Posts Tagged ‘capital’

The purpose of this Phenotype element is to determine what if any debt the business may have at the time of the financing, and more importantly if that debt will be serviced immediately upon closure of the round. What one isn’t looking to do is to fund a company only to have all the cash go out the door to service old debt, leaving the company with no cash to operate. Ideally there is no debt, or debt that converts to equity at the time of the financing. If there is debt after the financing, the terms should be examined to determine what impact it will have on cash flow. There should also be provisions that give the current investors some protections in the event of a wind up. In addition, keep an eye out for and examine any investment banking agreements that may impact the cash position upon closure of the round.


The definition of debt here is broad and includes trade financing, outstanding credit (even personal credit card balances if known), informal borrowing from friends and family, bank lending, private loans, convertible securities or other forms of debt, formal and informal.  Will such debt need to be serviced immediately upon closing this round of financing?  Are there any existing agreements (e.g. with investment bankers) that may impact cash or equity upon closure of the round, such as warrants or convertible securities? How can existing debt hamstring a new venture?

This is just one of the key criteria forward-thinking investors use when evaluating the strength of entrepreneurs and their new ventures. How do you measure up? Go to www.venturephenomeproject.com to read all 80 criteria and swap knowledge with other entrepreneurs & investors.


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261728814_887d305c1dWhen evaluating a venture, one of the key areas to look at is the company’s projected time to break even. In economic terms the equation looks like this: (Break Even = Fixed Cost / (Unit Price – Variable Unit Cost)), but in reality the break even point is a huge day for a new business.

The purpose of this element is to determine how far the business is from that magic point where revenue can eclipse costs. Does a venture require more than 24 months to break even or has it used a skeleton staffing model to crack the code in under 6 months? And if the economic model is fundamentally broken, breaking even is probably nothing more than a fantasy. The break even point is critical, and any venture that can’t reach this point quickly will face mounting pressure as capital consumption starts to create a moving brick wall coming towards the company. How patient should investors be for reaching the break even point? How long is too long?


Remember, sales forecasts for new products are notoriously inaccurate, and giving yourself less than a 10% margin for error seems risky. When looking at new ventures, we immediately throw the projected financials into excel and put them through a stress test, making sure that the management team has left themselves some wiggle room. Most investors are usually not willing to wait more than 18 months to see a profit, so some flexibility with the pricing structure is a good thing.

Have you left yourself some wiggle room? Go to www.venturephenomeproject.com and share your experiences with investors and entrepreneurs.

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compforcapitalThis section wouldn’t be complete if we didn’t mention the plethora of contests and competitions out there for entrepreneurs. Most of these are business plan writing competitions that target upstart entrepreneurs to enter in hopes they are going to get in front of a panel of investors who will then choose their venture and write them a big fat check.

For young entrepreneurs, it seems that every college with an MBA program is promoting one of these. But again, if you happen to enter one, don’t just fall under the spell of dollar signs. Most of the competitions offer entrepreneurs the opportunity to: 1) help crystallize their thinking (and making them more investor ready); 2) receive feedback and advice from forward-thinking entrepreneurs and investors; 3) network with fellow entrepreneurs and distinguished investors; and 4) sharpen their skills in analyzing, writing, and presenting their business plan. Again, the more value one of these contests provides back, the better it makes the entire process for starting and funding a company.

riceThe Rice University Competition has become one of the premier collegiate competitions in the world; with over 35% of its entered teams (since 2001) going on to successfully launch their business. These impressive numbers can be directly attributed to the counseling and feedback all of these teams received at the competition. Now that’s entrepreneurial education done right.

“The support of business leaders and successful entrepreneurs ensures that tomorrow’s leaders can pursue their dreams by utilizing such an investment to refine their business plan and presentation, potentially develop a prototype or begin the patent process, and build the foundations of a viable business – ultimately attracting additional capital and fostering the spirit of entrepreneurship in the US,” explains Steven C. Currall, PhD, and Founding Director of the Rice Alliance for Technology and Entrepreneurship.

Alternatively, many VCs and Angel Groups are now holding “segment specific” competitions to generate quality deal flow in hopes of surfacing the next big thing. Entrepreneurs submit their innovative ideas on everything from gaming to green energy to senior products & services to social media. The winner can usually drive home with as much as $100,000K of start-up capital in their front seat.

