Tag: finance

Finance by the masses

Can crowdfunding work for business?

“Crowd” is one of the hot terms of the moment – the idea that groups of connected, motivated people with the right incentives can deliver great value when their skills and talents are bought together.

One of application of this idea is crowdfunding where businesses, artists, writer and movie producers can call  on the community to donate or invest small sums into a project in return for a benefit like a copy of the book or being an extra in the movie.

The biggest success in this space is the New York based Kickstarter which was founded in 2008. Pozible, an Australian equivalent, that provides local creatives with the opportunity to raise funds without dealing with the hassles of US bank accounts or social security numbers.

Both of these services make money from taking a commission on the money raised, for Pozible users this fee ranges from 5 to 7.5%.

While the focus of Pozible and Kickstarter is on creative projects like books, music and movies, it’s interesting to consider how this model can work for other businesses.

Perhaps an IT business can offer a free year of support or food delivery service free shipping in return for a donation. The possibilities are endless.

It’s not without risks – there’s no doubt the regulators will at best be suspicious of fund raising through these services and anyone participating has to accept the risk of not getting any sort of return.

Since the 2008 banking crisis, funding for small business has dried up around the world. Many viable enterprises found their lines of credit being withdrawn and some even went under as a result.

With banks rationing small business credit, there’s a need – we could even argue an economic necessity – for alternative sources of capital. Crowdsourcing could be an option.

Now the days of easy credit are over; businesses, banks, investors and governments have to adapt. Believing models and regulations that were designed when capital was cheap and abundant won’t work in a very changed economy.

Crowdsourcing will be one of the issues confronting regulators, it’s going to be interesting to see how they deal with it.

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The pros and cons of bootstrapping

Should a business fund itself from cashflow?

There are plenty of ways of raising money for a business; venture capital, bank loans, private equity and – by the far the most common – bootstrapping, where a company finances it’s growth through its own cashflow.

An article in Tech Crunch by Ashkan Karbasfrooshan looked at the reasons why bootstrapping doesn’t work, his views are understandable Ashkan given his own business has raised $1.5 million in venture capital (VC) funding over the past four years.

Outside the Silicon Valley bubble, it’s worthwhile considering the real benefits and disadvantages to bootstrapping your business. As with any business tool there’s real pros and cons with all financing methods.

Benefits

There are a number of benefits with bootstrapping, in that it forces the business’ management to focus on the product and customers while giving founders full control of the business.

Total control

A bootstrapping business has total control over its destiny – the business owners answer to no VC, bank or outside imposed board of directors.

Those outside investors may also have different business objectives to the founders. Often a venture capital or private equity investor has a three to five year time frame while a founder may be looking further.

Also a mis-match between the founders’ and investors’ exit strategies will almost certainly be a problem should the opportunity to sell the business arise.

One of the biggest risks for a smaller business is banks can call in loans or ask for additional security – something that crippled many smaller businesses during 2009.

For those who’ve raised equity funding, founders can find their shareholdings diluted or even be fired from the business they created.

Customer focus

The business that is focused on funding itself pays close attention to the needs of its customers. The distraction of raising, and then managing, investors or lenders can distract from building the business.

Validating the business model

A successful business that has grown through funding itself is has, by definition, a valid and profitable business model. This is not necessarily true of VC or debt funded enterprises.

Overcapitalisition

In his Tech Crunch article,  Ashkan quotes Marc Andreessen and Jason Calacanis as saying “raise as much money as you can.”

This may well be conventional wisdom in Silicon Valley though the reality is a business can have too much money, as we saw in the original dot com boom with businesses such as Boo.com lavishing money on founders and expensive frills.

A business can be crippled by having too much investment money that distorts the founders’ objectives and allows the company to lose focus on helping customers and getting the product right.

Generally with bootstrapping this isn’t a problem unless the founders have an insanely profitable business, which renders the need for outside investors largely irrelevant.

Disadvantages

For all of bootstrapping’s advantages there are real downsides as well including the risk of being undercapitalised and the difficulty in attracting diverse management.

Undercapitalisation

One of the main reasons for business failures is under capitalisation; simply not enough money to grow the enterprise or to put it on a sustainable footing. This is a constant risk for bootstrapped businesses.

Inability to focus

Many owners or managers of bootstrapped businessese focused on making sales so they can pay the rent and make payroll; this distracts management from executing the longer term aims of the business.

Expertise

In taking an equity partner – either in private equity, venture capital or angel investor – the founders get the benefit of the investors’ expertise.

A good investor who has similar objectives to the founders can add real value and complement the original team’s strengths and weaknesses.

No one size fits all businesses

Overall there’s no black and white to bootstrapping versus borrowing money or finding an equity partner; all of them have their risks and benefits.

As entrepreneur Steve Blank points out, there are six types of startup and only two of them; the scalable and buyable (born to flip) are suited to the Silicon Valley venture capital model.

The real risk in business is assuming one way or another is the only way to fund an enterprise, for many it’s a combination of some or all of the methods to raise funds.

It’s quite possible to see a business first bootstrap to get established, then get a bank loan to finance growth, followed by a VC or seed investment that finally sells out to a private equity fund.

For many business owners though, funding the business out of cashflow is the most sustainable way to grow and profit. If you’re happy with what you’re doing, there’s no reason to be hassling for equity or begging at the bank.

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Mad, bad or dangerous: The One Percenters we need to avoid

There is a certain type of customer business need to be careful of.

