Bad To Worse

BAD TO WORSE Why Some Start-ups Go Down the Tubes … and Others Don't GREG FISHER #1 BESTSELLER

Top 10 Mistakes of Entrepreneurs

“ I don’t care about the product, I just want to make loads of money” 1 NO REAL PASSION FOR THE BUSINESS

Linking Market Demand with passion, skills and resources to create an entrepreneurial opportunity Market Demand Passion Skills Resources

The Key Elements in Creating an Entrepreneurial Opportunity Opportunity Market Demand Passion Skills Resources Entrepreneur

Key questions to sourcing the right opportunity

What do people need? Who will buy it? Why do they want it? How can I reach them?

What am I (are we) deeply passionate about?

How can I leverage my (our) unique skills ?

Where can I (we) get the resources to make it happen?

“ We want one so everyone will want one ” 2 NO UNDERSTANDING OF THE MARKET

Researching an Idea

Consider different revenue models:

Evaluate the costs and the costs drivers. Distinguish between fixed, variable and semi variable costs. Consider the source of costs:

Do cash flow projections

Speak to industry experts

Revenue

Cost drivers

Investment

Critical success factors

The Company Model

Visit suppliers

Discuss funding options with other entrepreneurs

Discuss funding options with the banks

Obtain and read the national venture capital association handbook

Search the web

Suppliers

Funders

Partners

Collaborators

Become a customer of the competition.

Visit competitor websites, stores and read their promotional material.

Interview competitors customers

Number of competitors

Product or service offerings of competitors

Where the competitors are situated.

The strengths and weaknesses of competitors

Competitors

Trade journals, market reports and industry associations.

Interviewing experts in the industry.

Interviewing, observing or surveying potential customers.

Market size.

Growth

The needs pf customers

The buying decision of customers

Customers How can one gather the information? What needs to be researched?

“ We are going to be just like Amazon.com, only better” 3 NO DIFFERENTIATION

Assessing an Opportunity [VENTURE] Concept Attractiveness Competitive Advantage [ENTREPRENERIAL TEAM] Low Low High High Market Size Market Growth Differentiation Customer Need Skills Resources Passion / Energy Network 1 2 3 4 5 6 7 8 9 10 10 9 8 7 6 5 4 3 2 1

Response [VENTURE] Concept Attractiveness Competitive Advantage [ENTREPRENERIAL TEAM] Low Low High High Avoid / Wait & Reassess in Future Build / hire / develop the required capabilities Identify / exploit a specific under served niche Revise product or business model Invest and pursue the opportunity 1 2 3 4 5 6 7 8 9 10 10 9 8 7 6 5 4 3 2 1

Strategy Formulation Questions What are the threats for the business? What are the opportunities for the business? What are our weaknesses? What are our strengths? Current status Where are we at? Who is responsible? What needs to happen in the next 30 days? What are our 1 year goals? What are our 3 year goals? Goals, Action & Priorities What must we do and how will we make it happen? How do we behave? What is not negotiable? What turns us on? What assumptions guide us? Organis-ational Character What is our organizational character? How will we evolve as a business? What makes us different? What is our value proposition? What is our org sustainability model? Business Recipe How do we create value ? Why do we matter? What value do we deliver? Whom do we serve? What are our personal objectives Purpose Why do we exist?

“ We are so unique that we have no competition in the market” 4 NO COMPETITORS

If no competitors … WHY?

Be REAL about your competition

Competitor Analysis Image Advertising Credit Policies Sales Method Appearance Location Company Reputation Expertise Stability Reliability Service Selection Quality Price Products Importance to Customer Competitor C Competitor B Competitor A Weakness Strength My Business FACTOR

“ We will work out our revenue and cost model as we go along” 5 NO BUSINESS MODEL

Business Model Critical Success Factors Investment Costs Source of Revenue Income Stream 3 Income Stream 2 Income Stream 1

Key questions for building a business model

What are the sources of revenue for the business?

