With Venture Capital Scarce, Entrepreneurs Find Alternative Mean

http://www.writebusinesscapital.com/contact.html

Need Funding? Better Get Creative

With Venture Capital Scarce, Entrepreneurs Find Alternative Means

By EMILY MALTBY

Sean Conway needed to raise funds for his start-up, Notehall.com, an online marketplace for college students to buy and sell class notes. But a year into the venture he was broke and investors weren't willing to infuse the company with a capital boost.

Mr. Conway's grandfather contributed $17,000 for marketing and operations, which allowed the company to hit nearly 8,000 users at Mr. Conway's alma mater, the University of Arizona, by January 2009. But the angels and venture capitalists remained skeptical.

"I had invested my life savings and I knew there was no turning back," says Mr. Conway, a 2007 graduate.

So last March he submitted his idea to DreamIt Ventures, a sort of entrepreneurial boot camp in Philadelphia—funded by four economic development organizations—that provides office space and mentoring to fledgling business owners, and helps set them up with potential investors. Notehall.com, one of 10 ventures chosen to participate in the three-month summer program, walked away with about $500,000 in investments.

Amid a stark climate for venture capital, small-business owners are finding more creative ways to get funding. Some are turning to boot-camp-style programs like DreamIt Ventures, Y Combinator in Mountain View, Calif., or TechStars in Boulder, Colo. Others have found success appealing for funds via television, or even hitting up friends and relatives for cash.

Venture capital deals have been steadily declining since 2007 and are hovering at levels not seen since the mid-1990s, according to data from PricewaterhouseCoopers and the National Venture Capital Association. The amount of funding in the second quarter dropped more than 50% from the year earlier period, landing at 612 investments worth $3.7 billion.

Yet entrepreneurial activity can remain vibrant even in downturns. A June study by the Ewing Marion Kauffman Foundation, a Kansas City group that promotes entrepreneurship, found that periods of unemployment trigger individuals to launch their own ventures instead of applying to corporate jobs. These days, like Mr. Conway, they are needing to find alternative paths to reach investors.

After his success with DreamIt Ventures, Mr. Conway applied to be a contestant on ABC's Shark Tank, a television show that gives entrepreneurs a chance to pitch to investors and vie for their money. Through the show, which aired Notehall.com's episode last week, Mr. Conway landed the company an additional $90,000 after agreeing to give up a 25% equity stake. "The last two weeks have been crazy," says Mr. Conway, who says he hopes for the company to reach 30 colleges by the end of the year."Everyone is emailing, wanting to partner with us."

Marc Fienberg, head of Story Films Inc., a production company in Los Angeles, also found his enterprise wasn't garnering much respect from the venture capital community. So he tapped some acquaintances from his days at Northwestern's Kellogg School of Management and proceeded to network for about three years.

"I quickly realized that to do this, I'd have to reach outside my comfort zone," he says. "There was no room to be shy or humble."

In total, Mr. Fienberg says he pitched to hundreds of contacts, many of whom scoffed at the idea and told him he was wasting his time. But eventually he found 17 people—made up primarily of Kellogg alumni—who were interested. He flew to meet each in person.

From 2007 to 2009, Mr. Fienberg says he secured between $1 million and $5 million. His company's first film, "Play the Game," recently landed in theaters and has grossed about $500,000 in box office sales.

In this economy, entrepreneurs need to work even harder and put more effort into thinking outside the box, says Bo Fishback, vice president of entrepreneurship at the Kauffman Foundation."Smarter entrepreneurs are looking to put more sweat equity into the company, not magic $100 bills."

Mr. Fishback is seeing a trend of more innovators competing online at NineSigma.com and InnoCentive.com. Large companies post challenges on these sites and award money to the winning inventor or problem solver.

Small projects from large companies can be lucrative. That's what William Volk found out after he joined a start-up called MyNuMo LLC, a company that produces games for smart phones. In 2008, he reached out to a venture capital firm that had invested in a company where Mr. Volk had previously worked. "I thought for sure we would get it because I had a track record," says Mr. Volk. But he wound up losing to a competitor seeking capital from the same firm.

Given his background in programming, an undeterred Mr. Volk contacted several companies to see if they'd be interested in a custom smart-phone program. "We were using those smaller projects to keep us going," he said. The projects financed the research and development for MyNuMo's game applications, which are now available online and as mobile-phone applications.

