Choose the Right Funding for your Startup

No matter what kind of business you own, ideally, your products and customers should provide all the funding that it needs.  But, reaching that can be tricky and often takes time. Choosing the right way to fund your business as your customer base and revenue grows is critical.  There are a number of different ways to get the funding you need it your company grows.  Here are some of the considerations to keep in mind when choosing your funding sources.

Bootstrapping

Since the goal is to have your customers provide all the funding for your business, why not try that from the beginning.  Nationally, as funding markets are "correcting for years of overly exuberant startup funding," or in states like Vermont where startup capital has always been difficult to find, bootstrapping your company can be an attractive option.

With bootstrapping, you create a profitable product from the beginning and then reinvest the early revenue to improve the product, expand your customer base, and grow your profits.  The process strongly aligns with the principles of the Lean Startup methodology, which emphasizes continuous validated learning.  Bootstrapping requires a strong internal drive, a willingness to build sweat equity, and a lifestyle that gives you the flexibility roll with the inevitable ups and downs of income.

It also requires that you develop and sell a good product quickly. When your only source of cash is revenue from the products you sell, you must have a product that people want to buy from the start. With outside funding, poor product performance can be masked.  When funding runs out for these products, they fail in the marketplace.

Without external investors, you continue to own and control your entire company and you can grow and learn at your pace without answering to anyone else.

Crowdfunding has become a popular mechanism for bootstrapping a new product.  Platforms like Kickstarter and IndieGoGo allow businesses to offer the public early access to a product, typically for a reduced price.  This allows you to test the demand for a product before it is produced and to collect the funds needed to make a product before you deliver it.  Crowdfunding allows you to make larger jumps in scale than would otherwise be possible if you had to make the product before you sold it.

External funding

Not every business is suited for bootstrapping.  Businesses that are very capital intensive will likely need outside funding since it will take a lot of money before they are able to generate revenue.  Similarly, businesses that are looking to quickly grow to massive scale (hundreds of thousands of customers and up) can benefit from outside investment to power the rapid development and scale up needed.

Additionally, not every business owner is well suited for bootstrapping.  If you benefit from having a strong outside source of motivation and direction, bringing in an outside investor may increase your chances of growing your business successfully.

If bootstrapping isn't the right fit for you or your company, you will need external funding.  Choosing the right type is extremely important.  Should you take a loan from a bank?  Should the business take an investment in exchange for equity?  Read below to learn more about options for external financing.

Equity Financing

Equity financing is the umbrella term for investments in which the investor takes an ownership stake in the company in exchange for providing funding.  There are many different types of investors who do equity investments and each is suited for particular types and/or stages of a business's growth.

Angel Investors

Angel investors are typically "wealthy individuals who like to invest their personal funds in startups."  They tend to be less formal than venture capitalists, and while they typically take an ownership stake some look for a percentage return on their investment instead.  Their informality and generally smaller investment size makes them well suited for early investment rounds before other investors would be interested.

Angel investors are also typically people that you already have a trusting relationship with, which makes networking and relationship building vital to securing this type of funding.  Additionally, since angel investors often have entrepreneurial backgrounds, they may be able to provide expertise and access to networks beyond their financial investment.  However, as with any investor, it is important that you can work well with an angel investor long term.

Family and friends may also invest in companies in a similar manner.  Depending on their background, they might act like an angel investor or they may invest based on their faith in you rather than on a deep understanding of your business.  Either way, they are often one of the earliest sources of funding that a company is able to access.

Venture Capitalists

Venture capitalists (VCs) are organizations of investors.  Run by professional investors, they use funds raised from partners "partners such as pension funds, endowments, and wealthy individuals."  In general, VCs are interested in later stage companies that have already shown potential for long-term growth.  VCs also typically look for more control in the company than angel investors do.  Their investments will often require seats on the company's board and sometimes even the ability to replace you as CEO  the company.

Even more so than angel investors, VCs bring business expertise and access to networks to help companies grow.  This, coupled with their ability to make large investments, makes them a powerful partner for companies that are looking to quickly grow to massive scale.  In exchange, they look for much greater control over the company.  This increased control makes it vital for you, as a business owner, to carefully choose which VCs you take investments from.

