Startups and fundraising
Startups almost always must go through the exciting, excruciating, time consuming, eye opening, and ultimately important step of fundraising (at least once). It’s a horrific experience on one hand – taking too much time and work, requiring significant legal preparation and trust me, you hear “no” a lot, just to name a few of the fun things one encounters.
On the other hand, it is a valuable experience for a business – helping refine the plan, preparing leadership for what lies ahead, and offering introductions to many smart and successful mentors in the industry. And the money that comes in enables and accelerates growth, opens new doors and can provide some safety for the founders and employees. Contrary to what some entrepreneurs feel, though, bringing money in doesn’t make their jobs easier – they have more responsibility, more obligations and an important new group to report to.
It is this dichotomy of good and bad that makes the angel investing process so exciting. It is also what makes it so difficult. Each investor has his own process for evaluation and decisions. Some stick to one industry they know best while others diversify. Some invest in people with a proven track record and others migrate towards Intellectual Property. I look for four things in a company I evaluate – and only make decisions to move forward where a business scores well in all four.
Businesses must score well in these categories
Executive Leadership: It is people that behave ethically, work hard, innovate and ultimately turn a plan/idea into a thriving business that creates value. Or not. I have to trust the team I invest in – as people, leaders and business people. This is why I always prefer to invest in people I have worked with, know well or who have come highly recommended by someone in my trusted network… and I especially like to invest in companies where I am on the executive team.
Market Opportunity: I love markets that are already maturing or are fully matured, but that are growing. They need to be big enough so that a “win” will provide substantial financial gain for the business – but depending on competition and the current environment, this doesn’t always mean multi-billion dollar markets. Medium sized companies (and industries) can be home runs too. Be the best in a market.
Improve Business Efficiency: I look for businesses that use technology and/or methodology to improve the business model and create efficiencies that have tangible financial benefits. I don’t often look for leading edge technologies – or those that are unproven. I prefer proven technology or business methodology that is applied in a new way or in a new industry.
Improve Customer Experience: Customer experience is at the core of my business mantra. No business should be allowed to open its doors unless leadership has a strong focus on understanding who their customers are and what they want, and then keeps that focus to ensure customers are happy. Once again, I look for businesses that apply proven technology and/or methodology in a new way to improve the customer experience.
A beautiful road map
If you ask me, that’s a beautiful road map for successful early-stage investing right there! Even so, angels (myself included) don’t always get it right. Having solid criteria angels believe in, and that you can be successfully evaluated in, will dramatically improve success rates.This is why entrepreneurs who are looking for funding shouldn’t just perfect their pitch. They should learn about their network and the greater investment community, and understand their investor prospects. Business leaders should target their angels – if they do, they will increase their funding success rates.
What challenges are you finding in your search for early stage investment?
When office hunting, don’t call a Realtor first
Often, a startup’s first step when hunting for offices is to call a Realtor, but that is not necessarily a good idea – do your homework first.
Are you getting ahead of yourself?
So you want to buy a building for your startup business? Do you really want to do that? Should you really do that? I am sure you have pondered over these questions in your mind a million times by now if you are actually on the phone asking a REALTOR to show you some places in the location of your dreams! After all, the REALTOR is the first step right? Finding a great affordable location?
WRONG. Your REALTOR is actually the person that you should be talking to LAST. Now I know this seems counter-intuitive, but there are some pretty important steps that must be taken first before looking for a location. Any REALTOR out there that either sends you active listings or takes you out looking for space without the following steps being completed first is either just hunting for a paycheck, or isn’t worth their salt in the industry and is about to make some pretty big mistakes on your behalf.
Before you look for your space…
Here is a quick protocol someone should do before they even start to look for space:
- A well-built business plan. This should be at least 5-10 pages long. You can actually get great examples and templates at SBA.gov or your local Small Business Administration where you live. Have that business plan ironed out. That is going to then provide you with a monthly rent or loan payment allowance and based upon the information in the business plan that figure may also be altered.
- A personal financial sheet is going to be needed. This will tell the landlord or the lender, if you and your business will be bankable.
