Financing Your New or Existing Business: What Is Your Entrepreneurial Profile? By Lisa Gerr

Welcome to the second installment of our new Money Matters series, “Financing Your New or Existing Business”. Next quarter we will dig into the exciting world of business plans. Hey! I’m not being facetious. Business plans truly get my blood pumping. The process of summarizing and your business in terms of projections, research, analysis and execution for the purpose of marketing it to an investor or angel brings your dream one step closer to a reality and the process you go through gives you the opportunity to analyze whether your plan is a solid one. If you are already in business and are operating without a plan, it’s not too late to write one – and you should. First we lay the ground work by learning the eleven thinking skills that highly successful people approach life and business with then we begin the nuts and bolts process of planning your business’ success. So look forward to that!

Meanwhile, let’s understand who you are, because, after all, you are who the investor or angel or bank is investing in. At the end of the day it is the value that you bring to the opportunity. There are many ways to raise capital. The key lies in knowing who you are what your company offers and the pluses and minuses of all the individuals and institutions that provide capital. If I polled the readers, I am certain a strong majority of us will agree that capital is the single most important link to starting and / or growing your business and yet probably the least understood and most challenging to master. I mean, raising money, in and of itself, requires a skill set that many of us do not possess. Why? Because most of us have very limited, if any, experience in raising capital. In fact, some start ups hire professionals to present their business, product or service to the Venture Capitalist (VC). Often the fee is a percentage – usually 10% - of the amount raised. Remember what we said about VC’s? For many of us, this will not be the right choice. VC’s are investors looking for projects that will produce aggressive results. Sometimes the return criterion is set as high as $50 million and outlines a three year exit strategy. These types of projects are usually technology-based. Without having a prior (or minimal) capital raising experience, many entrepreneurs pursue anyone who gives them the slightest bit of encouragement, approaching almost anyone with money. Unfortunately, these opportunities that seem so obvious are usually dead ends. Still for some that may be the ticket. In any case, before you pitch your idea or present your business concept you must organize your thinking and become cold and calculating so that every presentation is meaningful and has been determined to have a better than 50% chance of attracting the funding, otherwise, your business plan becomes dog-eared and shopworn and takes on the characteristic of one that can not raise funds and you may become disenchanted and question the feasibility of your plan. Let me pause here to say that recognizing a poor business idea is just as valuable as coming up with a winner so do pay attention to that little voice inside and insist on examining closely any red flags that arise. Don’t ignore them or feel that you are giving into negative thinking. This is the time for realistic thinking. Realistic thinking must; in fact, be the foundation of your business because it is from this that you will derive certainty and security. Your natural optimism can fuel your plan but optimism alone cannot drive it. Reality checks are the difference between what you wish and what is. Realistic thinking will minimize risk. Actions always have consequences

and realistic thinking helps you to determine what those consequences could be. Realistic thinking gives you a target and a game plan – it simplifies practices and procedures. I will be digging deeper into this later. Right now I will review how to realistically evaluate your entrepreneurial profile and crystallize your attributes and those of your company in order to find an investor that has an affinity with one or more of those attributes. Let’s get our juices flowing by developing our capital-raising strategy using this handy-dandy Entrepreneurial Profile Questionnaire below – created by our friends, Ralph Alterowitz and Jon Zonderman. This form addresses many of the same issues you need to discuss in your company’s business plan, but is a bit more centered on you and views your venture as a brainchild and extension of you as opposed to some unattached impersonal entity you are proposing to manage. ENTREPRENEURIAL PROFILE This profile includes nine questions. They require reflection and a close examination. Feel free to copy and paste these questions for use later, as these answers may change throughout your capital-seeking experience. 1. Who are you as an entrepreneur?

When you are looking for capital, who you are is as important as what you want to do with the money. Most money is raised through networking. Closely evaluating your demographic particulars can help you determine if there are specific people or institutions who might want to help you raise capital. Ethnic and other personal demographic characteristics such as gender factor significantly and can help you secure financing. For instance, women entrepreneurs may find their funding solution through Women’s Funding Network, a movement spearheaded in the 70’s. Black Enterprise was established thirty years ago to help fund African American business owners. Take advantage of any particular trait you have so you can get the cash you need for your dream to become reality. This is worth doing regardless of your philosophical point of view about universalism vs. ethnic, religious or racial particularism.

2. What is the geographic area in which you want to begin or operate your venture?

Regional agencies such as states and municipalities have programs designed to attract businesses such as tax incentives, tax credits, low interest loans or access to community development block grant or other federal funding that is distributed locally.