Strategic Investors

Strategic investors are similar to VCs, but are typically corporations making investments instead of funds.  For example, when Coca Cola invests in an up and coming beverage company or Budweiser invests in a craft brewer, these are strategic investments.  The level of funding can vary greatly depending on the stage of the company.  These company's investment styles are similar to VCs and many of the same benefits and drawbacks still apply.  They often have deep knowledge and experience in the market and can provide expertise that may be impossible to find anywhere else.  In exchange, they are also likely to require high levels of control over the company.

Debt Financing

Finally, debt financing is an option for some companies that do not want to give up ownership or control of the company.  Typically, debt financing comes in the form of loans from banks, though sometimes angel investors will provide funding with a fixed return.  The benefit of debt financing is that you, as the business owner, retain control over your company.  However, banks are also often less likely to lend to businesses with significant risks.  Thus, if your business has high capital requirements but relies on relatively proven technologies you are more likely to be able to secure debt financing.  Keep in mind that debt financing usually gets paid back before any return is given to equity holders.  So, a business with a lot of debt will be less attractive to VCs and strategic partners.

Regardless of how you want to fund your company, you will need a plan for turning your ideas into a business.  Contact us today to learn more about how we can help you prepare your ideas and your business for growth.

The 90/90 Rule, or Why Everything Takes So Long

Also, how to spend your new funding, get more sleep, talk with your hands, and find a new job!

Just Got Start-Up Seed Money?

Cause to celebrate? According to this author, "You've just sold a piece of your business. You shouldn't celebrate this any more than you celebrate your mortgage or the balance on your business credit card."  Read this article to find out what you should do to make the most of your opportunity.

Sleep Well, Work Well

Very few people can run a marathon every day and do it well every time. A good marathon run is the culmination of intentional schedule of work and rest. Leaders are like marathon runners. Sleep is an essential part of the equation for a good leadership run. "When leaders trade away sleep in order to work more, they become more abusive toward subordinates, have less effective working relationships with their employees, are less able to inspire others, and see engagement rates drop on the teams they manage."   In addition, whether you are a leader or not, sleep deprivation leads to impulsiveness, disrupts decision making, and undermines creativity and innovation. If you are in the habit of giving up sleep to get more work done or work in a corporate culture that encourages you to do this, read this article to find out why and how you can work less, sleep more, and be more productive. 

Use Your Hands to Get People to Listen

When young children are learning to communicate, teachers will remind them that to best be heard, they need to "use their words". As an adult, if you want people to listen, you also need to use your words. In addition, here are seven hand gestures (all polite) that add power to your words and get people to listen. Using the right ones at the right time is key.  Learn what they are and when to use them in this article from Entrepreneur.com.

Can You Do a Job You've Never Done Before?

I have an acquaintance who is in the middle of a job change after 23 years in the same position. With a wealth of experience to offer, she's considering jobs that may seem far afield. To be successful, she needs make the case to herself and then to potential employers that she is the right match. In this article you'll learn how to make that case for yourself through self-assessment and feedback from those who know you well.  These same principles apply to entrepreneurs.  When starting a new business you will likely have new roles and new responsibilities that you've never had before.  Make sure you know which are a fit for you and which you will need help with!

Why Does Everything Take So Long?

Have you ever started a project optimistically thinking, "this will be fast and easy", only to find that it was far from it?  You're in good company. Estimating the time needed to complete a complex project takes both art and science. According to this author, there's a difference between when we want something to happen, when it should happen, and when it actually will happen. Read this article for some basic tips about how to turn optimism into realism and set better expectations for project completion.

Have an idea for a business but don't know where to start?  Trying to grow your business but feel like you’re running in circles?  We can help you move toward the business of your dreams!  Get in touch today!

Building your Recipe for Success

Last week I showed you a picture of the giant pot of sauce that I made in advance of my brother's wedding and I shared some links about the ingredients for business success. But, ingredients are only the start.  You still need to combine those ingredients to make your dish.  All the steps you take ultimately make up your recipe.  Follow those steps well and you should end up with a delicious meal at the end.