Revenue is expected to hit $1.5 million this year. "We managed to create a higher number of titles than our well-funded competitors," Mr. Volk says.

Do You Really Need a Business Plan?

http://www.writebusinesscapital.com/contact.html

Do You Really Need a Business Plan?

The experts aren't so sure--but entrepreneurs like the founders of Roaring lion energy drink say it's a must. here's how to know if writing a business plan is for you.

By Mark Henricks | Entrepreneur Magazine - December 2008

URL: http://www.entrepreneur.com/magazine/entrepreneur/2008/december/198618.html

Starting a business was the last thing on Sean Hackney's mind when he sat down to write a business plan. Hoping to persuade a soft drink company to hire him, Hackney scripted a plan for taking on his former employer, Red Bull North America Inc. But when he showed it to his corporate attorney father and former Red Bull managing director, "they said, 'Don't send this to Coke or Pepsi. Start the business, and we'll start it with you,'" he recalls.

That was in 2000. Today, the 40-year-old is co-founder and co-owner of Roaring Lion Energy Drink, a $6.2 million company in Sun Valley, California. "We've grown the business from a $62,000 investment to the No. 2 energy drink in bars and nightclubs," Hackney says. The company has 32 employees, and Hackney's erstwhile sounding boards are now his investors and co-managers. The business plan he wrote has been through numerous revisions, and today, a regularly updated marketing plan guides the company. Writing the plan, Hackney says, was "absolutely" worthwhile. "I had a lot of stuff in my head that needed [to be] put on paper."

Clemson University entrepreneurship professor William B. Gartner believes business plans are essential. And the SBA notes on its website: "The importance of a comprehensive, thoughtful business plan cannot be over-emphasized." But lately, questions have arisen.

In 2006, William Bygrave, a professor emeritus at Babson College and longtime entrepreneurship researcher, studied several years' worth of Babson graduates to find out how much better those who started businesses with a formal, written plan did than those who didn't. "We can't find any difference," he admits. In other words, Bygrave and his team found that entrepreneurs who began with formal plans had no greater success than those who started without them.

For or Against
That's hardly the final word, however. Gartner also set out to study the idea. "Going into the study, I was very skeptical about the value of business plans," Gartner says. But after he and his colleagues looked at data from the Panal Study of Entrepreneurial Dynamics, a national generalizable survey of more than 800 people in the process of starting businesses, he found that writing a plan greatly increased the chances that a person would actually go into business. "You're two and a half times more likely to get into business," he points out. "That's powerful."

Gartner's earlier concerns about the necessity of business plans, he says, were that they were "all talk. Our research shows that business plans are all about walking the walk. People who write business plans also do more stuff." And doing more stuff, such as researching markets and preparing projections, increases the chances an entrepreneur will follow through.

For his part, Bygrave doesn't think his research says business plans are a waste of time. "We're saying that writing a business plan ahead of time, before you open your doors for business, does not appear to help the performance of the business subsequently," he explains.

So what would Bygrave like to see instead of a business plan? Attempts to sell the product to actual customers, even if it doesn't exist yet. "Have you talked to a customer?" he asks. "If not, I don't want to talk to you about the business."

Bygrave still thinks plans help, however. Forty percent of Babson students who have taken the college's business plan writing course go on to start businesses after graduation, twice the rate of those who didn't study plan writing. "Even if they don't write a plan," Bygrave says, "they've had to think about how opportunity recognition fits with marketing, building the right team, making financial projections and so on."

And a wide gulf separates having a formal written plan and having no plan at all. "Every business has to start with a plan," says Bygrave, whether it's a mental construction never committed to paper or a more advanced description jotted down on the back of an envelope.

The Money Factor
Skeptics and fans of business plans agree on one point: Securing funding almost always requires a formal plan. Companies funded by friends and family may not need a plan, Bygrave says, but if you go to venture capitalists, commercial banks, government-backed lenders and most angel investors, you will need a business plan.

That viewpoint gets no traction from Daniel Stewart, co-founder of Port Richey, Florida-based Envala. Stewart and his partner funded the small-business software provider, yet Stew-art still put together a business plan complete with financial projections. "We didn't need to because we're our own invest-ors," says Stewart, 38,"but to be a responsible entrepreneur, you have to see things as they are."

A primary purpose of the plan was to evaluate the feasibility of their proposal to sell online automation software to small businesses. So they created three sets of financial forecasts: a rosy picture, a more reasonable one and a disaster scenario. They also placed extra emphasis on describing the corporate culture mission. "We exist to increase satisfaction, productivity and profitability of small businesses," Stewart says. "It was important for us to establish that [early on] when everything is uncertain."

