Equity Investments for Small Businesses: A Primer

October 9, 2012 Tagged With: ,
By Kshitij J. Zaveri

 

Mention the words “Equity Investors” to any entrepreneur and they will start shifting uncomfortably in their seats. After all, equity investors are perceived as predators that will give you the money, no doubt, but will end up taking over the business and showing you the door at some point in the future.

Is that true? Maybe. Always? No.

Let’s start by taking a look at the investment stages a typical new business may go through. Of course, these may vary depending on the type of business you are in.

 

 

Most first time entrepreneurs underestimate the effort it takes to secure equity investments. At the same time, they are wary of the equity stake and management control they would have to give up if they accepted these investments. Let’s take a look at some of the pros and cons of equity investments versus traditional bank financing options.

 

 

 

 

 

 

 

There are industries that are capital intensive or are classified as ‘risky’ by the banks and it is very difficult, if not impossible, to secure debt financing for these, especially for start-ups. Then there are industries where businesses have an incubation period before they can complete their research and develop a product/service.  Sometimes, the entrepreneurs’ personal financials make them ineligible for a loan. Such instances are examples when the entrepreneur might be better off seeking equity investors.

So what do equity investors like to see before they invest in a business? Pose this question to professional investors and it is likely you will get different answers from different groups. This is because every investor has his or her own sweet spot when it comes to the industry, dollar amount, and business life cycle that they will invest in. While shortlisting potential investors, entrepreneurs would do well to take these factors into consideration. A later stage investor that invests between $2 to $5 million per investment in e-commerce companies would like to see something entirely different than what a seed stage Angel group, investing amounts up to $500,000 in brick-and-mortar retail stores, would like to see. Having said that, there are a few things that all investors pay attention to and we feel entrepreneurs would do well to cover these bases, amongst other things.

 

 

 

 

Seeking equity investors can be a time consuming and frustrating process but the rewards may make it worth the effort. Be persistent, don’t lose focus and above all, do your research. These are exciting times we are living in, with the booming start-up scene and droves of investors setting up shop in the Silicon Alley!

Kshitij J. Zaveri
Business Advisor/Baruch SBDC

 

 

Spend Money on Marketing

October 2, 2012 Tagged With: ,
By Alek Marfisi

To preface this entire discussion, let’s absorb the following logical facts:

  • Spending money on marketing increases sales.
  • (The inverse) Not spending money on marketing results in fewer sales than if a business was to spend money on marketing.

Here at the Field Center, we are in the business of reviewing business plans, and business is booming.  One may ask “What qualifies a generalist to comment on a niche business?”  Well, the truth is that there are commonalities amongst all businesses that, on the whole, determine whether a business will be successful or not.  The number one issue that I see with businesses (I would say, somewhere between 8 or 9 times out of 10) is a lack of marketing due diligence and insufficient funds allocated to marketing strategies.

A classic example:

A person is looking to start a restaurant.  They will build out a 60 seat facility and are looking to bring in nearly $1 million in revenue the first year.  A review of their financial statements shows a healthy $1 million in sales revenue…scroll down the same page to their operating expenses and they indicate a monthly expenditure of $500 on marketing.  A glance at their business plan reveals that the business will focus on social media as a marketing resource and look to build the conversation through “Likes” on their page and spend minimal funds on paid marketing.

The concept that paid marketing is a thing of the past is an illusion.  To clarify, building a conversation on a social network is a way of engaging the audience that you already have; it should not be used as a sole mean of building a bigger audience.  Conceptualize a sphere of influence around your business (see below):

What you are paying for when you buy advertising space is the opportunity to interface with your target customers that are outside your direct sphere of influence, and this exposure is invaluable.  For most businesses, the vast majority of your target customers are in this latter group; and your business will never reach its full potential if it does not interface with them.

A better way to put together marketing estimates:

The best way to put together your sales projections should be one in which they are directly based upon your marketing expenses.  What’s the relationship between these two?

  • Total Client Volume = Marketing Budget / Estimate of impressions garnered through all marketing channels.
  • Total Sales = Total Client Volume X Average Price
All in all, take another look at your marketing strategy and ask yourself “Can I justify my sales with this strategy?”