Of course, there are different types of recipes for different dishes and often many versions of the same general recipe that make slightly different dishes (think of all the different ways to roast a chicken or make a stir-fry).  In the business world, we can think of a business model in the same way as we do a recipe.  Your business model includes everything it takes to make your product and sell it.  And, like recipes, there are often variations on common types of business models.  Continuing the lessons from my brother's wedding, below are examples of common business models found among the 23(!) vendors that were involved.

Multi-Sided Platforms

Multi-sided platforms connect multiple, independent groups of customers.  The value of the platform is found in the interactions that occur through those connections. Benefiting from the network effect, the more users the platform has the more valuable it becomes.  Multi-sided platforms are a common business model for internet companies.

Among the wedding vendors, the wedding website company called The Knot makes use of a multi-sided platform model.  The Knot's platform connects wedding vendors with couples that are planning weddings.  It offers couples extensive resources about planning their wedding, including planning tools, articles about common wedding related topics, and access to two-way communication with other Knot members.  For couples, this access is free.  The Knot also provides a listing and advertising platform for wedding vendors, allowing them access to couples planning their wedding.  Vendors pay a commission to The Knot when couples purchase their products or services through the website.

By connecting couples and wedding vendors, The Knot is able to provide wedding vendors easier access to a much larger pool of potential customers, attracting those customers with free wedding advice.  The more customers there are on the site, the more valuable it is to wedding vendors, the more money The Knot makes, and the more advice they are able to provide to couples.  A classic win-win situation.

Google is another example of a multi-sided platform, which connects searchers with advertisers by offering the customers a free search engine.  Advertisers pay Google to put their advertisements at the top of the search results for relevant searches.  The advertisers benefit from highly targeted advertising and Google makes money for connecting them with the searchers they want to reach.  The more content that is available and easily searchable through Google, the more people will use it for searches. The more people use it for searches, the more valuable it is to advertisers.

Freemium Offerings

Like the multi-sided platform model, the freemium business model offers a blend of free and paid services.  However, this model differs from the multi-sided platform model.  The multi-sided model makes different offers to different customers on the platform (e.g. wedding advice for couples and targeted advertising for vendors).  In the freemium model, companies offer users a basic service free of charge and charge users for access to a premium version.  This model works when the cost of servicing additional users is minimal and the small percentage of users that pay for the premium version cover the costs of providing the platform.  The benefit of this approach is that it makes it easier to get new customers hooked when they can use limited functionality for free.  Users who outgrow the free offering will often happily upgrade to the paid version.

Interestingly, The Knot is also an example of a freemium business model.  In addition to the multi-sided platform for couples and vendors, The Knot also offers couples a wedding website to help them communicate with their guests and manage registries, RSVPs, etc.  Couples can register for a free website, but the URL is unwieldy and the website has limited functionality.  Couples can upgrade to a premium website to gain access to a customized URL and additional functionality for their website.

Dropbox, which provides a cloud-based file storage and sync platform, is a well known freemium model business.  Dropbox is free to use for a relatively small amount of storage.  However, if you need more storage or more advanced tools for managing access to files, you can pay for their premium offerings.  Because adding more storage to their platform is inexpensive, the customers that pay for the premium service more than cover the cost of providing the service for free.  

The Long Tail

The long tail business model focuses on selling a wide array of niche items, each with a low volume of sales.  Compared with high-volume sales models, the long tail model benefits from lower inventory costs and attracts customers who value specialty items. The internet has been a key factor in the rise of this model.  By decreasing the costs to reach consumers of niche products it has become much more feasible to offer such a wide variety of products.

Among the wedding vendors is a company through which my brother purchased customized, engraved glasses for his groomsmen.  The company, Magic Wood Shop, lists their products on Etsy (another multi-sided platform) and offers a wide array of products (e.g. drink glasses, pocket knives, bottle openers, etc.).  Each product is personalized to order using laser engraving.  Because the same process can be used to make a wide variety of different products, the cost of the machine is spread out and the personalized products can be made economically.  Thus, where other companies focus only on accounts that might order hundreds or thousands of an engraved product, Magic Wood Shop is able to serve customers that may only want a single item.

