Up and Running:

We’re sort of back to normal at Palo Alto Software now, after the big push to create our own sort of stimulus package for our state last week.

I posted about this here last week. The idea was that we decided to do something to help our state with its unemployment problem–in Oregon we have the second highest unemployment rate in the country–so for one day we gave away our premier Business Plan Pro software to anybody in Oregon who wanted it enough to go to one of 84 locations and pick up a download card.

The Eugene, Ore., Register Guard, the daily newspaper in our town, has the story.

I hope it doesn’t seem like total self promotion–I’ve tried to avoid that as much as possible on this blog–but hey, tomorrow Palo Alto Software is going to give away thousands of copies of Business Plan Pro (and not a light version, the upscale, premier version) for free to Oregonians who want it. I would like to think that’s newsworthy, even if it’s my company.

The video here is my talking for slightly less than three minutes, my summary of what happens tomorrow. If you can’t see it for any reason, please click here to go to the Youtube source.

And for more information, here’s the link to the page at Palo Alto Software that explains what we’re doing and provides a map of the 85 locations (mostly town halls and chambers of commerce, no commercial locations–it really is a free giveaway) where people can go tomorrow to get the software.

It’s just for the one day, tomorrow, July 1. For any Oregonian 18 years or older who goes to one of those locations to collect a download card.

Sad but true: Compare these two scenarios, holding everything else–the company, its history, its credit rating, its founders’ credit rating and its balance sheet–constant:

• Scenario 1: Company goes to the bank in April with business plan output showing they’re going to need a bridge loan to finance an expansion over the summer.
• Scenario 2: Company goes to the bank on Tuesday needing a bridge loan to meet payroll on Friday.

I’m guessing that you’re guessing right. The company in scenario 1 gets the loan, the other one doesn’t. That’s about 10 times out of 10.

What brings this to mind is the New Intuit Future of Small Business Report-Credit Outlook, released last week, titled Where Small Is Going.

The report, the research, sponsored by Intuit and conducted by Emergent Research, comes up with some important (although not surprising) key points:

• Community banks and credit unions can be an excellent and accessible source of credit for small businesses that meet their lending criteria. They want the business and are ready to lend.
• Businesses that can demonstrate the ability to manage assets and cash flow will find credit is still available, although not unlimited.
• Credit availability will remain tight. Even though community banks and credit unions are looking to expand small business lending, they simply don’t have the asset base to replace the large lenders.
• The reality is that the smallest of small businesses–those with five employees or less–often will not qualify on paper for business credit. They’ll need to rely more heavily on relationships with their bankers.

While the new report seems to reflect the continuing recession, the major economic problems we’re all aware of, I think we should also recognize that this is pretty much the long-term condition of banking and small business. Banks aren’t supposed to be lending money to small companies without assets, whether or not they have intriguing business plans. Banks are supposed to be safe. It’s the law.

So one of the things you want to build, as you build your business, is your relationship with one or more local banks. Start with a checking account, if that’s all you can get, but try to get a small loan first and get some history with the bank.

And plan ahead as much as you can. You never want to wait until you need the money badly. Talk to the bank early, and it will be much more likely to help. That’s good business for all.

And yes, I know that’s obvious. But we forget. Reminders are good. We’re all pretty busy these days.

Bill Cosby, comedian and educator, once said: “I don’t know the secret to success, but the secret to failure is trying to please everybody.”

Business advice? Look at this picture. Imagine you’re driving. You have to choose one lane; you can’t take two or all three lanes.

That’s a lot like developing strategy in a small business or a startup. It isn’t just what you do; it’s what you don’t do that matters. Not just whom you address, as a target market; but also whom you don’t address.

Okay, let’s assume you’re afraid of the business plan which people are telling you that you need. It seems to be too big a job. You don’t have time.

So don’t take so much time. Start anywhere, and get going. Here are some ways to break out of that inertia and get going.

1. Do a sales forecast. Take a spreadsheet and set up 12 months in columns and your main sales lines along the leftmost column. Estimate — don’t sweat it, it’s just an estimated guess — your unit sales first, then average price you get per unit, and then multiply price times units to get sales. Add totals on the bottom, and along the rightmost column, you get annual totals. Here’s more info:
2. Do a SWOT analysis. Strengths, weaknesses, opportunities, and threats. It’s simple and it gets you started with strategic thinking.
3. Tell a story. Think of it as creative writing. Invent a person who might be your ideal buyer (or decision maker if you sell to businesses) and tell the story of how this person needs or wants what you’re selling, finds you, and buys. What is the buyer problem that is solved.
4. Create a market segmentation. Think about what kinds of people or companies you sell to. Big, small, rich, poor. Use stereotypes like you did in high school: jocks, stoners, hippies, goths?  Ask yourself which of these groups is a better target, and why.
5. Figure out a mantra: describe your business in a single sentence, making one that would describe it uniquely, eliminating all competitors. Or go further, and do a mission statement, which includes why your business makes life better for buyers, employees, and owners.
6. List your three most important keys to success.
7. Define the main marketing message for your most important target market group.
8. List your most important assumptions.

