Category: finance & accounting

The Importance of Bootstrapping

The importance of bootstrapping cannot be emphasized. Most businesses fail because of a lack of cash and bootstrapping’s main objective is to do the most with the least amount of cash.

Bootstrap – adjective

A situation in which an entrepreneur starts a company with little capital. An individual is said to be bootstrapping when he or she attempts to find and build a company from personal finances and/or from the operating revenues of the new company.

“The business was a bootstrap operation for the first ten years.”

The importance of bootstrapping

Most startups do not have a bunch of cash lying around.  The importance of bootstrapping is all the more critical for them. Businesses have to make do with what little they have.  We often tell our clients that as the CEO/Founder, they are also the janitor. One potential client wanted to hire a marketing manager for her startup. Hiring a marketing manager was vastly beyond her revenue allowance. She should have allowed us to consult on how to manage her own marketing campaign. She then could’ve saved a fortune by being her own marketing manager.

The temptation to abandon bootstrapping is strong, especially when investors come knocking.  One of my clients attracted large investors with a business plan I had prepared for him.  Initially, I budgeted a modest salary for him in the financial projection.  He saw that there was a good amount of retained earnings (something investors want to see) and had since budgeted a larger salary for himself.  I had to tell him to reduce his salary.  I am not alone in emphasizing this sentiment:

  • A red flag goes up for Mark [Cuban] when a Shark Tank contestant says that he’d be comfortable with a six-figure salary.  Ultimately, Mark and all the other sharks walk away from the deal.
  • Serial entrepreneur Neil Patel, founder of Crazy Egg and KISSmetrics, reflects on how glad he was keeping a $5,000/mo. salary even after raising $4,000,000 in seed and series A rounds for KISSmetrics.

Your Startup Guru advised a client to pay himself less and take in dividend income instead because it is taxed at a lower rate.  In business, cash is king, and the CEO doesn’t want to be the kingdom’s worst drain.

Launch and Grow Your Business

Contact us today to learn how to bootstrap your business.

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Importance of a Financial Plan

learn vest

LearnVest CEO Alexa von Tobel talks on HuffPost Live about the importance of having a financial plan with their business plan.

huffpo

LearnVest, a financial planning service for women, was acquired by Northwestern Mutual for $250 million in 2015.

Luckily for you, all of my business plans come with a 3-5 year financial plan that includes income statement, balance sheet, and cash flow statement.

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Calculating what equity percentage to give

2000px-Cake_quarters.svgMy clients are often in the position of having to offer equity in their company to potential investors.  However, how does one know what percentage to give?

Well, one way is just by gut.  You got a person willing to invest $20,000 into your company but you don’t know want to give up too control so you offer 25%.  Conversely, on Shark Tank we see entrepreneurs be given very little money while giving up a large portion of ownership in their company.

There are other more quantitative methods such as asset-based, comparable, option-based, etc.  However for a start-up without much in assets or earnings per share data, these methods are difficult because there aren’t enough figures to go by.  Also, if the business is truly unique, then comparisons of “similar” companies don’t exist.

One of the more common measurement for valuing public and private companies used by investment bankers is the Discounted Cash Flows Method.  This is useful because with every business plan and financial projection I create for my clients, I create a cash flow statement.  With this I take the total projected cash flows from each year and adjust their future value into their present value.  This is to adjust for interest (i.e. $100 today doesn’t the same as $100 in ten years).  Then I take the discount rate (risk-free U.S. treasury rate is most common) to calculate the present day equity value of the company in X years using this formula:

dcf formula

The amount of investment capital received is the percentage of equity given.  There is obviously room for negotiation because forecasted cash flows is debatable and the amount of involvement (i.e. sweat equity) the investor wants to put in is also a factor.  Nonetheless, it is a gauge one can use to make sure they’re not giving up too much.

 

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Work 100-hour weeks to not work 40-hour weeks

Work 100-hour weeks to not work 40-hour weeks

“We work 100 hour weeks to not work 40 hour weeks,” says Nihal Mehta, a serial entrepreneur and venture capitalist. Mehta has created five start-ups and now uses the lessons from two failed companies to be a more effective investor. However, at one point in his career, Mehta found himself with $400,000 in debt. The lessons he learned through his many failures before finding success are very common in entrepreneurship.

