Monday, June 26, 2017

Mark Cuban's 12 Rules for Startups


Harvesting

Having an exit strategy from the beginning stages of business conception gives a sense of comfort and confidence moving forward to everyone involved in the business plan.  Even exit plans that address an unsuccessful result offer support; they inspire risk and poise by giving failure a face.  When the outlook of failure can be identified, it no longer is equated to the end of the world; it becomes a surmountable reality. 

However, exit plans do not all revolve around the failure of a business.  They also address fulfillments to obligations and shareholders.  The eventual harvest of profits is the goal of both the entrepreneur and investor, so making the terms of well-defined is important to create a goal-oriented business strategy. 

Here are some exit plans that address this idea of Harvesting:

Strategic Sale – Strategic sales are generally labeled mergers and acquisitions.  In this scenario, an industry player can buy or merge the business with a similar company.  These sales generally create a win-win scenario for all parties involved.

Initial Public Offering – An initial public offering or IPO are the preferred method for venture capitalists and other savvy investors, especially when markets are bullish and the company is need of cash.  Having a publicly traded company is an easy route to raising additional capital.  Also, investors and stakeholders alike stand to gain a significant return from the sale of holdings after the IPO has completed. 

Financial Sale – In this transaction, buyers purchase the business based on current value and future cash-flow expectations, making the return of investment somewhat predictable.  It’s a very clean way to cash out and pay investors.  Do your business and its stakeholder a service by ensuring the sale goes to a competent buyer.      



References:

Amis, A. & Stevenson, H. (2001). Winning Angels: The 7 Fundamentals of Early Stage Investing. Great Britain: Pearson Education.

Sunday, June 25, 2017

Supporting

Savvy investors can not only be a great source of financing, they can also be a great source of information when starting a new business.  Angel investors often look to take on a role in the new business, and this usually is realized in the form of a coach or mentor.  Having the perspective of and investors and a third party, in general, is a great way to make sure you are on the right track.
Sometimes they are the voice of reason when a reality check is needed.

These are the roles an investor/advisor can offer you support:

Strategic Planning – You may have a great idea or a great product but no definitive direction to take it; this is where having an advisor can absolutely help.  An advisor can offer much-needed clarity by helping with the creation of mission, goals, and objectives.    

Business Plan – For some entrepreneurs, this may be their first attempt at writing a business plan.  For the investor/mentor, this may be the hundredth business plan they have been presented.  A mentor can help guide the entrepreneur in making a solid business plan in line with what would be investors are looking for.

Business Negotiations – Not all entrepreneurs have the experience or confidence needed to negotiate with well-seasoned investors.  An advisor can assist in lending the entrepreneur the investors perspective.  This can at least help the business owner know what the person on the other side of the table is looking for in finalizing a deal.  Having insight on these variables can help facilitate the entrepreneur’s presentation.



References:

Amis, A. & Stevenson, H. (2001). Winning Angels: The 7 Fundamentals of Early Stage Investing. Great Britain: Pearson Education.

Negotiations

Negotiations come into play when the investor and the entrepreneur do not see eye to eye on the structure of the deal; one party feels that they are being slighted in some way.  Greed may also be the driver.  Regardless, to make the transaction happen negotiations of the terms and conditions of the structure must be revised to move forward and maintain a positive business relationship.  Sometimes this simply doesn’t happen, and one of the parties moves on.  When starting negotiations, both sides should aim to understand the motivation of their counterpart and the reason for their objectional stance.  Once a baseline is established, small moves can be made in either direction.  Know going the maximum flexibility you have and stick to it; make this analysis well before negotiations.

Here are the guidelines to successful negotiations:

Be Prepared – As said before, knowing your position before negotiations begin is very important.  You do not want something to happen during negotiations just because you were not prepared or the numbers had not been run.  Agree with other minority investors on which terms you see as non-negotiable.

Be Flexible – Entering negotiations without flexibility is not considered negotiating!  Period.  If this is a deal that must be made, you have to be willing to make concessions, or the deal may not be made. 

