Why would I seek venture capital for my company? If you are experiencing or expecting rapid growth, you may need financing that exceeds your personal resources and is more than you can borrow from traditional lending institutions.

What does it cost? It’s not unusual for a VC firm to target a return of five times their initial investment over the expected life of their investment. They make most of this money when they sell their investment, and they like an “exit strategy” that materializes within 3 – 7 years.

Would my company be attractive to venture capitalists? VC’s look for:
- product or service that is unique and has high growth potential –
- product or service that is “scalable” in that revenues can be quickly expanded
- management team that is “coachable”
- product or service has been proven as a concept and there is a market.

How would I choose a venture capital partner? Look for those with experience in your industry, have contacts that could help you, etc. Remember that the VC will  likely have a presence on your Board. Be sure that you’ll work well together and that they will be in a position to add value. You should also check on the reputation of the VC.

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1. Get to know  bankers at several  institutions. Find out which banks in your area make loans to firms like yours. Some banks specialize in business loans; others don’t. Some specialize in lending only to  certain industries. The best way to find out is to simply ask the bank.

2. Briefly summarize your firm’s value proposition and your strategic plan. If you can’t clearly articulate how you’ll effectively compete in your market, the chances of getting a loan are slim. Develop a business plan with three scenarios: Best case, most likely case, and worst case.  Be prepared to discuss in detail the assumptions behind those scenarios.

3. Think like a banker. Understand and be realistic about the risks of operating in your industry. Share your ideas on how to mitigate those risks. The bank will do a risk analysis anyway.

4. Develop at least two ways to repay the loan. Bankers look for primary and secondary loan repayment sources.  The more certainty that the banker has about your ability to make payments, the more likely it is you’ll get the loan plus the best interest rate.

5. Don’t ask for loans that should be funded with equity injections.  If your needs are best met by an angel investor, that’s where you should look for money.

6. Anticipate  questions. The bank will want to know how you plan to use the money, how reliable your financial information is, what kind of credit you have  and why you really need to borrow.

To find small business lenders, visit the small business loans section at Business.com.

Request a meeting with a SCORE mentor. In Cincinnati call (513) 684-6812.

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Advantages & Disadvantages

• You are in control of your  working hours and free from someone telling you what to do. However, you can easily  fall into the habit of working too much or too little , with dire results for you mentally and economically, as well as  your family relationship.
• You  gain  privacy and freedom to operate that cannot be found in a business office . However, you may not be able to find these at home if you have a family buzzing around your work space or you allow other distractions. Discuss this seriously with your family.
• The space that you will set aside  should be dedicated strictly for business. Can you make this happen?
• Overhead costs are relatively low and costs for commuting , lunch, clothing, daycare, etc., can be reduced.
• You can save considerable tax dollars by applying IRS-approved deductions for space and expenses used  exclusively for business.
• You are readily available for family needs. However, mixing  time for business with  time for  domestic responsibilities can cause conflicts.

In sum, working at home could result in many advantages, but you will have to exercise personal discipline and have family cooperation.

A Plan Is Necessary

Because your business is  home-based, it does not eliminate the need for a business plan to improve your chances of success. This involves  such factors as form of organization, an operations plan, financing, marketing, accounting, licenses and permits, etc.

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Case in Point: A physician who owned all the shares of a very successful and profitable medical corporation Sub S Corp with 7 doctors, asked for counseling to smooth the succession and transition of leadership roles in the corporation. The father of the owner had founded the practice and, despite his intentions to retire and encouragement from others to retire, had shown no inclination to back away from policy making and management responsibilities. He would periodically visit the practice to make operational decisions. In an effort to transition the practice, a new office manager was hired six months previously, but she had had little cooperation and success in being either trained or informed by the former bookkeeper who had been with the organization for 25 years. The loyal bookkeeper/ office manager and founder of the organization were trusted allies and both had expressed an interest in retiring—soon. The firm’s accountant was helpful to the new office manager and owner but shared only a limited amount of the information required to understand the financial position.

The problem was obviously a personal one between the founding physisian and his offspring to whom he had assigned the ownership shares in the corporation. The offspring was very emotional during the counseling session that was abbreviated by time constraints to see the afternoon schedule of patients. The suggestion for the owner to exert authority and take charge of the organization was poorly received. The counselor was thoroughly frustrated in his desire to mediate a workable solution and to find himself in the midst of a family matter. Family affairs are generally beyond the purview of SCORE counselors, because few families can view the issues from an objective perspective.

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Not long ago, I was helping a small business set up a new e-mail system when the owner’s assistant told me to set her password to the firm’s phone number–the same number posted on the firm’s website. She explained that was the standard password she was using for lots of different applications and online services, and that it was OK. After all, who was going to pick on her?

