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Blog | Save The US Economy - Part 2

Save the U.S. Economy Blog

Funding Your Business

Funding your business is always a tricky task, there are many options. There are many questions that arise, do you start small with family and friends or go strait to the angels.

In this particular article by Clate Mask, the co-founder and CEO of software company Infusionsoft, makes three points at the end that I believe drive home a clear path to a financing success. “Get customers, show revenue and prove your model first.”  A single real world win is worth a thousand projections.

While many entrepreneurs dream of raising capital from the outset, the reality is that most startups must be bootstrapped long before an angel investor or venture capital firm will give them the time of day.

At Infusionsoft, we bootstrapped the company in the beginning and eventually secured $17 million in two rounds of venture capital funding.

As we worked up to the venture capital level, we were obsessive about growing  customers and revenue (thus taking risk off the table for future investors). Early on, I saw this as the most effective way to both raise money and hold on to shares of the company. I fell in love with the idea of only taking as much money as necessary to get us to that next stage of business.

In doing this, we noticed we went through four steps of financing:

Banks: Small credit lines allow you to discover your market
Friends/family: Once you’ve got the market identified, this funding allows you to develop a prototype
Angel: Once that was complete, we secured $1 milllion to prove the prototype
Venture Capital: This money allowed us to scale the business and become profitable

By the time we got to the venture capital stage, we had a number of investors that were interested in us, because of our recurring revenue.

When you get right down to it, getting funded is a risk/reward proposal to the investor. You can either work really hard on the risk part of the equation (i.e. have revenue) or you can focus on reward (i.e. ‘we have the next Google’). The biggest challenge an entrepreneur faces is you must present an equation that is makes sense to investors.

In this economy, revenue is the most compelling argument you can make. Investors are nervous – and work hard to mitigate risk (much like banks). Investors that historically could be counted upon to put more money into the VC funds are often no longer able to do so – meaning VCs don’t have as much freedom to focus on the risk.

The timing for our series B fundraising round could have been better. We began loosely talking about beginning the search for a second round in the summer 2008, but actually went out in early September. In hindsight, we should have gone out a month or two earlier – because by that time the economy was in crisis mode.

Turns out my approach to getting just enough money for each stage proved to be less than prudent in this case, as it prevented us from going out at the right time in the market.

We didn’t need to raise any money when the market was good, but by the time we decided it was time, the market was three weeks away from collapsing. Ultimately, we probably would have raised more cash for the same equity had we gone out a month or two earlier.

The big lesson: only take the money you need to get to the next round – with the caveat that you need to pay attention to what the market is doing because it’ll affect your valuation.

Taking money down the road may be more expensive than taking less now. So even if you still have plenty of cash in the bank, you need to watch what the market is doing and understand how that impacts your valuation.

The other lesson learned is the importance of selling. When you don’t have cash in the bank, you’d better know how to sell. It’s amazing how many entrepreneurs who raise capital are great in academic discussions but terrible on a sales call. The art of persuasion is not what business school is teaching, but it’s what drives the success of the business.

Often when you have raised VC, it’s easy to fall into the “strategy” trap. That’s where the team spends most of its time engaging in relentless discussions on strategy and big ‘game-changing’ things, which is fine, but who’s selling? When you haven’t raised VC you get your butt on the phone and you persuade people to buy your stuff. That’s what we did in the early stages of Infusionsoft, and despite our two rounds of venture capital funding, we still make sure to keep that part of the business running without interruption.

Selling is what drives the business. It also drives an efficient use of your VC firm’s capital later on.

The bottom line? Get customers, show revenue and prove your model first. That’s easier said than done, but in the end, it’s the best, most viable way to getting the capital you need to take the business even further.

Source: Clate Mask

Challenges and Rewards of Starting a Small Business

We are a nation of dreamers.

Some of us yearn for an idyllic life as a novelist, shaping a story in a quaint country house. Or hope to wake up in a swank city apartment and take a company-paid town car to a top financial firm.

Still others want to be like the millions of entrepreneurs who had the guts and drive to push their big ideas into businesses that they own and operate — beholden only to themselves and the customers they cultivate.

Remarkably, even in dire economic times such as these, the desire to own a small business doesn’t diminish. Annual business creation in the U.S. has remained consistent for nearly 30 years, even during downturns, according to a new study from the entrepreneurship-focused group Ewing Marion Kauffman Foundation.

“Entrepreneurs are not easily discouraged,” Kauffman CEO Carl Schramm says. “In boom times and in tough times, roughly 600,000 firms are formed every year in America — about one per minute.”

Even the harsh climate of the past two years, the worst economic crisis since the Great Depression, hasn’t smothered such aspirations. Credit has evaporated and consumers have closed their wallets, yet hordes of potential business owners still possess a can-do attitude.

“For a lot of entrepreneurs, when they have an idea, it becomes a passion, almost an obsession,” Schramm says. “They cannot not do it.”

