Startup fundraising is never easy and the current pandemic crisis makes it even harder. Typical early-stage investors, such as angel investors and venture capital funds, today might be more reluctant to take risks and bet on early-stage startups. In such situations, entrepreneurs often turn to friends and family (2F’s) to support their endeavors.
Asking people close to you for money, however, has its challenges and needs to be done in a planned, sensible way. Here are a few best practices to follow:
1. Select potential leads carefully – Make a list of potential investors among friends and family based on two key factors: net-worth and personality. In terms of the former, you should only consider people you know have the resources to support you. Don’t put people close to you on the spot if you don’t think they can afford to lose the investment. If the business fails, you don’t want to see them struggling financially, no matter the circumstances. Regarding the latter, only approach people you have a good relationship with and that you think have the right temperament. Make sure the person is reasonable and understanding. Remember they will become your partners (or lenders) and business partnerships are often hard to manage. Money comes at a very high cost if the person is difficult to deal with or might freak out at the first adversity and become a headache for you and your other partners.
2. Prioritize those who might help – From your list above, try to identify people who might be business savvy, well connected, and who can bring something else to the table besides money. For example, prioritize the uncle who is a corporate executive or entrepreneur, and might help you with mentoring and contacts in the industry, over a friend who might even be more well-off, but is a medical doctor or an artist with no business knowhow or networks.
3.Approach them professionally – Just because these are people close to you and that you know might be inclined to help, it doesn’t mean you shouldn’t be professional when approaching them. Quite the opposite. Show them you are serious about your business and that you are proposing a business partnership that runs parallel to your personal relationships. Only approach them when you know exactly how much money you need and for what: present them with a use of funds table. Make them a compelling presentation of your business case and bring (or send them) printouts of your business plan, Lean Canvas, or executive summary. They will appreciate your professionalism.
4.Think through instrument options – Make sure you understand all investment instrument options before you approach friends and family because you will need to explain it to them. For example, are you selling shares of your company (equity)? If so, at what valuation (make sure it is not overvalued to be fair to them)? Do you want a loan (debt) and, if so, under what terms, ideally? Are you considering convertible notes, where the investment starts as a loan and can be converted into equity at the next round of investment, at a discounted valuation? The latter, by the way, is likely the best option for early stage startups. [Note: I will be covering these instruments in a future post – stay tuned by signing up to receive notifications of new posts by email].
5. Make them comfortable to say “no” – Unlike professional investors like angels and VC funds, these people are listening to you specifically because they like you and want to help you personally. Therefore, you have the moral obligation to not take advantage of that (which you might do unconsciously) and you must put them in a comfortable spot. After presenting your pitch and explaining how much you need, for what, and under what terms, answer all the questions they have, and give them time to think. Don’t ask for an answer on the same day (unless of course it is a clear negative) and tell them to sleep on the offer and come back to you on a later day.
6.Consider a “2F club” – Depending on the amount of money you are asking and the number of people on your list, it might be a good idea to have more people invest smaller pieces. For example, instead of getting $50,000 from your big sister, get 5 x $10,000 from her and four other friends. This is good for diluting any one person’s risk and might also provide you with extra help. If you are going for equity, though, be mindful of having too many people as partners – i.e., too many voices at the table. Get help from a corporate lawyer or legal mentor to design an effective way for these people to become your partners, perhaps by having them all come in through a company of their own, with each owning 20% of it.
7.Tell what you expect (and don’t) from them – When friends and family invest, with their best intentions, they often want to help in many other ways too. They may want to opine on the business strategy, suggest hires, introduce you to this or that person, try the product before you launch it etc. If not managed properly, this situation can escalate to your aunt, who’s a dentist, wanting to participate in your biggest contract negotiation! Therefore, before the investment deal is closed, make sure you tell them the level of involvement you expect from them. You may simply not want them to get involved at all, which is fine, as long as this is part of the agreement and they are ok with it. In any case, keep in mind that, as partners, they do have the right to at least receive updates and participate in quarterly or biannual meetings.
8.Be 100% transparent about the risks! – Avoid problems in the future. These are people you care about and may know nothing about startup investing. They are doing this because they care about you too. Ensure they are aware that this is a risky endeavor and that they might lose their investment (equity) or that you may take a long time to pay them back (debt) if the business fails. Certify that they are ok with the risks and that they can afford losing their investment without major personal financial consequences.
Times of crisis call far stringent cost management measures and creative fundraising, including from friends and family. If you do it right, the 2F’s can be a good option to help you through these troubled waters.
Andre Averbug is an entrepreneur, economist, and writer. He has over two decades of international experience working in the intersection of economic development, entrepreneurship, and innovation. He has worked and lived in multiple countries across North and South America, Europe, Africa, and Central Asia.
Andre has started and run four startups, in Brazil and the US, and was awarded Global Innovator of the Year in 2009 by World Bank’s infoDev. He has extensive experience supporting companies as mentor and consultant, both independently and as part of incubators such as 1776 and the Kosmos Innovation Center, and programs like Shell LIVEWire, StartUp Weekend and WeXchange.
As an economist, Andre has worked in topics ranging from innovation ecosystems, entrepreneurship and MSME development policy, competitiveness, business climate, infrastructure finance, monitoring and evaluation (M&E), and country assistance strategy for the World Bank, the Inter-American Development Bank (IDB), and the Brazilian Development Bank (BNDES). He has also consulted for clients such as DAI Global, the Economist Intelligence Unit (EIU), TechnoServe, among many others. He holds a master’s degree in economics from the University of London (UK) and an MBA from McGill University (Canada). Andre lives in the Washington, DC area.
When the Financial Accounting Standards Board (FASB) met on May 20, 2020 to address the impacts of the COVID-19 pandemic, they voted on a one-year effective date deferral of Accounting Standards Codification (ASC) Topic 842, Leases, which will result in a modified effective date for private companies and certain private not-for-profit entities for fiscal years beginning after Dec. 15, 2021, and interim periods with fiscal years beginning after Dec. 15, 2022, once the final standard is issued (expected June 2020). Private companies in technology and life sciences, particularly with significant operating lease activity under current lease accounting guidance, can take advantage of the delayed ASC 842 effective date to prepare for implementation.
FASB originally issued Accounting Standards Update (ASU) 2016-02 in February 2016. Accounting Standards Codification (ASC) Topic 842, Leases, along with several subsequently issued related ASUs, which amended the accounting guidance for leases.
GENERAL ASC 842 REQUIREMENTS
Under ASC 842, a company is required to recognize leases with terms greater than 12 months on its balance sheet. Specifically, lessees are required to recognize the following at lease commencement:
ASC 842 represents a change for operating leases that were historically considered “off balance sheet” obligations. FASB believes a balance sheet presentation of leases will provide a clearer view of a company’s future commitments with operating leases recognized on the balance sheet.
Under ASC 842, leases recorded on the balance sheet will be classified as either finance leases or operating leases, which will determine the presentation of the related expense in the income statement. Finance lease arrangements will result in depreciation and interest expense recorded each reporting period similar in manner to existing capital leases under legacy guidance. Operating lease ROU assets and liabilities will be amortized and accreted, respectively, to develop a straight-line rent expense presented as lease expense in the income statement.
