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24 Mar

As an entrepreneur seeking business finance, it is crucial that investors see you as intelligent, credible and competent. Your business plan can support or deny that you possess the above attributes, depending on several important details within the text. Most entrepreneurs have heard what NOT to write (i.e., "Our competitors do not exist, and our management team is unbeatable"), but the following five tips are excellent examples of what you SHOULD do to gain credibility and be taken seriously by a venture capitalist.

 1. Research your market. Probably the most important element of the business planning process is that it forces you as an entrepreneur to investigate your market. Make sure you speak to potential clients, not just family and friends. You need to find real evidence that people in the market will be willing to part with their cash in order to get hold of your product/service. The information you gain here can be used for the business plan. the financial projections, creating the product or service offering, marketing your business and a whole range of related benefits. So first step when thinking of launching a new business, product or service = Get into your market and find out if there is a need.

 2. Keep it real. When it comes to your financial projections, make sure they are realistic. Do a "sanity check" by looking at your income statement, particularly your year-to-year growth and your profit margins. If something seems "too good to be true," it probably is. Dig through your assumptions and temper them to make sure they're all realistic. Also, keep in mind that not everything will go as planned.

 On the other hand, if you can realistically support that your business will double in size every year, by all means do so. But be prepared for healthy skepticism from investors, and be ready to answer all of their questions in detail. Another common assertion is that a business will have unrealistically strong operating margins. If you can show data from comparable companies that are actually making those margins, then your projections are believable.

3. Examine the barriers to entry. This is an overlooked part of many business plans. You will win credibility and favor in the eyes of investors if you can articulate something real other than a "first mover advantage." It's been said that the first-mover advantage only lasts until there's a second mover.

4. Define, analyze, and explain your customers' needs. Show the investor that you've done your homework. Use as many reliable third party resources (reports, studies, etc.) to show how your business provides exactly what the market is demanding.

5. Talk about the relevant market, not the total market. This is a common mistake in healthcare business plans; the healthcare market, broadly defined, is worth $1 trillion, but that includes everything from knuckle bandages to titanium hips and open-heart surgery. When writing the plan, include the eye-popping market size figure, but be certain to condense that figure down to your relevant market. For example, caffeinated citrus-flavored sodas are a fraction of the global beverage market, but the market size for this specialized product is much more meaningful to an investor.

6. Draw attention to tangible milestones and achievements. Have you been successful in the past? Investors will think you're more likely to succeed in the future.

Lastly you need to ensure that potential investors are clear on what is in it for them. Speak about your dreams and visions all you like, with 99% of people out there, the main issue is being clear on how they will benefit from the deal.

25 Mar

Starting a business today is certainly not the same challenge as it was in the days of our parents. Business plans are becoming more important, investment is easier to access, business support communities are readily available for those seeking support and both graduates and non graduates are starting to see entrepreneurship as a real alternative to being employed by large organisations. 

Very much in the same way as technology seems to becoming cheaper as new methods and processes are developed to make technology available to a wider audience. Business seems to be following much of a similar patterns seems to be seen for entrepreneurs where, in the service industry especially, where much lower levels of investment is needed as there fewer assets to buy prior to starting. The service based business basically needs the entrepreneur, knowledge, support, IT and communication tools and possibly somewhere to work from. Looking at what is needed its clear that because of the lower risk taken on by investors, these investors can now invest in a wider range of businesses, with the knowledge that only one or two successes will more then cover the cost of the losses made on others.

Lets look at the factors that may be leading to this in a bit more details.

1. Plenty of businesses starting

So my first prediction about the future of web startups is pretty straightforward: there will be a lot of them. When starting a startup was expensive, you had to get the permission of investors to do it. Now the only threshold is courage.

Even that threshold is getting lower, as people watch others take the plunge and survive. In the last batch of startups we funded, we had several founders who said they'd thought of applying before, but weren't sure and got jobs instead. It was only after hearing reports of friends who'd done it that they decided to try it themselves.

Starting a startup is hard, but having a 9 to 5 job is hard too, and in some ways a worse kind of hard. In a startup you have lots of worries, but you don't have that feeling that your life is flying by like you do in a big company. Plus in a startup you could make much more money.

As word spreads that startups work, the number may grow to a point that would now seem surprising.

We now think of it as normal to have a job at a company, but this is the thinnest of historical veneers. Just two or three lifetimes ago, most people in what are now called industrialized countries lived by farming. So while it may seem surprising to propose that large numbers of people will change the way they make a living, it would be more surprising if they didn't.