Remember, form follows function. Don’t sweat the formats, or the writing, or the tools. Just get going.  It’s planning that matters, not just the plan.

A Twitter friend (Matt Riopelle) asked me to help his friend (call him Ralph) find investors for his business.

Offhand, even without knowing either of them, I’m sympathetic. After all, if you keep up with this blog, you’ll know it’s a topic I care about. And I’ve posted here about my recent experience as an angel investor (and if you’re wondering, no, I’m all tapped out at the moment), so I’m not surprised by the question.

I looked at Ralph’s website. It’s an interesting business, local to me, with new technology for an otherwise traditional and low technology business. New materials, a new take on old products. And they’re making a product I use.

So I’m interested in the problem.

(And if you wonder why I’m not being more specific, I don’t have anybody’s permission to mention the business, and seeking investment can be sensitive. Besides which, it’s also possibly illegal (depending on interpretations) to mention a business that’s looking for investment on a blog like this; could be taken as soliciting investment improperly. That’s why I’m not giving details.)

But first, some questions:

1. Are you really sure you want to go that way?

Sometimes I think we all (we entrepreneurs, that is) move too quickly to the investment alternative. Having investors is like having a spouse. No, it’s like having a spouse who is also a boss. Your business is not going to be yours ever again.

Oh? What? You want minority investors who give you a lot of money without attaching any strings? Fat chance. You mean you want somebody who has a lot of money (they have to have a lot of money, to make the transaction legal) and is also relatively naive? And really generous? Good luck with that.

Take a good look at your prospects. Do a business plan, not for outsiders, not formal and hard to do, just a business plan with realistic forecasts for sales and expenses. Then ask yourself whether you can get by without the investment. Can you borrow enough to make it work? Can you live with the burden of debt? Have you considered SBA-backed loans (they are moving again), which lessen the debt burden?

Don’t go down the investment path just because everybody says you should. Think about the rewards of making it work without the outside investors, so you own it all yourself. Food for thought: this post on Planning Startups Stories.

2. Do you have a business plan?

The good news is that you don’t have to have a plan you can show to investors tomorrow. You do, however, need to have a plan for yourself, covering strategy, markets, sales, profits, cash flow, all the key points. These factors are all related to each other and you can’t just wing it. You need to have real numbers.

And it’s not about showing the investors your plan. That may or may not come later. It’s about knowing what you need, and why, and what that’s going to produce.

3. Do you need enough money to interest investors?

Angel investors don’t usually want to deal with less than $100,000, and venture capitalists don’t want to deal with less than a couple of million dollars. Sure, there are exceptions, but those are general rules.

And you can’t just say you want it; you have to be able to show you can use that money to grow the business. You have to have a real plan, what you’re going to spend the money on, how it will increase your business.

If all you need is tens of thousands of dollars, then bootstrap. Maybe you have to get friends and family involved, but really, for less than six figures, it’s not worth it to professional investors.

4. Can you grow your business a lot, in a few years?

Investors who put money into small businesses are taking big risks and they deserve big returns. They don’t have to invest in entrepreneurs, they can lose their money just as easily in the stock market, and they can get safe interest with no risk. So you have to give them the hope of a big payoff.

That means big growth. Can you convince them your business can sell five times what it’s now selling in two years? Or ten or 20 times in five years? That’s what they need to make money worth the risk.

5. Do you have a convincing team?

Investors are going to want track records, people on your team who can run the production, marketing, sales, and administration of your business. They want people who have done that kind of thing before, sucessfully. If you don’t have them on your team, then the investors won’t be interested.

If you can answer yes to all of those questions, then you’ll likely be able to get investment (although not from me, but I can point you in the right direction).

I’ve posted about BizEquity before on my Planning Startups Stories blog, but I believe it belongs on this blog as well, because it has a lot to do with basic information about entrepreneurship.

What’s a business worth? What could the owners get for it if they wanted to sell it? What’s a reasonable estimate to use for attracting investors?

The buzzword for this is valuation. If you own a business or want to start a business, then you care about valuation and how it works. Even if you don’t now, you will later.

• Businesses that seek investment need to anticipate valuation as part of the exit strategy, which is how the investors make money. You get investment now, but only if investors believe they’ll make money when the business sells later.
• For estate planning, you need to estimate valuation if you deal in shares of a business for your wife, partner, significant other or children. Tax code defines how much you can give in any given year, and that depends on valuation.
• Lots of people who never thought of exit during years of running a business start thinking of selling as they get into their 60s and 70s. And that means selling the business.
• Valuation is obviously critical for buying or selling a business.
• Not to bring up unpleasant angles, but valuation figures in wills and divorce settlements, too.