Lots of small businesses have that same casual attitude toward information security, thinking they’re too small to be targets. Wrong.

For one thing, criminal hackers and mischief makers routinely run automated scans on everything connected to the Internet–every router, every website–looking for vulnerabilities. It’s like walking down the street jiggling the door handles on every car to see who left the door open, whether it’s a shiny Mercedes or a rusty old Chevy.

Breaking into your small-business e-mail accounts might not be as big a win as hacking into a bank. But what if there are messages in your inbox that contain account signup notices for various online services? Pretty soon, an attacker can be resetting your passwords and extracting confidential data.

“Most small businesses are using computers to run their business, but they’re not protecting themselves because they think they’re small potatoes, and nobody would be after them,” says Richard L. Kissel, an information technology specialist at the National Institute of Standards and Technology. NIST partners with the Federal Bureau of Investigation and Small Business Administration. NIST gives this as a SCORE seminar for the San Diego chapter. 

Kissel has given a series of seminars on the topic of a small business outreach program. NIST published his paper “Small Business Information Security: The Fundamentals.”

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Step 2: Get out  and study your competitors . Visit  locations where their product is offered. Analyze the location, customer volumes, traffic patterns, hours of operation, busy periods, prices, quality of their goods and services, product or services offered, promotional techniques, positioning and  handouts. If feasible, talk to customers and  staff. You may want to contact a similar business in another city.

Step 3: Use your research to estimate your sales on a monthly basis for your first year. The basis for your sales forecast can be the average monthly sales of a similar-sized competitor’s operations operating in a similar market. Make adjustments for this year’s predicted trend for the industry. Be sure to reduce your figures by about 50% a month for the start-up months. Consider how well your competition satisfies the needs of potential customers in your  area. Determine how you fit into this picture and what niche you plan to fill. Will you offer a better location, convenience, a better price, later hours, better quality, better service? Consider population and economic growth in your  area. Using your research, make an educated guess at market growth over time and your market share. If possible, determine the number of customers you need to reach your sales goals..

Ask SCORE for help. In Cincinnati phone (513) 684-2812.

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Simply, cash flow shows how cash comes into and goes out of a business. Cash flow statements report where money comes from, where it goes and when the cash flows occur. Most often, a company tracks cash flow in three categories: operating, financing and investing.

• Operating Cash Flow is the cash generated day to day when a company sells its goods and services. When customers pay for these, cash flows into a company. Cash flows out when a company pays for the materials, labor and benefits, utilities, maintenance, and shipping needed to provide and deliver its product. Cash also flows out when: 1) interest is paid on loans and 2) federal, state and local taxes are paid and 3) inventory increases.  When inventory decreases cash flows in. After-tax profit is the difference between the incoming and outgoing cash flows.
• Investing Cash Flow is comprised of 1) the cash spent when a company invests in itself and 2) the cash returned when it sells assets. Investment cash is used to buy capital assets, another company, a proprietary process or a brand. Capital assets include equipment, buildings, or land having more than one year of operating life.
• Financing Cash Flow measures 1) cash inflows when a company borrows money and 2) cash outflows when a company pays off debt or when it pays dividends to its owners.

At the end of any time period—a day, a week, etc.—a company’s cash balance is equal to the cash it had at the beginning of the period plus the sum of the three cash flows.

Cash flow statements are important because they help a company manage its cash, receivables, payables and inventory levels and because they help owners decide whether they can afford an investment or whether they should take on or pay off debt.

Someone starting a business should consider using an accountant to set up his/her cash flow and other accounting and financial systems.

Courtesy, Thane Brown

Thane Brown worked more than 36 years for Procter & Gamble in both engineering and manufacturing roles, retiring as the Director of North American Engineering. After P&G, he taught Engineering Economics at UC and UD and wrote a textbook on the subject. He is now a member of the Greater Cincinnati SCORE chapter. For more information, go to www.scoreworks.org or call 513-684-2812.

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Friction manifests itself by causing barriers to entry for new competitors, limiting the number of outlets from which the consumer has to choose. Large companies, with multiple sales outlets, and economies of scale, have greater power to direct the marketplace.

The degree of friction in the developed world has been decreasing for some years now. Affordable air travel, overnight delivery, improved telephone and fax communications have shortened distances. Credit cards and toll-free numbers have spawned at-home shopping from sources across the country.

The Web has taken the friction in our economy down another notch. In principle, we can sell products and services to a worldwide audience as easily and effectively as our largest multi-national competitor.

In the friction-less economy, the challenge of differentiating ourselves from the competition becomes even greater. Successful small businesses tend to be those who can find some competitive edge, even when their product or service is similar to those around them.

