Q & A with Geoff

I sat down with Alice (DefrostingColdCases.com) today for a short Q & A sessions about entrepreneurs and start-ups. Here’s what we spoke about:

Q1: What advice would you give to people who have an idea for a business and they know there is a demand for it but: they do not know how to write a business plan, they will need financing, and they do not know where to start asking for advice. Is there any step-by-step guide or a specific order people should follow to get their thoughts on paper? Of course, there are Small Business Development Centers but many people would like to have something on paper before they schedule an appointment.

Geoff: The first step in the capital raising process is to draft a capital plan for the growth of the business. The capital plan is used to identify funding requirements in terms of the amount, the timing, the structure (loan, lease or equity) as well as the most appropriate capital mix for business growth. It should also investigate alternatives to raising external capital.

Start by defining the business objectives and strategies. Identify all the costs involved in your business growth plans, including working capital requirements as well as the impact of budget over-runs and product development delays. Then look long and hard at the feasibility of your proposition. The capital plan will need to be revisited once the business plan is completed as this is likely to identify additional issues.

Determine what resources you require to grow your business, when they are needed and how to obtain them and whether these can be sourced from within the business. If external capital is needed then consider what you are willing to give/offer to achieve your business objectives and what will be the value of your equity in the business following the introduction of new capital.

If you were a dispassionate investor with a wide range of choices, what would make your business expansion or idea irresistible? Check if your plan is viable, sound and realistic by seeking professional financial advice from someone familiar with the size and type of your business.

Q2: My thoughts on business plans are that they should evolve with the business so you need one to get started and get financing, and another one to cover year one (maybe until you break even)? What are your thoughts?

Geoff: Creating a solid business plan is the first step toward success in your business venture. From obtaining funding to hiring employees to planning for expansion, a business plan can be your guide to keeping your business on track. Your business plan can keep you focused on your goals and keep you moving forward when faced with obstacles.

Qualify potential investors based on their preferences and availability of capital – not all venture capital funds have money available for start-up investments.

What makes an attractive investment opportunity

Some of the factors in making an investment opportunity attractive are:

 experienced and effective management – track record
 high growth sector
 high business growth potential
 replicable business model
 strong financial returns
 significant entry barriers – competitive advantage
 sales history or confirmed purchase intentions – customers
 market knowledge and distribution systems
 exit strategy

Q3: Imagine someone has started to execute their idea and it takes off faster than expected. They rolled into their career, they have clients, and are suddenly faced with time management and shaping their daily routine and responsibilities. Remember what you did when you were in that phase? How did you handle that?

Geoff: Every entrepreneur tries to maximize his/her start up growth by building and selling more product and services for the widest geographic area that he can support. This strategy is called “organic growth,” yet it alone may yield only a fraction of the potential you could achieve, unless you add the additional strategies of partnerships and M&A (mergers and acquisitions).

The real challenge here is balance. Too much emphasis on organic growth can become a straitjacket that leads only to incremental innovation and limited horizons. Too much reliance on growth via contracts and alliances makes you vulnerable to partners’ actions and conflicts of interest. Overreliance on acquisitions drains resources and de-motivates internal teams.

In every startup, as well as in mature companies, there is no substitute for constantly maintaining a pipeline of alternatives. This requires constant focus, as well as maintaining the skill set. to do things like the following:

There is no question that startups which manage the broadest alternatives for growth will gain competitive advantages. This selection capability is a skill and a discipline that every entrepreneur needs to nurture and develop over time. The world and current economic environments have changed. The past can be a deadly rear-view mirror. Look for new horizons.

Q4: Every start-up should use social media. However, a start-up must focus first on products/services before they can market themselves or promote themselves. Right or wrong? Can you promote yourself without having a line of products/services or should you wait?

Geoff: Going into business for yourself for the first time will change your lifestyle, both professionally and personally, and can involve a significant financial commitment.

There are many reasons why you may be thinking about starting your own business. You may have a great business idea or the opportunity to take on a franchise or to purchase an existing business. For most people it’s a combination of many factors including a desire to make money, greater autonomy and freedom, an opportunity to work at something they enjoy doing or the prospect of building an enterprise they can eventually pass on to their children.

Whatever the reason it’s an exciting venture that could provide an opportunity to enhance your lifestyle or achieve personal goals. Whether your business succeeds or fails depends on many things including your abilities, initiative and capacity to work, as well as the economic and business environment in which you’ll operate.