His first startup, Philly Tonight an online city guide website for the Philadelphia, Pennsylvania, was a very doctom 1.0 company. The office was a typical well-funded startup with high ceilings, nerf basketball hoops, and a ton of energy. What they had in focus for growth, they lacked in concern for revenue. They racked up $400,000 in debt and no way to raise additional money.

The one thing that would have changed everything was if we focused on profitability [instead of growth] the business would have survived.

After learning the painful liquidity lesson. Mehta changed his outlook on business development. This resulted in his next startup being a success.

The difference in mentality was we started it as a cash flow positive business. We grew it and never hired ahead of revenue.

One cause of failure was poor cash flow management.  Good thing for our clients, a cash flow analysis comes with every business plan!  It can tell in which month/quarter you will be cash-strapped, what your break-even point is, even down to how much you can budget for rent.  It can also tell you how much to ask, in either debt/equity and what interest rates and payment duration will work for you.

Nihal has since found Eniac Ventures, a a seed-stage Venture capital firm with offices in San Francisco, California and New York City.

See his insightful interview at:  http://cnb.cx/1MyP7Kj.

Launch and Grow Your Business

Contact us today for a business plan or a financial projection for your business.

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Walmart hits the slumps

sad walmart

Walmart lost $21 billion in market value after it forecasts drop in 2017 earnings resulting in the steepest decline of the company’s stock in 25 years.

In layman’s terms:  Because Walmart said it’s expecting to earn less in 2017, lots of their shareholders sold their stock and lots of potential buyers said they weren’t willing to buy unless the asking stock price is lower.

Why

  1.  Amazon.

Amazon is crushing pretty much every retailer (except some custom designers; however with Amazon Local they are partnering with may of those product/service providers).  Amazon sells practically everything you can put in a box and ship.  At extremely competitive prices.  Free overnight/2-day shipping in some cases.

Walmart offers very very competitive prices and has locations pretty much anywhere in the US.  However, they are still a brick and mortar business so there is a limitation on floor space thus a limitation on product offerings.  I say brick and mortar instead of ‘click and mortar’ because even though they have an online store, it sucks.  Last year, I purchased a product online and selected in-store pick-up.  5 days later it was available for pick-up at he Walmart that is down the street from my office.  Walmart’s supply chain management system is one of the best in the world.  However, somewhere down the road there was an implementation issue of the online business with the existing business.

Walmart’s situation has similar elements to that of Blockbuster.  They have a size and first mover advantage.  However, over time they lost their position.  I doubt Walmart will face the same fate as Blockbuster but with a $21 billion dollar loss, it is not nothing.  You can read about Netflix/Blockbuster here.

2.  Other competitors

  • Dollar stores:  Walmart is known for low prices but no one goes lower than dollar stores.  Furthermore with the long-going Great Recession and great income disparity dollar stores enjoyed great profitability.
  • Grocery stores:  Walmart has Neighborhood Market stores in some markets and super stores (all encompassing stores) in other markets.  Nonetheless, companies that are just grocery stores are a big and aggressive competitor to Walmart.

Other Factors

Walmart is also facing PR issues:  1)  It is considered low-class.  There is a search term “people of Walmart” which shows rather uncouth individuals shopping in Walmart stores.  2)  Also, Walmart is criticized for killing off small, independent stores.

Walmart is doing many things to try to turn their path around.  We’ll see how effect these efforts are.

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How Quiksilver (and surf brands in general) can save it/themselves

Last week I highlighted aspects about Quiksilver’s bankruptcy.  So this is what Quiksilver and other surf brands do should to save themselves.

Sector downturn

Looks like the other big surf brand, Billabong is also hurting too with diminishing revenues and net losses from 2012 to 2014.

billabong financials

Recently Billabong also sold its other assets: DaKine, Swell.com and Surfstitch to enhance liquidity.

Billabong also thought about selling RVCA but didn’t.  I’ll get to that in a bit.

As I discussed in my previous post, Quiksilver bankruptcy is partly due to surfing not being as cool as it used to be.

So what is cool?

If extreme sports was cool in the ’90s and ’00s, extreme athletics is cool now.  MMA and CrossFit is cool.

