Seth’s post is called Debt, equity and a third thing that might work better.

It works like this: You have an idea, a fledgling business or a new market to enter. You find an amateur investor (a wealthy dentist, a retired executive) and raise the money to bring it to market. And in return? The investor gets $xx for every unit you sell. From the first one until forever.

This is instead of the classic either-or: You get new money to finance a new business by getting either bank loans or new investment. The problem, of course, is that both of those are hard to secure, at best, and impossible for the vast majority of new businesses.

It turns out that back in 1994, when we were first trying to build Business Plan Pro, we contracted programming help for a fee plus a percent of future revenue. My wife and I didn’t want outside investors; we’d already mortgaged ourselves up to the hilt. But we really wanted to do the new product.

That actually worked for us. Business Plan Pro came out early the next year, and the company grew. The developers ended up making good money, too. Everybody wins.

Seth adds:

My general bias for entrepreneurs starting out is to bootstrap their business, because raising money is so hard and so distracting. But if you’ve set out to do something that needs cash you can’t raise any other way, this is worth exploring. Tell a story to an investor that wants to hear it, and create a cash-flow scenario that makes the investment worth it for both of you.

I agree with that. Good suggestion.

(Photo credit: dedek/Shutterstock)

If you can, find the early customers. Give them a deal, make them important, work with them to optimize their needs; but make a sale.

Even if you do need to go out and find investment–and I speak now as an actual angel investor–there’s almost nothing as convincing as actual sales. People are spending money on your product or service. It makes a new business proposal far more credible.

True, not all businesses can do that. But a lot of them can. And, as we write about business plans and seeking investment and all, we forget the real sweet spot: financing growth by making the sales.

(Note: this is a repost from Planning Startups Stories, where I posted it a few days ago. I can’t remember the last time I reposted from that blog to this one – it has been a while – but I decided to do that today because it seems to be very appropriate here too. It’s been on Twitter a lot already, from the first time I posted it.  Tim. )

What our lack of funding made us do is go back to basics. We know we had the seed of a good idea but struggled to come up with a sustainable model. Along with lots of hard work we talked with potential customers and came up with a solid way to generate revenue. Our potential customers are now signing letters of support saying they like our product and find it beneficial for their business and are willing to be contacted by investors. We have never had this in previous attempts to raise money and now feel confident in our plan.

The author, who has a screen name but not any additional details, makes this excellent conclusion:

Don’t despair if you haven’t gotten funded yet. It could be a gift in disguise.

Good point. And good example.

Which reminds me: If you’re an entrepreneur looking to get funded, go to thefunded.com and angelsoft.net. Both of those are excellent sites, very valuable for entrepreneurs, free and very useful. Oh, and by the way, if you’re an Oregon entrepreneur and looking to get funded, go to Willamette Angel Conference. Please.

(Photo credit: William Attard McCarthy/Shutterstock)

But what really matters is that this is a very good list. It matches my dealings with startups and investors, on both sides of the table.

1) Strong sense of the key milestones–Entrepreneurs often ask what metrics they need to get to in order to get an investment. I often turn that question around and get them to tell me what the important milestones are.

In a nutshell: Metrics. Trackability. He adds: “Milestones are a waterfall–and having them as goals should inform product, marketing, financing, etc.” Agreed.

2) Implementation of a product strategy–More so than any other aspect of the business, the thing I see early entrepreneurs tend to drop the ball on most–myself included–is product strategy.  I’m not saying you have to know all the answers, but you should at least know what your landing pages are trying to accomplish, where they’re going wrong and what steps you’re taking to identify the solution. I like to know that, even if you haven’t figured everything out, you have a process around product–so this way I can bet that you have the tools to figure it out.

The product road map included, and this gets even more powerful when you add on the milestones in the first point. In the post he adds the practical question, “How do I know you’re not going to spend the whole financing moving the search box around when it turned out that being on mobile was more critical to your success?”

3)  A theory on customer acquisition–You may not even have your product out yet, but having a reasonable sense on how people are going to discover it–past the buzz around your launch–is necessary. Just tell me how the first 10,000 users who aren’t your friends find it–and if it’s viral, tell me why people pass it on other than “because there’s an invite friends link.”

And, within that, this very real note about what doesn’t work:

If your strategy is to reach out to all the bloggers in your industry and get them to write about you, that’s pretty much what every other startup is going to do–and anyone who has done it will tell you the results will likely be underwhelming.

So make it real, and also realistic. Don’t just do what everybody else has done.

4) A financing strategy that gets you *somewhere*–When I say *somewhere,* I really mean one of three outcomes: getting critical mass (whatever that is for you) or at a product milestone that makes your venture fundable, starting to get revenues or cash-flow positive. When someone asks you, “What does this money get you?” they really want to know that it gets you to some amount of users, coverage of certain platforms, first enterprise customers, whatever it is. Just something more mission critical than “18 months.”

