How much risk is an entrepreneur really taking?

In Mel Brooks' comedy, The Producers, the character Max Bialystock tells young Leo Bloom the two cardinal rules of being a Broadway producer: rule number one, he says, is "never put your own money in the show."

And, for rule number two, he screams: "NEVER PUT YOUR OWN MONEY IN THE SHOW!"

I have met with dozens (well, it feels like dozens) of people who want to start a business.  

But, they won’t put any of their own money into it.

So, while the concept is funny in a Mel Brooks show, what these would-be entrepreneurs are telling the world is that they have this great idea, but they don’t believe in it enough to risk their own savings.

On the face of it, what does that tell you?  Would you invest in a venture in which the owner hasn't put any of his/her own cash?  Or would that send up a red flag?

Some might argue that they have, instead, put in "sweat equity".  In other words, they have worked to get the business going and that constitutes their investment.

I believe that, to most investors, the idea of "sweat equity" is valid.  But, there's an issue here that investors I have spoken with (myself included -- yes, I spoke with myself) see as possibly important and maybe very telling: does the entrepreneur still have his/her day job?

In other words, does the entrepreneur believe in the business enough to take a real risk, quit his or her comfy, secure job and work full time in the venture, for equity, in the belief that the effort and sacrifice will pay huge dividends when the business succeeds?  Or are they working 40 hours a week at the good paying job in case the new business collapses?

Because, if they kept their day job and they have no money in the company, how much have they truly invested?  To an outsider, this scenario may look more like a hobby than a business.

Entrepreneurs should understand that many investors will expect you to take risk.  This is a level of credibility that many private investors look for; they will want to know whether you have risked your own money and livelihood to make your vision succeed.

After all, if you don't believe in your company enough to truly invest in it, why should an outside investor?

There are alternatives for those with great ideas and high levels of risk-aversion.  One is to consider selling the idea to someone else (perhaps in exchange for a royalty of some kind).  My point, however, is simple: generally speaking, if an entrepreneur isn't willing to risk anything, he might have a difficult time getting someone else to do so.

The SBIR program -- one way to get an innovation funded

The US government will, under certain circumstances, send your business some cash.

We are not referring to the websites that pop up if you Google something like “how to get free money from the government”.  You may want to stay away from those.  :-)

The funding that we are referring to is from a successful program started by the federal government over 30 years ago. It’s called "Small Business Innovation Research" (also known as SBIR) and is coordinated by the Small Business Administration.

Under this program, the government will provide funding to turn innovative ideas into commercial products that might help the federal government and the economy at the same time.  The small businesses get the cash and use it to work on the innovations. When the innovations turn into products, the businesses hire people, which helps the economy and brings in tax dollars back to the government.

The process is pretty much as follows: Government agencies (e.g., the Department of Defense, the Department of Energy, the National Science Foundation, etc.) periodically publish topics of interest and proposal guidelines.   Any small business that wishes to apply for SBIR funds must submit a proposal under the relevant topic.  The proposal will be evaluated and either accepted or rejected. 

Funding decisions are based on a number of factors, including the proposal merit, the team and available funds (Congress determines how much the SBIR program is allocated each year).  We know of at least one funding agency that will list the proposals they wish to fund in order of preference.  They will start with the top of the list and go all the way down until they run out of available funds.  Each year, good, intriguing proposals are not funded because the agency simply did not have enough cash available.

The agencies will provide funding in two phases. Phase I awards are typically around $100,000 and Phase II awards (which are granted to a small percentage of Phase I awardees as follow-ons) might amount to $500,000 or sometimes as much as $1,000,000.

If you’ve never received an SBIR award, here are some tips from those of us who have:

-- make sure you follow the proposal guidelines to the letter; you may have the best idea in the world, but if you use an improper font size, wrong margin widths, submit too many pages or otherwise don’t follow the specific steps outlined by the agency, they will almost certainly exclude your proposal (and, most likely, they won’t even read it)

-- make sure you address the topic; if the agency is asking for innovations relating to, say, a light emitting diode, do not respond with an idea relating to halogen.  No matter how much better you think your idea might be, chances are good that the program officer reviewing your proposal will deem it “unresponsive” to the topic and reject it.

-- attend an SBIR conference; the agencies host SBIR conferences periodically all around the nation. If you are serious about getting funding for your idea, they are worth attending. You can learn about the different agencies involved, meet and network with program officers and learn more about the specifics of what they are looking for. We have personnel who have attended these conferences in the past; our opinion is that they are well worth it.

The SBIR program has been extraordinarily successful. If you Google “SBIR success stories” you will find quite a few examples.  An award can give you a financial boost and (if your venture is a little riskier than most) a level of credibility when angel investors and VCs might otherwise be hesitant to give you the time of day.

If you are seeking funding for an innovative idea, we encourage you to check out the programs. Here are a two important links:

http://www.zyn.com – this popular site is called the SBIR Gateway. It is a central source for the agencies that participate in the program and, among other things, provides links to solicitations.

http://www.sbir.gov – the SBIR official website.

