What do entrepreneurs do now?

Editor’s note: “The Angel Connection” is a regular feature in WRAL Local Tech Wire. LTW asked consultant Bill Warner to share advice for entrepreneurs seeking angel investors and/or venture capital investment. He is chairman of the Triangle Accredited Capital Forum, an angel investor network with over 100 members throughout the Southeast.

RESEARCH TRIANGLE PARK, N.C. - What just happened to entrepreneurs, almost overnight?

Bank credit is slowing down as banks raise the hurdle they have to leap over to qualify for loans and lines of credit. Their early investors are telling them to conserve cash, rethink the revenue plan, re-justify capital purchases, get profitable and cash positive quickly, and look for exits now. Entrepreneurs who are currently raising money are having discussions about a lower starting valuation. Those raising additional funds from their current investors are being asked to rethink their business plans. Those that need institutional money (VC’s) are starting to see it disappear, as new institutional money becomes even harder to get.

Entrepreneurs might ask if this is the right time to start a company. If asked, I would say yes. Think about it. All of these demands for more scrutiny on the entrepreneur’s business are things that they should be concerned about anyway. The economic mess we are in is simply forcing us to be more disciplined and focused.

Entrepreneurs at the Ideation and Research Phase

An entrepreneur with a great idea and perhaps some technology that has yet to achieve proof of concept or define the business has similar challenges.

These entrepreneurs, as they did before, have to raise grant money or foundation money to complete research and commercialization work. Or, they have to make a proposal to friends and family to finance this phase. They might even go for bank loans if they have the collateral to support it.

Getting money from any of these sources of early financing is going to be harder. The entrepreneur has to provide a well thought out application for grants or foundation money, or business proposal to present to friends, family or banks. Only the best proposals are going to get the money.

The kinds of information entrepreneurs need to provide is not really new. The quality of the information is going to have to be extraordinarily better than ever before. They will have to present:

• Compelling and relevant industry problems being solved
• Innovative ideas and technologies that provide unique solutions that will have high impact
• A clear view of how the research and commercialization work will be performed, resulting in well thought out objectives that will be achieved
• A solid group of technical people and business professionals that can convincingly perform the work

Any thoughtful entrepreneur can step up to this challenge and do the hard work that is needed to get this form of financing through dedication and diligence.

Entrepreneurs Ready to Launch Their Companies

Those entrepreneurs that need financing to launch their businesses are going to have to raise money from angels, friends and family, and banks. They are dealing with people who want to get paid back someday. The entrepreneur’s story has to gain their enthusiastic buy-in and show them how they are going to get a great return for their investment.

These sources of financing are going to want to see a lot more discipline in the business plan:

• The market description will have to show that they have really tested their market entry with real customer feedback and survey results and bring the whole story alive with real and potential customer engagements.
• Entrepreneurs will need to provide examples of competitive situations that they can win, especially when it can be verified by customer feedback. The potential buyer will need to say how competitive the company is.
• Marketing targets will have to be relevant to the buyer’s purchasing profile and show what programs will be initiated to achieve lead generation objectives. Lists of potential customers will have to support the targets. This will be marketing by the numbers, not just words.
• Sales targets have to be substantiated with an emerging pipeline of sales prospects, some of whom having been contacted and will verify their interest in the entrepreneur’s product or service. Additional prospects have to be shown that demonstrate great confidence that the first year’s sales targets can be met.
• The financial forecast will have to show that the entrepreneur knows how to manage cash. Solid estimates for cost and expense, along with capital purchases, will have to be verifiable. The revenue model has to be supported by the marketing and sales plans.
• The management team has to be very strong. First time entrepreneurs are going to have a tough time getting financing without having a seasoned executive at the helm. Entrepreneurs will have to show that they have a management team with a proven track record and relevant industry experience.

Entrepreneurs with Operational Companies

Entrepreneurs that have already launched their businesses should view the current economic situation with a great sense of urgency to tighten up the operating plan immediately.

Don’t wait to be asked by the Board. Undertake a top to bottom reconfirmation of the business strategy and adjust the operating plan to respond to an economy that has greatly reducing chances for new funding. Here are some key things to consider, realizing that cash is an even bigger king that before:

• Reassess the basic assumptions about customer purchasing and sales cycles. Adjust the sales plan accordingly.
• Pull the trigger on cost reduction programs that will provide some near term payback and have the effect of reducing the time to profitability.
• Cut all unnecessary spending. Anything that is not in line with your main sales objectives over the next year should be eliminated. Consider reducing salaries.
• If you are in the middle of raising money, get to closure quickly. The opportunity will dry up as the economy gets worse and money tightens even further.
• Get real with your current investors, telling them where you stand and forewarning them if they are going to be asked for more financing.
• Look for early exit possibilities so you can provide a good return sooner.
• Going after institutional money is almost not in the cards unless you have an extraordinary opportunity for them. Don’t count on it.