Saturday, April 12, 2014

How Much Money Does a Startup, Expanding Public Company or Venture Really Need?

"If I just had $1,000,000 this business would work, I would make so much money." When a client comes to me with this initial statement, I generally am assured that the amount of funding which is needed is a flawed projection.

Many entrepreneurs, as visionaries, see the picture but fail to realize how much the picture really cost. Publicly traded micro-cap companies as well as start-up ventures are both guilty. So how much money is really needed to fund your venture?

Well the exact dollar amount varies for each company or venture depending on various factors including what you are selling, the market for your product or service, or how much money you are looking to raise. But there are a few principles and common problem areas that I see time and time again either misconstrued or not acknowledged at all.

Only take what you need.....
What do you need the money for? If you can't answer this question then you probably should not be asking for a loan or an investment. Too many times I have had clients whom sought to take out additional capital on top of what they needed. I consistently advise against this practice. While having operating capital is necessary, an additional amount on top of anything you absolutely need, has an adverse effect on a company's or start-up venture's financials. I was retained by one entrepreneur who was looking to take out a 1 million dollar loan and use $100,000 for growing the business and the other $900,000 he wanted to keep in the bank so when he "ran into a deal" he could grab it. Taking out the additional $900,000 as a loan would not be cost-effective. The $900,000 he was seeking is better off as a line of credit so the interest accrues as he needs it as opposed to a loan where the interest accrues from day one, or an investment where the investor starts measuring his return from day one. If you are looking for financing today for an action that will happen 6 months to a year from now, make sure you take into account the interest the loan will accrue while the cash is sitting in your bank account doing nothing.

When you can, cover your operating expenses out for three quarters...
This principle is a common mistake overlooked by many entrepreneurs and it is the exact opposite of "taking what you need" as described above. If you take or ask for too little money then what you need to profit, you are setting up for failure. One common mistake I have seen over and over again in projecting what expenses will be pertains to salary projections. Most CEOs and entrepreneurs for some reason or another do not include what they will pay themselves when they project out finances in business proposals. This is especially true when they are in front of the person or entity from whom they are seeking an investment or loan. Generally the thought is 'I will pay myself with the money I make' or 'there is no money to pay myself yet".  If your business cannot pay you as a CEO or a manager, then you will look somewhere else for money and your attention will not be focused on the business plan. On the other side of the coin, if you are investing in a company or an entrepreneur and their business plan does not have a set way for them to get paid, then you can believe with almost 100% certainty that their focus will not be to turn over the capital invested, rather to make a living for themselves somewhere else.

Investing in the proven model and tip toeing into expansion.....
For publicly traded micro-cap and small cap companies as well a small privately owned businesses, investment into proven business models have an actual accountable return history. This allows for the investor and the company to measure projected returns based on prior performance instead of unreliable projected data. If the company has made money doing something before, as long as it is scalable, the investment will multiply the return/revenue. So if a company put $2 into a product or marketing a service and then sold the product or service for $100, this proven model should return $100 for every 2 dollars invested. Of course growing this business model, the numbers will not stay the same. As revenues grow, expenses grow, and it will generally cost more to make more in percentage value. In other words putting two billion dollars into a product or service will probably not return 100 billion dollars. There are only a certain amount of dollars in the world, get my drift....

If you are investing in what you do well, your investment will fare well. If you put the money your company seeks into something that has generated a positive cash flow, it will multiply this effect and your job will be to limit the expenses incurred additionally upon expansion.

If the loan or investment is sought for expansion into a business model that is unproven, in other words has not been done by the company before, it is well advised to tiptoe into the expansion. To be clear, if the company makes chocolates and decides to expand into t shirts, the expansion into t shirts should be taken with precaution and nominal amount of investment should be made until the business model is proven. The same goes for advertising. If one advertising outlet generates a positive return for a product or service and a company is looking to expand into an additional advertising platform, then that advertising platform should be invested at the beginning to test the effectiveness, not to post an enormous projected return not proven.

A note on investing in proven and un-proven business models:  If your company is seeking to expand into something they never have done before, but retain the right party or human resource or employee who has proven the new business model....then the proven business model is imputed to the company, and the company can be more aggressive in investing into that expansion.

Don't forget fool, you have to pay that back....
My final advice may seem obvious but too many entrepreneurs, especially in the publicly traded Microcap and Small cap markets were the life of the company after the current CEO leaves generally continues and the going concern of the company is minimal, seem to forget they have to pay back the loan or investment..somehow.

First figure out what you need to grow your business. Second, price those needs. Ask for an investment the size of what you need. Make sure you will be able to pay yourself to execute your business plan until profitability. And always ask yourself, how will I pay back this loan while making myself money?

"Your net worth to the world is usually determined by what remains after your bad habits are subtracted from your good ones." -Benjamin Franklin

The MicroCapCompany Team
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About the Author: Nicholas Coriano is a Business Consultant and Planning Guru.  He is a graduate of The University of Connecticut Business School and the John Marshall Law School in Chicago.  He has worked at Merrill Lynch, The New York Stock Exchange and as an Investor Relations Agent & Consultant to Micro Cap Companies and Penny Stocks.  He is the founder and author of The MicroCapCompany.com a blog focused on providing information and advice to Micro Cap Company Executives and Investors.  You can also find him blogging about Social Media, SEO, Web Development and Tech on PushYourRank.com

About MicroCapCompany.COM: MicroCapCompany.COM (The Blog) is a blog focused on providing articles, news and information on the micro cap sector and start-ups.  The Blog is a free service offered by Cervitude™ Investor Relations (a micro cap investor relations firm) and offers compensated research reports and business plan writing services for micro cap companies and penny stocks.  If there is a particular topic you would like to see covered on The Blog, email CervitudeNetwork@gmail.com, If you would like to advertise on The Blog, click here

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