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What entrepreneurs can expect during due diligence

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Kick starting with capital

In the present business climate, it is very difficult to get a business started without capital – either from the founders themselves, friends and/or family, or outside investors. Most entrepreneurs know that at some point(s), fundraising will be an important part of their role. What many don’t know, however, is what the process is like and what they will have to do for it.

Many complex “things” come along with raising money including legal work, new obligations, and investor relations. Due diligence is one of these things, and it can be a substantial effort requiring a huge amount of time and documentation.

Investors will have different needs

All investors are different, and their due diligence needs all vary too. Friends and family usually need only basic diligence. Professional investors will require significantly more, and all have their own unique set of “hot buttons” that they look for, or extra closely at. Regardless of the variance between investors, entrepreneurs should expect to provide some combination of the below:

  • A strong executive summary and PowerPoint deck is important to get investors hooked, but you are going to need a fully developed business plan to reel them in. Founders will need to speak to all aspects of the plan, and back it up with insight, data and answers.
  • Detailed past and current financials, as well as future projections going out at least three years (quarterly reporting/projections should be fine). A sophisticated revenue model that can be backed up by industry data, and that also includes expense projections at a fairly granular level, should back up the projections.
  • A revenue/profit growth curve that is strong and presents significant upside for investors, but that is also realistic.
  • Verification of market size and trends using multiple independent data sources.
  • Potential investors will likely want to interview a sample of customers, suppliers and strategic partners, and the whole management team.
  • Employment contracts for all key employees. These should include non-compete and Intellectual Property clauses.
  • In-person presentation(s) at company headquarters, and by traveling to investors’ offices.
  • Time. Time for impromptu calls and questions, as well as for scheduled presentations. Time to prepare documentation. Time to think. Time.

There can be more to due diligence, but the above covers a significant amount of the landscape. Once you successfully navigate your potential investors through this process, be prepared for deal terms negotiation. Everything may be up for negotiation here, including valuation, interest rate (for convertible debt), conversion terms/rights (for convertible debt), equity preference, guaranteed return on investment, board of director seats, and approval rights on: annual budgets, large expenses, strategy, key hires/fires, etc.

Yes, raising capital is a daunting process. It takes too much time, too much effort, and is riddled with too many “no thank you” answers. Fundraising is our reality though, and if a company brings in investors who are a good fit, along with enough money to fund the business plan, then it will all be more than worth it.

Hoyt David Morgan is an entrepreneur, angel investor and business strategy leader. He is an investor and/or adviser to a handful of exciting and high growth companies, and has been a part of several high-value exits. He is passionate about customer experience, smart business and helping innovative companies grow... and sailing.

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Business Entrepreneur

Is the best time to relocate your business before, during, or after the holidays?

(ENTREPRENEUR NEWS) If your business has outgrown its current space, it may feel like there’s never a good time to relocate. When can you pack everything up without disrupting operations, going offline, and sinking your sales?

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If your business has outgrown its current space, it may feel like there’s never a good time to relocate. When can you pack everything up without disrupting operations, going offline, and sinking your sales? The answer may be during that post-holiday slump.

Though the holiday season is marked by increased shopping and general economic activity during the run-up, once the holiday season actually begins, we tend to see a slowdown that leads to low first quarter profits. Decreased profits during this period don’t mean we’re looking at an overall economic slump, but rather that everyone is recuperating from holiday spending sprees, while companies assess and prepare to launch their start-of-year marketing strategies. It’s a time of renewal and reconsideration, from an economic perspective.

If you’re thinking about staging a move for your business this holiday season, you’re on track for decreased business disruptions, but that doesn’t mean you have an easy road ahead of you. Here’s what you need to know to execute the move smoothly.

Have A loose timeline

One of the most challenging things about planning a business move is that it can be hard to predict how long it will take to properly execute your move. That means, even if you tell your customers you’re relocating, you shouldn’t expect to give them a hard re-opening date. Rather, the length of time it takes to move tends to hinge on a number of factors, including distance, size of your business, infrastructure issues, and regulatory concerns, not all of which are easily predictable.

You’ll also want to leave some buffer time when planning your move because you can’t predict problems that might arise with the moving company. Bad weather or a broken down truck can delay a move, especially if you’re working with a small company. Moving companies may also offer you a lower rate if you’re flexible with your move dates.

Consider your employees

Another question you’ll want to ask before moving is, “Where are my employees in all this?” Some companies firmly believe in giving employees holidays off, even if it means closing a profitable business like a restaurant during an otherwise profitable time. Other companies, however, typically assume employees will be in the office during or immediately after major holidays.

Regardless of your usual philosophy, you need to determine what role your employees will play in your move.

While they shouldn’t be responsible for the physical process of moving, do you expect them to participate in packing and setting up the new location? You should be clear about your expectations while recognizing that moving is outside the scope of typical job duties. You also will need to budget to pay your employees during this downtime while also financing the move, even though you won’t be bringing in a profit.

Mind the locals

If you’re primarily an online business, you may not have to worry about how your move will impact customers – other than some downtime, these individuals will be minimally affected. However, for businesses that run a brick and mortar storefront, changing locations can have implications for your community relationships.

If you move outside your original area, for example, you may lose customer goodwill or even sacrifice some of your customer base altogether. Depending on the service you provide, they may come back, or they may find another option closer to home.

