Planning a New Business: Alternative Funding Sources

 

We talked last time - yes a whole 2 weeks ago - about funding a new company. There are two funding sources that I have deferred to today. The first is Micro Loans and the second is Crowdfunding. Finally, I want to say something briefly about Crowdfunding in general.

Micro Loans are generally smaller amounts that can be used to help fund a new business. They are available from lots of sources. The Small Business Administration (SBA) of the US Government has its own program. Most of the more well known micro funding sources have a social consciousness objective as well. They are intended to provide small amounts of capital to help those that can not receive funding from existing banking sources. There are lots of programs and they all have different requirements. If you have exhausted your other sources, then this might be a place to start.

Crowdfunding is different. Unlike other sources of funding, Crowdfunding is a way for people to donate to you to start a company. The quid pro quo is generally some form of perk. The funder has no rights to the use of proceeds. On top of that, there is neither an ownership or debt position that is created as part of this funding. The types of investments that get funded often have some form of social responsibility. This can include sticking it to the purveyors of the status quo. Significant capital (sometimes over $1M) has been generated via Crowdfunding, but much smaller amounts are more typical.

I want to point out something that comes out of Crowdfunding and that is the push to change the definition of an Accredited Investor. When you are starting a company and selling equity (aka Stock), there are limits to the number of small investors that can be included. To keep things simple, some companies won't sell stock to non-Accredited Investors. Folks are greatly concerned that the requirements to be an Accredited Investor are very high so that the number of people that can invest is small. There are groups that feel that this is too restrictive and want the SEC to dramatically lower the requirements.

I wish to argue caution here. 9 out of 10 startup businesses fail within 5 years. That means that startup investing is on the very edge of High Risk/High Reward spectrum. You should assume that any investment is gone the moment you make it. Even if the company survives, early investors often their ownership diluted to the point that they get no return. This is especially true in the case of Crowdfunding. If you want a classic case of this, look into Oculus (acquired in 2014 by Facebook). The Crowdfunders were very unhappy because they are generally unhappy with Facebook. They felt that their good will was abused, by the sale. Remember, as a Crowdfunder you have no rights so you get what you get.

So, one more in this series and then I go into the next series (which I will announce at the end of next week's article).

Jim Sackman
Focal Point Business Coaching
Change Your Business - Change Your Life!
Business Coaching, Sales Training, Web Marketing, Behavioral Assessments, Financial Analysis

Net Neutrality Friday

Ah, well I thought I could post about Personal Finance this week. I really do want to get a chance to talk about Consumer Debt. But then our friend Tom Wheeler at the FCC decided he would talk at a startup Incubator called 1776. The topic of his talk was all about ensuring that there was lots of Broadband Competition. I felt like it was 1996 all over again and we were going to start talking about Competitive Local Exchange Carriers (aka CLECs).

Look, I think competition in the Broadband Service is a great thing. The problem is that it is hard to create. The Telecom Act of 1996 created the CLEC which was a way of creating competition by requiring that Incumbent Local Exchange Carriers (aka ILECs aka the former Bell System Companies aka RBOCs) had to rent parts of their network to others to use. This led to a lot of companies (If you look HERE, you can read about my experience with one of them) that spent money like mad but did not create a lot of innovation. There was a mini-bubble around this that collapsed as part of the DotCom Bubble.

There are 3 angles to understand: Money, History and Technology. I will cover them in order.

Money is simple. Building networks is a huge investment in capital. That capital needs to be spent up front and to create more broadband networks it needs to be taken all the way to residences. Lots of things in technology get cheaper over time. Digging up streets to lay cable to a home is not a lot cheaper than it was 50 years ago. So telling the world that a Government will encourage a new broadband competitor is stupid. Some communities who are vastly underserved are doing it and that is not something new. Many rural towns were bypassed by the Bell System and built their own phone networks 100 years ago. But there is not a brand new national broadband network going to get built. It simply costs too much and takes too long for it to happen.