Single or multiple revenue streams?

Payment terms – upfront, over a period of time or post delivery?

What are the cost drivers for the new business?

Major costs incurred to generate revenue?

Nature of costs – fixed, variable or semi-variable?

Payment terms – upfront, over a period of time or post delivery?

What size capital investment is required to launch and sustain the business?

To sustain a positive cash balance?

To make profit?

What are the critical success factors for this business?

Identify the issues that will determine the success or failure of the business?

Business Model Diagram New Business Inputs Required (Cost Drivers) People Product Premises Marketing etc. Buyers What they buying Range of products or services Volumes; Frequency How they pay Timing of payment Up Front Investment Equipment Premises Branding Training Working Capital Etc Input Output Input $ $ $ Critical Success Factors What are the factors that are required to ensure that this model works? Revenue Costs Investment

“ We are four CAs so all is okay” 6 NO BALANCE IN THE TEAM

0 Rands Revenue Investment Extremist Revolutionary Growth Entrepreneur Lifestyle Entrepreneur Survivalist Breadline Time Types of Entrepreneurs

The Entrepreneurial Team Creativity and Innovation General management skills, business know-how and networks Low High High Source: Timmons & Spinelli. New Venture Creation.2004. McGraw Hill. Manager, administrator Promoter Entrepreneurial Team Inventor

Quality of the team

Entrepreneurial Attributes

Commitment and Determination

Opportunity Obsession

Tolerance for Risk, Ambiguity and Uncertainty

Creativity, Self-Reliance and Ability to Adapt

Motivation to Excel

Leadership

Management Attributes

Marketing

Operations / Production

Finance

Administration

Interpersonal / Team

Law

Source: Timmons & Spinelli. New Venture Creation.2004. McGraw Hill.

“ Who cares about cash when you’ve got the profit margins we’ve got ” 7 NO CASHFLOW FORECAST

Financial Plan

Sales forecast

Startup expenses

12 Month profit and loss statement (monthly)

12 Month cash flow statement (monthly)

3 – 5 Year profit & loss (high level – quarterly)

3 – 5 Year cash flow (high level – quarterly)

Opening balance sheet

Projected balance sheet

Breakeven analysis

Financial Plan

Sales forecast

Startup expenses

12 Month profit and loss statement (monthly)

12 Month cash flow statement (monthly)

3 – 5 Year profit & loss (high level – quarterly)

3 – 5 Year cash flow (high level – quarterly)

Opening balance sheet

Projected balance sheet

Breakeven analysis

Cash Flow Forecast (NB) = _ _ + + M5 Budget = _ _ + + M6 Budget … Units Sold = = = = = Closing Cash Balance _ _ _ _ _ Variable Cash Outflows _ _ _ _ _ Fixed Cash Outflows + + + + + Cash Inflows + + + + + Opening Cash Balance Total Budget M12 Budget M4 Budget M3 Budget M2 Budget M1 Budget

Sales Forecast * State the assumptions on which these numbers are based c Cat 2 Units Sold* d Sales Price Per Unit* cxd=Y Category 2 TOTAL M5 Budget M6 Budget … Z + Y Monthly Total axb=Z Category 1 TOTAL b Sales Price Per Unit* a Cat 1 Units Sold* Total Budget M12 Budget M4 Budget M3 Budget M2 Budget M1 Budget

Start Up Expenses XXX Other loans XXX Working capital XXX Reserve for contingencies XXXX TOTAL XXX Other expenses XXX Advertising and promotions XXXX TOTAL XXX Bank loans XXX Owners investment Sources of Capital XXX Opening inventory XXX Location and admin XXX Capital equipment XXX Real estate Start Up Expenses

P & L Forecast _ _ _ _ _ _ _ Expenses = = = = = = = Profit before tax = = = = = = = Gross Profit _ _ _ _ _ _ _ Cost of Sales = _ + M5 Budget = _ + M6 Budget … = = = = = Profit after tax _ _ _ _ _ Tax Expense + + + + + Revenue Total Budget M12 Budget M4 Budget M3 Budget M2 Budget M1 Budget

