Another way of financing your startup

There are many ways of financing a startup. Depends on how resourceful you are.

But one way that is used often is over draft accounts.

Example:

1) You have people sign up on purchase agreements.

2) You then use the purchase agreements as securities for an over draft account.

3) Which you then can draw upon to finance the startup.

Still, you need to hire a COO to have things made right from the start. Don’t do it yourself, it is just stupid. Unless you are a born manager or if you obviously is a great manager (look at the results and you will find out if you are).

Just a short tip for today. Stay tuned for more ideas on startups.

“I don’t have the money”

Well, many don’t. But there are solutions for that you know. Heard about the idea of “building equity”? If not, then read on this will be something of great value for one reason: Controlling a big chunk of the company even though you have invested next to zero dollars of your own. Doesn’t that sound golden:)? I think so.

Ok, so here is the deal: You have a new business idea. You think your new product/service will sell like ice cream in the dessert. Well….if you think so, why not pre-sell it? Find 100 retail customers or 20 company buyers and sign them up on purchase agreements in advance. Tell them they will only pay when you deliver.

Now you go and find an angel investor, tell him/her that you have all these signed purchase agreements for your product and that you want to form a joint company with him/her. The angel investor invests cash so you can hire a COO (Chief Operating Officer) and then for financing the operations for 12 months. Your investment will be the purchase agreements you have invested your time in getting signed. This is normally called “sweet equity” in the world of business. The best equity there is if I should quote Mark Cuban, the american billionaire. I totally agree with him. It is cheap if anything. And if you are starting out, then time is usually what you have the most of (in comparison to money at least). And let’s face it: I mean every signed purchase agreement makes you personally a whole lot richer. That is a great feeling to have.

Let us take an example (I love examples):

You have a new type of cheese that tastes like Gods best creation. You love it and you are dead certain many people will love it too. So you go around with a test sample and let private individuals test your cheese, then you ask them to sign up for a 12 month membership in your cheese delivery program (delivering fresh cheese 1-2 times a month for 12 months). You sign up 100 such retail customers and tell them all that you will now create a corporation so as to deliver this cheese to them. You tell them that you will not charge them if you cannot deliver. Make that perfectly clear so that people understand the situation. Don’t lie about it.

Let’s say the cheese will be sold for $10 per kilogram cheese and you deliver 2 of these cheeses per month, 24 cheeses per individual and year. That is $240 in revenue on each customer. With 100 signatures that will become $2400. This is the contractual value you will bring into the corporation you sign with the angel investor.

Let us say the 12 month period with COO salary etc will come to a sum of $100,000. What you will have in ownership is ONLY $2400 / $100,000 = 2,4%. But please note, if this is your very first company and you have no cash money at all to invest in this and this company takes of and makes $10 Million a year in revenue and perhaps $1 Million in pure profit, then 2,4% still equals $24,000 in dividents per year (if you decide on paying it out that is. Some companies reinvest company profits for expansion purposes). Please note, we are talking about passive income for you. You can quit your job and start a new company, now with some cash to invest too.

The other good thing is, should your company become a big success, then you would not need to do any more hard work. I mean you have the COO doing the hard, day-to-day activities already from the get-go. You have the angel investor who can have the CEO title. You could perhaps get the Chairman position for yourself if the angel investor agrees to it (the angel investor is in charge if he owns the majority of the shares. Especially if you have the same class of shares and with the same class of votes per share. In a corporation it is always the one with voting majority who decides who sits on the board of directors which includes the Chairman position).

Many entrepreneurs looks blindly on having all the ownership themselfs when they should look at what they could get, seen from the position they are in right now. If you are broke, then you are in no real situation to bargain with cash rich angel investors. And why should you?

There are two things you can do to make your situation better ownership wise if you want to (if you are determined to have a bigger piece of the cake, which of course is understandable). Those solutions are:

1) Create more purchase signatures so you build up more equity for yourself. Golden one I might say.

2) Haggle the budget demand. The COO of course wants to have a big time budget to make things as simple and fast as possible. If you have a big budget you can expand quicker (obviously). But haggle the budget and find a better way of getting almost the same thing and in the same time frame with much less money. This way you will get more of the pie.