Lots of contenders

The push to start a business is varied. Some decide after a layoff that they never want to report to another manager again. Others want to turn their passions — quilting, genealogy research, book collecting — into full-time vocations.

Last fall, USA TODAY published a six-part series about starting a business and asked prospective entrepreneurs to submit their business ideas for the Small Business Challenge, a six-month series that would follow their progress as they moved their businesses from ideas to making the first buck.

Near 1,800 budding business owners responded, pitching ideas displaying ambitiousness, earnestness, smarts and yes, even misguided drive and planning.

Submissions included: restaurants, a tattoo parlor, an Italian ice pushcart business, a dog-poop-scooping service, an iPhone app-creation firm, a tanning salon, the invention of an Easter egg dying kit targeted to dog owners, a tourist-photography business, a line of feminine-looking gun cases targeted to females, and an “ultra-thin, liquid nipple cover” that would help prevent chafing from workout clothes and other materials. Contenders covered all ages, ethnic backgrounds and geographic locations.

The range of sophistication and — in some cases the lack of it — does not surprise experts. The entrepreneur coaching groups Score and the Association of Small Business Development Centers, which combined help more than a million people a year, say they regularly see clients who have each, and sometimes all, of these traits.

But it’s enthusiasm that often stands out more than any other characteristic. That’s expected among entrepreneurs, says Rick Wade, the U.S. Commerce Department senior adviser and deputy chief of staff.

In general, Americans are hopeful, he says: “It’s at the core of who we are.”

But he stresses that small business owners, in particular, “have a different kind of drive.”

“They’re accustomed to overcoming obstacles,” he says. “I don’t know of any start-up that didn’t have a challenge.”

Meeting these challenges gives entrepreneurs the inherent knowledge that they will be able to survive hard times. It’s the mindset of “we fall down, but we are going to get up,” he says.

Up-and-down emotions

When Carl Edmunds’ division at a corporate printing company was on the potential chopping block, the West Windsor, N.J., resident morphed an interest in household repairs into a new career as a home inspector and energy use auditor.

“It’s time to take control of my own destiny!” Edmunds, 56, wrote in his submission to USA TODAY. “I will not continue to live in constant fear of the inevitable arrival of the proverbial ‘Pink Slip.’ ”

Edmunds’ business, NuVision Inspections, is one of five start-up firms that USA TODAY will follow for the next six months. The others: a wine bar in Gainesville, Va.; a high-end property rental service for homes in Vail and Golden, Colo.; a Botox-provider in Mequon, Wis.; and an all-natural butter-toffee-peanut seller in Orlando.

Although each business is beyond the idea stage and through initial struggles, the neophyte owners will continue to experience the self-fulfilling highs and gut-wrenching lows that come with self-employment.

Running a business is “an extremely messy process,” says Dane Stangler, a senior analyst at Kauffman.

“We may boil it down to business-plan-writing at universities,” he says. But it’s not that simple. “It’s one step forward and one step back, and then some side steps.”

Edmunds has been mentally taxed as he has taken six different licensing tests in two months, as well as insuring and incorporating his new firm. Tasks such as developing a company website have been placed on the back burner.

“I’ve hit a lot of stumbling blocks,” he says. “I had no idea how difficult this would be.”

Yet, on Jan. 12, he received some uplifting news: He passed a vital home-inspection exam. With that final license secured, he should be able to launch his business in time for the spring real estate push.

“I’ve always wanted to be my own boss,” he says. “I can work out of a little 8-by-8-foot office in the back of my house and a pickup, and be happy.”

A long road

Start-up accomplishments come in many forms, such as getting a website’s e-commerce function to work, creating a high-impact marketing campaign and even persuading a potential distributor to take a chance on novel new products.

But for new business owners, rejection and unexpected obstacles will come with the territory, Stangler says.

Each year, home shopping giant QVC gets pitched hundreds of thousands of ideas from hopeful business people. Yet only about 15,000 new products will get on the air each year. (Another 45,000 products come from existing suppliers.)

The long odds also come into play at TeleBrands, the infomercial seller of products such as the PedEgg foot callus remover, Pedi Paws pet nail trimmer and Stick Up Bulb wireless light bulb. Telebrands receives about a thousand product pitches from entrepreneurs annually but typically markets only four or five new products.

“The majority of ideas — the majority of products — do not sell commercially,” CEO A.J. Khubani says. “Take Thomas Edison: He had over 1,000 patents to his name, yet how many were commercially viable? We only know of a few.”