P & L Forecast EXAMPLES Salaries & wages Other operating expenses Interest payments Depreciation EXAMPLES Direct cost of goods sold _ _ _ _ _ _ _ Expenses = = = = = = = Profit before tax = = = = = = = Gross Profit _ _ _ _ _ _ _ Cost of Sales = _ + M5 Budget = _ + M6 Budget … = = = = = Profit after tax _ _ _ _ _ Tax Expense + + + + + Revenue Total Budget M12 Budget M4 Budget M3 Budget M2 Budget M1 Budget

Cash Flow Forecast (NB) = _ _ + + M5 Budget = _ _ + + M6 Budget … Units Sold = = = = = Closing Cash Balance _ _ _ _ _ Variable Cash Outflows _ _ _ _ _ Fixed Cash Outflows + + + + + Cash Inflows + + + + + Opening Cash Balance Total Budget M12 Budget M4 Budget M3 Budget M2 Budget M1 Budget

Cash Flow Forecast EXAMPLES Cash sales of goods or services Collection of accounts receivable Interest earned Sales of fixed assets or investments Capital from investor Loan received EXAMPLES Payment of cash expenses Payment to creditors Payment of salaries and wages Purchase of inventory for cash Purchase of fixed assets or investments Payback loans Payout dividends = _ _ + + M5 Budget = _ _ + + M6 Budget … Units Sold = = = = = Closing Cash Balance _ _ _ _ _ Variable Cash Outflows _ _ _ _ _ Fixed Cash Outflows + + + + + Cash Inflows + + + + + Opening Cash Balance Total Budget M12 Budget M4 Budget M3 Budget M2 Budget M1 Budget

Balance Sheets

Owners Equity

Capital

Retain earnings

End Y2 TOTAL LIAB & EQUITY

Long Term Liab.

Loans

Current Liabilities

Accounts payable

Liabilities & Equity TOTAL ASSETS

Fixed Assets

Property

Equipment

Furniture

Vehicles

Current Assets

Cash

Inventory

Acc receivable

Assets End Y3 End Y1 Opening

Balance Sheets Goods or resources owned by the business to be transformed utilized / realized in 1 year Goods or resources owned by the business that have a life span exceeding 1 year Amounts owed by the business to be paid back within 12 months Amounts owed by the business to be paid back after 12 months Portion of the business attributable to the owners Total amount OWNED by the business Total amount OWED by the business to lenders or owners

Owners Equity

Capital

Retain earnings

End Y2 TOTAL LIAB & EQUITY

Long Term Liab.

Loans

Current Liabilities

Accounts payable

Liabilities & Equity TOTAL ASSETS

Fixed Assets

Property

Equipment

Furniture

Vehicles

Current Assets

Cash

Inventory

Acc receivable

Assets End Y3 End Y1 Opening

“ We need R10m in venture capital and then we will get going” 8 NO MOMENTUM UNTIL CAPITAL IS RAISED

New venture financing and the equity gap Stage Source Demand Supply Pre-seed Seed / Start-Up Early Later Founders Family Friends Angels / Angel Alliances Venture Funds Private Equity 100k 500k R5-10 mil R20 mil Government Funds Equity Gap Adapted from a model proposed designed by Jeffery E Sohl – Center for Venture Research, University of New Hampshire

Sources of finance for a business

Loan must be paid back which can create strain on cash flow for the new business.

Bank is unlikely to assist in opening doors, giving advice or introducing founders to useful contacts.

Founder maintains full ownership of the business.

Founder can manage and run the business as he/she sees fit

Lose a portion of the ownership of the business.

Equity owners can be controlling which can cause friction with the founders

Difficult to value an entrepreneurial business when allocating shareholdings

Often comes with useful management input and advice.