Planning Trends
Plans today no longer need the 20 to 40 pages prescribed by classic planners. "The shorter [it is], the better chance [it has] of being read," says Bygrave, who recommends devoting no more than five pages to income, cash flow and balance sheets. "And don't have any numbers in [there] you can't explain instantaneously."

As tools such as spreadsheets and plan writing software have grown in importance, some critics say business plans have become overstuffed with complex financials that are often backed up by little more than guesswork. "[These tools have] made it easier to produce a business plan," says Bygrave. "But they've produced page after page of financials that basically came out of thin air." As a result, investors today want fewer and better-documented financials.

"No one's impressed by spreadsheets," agrees Gartner. "[It's] the action behind the spreadsheets." By that, he means investors want to see that an entrepreneur has actually examined the market for a product or service, identified potential customers, assembled a capable team, devised a business model and more.

While investors want to see action, they don't want to work for it. A plan today is more likely to be a modest deck of slick, colorful presentation slides than a thick stack of white paper. Digital slides are easier to distribute to a dispersed audience via e-mail and to present to large groups on an overhead projector.

But limit your presentation to no more slides than you would in a paper plan, meaning 20 or fewer. And don't cram a lot of information on a single slide. "Just put highlights," says Bygrave. "[No] more than six or eight lines on a slide."

Planning for the Future
Whether plans today are long, short, elaborate or simple, they still contain the same basic elements they always have. Typically, most have an executive summary, a marketing plan, a management team description and financials (income, cash-flow and balance sheet projections).

The recent studies are hard to ignore because they're based on reasonable samples and were performed by reputable researchers. But business plans show no sign of going extinct. Business plan competitions and college-level business plan courses are more abundant than ever. "Why do people write business plans?" Bygrave asks. "They've been trained to write business plans, so they do. Another cause is that investors or strategic partners insist on it."

Hackney's experience writing the plan for Roaring Lion convinced him of both the benefits and limitations of business planning. Simply writing a plan helped push him to start a business when he had no intention of doing so. But the plan wasn't nearly as effective when it came to identifying and quantifying the risks and opportunities his company would face.

One problem arose when it became apparent he had overestimated the business's revenue potential by about 500 percent. His company's annual sales are nothing to sneeze at, but they are far less than Hackney expected in his plan.

Among other missteps, he underestimated the actual selling price of the company's products. The economic appeal to customers is still strong, but it's not as strong as he'd hoped. Perhaps most important, his plan didn't recognize the amount of financial capital it would require to grow the company, which has made it difficult for him to reach those early sales forecasts.

Like many entrepreneurs, Hackney learned to write a business plan from a book. That, plus feedback and many hashing-out sessions with his soon-to-be investors and partners, produced a plan that was accurate in its basic aim: to describe a business model that would allow him to build a successful enterprise.

Today, Hackney says he'd definitely write a business plan if he started another business. But he'd be much more conservative with his financial projections and de-emphasize the use of them. "I'd make it much shorter," he adds. "I'd deliver the core principles of what the business is founded on in such a way that the purpose would be finding money."

How to Win a Business Plan Competition

http://www.writebusinesscapital.com/contact.html

These days, business plan competitions yield prizes worth more than ever.

The Wharton Business Plan Competition, for example, awards $20,000 in cash and $10,000 in legal services to its top entrant. Harvard Business School’s traditional trackcompetition awards $25,000 in cash and $25,000 in business services to its winner. M.I.T.’s Clean Energy Prize includes $200,000 in cash. And Rice University offers a whopping $225,000 prize to its first-place winner, including $125,000 in equity investment, $20,000 in cash and more than $80,000 in services.

Still, it’s really not about the money, says Cliff Holekamp, a senior lecturer in entrepreneurship at Washington University’s Olin Business School, which hosts multiple competitions, including the recently introduced Social Entrepreneurship and Innovation Competition, a do-good variation with a $150,000 prize pool. “The value of participation,” says Mr. Holekamp, “is not found in funding but in a process that brings you mentorship, support, structure and access to the resources and people that will help perfect your business model.”

As impressive as the cash awards sound, Saad Khan, who has served as a competition judge and is an investor with CMEA Capital in Mountain View, Calif., says the amounts are “fairly small in the context of starting a business.” A better reason to compete, he says, is “to get feedback in real time and to get noticed by alumni who have done well, local VCs and other investors in that community.”