- Money. Bottom line, it takes money to make money. It doesn’t have to be your money, but it does have to be accessible to you at all times. There will be things that your lender or landlord won’t cover and that will be on you. Consider this the term you probably by now have heard “skin in the game.” Oh yeah, and whatever figure you think you will need to have in your head, double it.
I have had the painful privilege of dealing with hundreds of small business startup’s in my day, and I have also witnessed REALTORS unknowingly destroy a business success before the doors even open. Most of which could have been avoided if the startup would have had these three things figured out before they called the REALTOR.
Housing’s silver lining: turning REOs into rentals
While housing sputters along near the bottom, most entities are cynical of the market, while one company is expanding rapidly and seeing success in turning REOs into rentals while revitalizing communities and getting involved in the up-and-coming real estate hot spots.
With a continually struggling housing market, the prognosis for the sector is still poor, but there are areas of the nation and types of investments that are improving greatly, pointing to signs of life in real estate. One company embodies the signs of health, a family-owned company in Memphis that focuses on the REO-to-rental market.
Memphis Invest converts distressed REO properties to rentals, and they place a tenant, so it is a performing asset for private investors. The company recently released their first quarter activity report, showing a 67 percent year-over-year increase in the number of its homes sold to investors. Of those, 82 percent were REO, thus providing the nation a great example of how the REO to rental strategy can help revitalize communities one home at a time.
Chris Clothier, Partner at Memphis Invest is one of the nation’s leading experts in single-family rental real estate services and attributes the company’s growth to lower prices and lower interest rates, as he notes they have “removed many barriers for both novice and experienced investors, and these individuals are now getting heavily involved in the single-family rental housing industry.”
Clothier added that many investors have no interest in being a landlord, so they work with companies like theirs to allow remote involvement. “That ease of entry and passive involvement also lead investors to move beyond two or three properties and into portfolios of seven to ten,” said Clothier.
Cities primed for growth
The REO conversion market is heating up, and Clothier points to Memphis, Dallas, and Atlanta as hot spots. “We obviously like Memphis and Dallas,” said Clothier, “and feel that they will continue to be strong markets for single-family rental investments, and we continue to look toward expansion into Atlanta and possibly Nashville. These southern cities are some of the fastest growing areas in the country and have solid, fundamental economies in place. Large employers, solid infrastructure and solid future demand for their core industries mean consistent demand for good housing in these markets. In light of the shift from home ownership to renting, much of that housing demand will be for high quality rental housing.”
Making an important distinction, Clothier adds, “So MSAs with growing economies, solid fundamental industries and growing populations are prime areas – not simply cities with high concentrations of foreclosures.”
What government programs should be expanded or contracted?
In an election year, there is much focus and introspection as a nation as to what our government is doing to help or hurt the economy, and Clothier takes an optimistic look at which programs are beneficial.
“A federal government program that I would like to see expanded is the Federal National Mortgage Association’s (FNMA) role in providing funding to SFH investors,” said Clothier. “This is a group that can and will adhere to stricter guidelines designed to offer protection to FNMA’s portfolio. I would love to see FNMA expand their financing options for investors beyond 10 properties and couple that expansion with tighter lending requirements such as higher down-payments. If investors were asked to put 35 percent to 45 percent down on investment properties in order to obtain mortgages number 11-20, I feel this would draw many investors who are sitting on the sidelines holding 10 mortgages back into the market. These are typically investors who would like to be participating but would prefer to stretch their capital further by using financing.”
Clothier noted, “In addition, I would love to see the federal government work with local governments to turn over foreclosed properties in extremely blighted areas for the local government to remove dwellings and take the properties back to unimproved land. This would greatly reduce crime in these areas, discourage vandalism and blight and when the time is right, allow a community to re-invest and rebuild areas.”
Company growth plans
Where does Memphis Invest see their company headed? “Our growth demands are predicated by the appetite of our clients,” said Clothier. “We are constantly being asked for more options to diversify portfolios and are answering that demand by entering Dallas and Atlanta.”
The company says they will be managing over 2,000 properties in Memphis, Dallas, and Atlanta by the end of 2013, representing $200 million in real estate value. “Future plans involve identifying additional markets that include Nashville, among others, and continuing to meet the demand of the new investor,” noted Clothier.