“I’m not going pay you, your technician was constantly looking at his watch,” growled the customer when asked why she’d stopped a cheque for some work we’d done for her.

There’s many excuses for not paying your bills but a tradesman trying to keep the client’s bill to a minimum is an excellent dodge.

Over the phone call’s ten minutes, it was clear this lady was going to be a tough customer.

First the job wasn’t done properly, then the charges were too high, she accused us of taking advantage of vulnerable women and finally she was going to complain about us to her union.

It was clear we were in for a fight to get a hundred dollars from her, so I let it go. She went away believing she was right.

The saying “the customer is always right” was coined by US retail pioneer Marshall Field and exported around the world by Harry Selfridge, one of his employees who also founded a business empire.

We can be sure neither of them actually meant that customers are always correct in what they do, just that the key to successful service is the client walking away believing they are right.

Regardless of how well we deliver on our promises, there are always going to be some that aren’t happy. In most cases this is due to misunderstanding, or just a bad day on our part, but sometimes there’s the one percent of customers who are mad, bad or dangerous.

The Mad

Some customers just aren’t quite with us. These people, some of whom have genuine psychological problems, simply aren’t going to be reasonable.

There’s no point in fighting them as that’s only going to make their issues worse and maybe even transfer some of their problems to you.

Fortunately as you become more experienced in business you get better at detecting and avoiding these type of customers although there’s always the odd one who sneaks through.

The Bad

There’s a certain breed of people – and businesses – who don’t pay their bills, seeing their suppliers as banks and an invoice as an interest free loan.

Often these customers are charming and the perfect client before the bill is presented then they string you out for months of years before paying your invoices.

For these people and organisations, who are genuine deadbeats, there’s the fool me once, shame on you; fool me twice, shame on me philosophy. It’s usually better to write them off rather than sink hours of management time.

The Dangerous

Of all the bad payers, the most dangerous is the game player. To these people, not paying debts is an intellectual challenge which they enjoy and play for fun.

These folk will just as happily mess around the phone company or the tax office as much as the local plumber or newsagent, it’s just a game which they’ll play to their maximum enjoyment and your frustration.

For the big companies, these people can be a benefit as they justify the existing of entire bureaucracies dedicated in getting them to pay; small business though don’t have the time and resources to spend the hours of work over years to extract payment from them.

Thankfully these folk usually stonewall as the first invoice so there’s early warnings you’re dealing with trouble. Resist the urge to play the game with them as they are usually better at it than you.

Regardless of which category these bad debtors fall into, in each case it’s better for your valuable time and sanity to let them believe they are right, write the debt off and move on to helping customers who really matter.

Fortunately these people really are the One Percenters and only representative of a tiny proportion of our customers.

The taste of copping a loss is always painful, but at least we get good stories from the excuses they give. What’s the best reason you’ve heard for a customer trying to dodge a debt?

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A Capital Question

How do we raise money for a new business?

How do you raise funding for new venture? Business coach Lindy Asimus asked over the weekend. It’s a question that perplexes many people starting out a new enterprise or trying to grow an existing one.

The real question though is “how much capital do you need?” Being undercapitalised will often stunt a venture’s growth and is probably the reason why many otherwise excellent business ideas fail to achieve their potential.

How much money do you need?

While business plans are often disparaged, one of the great advantages of doing one is the budding entrepreneur gets an idea of the capital required along with the cash flow required to service any debts. Even if the business plan itself is filed away and never looked at again, understanding the upfront cash requirements can help avoid some nasty mistakes.

The other key factor is the business itself, if you’re buying a fast food franchise, setting up a store or fitting out a restaurant then there’s going to be some big upfront capital costs involved before you start trading but there is more to it than just the immediate cash needs.

What is the type of business?

A business’ capital needs are going to vary with the type of business and the objectives of the owners, not just in size but also in type. As business writer and educator Steve Blank says, there are six types of startups and for certain types an equity investment from say an angle investor or venture capital company will be more appropriate than a bank loan.

For small businesses, the type that Steve Blank describes as “work to feed the family” businesses, a bank loan that can be paid back out of cashflow is going to be the most obvious way to fund an enterprise while it would be rare a venture capital investor would even answer a phone call from such a business.

On the other hand, a family member or friend might be interested in taking equity in such a business, the old “families, friends and fools” is a time honoured way of setting up a venture.

Government grants

In these times of rampant corporate welfare for big banks and major corporations, it’s tempting to think the government may be able to help the small businessperson. Sadly most of the grants available are small sums for specific purposes like export programs or hiring trainees, they aren’t designed or intended to provide entrepreneurial capital.

Bootstrapping and “sweat capital”

Most businesses though are best served by “bootstrapping” and “sweat capital” for most, particularly in the service sectors, funding your business out of cashflow and the hard work of the founders is the way to grow a viable enterprise.

The term “sweat capital” refers to the founders working hard and capitalising their businesses from the sweat of their brows while  scrimping and saving every penny. Most founders of successful businesses have stories of spending years expending that “sweat capital” while living on cheap pizzas or packet noodles.

Bootstrapping, funding your business through sales, is the other great capital source. In many ways, this is the best form of capital in that it proves a business is viable and doesn’t involve signing over assets to banks or giving equity away to investment partners. Again a well thought out business plan quickly shows whether this is feasible.

So the question of capital is complex, but having enough is always the biggest struggle for those starting a business.

Of course it is possible to have too much capital and we might talk about that in another blog post.

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