used price-to-earnings ratio, in stock assessment. Specific restrictions exist when utilizing the P/E ratio, which could make the P/E ratio less purposeful. On the other hand, revenue multiples are much more appropriate even in some unique business and earnings scenarios for venture capitalists.