Be Confident – Being confident and assertive will take you far in negotiations.  Operating from a disposition of weakness will be realized and preyed upon.  The investor may only be wanting to test you to see if you can handle the stress.  If they see you cave under pressure, they may not see you as a business owner worth investing in.   



References:

Amis, A. & Stevenson, H. (2001). Winning Angels: The 7 Fundamentals of Early Stage Investing. Great Britain: Pearson Education.

Structuring

It’s important to structure a deal that is favorable for both parties involved.  This process can be broken down into 3 facets: keep the deal simple, align interests of both the investors and the founders, and determine the best deal to implement moving forward.

Keeping a deal simple creates room for creativity and flexibility later on.  Simple deals also increase the likelihood of gaining and investment.  A great goal is limiting the terms of the agreement to one page Making the interests of both the investors and the entrepreneur match is critical to keeping it simple.  If a party feels slighted, it will increase the likelihood that the deal becomes more complicated.  (Amis & Stevenson, 2001, p. 201-203).
    
Savvy investors will recognize the difference between serial vs lifestyle entrepreneurs.  A serial entrepreneur is one that has several ideas for different startups and has a history of doing so.  They may simultaneously have other deals playing out, unrelated to the current investment.  These are entrepreneurs are idea generators, and are great for facilitating the groundbreaking and growth at the beginning.  But the serial entrepreneur is typically not in for the long haul and establishing final success, so investing in one makes timing an important variable.  They are ideal targets based on historical success, but because of outside interests, they can be difficult to invest with.  On the other hand, the lifestyle entrepreneur is a reliable target due to their vested interest in the company.  However, most venture capitalists avoid the lifestyle entrepreneur because they tend to live off the income of the business and fail to reinvest for growth.  In general, this information will help guide the both the investor and entrepreneur in choosing an exit strategy that makes sense given the scenario.  As the entrepreneur, it is your job to recognize whether they find interest in the long haul, or if they are simply out to make a quick buck.

Considering the type of investment is also important in structuring the deal.  Is the entrepreneur offering common stock, preferred stock, or convertible notes?  Each scenario has its advantages and disadvantages, but Angel’s tend to lean towards preferred stock due to the leverage it creates within the operation of the business. Preferred stock also gets paid out first in the event that the business becomes insolvent, but it can hinder future rounds of investors should the need for additional funding arise.  Convertible notes are another popular option as they allow the investor to gain a percentage of the company before a valuation is established.  A convertible note is short term debt that converts into equity if the business becomes a success.  It’s a best-case scenario for the investor as it allows them to get a great deal on equity if things pan out, and possibly recover their money if things do not.  This is not a popular option among experienced entrepreneurs for obvious reasons.

In the end, the best deals are made when both parties feel that the deal treats them fairly, and in a good business relationship, this is a merit both parties should aim to achieve.    



Valuing

The value of a company is a premise looked at from a number of angles.  The balance sheet for is usually the best place to start with respect to a business's financials, but other intangibles also hold value.  Patents, copyrights, trades secrets are all things to consider when giving value to a company.  Sometimes these variables are hard to label with a certain monetary worth.  Ultimately, it’s the experience and wisdom of the investor to make a determination of their own using the information they have at hand. 

Aside from a gut feeling based on the product and intellectual property, there are many ways to evaluate the value of the business as a whole.  The Academic/Investment Banker Method uses financial tools to assess the worth, such discounted cash flow calculators and concepts such as the multiplier method.  The Professional Venture Capitalist method is prevalent among angel investors.  If an Angel assesses a speculative value, rather than donate pure financial contributions, a Compensated Advisor can lend support to a business in exchange for a percentage of equity or future profits. 