3. What type of business are you in?

Depending on what type of amusement business you are opening you may be able to get funded by the property owner. For instance, a friend of mine received financing from the owner of the mall that he was going to lease his space from. The family entertainment center you are planning to open is considered a “destination location” so property owners of “B”–grade malls or strip malls will go the extra mile - including loaning you start up capital - to attract your business because it raises the value of the other retail spaces in that mall or strip mall. In the case of my friend, they loaned him $80/square foot. Otherwise, it is important to articulate the exact nature of your business so that you may search for investors who know and understand your business and industry, and see its value

immediately. An investor from within the amusement industry will more immediately see the value and potential return of your indoor or outdoor business because they are intimate with the industry, its history and therefore be better equipped to gauge its future.

4. What and where is your market?

Understanding the value of your business in a particular market or area of town can lead you to new sources of funding. If a city is attempting to revitalize a particular area, your indoor playground may be just the kind of business they are looking for. You may find a local foundation focused on business development for that specific area of town.

5. What round of financing are you seeking? (i.e., seed, mezzanine, third-round VC, etc) Business financing is often described as happening in ‘rounds’. The first round is usually from sources outside the entrepreneur’s own pocket and is typically called “seed” funding. Some entrepreneurs are able to pull enough money themselves to cover the seed round. After the seed round, there are usually one to four rounds of private equity investment, with each round being a larger infusion of capital. The earlier the funding the bigger stake the investor generally wants.

6. How much money do you need in this round of financing?

The amount of money you need helps determine the kind of capital you go after. For instance, if you need $100,000 or even $500,000, don’t target the professionally managed VC funds; they generally don’t make investments that small. Most investments of under $1 million come from individual angel investors or from pooling smaller investments made by friends and family members.

7. What do you need the money for at this time?

Investors often provide funds for specific uses, sometimes preferring certain uses to others. Be specific about the purpose and tell the potential investor exactly how you will use his or her funds. For instance, “general operating expenses” doesn’t tell you too much. Include ideas like how long the money is expected to last and whether it will be enough to reach important milestones.

8. How quickly do you need the money?

If you need money quickly, debt financing will definitely be easier to acquire than an infusion of equity since negotiating the specifics of a sale of equity can take a long time. Some banks make loan decisions relatively quickly, but if you don’t have collateral you may not secure a loan, and if you do, the interest rate can be oppressive. There are a number of ways to raise money quickly, ranging from borrowing from a family member or friend to selling your accounts receivable at a discount.

9. Are you looking to raise capital through debt or equity sale?

Do you want to take on debt (borrow money) or sell equity to outside investors (have investors put up money that does not have to be paid back in exchange for a percentage of the ownership interest in the company). What’s the most popular? With smaller companies, most of them raise over 90% of their capital needs through simple forms of debt and less than 10% through equity. Flip flop that for the larger companies (those with more than 500

employees). These companies raise over 80% of their capital needs through sales of securities and less than 20% through traditional debt such as bank loans, commercial mortgages, finance company debt and trade debt. In fact, many entrepreneurs take on $100,000 or more of personal debt to start their businesses and put as much as half of their net worth on the line. Almost 90% of entrepreneurs start their businesses with their own personal assets. Many also rely on the personal assets of friends, family and cofounders. Many times founders and cofounders take out second mortgages or refinance their homes, borrow against retirement funds or max out personal credit cards. You may find an angel investor that might agree to make a $500,000 loan to your company at the prime rate plus 10% interest per year. Four milestones are established and at each milestone, $125,000 of the loan, plus any accumulated interest, is converted into 5% of the company’s stock. If some or all of the milestones are never reached, the entrepreneur must pay back the portion of the initial loan, with interest, that was not converted into equity. With either debt or equity financing, your financier will have some level of control over your ability to make business decisions and maneuver your company, to some degree becoming a partner in your business and management decisions.

So, there are many ways to raise money for a start-up or growing business. The entrepreneur needs a game plan for raising money. Understanding yourself as an entrepreneur is important in order to raise money successfully. Answer these nine questions thoughtfully in order to organize and develop your game plan. And remember, you must be willing to put your own financial resources at risk in order to get investments or loans from others. Assess your entrepreneurial assets. Set up feedback sessions with your banker, attorney, accountant, etc. After you have described your self and your venture, have them behave as potential investors and ask questions. Do the same with someone from your local Small Business Development Center. S.C.O.R.E. is an excellent federally funded business resource. Standing for Senior Core Of Retired Executives, this agency’s volunteers are senior executives from across all vertical industries that donate their time and talent to furthering your business goals. This nonprofit association brings Fortune 500 executives and successful entrepreneurs to your team as mentors and the counseling is always free-of-charge. In the next issue of Financing Your New or Existing Business, we examine how to get our thinking engaged. This is based on the simple premise that in order to do well in business as in life, you must first think well. While I could ramble forever about the value of good thinking, for the purpose of this series we will cover the eleven thinking skills every successful person needs, thereby titling our next installment Financing Your New or Existing Business: Eleven Thinking Skills Every Successful Person Needs. If you have questions or comments feel free to email me at lisagerr@gmail.com.