| 10 Tactics To Shorten Your Race To Cash-Flow Positive Posted: 12 Apr 2021 07:05 AM PDT  As I'm sure you are aware, surviving that first couple of years as a new business is a huge challenge, waiting for cash flow to turn positive. In my experience as a business advisor and occasional investor, many of you won't make it that far, succumbing to the high costs of getting those first customers, funding an initial inventory, and building an operational support process.
Of course, it helps to pick a business model that minimizes these costs, such as e-commerce to minimize initial staff and facilities, or professional services, where you are the initial product. After you have sold your first company for several hundred million, you can then afford to challenge Elon Musk on the next line of electric vehicles, or Apple with a new and better smartphone. For the rest of us, I've accumulated the following additional practical strategies for surviving the scale-up challenges, and making your business profitable and sustainable: Enlist an experienced advisor to project real costs. Don't let your passion and "can-do" attitude convince you that you can overcome all financial realities. I'm a big fan of first creating a real business plan, with five-year financial projections, to convince yourself and investors that you have done your homework. The advisor will give you real credibility. Assess your resource potential before you start. Surprisingly, I still find many aspiring entrepreneurs who assume that if their idea is good enough, funding will appear. There is a reason that ninety percent of startups are still self-funded, and most of the rest have major contributions from friends and family. Build your plan around resources you know. Start networking for funding before the crisis. Even if you intend to bootstrap the business, or have an anticipated funding source, it pays to start early in lining up an alternative. When the cash crunch hits, or other alternatives change, it's too late to start looking, and you won't have any leverage or credibility to negotiate the terms you want. Join a startup accelerator or structured peer group. The real value of these groups is the relationships you can build with key people who can help you later, as well as the early learning from the incubator organization. These can be a key source of funding connections, vendor contacts, and potential partners during your rollout and scaling. Negotiate bartering deals versus cash contracts. Don't underestimate the advantages of providing your products and services in exchange for access to facilities and equipment you need to grow. Especially today, when more companies are willing to work through outsourcing, freelancing, and contracting. Everyone wins with this approach. Nurture current income sources as long as possible. Contrary to the advice of Mark Cuban, don't quit your current job until the new business is cash-flow positive. Startups always take longer to get started than anticipated, so jumping in with both feet too early will dramatically increase your risk of running out of money with no buffer available. Actively seek out government and local incentives. Especially in these times of pandemics and economic initiatives, SCORE and other government agencies are likely to help you if you plan ahead. These programs don't usually ask for equity, and they are particularly targeted to the early stages of your business to facilitate growth and survival. Negotiate a line-of-credit with a financial institution. Even if you don't intend to use it, a line of credit is a great backup for unanticipated scaling costs, such as inventory. It's another backup that can be arranged much more readily before a crisis, is more often available than a loan, and doesn't usually cost money until and unless it is really used. Consider partnerships or joint ventures with competitors. This approach, often called "coopetition," works best when you find someone who has complementary products, rather than direct competitors. In these cases, you both win by expanding the market. Use this strategy to fill gaps in your product line without great new cash outflow. Use "white label" or custom contract for extra income. White labeling is custom branding your product for a particular customer, to keep committed resources busy. You see these labels at grocery stores all the time. Similarly, a custom contract for a big customer can get you over a growth gap, without diluting your brand in the market.
In the minds of most business consultants, the challenge of surviving as a business until you make a profit is so great that this stage is often labelled the "valley of death." It's the time when your invention or innovation gets transformed into a viable business, or you have nothing. I'm counting on your diligence, as well as your passion, to make it happen for you. Marty Zwilling
*** First published on Inc.com on 03/29/2021 ***  |
| 5 New Venture Mistakes That Can Cost You The Business Posted: 11 Apr 2021 07:05 AM PDT  Although every startup is unique, there are certain common avoidable mistakes that can lead to legal complications which jeopardize the long-term success of the business. I'm not suggesting that every startup needs a lawyer, but you should definitely pay attention, and not be afraid to consult legal counsel if any of these raise qualms for you.
Like other environments, most legal issues don't result from fraud, but from ignorance on specific requirements, or simply never getting around to doing the things that common sense would tell you to do. Here are five of the most common examples: - Failure to document a Founder agreement at the beginning. This oversight can lead to the so-called "forgotten Founder" problem. Early partners or co-founders often drop out of the picture early due to disagreements, and you forget about them, but they don't forget about the verbal or email promises you made.
Later, when your venture is trying to close on financing, or even going public, that forgotten partner surfaces, demanding their original share. This problem can be avoided by incorporating immediately after early discussions, and issuing shares to the Founders, with normal vesting and other participation rules. - Trouble with the IRS over Founders stock value. Many startups delay incorporation until the first formal round of financing, which is too late. At this point your entity may already have several million in valuation, so the IRS will tax your shares at that value immediately as income, just when your cash flow is at its lowest.
The solution again is to incorporate early, when Founders shares clearly have trivial value, and filing an "83(b) election" with the IRS within 30 days of the agreement. Then you will only have pay tax on the increasing value of your shares when they are sold. - Disclosing inventions before the patent application is filed. Entrepreneurs often put off the hassle and the cost of filing a patent until first funding. Then they realize that they have talked to many people without signing non-disclosure statements, precluding a patent, or someone else has now beat them to the filing docket.
There is no excuse for not filing at least a provisional patent early. This will hold your place in the patent line for a year, and the costs and time for this filing are much less. Even trade secrets need to be documented, and reasonable steps taken to keep them secret. Business plans and other documents should always be labeled as confidential. - Founders ignore non-compete clauses from former employers. If your new business is even remotely similar to that of your current or former employer, think hard about any written or implied non-compete agreements you might have. Do the same for every business partner or employee you may hire.
The best way to short-circuit this problem is to have a frank and open discussion with former employers, perhaps under the guise of asking them to invest in your venture. This is a smooth way to end the relationship, and get some money, or get their lack of interest documented in a note back to them. If a lawsuit is inevitable, better sooner than later. - Taking money from unknown or non-professional investors. Investment fraud continues to be a common subject, even though Bernie Madoff has long been safely behind bars. It's not a good idea to take money from anyone, even friends and family, without an experienced investment attorney drafting or reviewing the agreement to make sure it complies with federal and state securities laws.
This works to protect you from unscrupulous investors, as well as non-professional investors who may later say that your business plan was misleading. The best advice is to only take investment funds from people who can financially afford to lose, and who qualify as accredited investors.
Overall, the biggest legal mistake that a startup can make is to assume that any legal problems can be resolved later. Finding a lawyer early is easy these days, through local networking or even online services like LegalZoom. In reality, it will cost you much less to get it right the first time, when the stakes are still low, compared to the heartache and cost of correcting it later. Marty Zwilling  |
No comments:
Post a Comment