 

Alek Marfisi
MBA Candidate
Field Fellow/Baruch SBDC

 

 

Select U.S. Cities Offer Insight Into Innovation in America

October 1, 2012 Tagged With: ,
By Michael Tong

Today, the thought of a locale synonymous with innovation and research likely produces familiar names in Silicon Valley, Austin, Texas, New York City, or Washington D.C., as commonly associated growth factors traditionally include a specialized industry (e.g. technology), access to capital investment, and world-class research universities. However, by examining the Inc. 500 – an annual list of the 500 fastest-growing private companies in the U.S. – the Kauffman Foundation is challenging tradition and offering new insight into innovation in America. Here are their findings:

  •  Many high-growth companies are located in areas traditionally specializing in large scale manufacturing, such as: Indianapolis, Buffalo, Baltimore, Nashville, Philadelphia, and Louisville. While there is no definitive reason why these regions have become centers of growth and innovation, it may be an economic resurgence in response to historic population loss, loss of local tax revenues, chronic high unemployment, and an inability to adapt industries.
  • A highly skilled labor force is the only important regional factor associated with high-growth firms, rather than the aforementioned need for a specific industry, major research institutions, or large capital investments.
  • Washington, D.C. represents the highest concentration of Inc. firms, both in absolute number and per capita. Nearly 46 percent of private firms in Washington D.C. operate in government services, and the outsourcing of government services has contributed to growth in private firms providing these services. This demonstrates the U.S. government has de facto industrial policy through outsourcing and can play a large role in the growth of private firms.

For more information please visit the Kauffman Foundation (www.kauffman.org) to read “An Analysis of the Geography of Entrepreneurship” by Yasuyuki Motoyama and Brian Danley.

Michael Tong
MBA Candidate
Field Fellow/Baruch SBDC

SIBL: A Powerful Library Resource for Entrepreneurs

September 25, 2012 Tagged With: ,
By Jesse Karasin

Are you are trying to start a new business or are already up and running? If so the Science, Industry, and Business Library (SIBL) in New York has something for you. The library holds weekly programs, annual startup events and has tons of resources to help you take your business venture to the next level. In this article I will speak about a couple of the phenomenal opportunities that SIBL has to offer. First all the research and information the SIBL offers, and secondly the New York StartUp Business plan Competition.

The SIBL has a plethora of information that small business owners and startup companies will find useful, like tools for benchmarking and tons of market data. Market data includes in-depth information about specific neighborhoods and mailing lists, giving you advanced analytics and enabling you position yourself in the best place to capitalize on your target market! The SIBL also holds educational classes on everything from how to create a PowerPoint to the use of a Bloomberg terminal. Some of this information can be accessed at home but to get the full scope of what the library has to offer make an appointment with a librarian. Some of these classes are tailored to NYC’s major industries like fashion, and SIBL brings in successful entrepreneurs in those fields to help point startups in the right direction. What’s that you say?  Too busy to attend the classes or set up an appointment with a librarian?  You can always check out the instructional videos SIBL posts on its website.

The SIBL also runs an annual business plan competition where the winners are awarded cash to fund their operations. This year’s Start Up event has just ended but the details of next year’s event will be posted on www.nypl.org on October 12, 2012. Last year’s event was funded buy Citi Foundation and prizes were awarded from first to fifth place, with prize money ranging in value from $1,500 to $15,000.  Last year’s winners were Dwayne Samuel, R.N., Esq. and Jason Funes, JD, who presented Curatio HCS, a full-service home health care agency in the Bronx.  For more rules about the 2013 contest please visit http://www.nypl.org/locations/tid/65/node/95979.

The city of New York has many programs giving entrepreneurs the resources they need to succeed in a challenging landscape.  The SIBL along with the SBDC are great ways to get start up advice or explore ways to expand your business. Meetings with these experienced professionals is a great way to get the information your business needs while avoided the high costs of business consultants. On top of this, programs like the business plan competition give small companies the startup capital and recognition needed to chase their dreams.

Helpful Links mentioned in this article:
Market Data: http://ow.ly/dYDp8
SIBL Class Schedule: http://www.nypl.org/locations/tid/65/calendar
Make an appointment with a SIBL Librarian: http://www.nypl.org/locations/tid/65/node/29868
SIBL Instructional Videos: http://www.nypl.org/node/90324
SIBL 2013 Business Plan Competition: http://www.nypl.org/locations/tid/65/node/95979

Jesse Kasarin
MBA Candidate
Field Fellow/Baruch SBDC

 

 

 

Create Effective, Efficient Financial Projections for Your Business

September 20, 2012 Tagged With: ,

By Santiago Perez

I often hear from entrepreneurs that creating financial projections when you are just starting a business is a waste of time, as projections are very often off the mark even when you have historical data to work from. The two things to remember are:

  1. Is a decision made on a projection that is intelligently constructed likely to do better on average than a complete guess? The answer is overwhelmingly yes, it is no fun flying blind. For example, entrepreneurs consistently find that failure to project what a big order will mean in terms of the cash outflows to fill it means they find themselves unable to do so, missing the boat on their one big chance. Remember that by far the highest cause of death for small businesses is cash flow, not slow revenues or debt.
  2. Having a well-structured and defensible set of financial projections is invaluable both for reassuring investors and bankers that you have the business acumen to manage their money effectively.

