The HBS Blog offers insight on Delaware corporations and LLCs as well as information about entrepreneurship, start-ups and general business topics.
In our last HBS post we gave some advice on how to successfully solicit friends and family to become financial supporters for your business. While friends and family investors have been around for as long as entrepreneurs have been starting businesses, the rise of social media and the online economy has given rise to a thoroughly modern new way to raise capital—crowdfunding.
Crowdfunding allows entrepreneurs with a business proposal to pitch their ideas to anyone who has an internet connection and to receive contributions from anyone that wants to support their idea. Rather than providing you with a loan or buying an ownership stake in your business, crowdfunders simply pledge a specific dollar amount that they’re wiling to give to help you realize your dream, typically in exchange for a reward that demonstrates your appreciation for their contribution.
If this all sounds a bit farfetched, a quick look at the two leading crowdfunding sites, Kickstarter and IndieGoGo, reveals a host of entrepreneurial success stories, from the $1.5 million raised to design a better iPhone dock, to more modest victories like the $47,000 for a custom-fit jeans business, and the $6,000 to open a new hair salon.
In exchange for providing entrepreneurs with a platform to raise money, crowdfunding sites keep a small percentage (typically between five and ten percent) of the money raised. Kickstarter is focused on creative projects while IndieGoGo accepts a wider array of fundraising campaigns. Both sites have some specific rules about what type of projects they allow, so read up on their guidelines to figure out which one is better-suited to you. There are also a few smaller crowdfunding sites targeting the entrepreneurial community that may be worth checking out, including MicroVentures, Peerbackers, and ProFounder.
If you decide to go the crowdfunding route you’ll probably still get a large percentage of your money from friends and family. But you’ll also open yourself up to a much bigger pool including friends of friends, current customers and business associates, and if you’re lucky and your campaign goes viral, total strangers.
In order to launch a successful campaign try following these four steps.
1.) Make it Personal – Because you’re presenting yourself as an independent entrepreneur and appealing to individual donors, you’re going to need to make a personal connection. So shoot from the heart, tell people not only what you are doing, but why, and why it matters. Making a short video is an important part of most crowdfunding campaigns and this will be your best opportunity to tell your story in a compelling way.
2.) Offer good rewards – This doesn’t mean rewards that are worth a lot of money. In fact, you may want to avoid high-value rewards as they could trigger unintended tax consequences for your backers. Instead, focus on rewards that demonstrate a personal touch and, if possible, that can help you build your customer base. For example, if you reward backers with a prototype of a new product you’re designing, you may develop some loyal long-term customers.
3.) Keep it realistic and focused – This means choosing a reasonable funding goal and an appropriate length of time for your campaign. (Most sites require that you pick a funding target, and if you don’t meet the target then your campaign is either canceled or subject to higher fees). While there is no magic formula, the average project raises less than $10,000 and is live for about two months. Consider the size of your network and their financial position when setting your target, and stay engaged with them throughout the length of your appeal.
4.) Spread the word – Friends and family will almost certainly be your first donors so get the word out to them right away, and then encourage them to share with their networks. You’ll also want to integrate your campaign onto any social media sites and blogs that you maintain.
If you end up successfully raising money through this exciting new vehicle, make sure to consult a tax professional to see what you need to do to properly account for your contributions.
Entrepreneurs the world over have been abuzz with the news that Facebook is kicking off its long-awaited IPO, valuing the company somewhere in the $75 billion to $100 billion range. As part of the IPO process Facebook has at last been forced to divulge that its revenues amounted to $3.7 billion last year, so a quick check of the math tells us that that the company is being valued at a multiple of between 20 and 27 times revenue. Which may lead many of you to ask the question: How much is my company worth?
The short answer—unless you happen to have 845 million users—is, unfortunately, nowhere near 20 times revenue. But don’t let that stop you from coming up with a reasonable valuation estimate, as it will prove extremely useful when negotiating with potential investors.
Valuing a private business—particularly an early-stage one—is a difficult process that requires a blend of art and science, but it is an important endeavor to undertake. Value your business too high and you’ll scare off potential investors and block any exit strategy you might have. Value it too low and you may end up giving away control of your business at a fraction of its true worth.
A good way to begin your valuation analysis is to pull out your financial statements and have a look at your total revenues, your earnings (if your business is profitable), and some other common industry figures like EBITDA (earnings before interest, taxes, depreciation and amortization). If you have a few years worth of financial statements you’ll also want to track the growth rate of these key metrics. Once you’ve got the numbers in front of you it is time to search for other comparable businesses to yours and see how the market is valuing them.