The holidays are a busy time in general, but they’re an unusual time for businesses since economically it’s the pre-holiday period that’s actually the most hectic. Take advantage of this imbalance to move your business with the least fuss during the last few days of the year or at the start of the first quarter. You’ll be pleased to find how smoothly a company move goes when customers are otherwise occupied.

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Business Entrepreneur

Hobby to profession: The new-age entrepreneurs

(ENTREPRENEURS) Turning your hobby into a career is harder said than done but a few knitters are putting on a clinic on how to do it.

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I’ve often heard the advice that you should follow your passion, and eventually, someone will pay you to do it. But the truth is, turning your hobby into a career is easier said than done. The process by which a person turns a hobby into a business is poorly understood by experts – at least partially because it’s so difficult to collect data on this topic. In order to separate the lifelong hobbyists from the entrepreneurs, you’d have to trace the activities of many hobbyists over many years to understand how their paths diverged.

An MIT Ph.D. candidate has hit upon a novel way to research the transition from hobby to entrepreneurship by following Ravelry.com, a social media and pattern-sharing platform for knitters and crocheters, often known as the “Facebook of knitting.” The site encourages crafters to keep track of and share their projects, tools, techniques, and patterns.

The Washington Post reports that by analyzing over 400,000 profiles on Ravelry.com and interviewing 100 knitters, found through an additional newsletter and three blogs, Ph.D. candidate Hyejun Kim was able to draw some interesting conclusions about what can “cause someone to flip the switch from ‘fun’ to ‘profit.’” Only 1.5 percent of Ravelry users become entrepreneurs who sell their own patterns, knitted items, or yarns. What sets this small number of knitters apart?

Although the internet provided the crucial data Kim needed for the study, it was, in fact, real-world connections and encouragement that turned out to be the tipping point into entrepreneurship for most knitters-turned-business-owners. When asked why they decided to start their own businesses, most reported that they were encouraged by their friends and spouses.

Most of the crafters who became entrepreneurs were already very skilled knitters, to begin with. Kim was able to isolate a number of knitters who joined in-person knitting groups like Stich ‘n’ Bitch. Those who joined a group were 25 percent more likely to become entrepreneurs than those who didn’t. That’s because their crocheting comrades would compliment their creations, boosting their confidence and inspiring them to take it to the next level.

It shouldn’t be overlooked that 96 percent of Ravelry users are women. The forces of sexism in the world of startups and the undervaluation and domestication of women’s handicrafts likely combine to give women the impression that their skills and talents are just for fun and shouldn’t be seen as an opportunity to make money. Kim’s research shows that when it comes to entrepreneurship, sometimes talented women just need a nudge in the right direction.

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Business Entrepreneur

How to effectively share negative thoughts with your business partner

(BUSINESS) You and your business partner(s) are in a close relationship, and just like a marriage, negative emotions may play a role in the relationship.

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You and your business partner are in a relationship. Your business was born when you shared a common vision of the future and became giddy from the prospect of all you could do together that you couldn’t do alone. Now, you spend much of the day doing things together in collaboration. The stakes are high; there are obstacles to overcome, decisions to make together, deadlines to meet, and all the stresses of running a business.

It’s no wonder a business partnership can often be just as complicated and emotional as a romantic relationship. If you are struggling with your business partner, you might find helpful advice in resources originally targeted towards troubled couples.

Relationship expert Dr. Jeffrey Bernstein has explored how to share “toxic thoughts” with your partner. In a linked article, Bernstein describes toxic thoughts as distortions of the truth that cause us to overemphasize the negative attributes of our partner.

Some examples of toxic thoughts include blaming your partner for larger problems that aren’t really their fault, inaccurately assuming your partners intentions, or resenting your partner for not intuiting your needs, even if you haven’t expressed them. The defining characteristic of these toxic thoughts is that, although they may be based in the truth, they are generally exaggerations of reality, reflecting our own stresses and insecurities.

Just as much as in a love relationship, these toxic thoughts could easily strain a business partnership. If you find yourself having toxic thoughts about your business partner, you will need to decide whether to hold your tongue, or have a potentially difficult conversation. Even when we remain quiet about our frustrations, they are easily felt in the awkward atmosphere of interpersonal tension and passive aggressive slights that results.

Dr. Bernstein points out that being honest about your toxic thoughts with your partner can help increase understanding and intimacy. It also gives your partner a chance to share their toxic thoughts with you, so you’d better be ready to take what you dish out. It might be hard to talk about our frustrations with each other so candidly, but it might also be the most straightforward way to resolve them.

Then again, Bernstein points out, some people prefer to work through their toxic thoughts alone. By his own definition, toxic thoughts are unfair exaggerations of and assumptions about our partner’s behavior. If you find yourself jumping to conclusions, assuming the worst, or blaming your partner for imagined catastrophes, perhaps you’d better take a few minutes to calm down and consider whether or not it’s worth picking a fight about. Then again, if you’re self-aware enough to realize that you are exaggerating the truth, you can probably also tease out the real roots of any tension you’ve been experiencing with your business partner.

If you are going to get personal, shoulder your own emotional baggage and try to approach your partner with equal parts honesty and diplomacy. Avoid insults, stay optimistic, and focus on solutions. State your own feelings and ask questions, rather than airing your assumptions about their intentions or behaviors. Keep your toxic thoughts to yourself, and work towards adjusting the behaviors that are making you feel negatively towards each other. Your business might depend on it.

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