What is fair is that time is a precious commodity for an entrepreneur, who has a million matters to tend to. To address this concern, the Baruch SBDC has created a financial projections template which produces a number of very useful reports based on minimal data input from the user. You can access it here: 3 Yr-Cashflow Template .

Step 1:  Simply input all your expected operating income and expenses. By inputting these figures into the Cash Flow worksheets, all the other worksheets will be automatically generated.  These include breakeven volume at different price points, Pro Forma Income Statement and Balance Sheet, Loan Repayment calculator (where applicable) etc. You can do 1, 2 or 3 years depending on your needs.

Step 2: Enter the amount of cash currently available to the business into the beginning balance cell. If after entering your expected income and expenses you see that the amount in the Beginning Cash balance column goes negative or too close to 0 for comfort, then you will know that you need additional financing for the venture, by when you will need it, as well as the amount. You can enter the amount you need to keep a positive cash balance in the Inflow from Equity cell (ie you get an investor) or Inflow from Financing (a loan).

Step 3: Once you know your costs month by month, you will know what volume you will need to sell at different price points to break even. You can change the price per item on the Break-Even tab so you can analyze whether you can support your current costs with the price the market will support, or whether you need to start thinking of cutting back.

It is normal to have to make some educated guesses in this process, though you should state your assumptions. When you can’t find reliable data, make an assumption that is “conservative”. That means, make a reasonable estimate and then decrease it slightly if it is a revenue or increase it if it is an expense. It is always safer to understate than to overstate your profit margin in the planning stage.

If you would like to discuss your projections further, book a free appointment with one of our finance counselors at the Baruch SBDC at 646-312-4790, who can help you to refine them and lead you to different options for financing your venture.

 

Santiago Perez
MBA Candidate
Field Fellow/Baruch SBDC

 

No Time Like The Present -The NYC Startup Landscape

September 13, 2012 Tagged With: , ,
By Marc Kelly

Co-working space at Sunshine Suites, NoHo, NYC. Sunshine Suites is a Baruch College partner.

Carpe diem! Opportunity rarely knocks twice, and you would do best to answer when it does. The real question is ‘what are you waiting for?’ If you want to start a company or achieve something, you should start today. There is nothing holding you back but yourself.

You don’t have to travel to California to start a great company anymore. The startup ecosystem is very alive and vibrant in New York City. The city is firmly entrenched in embodying the Silicon Alley moniker. The city and state have invested millions of dollars into supporting small business growth in New York. The NYS SBDC offers free business services with offices in all five boroughs.

The road to becoming an entrepreneur is much smoother today than in years past. Startup incubators and accelerators are plentiful across the country and New York has exploded with what I call ‘startup schools’.  From Dreamit Ventures and ERA to The Hatchery and NYU-Poly, there are more than enough programs for entrepreneurs with great ideas to get started. In addition, there are tons of co-working spaces in the city for entrepreneurs looking for affordable office space. There’s even free space available at Wix Lounge in Union Square of all places!

Don’t forget about us! The Lawrence N. Field Center for Entrepreneurship has partnered with the NYS SBDC to host a myriad of programs, events and competitions for entrepreneurs. In addition, the Field Center is the largest SBDC in New York State. Providing free business consultation, the Field Center works with over 1,200 clients a year!

New York City is also home to a ton of funding sources. The New York Angels, who focus on early stage investments, and Golden Seeds, who focus primarily on women-owned businesses, cover the angel investment landscape in New York. Firms such as Union Square Ventures, First Round Capital, and Greycroft Partners make up the city’s Venture Capital component.

So if you haven’t already, get out there and start working on your ideas and start executing those plans you’ve been making. New York is well on its way to embracing the Silicon Alley moniker and becoming a hub for an explosion of entrepreneurial growth. The startup community in NYC is alive and well. It’s just waiting for you to become a part of it.

Marc Kelly
Field Fellow, MBA
@UrbanMBA

 

 

 

In Defense of Debt

September 11, 2012 Tagged With: , ,
By Alek Marfisi

Far too often, I am sitting in our meeting room with clients discussing their businesses and reach the critical point: how much money do you need and where are you going to get it?  Very often, small business founders overlook debt in favor of equity, but this is not always the best option.

If you are starting a business that does not have a high proportion of research and development expenses, or is not depending on a massive marketing campaign to solely generate user traffic, then debt is an option that you should take a closer look at.  First and foremost, the major illusion that business owners must overcome is that debt is expensive; more expensive than equity.  This misconception comes from the fact that debt servicing is a requisite cash outflow while equity distributions are voluntary.  Such a shallow analysis of the true cost of these funding sources is insufficient.  While you do not have to make payments on equity in the immediate term; equity is a far more expensive resource.  Owing to the risk that investors must take when they involve themselves in your business, their limited chances of recuperation in the event the business goes south, and a myriad of other risks that could affect their return, the cost of equity is several times higher than that of debt.  On the other hand; credit is a centuries-old institution that cares only about one thing: being repaid with interest.  Debtors also have the first right to companies’ assets if the business fails.