SPECIFIC CONSIDERATIONS FOR TECHNOLOGY AND LIFE SCIENCES COMPANIES
The delayed ASC 842 effective date provides additional time for technology and life sciences companies to prepare for implementation. Specific considerations prior to implementation include:
1. Impact to Balance Sheet and Financial Ratios
Technology and life sciences companies should expect increases in balance sheet amounts (e.g., long-term assets and both current and long-term liabilities) for operating leases. Companies with significant existing operating leases may be surprised by the impact on reported balance sheet amounts. These financial statement changes may impact certain financial ratios, including current ratio, leverage ratio and debt service coverage ratios.
Example: How ASC 842 Can Affect Key Metrics
As many technology and life science companies use cash flow-based lending, the example below provides the potential effects on the balance sheet and the associated debt service coverage ratio. Some do not consider operating lease liabilities as ‘debt’ for purposes of calculating debt-based ratios and you can expect that there may be diversity in practice. Technology and life science companies should confirm with their lenders in advance their view of the treatment of ASC 842 operating lease liabilities with regard to covenant calculations. Understanding the impact on key metrics early is advised. The following is an example showing the impact on certain ratios when operating lease liabilities are considered debt.
Balance Sheet Impact
Notice how the reporting of ROU assets and lease liabilities increases the total amount of assets and liabilities on the balance sheet after adopting the new standard.1
Prior to adopting ASC 842
After adopting ASC 842
Total current assets
Operating lease ROU asset
Total non-current assets
Accounts payable and accruals
Long-term debt, current
Operating lease liability, current
Total current liabilities
Long-term debt, net of current portion
Operating lease liability, net of current portion
Total non-current liabilities
Total liabilities and equity
1) In this example, it is assumed that the lease liability in an operating lease. However, if the lease liability was classified as a finance lease, the ROU asset could be included within PPE.
Debt Service Coverage Ratio Impact
Debt service ratio coverage is a common financial covenant found in debt agreements. As illustrated below, the ratio may significantly change with the adoption of the Standard.
Debt Service Coverage Ratio
Prior to adopting ASC 842
After adopting ASC 842
Current portion debt
and capitalized leases
Debt service coverage ratio
Many technology and life sciences companies may find that certain metrics and loan covenants are impacted due to the changes in the balance sheet as a result of adoption. Companies should give priority to their financial statement and disclosure changes for the purpose of maintaining compliance with their loan covenants. As previously discussed, companies should also engage in early communication with their lenders regarding the potential impact on financial covenants and whether the lenders will take these changes into consideration when analyzing the company’s performance.
2. Lease Population Completeness Considerations
During the ASC 842 transition, all leases should be identified. While many leases may seem straightforward, such as leases for real estate or equipment, others may be embedded within other service contracts. For example, a router that is utilized as part of an internet service arrangement may be considered a leased asset. By electing the package of three transition practical expedients, companies are allowed to not reassess the following:
whether any expired or existing contracts are or contain leases;
lease classification for any expired or existing leases; and
indirect direct costs for any existing leases.
Embedded leases are commonly found in the following arrangements:
A lease exists if a contract conveys to a company the right to obtain substantially all of the economic benefits from use of the identified asset and the company directs the use of the identified asset. An identified asset must be physically distinct and specified in the contract. The existence of substitution rights may indicate a specific asset has not been identified. Under Topic 842, substantive substitution rights exist when a supplier has the practical ability to substitute alternative assets throughout the period of use, and the supplier would benefit economically from the exercise of its right to substitute the asset. When evaluating the existence of a lease, companies also need to assess if the use of the identified asset is significant. If another party’s use of the identified asset is more than insignificant, the contract does not convey control of the identified asset, therefore, the contract does not contain a lease.
The following are some examples where judgement and further analysis may be required to determine the presence of a lease component.
REVENUE CONTRACT WITH CUSTOMER – SUBSTITUTION RIGHT
A: SaaS contract with hosting arrangement – identified asset without substantive substitution rights
Facts: A software company enters into contracts with its customers to host software on the software company’s servers, each of which is designated to a specific customer. The contracts do not allow the software company to substitute the server for another one without consent of its customers.
Analysis: An embedded lease may exist (even without an explicit lease agreement) considering that the server is dedicated to a specific customer, and the software company does not have “substantive substitution” rights for the server.
B: SaaS contract with use of equipment – identified asset with substantive substitution rights
Facts: A company enters into a contract with a customer that includes SaaS services and the use of a designated computer medical cart through the term of the SaaS services. The company has the option to swap the medical cart with another one at any time.
Analysis: The Company can swap the medical cart with another one at any time during the term of the contract. Therefore, the “substantive substitution” rights criteria has been met, and the use of the computer medial cart is not considered a lease.
MEDICAL SUPPLIES PURCHASE CONTRACT – IDENTIFIED ASSET WITHOUT SUBSTANTIVE SUBSTITUTION RIGHTS
Facts: A bio-tech company enters into a medical supplies contract, which requires the purchase of consumables and test kits for research and development purposes exclusively from this supplier for the term of five years. As part of the arrangement, the supplier also provides the equipment for testing at no charge. The equipment is installed and customized for the bio-tech company, and the contract does not allow the supplier to substitute another equipment without the approval of the bio-tech company.
Analysis: A lease may exist since the equipment is specified in the contract and designated to the bio-tech company; At the inception of the contract, the supplier does not have substantive substitution rights to the equipment and it is not feasible that the equipment can be easily substituted by the supplier.
INFORMATION TECHNOLOGY (IT) SERVICE CONTRACT – IDENTIFIED ASSET WITHOUT SUBSTANTIVE SUBSTITUTION RIGHTS
Facts: A technology company enters into a network services and security agreement with an electronic data storage provider. The services are provided through a centralized data center and use a specified server (Server No. 9). The supplier maintains many identical servers in a single accessible location and determines, at inception of the contract, that it is permitted to and can easily substitute another server without the customer’s consent throughout the period of use.
Analysis: Based on the facts above, the vendor can interchange the underlying asset without the customer’s consent. As the asset is interchangeable in nature and service and is not dependent upon the specific asset, there is no lease based upon the “substantive substitution” rights criteria.
ADVERTISING CONTRACT – SIGNIFICANCE OF USE
Facts: A company enters into a marketing services agreement which encompasses a variety of marketing and advertising vehicles, one of which includes electronic billboards.
Analysis: Although this contract could be written as a marketing services agreement, the right to use one or more billboards may result in a lease if the billboard is specifically identifiable and dedicated to the company, and the company obtains significant use of the billboards throughout the term of the contract. Understanding if other parties have the right to advertise on the billboards and the significance of those other arrangements will be important to determining if a lease exists.
Considerable judgement is involved for each example when reviewing a contract for embedded leases. A slight alteration in facts and circumstances may result in a different conclusion. Keep in mind that if there is a specifically identified asset dedicated to a party, it is likely to contain a lease. Further, predominance and significance of the activity will impact lease related decisions and conclusions.
3. Negotiation of Future Arrangements
The impact of ASC 842 may be an important factor in evaluating whether to structure the acquisition of assets as lease arrangements or purchase arrangements going forward. Further, Topic 842 may have implications on other accounting standards such as revenue recognition. The consideration of future arrangements will be particularly important for companies with significant lease activities as many such lease arrangements may move on to the balance sheet under the ASC 842. Technology and life sciences companies should identify and perform an inventory of all existing leases, including embedded leases, in conjunction with forecasting needs for future assets. The company can then evaluate and plan for these future needs with a clear understanding of the trade-offs between lease and purchase arrangements.