The Long Tail model has also started to transform the book publishing industry with the rise of direct publishing platforms.  On these platforms, authors can upload their own work.  When a customer orders their work, the platform prints it to order and sends it to the customer.  The author then gets a cut of the sale.  This "print on demand" ability is usable across all of the works that authors upload and the platform incurs minimal cost until the work is ordered, printed, and delivered.  Thus, it can offer a significantly wider selection than a traditional publisher, which tries to anticipate demand and print enough inventory to meet it.

Choosing the Right Model

Choosing the right model for your business can be difficult.  It requires carefully considering your customers, your value proposition, and how your customers will want to pay for that value.  In an upcoming blog post, I'll introduce you to a tool for organizing your business model on a single page, making it much easier to understand and refine as you test your ideas out.

Do you have an idea for a business but aren't sure where to start?  Give me a shout!  I can help turn your idea into a business and set you on the path to building your own, successful business.  Contact me using the form below!

Finding the Recipe for your Business Success!

My brother got married this past weekend!  I tell you this because it makes it seem more reasonable that I made 15 quarts of bolognese sauce (photo below) to assemble into lasagnas over the past week (so many visiting relatives to feed!).  So, you might say I have cooking on the brain.  The truth is, business success shares much in common with cooking.  There are many ingredients and numerous ways to combine them. Some have something unique that you hadn't considered before or that really resonates with you.  As a business person, you need to find the recipe that works best for you, the one that suits your tastes. This week, I have five articles for you to read about the ingredients of business success.  I expect that you will see common themes among all of the articles yet find that each article brings a different and unique perspective.  No single recipe is the right one, it all depends on your goals!

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7 Ingredients for Small Business Success Online 

If you are an entrepreneur and are scaling up your business, chances are you are focusing a good amount of marketing energy on content marketing.  Content marketing entrepreneur Suhaib Mohammed has identified seven "mindsets, traits, and abilities necessary for success online.  Read about why passion, an attitude of service, obsession for the customer and for quality, compelling content, innovation, and consistency all factor into the recipe for success.

Business success with 10 ingredients

Debbie Bixler, who specializes in direct sales marketing training says that a system is the key to success in business. She lists ten ingredients that lead to success. Among her most important: Smile like a tiger - Smiling creates power for you and for everyone around you. Like the way this sounds?  She has 9 more!

Trust is the One Ingredient That Rules Them All

Want to know more about the most important ingredient in business success? Ric Edelman of Edelman Financial Services will tell you 4 ways to acquire and maintain trust. Trust comes in four flavors.  Learn what they are and how to blend them in this insightful article.

Brain salad - The Knowledge You Need to Succeed

According to Siimon Reynolds, you don't have to be smarter than everyone else to succeed in business.  What you need is three types of knowledge.  Do you have specialized industry knowledge?  Do you know how to build a business? Do you know how to get things done?  How good is your brain salad? Read the article to decide how it rates.

Richard's 11 Ingredients for Business Success

Richard Rea is a CPA from Ohio who founded a firm in 1938 which now employs more than 250 people and has multiple offices.  Sounds like he found the right recipe for success.  Work hard, be dedicated, be humble are the first three.  Read about Richard's 11 ingredients and see how you can make your own sauce for success.

Let me know what you think of these links using the contact form below!

Building your Growth Engine

Starting and building your own business is exciting and scary at the same time.  Turning an idea into a business is full of unknowns, chances to learn, and pitfalls to avoid.  Growing a business challenges you to change and grow as a leader as your business changes and grows.  Fear not, you are not alone!  Iconic businesses, like Apple and Ben & Jerry's, were literally just two creative people in a garage trying out an idea. As their start-ups took off, they faced the same challenge that all startup leaders face: how to evolve their leadership style to match their company's evolving needs.  As a great example, read HubSpot CEO Brian Halligan's story about how he had to learn to say no as HubSpot grew from start-up to scale.

Not all businesses grow to the size of Apple, Ben and Jerry's or HubSpot, but significant growth is possible even at smaller scales.  Regardless of the size you aim to be, building your growth engine involves the same progression. There are three major phases involved in starting and growing a business—start-up, scale-up, and build out. In the paragraphs below, I'll walk you through them. For each phase, I point out key tools and techniques that will help you excel at your current stage and set you up for further success as you grow.  You'll see a common theme of constant learning and iterations throughout, even as the focus changes through each stage of growth.  Check them out and reach out to us if you have any questions!