2. A basic formula and standard
When technology makes something dramatically cheaper, standardization always follows. When you make things in large volumes you tend to standardize everything that doesn't need to change.
At Caban we still only have a small team, so we try to standardize everything. We could hire employees, but we want to be forced to figure out how to scale investing.

We often tell startups to release a minimal version one quickly, then let the needs of the users determine what to do next. In essense, let the market design the product. We've done the same thing ourselves. We think of the techniques we're developing for dealing with large numbers of startups as like software. Sometimes it literally is software, like Hacker News and our application system.

One of the most important things we've been working on standardizing are investment terms. Till now investment terms have been individually negotiated. This is a problem for founders, because it makes raising money take longer and cost more in legal fees. So as well as using the same paperwork for every deal we do, we've commissioned generic angel paperwork that all the startups we fund can use for future rounds.

Some investors will still want to cook up their own deal terms. Series A rounds, where you raise a million dollars or more, will be custom deals for the forseeable future. But I think angel rounds will start to be done mostly with standardized agreements. An angel who wants to insert a bunch of complicated terms into the agreement is probably not one you want anyway.

3. The opportunity to to be bought
Another thing I see starting to get standardized is acquisitions. As the volume of startups increases, big companies will start to develop standardized procedures that make acquisitions little more work than hiring someone.

Google is the leader here, as in so many areas of technology. They buy a lot of startups— more than most people realize, because they only announce a fraction of them. And being Google, they're figuring out how to do it efficiently.

One problem they've solved is how to think about acquisitions. For most companies, acquisitions still carry some stigma of inadequacy. Companies do them because they have to, but there's usually some feeling they shouldn't have to—that their own programmers should be able to build everything they need.

4. We can take on more risk
Risk is always proportionate to reward. The way to get really big returns is to do things that seem crazy, like starting a new search engine in 1998, or turning down a billion dollar acquisition offer.

This has traditionally been a problem in venture funding. Founders and investors have different attitudes to risk. Knowing that risk is on average proportionate to reward, investors like risky strategies, while founders, who don't have a big enough sample size to care what's true on average, tend to be more conservative.

If startups are easy to start, this conflict goes away, because founders can start them younger, when it's rational to take more risk, and can start more startups total in their careers. When founders can do lots of startups, they can start to look at the world in the same portfolio-optimizing way as investors. And that means the overall amount of wealth created can be greater, because strategies can be riskier.

5. Entrepreneurs seems to be becoming younger

If startups become a cheap commodity, more people will be able to have them, just as more people could have computers once microprocessors made them cheap. And in particular, younger and more technical founders will be able to start startups than could before.

Back when it cost a lot to start a startup, you had to convince investors to let you do it. And that required very different skills from actually doing the startup. If investors were perfect judges, the two would require exactly the same skills. But unfortunately most investors are terrible judges. I know because I see behind the scenes what an enormous amount of work it takes to raise money, and the amount of selling required in an industry is always inversely proportional to the judgement of the buyers.

Fortunately, if startups get cheaper to start, there's another way to convince investors. Instead of going to venture capitalists with a business plan and trying to convince them to fund it, you can get a product launched on a few tens of thousands of dollars of seed money from us or your uncle, and approach them with a working company instead of a plan for one. Then instead of having to seem smooth and confident, you can just point them to Alexa.

This way of convincing investors is better suited to hackers, who often went into technology in part because they felt uncomfortable with the amount of fakeness required in other fields.

6. So much support for entrepreneurs
It might seem that if startups get cheap to start, it will mean the end of startup hubs like Silicon Valley. If all you need to start a startup is rent money, you should be able to do it anywhere.

This is kind of true and kind of false. It's true that you can now start a startup anywhere. But you have to do more with a startup than just start it. You have to make it succeed. And that is more likely to happen in a startup hub.

I've thought a lot about this question, and it seems to me the increasing cheapness of web startups will if anything increase the importance of startup hubs. The value of startup hubs, like centers for any kind of business, lies in something very old-fashioned: face to face meetings. No technology in the immediate future will replace walking down University Ave and running into a friend who tells you how to fix a bug that's been bothering you all weekend, or visiting a friend's startup down the street and ending up in a conversation with one of their investors.

