Entrepreneurial

5 things entrepreneurs need to know about valuation

– Tim Berry is the president and founder of Palo Alto Software. This post originally appeared on his blog, “Planning, Startups, Stories”. The views expressed are his own. –

Valuation is one of those four-syllable business buzzwords you’re going to have to deal with, eventually, if you either want to start a business or own a business. If it doesn’t come up when you start, it will come up later. Here is what I think you need to know, in five short points.

1. The word has vastly different meanings: don’t you hate it when the same words mean different things? Valuation means at least three different things:

• A. What a business is worth to accountants for legal purposes, such as divorce settlements, inheritance taxes, and gift taxes. A certified valuation professional, usually a CPA, makes a guess. Most of them use financial statements and analyze financial details.
• B. What a business is worth to a buyer. Small businesses go up for sale with business brokers. Hardware stores, for example, get about 40-50 percent of annual sales plus inventory, as a starting point. Plus a bonus for growth and special strengths, or a discount for lack of growth and special problems.
• C. The pivot point in an investment proposal: it’s simple math, but tough negotiations. If you say you want to get $1 million for 50 percent of your company, you just proposed a valuation of $2 million.

2. What’s anything worth? Like your car, your house, and a share of IBM stock, something’s worth what somebody will pay for it. The valuation in A is theoretical, hypothetical, but legal. With B and C, though, valuation is as real as agreeing to buy a house. It’s not what the seller says it is; it’s what the buyer is willing to pay. And this cold hard fact drives many entrepreneurs crazy.

3. For small businesses, there are guidelines and rules of thumb. If you do a good search, or work with a business broker, you can find general rules of thumb for what your long-standing small business is worth. For example, a hardware story is worth roughly half a year’s sales plus inventory, with bonuses for positive factors like recent growth, and discounts for negatives like lack of growth. You could read up on it in Bizbuysell.com, Bizequity.com, or Business Brokerage Press. Or do a Web search and check the ads for valuation experts.

4. For startups, it’s what founders and investors negotiate. Startups and investors and culture clash over valuation. Investors care about valuation. Founders often misunderstand valuation. And never the twain shall meet. I’ve seen these kinds of problems many times: founders walk into the valuation discussion full of folklore and fantasy like stories of Facebook and Twitter. They want lots of money for very little ownership. Investors see two or three people with no sales history thinking their dream startup is already worth $2 or $3 million.

How much money do I need for my startup?

– Tim Berry is the president and founder of Palo Alto Software. This post originally appeared on his blog, “Planning, Startups, Stories”. The views expressed are his own. –

It’s an obvious question. And if you’re looking for startup investors you’d better be able to answer it well, and quickly too. No wandering eyes. No doubt. If you’re doing a pitch, have a slide for it. And be specific.

I liked this from Ben Yoskovitz’s Instigator Blog on Use of Funds:

… most descriptions of “use of funds” are incredibly generic and standard, typically involving the following: hire key personnel, product development, sales & marketing. Hhhm…the phrase, “No s!@# Sherlock…” comes to mind.

And on the other hand, there’s this about that, from Perfecting Your Pitch, by Guy Kawasaki’s Garage.com Ventures:

It should be clear from your financials what your capital requirements will be. On this slide you should outline how you plan to take in funding — how big each round will be, and the timing of each — and map the funding against your key near-term and medium-term milestones. You should also include your key achievements to date. These milestones should tie to the key metrics in your financial projections, and they should provide a clear, crisp picture of your product introduction and market expansion roadmap. In essence, this is your operating plan for the funds you are raising. Do not spend time presenting a “use of funds” table. Investors want to see measures of accomplishment, not measures of activity.

So go figure. There are two opposite points of view from two good sources.

10 reasons not to seek investors for your startup

– Tim Berry is the president and founder of Palo Alto Software. This post originally appeared on his blog, “Planning, Startups, Stories”. The views expressed are his own. –

Sure, maybe you need the money. Maybe that’s what your business plan says. But seriously: Do you really want to have investors involved in your dream startup?

I’ve said it before: bootstrapping is underrated. I get frequent emails from people asking how they can get investment for their new startup, and I’ve admitted to being a member of an angel investor group. But let’s not forget, while we’re thinking about it, these 10 good reasons not to seek investors for your startup.

1. It’s almost impossible to get investment for your very first startup. If you don’t have startup experience, get somebody on your team who does. Chris Dixon said it best: either you’ve started a company or you haven’t. And if you haven’t, and nobody in your team has either, that makes it very hard.

2. You are selling ownership. Investors write checks to own a serious portion of your business. I admit that’s patently obvious, but you should see the emails I get in which people think of investors as if they were some sort of public agency. Once you get investment, you don’t own your entire company.

3. Investors are bosses. You are not your own person when you have investors; you’re part of a team. You can’t decide everything by yourself. Politics matter. Investor relations matter. If you screw up, you do it in front of other people, and it hurts those people.