To give yourself every chance of success, be sure to make some time to pre-plan before diving into your business head first. Take a step back and consider the feasibility of your idea and your personal suitability for going into business. Some of the things you should think about are:

• Personal Attributes
• Technical Skills
• Hobby or Business?
• Business Management Skills
• Feasibility of the Business Idea
• Financial Capacity
• Business Names
• Business Licences and Permits
• Business Structures
• Business Starters Checklist

Q5: We all need to reflect on what we are doing to maintain the right balance. How often do you recommend that entrepreneurs evaluate their actions with their team or mentors to possibly adjust their course of action (aside from adjusting their business plan)? Quarterly?

Geoff: If we don’t know what the business is seeking to achieve, how can effective business decisions be made? How can conflicting priorities be resolved? How can people be held accountable? Conventionally, the answer to these concerns has been to write a business plan.

However, business plans are almost always written primarily to attract and retain capital. As soon as they are published they are out of date, and within a matter of months often bear little practical relevance to what’s happening in the real world. Even where they are in place, conventional business plans are seldom used to proactively manage the business. Typically, only the senior managers of the business are actively involved in the process of developing and using such plans. These plans rarely enable individuals to be held accountable for results.

Some key points for maintaining business continuity:

· Every quarter the business plan is replaced by the next version. This takes place at the quarterly strategic review meeting. This meeting is not the place where the next version of the plan is devised, but where it is endorsed as being in place.
· During the quarter, performance is reviewed on an hourly/daily/weekly/monthly basis against the agreed structure of expectations within the plan.
· During the quarter the most recently agreed version of the business plan is used as the starting point for developing the next version.
· The primary mechanism for developing the plan is that the senior person/team coaches everybody in his or her contribution to the plan. The plan structure provides the agenda for discussion.
· Everybody’s key objectives are documented within the plan, especially their short-term (i.e. current/next three months) objectives.
· Whilst in the process of delivering their agreed objectives in the current quarter, people are already giving thought to what they will be aiming to achieve in the next quarter.
· The primary role of the senior person/people is to ensure that everybody’s objectives are in alignment with each other. They have a key responsibility to ensure that everything that needs to happen to achieve the strategic goals of the business are the identified responsibility of a specific individual or team.
· All of the key result areas are monitored with Key Performance Indicators.
· For it to work, the plan is kept as simple as possible. Anything that doesn’t change much quarter by quarter should be taken out of the rolling business plan document and should appear as (optional) appendices, or supplementary documents. Examples might be market analysis, mission, vision, values, etc.

Q6: Someone approaches you with a great idea but is very hesitant to start on their own. What could you do to help this person?

Geoff: We use a capital raise diagnostic for strengths and weaknesses. The Capital Raising Diagnostic is a self assessment tool to help businesses determine their level of “investment readiness” or capacity to attract capital. It also forms part of the assessment for entry into the Capital Raising Program.

1. Growth and Capital Requirements

1.1 – Expected business growth (total not average) over next 3 years.

1 = < 10% 3 = 30 – 50% 5 = > 100%

1.2 – Average annual growth rate of the industry sector you will operate in.

1 = < 0% 3 = 10 – 20% 5 = > 30%

1.3 – Have you sufficient existing resources to fund operations into the future?

1 = less than 3 months 3 = 6 – 12 months 5 = > 18 months

1.4 – Have your resource needs for the next 3 years been fully costed?

1 = Estimate 3= Partly 5= Capital and cash flow needs fully costed.

1.5 – Have you identified the most appropriate capital mix (loan, lease, equity, etc) for your needs?

1 = no 3 = partly developed 5 = yes, capital plan in place

2. Management

2.1 – Do management skills meet current and future business growth / commercialisation needs?

1 = Not meeting current needs 3 = Meets current needs 5 = Meets future needs

2.2 – Have strategies been implemented for the future management of the business?

1 = No, rely on 1 person 3 = Some skills development 5 = Systems to develop / attract key people in place

2.3 – Are the business’s directors and advisors skills sufficiently diverse and well developed to meet business needs?

1 = Unsure 3 = Partly 5 = Yes

2.4 – Are there strategies in place to retain key skills?

1 = No 3 = Informal incentives 5 = Formal incentives and contracts

2.5 – Is there a well understood growth strategy for the business?