Millennials learning from their Boomer-parents’ mistakes
As Boomers lost their pants with IRAs and 401Ks, Millennials are increasingly seeking out real estate investments and planning out their retirement, taking into account the losses of the previous generation.
A sizable Millennial clientele
Though the percentage of my clientele who’re 35 years old or younger is less than half, it is significantly sizable, and happily so. Roughly 20%. In any given year, I now have more clients in that age group than in any 10 year period between the time I opened my real estate investment firm, January of 1977, and 2006. This is an excellent trend, if six years can be counted as a trend — and for just one firm.
I bring this up in order to sound the alarm to the children of Boomers. As a Boomer, I view this development as possible evidence of Millennials and their big brothers ‘n sisters eschewing the advice of their elders. This is a good thing.
Millennials learning from others’ mistakes
I view that as a silly question. Boomers as a generation, are retiring ugly, or at best, boring, generally speaking. Millennials and their older sibs are simply using their heads, nothin’ more and nothin’ less. Would you take shooting lessons from a guy with three missing toes? Nor would I — and I wouldn’t take retirement advice from a 69 year old barely makin’ it, whether it was a parent or not.
Based upon first hand experience, I’ve come to admire Millennials. So many of ’em seem to be from Missouri — in other words, ‘show me’. They don’t necessarily buy the story sold them about 401Ks and IRAs being the likeliest road to a solid retirement. After all, it worked so well for their parents — NOT.
I applaud them. The fact so many of ’em are landing on real estate as a vehicle to retirement, shows freshly gained wisdom — and a lotta reading. History shows us that in good times and bad, in recession and in boom times, even, maybe especially in times of economic inflation, real estate not only holds its own, it triumphs. And no, citing your Uncle Fred’s disastrous experience with real estate doesn’t change any of it. People have lost fortunes investing in gold, yet it remains on the ‘A’ list of wise, long term investors.
Staying away from 401Ks and IRAs
So, in case I’m not being clear, the point is to STAY AWAY FROM 401Ks AND IRAS.
They will suck you dry for no readily apparent reason. Sometime around your 45th to 50th birthday it will hit you like a red hot anvil, falling from the sky. ‘Holy crap, I’ve screwed the pooch’. This nasty little thought bubble happens when a 40 to 50-something realizes they have $132,000 in their so-called ‘retirement plan’ at work. This is followed by the horrifying epiphany that there’s no way in hell they’re gonna build that paltry figure into even a laughably viable figure, allowing them to retire to a life of bitter resentment, and endless ‘StayCations’.
Here’s my advice: Get out of your 401K/IRA — period, end of sentence, no exceptions.
If ya can’t get out, at least stop throwin’ good money after bad, and stop contributing. And no, your next objection about forgoing the ‘hugely beneficial’ employer match, is better left unsaid, to avoid embarrassment. Remember, the vast majority of your parents had employer matches too. Let’s review, OK? How’s that been workin’ out for THEM lately?
Invest in real estate.
Get outa your 401k/IRA if allowed. Pay the taxes and penalty. You’ll be lucky to end up with 50-60% of the original balance. That’s the bad news. The good news? If a solid real estate investment program, beginning with half your current capital balance can’t slaughter the ultimate long term results of your crummy employer retirement plan, then somebody’s not payin’ attention.
Let’s conclude with some real numbers, shall we?
If your parents had invested when they were your age, say back in 1975, they’d of enjoyed two impressive upturns, and one historically colossal upturn in real estate values. Same with rents. If their luck was less than cool, and they retired a couple days before the aforementioned historical bubble burst, where would they have been then, and where would they be now?
So happy you asked, as I lived through those times and know how the final chapter works out. They lost big time — give or take about a third of the value of their real estate investment portfolio, almost faster than they could watch it happen. Yet, having spent just over 30 years investing and/or exchanging when times were good, and waiting when times were bad, they easily built that portfolio into $2.5-3 Million. They paid off their home too. They’re debt free. Imagine that. They never bought into the myth of the employer match or any other such Barnum and Bailey hokum.
From the day they retired their monthly income has never fallen below five figures monthly. Most likely $12-15,000. Know what you’ll never hear them paid to say?
Hi — Welcome to WalMart! I rest my case.
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