History is complicated. If you go back to the pre-1984 breakup of AT&T, you will find the primary regulatory objective of agencies regulating AT&T was to make sure that it did not spend too much money. In those days, companies got a fixed rate of return on their assets. The way to grow profits was to spend money on the network and therefore raise rates. In order to keep things affordable, Regulators made sure that Bell Companies kept their spending reasonable. We still have not come up with a Regulatory paradigm that makes a company want to invest money. Governments are not good at it and the best thing they can do is provide tax breaks for companies that invest the way they want. Our current Regulatory structure is not a way for this to be done.

Finally is technology. Much of what we do in communications is very old. In this case, I want to talk about a gentleman named Claude Shannon. He is the father of information theory and gave us a simple rule. The non-technical version of it is "The Quieter a Channel is the More Information you can send over it." A bit more technical would add "For a Given Transmitted Power". So when people tell me that Wireless is going to get faster than Wireline, I just tell them that they should meet Mr. Shannon. In our current world the Noisiest to Quietest Channel Media are: Wireless, Twisted Pair Copper (aka Phonelines), Coaxial Cables (aka Cable), and Fiber Optic Cable. Once you have chosen a medium, the only way to up the maximum Information rate is to up the transmitted power. As you can imagine, we don't want to up the power that you cell phone transmits next to your ear. So, there are limits here. What we have been doing to improve things is to improve the chips, coding, materials and antennas involved so that we can implement more complicated schemes. So, what we have done is to push as close to the Shannon limit as we can. We also shorten the channels - thus reducing the noise. One of the reasons that U-verse is faster than standard DSL is that the electronics that your home communicates with in U-verse is closer than it was with standard DSL. Shorter distance equals less noise (there are actually larger capacitive effects here but hey lets not confuse folks).

This is one of the reasons this whole thing is a debate. If you are say Comcast, you have choices about how you invest your dollars each year. You are not a charity so, where do you put your money? The places with the best Return On Investment (ROI). Some people think that a relaxation of Net Neutrality will cause better ISP ROI and thus spur network investment. I would say, that I am not sure I believe that. But at least its a theory.

Have a great weekend!

Jim Sackman
Focal Point Business Coaching
http://www.jimsackman.com/
Change Your Business - Change Your Life!
Business Coaching, Sales Training, Web Marketing, Behavioral Assessments, Financial Analysis

Sonoma County: News and Notes

This is a bit of a special edition of my Sonoma County News article. I have several things going on and want to announce them all here. The first thing is that I am part of a Workshop on "Building an Integrated Marketing Plan" that I am sponsoring jointly with N2 Publishing and Fuze (the Fuzeviewer Team). This workshop is being held at Stout Brothers on September 24th @ 5:30PM. Expect about 1 hour of presentations followed by about an hour of networking. I have a few spots available and the event is free! If you have any interest, contact me at jsackman@focalpointcoaching.com.

I want to introduce you to my partners on this event. N2 Publishing has two neighborhood magazines in the area. They are Fountaingrove Life and Skyhawk Living. N2 works at turning neighborhoods into communities. The magazine content is generated by the residents. Blake Bascherini and Paige Pedri host events for their residents and business partners. If you want to grow your business in either market, then you should consider working with them. You get to connect with the residents by more than just advertising.

The Fuze Team operates an Augmented Reality advertising product which is a very forward looking way to present your message to your customers. Follow the LINK to learn more about it. This technology is a way of providing information to your customers in a new and unique way. Mobile technology is the wave of the future and you need to keep current with all the new trends. If you have print advertising that you want to turn into mobile advertising, then contact Fuze!

Next, I am hosting a Webinar with Roy Johnston of Johnston-Thomas Attorneys at Law on October 28th @ 9AM. Roy will be talking about "Succession Planning: Create Your Future". I will be sending out details over the next couple of weeks. Again, this is free of charge. Succession Planning is all about "Who is Next?". If you are a family business, how do you transition to the next generation. If you are a Corporate Executive, do you have a plan to replace yourself so that you can reach the next stage of your career? These are typical questions in Succession. So, create your own next step - don't wait for it to be forced on you.