There’s a sister program of sorts called Small Business Technology Transfer, or STTR (and yes, the various government agencies are aware that the initials don’t match the name of the program, but no one seems to really care).

We've had a ton of experience with this program.  We've won proposals, lost proposals, attended the conferences and some of our staff have even served as part of review panels for SBIR programs at government agencies.  So, feel free to contact us for help as well.  

HR no more?

I have a masters’ degree in human resource management with an emphasis in organizational development. It doesn’t seem like I was attending my masters' classes that long ago, but apparently, having a degree in "HR" means I'm old school.

In the past couple years we’ve been hearing more and more about how the term “human resource” is being replaced and the concept is being tweaked.

A recent blog in Forbes (you can find it here) applauds the demise of the term, mentioning (as an example) that Cisco has changed one person’s title from Chief Human Resources Officer to Chief People Officer. The owner of Reputation.com blogged that they have a Chief People Officer, too (his post is here). Other companies are replacing the term in the same or similar ways. That’s nice.

There’s a danger here, though. When leading companies make changes like this, there seems to be a tendency for other companies to follow suit, without addressing real issues.

In other words, they do little more than put lipstick on a pig.

As the Forbes author rightly points out, the term “human resource” is old. It originated over 100 years ago, after employment issues evolved from serfs, slaves and indentured servants to Bob Cratchit, The Jungle and early 20th century labor organizations.

The term is associated with the concept of people as assets.

A number of research studies during the ensuing 100 years or so showed that, overwhelmingly, people work better when:

• they are properly matched to tasks that they enjoy and that provide fulfillment,
• they are treated well and with respect,
• they are challenged, motivated and inspired by management,
• they are provided opportunities to attain statuses and/or things of perceived value (e.g., promotions, awards, etc.) and, last but certainly not least,
• their needs are met.

So, will the new terminology reflect the important values and factors that result in the best, most productive and, not-so-coincidentally, happiest employees?

If doing away with the “human resource” term means that you’re getting rid of 1850’s-era southern plantation owners and Ebenezer Scrooges, then great. Toxic managers, like all toxic employees, need to be identified and excised – quickly. They are real liabilities.

Uh oh – if they are liabilities, does that mean that good people are assets after all?

Let’s make sure we keep both off the balance sheet. It would be tough to explain to an auditor.

Our first post . . .

Pop quiz — how long should a business plan be?

A: <10 pages
B: 11-20 pages
C: 21-50 pages
D: Over 50 pages

The answer: all are correct!!  And . . . all are wrong.

Welcome to Finch Walker LLC’s blog!  We are business consultants (someone once told me the word “consultant” was an euphemism for “unemployed”; that’s not always true, and it’s certainly not true for us, but it’s kinda funny).

This is our first blog post and hopefully not our last.  While we can’t promise to be consistent in our postings, we can promise to strive to make them somewhat interesting.

Now, regarding the business plan thing above, over the years I have consulted Entrepreneur magazine, the Small Business Administration, a business expert panel at MIT, dozens of business lawyers, angel investors and venture capitalists, not to mention a ton of blogs, websites and books.

They all tend to say different things when it comes to the length (and sometimes the content) of the ideal business plan.

I confess that this is a little unfair of me.  A business plan, of course, should be just as long as it needs to be to get the message across and to entice the reader to act in a positive way.

If the person you’re targeting likes to read shorter plans, make it shorter. If he or she wants more detail, include it. I know that’s a little obvious and maybe more than a little simplistic, but it’s the truth. Believe me — I’ve been there. Many times.

It just ticks me off a little when people try to say the best plan is always X pages.

We’ll talk about stuff like this in the future, I hope.  And we’ll talk about other things as well that might be of more interest.

I won’t be the only author (I’m sure you’re happy about that) and the specific subjects will vary. I think it will be interesting.

So, thank you for checking this thing out — we hope you’ll like what we say and enjoy the experience.

Know what you're missing

A friend of mine is a partner at a venture capital firm in Los Angeles. He says he sees about 1500 business plan each year and, in a good year, they will fund maybe 6 or 7.

When evaluating businesses for possible investment, he has told me that he looks closely at the company leadership, and he wants to see two main things: passion and business acumen.

Whenever he watches an entrepreneur eloquently describe his dream, and sees the excitement and fervor in the presentation, he always looks on the staff for "the nervous, book-ish person; the guy with the bow tie or the shy woman with the glasses."  If he/she is there the VC will feel much better about the enterprise.

He feels that many businesses fail because they lack a key resource (financial controls, management, etc.).  He feels you need to have both the passion and the business knowledge.  And he wants any new business to at least understand what they are lacking.

The point is, it's a good idea to take a long, hard, honest look at your company and see what resources you're lacking before you present to a potential investor.  You should at least be aware of areas you need help in, and admit to those needs, before you look for investment cash.