All of which brings up BizEquity.com, introduced last year as “the Zillow.com of small business valuation.” Take a look at it. You can search your ZIP code for estimated valuations by type of business. You can search for your specific business by name. Most interesting, and a new feature, you can sign up and run through a valuation based on your business numbers.

I did a test run over the weekend, by inventing hypothetical numbers for an internet company. I had it started just three years ago, growing sales to $350,000. It had little or no profits, a bit of debt and a lot of dependence on the owner (the site’s auto wizard asked me the right questions). The estimate ended up at about $275,000, with interesting variations above and below that depending on how I set several sliders. You probably can’t read the details in the shrunken illustration below, but the sliders are asking how favorable the location, the level of competition, and how you foresee the future financial performance.

With the way the sliders work, you can see instantly how valuation would change with different settings

Obviously, these are just estimates. As with estimates of house values, before you list your house, these estimates give you some idea but are far from exact. They’re based on some standard formulas that estimate valuation based on factors such as sales, profits, assets, liabilities and so forth. Don’t even dream of using this for a tax-related valuation, which requires a certified valuation professional; but it’s still a useful first look.

There’s an excellent post yesterday from Steve King of Emergent Research on his Small Biz Labs blog: If You Are Raising Money, You Need a Business Plan. Steve acknowledges that people say venture capitalists don’t read plans, but adds: “that is totally missing the point.” He says:

The goal is not to get a VC to read your plan.  The goal is to get a VC to invest so you can build a successful company.

Yes, VCs like to get most of their information through pitches, pitch meetings or just talking to entrepreneurs. But they have to have a plan to make that work.

Steve explains:

I’ve been through this many times.  VCs always ask lots of detailed and specific questions that cover all aspects of the startup’s business.

And entrepreneurs [who] cannot succinctly explain the opportunity and show they have thought through the key issues facing the business do not get funded.

In my opinion, the best way to prepare for the pitch process is to develop a business plan.  Preparing a plan organizes the entrepreneur’s thinking, requires going through all aspects of the business and helps to identify important issues facing the company.

So I agree with him about the plan, and I think it’s important to not take the fake here: When people say venture capitalists don’t read business plans, most entrepreneurs are tempted to take that as a reason not to plan. It isn’t. Planning isn’t just a document that somebody else reads. It’s how you run your company.

And if you are talking to venture capitalists, then the plan is also the backbone of what you have to say. Whether they read it or not.

So this week we get it again: another business publication with a poorly conceived rehash of a misguided academic study saying venture capitalists don’t read business plans.

Why poorly conceived? Why misguided? And why a molehill?

The molehill reference is to the old phrase about making a mountain out of a molehill. In this case it’s making a molehill out of something much smaller than that.

The journalists like that study because it seems like the conclusion is contrarian: It seems to deny what everybody assumes is true. Specifically, it seems to question the usefulness of an entrepreneur developing a business plan.

But the truth is that the business plans that entrepreneurs should write, review and revise frequently were never really there just for VCs to read or not read. They were there to figure out what’s supposed to happen, when and why, how much it costs and who’s responsible.

The business plan is for you to plan your business. Whether somebody else reads it or not, you need to know what you’re talking about; and if you don’t have a plan, it shows.

So it’s a ruse, really: To say that VCs don’t read business plans is like saying audiences don’t read screenplays. The VCs get the results. The plan is for the entrepreneur.

Oh, and by the way, that study they’re citing lately, done at the University of Maryland–it was done almost 10 years ago at the height of the dot-com boom, when it wasn’t clear that VCs were reading anything, let alone business plans.

And of the million or so new businesses that start up every year, only about 5,000 of them are financed by VCs.

My business plan reading marathon continues.  With the main intercollegiate business plan contests done we head for the home stretch with the angel investment group I’m in. I wrote some comments on business plans in 10 Things I Hate About Your Business Plan, which I posted on the American Express OPEN forum.

I’ve been joining the #sbbuzz chat on Twitter lately, Tuesday evenings. I’m finding it a nice way to get in touch with a lot of people at once with an interest in technology in small business. I guess Twitter is controversial in some circles, but I like it and use it a lot.

For example, click here for the transcript of a recent chat on business planning and funding for new businesses.

And you can click here for instructions on how to participate in the sbbuzz Twitter chat on Tuesdays.

And from last week, the group produced this list of good small business blogs.

This is a five-minute answer in video to a very common question.

If you can’t see the video here, please click here to go to the source on YouTube.