4. Tax Impact
ASC 842 will have a noticeable impact on financial reporting for lessees, but the effect on taxes may not be obvious. The new lease standard does not change lease accounting for federal income tax purposes. Therefore, without a corresponding change in tax basis, deferred tax accounting may be impacted. Implementation of ASC 842 could result in new deferred tax assets, liabilities or additional book to tax differences in a company’s income tax provision. Under ASC 842, lease assets are subject to impairment, which is often reversed for tax purposes. Technology and life sciences companies should understand and plan for the potential tax impact.
5. Assurance Perspective
Technology and life sciences companies audited by an independent public accounting firm should maintain relevant documentation of the ASC 842 implementation process, as the independent auditor may require the documentation in order to complete the audit. Such documentation should include evaluation of lease classification as finance or operating, selection and application of the transition method, discussion of any practical expedients applied, basis for significant assumptions such as discount rate and the company’s lease identification completeness procedures, including evaluation of embedded leases.
6. Future Operations, Processes and Related Controls
To comply with ASC 842, companies will likely need to implement changes to their current control environments and business processes. Companies should establish policies and procedures to address ongoing considerations such as initial assessments of new contracts, appropriate interest rates and lease modifications, as well as develop methods to appropriately capture financial disclosure information. Significant judgement will be required to assess lease terms through an ASC 842 lens, specifically related to lease term, allocation of lease payments to lease and non-lease components, and remeasurement events.
By delaying the effective date for non-public business entities, FASB has created an opportunity for technology and life sciences companies to fully consider the impact of ASC 842 and prepare for the upcoming transition.
As a Senior Manager in the DHG Technology practice, Ling Zhang, CPA, works closely with client management and C-suite executives to provide audit, financial accounting advisory, and risk advisory services to multi-national publicly-traded corporations and private companies with revenues ranging from $10 million to $50 billion. She advises clients on SEC filings, complex debt and equity transactions, merger and acquisition, new accounting guidance implementation, internal control system design and implementation, and financial statements reporting and disclosures. She can be reached at firstname.lastname@example.org.
Recently, I was interviewed by the Montgomery County Economic Development Corporation about The Big Idea CONNECTpreneur Forum, of which they are a sponsor. Following is the transcript of the interview. I have been a Board Member of this tremendous organization for the past 4 years.
CONNECTpreneur recently entered our 9th year. To date, we have hosted 47 events, the last 4 being “virtual” events. Over 20,000 business leaders, investors, and entrepreneurs from around the world have attended our events. Our website is connectpreneur.org. Please check us out!
THE BIG IDEA
IN CONVERSATION WITH TIEN WONG, CEO, OPUS8, AND
FOUNDER & HOST, CONNECTPRENEUR
Get to know CONNECTpreneur, a unique forum which attracts the region’s top entrepreneurs, investors, innovators and game changers. Organizers of the top tech and investor networking events in the region.
WHY IS IT IMPORTANT TO MAKE CONNECTIONS BETWEEN BUSINESS LEADERS OF ALL STRIPES – CEOS, VCS AND ANGELS – TO EARLY STAGE COMPANIES?
Not just for early stage companies, but all businesses of all sizes, the old adage, “It’s not what you know, it’s who you know,” still applies very relevantly. People want to do business with people. Early stage companies, in particular, have many needs: capital, talent, customers, vendors, partners, product development, marketing, etc. and having a large and deep network gives an entrepreneur a huge advantage in the marketplace, for obvious reasons. There is a proven correlation between the size and quality of one’s network, and one’s overall success — in entrepreneurship and most endeavors.
WHAT IS THE SECRET SAUCE THAT MAKES CONNECTPRENEUR A TOP TECH NETWORKING EVENT IN THE REGION?
It’s our ability to attract the region’s top entrepreneurs, investors, innovators and game changers. We pride ourselves on organizing the top tech and investor networking events in Montgomery County and the Washington region as a whole. We think that the reason that over 70% of our surveyed attendees rate CONNECTpreneur as the “number one” tech and networking event in the Mid-Atlantic region is because of the high quality and seniority of our attendees, which is unprecedented. Over 20% of our attendees are accredited angel investors or VCs, over half are CEOs and founders, and we intentionally keep the ratio of service providers as low as possible. This makes for more meaningful connectivity among the participants.
HOW DOES CONNECTPRENEUR SUPPORT FEMALE ENTREPRENEURS AND ENTREPRENEURS OF COLOR?
CONNECTpreneur is very intentional about providing a diverse set of presenters and speakers in our programming. Our community of entrepreneurs and investors is highly diverse, and our selection committee is very tuned in to the benefits of gender and cultural diversity. We actively work with and partner with local, regional, and national players who share our values of “double bottom line” ethics which value social impact as well as financial gain. Some of our partners include Maryland Tech Council, TEDCO, Startup Grind, Founder Institute, Halcyon and Conscious Venture Labs to name a few.
WHY IS MONTGOMERY COUNTY A GOOD LOCATION FOR AN INNOVATIVE STARTUP COMPANY? AND, WHAT’S YOUR BEST ADVICE FOR SUCCESS?
Montgomery County is a top tier County nationally for startups, and that’s evidenced by numerous awesome success stories. MoCo has a tremendously educated talent base, world class government institutions, top schools, and a large base of angel and high net worth private investors who can provide seed funding. The best advice for success is to understand thoroughly your customer and their needs and pain points very deeply. That way you can get to “product market fit” more quickly, de-risk your opportunity, and be more capital efficient. Too many companies get enamored with their product and design, or culture, or getting media coverage whereas the true essence of any successful business is to provide excellent products and solutions to its customers and sell into their markets like crazy.
WHAT ARE SOME UNIQUE CHARACTERISTICS OF AN EARLY STAGE COMPANY THAT SPARK YOUR INTEREST TO EXTEND AN INVITE TO PARTICIPATE IN THE FORUM?
We are looking for presenting companies which have truly disruptive ideas, products and/or solutions which could be sold into huge markets. And of course, the most important criteria are the quality, expertise, and coachability of the founding team. We have had presenters from all kinds of sectors including life sciences, cyber, telecom, blockchain, wireless, mobility, e-commerce, marketplaces, fintech, medical devices, IoT, etc.
Learn more about CONNECTpreneur at our website: connectpreneur.org
This is a Guest blog post from Jeff Cherry, Founder and Managing Partner of The Conscious Venture Fund and Founding Partner of The Laudato Si Startup Challenge. He is a tech CEO and mentor, investor, philanthropist, and community builder.
I recently listened to a thought-provoking episode of the TED Radio Hour on NPR entitled What We Value. Its premise was that this economic and societal crisis in which we find ourselves is accelerating the move towards a new set of values when it comes to the practice of capitalism. Those of us in the social impact and Conscious Capitalism space are heartened to see this discussion gaining momentum, but the question remains: How will capitalism change now that the unhealthy state of business and our major societal institutions have been laid bare?
There are many indications that this shift was in the offing far before the onset of the coronavirus pandemic. Although late to the game, the statement released by the Business Roundtable in August 2019 signaled a transformative move away from the outdated notion of shareholder primacy and towards a more human and effective form of business. It certainly garnered the attention of the press. And others in the business mainstream who had been either unaware or hostile to the market forces driving this change, are now finding it hard to ignore discussions of stakeholder management and whether business should have a broader role in society.
These ever-expanding discussions about the purpose of business in society are now taking place in the context of what does a return to “normal” look like in the economy. And a growing sentiment that the normal we were experiencing — where greed, inequity, declining living standards, crony capitalism, rent-seeking, regulatory capture, share buy-backs, corporate welfare and environmental depletion were the norm — isn’t in fact normal. Nor a state of being for which we should collectively yearn. As you might imagine, I agree.
