One thing about providing a good service to all our readers is to try and provide it on an almost continuous basis, and while we do talk about starups, entrepreneurship, best practices, capital and a whole array of other topics relating to new and small enterprises – we figured, if most entrepreneurs are working six days a week, so should we, after all, we don’t want to be called hypocrites here at F3FundIt.
So we got to thinking, Saturday should be a time to at least wind down a bit, and what better way to wind down than to each Saturday feature a new promising startup. Now this being week zero of this feature series we figured we might as well give you a general guideline on what to send us in order to qualify for … wait for it….
Just send an e-mail to firstname.lastname@example.org with the subject line “Startup Satuday Submission” or “S3” with the following information.
: Satrtup Name – : Website – : Industry – : Where are you located? – : What exactly do you do? In one sentence please. – : How did you come up with the idea? – : What stage of the startup process are you currently in? – : Any milestones we should tell the world about? : How about your team? Who are they? – : Any fears, phobias, anxieties? – : Any advice to pass onto new budding entrepreners? – : Anything you want to add? –
Groovy, that ought to cover it. And when you do submit your startup, it’d be killer if you could provide a logo that we could throw up and if you have a video or any other media, well… you can submit that as well.
You have to be thinking to yourself, what on earth does Burger King have to do with startups. Well, a few months back I was talking with a colleague regarding startups, projects, and someone wanting to buy a portal we had developed for a small sum, and the concept of the burger king opportunity cost came about.
In a nutshell it’s a way to quantify if the time spent working on your project is paying off, or if it’s an utter and complete waste of time, i.e. is my startup worth more than the money I could earn flipping burgers at Burger King.
Now, valuing a startup is no easy task, and most current tools are used to assess whether or not to invest in a company, not whether the entrepreneur’s time is worth the commitment to the idea and startup. However we need to understand and employ these methods in order to find out if you’re time is worth it. Depending on the stage of the startup, methods utilized by investors are
Anticipated Return on Investment (ROI) – which basically states that an Angel Investor should look to invest in companies that can yield 30x Return on Investment, i.e. 100k invested -> 3million return.
Why so high? Startups are RISKY investments and on average at least 50% will fail, as an investor, the portfolio of companies invested in should ideally bring in between 10x-50x ROI. Anything less, doesn’t justify the investment. Can your startup compete with this?
Venture Capital Method – which in its simplest form is
Post-Money Valuation = Discounted Terminal Value / Cash-on-Cash ROI
Post Money Valuation – is the valuation of a company immediately after a round of investment is closed.
Terminal Value – the valuation of a company at exit, meaning the proceeds from the sale of the company via M&A, IPO where investor ownership is liquidated
Cash-on-Cash ROI – the cash-on-cash return on investment expected for said investment in the year of harvest (exit).
To calculate your BK Opportunity Cost, you have to get the value of your startup today. But how do you do that?
Fundamentally, we have to look at two things. 1. Is your startup able to bring in a ROI of 30x for an angel, and if it is 2. What is its Pre-Money Valuation in the Angel Round, meaning now.
Burger King Opportunity Cost
So for the sake of the exercise, let’s assume the following.
You and your partners own 100 shares of Startup Ltd, which is 100% of equity. And say you’re looking for investment into Startup, Ltd. of 100k in return for 20 newly issued shares, the implied post-money valuation is:
(€100k) * 120 / 20 = €600k
To calculate the pre-money valuation, the amount of the investment is subtracted from the post-money valuation. In this case, it is:
€600k – €100k = €500k
So you and your partner dilute your ownership to 100/120 = 83.33%.
To get the Burger King Opportunity Cost of your business you follow the formula
Pre-Money Valuation – Investment in Project ≥ Possible Salary Received from Working at Burger King * Partners * Time
Using the above example, Startup Ltd. has three partners, you’ve been working on the project for a year each, your Pre-Money Valuation is at €500k and say you invested in the company €100k. And, assuming the annual salary of a burger king employee on a monthly basis is €1000, Your BK Opportunity Cost would then be.
€500k – €100k ≥ €1k * 3 * 12 = €400k ≥ 36k @ BK
Woohoo, it was better off for the guys Startup Ltd. to start the project than to flip burgers.
Why? Because the opportunity cost of starting Startup, Ltd. is greater than the minimum sustainable wage that you can have in order to survive, and for that specific reason we’ve used Burger King, and not the salary of an iBanker, Engineer, etc… however those salaries can be easily applied to the opportunity cost formula.