4. Valuation is critical to them and you. Simply put, valuation means the price. If you want to give only 10 percent of your company to investors who pay $100,000, you’re saying your company is worth $1 million. And so on. Simple math, but wow, not so simple negotiation.

How to deliver a killer elevator pitch

– The following article originally appeared on Under30CEO.com. The views expressed are their own. –

The elevator pitch is one of the most important elements in starting your business successfully. Picture this: you are searching for funding for your new business, taking an elevator from a big meeting when in walks Donald Trump. What do you do? Do you freeze up when he asks you what you are doing here or do you nail him with a perfect pitch, snag his business card and score a meeting?

Here is a guide to the several core elements of the elevator pitch. This is not your “commercial” and is not a sales pitch. That can be crafted from this, but this serves as a professional pitch with the purpose of raising investment for your business. This is a pitch for your company, not what you are selling. Tell them why your business will be successful.

This pitch needs to be short and to the point, because by the time the elevator stops, you’ll need to have completed your pitch!

Step 1: The Hook

First you’ll need to grab your audience’s attention. Why should they care? If they are an investor they’ve heard dozens of pitches this week. How will yours stand out from the crowd and get a call back? You’ll need to appeal your audience by speaking directly to their problem. Try asking them a question or strike them with humor to get them thinking or warrant a response.

Exclusive: Entrepreneurs vow to create 1,000 jobs in two days

Jon Cook

Sep 21, 2010 08:21 EDT

By the time he was 30, Dan Bliss had started 10 businesses, employing hundreds of people. Now he wants to help other entrepreneurs create jobs.

Bliss is the founder of the Perfect Business Summit, a two-day event held in Las Vegas October 7-8, that brings together top CEOs, entrepreneurs and investors with more than $10 billion in capital. For the second anniversary of the conference Bliss got the participants to commit to creating 1,000 new jobs by spring 2011.

“This is like a two-day economic stimulus,” said Bliss, now 40, who made his fortune running restaurants and concert venues in his native Cleveland, before relocating to Los Angeles nearly a decade ago. “Our event isn’t one of those rah-rah conferences where it’s just a bunch of motivational speakers. We bring real CEOs, real business founders to these events that have done it.”

Virgin Inc. founder Sir Richard Branson was the keynote speaker at last year’s inaugural event and this year Bliss has raised the bar, doubling the number of speakers to 75. That group includes a who’s who of entrepreneurs such as Zappos CEO Tony Hsieh, Palms Casino founder Gavin Maloof, UStream.TV founder Brad Hunstable, Hard Rock Cafe and House of Blues founder Isaac Tigrett, Aaron Patzer, founder of Web-based money manager Mint.com, Gina Bianchini, co-founder of social networking site Ning and John Paul DeJoria, founder of Paul Mitchell salons.

Josh Stein, managing director at prominent venture capital firm Draper Fisher Jurvetson, will also be among the speakers.

Bliss said the idea is to tap the business acumen and capital of these entrepreneurs to help the startups attending the summit expand and hire to meet the collective pledge of creating 1,000 jobs by next April. These startups will include the winners of the business pitch competition run by Perfect Business, the Los Angeles-based startup consultancy firm Bliss co-founded with partner Mark Verge.

“It’s a realistic figure,” Bliss said of the 1,000 jobs, adding that come the spring they would be reaching out to students graduating from business schools in Nevada, Arizona and Southern California to try to fill some of the jobs at these startups. “We’re internally setting goals even higher than that.”

Betting the farm on your customers

Jon Cook

Jun 17, 2009 10:44 EDT

Organic dairy farmer Dante Hesse is hoping the customers who lap up his milk by the quart at local New York farmers’ markets will also invest in his future.

What started as a series of “low key” one-on-one conversations with customers at local farmers’ markets near his Ghent, New York farm, has escalated into a serious attempt to raise $850,000 – in as little as $1,000 increments – directly from his dairy-loving consumers.

“I learned pretty quickly that there was a lot of interest, but I also needed to find some council who could tell me how to do this legally,” said Hesse, who founded Milk Thistle organic dairy farm with his wife, Kristin, three years ago. He intends to use the bulk of the money to build an onsite processing plant that will help him ramp up production and diversify into making other milk-based products like yogurt, butter and ice cream.

“If it has to be 850 people at $1,000 each then that’s what we’ll have to do and I think we could get it,” said Hesse.

THE PITCH

Hesse knows the math behind the milk and feels if he’s properly capitalized, he can move into more “value-added” products like butter, yogurt and ice cream, where the gross margins are 20-30 percent higher.

According to the Organic Trade Association, sales of organic milk in 2007 totaled more than $1.3 billion in the United States. While organic accounts for just 3 percent of the U.S.’s total milk sales, it has been growing at an annual average rate of more than 20 percent over the past decade (last year it dipped to 10 percent).