The challenge we face now then, is how do we actually execute on this new idea? Many people talk about business for good and changing the purpose of the firm. But in the real world of competitive advantage, pricing models, customer needs, shareholder demands, supplier, employee and community relationships, knowing what to do is hard. We speak to entrepreneurs all the time who are philosophically aligned with a new narrative about business. They can cite anecdotes about others who have been successful, and they lack a cognitive frame that they can use to build an organization that embodies this day-in and day-out.
I’ve written at length about why I believe a focus on stakeholders in business and capitalism needs to replace the old story. In this article, the first of a two-part series, I’ll describe a framework to begin the journey to business as an institute of societal well-being: Or Human Capitalism.
The New Narrative of Business in Society: Human Capitalism What does a new story about the practice of business and capitalism look like in practical terms?
In order to fully bring this new narrative to life, I believe we need to re-define the purpose of business as a societal institution. Then, we need to translate that definition into tools that real entrepreneurs and executives can use every day to guide how they formulate strategy, individual decision making and implementation.
When a new cohort of the Conscious Venture Lab convenes, I ask a question to frame the work we’ll be doing over the ensuing 16-weeks: “What kind of world could we create if investors, executives and entrepreneurs cared as much about people as they care about profit?” It isn’t a question I expect any of the teams to answer outright. It’s a rhetorical challenge to think about how these ideas impact their businesses and the broader society.
Over the last few months, I’ve reframed that question: What kind of world could we create if we decided our first duty in business was to simply care for each other? This is the essence of Human Capitalism.
This version of the question doesn’t pit people against profit, which I believe is a false construct. Instead, it captures the meaning we’re all experiencing in this moment: can we be a complete society if the overarching purpose of business is only to increase profits and not primarily to improve the human condition? Both of these questions are variations of the age-old investigation of “What is a business for?” Academics, economists, politicians, social scientists and businesspeople have been asking this question for decades, if not longer.
Liesel Pritzker Simmons, co-founder of the impact investing firm Bluehaven Initiative, has said, “A crisis gives us an excuse to have conviction earlier.” What we are experiencing in this moment has emphasized how interconnected we are as a society and as a world. It has emphasized the importance of health as a public imperative. The importance of economic, community and personal resiliency as interdependent societal imperatives to which individuals and all societal institutions, even businesses, need to contribute. This crisis is bringing along those who may not have reached a level of conviction to move to a more human form of capitalism had things stayed … normal.
In this new reality it’s clear that the question about what type of world we want to create can no longer remain abstract or rhetorical. The coronavirus pandemic has exposed the truth, that a focus on our interdependent well-being is necessary for society’s survival. Succeed together or fail together the choice is ours, but we can no longer hide behind a narrative that separates individual financial self-interest from our mutual survival.
In the post-COVID world, the new narrative of business in society is a narrative about authentic caring, societal resilience and collective well-being.
Practical Ways to Integrate Human Capitalism Herb Kelleher, the legendary founder of Southwest Airlines, once said, “The business of business is people — yesterday, today and forever….” But what does it actually mean to structure your business around people? What can you do tomorrow to transform the structure of your business, respond to this new reality and become the type of leader that society needs?
Caring is Job 1: Above all there is one thing leaders must do first in order to be successful in this new world: They must actually care! To be clear, leaders who embrace the idea of caring for stakeholders as a core value and primary motivation for running a business will be well-positioned to succeed in this new world. They’ll be more able to execute on the ideas described later in this article and more likely to attract talent, customers and investors in a post-COVID world of business as a vital instrument of society.
At first this seems obvious and perhaps, some would say, no different than the status quo. But the nuance of authentically treating employees, suppliers, customers and communities as individuals deserving of your care for their own sake, as opposed to primarily as fodder for creating returns is critically important. Not only to how your company will be perceived, but authentic caring — or the lack thereof — will have a tremendous impact on your competitive performance. People understand instinctively if you are treating them fairly simply as a form of manipulation for other ends. And, unless you’ve created a true culture of caring in your organization, you’ll be tempted to abandon that care when it comes into conflict with your “real goals.” The best leaders however will understand this simple truth: how we think about creating financial value is now, more than ever, clearly tied to the way we create societal value. Authentically caring is a key component of this new narrative.
With that as our foundation, there are two things that every leader can do to build caring into the operational DNA of their business:
First, adopt a specific set of guiding principals about what it means to care for each other in service of societal well-being. And second,
Institute a practical business operating system that provides a framework for living into those guiding principals.
Here in Part-1, I’ll discuss a set of guiding principles we’ve created at the Conscious Venture Lab to help entrepreneurs execute upon these cultures of caring.
Guiding Principles: The Five Promises of Collective Well-Being In order to seed this new culture of caring into the DNA of your operations, it is crucially important that you articulate and codify a set of guiding principles that the entire company can use to organize your thought processes and create operating norms, policies, procedures and metrics that will keep your culture on track in good times and in challenging times…like during a pandemic.
Companies that will lead us into a more effective model of capitalism and a future of broadly-shared prosperity have structured their business to deliver on what I call The Five Promises of Collective Well-Being, through which we vow to use business to make the world:
More sustainable and
More prosperous for all.
Let’s examine each principle:
Business as a path to a More Just society: Leaders who are best at this will work to create social justice by structuring their organizations to level the playing field and authentically create access to opportunity for all those in their ecosystem who want to contribute.
Conscious Venture Lab and SHIFT Ventures portfolio companies Hungry Harvest and R3 Score have built this promise into their business models, which drives impact and returns.
Hungry Harvest creates a more just world by providing fresh food to communities that wouldn’t otherwise have access to it and dignified work opportunities to people in need. As a result, they create scores of “Harvest Heroes” who loyally buy wholesome food from the company that otherwise would have gone to waste. In the process they have increase sales by more than 34,000% over the last 4 years.
R3Score creates a more just world by providing a dignified return to civil society for millions of formerly incarcerated Americans and allowing banks a way to engage with people they would otherwise ignore. Thereby expanding the banks’ customer base, putting financial assets to work that would otherwise lay fallow and giving the 1-in-3 Americans with a criminal record the opportunity to build a new life.
Business as a path to a More Joyous life: Leaders who bring more joy into the world will do so by focusing on a combination of the quality of the human interactions in their operations, eliminating misery as a core aspect of their business and/or creating products that bring authentic joy to more lives.
One of my personal favorite companies, Union Square Hospitality Group, uses a culture of caring and enlightened hospitality to bring joy to employees, customers and suppliers alike.
Startup Aqus Water, that was a part of the Vatican Laudato Si Challenge in 2017, has created a product that puts “three years of clean water in the palm of (the) hand(s)” of people in places where lack of clean water has been causing extreme hardship for centuries. With more than 780 MM people in the world lacking access to clean water, bringing joy will undoubtedly bring prosperity to many.
Business as a path to More Equitable communities: When leaders focus on creating a mutual exchange of value between all stakeholders, they move their organizations away from the negative consequences of shareholder primacy and create more equitable communities for everyone. Paradoxically, an equitable approach to business, or removing the shareholder blinders, often creates new paths to greater value for shareholders.
Greyston Bakery in Yonkers New York is a pioneer of open hiring. They create a more equitable world by focusing not on the tyranny of weeding people out in the hiring process but by providing the dignity of work to anyone who wants it.
Here in Baltimore, Jacob Hsu and his company Catalyte have created an entirely new way of identifying undervalued individuals who have the aptitude to become exceptional engineers. Creating new paths to equity and unleashing massive financial potential for communities, his clients and the company.