On the other hand. If Startiup, Ltd. is not able to get Business Angel Investment of a 100k, and instead are only are able to sell their work for €20k, then the BK opportunity cost is €20k ≤ 36k @ BK, and it’s reversed, meaning their time would have been better spent flipping burgers.
When it’s time to approach business angels there’s a few things to consider and a few other things to keep in mind, and a few even other things that for the most part are common sense yet entrepreneurs tend to forget about all the time.
But before you’re ready to look for someone that will assist you not only in the next round of financing for your company, but also extend a hand in helping to get the company off the ground, you should consider a few things.
For those who read this regularly, we may be repeating ourselves, but bear with us until we get to the meaty stuff.
Am I a functioning company, and do I have a product or service that I can offer for sale, or am I already selling? If the answer is yes, you can consider starting to contact business angels. If you are prior to this stage in your business development, then we highly recommend you save yourself and the business angels the time and not send anything out.
Now, since you’re ready to seek funding, you’re selling a product, and need a financial boost, here’s some very good, yet very simple best practices on….
Raising Angel Capital….
One: This may seem obvious, but apparently it’s not. Do not send your proposals to angels / angel networks that are not in your industry. If you’re a high tech company, a business angel network that deals with energy is not a good idea to send your summary to. Please stick to soliciting people to the industry that you’re in.
Two: Don’t bother sending proposals to “managed” angel funds. These fund managers are often that, just managers, they invest in companies but offer no outside help, and neither do the business angels. These types of funds tend to result in the following. 1. Companies going bust 2. Funds going bust due to poor investment decisions. 3. Angry investors.
Three: Two goes into three nicely, you want an Angel that can lend a helping hand, an industry expert on who you can count on and someone who will want to actively help in getting the company to the next level. That someone should mesh well with the current management, and aside from playing financier, should also want to mentor. This is VERY important.
Four: When sending out your proposal, executive summary, business plan – wait … actually don’t do the third one, never ever do the third one. “But why F3FundIt?” Because no one who is busy wants to read through 25-40 pages of your analysis, and I mean no one.
Send out proposals/exec summaries that are 2 pages maximum. Any more and it will probably wind up in the bin. It’s not that your sweat isn’t worth anything, your b-plan is in fact a guideline for you and your company, not for your investors. They’ll know if they like your concept in the first 3 minutes, and if something catches their eye, they’ll get in touch with you. At the same time, when you contact them, they can’t honestly say “No I haven’t had a chance to read your two page summary”, can they now?
Five: Something that we constantly hear form Angels are complaints about how poorly the company presents itself, how, after 15 minutes of speaking on the phone with an entrepreneur the Business Angels are lost as to what the hell the entrepreneur is doing. Know business terms, get accustomed to knowing your value proposition and pitching your company – practice in front of the mirror if public speaking isn’t your thing. Be clear, and be concise. Your startup will thank you for it, after all your selling it, and yourself.
Live by it, learn it, and do it. Chances are if you follow these tips and you have a good idea – you’ll wind up getting meetings, or at least phone calls.
And if any BA’s are out there, any other pet peeves you’d like to tell us about?
This video series comes from the leader in innovation consulting & design, IDEO. And if you don’t know who IDEO is, it’s all the more reason for you to watch, not only to see these guys in acion, but learn the process behind innovation design and apply some of the best practices to your own products and services.
However, there is another lesson in these videos which is not only about the design process, it’s the mix of individuals that IDEO hires, you’ll see that they aren’t all “designers” by trade, but come from a wealth of backgrounds.
Why is this? Well, I suppose you’ll just have to watch, total run time is about 21 mins.
ECER along with Banque Populaire have released a list of the top European cities to start conducting a business in. The study itself is based on a dual measure of the importance and satisfaction expressed by entrepreneurs regarding the range of territorial provision available to them and looks at both the importance of the city, and the satisfaction gained from conducting business there. The process involved asking nearly 2400 entrepreneurs a series of 36 questions, in 37 major European cities, 19 countries and 14 languages.
Out of the top 10, four cities were in Scandinavia, and 3 of these in the top five. Germany also saw four cities in the top 10, with the other two spots going to Austria and Poland.
The bottom of the list saw UK then Southern European cities taking up the bottom spots along with Paris, however the Southern Europe has made some serious gains within the past years, especially Spain, and Portugal.