Small stumbles and all-out defeats are common for entrepreneurs. Yet, one way to work around those pitfalls is to rely on advice from others, as well as learning from past mistakes. “Everyone has a dream,” says Doug Rose, QVC head of programming and marketing. “But if you’re really, really wise about how to develop it, you’ll listen to feedback from others, and you’ll welcome it, even if it’s hard to hear”

Rodney Hughes, a USA TODAY small business challenger who is selling the butter-toffee peanuts, knows what it’s like to see entrepreneurial dreams crumble. One of his past businesses, a printing shop in Tennessee, went under in the economic downturn after the Sept. 11 terrorist attacks.

“It was one of the roughest times of my life,” he says. “But I learned some lessons.”

Among them: Don’t rely on one client for most of your business. Hughes had one buyer who represented 70% of his sales, and when that buyer stopped purchasing printing services, it had a dramatic effect on his business.

Hughes has a more cautious path to entrepreneurship now.

He holds a full-time job working in business development at the Metro Orlando Economic Development Commission but has invested in other firms such as a bar in Orlando.

He also took some of the pressure off himself by partnering with friend Lee Goldberg and several others to start the nut line. So far, the venture has had its share of setbacks, but the group also is proud to have created a logo and aggressively seeded online media with mentions of their brand.

Successful entrepreneurs learn to balance the good times and bad.

“The most important (trait) is resilience,” says Kauffman’s Stangler. “It’s about not giving up hope.”

Hughes and his peers at Poppa D’s haven’t sold their first commercial bag of nuts, but they still have confidence.

“For us, it’s just the fact that we feel in our hearts that we can make this work,” Hughes says.

By Laura Petrecca, USA TODAY

Personal Saving Drives Up Consumer Spending

U.S. consumer spending rose slightly less than expected in December as households opted to save extra cash, lifting savings to a six-month high, a government report showed on Monday.

The Commerce Department said spending rose 0.2 percent after increasing by an upwardly revised 0.7 percent in November. Consumer spending in November was previously reported to have climbed 0.5 percent. It was the third straight monthly gain in spending.

Analysts polled by Reuters had expected consumer spending, which normally accounts for over two-thirds of U.S. economic activity, to rise 0.3 percent last month.

For the whole of 2009, spending fell 0.4 percent, the largest drop since 1938.

Boosting consumer spending is critical to putting the economy on a sustainable recovery path, but a 10 percent unemployment rate is pressuring households.

The economy grew at a 5.7 percent annual pace in the fourth quarter, its fastest clip in six years, driven by a sharp slowdown in the rate at which businesses reduced stocks of unsold goods, the government said on Friday. Consumer spending slowed to a rate of 2 percent after rising 2.8 percent in the July-September period, the GDP report showed.

In December, spending adjusted for inflation edged up 0.1 percent after rising 0.4 percent the prior month. Personal income increased 0.4 percent last month after increasing 0.5 percent in November, the Commerce Department said. That was a touch above market expectations for a 0.3 percent increase. For the whole of 2009, personal income dropped 1.4 percent, the largest fall since 1938.

Real disposable income climbed 0.3 percent last month after rising 0.3 percent in November. The rise in income saw savings rising to an annual rate of $534.2 billion, the highest level since June. The savings rate rose to 4.8 percent from 4.5 percent the prior month. For the whole of 2009, savings rose to a record $502.7 billion.

Commerce Department data also showed the personal consumption expenditures price index, excluding food and energy, rising 1.5 percent from a year ago in December. The index, which is a key inflation measure monitored by the U.S. Federal Reserve, increased 1.4 percent in November.

Source: Reuters

The US Economy Coming Around – or Not!

U.S. real GDP rose a much stronger-than-expected 5.7 per cent annualized in Q4, building on a modest 2.2 per cent advance in Q3, and a far cry from the 5.4 per cent slide of a year ago.

“The advance in exports, personal consumption and business capital spending points to some positive momentum in the economy,” said Sal Guatieri, Senior Economist, BMO Capital Markets. “First-quarter GDP growth should top 3 per cent, further distancing the economy from the Great Recession, and encouraging firms to resume hiring.”

More than half of the quarterly increase reflected inventory rebuilding, with an assist from net exports. Exports soared 18.1 per cent, even topping the prior quarter’s sharp gain, amid support from an upswing in global demand and a weak dollar. Final sales (GDP ex-inventories) strengthened to 2.2 per cent, though final domestic demand weakened a bit to 1.7 per cent. The latter reflected a moderation in consumer spending (2.0 per cent), after the cash-for-clunkers auto program boosted sales in Q3. However, the underlying rate of consumer spending, though still soft, looks to have picked up.

Government spending was also weak due to ongoing retrenchment at the state level and a pullback in defense spending. Non-residential construction remained in the dumps, sliding 15.4 per cent. The main upward surprise in the report came from a 13.3 per cent surge in business equipment spending, the fastest in nearly four years. Recent strength in capital goods orders, coupled with the President’s proposal to provide investment tax credits, point to ongoing strength ahead. Residential construction also advanced further in Q4, despite a recent pullback in housing starts.

Source; PR Newswire

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