Business Finance

When I was researching how businesses change or pivot their business plans, I found this presentation about Venture Capital and when you need it and when you don’t, by Union Square Ventures in New York.

Venture Capital Presentation

Since I have no control over whether it disappears from scribd, I want to pull out a few points about venture capital. First, high risk capital wants a 50% plus return a year – and that’s going to compound over time – that’s double the money back in about 18 months and much more if the investment is long term.

Second, raising venture capital is a 3 to 6-month project. Don’t expect the cash to be easy or quick.

Third, 99% of new ventures don’t need venture capital and venture capital firms look at more than 100 business plans for each investment.

Fourth average dilution from the initial venture capital investment is 40% and on exit, the average entrepreneur who uses a VC owns less than 10%. The logic is that 10% of something big is better than 100% of something small but it does show there huge culture change required.

Venture capital is wrong for you if you’re too early in the start-up phase, your business is too small or you trade in n industry which doesn’t have barriers to entry to stop plenty of competitors rushing into the market to share in your early success.

The presentation offers bootstrapping up as an alternative to venture capital as i mentioned in Why Don’t Banks Finance Startups . I also agree completely with the comments that “cash in the bank makes you soft” and “sell, sell, sell – your customer is your best VC”.

It’s well worth taking a look at the presentation before you start thinking about wanting venture capital.

If you think about going down the venture capital route for funds for your young business, I recommend you read this blog post from Fred Wilson of Union Square Investments.

Why Early Stage Venture Investments Fail

It’s always good to understand the situation from the other side since it makes their demands seem more reasonable. You may not like them, but at least you understand why they are made.

It’s well worth reading for how the business plans are changed between the venture capital investment and exit and how success seems to improve when the business plan is changed.

I hope Fred Wilson doesn’t mind if I pull out a few quotes I particularly want to emphasise.

Dick Costolo, co-founder of FeedBurner, describes a startup as the process of going down lots of dark alleys only to find that they are dead ends. Dick describes the art of a successful deal as figuring out they are dead ends quickly and trying another and another until you find the one paved with gold.

This may not sound like the rational, straight line planning model you want to use for your new business but I think it’s a remarkably astute way of looking at business planning in a start-up. The planning helps you to think about the options and focus on those that you think have the best chance of success.

But the true test happens in the market.

Either customers buy… or they don’t.

You can go down lots of blind alleys if the cost of doing so is low. But if you are spending a million dollars on each blind alley, you’ll be out of business in no time.

Testing small is good… failing early is good when you learn what doesn’t work. It gets you closer to what will work. See The Lean Startup book by Eric Ries.

Most venture backed investments fail because the venture capital is used to scale the business before the correct business plan is discovered. That scale/burn rate becomes the cancer that kills the business.

This is interesting because it makes it clear that money isn’t the panacea to business start-up problems that many entrepreneurs think.

The answer lies in finding a winning strategy and proving it in the market.

Only when you are confident that you are right and you have the evidence that will stand up to third party scrutiny should you look for the finance to scale up your business.

The UK credit crunch in the wake of the sub-prime mortgage loans crisis in the US and the run on the Northern Rock bank has made it more difficult for small businesses to raise loans the Federation for Small Business has reported.
Even if businesses manage to get a loan, it is more expensive with interest rates of 10% to 11% so this is 4 to 5% more than base rates at the moment.

More details on this story.

If you need to raise finance at the moment, or even renew an existing overdraft then you need to make sure that you prepare properly for your meeting with the bank manager.

Talk to your accountant, update your business plan, make sure that your forecasts are realistic and credible.

Getting To Know Me

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[6Steps]

In this article, I list eight common finance mistakes which could be harming your business.

Are you one of the many small business owners or managers who will admit that finance and accounting are not amongst your strongest skills?

If so, you may find it very worthwhile to check whether you are making any of these common financial mistakes that could be costing you a fortune.

Finance Mistake 1 – Accepting Losses While Building Your Business

It’s conventional wisdom that you will lose money during the early stages of creating a business and that period may last for up to three years.

While it is certainly true that you can have a lot of start-up expenses, you also need to accept that your business is in its infancy and you have to cut your cloth accordingly. [continue reading…]