To quote Stephen King, the famous author, “What separates the talented individual from the successful one is a lot of hard work.”
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Are you thinking about venture capital backing?
How about some case studies of successful start-ups that made it to the global stage?
We interviewed dozens of entrepreneurs and venture capitalists so the new edition of Enterprise & Venture Capital (Allen&Unwin) has it all.
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The idea stage is quite early for most VC firms. Angels may be your best bet but talking to VC’s early will build a relationship that may be handy sooner or later.
I recommend you go on the various VC’s websites, find out who they are invested in and contact the founder or someone else in the company. See how they have found the experience, what their VC wanted and see if they can put in you direct contact with their backer. Just make sure the company is not a competitor to your idea!
Next best bet are to find who the lawyers and accountants and other advisors are for the VC backed company (or the VC firm if you can find this out. Make contact with them and ask similar questions and favours.
You should read Enterprise and Venture Capital by Chris Golis (4th Edition). It will help you with guidance on all aspects of building a growth company. The 4th Edition is Australia focused but the general principles apply world wide. I am currently co-authoring the 5th Edition, which will be a little more international.
Make sure you spend time with people who have done it before, even if you have to spend a little money, to learn how they did it.
Make sure you have plenty of your own capital in the business because without personal financial commitment, its unlikely any one else will trust you with their money.
Cheers
Tom
Both can be very challenging.
1. Know what you aim to achieve in the business (are you trying to change the world, are you out for lifestyle or determined to build a fast growth business, do you need total control or would you be interested in an MBO where you and a few other managers own a smaller but potentially very valuable stake, do you want to own it for life or exit in 5 years, etc.)
2. Know your personal objectives and make sure they fit with your business objectives (for example, its hard to run for council or other political office if you want to buy or build a fast growth business)
This is not exhaustive but they are extremely important in forming your decision.
Buying is probably going to cost you more upfront and there are risks such as losing key customers as pointed out by Scott. Another key risk is the potential loss of key staff. Is your style going to be the same as the prior owner? If not, customers and staff may walk.
If you buy another company, you need to be careful to get appropriate representations and warranties about the business (and that they vendor can actually pay the damages if you sue for them – if they can’t, reps and warranties insurance is possible.
You will want to buy the business and its assets so you don’t get stuck with any legacy liabilities of the company (tax issues, legal, PI claims, etc.)
In summary, buying a business means careful due diligence upfront and careful planning to retain clients and staff and so forth after the acquisition.
Today, with private equity, its possible to buy very large businesses with the support of private equity sponsors. If you are doing it alone on a smaller scale, make sure you don’t over pay, try to pay in instalments with some based on subsequent post-acquisition performance of the biz.
Building has its own set of difficulties. You are starting from scratch. No customers, no products/services. It also takes funding but that is somewhat spreadout over time. Of course it can be awhile until the first signs of revenue. Cash flow forecasting will be key, as well a careful analysis of the customers and markets. Get into their world. Read what they read, do what they do, network where they network.
My number one tip for starting from scratch is “customer first, then product/service” – find the pain/need, then solve/fill it, fast!
Cheers
Tom
Start ups must have capital from the founder(s).
The amount varies but it needs to be a significant portion of the founder(s) personal networth.
That’s called hurt money and if the founder doesn’t believe in it enough to bet the farm, no one else will back it.
Angel Camps – probably worth while. Anywhere you can go to learn from other people who have done it before will help you.
Bootstrapping is a great way to make a start. I know an entrepreneur here in Australia who did consulting for many years to fund the development of his software product. He also utilized government grants very well.
Returns – VC’s and angels that I know want 5 to 10 times there money back when the exit event takes place, usually 3 to 7 years after the initial investment.
That may sound like a lot but returns are all tied to risk levels and start ups have very high risk.
How much – take as much as you can get. It usually takes several times more money and several times longer than you think to build a business.
How big – VC’s and angels want to back businesses that can generate $50m to $100m in turnover (or more). That means you need a very large addressable market.
Its rare to get more than 20% market share and its rare to grow share by more than a few percent per year.
Generally you need a market of $500m but many will tell you its got to be a potential market of $1Bn+.
Read the book Enterprise and Venture Capital by Christopher Golis. I am currently co-authoring the 5th Edition of this book. Cheers Tom
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