Business as a path to a More Sustainable world: The winning leaders of the new narrative think and plan for the long-term. They understand that sustainability in every sense is the key to enduring organizational health. They establish a circle of growth for the planet, the people who serve or are served by the organization and the organization itself.
Billion-dollar clothing company Patagonia has rejected the world of “fast fashion” by creating high quality, long-lasting products and offering a repair and reuse program to discourage customers from buying things they don’t need.
Business as a path to a More Prosperous existence for us all: The best leaders view value creation with a polarity, or both/and mindset. They actively look to create real wealth for employees, customers, communities, suppliers and shareholders. They work to manage the polarity of creating value for all stakeholders by asking themselves questions like: “How do we simultaneously achieve the upside of paying our employees as much as possible, and, the upside of creating great returns for shareholders?” This is in contrast to shareholder value leaders who see all stakeholder relationships as tradeoffs that need to be solved for the benefit of shareholders.
Starbucks has fed more than 10 million people through its FoodShare program, redoubled its commitment to eliminate gender pay equity gaps, and committed to becoming “… resource positive — storing more carbon than we emit, eliminating waste and providing more clean fresh water than we use …” — all while rewarding shareholders handsomely — even during the coronavirus pandemic.
Why Human CAPITALISM? In Part-2 of this series I will discuss how the tenets of Conscious Capitalism and stakeholder management will allow organizations to clear the clutter and build these principles into everyday operations.
For now, a note before we end to my main audience: The Skeptics:
I spend the majority of every waking hour thinking about how to support entrepreneurs who have previously been neglected and who are creating world changing companies despite the immense hurdles they face. I also spend a majority of that time thinking about how to invest on behalf of my limited partners in a way that will create exceptional returns. I am a capitalist who believes capitalism can and should be practiced in a way that unleashes its power to elevate all humanity. That we can create a more humane form of commerce and human cooperation. What I am suggesting is that capitalism, like any man-made system, must evolve as society evolves. To paraphrase my friend and mentor Ed Freeman, professor at the Darden School at The University of Virginia, the alternative to capitalism as we know it today is not socialism, but a better, more human form of capitalism.
For those who would push back on these ideas as leaving shareholders behind and giving away profits I would simply ask you to suspend disbelief for a bit. Take a few minutes to think not about what you might lose, but about what you might gain. What kind of world could we create if we decided our first duty in business was to care for each other? Look around…I think that time has come.
Jeff Cherry, is CEO and Managing Partner of SHIFT Ventures, and Founder & Executive Director of Conscious Venture Lab, an award-winning and internationally recognized early stage accelerator. He is also Founder and Managing Partner of The Conscious Venture Fund and Founding Partner of The Laudato Si Startup Challenge. Jeff is a pioneer in conscious capitalism and double bottom-line investing. He can be reached at email@example.com.
This is a Guest blog post by Kerry Moynihan, Partner at Boyden.
WHY LEADERSHIP MATTERS MORE THAN EVER
A Very Brief History of Private Equity
The origins of today’s private equity industry (which I would define as including both venture capital and leveraged buyouts) date to 1946 with the foundations of American Research & Development Corp. (ARDC) & J. H. Whitney. Prior, risk capital had almost exclusively been the domain of wealthy families. Venture capital pioneers Mayfield and Kleiner Perkins were founded in 1969 and 1972, respectively. In the buyout realm, the origins of LBO pioneers KKR began at Bear Stearns with “bootstrap” investments in the early 1970s, forming the foundation of the firm as we know it today. TH Lee; Forstmann Little; Welsh, Carson, Anderson & Stowe; and GTCR were all in operation by 1980 and became major players. The modern private equity business continued to emerge in the 1980s with the realization that there were major discrepancies between public company management interests, the age old “agency problem” and the values that could be unleashed were business units to be decoupled from large public companies. The year 1980 saw some $2.5 billion raised dedicated to the emerging alternative asset class and in the decade that followed nearly $22 billion was raised by venture and buyout funds.
The wide availability of junk bond financing fueled a boom during the 1980s, followed by a crash as the stock market tanked in October 1987. High yield financing, or “junk bonds,” dried up for a time, and Drexel Burnham, the leading purveyor of these instruments, later went down. However, institutional investors had certainly picked up on the higher returns available to PE than in the public markets.
Key to these were the availability of debt financing, the disparity between management that were merely salaried and those that were incentivized by equity, and the discrepancy between public and private market information. For much of the next two decades private equity vastly outperformed the public markets. Clearly, the emergence of technological innovation in software, semiconductors, and telecom fueled the venture side, while widespread industry consolidation and globalization largely propelled the LBO market.
As ever more money flowed into pensions and other institutional investor funds, the demand for higher yields accelerated. This put more capital into the financial markets seeking higher returns and the boom continued. Of course there were blips and shocks, including the Foreign Debt crisis of 1997/98, the bursting of the dotcom bubble around 2000, the cessation of normal market activity following the 9/11 attacks, and perhaps most seriously, the major Financial Crisis after the collapse of Lehman Brothers and Bear Stearns in 2008.
However, markets rebounded, time and time again. Institutional capital, which seems to have a short collective memory, always seeks ever higher levels of Alpha (relative return) and will accommodate Beta (risk), often in unison, seemingly without independent, objective decision-making.
Institutionalization & Growth of the PE Industry
Funds were usually (relatively) small and privately held, and made individualized, partner-driven investment decisions. Yet as their size has increased, and in many cases the larger funds went out to the public markets, the industry has fundamentally changed. Now publicly traded, firms like Apollo, Blackstone The Carlyle Group, and others are, as the co-founder of one confessed to me “No longer in the business of making extraordinary, outsized returns on unique investments. We are now in the asset management business. If we can beat the S&P by 150 basis points and put huge sums to work from institutional investors, we are happy and the investors are happy.“ With the traditional model of a 2% management fee on assets under management (AUM) and 20% capture of the return on investment, the carried interest, who would not be?
Where a billion dollar fund was once considered a large player, there were over 350 by 2018 and even more today. There has been a veritable explosion in investment in the sector, as uninvested cash, or “dry powder“ at PE firms exceeded $1.5 trillion by the end of 2019. Blackstone alone, the Wall Street Journal reported, had $150 billion in cash to invest at the end of last year. Institutional Investor reported in July 2019 that 4000 funds were seeking to raise an additional $980 billion, up from 1385 funds seeking to raise $417 billion just four years earlier.
Yet in the 2010s the number of publicly traded companies stayed roughly the same while global AUM for PE firms and the number of PE-backed companies doubled, according to McKinsey & Co. It comes down to simple economics as more money is chasing fewer good assets, hence driving up prices, and reducing returns. S&P reported in November 2019 that the average pro forma EBITDA multiple was 12.9, up over 30% from pre-Financial Crisis pricing. The massive leverage, low prices, and eye-popping returns of the 1980s are but a memory. What is a simple fund to do?
Adding Operating Expertise
Importantly, funds have changed their own internal structures over the last several decades. Almost no funds had seriously tenured operating executives as part of their investment teams in the 1980s, being almost exclusively comprised of “recovering investment bankers.” The 1990s saw a bit of a change, but now almost every major fund has hired people who have more than an investment banking/finance background and have been senior operating executives who have actually run P&Ls. In many cases these are actual full partners in the funds, as the Silicon Valley venture capital community was quicker to adopt this model, typically by adding tech CEOs to their rosters, than the Wall Street LBO community. Many are termed Operating Partners or Management Associates, but whatever the nomenclature, there has been a collective recognition that strictly financial engineering and financing skills are necessary, but not sufficient, to create outsized shareholder returns.