When approached with an elevator pitch or in a scenario where quick decisions must be made, The Quick and Easy Method is, well, an easy method!  This early stage of investing is defined by a lack of information, a high level of unpredictability, need to move with relative speed, and when approached with a deal that appears to have a significant upside by making a quick decision.  Investments in this stage can be approached using a couple of different evaluation methods.  The first, The $5M Limit, created by Howard Stevenson, equates to never invest in a start-up deal valued over $5M.  The reason for this is the likelihood of seeing a significant return or viral growth is very weak at this stage of investing.  Stevenson’s methods aim at investing in home-run investments rather than safe bets.  The Berkus Method is similar in that it is also based valuation on variables unrelated to the company’s financial performance.  Rather, this method values the company based on many criteria; the soundness of the idea, an existing prototype, the quality of the management and board of directors, as well as whether or not the start-up has proven itself through product rollout or sales.  Lastly, The Rule of Thirds is admittedly one of the most popular methods utilized by venture capitalists.  This rule requires that Angel’s investment has a specific purpose; 1/3 of a new company's equity should go to the Founders, 1/3 to management, and 1/3 to the Seed Stage investors.


There is no right or wrong way when it comes to placing value on a company.  Ultimately, it’s a gut decision!  


Evaluating

Evaluating involves the investment criteria that investors assess when making a decision on where to invest.  According to the book, Winning Angels: The 7 Fundamentals of Early Stage Investing (2001), Investors are looking at you as the Entrepreneur, your team, and your idea. 

When looking at you, the investor is interested in your goals, knowledge, and capabilities. 
Your goals are important as it lets investors know what your long-term plans are.  Do you see yourself still as a part of the business?  Is this track in line with your interests and family plans?  Where do you see yourself living?  All of these questions are important as it gives the investor a gauge on how yourself as a part of the business both now and in the future. 
Your knowledge seems like an obvious concern, but these investors are interested in how invested you are in the idea and the industry.  If you show poor market analysis and lack a reliable assessment of the customer and competition, your ill-preparedness will be a large reason for concern.  Angels want someone that genuinely care about the business they are involved with. 
Angels want someone that can motivate and lead a business to future success.  Having a proven track record is the easiest way to achieve credibility.  These Investors need someone capable of fulfilling the plans in place.  If you do not have a background to rely on, you need to come up with a creative platform for displaying your capabilities.

In evaluating your team, investors are concerned with capability and commitment to the business.
Having an inexperienced management team is an immediate red flag to a potential investor.  They have to have confidence that your staff has the skills and capabilities to get the job done.  To do this, focus on finding like-minded individuals who are motivated to achieve the goals set forth.  Your negotiation skills will be tested when trying to find the right person for the job at startup costs.  Constructing favorable future terms and distributions may be a way to bring in valuable people early, but make sure you’re not creating a foundation of empty promises.  To earn their commitment, you must be as invested as you expect them to.


Striking a deal in the end directly relates to your idea and ability to sell it.  Having a well thought out business model and clear value proposition will assist you in making this happen.
When creating the business model, make sure it is clear and easily understood.  If the direction isn’t clear, the investor will not be able to make a connection.  The value proposition gives your investor an analysis of the costs, benefits, and value that your company will deliver to its customers.  Sales are the easiest way to convey the value spectrum, but ultimately your investor will put themselves in the client’s shoes to make a final determination. 

References:

Amis, A. & Stevenson, H. (2001). Winning Angels: The 7 Fundamentals of Early Stage Investing. Great Britain: Pearson Education.

Sourcing

According to the book, Winning Angels: The 7 Fundamentals of Early Stage Investing (2001), sourcing is defined as “identifying entrepreneurial projects of merit” (p. 33).

My main takeaway from this discussion on sourcing is that finding good deals and great opportunities for an investor is just as challenging as finding a great source of funding is for an entrepreneur.  The tactics discussed focused on gaining notoriety and credibility among the investor's field of interest/focus or desired area of expertise.

In my business, Liberty Lodging, we have a unique set of sourcing criteria.  Being in the government travel industry, we prefer to have both employees and investors with experience in the field so that they can speak knowledgeably and from personal experience to our customers.  We have yet to bring in investors or managerial employees but when we do it will likely be as a part owner and operator.  In this position, their previous knowledge of the industry will be of the utmost importance.

In this quick video, Barbara Corcoran explains her Angel Investor Checklist.  





Saturday, June 24, 2017

Pro-Forma Financials

Here's a quick video to go over the assumptions for Liberty Lodging. 