1 = Focus on immediate needs 3 = Focus on the next 6 months 5 = Long term focus formalised and understood by all

3. Business & Systems

3.1 – Do you have a comprehensive business plan?

1 = Not formalised 3 = Covers next 12 months 5 = Targets and details for next 3-5 years

3.2 – Are plans reviewed and updated regularly?

1 = Not formalised 3 = Updated annually 5 = Updated and reviewed on rolling basis.

3.3 – Have you identified company weaknesses and offered valid, productive solutions to these?

1 = Not identified 3 = Identified but no action taken 5 = Identified and strategies implemented to address

3.4 – Are there well developed financial management systems in place?

1 = Basic tax compliance accounting 3 = Financial management covers some aspects
5 = Budgets and monthly financial management reports for all aspects of business

3.5 – Are there well developed business systems and procedures in place?

1 = Not articulated 3 = Cover some aspects 5 = Systems and procedures documented for all aspects of business

4. Market

4.1 – Is there clear evidence of market need for your product / service?

1 = No 3 = Yes but anecdotal 5 = Yes, has been quantified

4.2 – Is there a global market for your products or services?

1 = No 3 = Yes but anecdotal 5 = Yes, has been quantified

4.3 – Have you identified the path to market, distribution channels and customer purchasing patterns?

1 = None 3 = Partly 5 = All of the above

4.4 – Have you completed your competitor analysis including identifying barriers to entry?

1 = No 3 = Partly 5 = Yes

4.5 – Are you able to list all potential domestic and international market segments?

1 = No 3 = Partly 5 = Yes

5. Product (or service) / Intellectual Property (IP)

5.1 – Has the product/service enforceable IP protection?

1 = No 3 = Partly 5 = Yes

5.2 – Is the ownership of the IP held by the entity seeking capital?

1 = No IP 3 = Licence arrangement 5 = Yes

5.3 – How many products could be developed as a result of the expansion / commercialisation project?

1 = Single product 3 = 3 – 4 new products can be developed 5 = Represents a technology platform

5.4 – Can the product / service be produced at a competitive rate?

1 = More costly 3 = Unknown 5 = Cost advantage

5.5 – Does the product / innovation represent a significant advance over existing products?

1 = no. 3 = Incremental improvement 5 = Significant advance.

6. Financiability

6.1 – Is there a sustainable competitive advantage?

1 = No 3 = Partly 5 = Yes

6.2 – Is your organisation able to supply audited financial statements and projected operational and financial statements?

1 = No 3 = Partly completed 5 = Fully

6.3 – Projected profits represent what percentage of funds needed to service borrowing requirements

1 = < 100% 3 = 150 – 200% 5 = > 300%

6.4 – Is the company compliant with environmental, equal employment opportunity and other regulatory requirements?

1 = No 3 = Well down the track 5 = Yes

6.5 – Asset backing (business assets and shareholder guarantees) is equivalent to what percentage of borrowings?

1 = < 100% 3 = 125 – 150% 5 = > 200%

Questions 7.1 to 7.10 are equity related questions

7. Equity Finance A

7.1 – Are you able to provide details of types of shares and share distributions to potential investors?

1 = No 3 = Partly 5 = Fully

7.2 – What will the venture return an investor (% return pa) ?

1 = Less than 10% 3 = 20 -25% 5 = Greater than 35%

7.3 – Can you demonstrate a well thought out exit strategy?

1 = No 3 = Partly developed 5 = Yes

7.4 – Have you perfected your investment pitch / presentation to potential investors?

1 = No work 3 = Partly 5 = Fully developed and assessed

7.5 – Are you ready to undergo the due diligence process?

1 = No 3 = Partly 5 = yes

7. Equity Finance B

7.6 – Are the shareholders realistic about your company’s market value?

1 = No 3 = Yes 5 = Have accepted an independent valuation

7.7 – Are private and company financial affairs separated in the operations of the business?

1 = Cash often taken 3 = Drawings captured in financials 5 = Totally separated

7.8 – Can you clearly articulate the attributes of your ideal investor?

1 = No 3 = Partially 5 = Fully

7.9 – Are you able to supply a copy the the company constitution and shareholder agreements?

1 = No 3 = Being developed 5 = Yes

7.10 – Are the company’s accounting policies in accordance with accounting standards?

1 = No 3 = Partly 5 = Fully

If you have any questions please leave me a comment and I will answer as soon as possible.