Where to start your business – locational effect?

BY F3FUNDIT

While we’ve seen monumental technological changes in society over the past two decades that have led to lower communication barriers globally, and have for the most part facilitated globalization thus making the world smaller, or as Thomas Friedman would call it, flat, these changes have not deceased the impact that businesses have locally.

It’s reasonable to think that a local establishment such as a bar or restaurant will draw most of its customers locally, but what about a high tech business, internet based, mobile, or clean tech? Since the markets for these types of businesses are clearly more international from the onset, the thought is that the customers too would be international from the onset. This is typically not the case, and for lack of a better term we’re calling it the locational effect.

Why this happens is exactly defined, however some general assumptions can give an insight.

  • Word of mouth & local network
  • Press coverage in local news
  • Ease of access to local clients

However, even internet startups that utilize a different language from the country in which they’re founded see this, which begs the question why? It could be a mix of the above assumptions but our thoughts are there’s more to it which we may explore in the future, but the overall reason for this post is not to deliberate on a topic which is in a way academic, it’s to give advice on where to start – physically.

What we mean by this is that with the level of mobility available to us, we should often think where to start, different industries are focused in different European markets, and each has it’s strengths and weaknesses, all the same, however, you also have to factor into your assessment what benefits and trade offs you’ll get. Is it worth leaving to open up shop someplace new if I’ll loose access to my network? The general answer is no, but if for example you’re running a web business for Polish migrants in the UK, a bad place to start and develop this would be say, oh Portugal, where as both Poland and the UK would be suitable and where the locational effect would help your business to grow. In any case, before we leave you, here are a few things to think about.

  • What is my trade off – what will I gain, what will I lose?
  • What kind of an impact can locational effect make on my enterprise?
  • Are there any cost savings towards moving starting elsewhere?
  • How quickly can we grow, and how big an effect will location play on this enterprise?

Think we missed anything? Let us know in the forums.

Are you and your business scalable?

BY F3FUNDIT

Scalability should be at the very heart of your business model. But what it is? In the formal definition it’s the ability for a business to accept increased volume without impacting the contribution margin (Contribution margin= revenue – variable costs).

Simply meaning that your variable costs should not have a negative affect on your contribution margin, or ideally no effect at all.

The problem with scalability however is not whether or not the business is scalable in itself, you see most businesses will have a scalability range. This is the area where as your revenues increase & your costs shrink, however, no business is infinitely scalable and here’s where you need to start thinking about your business model and your scalable range.

The scalable range, is the level of scalability, meaning that the cost of each incremental dollar must be going down. For the above example, the company’s scalable range is 11.000, another company however may have a scalable range of 20.000, or 4.000.000.

The higher your scalable range, the happier the investor will be in your product, and the quicker you’ll in all likelihood be able to get funding. However, it’s important to remember that there is no such thing as an infinitely scalable business.

However, that does not mean that after a business passes the scalable range threshold it is doomed to fail. At this point it’s important for the founders, board, directors, etc… to sit and analyze the business model.

– Why is it that we are not scalable? What is causing our costs to increase for each additional euro earned?

A good method of identifying this it to follow the KISS (Keep it Simple Stupid) method, meaning that is anyone in the value chain cannot simply explain what it is their job entails you’ve identified your problem, the same can go for what it is that the business does. If someone on the value chain cannot easily explain what the business does, you’ve identified your problem.

Now KISS is not ideal, scalability issues may arise from anything as trivial as paying overtime to your employees to running additional maintenance on your machines, but it is a good place to start. All the same, if you do encounter problems with scalability, try to step out of the circle and see where the problem lies, and ask colleagues, friends, etc… to see if they can’t identify the root of the problem.

With that good luck, and remember the more scalable a business is the more it will appeal to investors. In the end it all comes down to Ockham’s Razor

Seeking Investment – Raising Capital in a Dowturn

BY F3FUNDIT

You’ve done your leg work, you’re business plan’s been refined about ten times, but it seems like at least a hundred, and you’ve spent every weekend working on it. It’s time to go out and get some funding. Great.

But there’s a rub, a business plan is just a couple of pieces of paper, it’s a guideline for you more than anything else, a place where you keep your ideas, collect your thoughts and reference your vision, mission, and business model. It’s great to use when building slides for presentations, and to send the executive summary to bplan competitions, seed funds, and angels, but the sad truth is, that if you don’t have even a semi functional product, you won’t make much headway.

So what do you do? Well, you can ask your 3F’s for money (Friends, Family and Fools), at least enough to develop your product so it’s ready for testing. Why?

Well in this climate, this recessive climate, investors are keen to keep their money in their pockets, long gone are the days of the late 90’s when a few million was given out without so much as the blink of an eye.

But how do you get people to open up their pockets for you? There’s a few ways.