Finding information on publicly traded companies in your industry is pretty easy. Start with a web search for something like “average price to revenue ratio for a hotel” (or whatever type of business you run) and you’ll gain an understanding of how the market values your larger public competitors, as well as which metrics are deemed most important in your industry. Our hotel search quickly reveals that public companies in the industry currently are valued at about 2.4 times revenues (not exactly Facebook territory) and that there are several important valuation metrics that are unique to the industry such as ADR (average daily room rate) and REVPAR (revenue per available room).
Of course, if you are running a twelve-room bed-and-breakfast investors are unlikely to assign the same valuation to your company as they do to Mariott, which has about 3,500 hotels throughout the world. You’re going to have to discount your business significantly to reflect its smaller size and riskier nature compared to the leaders in the field.
In order to gauge what smaller privately owned businesses are selling for there are a number of online “business for sale” marketplaces that you can consult. Try to find data on recently completed successful sales rather than the listing prices of businesses currently for sale, as the list prices can be inflated and not reflective of true value.
Finally, if you are at the stage where properly valuing your business is critical (e.g. you have investors or buyers who are interested) then you’ll want to get some professional help. If you have a good small-business attorney and accountant they can be excellent resources to consult first. And if you need more advice then you might want to hire one or more independent valuation experts to conduct a detailed analysis of your business and assign it an estimated valuation. This won’t come for free, but a solid analysis that assigns a realistic valuation can end up saving you time and money when you are negotiating to sell a stake in your company.
If you’re like most entrepreneurs, you enjoy talking to others about your business, and can speak at great length about allf the wonderful things your company does. It’s probably easy for you to spend hours talking about how your new product is going to revolutionize your industry the way that Apple revolutionized the music world with the iPod and iTunes.
But have you taken the time to perfect your elevator pitch? It is a lot harder, and a lot more valuable, to be able to succinctly make your case to potential investors in sixty seconds or less. If your elevator pitch needs some work—if you’ve ever been given the cold shoulder by an investor then it probably does—try following these five rules to hone that pitch so that you make the most out of future opportunities.
1.) Keep it short. As in one minute tops. By this point in a pitch, if you haven’t piqued your listener’s interest then you’ve lost him. Practice you pitch and time yourself until you can confidently present the whole thing in under a minute.
2.) Start from the top. You should begin the pitch by explaining what your company does in the simplest possible fashion. Something along the lines of “We are a software company that developed a product to make filing your taxes as painless as purchasing a book.” That’s it. Stay away from any industry jargon or technical explanations, they’ll only serve to confuse and alienate your audience.
3.) Explain the problem that you are solving. You are solving a problem with this great new product you’ve been spending all of your time, right? If not, then people aren’t going to care about the product. To continue with our example, “Our Easy Tax software has helped the average user save three hours of time and nearly $600 on his federal taxes.” People are wasting time and money on their taxes—a major problem—you solve that problem, and your customers wind up with both more time and more money.
4.) Demonstrate how you are different. Facebook didn’t invent the social network, Apple didn’t make the first MP3 player, and Google wasn’t the first to try and organize the web. But they’ve all been phenomenally successful because they convinced investors, and customers, that they found a better way to do these things. Chances are your company isn’t the only one doing what you do either. But hopefully you are doing what you are doing because you’ve found a better way to do it. Don’t let your ego get in the way and say things like “We’re the only ones that can do this.” Instead, explain why you do it better: “Compared to the current leader in the industry, our product is 20% cheaper and requires 30% less time for the user to complete his tax return.”
5.) Be prepared for the most common objections. And be ready to calmly and politely refute them. By practicing your pitch on enough friends, colleagues, and family members you’ll get a sense of the initial objections that investors are most likely to pose, and to come up with a response that mollifies those objections. In our Easy Tax example a common objection might be “I don’t understand the first thing about filing my taxes and I don’t care to learn, that’s why I pay an accountant.” And a reasonable response would be “If you can fill out a credit-card application, you have the financial skills necessary to use our product.”
So keep practicing until you can tell a compelling story about your business in one minute or less. And then move on to working on the rest of your marketing and investor materials, because hopefully your new finely tuned elevator pitch will lead to more time in-depth meetings down the road.
As the owner of a small business you are used to doing things yourself. Many entrepreneurs start out with the attitude that they can do it all, and whether they are just launching a new company or have an established firm, they can be too slow too consider the possible benefits of outsourcing some non-core functions.
Once considered an option only for large multi-national corporations, outsourcing is now available even to the smallest startup company thanks to advances in technology and the growth of the global outsourcing industry. So it makes sense to understand the outsourcing landscape and to weigh the costs and benefits for your business.
Start by figuring out what tasks you may want to outsource. While anything that is outside of your core functionality can be fair game, most business owners derive the highest return from outsourcing the following types of work:
Low-skilled, repetitive tasks – In addition to basic data entry, this category can also include functions such as accounts payable and inventory.