Equity investors can give access to a network of useful contacts

No immediate strain on cash flow in terms of repayments of the capital

Disadvantages Advantages Disadvantages Advantages

Loans from family and friends

Loans from government agencies or NGO’s supporting entrepreneurs

Bank loans

Personal savings

Family and friends

Informal individual investors

Venture capitalists

Government agencies

Partnerships / strategic alliances with corporations

Private equity investors (for established businesses)

Listing on stock exchange

Alt-X

Main Board

Debt Funding Sources Equity Funding Sources

The Art of Bootstrapping

Focus on cash flow, not profitability

Forecast from the bottom up

Ship, then test

Forget the “proven” team

Start as a service business

Focus on function, not form

Pick your battles

Understaff

Go direct

Position against the leader

Take the “red pill.”

Source: Kawasaki, G. The Art of the Start. 2004. Portfolio.

Funding Realities

More likely sources of funding for startup:

Bootstrapping

Personal funds

Close connections

Some chance of getting funds for a startup:

Corporate investor

Government enterprise creation funds

Low chance of getting funds

Bank loan

Venture capital

“ We have hired offices in Sandton, acquired Hummer’s for the directors and will pay the most to get the best” 9 NO FRUGALITY

BUDGETING MONITORING REPORTING

Budget for CASH FLOW

Build your OWN models

Its not just about HOW MUCH but also about WHEN .

Know the NATURE of different cash flows

SHORT TERM = DETAIL ; long term = big picture

Your BANK BALANCE is your truth

Know your BASELINE (breakeven)

Keep UP TO DATE

Balance off being overly PEDANTIC versus dangerously LACKADAISICAL

10.Report results with PURPOSE Entrepreneurial Financial Management

“ Our marketing plan will be a combination of print, TV and internet advertising” 10 MISGUIDED MARKETING PLAN

Simple Marketing Plan List price Discounts Allowances Payment period Credit terms What does it cost us to produce the good or service? What are the competition charging for similar goods or services? Why are we charging more or less than the competition? How would revenue and profits be affected if we increased or decreased the price? You need to find a balance between attracting customers and making profits. Price Product variety Quality Design Features Packaging Services Warranties Returns Does it meet a specific need? What is that need? Must we customize our product or service? Do we deliver the appropriate quality for the customer? Good marketing begins with a good product or service. Product Considerations Key questions to be answered by the entrepreneur Description of the component Marketing mix component

Simple Marketing Plan Advertising Sales force Public relations Direct marketing How will we make customers aware of the benefits of buying our product or service? Promotion is about communicating the merits of the product or service to target customers and persuading them to buy. Promotion Channels Coverage Transport Are we going to sell locally, regionally, nationally or globally? How will we reach the customer? Do we need more than one channel for reaching the customer? Should we create our own distribution channel or partner with an established distributor? This is about getting the product or service to the customer. Customers will only buy products or services that they have access to, thus it is critical to have distribution channels that reach the customer. Place Considerations Key questions to be answered by the entrepreneur Description of the component Marketing mix component

New Venture Creation Model OPPORTUNITY Demand Passion Skills Resources STRUCUTRE Business Model Legal Form Tools / Facilities Team FUNDING Traditional financing Bootstrapping Cash flow SALES Product Price Promotion Place Word of mouth Growth Research BUSINESS PLAN

Focus points in a business plan

The People . The men and woman starting and running the venture, as well as outside parties providing key services or important resources for it such as suppliers, lawyers and advisors.

The Opportunity . The need in the market for the proposed product or service. The size and growth of the potential market and the attractiveness of the industry in which the business will operate.

The Business Model . A summation of the core business decisions and trade offs employed by a company to earn a profit. The decisions and trade offs include revenue sources, key expenses, investment size and critical success factors

The Strategy . The methods and means of creating sustainable competitive advantage for the new business.

The Context . The big picture – the regulatory environment, interest rates, demographic trends, inflation and the like – factors that inevitably change but cannot be controlled by the entrepreneur.