1. If you’re developing a tech platform, be in internet, mobile, or other, look at your burn rate. If you can’t get out of the red within 3-6 months, the odds are stacked fairly high against you. Your idea may be profitable in a year or two, but there’s just no money out there right now to support that. In today’s climate you have to be out of the red quickly.

2. Pool micro Angels. What’s a micro angel you ask? People who are willing to invest €, £, $10-40k. They like to invest and enjoy the risk but don’t have the capital of an angel who can throw 100-300k at your company. Pool a few of these and you’ve got an investment at the capital level of an Angel.

With that being said, remember, you don’t need a check cut out for the whole lump sum in one go. Let the micro angels know when you’ll need the money and at what milestones. Do you need 5k now, and then another 3k in a month, and then 10k three months from then? Small sums are much easier for people to manage than is one lump sum.

As you’re developing your idea, be sure to keep the micro Angels informed of progress. For them the investment means a lot and they’re emotionally betting more on you than a larger Angel network.

3. Once you’ve got a functional prototype, you’re ready for the Angels, now’s the time to network and bring what you’ve worked on to them, you’re ready for the capital injection of 100-300k. Here’s however where you and your Micro Angel need to make a decision, do they stay on with their small % equity stake in your company, or do they convert it into the recently sourced cash?

If possible, use the cash for operational activities, cash at this point in your company’s life is the most important thing in the world, no cash, no progress, and bets are you might not be able to acquire a bank loan due to the stringent climate. All the same, the Angel in all likelihood will not want you to using their money to pay back your rich uncle, so try and keep the micro angels on board until you’re generating healthy cash flows, and / or are ready for Series A funding.

Thoughts? Discuss in our Forum

VIDEO Series: Branson’s Keynote at the DMA

BY F3FUNDIT

While we honestly don’t think that Sir Richard Branson needs any introduction, we think that this video does. It comes from the 2006 Direct Marketing Association’s Keynote speech, and while Direct Marketing may have its benefits and drawbacks, we feel that the video more than compensates for any feelings positive or negative towards the practice.

Among other things Branson discusses the transfer or core business concepts from his music company to an airline, Virgin Atlantic, and how mass media outlets, and researchers believed that an airline named Virgin would inevitable fail.

In all the video is long, about 25 minutes whole, but a joy to watch from start to finish.

Thoughts? Discuss in our Forum

Internationalization should be part of your strategy from the start

BY F3FUNDIT

One thing that we see time and time again with many European start ups is that they think locally, and while the initial market for any new company will undoubtedly be local, implementing a good internationalization plan in your business plan from the onset is key to truly actualizing the potential of your enterprise.

Compared to the U.S., single European markets are still relatively small, the Spanish think first and foremost of Spain, the Germans of Germany, the British of the UK, the French of France, etc… etc…, and while barriers to entry in your country specific market and language are undeniably lower than in one that is foreign these markets are still undeniably smaller than that of the United States.

Looking at Europe, the largest local market is that of Germany, with 82 million inhabitants, Latvia on the other hand has a market of 2.25 million, compare that to the 300 million of the U.S. and you start to see what we’re talking about.

While a German company may be able to survive strictly within its own market, the Latvian one will have a harder time doing so, simply due to the country’s population as a potential client base.

However, that does not mean that the German company should think locally, in fact the opposite, both the Latvian and German start up should think of internationalization from the beginning, and once established in its own market should then look to move abroad. After all a good service is a good service and should be transferable across borders.

Here are a couple of things to think of when working on your business idea.
1. Is our product or service local, or does it have international appeal?
2. How difficult is it, would it be to deploy our product or service in a foreign market.
3. What are the easiest markets for us to move into, what are the barriers to entry in those markets and what are the needs of those consumers compared to ours.
4. How does the culture of our target international market(s) differ from ours, and how may we have to adjust our product to provide a good value proposition to those consumers.
5. Based on your assessments of the above will we have to adjust our launch strategy or is it easily transferable to adjacent markets.

Obviously expanding into new markets gives your firm an advantage in as far as potential market size is concerned. But with it you can also use your firms experience in these markets to create for yourself a strong first mover advantage, develop linguistic market competencies that can then be transferred to other markets using the same language, and secure additional funding for growth.

Mind you these are just a few simple things to think about, to truly understand and plan the internationalization of your firm you should be prepared, and many books have been written on the subject.

Here’s a list of books that we feel are imperative to learning the ins and outs of taking a small enterprise international.

: Internationalization, Entrepreneurship and the Smaller Firm: Evidence from Around the World
: Innovation and Small Firms
: The New European Rurality: Strategies for Small Firms (Economic Geography)
: The Foundations of Small Business Enterprise: An Entrepreneurial Analysis of Small Firm Inception and Growth (Routledge Studies in Small Business)

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