One interesting newbie on the competition front is Ideablob.com. Run by Advanta, one of the largest credit card companies in the States, Ideablob is a place for entrepreneurs to post their ideas and get real-time feedback from their peers. The site was developed around the premise that there are tens of millions of entrepreneurs and small business owners in the United States, but no real way for them to network and bounce ideas off of each other. Eligible individuals can submit their business ideas to ideablob.com, and based on votes from the ideablob.com online community; which includes other innovators as well as friends, family, colleagues, associates, teachers and mentors – one idea every month will win $10,000. Here’s to growing the blob and mentoring entrepreneurs in the process!

googlelunarxprizelogoLooking for something a little more unconventional? As of this writing there were already 16 announced teams registered for the Google Lunar X Prize competition. The Google Lunar X Prize will reward the first privately-funded team to land a rover on the moon (and travel at least 500 meters across its surface) with the $20 million purse. If no one is able to complete the mission and send video, data, and images back to Earth by December 31, 2012, the first prize drops to $15 million. The big challenge for these braniacs will be to do it affordably. Many are already raising money and even turning to corporate sponsorship to help get their idea on the launch pad. Let the countdown to liftoff begin.

The following excerpt is taken from Breaking Through The Broken: The Transparent Guide To Overcoming The Inefficiencies In Early Stage Venture Capital.

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This element is pretty simple: does the management team seem credible? While this element leans heavily on background and reference checks, it is also important to see if there are any inconsistencies with the business plan (insane growth curves, half truths in the market research, or a general state of optimistic denial). If the entrepreneur has great vision, that’s a good thing. If they can’t see the hole in the road because they are so focused on the clouds, that’s not a small mistake, that’s a major problem. References are a great place to start, but are their other ways to find out if someone is being honest? Outrageous financial projections perhaps? Constant name-dropping and false over-confidence?


You’d be surprised at the number of times red flags pop up when performing a simple background check. As Scott Austin reports for the WSJ, these occurrences are all over the startup world: Mahalo’s mishap

Have you followed Mahalo’s lead and hired a felon? Go to the venturephenomeproject and share your story with other entrepreneurs.

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Many early stage investors focus intently upon intellectual property protection, advantages, and ownership. This narrow focus can be a bit misleading as IP strategies are often overvalued when compared to the value of flawless execution. However, that doesn’t mean that they can be ignored completely. When looking at  IP, there are some minimal thresholds that must be examined, as IP strategy is primarily a defensive measure that enables entrepreneurs to defend their businesses in a mature market. If a company hasn’t bothered to put a government-approved mark on their assets, then they probably don’t have much ground to stand on in a free economy. Properly secured IP is the foundation for nearly all successful companies that maintain success over the long run, whether it’s the trademark protection for your own version of the Nike swoosh, or an iron clad patent on a revolutionary new nano-technology.


While any business that achieves some measure of success will inspire competition to chase the same market, the barriers to entry that can be constructed through various means can help protect the investment in the company. Is there a clear plan the company is executing that will provide some sort of a barrier to entry for competition? Or can the business be copied with the clone up and running in less than a month? How important is it that there is a natural or non-legal barrier to entry?

Is your IP protection iron clad? Go to www.venturephenomeproject.com to read all 80 criteria and swap knowledge with other entrepreneurs & investors.

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Sales and marketing is the knife’s edge for all companies, as these two disciplines can make or break any business. It’s always easier to manage growth when there is top line revenue and some cash flow rolling in. A few key elements to look for in the Sales & Marketing strategy: 1) Leveraged sales; is the sales strategy set up in such a way that the business can gain access to an existing pool of potential customers quickly?; 2) Sampling; while there are many products that can be effectively sold without the consumer getting a hands on experience? Do successful products lend themselves to an extremely low barrier of entry?; 3) Viral marketing and distribution strategies or strategic channel partners; one of the most common problems when launching a new business is finding the budgets for marketing the new product or service. Smart entrepreneurs often find highly leveraged, strong word of mouth, strategic partnerships or other distribution channels; and 4) Clear and compelling brand strategy; a unified brand can provide a powerful springboard for all sales and marketing initiatives.

The only way for a company to make money, and let me emphasize this, the ONLY way to make money is through sales.  Everything else (marketing, customer service, etc) either facilitates or supports your sales efforts.  What and how you sell whatever it is you’re selling is up to you, but if you want to make that register ring then  go SELL, SELL, SELL.

This is just one of the key criteria forward-thinking investors use when evaluating the strength of entrepreneurs and their new ventures. How do you measure up? Go to www.venturephenomeproject.com to read all 80 criteria and swap knowledge with other entrepreneurs & investors.

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