By Charles Moffat - February 2010.
There are lots of creative people out there who come up with great ideas for a business or a product. I know I come up with several ideas every week, but the key discriminating factors are availability of time and money. Whether the ideas are worthwhile and worth investing time and money in is the next factor.
If a person is able and willing to set aside their current career to run with their business idea, that conquers the issue of time but the question of startup money is critical.
Lets say they've made a new type of ant-farm, except instead of ants they used Fireflies. The Fireflies live inside a glass and plastic container, along with the necessary flowers (fireflies eat pollen and other organic material) needed to keep them alive and dirt so they can lay their eggs, reproduce and burrow underground.
Before attempting to market this product they first need to determine how many fireflies the need, how to build the containers, and which plants work best for feeding them. If their plan takes off it might be difficult to catch/breed enough fireflies to keep up with demand.
Getting the necessary funds to market and sell such an idea might be difficult however. Some people might just scratch their heads and go "Wait, you want to sell fireflies as pets?" and will evidently think you've lost your marbles. Others might respond with "Wow. I want one!" Some people just really like anything that glows.
A more reasonable business idea might be recycling gold and precious metals from trashed computer parts. Right now those electronics parts are sent overseas to Asia where they are ripped apart, melted down and then recycled. A single trashed PC contains more gold than 17 tons of ore. Researching how to recycle the metals, melt them down properly and then selling/recycling the gold is a more promising business plan than "selling fireflies" because gold is a highly valued commodity and unlike fireflies gold won't die by accident.
You could in theory take out a straight loan from the bank, but there are other ways to find financing.
#1: FAMILY AND FRIENDS
Often when looking for an investment people will look to friends and family. "Love Money" comes with its own pros and cons. Your friends and family will want their money back eventually and you will have to put up with them occasionally bugging you about how the business is going and even offering advise, whether its wanted or not.
#2: ANGEL INVESTORS
There are variety of hard to find companies out there who invest in startup companies, providing capital to pre-screened entrepreneurs. York Angel Investors Inc. in Toronto is an example of one such company. Their goal is to determine which startups are worth investing in and then they help provide their collective wisdom to make certain the company starts on the right foot. These investment groups don't like to advertise however and can be difficult to find.
#3: TRACKING YOUR BUDGET
Entrepreneurs often underestimate the costs of bringing a product to market. They don't realize the full extent of their costs, overestimate cash-flow projections and often make assumptions about how big their niche market is and how big they can grow. Keeping track of their budget means having a complete, fleshed-out strategic plan, not just cash-flow projections. Who are you hiring? When and why? What benefits or time off are they getting? What is the overall cost of staff, office supplies, new computers, IT support, photocopier repair, etc? What about emergencies? Does that match up with your spending projections?
Startup companies have a tendency to overspend, buying the best equipment and materials, thinking "Oh, we'll make it back later." But not immediately. Its a procrastination tactic. As such its important to have other people look over your costs and expenditures and see if you're missing anything.
"Wait, have you figured out how you're going to transport these fireflies?"
"Oh oh, I totally forgot about transportation costs."
"And what about insurance?"
"And have you determined your packaging?"
More stunned silence.
Knowing what your costs are is an important step for getting an investment. If your investors have doubts about your ability to stay on budget they will have serious second thoughts about giving you money.
#4: KNOW YOUR VALUATION
How much is your company worth? Don't use projected revenues for the next year or 10 years, how much is your company worth RIGHT NOW. Don't assume that just because you've spent $100,000 on your business that is how much your business is worth. You've got debts, obligations and your cash flow must not be that good otherwise you wouldn't be looking for investments. Its probably worth a lot less, especially if you don't own any patents or copyrights.
When approaching potential business partners you want to downgrade your valuation in the event that your partnership will become "value added". For example if you have an exclusive deal to sell your product through a major chain store that adds to the value of your company.
What you want to avoid however is "depleted value", wherein you sign a deal where you can ONLY sell your product to that one business partner. If they already have a competing product (ie. ant farms and fish aquariums) they might decide they don't really want your product and will keep you on the sidelines, your product wasting away in storage.
Its all about who you want to work with at the end of the day. Some business partners might not fit right or be suitable. Some investors might have a lot more experience with your chosen market and you'd be foolish not to take advantage of that if they're willing to give a more hands-on approach.
If they don't know much about the market however their offers to help might become quite cumbersome and not really helpful.
#5. KNOW WHO YOUR BUSINESS PARTNER IS
If you're meeting with an investor you will want to know more about their personal beliefs. Are they a green company? Are they currently being sued or in litigation? Do they have lots of business partners / clients? How much experience do they have? What is their profit margins? Are they doing any questionable business practices that might result in future lawsuits? Did they lose money in a Ponzi scheme (or worse, are they operating a Ponzi scheme)?
#6: BE HONEST AND OPEN
If you start lying about your finances or exaggerating how big your market share is the company you are dealing with might do some background checks and find out you've been covering up some horrible warts (ie. your debts to your family and friends). This could backfire in your face horribly, wasting both money and time.
An eleventh-hour discovery that you've tried to hide a major flaw will kill the deal.
Be honest about the challenges facing your company. Investors don't expect you to have all the answers.