Just two smart tips to make the scale work in your favour. You gotta be sharp to ge to the top;).

Corporate Philosophy – deadly serious

Making money is good, but as always: A business that only makes money, is a poor business.

What is equally, or more so, important is the “corporate philosophy”. Why are you here? Why should customers do business with you? What is your soul? What do you stand for?

This may not seem important. Maybe even a waste of time, but you are wrong if you do think so.

If you look around in the modern society today. At least in the western society. What we hold dear is certain values like “do not murder others”, “do not steal” etc. Values which exists to protect our public soul. A way of living together without causing any trouble. It’s a mutual agreement between all of us. When someone breaks those values we put that certain person in jail or even execute him/her. That is how we uphold our values.

The same things are needed in a business in order for the business to stand out from all the others. In order to build a brand it is essential to build a brand identity. With a brand identity you must create internal values which should be brought to the customers, suppliers, competitors etc. Without firm values, or philosophy, a company and it’s brand will die. This is when a company can be called “greedy”, because money becomes more valuable than upholding an ideal. Upholding a dream.

If you ever want to be able to create a company that will be alive perhaps even 300 years from now, you will need to sit down right now and create the values your company should support. It can be whatever value you want, as long as you’re company and it’s team will stand behind those values 110% (or even more). Without a team which supports the mission, value and philosophy of your company, you will ultimately fail. You need to find the right team for this to come true. This is always hard, but keep at it.

Let me give you an example of this:

If you wanted to form a company selling ice cream, then your corporate values might be:

1) Only sell ice cream made from goats milk.

2) Always treat every customer as if it was your best friend.

3) Never sell by telephone.

4) Never chase customers, always let customers come to you.

These are just example of a corporate philosophy. I remember the brokerage house Schwab (founded by Charles Schwab) had a rule that they never did cold calls, ever. They didn’t advise customers directly about which shares to buy etc. Those are corporate values which create a family inside the corporation. Something every employee follows or not. If they do not follow it, they should be fired. This was a standard thing at Charles Schwabs company. If your broke one of the values only once, you where out of the game…poof…just like that. No second chance.

The same thing goes on in families. You have certain values in your family, my family have certain values etc. All of our families have different values we believe in and which we follow almost religiously. This is how we keep things in order. This is how we can create systems of dependence. Systems wich makes trusting each other, possible.

Creating a corporate philosophy will be the most important thing you will ever do. It is that important. You will come only so far with money. If employees come to work for you only because they want your money, then you have lost. They will not in any way make your company a new Dell, Microsoft or whatever multi billion dollar corporation you can find out there. They will demolish it, because there are no values. It is like living in a dead body. Without the soul, without the life force of that body, that body will remain dead and will very soon become dust.

Why does your company exist? What does your company stand for? It doesn’t matter what it stands for, as long as it stands for something. If you’re company stands for “bringing back the dinosaurus to our time”, fine. If your company stands for “removing the addiction to Harley Davidson”, equally fine. It does not matter what you stand for. Just stand for something and people/customers/suppliers will know where you stand in the business world. And they will have an easier time cooperating with you because of this.

I think the funniest thing about creating a company is creating it’s soul, it’s purpose. That makes me tick. For example: In May 2009 I will create this tea company selling honey flavoured Green Tea. This tea company will have 3 certain values it will always strive for every day of it’s existence:

1) Help heal cancer through tea beverages.

2) Help heal AIDS through tea beverages.

3) Let customers come to us through marketing. No cold calls allowed.

Hire the right people – Part of the startup success

A very important part of a successful venture, or startup, is the hiring process. You need a smart COO to take this venture of yours to a new and more advanced level. You really do not need to hire anyone else. The COO is then given (by you) the authority to hire any other expertise he considers important for the success of his mission (which is doing what you have planned for him to do and with the budget you have set out).