Notice that it’s not necessarily all the way to the exit strategy. I find this very refreshing, looking at some real next step, and going back to the foundation of metrics and milestones, trackability.

5) Specific value creation –The easiest way to show value creation is to say that each customer is worth X dollars in revenue. Pair that with the cost of customer acquisition and net worth; there’s your business. I don’t care if these are wild-ass guesses–at least make some attempt at showing that at customer N, your business is worth X.

That’s a very nice summary of “value creation.” Units times price.

What I like about this post is that it gets away from the standards I find myself listing too often: exit strategy, differentiation, growth potential, defensibility, management team and so on. This different way of looking at it seems very useful to me.

I first noticed the so-called home office market back in the middle 1980s, when I did my business from a home office (so perhaps my attention wasn’t entirely by coincidence). I was consulting for a living in those days, doing planning and related research mostly for high-tech companies. I was also writing a monthly column in Business Software magazine. And one of the markets most of my clients wanted to reach was what they called the home office.

The problem, however, was that the people who ran their home office businesses didn’t really make a market. They were out there diffused in the world, without an identity, without much in common with each other and without product identity.

What did a home office need that was different from what small businesses needed? What did a home office buy, different from a general small business? It was hard to tell. In comparison, the mobile travelers needed some predictable items and read predictable magazines. So did the students, the engineers and so on. But not home office businesses. Or so it seemed back then.

Earlier this week Steve King of Emergent Research tipped me off to new research about home-based businesses that adds a new angle on the lure of the pot of gold. In his post “The Rise of the Homepreneur,” he offers real numbers from a new report based on data from the Network Solutions Small Business Success Index. The report is available here. And some of the key findings are:

• Home businesses employ more than 13 million people.
• Nearly 6.6 million home businesses generate at least 50 percent of the owner’s household income
• 35 percent of home businesses generate $125,000-plus in revenue and 8 percent more than $500,000.

So with new data from a new angle, it’s not that home office businesses are necessarily a market; it’s that they are a lot of people doing business, making money and doing (I hope) what suits them. And a reminder, as well, that “home office business” doesn’t mean inconsequential; the millions of businesses in this study are supporting people, employing people and generating real money.

And if you dig into the study, they are being taken seriously by customers and clients. And they offer lower-cost startup alternatives, too.

Now where was that rainbow?

Eliminate Paper and Filing with Screen Shots
“I’m finding I can eliminate a lot of paper and filing expenses–not to mention filing and recovery of documents–by taking quick screen shots of web orders and travel documents and such. I save them on my CPU unless they’re travel documents, in which case I save them as JPGs and put them onto my iPhone.”

Use the Amazon Cloud
“We’re saving several thousand dollars a month now by having moved our servers from a server farm somewhere else to the Amazon cloud. We get much better up-time and response time, but for significantly less money.  We’re also using the Amazon cloud for storing files and backup.”

Insist on Price Reviews from Existing Vendors
“When the recession was at its worst we pushed our vendors that provided phones and the office internet bandwidth to redo their pricing. We found that vendors we’d been with a long time were giving new customers much better deals than existing customers, and we insisted on a review.”

Hold Meetings Online Instead of Traveling
“We’re using the web conference for webinars and to host meetings, often one-on-one meetings, to reduce our travel costs. We’ve had success with both WebEx and GoToMeeting. We’re finding the simple meeting online as quick and easy, and a lot more effective, than getting on the plane.”

I’ve included these here because they were mine, which makes them automatically my favorites. But they aren’t the best of the bunch. The entire post is good reading.

Save Money on Technology | Small Business Trends

It’s not at all unusual, and it’s not as bad as it sounds either. The underlying problem is that growing a company often takes different skills and talents than starting a company.

BusinessWeek.com has a good story on that this week: An Entrepreneur Prepares to Pass the Torch, by Nick Leiber. It’s about Michelle White of Michelle’s Miracle:

It’s a classic dilemma. A first-time entrepreneur creates a thriving company from scratch with the potential to be The Next Big Thing, but her investors thinks she needs an experienced CEO and management team to take it there. They also bet future investors will want to see seasoned leaders in place.

It happens to a lot of people. My favorite example these days is Steve Jobs, who was kicked out of his post at Apple Computer in the 1980s to make way for John Sculley, who ran the company from the late 1980s to the early 90s. Then when Jobs came back to run the company again in the late 1990s, he brought it back from near death to prominence. 

(Photo credit: that photo appears in the businessweek.com story online. You can click it to go to the original.)

This man will probably make it. There was nothing dumb or naive about him, and he was old enough to know better. But the underlying assumption he seemed to be making is worth posting about.

He asked me how he would get money to start a new venture related to worms and compost. He seemed surprised, and maybe even discouraged, by my realistic answer.