The negotiation process to acquire equity is equally difficult.  The science of valuing a company only goes so far (it goes an even shorter distance if your company is still in its absolute infancy); and the deal ultimately comes down to negotiation.  In many cases, either the investor feels as though there was money “left on the table” (meaning that they could have bargained for a larger stake in the company for their dollars) or the entrepreneur feels as though they’ve given away too much of their company.

Some of the advantages of debt that you may or may not have considered:

  • It offers a definite schedule for you to transform cash received as debt into owners’ equity (your own equity).
  • Interest expense is tax-deductible.
  • High degree of flexibility: debt can be refinanced, payments can be scaled to match your cash flows, and liquidity can be made available for critical business needs.
  • Ease of transfer – if you sell your company, debt is many times easier to assume than equity.

In summary, if you are starting a business that needs to fund a balanced mix of start-up costs and working capital, take another look at debt as an option.  Don’t be discouraged if you are not immediately approved for financing either; this is a signal that you must spend more time building the business at a smaller scale and building your credit worthiness organically.  A failed loan application may not be a lack of confidence in your concept, but a sign that your business still needs developing before it is ready to move to the next level.

 

Alek Marfisi
MBA Candidate
Field Fellow/Baruch SBDC

Making Your Dream Venture a Reality….

August 28, 2012 Tagged With:

As someone who has met a diverse group of entrepreneurs over the past two years, I always find it fascinating to see how they turn their idea into a real business.  I ask myself, what was it that pushed them to make it happen? Were they just lucky? Why do some people make it and others “fail”? I use “fail” in quotations because I believe that no matter how successful your venture is or isn’t, there is always something to learn and grow from the experience. It’s possible to take a “failed” idea, change it, make it better and launch another venture. The industry term is called “pivoting”. If you asked me the top 3 skills required to be a successful entrepreneur and make your dream venture a reality, I would say the following:

Entrepreneurs working at Sunshine Suites, NYC.

1)     Persistence: Timing is a factor in launching a business and it usually takes longer than you would like. Staying focused and determined will get you to your end goal.

2)     Prioritize: To do lists can be overwhelming. Make different ones per time frame (day, week, or month) and write tasks that are actionable, getting you one step closer to launching your business.

3)     Pivot: Being flexible to a changing marketplace, consumer or competition will keep your venture relevant and financially sustainable.

Think of launching your business like training for a marathon, it requires focused determination, setting goals and adapting to your surroundings. Now’s the time to start!  For further guidance stop by the Field Center to meet with a counselor.

 

Anelisa Lauri is a Baruch MBA graduate (2012, concentration Entrepreneurship) and a Field Fellow at the Lawrence N. Field Center for Entrepreneurship.  In Fall 2012 she will be teaching an undergraduate Social Entrepreneurship course at Baruch.

 

 

August & September Workshops

August 5, 2012 Tagged With: , ,

The Baruch Small Business Development Center’s workshops for August and September have been posted!  Topics include Marketing, Business Plan Basics and Managing Your Company’s Finances!

For the full list and to register for these free workshops, visit our Workshops and Events page.

 

July Entrepreneurship Events

June 28, 2012 Tagged With: ,

The following events are occurring during the month of July.  If you would like your event listed on our site, please email us.

July 11 – New York Open for Small Business Outreach Initiative, Manhattan. 8:30am
These Workshops are designed to help Small Business owners start and grow their businesses in  New York.  Representatives from Empire State  Development, the Department of State, Workers Compensation Board, Department of Labor, State Liquor Authority and Department of Taxation and Finance will present, followed by a Q&A with individual agencies after the main presentation.  Pace University.  RSVP at smallbusinessRSVP-Manhattan@exec.ny.gov

July 11 – New York Open for Small Business Outreach Initiative, Bronx.  6:30pm
These Workshops are designed to help Small Business owners start and grow their businesses in  New York.  Representatives from Empire State  Development, the Department of State, Workers Compensation Board, Department of Labor, State Liquor Authority and Department of Taxation and Finance will present, followed by a Q&A with individual agencies after the main presentation.  TBA Bronx.  RSVP at smallbusinessRSVP-Bronx@exec.ny.gov

July 12 – Veteran’s Business Forum, 6-8pm
The Veteran Business Forum, sponsored by the Small Business Administration and the NY Small Business Development Center at Baruch, will occur at Baruch College’s Field Center for Entrepreneurship.  Small business specialists and other business leaders will discuss procurement opportunities and NYC licensing and regulations for veterans and non-veterans who have, or are interested in starting, their own business.  RSVP to Man-Li Lin at man-li.lin@sba.gov or Robin Deniels newyorkdo@sba.gov.

 

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