Finally, I am announcing an Annual Operating Plan Workshop/Coaching Product. This is intended for businesses to create a plan for 2015. The product will be broken into 4, 60-90 minute Workshops and 2, 60 minute one on one sessions. The final output for you will be a plan for 2015 and a Dashboard to track your progress around it. The classes will be held in Santa Rosa and more information will be available over the next couple of weeks. The cost for this product is $900.

Have a great week!

Jim Sackman Focal Point Business Coaching Change Your Business - Change Your Life! Business Coaching, Sales Training, Web Marketing, Behavioral Assessments, Financial Analysis

 

Net Neutrality Friday

This week there were a number of folks who comment on the pending merger between Comcast and Time Warner Cable, particularly Netflix. Netflix was quite negative and I thought I might say a few things here on the merger.

The first thing is that there is more difficulty in stopping this than most realize. The two companies don't actually compete for customers. Both are Multi-System Operators or MSO's in the cable business. Each System within the MSO operate independently and as incumbent operators in a locality. Consumers don't have a choice between the two companies. Either Time Warner operates in a location or Comcast does. So, the merger of these two companies doesn't actually eliminate competition. Under the strict rules of the Department of Justice part of the equation, there is no reason to stop the combination.

The FCC might have some other views. One thing that we all need to be clear about is that it has been a very long time since the FCC stopped a large scale merger like this formally. The FCC generally imposes merger conditions on the new entity. It did so in the case of SBC buying Ameritech and also when it bought BellSouth. In the former case, SBC had to create "Project Pronto". In the latter case, there were some concessions around many topics. One of the most forgotten was a promise for 100% Broadband deployment.

AFC was one of two DLC vendors "selected" for Project Pronto. As the CTO of AFC at the time, I can tell you that we knew that this was true when we read it in the Press Release. AFC had been an approved vendor at one time in both Ameritech and PacBell. But we were doing very little business with SBC at the time of Pronto. It took us several years to get full approval and Tellabs finally got 22 State approval for the AFC product (to include the former BellSouth States) in the last 2 years. By the time any real Pronto activity might have happened, the CLECs had collapsed and Pronto was not at the top of mind. SBC had to maintain the concept and this pretty much halted a lot of rural broadband in their properties. The cost to implement Pronto in a small office was just too high.

The 100% Broadband Deployment may have slipped your mind, but I believe that SBC counted people that could get Satellite Broadband as having Broadband available. I think it is quite clear that not 100% of folks in SBC territories can get DSL even today.

Given this, I would say that merger conditions are more bark than bite. If the FCC is unhappy with the proposed merger, then it needs to say no to it outright. The only reason to do so is that the combined company will have a large footprint of Broadband Users. This gives the company some amount of market power, but I am not sure that this will cause the FCC to stop the merger. As for myself, I am more concerned that Comcast owns Content. If I were making a merger condition, I would force a spin-off of NBC-Universal.

Have a nice weekend and a great Labor Day!

Jim Sackman
Focal Point Business Coaching
Change Your Business - Change Your Life!
Business Coaching, Sales Training, Web Marketing, Behavioral Assessments, Financial Analysis

Sonoma County: News and Notes

Thanks to everyone who has listened to my Webinar titled "Goals: The Foundation for Success". A link to the Youtube version of it can be found HERE. In September, I will be doing a Workshop in Partnership with N2 Publishing and Fuze (the gents behind Fuze Viewer). This workshop will be at Stout Brothers on September 24th @ 5:30PM. I will be speaking about "Integrated Marketing Plans: Your Roadmap to Attracting Customers". N2 and Fuze will be speaking as well, followed by some informal networking. Attendance is limited, so contact me @ jsackman@focalpointcoaching.com about attending.

I have gotten some feedback asking me questions about what I say in my Quarterly Reviews of the 3 Tech Companies that I chat about. Since this News is based on Sonoma County, I am trying to stay focused on Companies Headquartered in the North Bay. Those 3 companies (Cyan, Calix, and Enphase) employ many of my friends and former co-workers. I want to see how they are doing. I would be happy to add in reviews of any public company that the audience wants. Just contact me and let me know.