Marketing professionals often call a business’ competitive edge their “unique selling proposition,” or USP. Pinpointing and refining one’s USP, however, is not a simple matter. An approach is unique only in the context of our competitors’ marketing messages.

Some marketing messages go beyond product and service characteristics. For example, Charles Revson, founder of Revlon, insisted that he sold hope, not makeup. Similarly, United Airlines sells “friendly skies,” and Wal-Mart sells “always” the low price. Do these slogans convey how each company views their customers? Does their selling proposition appeal to your preferences?

Sharpen your USP:

• Put yourself in your customer’s shoes; satisfy their needs, not yours.
• Know what motivates behavior and buying decisions.
• Find the real reasons people would buy your product instead of a competitor’s. Ask them!
• “Shop” the competition, be open-minded about your product, and never stop looking for ways to make your product stand out.

Try now to recast your business idea in terms of its competitive advantage. Prepare an industry analysis (size, customers, trends, and competitiveness). Identify what you see as your specific market, and estimate the share you think you can capture.

The Web can be a powerful research assistant. Virtually every major business puts product and service information on the Web, including business directory services and magazines.

Search engines can help in improving your understanding of your industry, and the key success factors. Test the resources available on the Web. Visit sites of major companies in the industry, where appropriate. Search the archives of business magazines for articles that give background and statistics.

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• assess your strengths and weaknesses
• establish business and personal goals
• assess your financial resources
• identify the financial risks
• determine the start-up costs
• decide on your business location
• do market research
• identify your customers
• identify your competitors
• develop a marketing plan

Business transactions

• select a lawyer
• choose a form of organization (proprietorship, partnership, or corporation, for example)
• create your business (register your name, incorporate the business, etc.)
• Get a web domain compatible with your chosen company name, or get an appropriate domain name first and let it guide selecting the business name.
• prepare a business plan
• select an accountant
• select a banker
• set up a business checking account
• apply for business loans (if applicable)
• establish a line of credit
• select an insurance agent, obtain business insurance

First steps

• review local business codes
• obtain a lease
• obtain a business license or permit (if applicable)
• get a federal employer identification number (if applicable)
• get a state employer i.d. number (if applicable)
• get business cards
• set up at least a basic web site
• line up suppliers (if applicable)
• get furniture and equipment
• join professional organizations, subscribe to trade journals
• set an opening date

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In realizing the promise of CNN, Turner demonstrated another facet of the entrepreneurial spirit, persistence. There are a lot of bright ideas that never reach fruition; taking a “raw” idea and converting it into a successful business model is very hard work.

 And that work never stops. No matter how innovative your idea, the competition is always just behind you. With anything less than constant creative effort on your part, they may not stay behind you.

 Are you still with me? Here is where I reveal why everyone isn’t an entrepreneur:

 No opportunity is a sure thing, even though the path to riches has been described as, simply “…you make some stuff, sell it for more than it cost you… that’s all there is except for a few million details.” The devil is in those details, and if one is not prepared to accept the possibility of failure, one should not attempt a business start-up.

 It is not indicative of a negative perspective to say that an analysis of the possible reasons for failure enhances our chances of success. Can you separate failure of an idea from personal failure? As scary as it is to consider, many of the great entrepreneurial success stories started with a failure or two.

Some types of failure can indicate that we may not be entrepreneurial material. Foremost is reaching one’s level of incompetence; if you are a great programmer, will you then be a great software company president? Attitudinal problems can also be fatal, such as excessive focus on financial rewards, without the willingness to put in the work and attention required. Addressing these possibilities requires an objectivity about ourselves that not everyone can manage.

Other types of failure can be recovered from if you “learned your lesson.” A common explanation for these is that “it seemed like a good idea at the time.” Or, we may have sought too big a “kill;” we could have looked past the flaws in a business concept because it was a business we wanted to be in. The venture could have been the victim of a muddled business concept, a weak business plan, or (more often) the absence of a plan.

When small businesses fail, the reason is generally one, or a combination, of the following: 

• inadequate financing often due to overly optimistic sales projections;
• management shortcomings, such as:�
  • inadequate financial controls, 
  • lax customer credit,
  • inexperience, and
  • neglect
• misreading the market,�
  • indicated by failure to reach the “critical mass” required in sales volume and profitability, 
  • often due to competitive disadvantages or market weakness.

In a recent Wall Street Journal article titled “Why My Business Failed,” Ken Elias cautions that “even if the concept is right, it won’t fly if the strategy is wrong.” Still, on being asked whether he would start another business today, he answers: “Absolutely. The experience is fabulous, exciting and the possibility of success is always there.”

It's often a gamble

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