The question of whether to be in a startup hub is like the question of whether to take outside investment. The question is not whether you need it, but whether it brings any advantage at all. Because anything that brings an advantage will give your competitors an advantage over you if they do it and you don't. So if you hear someone saying "we don't need to be in Silicon Valley," that use of the word "need" is a sign they're not even thinking about the question right.

And while startup hubs are as powerful magnets as ever, the increasing cheapness of starting a startup means the particles they're attracting are getting lighter. A startup now can be just a pair of 22 year old guys. A company like that can move much more easily than one with 10 people, half of whom have kids.

The mobility of seed-stage startups means that seed funding is now a popular business. One of the most common emails we get is from people asking if we can help them set up a local clone of Caban. But this just wouldn't work. Seed funding isn't regional, just as big research universities aren't.

Is seed funding not merely national, but international? Interesting question. There are signs it may be. We've had an ongoing stream of founders from outside the US, and they tend to do particularly well, because they're all people who were so determined to succeed that they were willing to move to another country to do it.

The more mobile startups get, the harder it would be to start new silicon valleys. If startups are mobile, the best local talent will go to the real Silicon Valley, and all they'll get at the local one will be the people who didn't have the energy to move.

This is not a nationalistic idea, incidentally. It's cities that compete, not countries. Atlanta is just as hosed as Munich.

7. More effective choices need to be made
If the number of startups increases dramatically, then the people whose job is to judge them are going to have to get better at it. I'm thinking particularly of investors and acquirers. We now get on the order of 1000 applications a year. What are we going to do if we get 10,000?
That's actually an alarming idea. But we'll figure out some kind of answer. We'll have to. It will probably involve writing some software, but fortunately we can do that.

Acquirers will also have to get better at picking winners. They generally do better than investors, because they pick later, when there's more performance to measure. But even at the most advanced acquirers, identifying companies to buy is extremely ad hoc, and completing the acquisition often involves a great deal of unneccessary friction.

I think acquirers may eventually have chief acquisition officers who will both identify good acquisitions and make the deals happen. At the moment those two functions are separate. Promising new startups are often discovered by developers. If someone powerful enough wants to buy them, the deal is handed over to corp dev guys to negotiate. It would be better if both were combined in one group, headed by someone with a technical background and some vision of what they wanted to accomplish. Maybe in the future big companies will have both a VP of Engineering responsible for technology developed in-house, and a CAO responsible for bringing technology in from outside.

At the moment, there is no one within big companies who gets in trouble when they buy a startup for £20 million that they could have bought earlier for £2 million. There should start to be someone who gets in trouble for that.

8. Education is evolving

If the best graduates start their own companies after university instead of getting jobs, that will change what happens in university. Most of these changes will be for the better. I think the experience of university is warped in a bad way by the expectation that afterward you'll be judged by potential employers.

One change will be in the meaning of "after university," which will switch from when one graduates from university to when one leaves it. If you're starting your own company, why do you need a degree? We don't encourage people to start startups during university, but the best founders are certainly capable of it. Some of the most successful companies we've funded were started by undergrads.

I grew up in a time where university degrees seemed really important, so I'm alarmed to be saying things like this, but there's nothing magical about a degree. There's nothing that magically changes after you take that last exam. The importance of degrees is due solely to the administrative needs of large organizations. These can certainly affect your life—it's hard to get into grad school, or to get a work visa in the US, without an undergraduate degree—but tests like this will matter less and less.

As well as mattering less whether students get degrees, it will also start to matter less where they go to university. In a startup you're judged by users, and they don't care where you went to university. So in a world of startups, elite universities will play less of a role as gatekeepers. In the US it's a national scandal how easily children of rich parents game university admissions. But the way this problem ultimately gets solved may not be by reforming the universities but by going around them. We in the technology world are used to that sort of solution: you don't beat the incumbents; you redefine the problem to make them irrelevant.

The greatest value of universities is not the brand name or perhaps even the classes so much as the people you meet. If it becomes common to start a startup after university, students may start trying to maximize this. Instead of focusing on getting internships at companies they want to work for, they may start to focus on working with other students they want as cofounders.

What students do in their classes will change too. Instead of trying to get good grades to impress future employers, students will try to learn things. We're talking about some pretty dramatic changes here.

9. Competition everywhere
If it gets easier to start a startup, it's easier for competitors too. That doesn't erase the advantage of increased cheapness, however. You're not all playing a zero-sum game. There's not some fixed number of startups that can succeed, regardless of how many are started.

