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.  

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)

Trying to figure out where to start your business?

Aside from taxes, market for you product, and personal preference, what should drive you to open your business in a particular location?  It's a good question, and the answer these days may only be a click away...  

The United States Census is a government organization that has been in place since 1790.  Via Census.gov (http://www.census.gov/about/what.html), the mission of the Census bureau is "to serve as the leading source of quality data about the nation's people and economy."  The goal of the Census is to "provide the best mix of timeliness, relevancy, quality and cost for the data we collect and services we provide".  

How does this over-funded government program actually help out an entrepreneur? : )  If the answer isn't clear yet, that's ok...we all get lost sometimes trying to figure out exactly what it is that the government does!     

Among the many functions of the Census Bureau, one task is to track National, State, and County population growth trends.  These tracking statistics are available to general public, and can assist an entrepreneur in identifying potential growing markets.  Click here for the latest estimates of resident population change for incorporated places of 50,000 or more.

From this data, we see that the fastest growing city over the last 5 years has been South Jordan City, Utah.  According to the collected data, South Jordan has grown by 32%...from 50k to 66k residents! That is huge growth in a short amount of time, but does that necessarily mean that you should go open up your business in South Jordan City?  Well, not necessarily.  Depending on your business, a city size of 66k may not support the type of business you plan to open, especially if you are aimed at selling to a niche market.  

Lacrosse gear for example, while quite dependent on region already, is still a relatively small market in terms of a national footprint when compared with other sports like baseball, football, soccer, etc.  Let's say that the average sample of the US population interested in lacrosse is 1%.  For South Jordan, that comes out to 660 potential customers.  Can 660 potential customers support you business?

Let's compare South Jordan to a major metropolitan area, in this case, Denver City, Colorado.  Denver is the 34th fastest growing city; a 13.8% positive population increase during that same time frame.  Even though this is significantly smaller growth, the population grew from 600k to 683k!  That growth of 83k residents is nearly 20k residents bigger than the entire population of South Jordan.  So while the growth is not as significant, the customer potential is far greater.  

The Census Bureau tracks a ton of data, even at the state level  You don't have to marry it, but explore it just a bit, especially if you are undecided on where it is you would like to open your new business.