In March 2015 WWE announced a 50/50 joint venture partnership with MMA brand, TapOut.  Founded in 1997, the brand had $200 million in revenues in 2010.   Later that year the founders sold it to Canadian company Authentic Brands Group LLC for an undisclosed sum.

CrossFit had 8,000 affiliates in October 2013.  As of January 2014 the company had 9,000.  In May 2014 it hit 10,000 affiliates.

As shown by strategyandanalytics.com’s graph featured in Fast Company’s article, CrossFit’s popularity growth is amazing.

3035118-inline-i-1-infographic-the-popularity-of-trendy-workouts-over-ten-years

Of course, most people don’t actually want to do WODs and armbars.  They only want to dress like they do, much like surfing and snowboarding.

This is why it’s no coincidence that Reebok (doing well financially with 5% growth in 2014 and seven consecutive quarters of growth) has its hand in the UFC and CrossFit.

Under Armour is so popular.  Under Armour which also makes products for MMA and CrossFit enthusiasts were named as one of the most valuable American brands by Fashionista and as one of the top 10 MMA brands by FightState.

Heck, even Adidas (Reebok’s parent company) makes judo gis!

But Reebok isn’t a surf brand!!  Quiksilver isn’t an MMA/CrossFit brand!!!

So going back to RVCA.  RVCA, is a popular surf brand that is also popular amongst the brazilian jiujitsu crowd with its sponsored athletes such as MMA star BJ Penn amongst BJJ stars.  RVCA recently did a collaboration gi with uber popular gi brand Shoyoroll.  Billabong decided to keep this brand.

As RVCA has shown, it is possible for a surf brand to do a brand extension into other lifestyle activities.

So what should Quiksilver do?

Change their marketing communications.  Surf ads right now are blondes in exotic tropical locations.  Unfortunately for Quiksilver and other surf brands is that demographics are changing:  wealth discrepancy is large also Hispanics and Asians are the fastest-growing minorities in the US.  This growing market segment might not have the money or time to travel to exotic destinations nor do they even look like a pro surfer such as Alana Blanchard.

So abandon their existing surf model?  No, look at the other elements of surf.  The aspects of the lifestyle that are more relatable to this large, young, and growing market segment:

  • Surf spots:  Urban surf spots such as old Huntington Beach (it wasn’t always the gentrified “Surf City USA” it is now), Long Beach, Rockaway Beach NY, San Pedro, etc.  Even urban Honolulu can be a little edgy.
  • Embrace their connections with the skate world.
  • Athletes:  Add famous MMA and/or CrossFit athletes that also surf.  Especially with the Reebok-UFC deal, lots of MMA fighters are looking for more sponsorship money.  UFC middleweight contender Luke Rockhold surfs in Santa Cruz.
  • Other lifestyle images:  Tattoos and asphalt instead of sunsets and palm trees, turntables instead of ukeleles.
  • Diversify:  Buy or strategic partnership with boxing/muay Thai brand Fairtex/etc. or Brazilian jiujitsu brand Gameness/etc.

We’ll see what the future brings.

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Business terms

A couple weeks ago I sent my business partner in one of my projects a list of indirect competitors.  He, a television producer without a business background, replied that they are not competitors.  That made me realize that the many terms used in business are very confusing and their subtleties are unclear.  So I put together a little glossary of some terms that are often misused/mistaken.

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Direct competition vs. Indirect competition:  Direct competition is pretty clear but what about indirect competition?  For example Netflix’s direct competitor is Hulu.  They’re both streaming video platforms.  An indirect competitor can be the simple antenna TV or something that can be a technology that is still in R&D.  Over the air TV broadcast isn’t necessarily a streaming on-demand platform but it is a substitute video entertainment/content delivery system.  So a competitor can be something that is obvious or something that is not so conspicuous.

Industry vs. Market:  Industry is what your company is in.  It is your competitors, your supply chain, and related companies.  They are essentially the parties that sell to the market.  The market is your customers.  They are the buyers of your product or service.  When industry publications write “market size” they are talking about the amount of money that can be made from the customers.

Sector vs. Segment:  Sector is a subsection of an industry.  The “telecommunications industry” for example is made up of thousands of sectors; the router sector, the ground wire/cable sector, the GPS tech sector, etc.  Industry term is only as broad as the scale of your analysis.  If you are analyzing just the GPS sector, then you can say “GPS industry” and then breakdown the relevant sectors within that industry.  Segment is a subsection of a market.  A segment of the “millennial market” is tween girls, etc. (when a segment is referencing a group of people, then it can also be called demographic).  A segment of the “restaurant market” is Mediterranean restaurants.