There are even worthy competitions that offer no prize money. In 2006, for example, Ryan MacCauley won the Launch Award at the University of North Carolina’s Kenan-Flagler Business School with a plan for the Class Watch, a company he now runs with his brothers John and Kevin. “What wasn’t going to help us quit our day jobs and launch was a $20,000 check,” says Mr. MacCauley, “but winning gave us confidence.”

It also helped them secure a deal with an angel investor. The Class Watch, which sells customizable, college commemorative timepieces, began generating revenue in the second quarter of 2008 and hopes to hit $3 million in sales within a year.

Pick the Right Competition

Since their advent in 1984, when the University of Texas at Austin held its first “Moot Corp,” business plan competitions have proliferated within academia and beyond. More than 50 American colleges and universities host them. So do corporations, nonprofits and government economic development offices.

Hosts include Wal-Mart, Amazon.com, the states of Michigan and Nevada, the cities of Anaheim, Calif., and Pittsburgh, the Brooklyn Public Library, China’s government-controlled television network CCTV2, and Al Gore, in partnership with the Indian Institute of Foreign Trade.

Some remain invitational but most have loosened their eligibility terms to foster interdisciplinary, international and intercollegiate collaboration (in other words, you don’t have to attend most business schools to enter their competitions).

Competition within the competitions can be fierce, however. And that’s why Cindy Boyd, who is chief executive of the Houston-based consultancy Sentigy and a frequent judge at competitions hosted by Rice University and the Entrepreneurs’ Organization, recommends that would-be entrants conduct extensive online research via the Web sites of the host organizations. Even more important, she suggests contacting past participants — judges, winners, and losers — to ask what worked and what didn’t.

Don’t submit an application, says Ms. Boyd, unless the advice you get sounds do-able for your team.

Give Yourself Time to Prepare

After selecting an appropriate competition, George Abe, a faculty director at U.C.L.A.’s Anderson School, says most teams should take at least a year to hone their business plans. “The earlier the prep begins,” says Mr. Abe, who has seven years of judging experience, “the better the plan is. You can get away with three months minimum if you have a product or service crystal clear in your mind. But you cannot be figuring out a market and competitive story in 60 days.”

Business plan competitions require an initial submission, sometimes called the “intent to compete” entry. Normally, it consists of a two-to-three-page executive summary explaining all elements of the business: product, market, competition, finances and operations. If it isn’t well written and succinct, a team won’t make it through the door.

“Students spend too much time describing the hammer and not enough time talking about the nails,” Mr. Abe says. “They have to be able to explain their product or service quickly so a judge not knowledgeable in the field can basically get it. What every judge knows is how to question students about markets, competition and finances. Those are the nails.” The bottom line: you need more than a cool idea; you have to show how the idea will make money.

Judges are often impressed by serious market research: the results of customer surveys, for example, or of pilot sales programs. That may have been what gave a team from the London Business School the edge in Columbia Business School’s first Odyssey competition this year.

The team’s plan, says a team spokesman, Vivek Makhija, was for “a renewable energy company using a combination of original and licensed technology to offer power generation at a micro level to households in India.” As yet unnamed, the company worked with an alumni mentor who is deeply involved in market research to develop comprehensive reports on rural Indian consumers’ access to and use of electricity.

Make Sure Your Teammates Know Their Roles

NIR Diagnostics wanted to commercialize technology that can prevent amputations and fatalities caused by chronic wounds. These sores may appear to be healing on the surface even though they’re actually deteriorating and infected underneath.

Clearly defined roles were essential, according to the team leader, Armen Karamanian, the interim chief executive. “We came together around common goals and complimentary skill sets,” Mr. Karamanian says. “We didn’t want to wind up with a great, life-saving idea — and lawsuits over this, that or money.” Have an honest discussion over what your team wants to accomplish beyond the academic exercise, such as how you want to start the business and who will do what, he suggests.

NIR Diagnostics won the 2009 Wharton Business Plan Competition and believes it can miniaturize, manufacture and sell by 2012 a device (based on technology created at Drexel University) that bounces lasers through layers of a chronic wound to give doctors a more complete reading of its healing progress.

The company, recently renamed Lumina Diagnostics, is now seeking a $15 million investment over several years to gain F.D.A. approvals and refine its technology.