Most of my clients and many of my good friends are private equity professionals. Without naming names, an informal survey confirms the general thesis that by training they are not prepared to run the businesses that they buy. Increasingly they recognize these facts, despite being “the smartest person in the room“ on virtually any topic (sic), in the not so distant past.
Where Are We and Where Are We Going
Fast forward to today, the late 2010s and early 2020s. The game has changed significantly, to say the least. Not surprisingly, many of the factors that led to the tremendous success of the industry in years past have changed dramatically. There is a changing reality and investment firms have, with varying degrees of success, made adjustments. For example:
Financial engineering is no longer adequate.
Given the low interest rate environment of recent years, and explosion of alternative lenders such as credit funds, beyond the traditional large banks, a giant fund enjoys little advantage over a smaller one on the availability of financing or borrowing terms. And, let’s face it, even if KKR or TPG can borrow at 25 basis points lower and with slightly less restrictive covenants than XYZ Capital Partners can, that factor alone is unlikely to be the deciding factor between the success or failure of an investment.
Globalization of the industry
Where venture capital and leveraged buyouts were virtually exclusively a US phenomenon just a few decades ago, today according to various studies, only about 55% of global private equity activity is in North America today. While Africa and Latin America are somewhat underrepresented, Europe and Asia are booming in this respect and the former may well catch up over time. It has become, as in so many industries, a much more competitive, truly international playing field.
Ubiquity of information has changed the game
The asymmetry of information that led to smart buyers and uninformed sellers is simply no longer the case. The incredible proliferation of information and ease of access on a global basis means that sellers, even of relatively small and unsophisticated businesses, have a much better handle on the overall market than in the past. An investment banker friend and I have a running joke that Old Uncle Burt, selling his cornfield in Iowa, knows that he can command 7.8 to 9.3 times EBITDA these days and will have five buyers lined up! In short, because of this the market is much more ruthlessly efficient, further evidenced by the dramatic expansion in the number of deals done and in the ever higher multiples paid for them.
The Model Still Works
The increased volatility of public markets, however, continues to make private equity attractive. What was once termed an alternative investment is certainly now very much in the mainstream for most sophisticated investors. However, the delta in returns between public markets and private markets have flagged in the last several years. As Bain & Co. noted in its 2020 Private Equity Report, “10-year public market returns match PE returns for the first time.”
Yet the current crisis, at the same time akin to the ones we seem to have every five or 10 years, and on the other hand of unprecedented scope, has obviously put an enormous dent in the wealth accumulated in the stock market. The ability to be patient and not have to respond to quarter-by-quarter earnings can allow private equity investors to take a more strategic, long-term view and ride out much of the fickle fluctuations of the financial markets.
This may seem a bit ironic, since most PE funds would love to be in and out of investments in a 3 to 5 year timeframe if possible. But with the public markets bouncing as violently as they are, private equity will remain a very attractive industry, both for Limited Partners as institutional investors and General Partners, the PE funds, as the custodians and direct investors of those funds.
Executive Leadership Matters, Now More Than Ever
Over time, more and more funds have gone to a model of backing individual executives or executive teams in what I call the “Back-able, Bankable Leadership“ model, or BBL. Both venture and buyout funds have increasingly backed executive leadership that has had prior success and will continue to do so. The proverbial “Holy Grail“ for investment funds is to find management teams that are proven and have as close to a proprietary idea as possible. By this I mean either a specific target company(ies) for acquisition or a well-developed investment thesis with demonstrable potential acquisition targets.
How much better to create a situation where you have an organic genesis of an investment, rather than competing in a broad auction scenario against many other funds. In the latter case, the “winner” of an auction may be successful in acquiring a business, but a loser as an investor, having paid too high a price at the outset.
An old saw in investing circles is that “You are more likely to win by backing an ‘A’ management team with a ‘B’ plan over a ‘B’ management team with an ‘A’ quality plan.“ At no time has this been more true than today, as many firms actually have to reinvent their business models on the fly. As we face unparalleled turbulence in the markets, especially given the latest crisis, never has leadership, true leadership, been at more of a premium. Operational excellence, coupled with the genuine ability to inspire, will always be valued. In short, today it is more critical than ever to actually run businesses better.
Effective executive leadership makes all the difference. It certainly makes me quite sanguine about the prospects for the executive search industry in partnering with private equity clients to create value. Successful investors invest in superior management and leadership, especially when competition is greater than ever and times are uncertain, to say the least!
Kerry Moynihan is a Partner at Boyden. He has had a distinguished career of more than 30 years in executive search, making a significant impact on client organizations through strategic talent acquisition and development. Working across a range of industries, he specializes in partnering with boards of directors as well as private equity firms and the C-suite executives of their portfolio companies to deliver for investors. He can be reached at firstname.lastname@example.org.
This is a Guest blog post by Steve Pimpo and Bill Rossello of Greenhouse Consulting.
Common challenges we see and how to overcome them
Most business owners will come to the point in their journey when they feel it’s time to sell the company. They have spent a lot of time successfully building and growing their business, but most times are unprepared for the scrutiny and questions that they will face when being evaluated by a prospective “buyer” and their advisors. Based on our own experience and input we solicited from investment bankers, only about 10% of companies with owners seeking to sell are actually ready. Here are some of the reasons why:
Customer Diversity – A high percentage of company revenue comes from one client or contract. Unless a potential acquiring company is trying to “buy” into a market, buyers like to purchase companies that have a diverse client base or unique service or product offering.
Company Narrative – Some owners use the same sales pitch to pitch to prospective buyers as they do to customers. Communicating the value of a company to a potential buyer is different from selling services to a customer. You need to recognize what buyers want and articulate what is special about your company.
Financials – Sometimes there are accounting inaccuracies that can’t support “quality of earnings” or EBITDA adjustments. You need to ensure that financials are accurate and realistic and can stand up to the scrutiny of a potential buyer’s audit.
Quality of Contracts – Many prime government contracts are “set asides” or subcontracts and there is no clear path to transitioning them to a larger company. You should be prepared with a valid contract revenue waterfall, and a plan to transition set-aside contracts and relationships.
Management Commitment – Ownership hasn’t taken steps to ensure that the leadership and key players are “read in” and will remain with the company post-transaction. People are part of the “goodwill” and company “brand.” It is important to show buyers that there is a plan in place to retain these key employees through to the transaction and beyond.
New Business Pipeline –Buyers will hone right in on your pipeline looking for two things. Is the pipeline full of legitimate prospects and is your pipeline tracking system logical and consistent? If it does not consider reasonable estimates of gross and net revenue and probability of win, it’s not likely to pass a buyer’s sniff test. You need to be ready to justify the reasons you selected each big deal and why you think you have a good chance of winning.
Strategic Growth Plan – Many sellers lack the ability to articulate to potential buyers, a bona fide growth plan, one that paints a credible picture of where the company could go over the next 3-5 years with the power, resources and reach of a larger firm. You need to have that narrative ready to go when you put the company on the market.
Valuation Expectations – Often owners have an unrealistic expectation about the “multiple” of EBITDA or revenue a buyer will pay based on what their peers or friends have received in their transactions. Make sure you focus only on the value of your own business, what similar companies have sold for. Put yourself in the buyer’s shoes. Will they really pay for a tool that does not generate repeatable revenue? Or take a huge risk of paying a high multiple for a company with some of the issues raised herein? Talk to transaction experts and, if you’re willing to pay for it, get a formal valuation prior to putting your company on the market.