Revenue vs. Profit (income):  Revenue is the money that is coming in before costs, expenses, taxes, depreciation, etc. are taken out.  Once those pesky things are taken out you have profit.  There is gross profit which is revenue – expenses, and and net profit which is revenue – expenses – taxes.  Then there is retained earnings, which is another step!

There are many many more (branding, PR, etc.) so if you are unsure, please feel free to ask!

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How founders equity works

A few months ago, a client was looking to expand their company by bringing in more partners.  However, his partners were unwilling to give up equity.  This is fine, however in order to grow while maintain one’s shareholding amount within the company, the shareholders needed to put more money into the company. Either by hiring more workers/consultants or purchasing more assets.  They did not want to expand through labor or capital expenditures.  So they had to bring in new equity partners that were willing to invest money or sweat equity into the company.  But, as mentioned earlier, they didn’t want to give up equity.  The founder ended up leaving the company and starting anew.  Sad but a necessary step when working with partners that could not agree on how to move forward.

In reality, founders almost always have their equity positions reduced over time.  Pretty much every founding CEO you can think of will have a lower % than what they started with.  I will explain why.

Hypothetical Scenario

Typically, when Company A is formed there are a specified number of shares.  Let’s say 100 shares (in reality it’s more like 1 million or more, but for simplicity).  Founder 1 has 40%, Founder 2 has 35% and Founder 3 has 25%.  So that means Founder 1 has 40 shares, Founder 2 has 35, and Founder 3 has 25 shares (assuming all shares are out and none are held as treasury stock).  The founders decide to grow the company by seeking $50,000 (for hiring a consultant).  They can take a loan and keep their respective positions or bring in someone that can invest or do the $50,000 worth of work.

Equity Reduction

So in the hypothetical above for Company A, the board of directors (the three founders in this case) can decide to either 1) issue more shares say 9 more to the new shareholder or 2) give some of their own shares (to keep it at 100 shares).  Either way Founder 1-3 will have a reduction in their equity positions.

  • In option 1 (109 outstanding shares):  Founder 1 will have 36.69% (40/109), Founder 2 will have 32.11% (35/109), Founder 3 will have 22.93%, and New Guy will have 8.25% (9/109).
  • In option 2:  Say each founder gives up 3 shares; Founders 1-3 will have 37% (37/100), 32%, 22% respectively, and New Guy will have 9%.

Equity Maintenance

Let’s say the Founders do not want to give up any position.  They would have to divvy up the $50,000 proportionally so that their respective positions aren’t diluted.  However, in the hypothetical they do not have an extra $50k to invest into the company.  If outside money is not brought in through a loan, then the only way they can maintain their positions while giving up equity is to have a combined ownership of anything less than 100%.  This is because mathematically it is impossible to give more if there is nothing else to give.  So, let’s adjust the hypothetical to say Founder 1 has 39%, Founder 2 has 34%, and Founder 3 has 24% (a 1% reduction for all) for a combined total of 97% and 1,000,000 shares.  That means there are 30k shares available (without having to issue new stock) for New Guy to claim.  If new shares are issued, then New Guy can be given any number of shares as long as Founders 1-3 have 97% of the total amount of shares.

Company Growth

As the company continues to grow it will have to issue new shares (unless it takes on debt, which companies frequently do both).  At some point, the Founders will not be able to or unwilling to keep pumping money into the company to maintain their position.  Hopefully, at this point they won’t have to because the dividends that they may receive will be enough to satisfy their return on investment (ROI) needs.

This is why founding members rarely have the same percentage as the company grows.

For those that like pictures, check out this great infographic from FundersandFounders.com

how-funding-works-infographic

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SBA website improvement

The Small Business Administration is a great service for entrepreneurs. They connect you with a wide array of lenders and will guarantee up to 85% of your loan. Loans can go as high as $5 million and rates can be as low as 4%.