You will need to learn how to set budgets. Important as nothing else. You may do as Tim Ferriss do, give the COO a certain budget and certain authority up to a certain expense level. This will give the COO more room to actually make things happen without asking you every time an expense is to be paid. Don’t be frightened, this is a necessary step to becoming a successful entrepreneur. You need to trust people even if it is hard. I know it is really, really hard at first. I’ve been there. I felt like shit for almost 6 months first time I hired a COO to do what I used to do (lead the project). But that feeling slowly declined and now I am very happy I took the plunge, because I can now devote myself to many (and I mean MANY) other projects and still be a human being (meaning, if you do everything yourself in many projects, you will soon die in a heart attack. That is a certain thing).

What all this comes down to is: Get rid of your sick desire to micro-manage. It will do you no good at all. Get rid of it now so that you and your family can reap the benefits. After all you are in this for two main reasons: Realize a vision (which you can only do through others in the end) and make boat loads of money and wealth.

Be realistic, hire some help. Professional help. Hire a trustworthy COO.

You can thank me later, but for Christ Sakes, do it. Well…..what are you waiting for? Get busy.

What is my company actually worth?

Easy: It is worth as much as someone buys it for. Not what they intend to buy it for.

If you can sell 1% of your startup for $100,000 then your company is worth $10 Million. Fair and simple. The game is not any harder than that.

Unfortunately many people can’t think in simple terms so they make up all of these ridicules mathematical formulas of how much a company is worth. They calculate ROI’s, they calculate net asset values blah blah blah. Ad Nauseum.

I would be so bold to say that there are 3 main ways of putting a value on a company:

-Cashflow method (multiples on profit or sales)

-Net asset method (totalt assets – total debts)

-Strategic method

Let me explain the strategic method a bit closer. I think Facebook VS Microsoft is a prime example of this. Microsoft buys 1,6% of Facebook for $240 Million and raises the valuation of Facebook to $15 Billion. Many people cries foul over this, but the fact still remains: Facebook is worth as much as $15 Billion. Of course for others (due to everyone looking at one and the same problem differently) Facebook is worth only a paltry $5 Billion or much less. But the fact still remains: Facebook is worth as much as $15 Billion due to Microsoft’s chance of getting a strategic value in return for it’s money investment. Microsoft’s value in the Facebook case is “marketing advantage” for a couple of years.

Strategic value is by far the best method of raising your company valuation. At least if you want a high valuation.

As you may understand from reading this (or not), valuation is always a by-product of what your company may give to a partner or an investor. If you can give a strategic value for money, you are golden.

Let me give you an example:

If you have $1 Million in profits as an average every year and you want to raise your company valuation to $100 Million. What you then could do is sell 1% to an investor for $1 Million with a paid out divident of 10% annually for as long as the investor holds at least 1% of company shares (with veto rights against dillution of stock as a special treat for the investor). As you now may notice, if you make an average of $1 Million a year and you sell a cashflow stream of $100,000 (10% of $1 Million) you would still have a good divident stream for yourself. And you also have $1 Million (pre-tax) in the bank.

This may sound like hocus-pocus, but this is how the valuation game works. People can rant around all day about how to value a company, but at the end of the day a company is always worth what someone will pay for it. The same goes with bread, milk, real estate. The same deal all around.

So always remember the simple little rule: “What something is worth is what someone will pay for it”. Price reveals the value.

Startups and valuations

Many people come to a grinding halt when they are to negotiate valuations with VC’s for a startup business.

May I say, this is not as hard as it may seem. But because people have many views on the same problem, those easy things often gets confused and hard to determine.

My way of valuating a startup is by asking one simple question: “How much is invested currently in the business?”. That is the pre-money value (or the value that exists before anyone else puts money into the project) for me. I think that is a fair way of looking at it. A way that does not screw the investor over. Personally I have never understood all of these “made up” valuations some entrepreneurs present to me. Many times they can’t even backup the valuation. They can’t show me in black and white why their company is worth this and that. That is a weakness no startup entrepreneur can afford to have if they are to impress any VC or any investor. Only stupid investors go for that. And those investors, sorry for saying this, deserves to be screwed over. I mean, easy money is never something I would say no to. Would you?

And as I see it, if an investor is not smart enough to see the faulty link they should not be whining when the faulty link breaks. It’s their fault they didn’t look through the smoke and mirror of the clever startup entrepreneur. The blame game is a bad game. Always remember it.