In fact, I don't think there's any limit to the number of startups that could succeed. Startups succeed by creating wealth, which is the satisfaction of people's desires. And people's desires seem to be effectively infinite, at least in the short term.

What the increasing number of startups does mean is that you won't be able to sit on a good idea. Other people have your idea, and they'll be increasingly likely to do something about it.

10. More and faster progress

There's a good side to that, at least for consumers of technology. If people get right to work implementing ideas instead of sitting on them, technology will evolve faster.
Some kinds of innovations happen a company at a time, like the punctuated equilibrium model of evolution. There are some kinds of ideas that are so threatening that it's hard for big companies even to think of them. Look at what a hard time Microsoft is having discovering web apps. They're like a character in a movie that everyone in the audience can see something bad is about to happen to, but who can't see it himself. The big innovations that happen a company at a time will obviously happen faster if the rate of new companies increases.

So we can see for the main factors above that the business plan today are not only more easier to fund but in effect risk is becoming smaller as the business start-up capital needed is in effect becoming lower. Both from the entrepreneur and the investor perspective this is certainly very good news and will hopefully lead to an increasing number of business ideas getting funded and in turn more talented individuals turing to entrepreneurship as a career.

25 Jun

With many high flying entrepreneurs receiving plenty of publicity today and starting your own business becoming a real option for both graduates and experienced professionals, many would be business owners run the risk of losing everything if they don’t get their message across or manage to attract sufficient clients before money dries up. One of the key questions remain, how do I ensure my business plan is executed successfully?

We are constantly bombarded with messages and news stories talking about the millions of Rand and Dollars some start-ups are making and in many ways this can easily be compared with the gold rush phenomenon we saw a few hundred years ago both in this country and others around the world. So what can we do as entrepreneurs to ensure that our dreams of creating a business of our own and becoming independent and well revered entrepreneurs don’t end up remaining only that?

There may be a number of possible solutions from extensive marketing research before we start, creating well thought through business plans to be used as a road map and of course getting the right business partners on board. Few would disagree that looking at the success of current entrepreneurs may provide us with some important answers in our search for success. Here are five valuable lessons to be learned from those who are creating success right now.

1) Follow-through is essential

Nearly 1,000 startups raised R75 billion from venture capitalists in the second quarter of 2011, up 19 percent from the first quarter this year and 61 percent from the same period in 2009, according to the National Venture Capital Association. But the success rate of first-time ventures is only 20.9%, according to research published by the Journal of Financial Economics in 2010. Knowing what it takes to turn a vision into a successful business reality is crucial, and often times, is acquired through experience. Prove your ability to execute in both the short and long term, conduct comprehensive market-research and don’t give up when economic outlook appears grim.

2) Build an enthusiastic and passionate team

Experience teaches you the importance of building the right team and inspiring that team to never give up. Often times, ventures are formed with a top-heavy team of executives overly skilled and inappropriately scaled to the size of a business. When times get tough, instead of having the hunger to stick with it, many will jump ship. Build and inspire a core team that fiercely believes in your vision and has the commitment to persevere through market crises and the ups and downs of a startup.

3) Balance is critical

New ventures often follow an extremely lean operating model – too lean in fact. To a certain extent, you need to pay for play to capture greater market share. Raise sufficient capital and allocate the appropriate resources to expand your business. Seek to achieve the right balance; don’t be afraid to adjust your business plan depending on market conditions.

4) It pays to think like an investor

Venture capitalists alone evaluate hundreds of presentations a year. While you undoubtedly need a brilliant idea that addresses a market need to spark interest, investors also gauge their faith in the executive team. Experience helps you to build relationships with your target investor group, and identify the right type of capital to raise for your venture. This does not happen overnight, but over time, strong relationships help you expand your resources and understand how to raise capital and who to raise capital from.

5) Listen and learn

Listening is a virtue for a reason. Entrepreneurs often focus on communicating, convincing and selling. But investors can be more than financial-backers; they can also act as advisors who speak from their personal experience, failures and successes. Find mentors and industry leaders who can walk with you through your entrepreneurial journey.

In 2013, 565,000 new businesses were started per month by new and repeat entrepreneurs, according to the Kauffman Foundation. In this time of economic uncertainty, the need for innovative ideas and new business ventures is greater than ever. Entrepreneurs are a vital part of the economy, so hold fast to your vision, be flexible, and persevere through failure and fluctuating market conditions. It will pay off in the end.

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