Sometimes navigating the site was difficult and before you had to contact an SBA representative to get the ball rolling. Now they have LINC, an online referral tool that connects borrowers with participating SBA lenders.  You answer a short online questionnaire and SBA lenders will contact you within 48 hours.

sba linc

I filled one out for my client yesterday and got three bank emails already.  Check it out once you are ready to start looking for financing.

Contact us today for your fundraising needs!

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David vs. Goliath the story of Netflix vs. Blockbuster

David vs. Goliath

Over the weekend, I was doing some industry analysis for a client. She had a great idea, and a novel one at that. Well, it turns out that there was one other company in the same niche. A direct competitor…that has the early mover advantage. This reminded me of David vs. Goliath the story of Netflix vs. Blockbuster.

So what do you do when you’re the new kid on the block?  Like anything else, with lots of hard work and a great deal of luck.  Let’s look at the case of Netflix vs. Blockbuster for guidance.

In 2004, Blockbuster was the proverbial Goliath with about 9,000 stores globally and revenues of over $6 billion.  Netflix was David and had started just 7 years prior.  Fortunately, it had several things going for them:

1.  Hard work

  • Competitive Advantage – Netflix’s algorithm takes user ratings on movies they rented and then makes recommendations for other films that they might like, including movies that the viewer may have never heard of.  This rating-based recommendation is very commonplace now (seen everywhere from Pandora to Amazon), but in 1997, Netflix’s algorithm was a competitive advantage.  Viewers get recommendations they really enjoy, customer retention & satisfaction increase, and money comes in.
  • Constantly Improve – One of Netflix’s criticisms is that DVD delivery is often slow.  Creating a logistics and inventory management system that receives orders and quickly sends out products, in addition to receiving returns and repackaging for reshipment, was key to customer retention & satisfaction.  Netflix is still staying current by moving from DVDs to streaming VOD.

2.  Lots of luck

  • Competition was Flat-footed – Blockbuster kept the same mentality of a 1985 video rental shop.  They held on dearly to their late-fee revenue source, and its high fees and strict enforcement soured customers’ views of the business.  The late-80s/early-90s business model put them behind.  All they did was immitation.  In 2005, they finally did away with late fees.  In 2009, they introduced Blockbuster Express, a DVD rental kiosk designed to compete with Redbox.  By now, customers are streaming videos and renting DVDs at kiosks, while Blockbuster is trying to offload their many stores.
    • Additionally, Blockbuster did not consider the rapidly expanding prevalence of broadband internet in US homes. By 2009, 68.7% of US households had broadband internet. Also, in 2008, the Broadband Data Improvement Act, a bill to improve the quality of federal and state data regarding the availability and quality of broadband services was passed, ushering a digital highway for movie streaming.
  • Competition Thoughtlessly Expanded – Blockbuster rapidly expanded, adding its 1,200th store by June 1990 and 9,000 stores worldwide by 2004.  They wanted to be the biggest.  And fast.  They filled their stores with not just movies but video games, candies, and other goods.  Unfortunately, all these stores require operating expenses.  Operating expenses that were greater than the gross profit (i.e., Revenues minus Cost of sales).  Also, among many stumbles (which is much too long for this post but I put some references below so you can read to your heart’s content) is they failed to anticipate how media consumption will change.  From analog to digital.

Fast forward to today, Netflix has a share price of over $400, revenues of $4.37 billion USD, and over 2,000 full-time employees.  Blockbuster is bankrupt. David had defeated Goliath.

However, like most engaging stories, the end is never the end.  Dish Network purchased Blockbuster and its remaining 1,700 stores on April 6, 2011 for $233 million and took over Blockbuster’s $87 million in debt and liabilities.  Dish now continues to license the brand name to franchise location, and keeps its “Blockbuster on Demand” video streaming service and the “Blockbuster@Home” television package for Dish subscribers.  Maybe this strategy to resuscitate a nearly-dead brand  sounds foolish.  However, so did mailing out DVDs.

For more info:

http://www.referenceforbusiness.com/history2/93/Blockbuster-Inc.html

http://www.ibtimes.com/sad-end-blockbuster-video-onetime-5-billion-company-being-liquidated-competition-online-giants

http://www.fastcompany.com/1690654/blockbuster-bankruptcy-decade-decline

http://www.getfilings.com/o0000930661-02-000951.html

Click to access BBI_10_K.pdf

Contact us for help with Industry and Market research so you can make the right decisions for your company.

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