Your Near-term Future – Some owners just want to retire or quit the business after the transaction. If you’re the person who manages the company’s client relationships, or you’re the chief technologist, or if there is a major upcoming re-compete, the buyer is likely to want you to stick around for a while after the deal is inked. And there may be an “earn-out” provision that ties some portion of your proceeds to achieving certain objectives over that timeframe. Before you put the company on the market, be sure to consider how you would answer a buyer if they ask you stay on.
Due Diligence Preparation – There needs to be sufficient organization and appetite toward due diligence. The process is inevitably painful, invasive and underestimated. Approach this as a client engagement or actual project and assign one individual to own/manage responsiveness and production.
Without question, selling your company will be the most important professional decision you will ever make. If you address these issues prior to formally starting the process, you will get more attention from investment bankers, dramatically increase the probability of a successful transaction, and likely increase your proceeds too. Most investment bankers don’t have the time or resources to help you address most of the things we have identified. Even worse, they might see you as an unsophisticated seller and probably turn down your business. So, commit the time, effort and resources to prepare 12-24 months before you call the bankers.
Steve Pimpo and Bill Rossello are Principals and co-founders of Greenhouse Consulting, a Washington, DC based business that provides management consulting services to help companies grow or prepare to sell. They can be reached at email@example.com and firstname.lastname@example.org, respectively.
This is a Guest blog post from Ling Zhang, Senior Manager at Dixon Hughes Goodman LLP. She covers a lot information which is extremely valuable for small businesses.
“Cash is King” for businesses, especially when they are drifting in the rough currents due to COVID-19. What can technology, services, and life science companies do to survive the challenges and thrive through oppotunities in the current economic conditions? Here are a few considerations for innovative companies to manage cash flow since the pandemic’s inception.
Utilizing the CARES Act and New Laws and Legislation
Businesses have been following new legislation closely and, when possible, taking advantage of cash flow assistance from the federal government to increase liquidity. The following is a list of programs created by the CARES Act that support small businesses:
1. Paycheck Protection Program
As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Congress had appropriated $349 billion for the Paycheck Protection Program (PPP), providing loans of up to $10 million to certain qualified small businesses, and also offering forgiveness for
all or a portion of the loan. As the first round of PPP funding has been utilized, a new funding package has been approved for the PPP for $480 billion, which appropriated an additional $320 billion for the PPP.
The new funding package, passed on April 24, 2020, also includes $60 billion for the Disaster Loans Program and Emergency EIDL Grants.
2. Small Business Debt Relief Program
This program will provide non-disaster Small Business Administration (SBA) loans, specifically 7(a), 504 and microloans not made under the PPP. Under this program, all payments on these SBA loans, including principal, interest and fees, are covered by SBA for six months.
The program provides loans up to $2 million and emergency advances up to $10,000 that are not required to be repaid.
The CARES Act also has the following tax provisions available:
1. Employee Retention Credit
A refundable payroll tax credit for up to 50 percent of wages paid to certain employees is available to eligible employers during the COVID-19 crisis through Dec. 31, 2020. This credit is not available to employers receiving
2. Delay Payment of Payroll Taxes
Taxpayers can defer paying the employer portion of certain payroll taxes during the period beginning on the Act’s date of enactment and ending on Dec. 31, 2020. Half of the deferred amount is due on Dec. 31, 2021, and the other half is due on Dec. 31, 2022. For PPP loan recipients, the Internal Revenue Service (IRS) FAQs1 clarify that taxpayers may defer the employer portion of Social Security on wages paid between March 27, 2020, and the date which the lender issues a confirmation of loan forgiveness for the recipients’ PPP loan.
3. Other Tax Provisions to Accelerate Cash
Other tax provisions include correction of Qualified Improvement Property depreciation; use of excess business loss and Net Operating Losses; and use of Corporate AMT Credits. Consulting with a tax professional may help increase cash flows through maximizing tax refunds and tax planning for the business. Please reach out to your tax advisor to evaluate possible solutions as these may be complex decisions.
4. Main Street Lending Program to Provide Liquidity to Small and Mid-Size Businesses
These four-year term loans are for companies that have less than 15,000 employees and $5 billion in revenue and have a minimum loan size of $1 million. The loans are generally available even if you have received a PPP loan and there is currently no indication of “affiliation” rules that disallowed many private equity portfolio companies from eligibility for the PPP loans. The loan size is generally based on a multiple of 2019 earnings before interest, taxes, depreciation and amortization (EBITDA), which can be adjusted as permitted by lending institutions, and includes existing debt.
The Families First Coronavirus Response Act (FFCRA) also provides refundable tax credit as follows:
Eligible employers are entitled to refundable tax credits for qualified leave wages that are paid, during the period beginning April 1, 2020 and ending Dec. 31, 2020, for specified reasons related to COVID-19 under the FFCRA.
Federal and state governments are continuing to evaluate
additional assistance to businesses.
Turning Challenges into Opportunities
Many leaders of technology, life sciences and service companies, including technology giants and small businesses, have pivoted during the pandemic in different ways by identifying opportunities, and taking immediate action to generate cash to secure a future for their employees while contributing, in their own unique way, to find a vaccine.
Examples include life sciences and medical device companies developing and selling antibody or COVID-19 testing kits; tech manufacturers making ventilators; SaaS software companies offering free HR applications to help manage the health and safety of employees; cyber security information technology services companies developing tracing technologies and providing services to help mitigate cyber security and privacy risks of work-from-home arrangements; services firms providing assistance on the interpretation of new legislation; and more.
Managing Cash Flows
Tech and life sciences companies should also assess key performance indicators (KPI), monitor budget versus actual analyses more closely and frequently, and deploy a plan to manage cash flows through the pandemic and beyond. Companies can consider the following areas to manage internal cash flows in response to the current environment:
1. Accelerate accounts receivable collections through active collection efforts and/or evaluating new technologies to allow customers new payment methodologies;
2. Manage vendors by initiating dialogue and negotiations with extended or delayed payment terms;
3. Classify expenses by variable versus fixed, and consider plans to cut spending on variable expenses where possible. Seek concessions on fixed expenses such as rent abatements, delay in payments, or extended payment terms;
4. Evaluate plans to reduce salary expenses including furloughs, salary reductions, and/or a reduction in force;
5. Seek additional financing opportunities through loans or use of availability on lines of credit;
6. Revise and develop new cash flow forecasts from operations for various scenarios – three-to-six months or even longer if necessary.
As a Senior Manager in the DHG Technology practice, Ling Zhang works closely with client management and C-suite executives to provide audit, financial accounting advisory, and risk advisory services to multi-national publicly-traded corporations and private companies with revenues ranging from $10 million to $50 billion. She advises clients on SEC filings, complex debt and equity transactions, merger and acquisition, new accounting guidance implementation, internal control system design and implementation, and financial statements reporting and disclosures. She can be reached at email@example.com.
Demonstrating to investors that your business model is sustainable, especially in times of uncertainty or jarring disruption, like we’re facing now with the Coronavirus pandemic, can give you the edge you need to get funded. In my previous article, “Now’s the Time to Get Your Business Funded: Coronavirus Edition,” I highlighted the fact that savvy investors are still looking for great investment opportunities. Those great opportunities include investing in both the idea and the one with whom the idea originated.
