Be honest with yourself about your new business to see how it measures up.

When you're thinking about starting a business, it's hard to be objective. After all, this is your business!

But a key to success is your ability to step back and ask the tough questions. If you find you're unable to do it yourself, you should find someone who will force you through it (this is one of the values of a great, trusted board of directors).

Here are what I consider to be the Three Toughest Questions. Ask them regularly.

1. What are you selling?

This seems simple. Of the three it's by far the easiest, and most people think, "that's easy."

But it's a bit of a trick question, because it's really about the customer problem you're solving. In other words, it's not so much about what you're selling ("organic fertilizer"), but rather what the prospective customer is buying ("natural stuff to make my vegetable garden healthy to eat").

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An idea, passion and time are 100 percent of what you need to get your start-up off the ground.

For years my desktop wallpaper has been this New Yorker cartoon by Sidney Harris.

It is the condensed version of the advice I give virtually every entrepreneur who shows me a business plan.

Continue reading "Then a Miracle Occurs..."

The concept of dilution is a major factor when deciding on a financing strategy.

When the founders of a company bring in new equity money, they are typically concerned that they may be giving away the store -- reducing their percentage ownership by too large an amount. The culprit is typically something called "dilution."

The concept of dilution is a major factor to consider in deciding upon a financing strategy. By definition, bringing in an equity investor means that that the new party will be taking part ownership of the company. So where does the newcomer's ownership interest come from? Very often, it comes out of the prior owners' chunk of the pie, meaning that the percentage ownership of each of the prior owners decreases on a pro rata basis. The prior owners don't necessarily give up shares. Instead, new shares are issued to cover the newcomer's position. The number of shares held by prior owners does not change. However that number of shares corresponds to a smaller percentage of the total number of shares. That decrease in the percentage interest is dilution.

Hopefully the newcomer's contribution will make the pie bigger, so that the value of the prior owner's adjusted percentage ownership is worth as much or more than the original larger percentage. Unfortunately, this is not always the case (particularly if, for example, business plan milestones were not met, and "accommodations" must be made in order to attract "new money"), and there is always the issue of governance and control.

Continue reading "A Primer on Equity Dilution"

The team you have in place will figure prominently in an investor's decision to fund your business.

One factor that almost always figures into a savvy potential investor's evaluation of your company is your "team" -- key management and advisers. This is particularly true for a young company with no track record of its own.

Why do investors tend to base their decisions to invest on management teams? The answer is in large part because there are so many imponderables about any emerging business. Even a great business idea sometimes simply can't succeed on its own strength alone. The idea may be too revolutionary, too unproven or otherwise lack sufficient credibility. It may involve a product or technology that is simply too complex for the potential investor to understand, or market projections that are simply too speculative. This is when you have to rely on the management team to give the business credibility. The history of the management team may be the only solid, understandable, non-speculative information available to the potential investor.

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