But that is not the concern that folks have. They are focused on what is being perceived as negative comments. I guarantee that what I say is greatly negative compared to what is said on the Quarterly Conference Calls. Remember Quarterly Calls as Sales Calls. The Company is putting out information in a way that is intended to sell stock to investors. These calls have a language and a rhythm to them that can be understood if one listens to calls. If you are going to invest in a company, then it is important that you listen to the calls and hear what is being said.

But the reality is that the information requires interpretation and examination of the financials as they are released. That is what Analysts are supposed to do. BUT (and this is a big BUT) the folks on the call are generally what is known as "Sell Side Analysts". They are not doing deep work on any company. They do short papers on a dozen or more companies a quarter. The specific analysis is published in less than a single page. Much of it is repeated verbage from the calls. They have their role, but they are not going deep into long term investment potential for any stock.

So, I listen to the calls and read the financials. I try to provide what I think is a straight forward analysis based on those financials. I await evidence in the numbers that some initiative is doing what Management says on the call. I want to focus on balancing away from the Sales Pitch and hope to provide folks with some more grounded thoughts about the numbers. I am a Value Investor and that is what I base my thoughts on. I am not looking at whether the Stock Price is good. I want to know if the business is good. Good Business leads to a rising Stock Price in the long term. That is what I am looking for.

If you have read this far, I have one more ask. I would like to present interviews of different North Bay Businesses here when I can. If you have a business here in the North Bay or know someone who does (and they want some free PR), just send me a message. You can do that through the email at the top or through my website.

Have a great week!

Jim Sackman
Focal Point Business Coaching
Change Your Business - Change Your Life!
Business Coaching, Sales Training, Web Marketing, Behavioral Assessments, Financial Analysis

Planning a New Business: Funding Sources

We have gotten our new business in good shape from a planning standpoint over the last few weeks. We know what we do and stand for. We have a plan to sell and market our product. We know what the numbers look like. There are some steps left to do. Formally create the business and get it started. But the one crucial step is to look where we get the money to start it from.

As we talked about last time, you need to plan to get enough money to cover that worst case in the funding that you have from your financial plan. I have also put to you that you need to have a buffer as it is likely that you have missed some things and will need some money beyond that.

You might have enough cash to fund the gap out of your own cash. If so, go forth and make your business happen. But for most people to fund this gap, there are 2 choices: Equity and Debt. Equity is the process of selling a portion of your business to investors. Debt is a loan that needs to be repaid.

Most people look to Debt first. Why is that? With a couple of exceptions, most new businesses do not fit the profile that investors want to buy a part of. The exceptions are Friend and Family, Social Investors and VC backed startups. I will cover Friends and Family later as it is possible that they are a source of Debt as well. Beyond that, you need to have a company that meets a need of the investor. VC backed startups are ones that will get at least a 10x valuation after 3 years (rule of thumb). They are generally going to be product companies that are addressing a state of the art need in a market. Retail or Professional Services generally don't meet the outcome requirements of these kind of investors. Social Investors look at things in terms of the societal value of the outcome. Their reason for investing will not be purely financial and some kinds of startups might get funding there.

But most people have Debt in their future. I want to be quite clear right now. You are not going to walk into a Bank and get an unsecured loan for a startup business. It is just not going to happen. You may want that, but you can stop right now if that is your plan. What can happen is a secured loan. That means you have to have some form of asset to borrow against. Home Equity, 401K plans or IRAs are very typical assets used in this regard.

But many Businesses will be formed in conjunction with Friends and Family. This means you go to the folks you know and get them to give you money. This can be in the form of either Debt or Equity. But you should set up a formal agreement around this if you want your relationship to survive the business. A business failure that loses the money of the people you care about will cause a huge strain on the relationship. Taking care to have a good business plan and having a formal agreement around the financing will help greatly.

I deliberately avoided Crowdfunding here and I will talk about that and some thoughts about it next week.

Jim Sackman
Focal Point Business Coaching
Change Your Business - Change Your Life!
Business Coaching, Sales Training, Web Marketing, Behavioral Assessments, Financial Analysis