Pitch Sustainability In Any Market
As part of your funding story and pitch deck, it is important in today’s environment to present the ways in which you can navigate operating the business and even excelling despite quarantines and partial lockdowns being in place. Some sustainability concepts to consider include:
Business Model – Where does your business reside along the industry vertical or value chain?
Sales Model – How do you interact with and sell to customers (i.e., brick-and-mortar, direct sales, e-commerce)
Organization Model – What is the composition of your workforce? Do you require staff to be on premises? Are you dependent on contractors or outsourced partners?
Product or Service Offering – Is your offering something that will be of value during a major disruptive social or economic event?
Materials Supply – Will shutdowns like we are experiencing now impact your ability to obtain the raw materials, inputs, and supplies required to deliver your product to market?
Expertise – Who on your leadership team or advisory board has the experience and expertise in helping organizations navigate through crises and times of instability?
Finances and Cost Structure – Do you have a lean enough cost structure and a good enough understanding of the financials to ensure a proper runway for funding to growth?
Employee and Customer Sentiment – Do you have a clear understanding of the mindset your target customer has during “regular” times versus during a crisis like we’re facing today? What about your employees…do you know how a crisis will impact their ability to effectively deliver for your customers?
New Marketing or Channel Opportunities – Have you explored changes you can make to your product offering, pricing, payment terms, customer segments, delivery methods, marketing strategies, partnerships, and co-branding initiatives that would better meet the needs of the market during a crisis?
Investors want to invest in people with great ideas, but even more so with those who understand how to bring those great ideas to the market, whatever condition that market is in, successfully. Show them that you and your team have that expertise as part of your funding story and pitch deck. Now is the time, because if not now, when?
To learn more on how to create an epic fundraising story for digital presentations to investors, contact me for a complimentary consultation by phone at 314-578-0958 or by email at firstname.lastname@example.org.
Ines LeBow is the CEO, Transformation Executive for ETS. She is a known catalyst for business operations, bringing 30+ years of hands-on experience. Ines has a long history of being recruited into senior executive roles to improve the execution of business operations and to drive revenue growth. You can see her LinkedIn Profile at http://www.linkedin.com/in/ineslebow, view the ETS website at http://www.transformationsolutions.pro, or email her directly at email@example.com.
The Big Idea CONNECTpreneur Summer Forum is a “NETWORKING MASHUP” of 165+ of the DC Region’s TOP Entrepreneurs, Business Leaders, CXOs, Angels, and VCs. Most of the attendees are “INVITATION ONLY,” and we are limiting service provider participation in order to maximize the experience for our Attendees and Sponsors.
Presented by LORE Systems, this UNIQUE EVENT is like NONE OTHER in our region, due to the high quality of our attendees and participants, as well as our program and unprecedented networking.
Come see what happens when you put a group of “A List” business leaders and entrepreneurs in one room for a few hours!
“TURBOCHARGING Entrepreneurship” Discussion
“ART OF THE PIVOT” with “UBER” technology entrepreneur Reggie Aggarwal of CVENT
9 Emerging tech companies seeking funding will briefly tell their stories
Networking sessions before, during, and after the event
The venue is the Tower Club in Tyson’s Corner, Northern Virginia’s premier private business club. A plated breakfast and unlimited coffee are included.
7:00–8:00 am – ARRIVAL / NETWORKING
8:00 – 8:05 am – WELCOME
8:05 – 8:45 am – SESSION 1 – “TURBOCHARGING ENTREPRENEURSHIP IN THE DC REGION” with Uber entrepreneur and angel investor Doug Humphrey, CEO and Founder, CIDERA; Co-Founder, DIGEX
8:45 – 9:20 am – SESSION 2 – “THE ART OF THE PIVOT” with Uber entrepreneur Reggie Aggarwal, Founder and CEO of CVENT
9:20 – 9:45 am – NETWORKING BREAK
9:45 – 11:30 am – SESSION 3 – COMPANY PRESENTATIONS (all confirmed)
Last week, the State of Maryland became the first state in the USA to use an online auction to raise funds for a venture capital program. The auction yielded $84 million, a whopping 20% more than the original forecasted goal of $70 million. On September 24, 2011, I wrote a brief summary of the InvestMaryland program.
InvestMaryland will invest in the State’s promising start-up and early stage companies, as early as this summer. The $84 million raised was generated through an online auction of premium tax credits to 11 insurance companies (including Hartford Insurance, New York Life, Chubb, GEICO, and Met Life) with operations in Maryland. The inaugural round of investments will be made in innovative companies this summer through several private venture capital firms and the State’s successful Maryland Venture Fund (MVF),
Said Governor Martin O’Malley, “Our State is well-positioned to be a leader in the new economy as a global hub of innovation – a leader in science, security, health, discovery and information technology. That’s why last year, together with business leaders from across the State and the General Assembly, we chose to invest in our diverse and highly-educated workforce and the skills and talents of our people for the jobs and opportunity of tomorrow.”
Earlier this year, the Authority selected Grant Street Group to prepare for and run the tax credit auction and also recently selected Altius Associates, a London-based firm, to oversee the selection of three to four private venture firms to invest the InvestMaryland funds. The private venture firms will be responsible for investing two-thirds of the funds, which will return 100 percent of the principal and 80 percent of the profits to the State’s general fund. The remaining 33 percent will be invested by 17-year-old Maryland Venture Fund (MVF). The Maryland Small Business Development Financing Authority (MSBDFA) will also receive a portion of funds for investment. Returns on the funds invested through the MVF will be reinvested in the program.
InvestMaryland has the potential to create thousands of jobs in Innovation Economy sectors – life sciences and biotechnology, cyber security/IT and clean/green tech and attract billions of follow on capital.
Maryland has an outstanding infrastructure to support an Innovation Economy. The Milken Institute ranks Maryland #2 in the nation for technology and science assets. According to study results, while Maryland received high rankings in human capital investment, research and development inputs, technology and science workforce, and technology concentration and dynamism, it lagged behind other states in risk capital and entrepreneurial infrastructure, demonstrating the need for InvestMaryland and other programs.
How will Altius select the Venture Capital firms? Altius will be evaluating venture capital funds based on management experience, firm experience, investment performance and criteria defined in the legislation.
When will the firms be selected? Venture capital firms will be selected starting June/July 2012 for a projected18-month period and make first round of investments in summer 2012.
What is the investment return to the State? The selected venture firms will return 100 percent of the principal investment by the State before taking any distribution of profits and will then pay 80 percent of the profits to the State. Any returns on investments made through the Maryland Venture Fund go back into the fund for an evergreen program.
What is the projected average investment with venture capital companies? Investment will likely range from as low as $250,000 upwards to $10M.
Is there investment funding available from MVF?Maryland Venture Fund will continue to invest in early stage companies (tech, biotech, clean energy) from $50,000 to $500,000 as initial investments.
Maryland Venture Fund Authority (MVFA) will perform a monitoring role to ensure that investments and reporting meet the legislative guidelines.
In summary, as a member of the MVFA, and as a resident and business owner in Maryland, I am very excited to see this InvestMaryland program being implemented:
This program brings great benefit for taxpayers. It helps create the jobs and companies of tomorrow and builds an economic climate where the most promising ideas and innovations have a chance to mature.
This is a win-win for all constituencies within the State of Maryland. Through this initiative, we can:
Infuse much needed capital into our seed and early stage companies
Recapitalize the State’s successful Maryland Venture Fund
Ensure no up-front cost to taxpayers
Provide a tax benefit to insurance companies who bid today, who can begin claiming credits in 2015.
Thanks for reading. I’d appreciate any Comments or feedback you may have on InvestMaryland.