Start Up

In the Start Up phase, designing your business model and proving out your product-market fit are your top priorities.  This requires lots of experimentation and exploration.  Developing a business plan is a good step, though a traditional multi-page business plan is likely overkill.  Instead, try a Business Model Canvas.  These single page business plans allow you to quickly outline the major components of your business, from your core value proposition to your cost and revenue structures.  Our founder, Carl Lorentson recalls, "When I was starting up, these proved to be more useful than the formal business plan I put together in a class I took."  We continue to use them when we are considering new services for our clients because they allow us to efficiently outline the idea and ensure we have a complete offering.

Once your expected business model is defined, you must verify it in the market place.  Iteration and continuous learning are the name of the game.  An excellent approach is the Lean Startup methodology's feedback loops.  This process allows you to learn how your product or service is actually received in the market, adjust your approach, and observe the impact of your changes.  Using iterations to develop a minimum viable product (MVP), refine your business model, or improve internal operations is one of the most powerful habits you can adopt as a business owner.  It's rare that your original idea is the idea that finally sticks.  In fact, many well known companies started as something else entirely.  From Twitter and Paypal to Starbucks and Nintendo, big changes in business focus are common, especially when starting up a new company.

Initial Scale Up

As your product-market fit solidifies and your business model takes shape, you can start to scale up. At this stage, stepping up your marketing to bring in more customers is crucial.  Using social media to amplify your message, especially by using your earliest adopters as evangelists should allow you to quickly bring in more customers, more sales, and more revenue.  Tesla's Elon Musk does this well, consistently using social media to communicate with Tesla customers.

As much fun as more sales and more customers are, you can easily become a victim of your own success as you are overwhelmed by a rapid increase in customers and orders.  Now is the time to add feedback loops that are more focused on your internal operations.  The retrospective approach, adopted from agile software development practices, is a powerful tool to organize your team.  At RIS, we use these sessions internally to constantly evaluate and change how we are working, aiming for ever increasing efficiency throughout our company.  Continually reviewing how the many functions of your company (e.g. marketing, sales, production, shipping, etc.) are working together is a key step to ensuring your success.  Using the same iterative foundation as the lean startup model, this approach is a natural evolution of your business management toolbox to support greater scale.

Growth, Full Scale Up, and Build Out

During scale up, you will bring in an increasing number of customers and continuously refine how you and your team work together to serve them.  As you move beyond scale up, and your company continues to grow in size and you as an owner will become more distant from the on-the-ground decisions that will be made every day.  As you gain employees to coordinate and departments continue to grow and mature on their own, you will once again need to shift the focus of your organizational development to prepare for success as an established company.

Efficiency becomes the name of the game.  Driving out cost and delivering to your customers quickly, effectively, and efficiently allows you to create the most value for both your customers and your bottom line.  Software should be carefully selected and implemented to support all the functions of your business and integrate them.  The principles of Lean Manufacturing come into play as you look to avoid waste and continually work more efficiently.  Again, there are ample examples of the power of lean manufacturing, with Toyota probably being the most famous for adopting its principles to produce high quality products at scale.  The principles apply no matter how big or small your company is.  Finding and eliminating bottlenecks in processes will increase your productivity, profitability, and sanity. The retrospectives that were used during initial scale up should be continued and replicated at the department and team levels to encourage the same continuous improvement that was needed when the company was first starting to grow.  

Additionally, the feedback loops, established when the company first started, remain vital.  Collecting the data becomes more complex as your company grows.  Investing in software systems to provide a complete picture of your business by collecting and aggregating data from all corners is vital.  As your business continues to mature, business intelligence software, data warehouse, and even artificial intelligence could become components of your information systems.

All Grown Up

Once you have gone through these phases, you can hardly be considered a start-up company anymore.  With an established product, strong customer demand, and top-notch people and processes to connect them, you have become a mature company.  Now you get to figure out what's next?  New products?  Acquire other companies?  Sell your business and retire to a beautiful place of your choosing?

You can build a successful business!  We can help!  Find out more about how we can help you grow at the links below, or contact us for a free consultation!