I said relatively few startups get investment; that most startups make it on their own, from grit, work and getting something they can sell to customers early on.

I told him investment is really only for companies that can grow quickly and sell out soon enough (three to five years) to make it worth the investors’ money. For the investors.

And I told him that investment is particularly hard to find these days. And that he should look at how to get his company up and running on a smaller scale, and start selling.

I was surprised and disappointed that he seemed surprised and disappointed.

And yes, we call that bootstrapping.

(Photo credit: by Chika on Flickr)

Mary comes up with a great idea for an iPhone application. She works on it for three months in her spare time. She develops sketches and designs, trying to figure out how it would work. She looks at other iPhone applications doing related things.

About three months into it, her enthusiasm has waned a bit, but she’s still thinking about it. She’s spent maybe 10 to 20 hours on it so far. Her best friend suggests she talk to Ralph about it. She doesn’t know Ralph, but her friend does. They meet for coffee. Ralph is a programmer. He works for a company in town doing web programming. He’s also an enthusiastic iPhone user and has been thinking about taking an online course on programming the iPhone. Ralph is excited, and his excitement rekindles Mary’s excitement. They agree to be partners in a new business based on this initial iPhone application.

Four months go by. Ralph takes Mary’s initial idea and starts developing. It turns out, as he gets into the code, that what Mary imagined isn’t quite possible on an iPhone. Ralph revises the idea radically, makes it practical and develops a prototype. Mary meets with him three times, they talk, she accepts his changes begrudgingly. At this point Mary’s total hours have gone to 15 to 25, but Ralph has worked a lot, probably 120 hours, on the programming.

At Ralph’s suggestion, he and Mary take the prototype to Terry. Both of them know Terry, but neither knows him well. Terry has been through a failed startup, has a business education and is looking for a startup to do again, this time the way it should be done. Terry’s skill is mostly marketing, but he knows how to develop a plan and seek investment. Terry does a business plan and networks with local business development groups to find angel investors. They win an opportunity to present to an angel investment group.

Another three months have gone by. Mary has now put in more like 40 hours, Ralph 250 hours, and Terry 120 hours.

The three of them meet to plan their approach with angel investors. Ralph wants to quit his job and work full-time on the new thing but needs to get paid. Mary doesn’t want to quit her job but wants to stay involved; she’s not quite sure how. Terry wants to lead the new company as soon as he can get financing.

The business plan indicates it’s going to take $250,000 to develop the business for the first year, after which it will probably need another $750,000 to become cash-flow self-sufficient.

During this meeting, Mary and Ralph and Terry come to an extremely awkward realization: They’ve never really talked about who should own how much of this company, much less how much they are willing to offer to investors in exchange for $250,000.

So what do you think? This is a typical case.

1. How would you suggest that Mary, Ralph and Terry divide up the 100 percent ownership of the company now, before they go to the angel investors. Who owns how much?
2. What do you think of the management team here? Ralph and Terry both want to work full-time on the business when there’s money to pay them. What titles should they take? How much salary?
3. How much of the company should these three offer to the seed investor for $250,000?

I’ve read many times how investors would rather invest in a quality “A” team with a “B” level product than with a “B” team and an “A” product.  According to most, I have what would be coined as an “A” product and business model. However I only have me. I am looking to apply for formal Angel investment and the team part is an integral part. I am listing that I do in fact want to find a CEO who can run the company. I am listing CEDO (Commission for Economic Development) as a team of advisors. I am listing legal as on retainer. Please share with me what I should do at this point to make the team viable in the eyes of the angel investors.

My answer:

Fill in the team first.

Find that CEO, and let him or her help you find somebody to run either the marketing or the product development, whichever of those two functions you’re not going to do. Look for somebody who’s been down the road, done a startup, made it successful, and sold it. And while you’re looking, keep an eye out for a finance/admin person as well.

What you’re looking for most is experience. Credentials are nice too, but in a pinch, experience trumps credentials, and if you possible can, get both.

Compatibility is a big deal too. You’re going to want people you can work with, who share the same values, who believe in what your company is going to do. Compatibility doesn’t mean sameness, either; same values maybe, but diversity broadens a company. Look for people who have skills and experience that you don’t. Fill gaps.

I assume what you’re thinking is that the investors can help you fill in the team, and that having people they know and trust on the team might seem to be an advantage. But the problem with that idea is that the team is so much of what they’re investing in that it’s like trying to sell a car without tires or an engine.

Investors don’t want to do it themselves. They want you to do it. That’s where the value comes.

Core problem: valuation. Divide how much money you want by how much of your company you’re offering, and that’s valuation. So for example if you want $500K for 33 percent of your company, you’re valuing your company at $1.5 million. Not having a management team really kills your valuation.

(Illustration: istockphoto.com. The point? an individual playing a team game.)