Hotelier 101: A Survival Guide in Marketing

As one would expect, business space in the hotel industry has a strong foundation.  Hospitality is a centuries old practice thought to date back to the earliest civilizations, with the Inns of medieval Europe serving as the precursor to modern hotels.  Big name hotel groups like Hilton, Marriott, and Intercontinental have been around for decades, and in all likelihood, will continue to exist for the foreseeable future.  For newcomers, gaining a lasting foothold in an often overserved industry is no easy task.  As a hotelier with a couple of hard years under my belt and countless lessons learned, here are my five essential marketing techniques in this test of survival.  

Channel Management
Widely distributed travel information available online has induced the slow death of travel agencies around the world; a movement enabled by travel sites and efficient channel management.  Self-evident by name, Channel managers efficiently organize and connect properties to online sales distribution networks.  In practice, hoteliers use channel management companies to connect their properties to sites such as Expedia, Travelocity, Priceline, etc.  The channel manager collects and distributes up-to-date information concerning rooms, rates, and availability to multiple online sales forums.  Having bookings available online is essential, and from my experience as a proprietor, this convenience can easily enable an increase in sales of up to 90%!  See the listings and evaluations on Capterra to assist a business in choosing an effective channel management partner.  (http://www.capterra.com/channel-management-software/)     

Search Engine Optimization (SEO)
For the same reasons that channel management is imperative, so is establishing a well-coordinated SEO base.  Google is not only a household name, but it’s also an indoctrinated verb in the English dictionary! When searching for a hotel online, potential customers have two general directions when they decide to book. Either they visit a travel site to book accommodations or they secure a direct booking by searching Google for key terms such as “hotel,” “lodging,” “extended-stay” or similar language and the name of their destination city.  When the latter occurs, SEO filters the results by popularity and relevance, so the hotels that maximize their SEO find the top of the list.  Reaching the top of this list or at least being on the first page of a Google search is critical for hotels when acquiring direct bookings.  See The Beginners Guide to SEO for tips on establishing a solid SEO foundation.  (https://moz.com/beginners-guide-to-seo)       

Ratings and Reviews
SEO becomes meaningless if as business’s online content is belittled by poor customer reviews.  Online reviews are vital to attracting new customers.  Whether it be Yelp, Google, or the Better Business Bureau (BBB), reviews directly impact how potential customers evaluate your business.  Positive reviews create leads, while negative reviews may prevent a potential client from even making an inquiry.  When guests check out, I always make an effort to request that they leave an online review, especially if their experience was a positive one!  See A Marketer’s Guide to Accumulating Awesome Online Reviews for some great advice on generating positive reviews.  (https://blog.hubspot.com/blog/tabid/6307/bid/31852/A-Marketer-s-Guide-to-Accumulating-Awesome-Online-Reviews.aspx)    

Social Media
Social Media is the black-sheep of marketing and customer acquisition; nobody wants to acknowledge that it works.  Ads are frowned upon as they invade leisure time, similar to a commercial interrupting one’s favorite show.  The trick to Facebook ads is to disguise them as meaningful content, similar in concept to blogging.  For instance, a hotel could review a local restaurant, and offer happy hour specials on behalf of the hotel.    If users follow a business’s content, it serves as a constant reminder.  The same rules apply in gaining followers to a Facebook page.  Often it’s the content that creates the hook, not the product.  Facebook has an entire forum dedicated to business and creating effective marketing campaigns.  See the link for additional details. (https://www.facebook.com/business/learn/facebook-tips-recommendations)           
    
Word-of-Mouth Referrals

Word-of-mouth can be a wildfire in any industry.  There is nothing better than having a patron make a personal recommendation of your business to another potential customer.  A personal recommendation puts the person at ease with making a decision and automatically facilitates some degree of trust.  To gain word-of-mouth, a business has to be memorable.  The customer has to feel not only that they were offered a unique experience, but also that their business was wanted and appreciated.  Simply put, customer service drives word of mouth referrals.  If the person feels that the hotel genuinely cares about them, then they will take pride in being a patron. The article _ offers additional sound advice.  (https://www.entrepreneur.com/encyclopedia/word-of-mouth-advertising)