Technology-related expertise – Hiring a full-time IT person is expensive, and trying to troubleshoot technology issues yourself can waste endless hours. But outsourcing your IT help on an as-needed basis can save you both time and money, not to mention headache.
Senior Executive-level help – It may surprise you to learn that it is possible to outsource—rather than hire—senior-level professionals to help with your business, but this is a corner of the outsourcing market that has seen a good deal of growth recently. Although you might be a great CEO, if you don’t have a strong finance background you may not be an ideal CFO. But full-time CFOs don’t come cheaply. Rather than hiring one in-house, it is possible to outsource the role to someone who can spend a few days a month with your company making sure that your financial house is in order.
Once you figure out what you want to outsource, you’ll need to decide when to do so. This of course depends on where you company is in its development but it is never too soon to consider beginning the process. If you have a startup you can benefit right away from having help with the low-level repetitive tasks so that you’re free to focus on building the business. For a more mature business, if growth has stalled because you and the other key personnel are wearing too many hats, that is a clear sign that it is time to look for outside help.
So now let’s move on to how to implement an outsourcing plan. While it has gotten a bad rap in certain circles, outsourcing is not a dirty word and it doesn’t have to mean shipping jobs overseas to the developing world. There are lots of options closer to home that can still save you a good deal of money. If you are located in a high-cost metropolitan area, then consider outsourcing functions that can be performed remotely to contractors in smaller markets or rural areas where the cost of living is lower. Their rates should be lower and you’ll be supporting the economy in a place that could probably use the help.
And the same can be said for hiring help from overseas. You may have to deal with language, cultural, and time-zone differences if you go this route, but it can have its advantages as well. In addition to offering very affordable labor, overseas contractors can allow you to expand the number of hours in a day that folks are working on your business. It can be nice to assign someone a project at night and wake up in the morning to find it competed.
Outsourcing is not without financial risk, so in order to make sure that you don’t wind up with runaway costs from your contractors it makes sense to start out with highly specific task-based agreements when dealing with new providers. Once you are satisfied with the caliber of their work you can switch them to an hourly rate or a fixed-cost retainer.
Despite the risks, in the end you may well find that outsourcing offers you a cost-effective way to build the right mix of professionals and frees you up to focus on the most critical matters facing your business.
A mastermind circle is a group of individuals with common goals and interests that surround themselves with each other for the purpose of goal setting, sharing ideas, strategizing, and providing inspiration so each member can more easily reach his or her goal. One of the most important things a mastermind circle does is provide accountability. The members hold each other accountable to do the things they said they would do. Mastermind circles can meet or speak as much or as little as the group decides, but successful people will often communicate with their mastermind circle at least weekly.
In an interview, Tiger Woods revealed that he, Michael Jordan and Charles Barkley speak either in person or on the telephone at least once a week. They speak of matters pertaining to not only sports but also business and finance as well as life in the public eye. The fact that Tiger Woods plays one sport, while Michael Jordan and Charles Barkley played a different sport, does not negatively impact their mastermind circle.
In the book The Inner Edge:The Ten Practices of Personal Leadership, Joelle Kristin Jay and Howard J. Morgan noted these points about the mastermind circle"
- A mastermind is not a networking group. You are not trying to get business from your mastermind, and they are not trying to get business from you.
- A mastermind is not a mentorship. Although your mastermind members share characteristics with the wise and trusted counselors we call mentors, they are not the same. Mentoring relationships tend to involve a one-way teacher to learner dynamic. Mastermind members are peers who see each other as equals.
- A mastermind is not political. You are not trying to develop any kind of power coalition in a mastermind. The purpose of the mastermind is not to join forces but to encourage the betterment of each individual member.
Benjamin Franklin is credited with creating the first mastermind circle. His “Junto” started many social institutions in Philadelphia in the 18th Century. Some of Benjamin Franklin’s greatest ideas got their start in the Junto. The Junto Club eventually grew into the American Philosophical society.
In Hill Harper’s book, The Wealth Cure: Putting Money in its Place, he thoroughly recommends forming a mastermind circle in order to build self-confidence, success, and all aspects of wealth. He suggests seeking out people who have similar talents and/or levels of success. All members should want to make this year better than the last, and they all should have the desire to reach their goals as quickly as possible. When this group works the way it’s supposed to, everyone comes out of the meetings feeling inspired and ready to tackle their most complex problems and paralyzing quandaries. This book was very inspiring to me because it just makes sense. If great leaders in history, sports stars and celebrities have credited much of their success to a mastermind circle, then it seems that it makes sense for entrepreneurs to create one. Some people may have a mastermind circle and don’t even know it. If you do not have one, then why not start one?