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In our investment banking business we are often contacted by business start-ups asking for our help in raising money. I am sure that we were not the first organization that was contacted and that these hopeful entrepreneurs had been searching for months for funding. I try to be helpful and spend time on the phone with these people asking what I consider to be basic Business 101 questions. What is your product or service? What unmet need is it designed to fill? Who else is in your space? How does their product or service compare to your product or service? What is the size of the potential market? Why would a customer switch to your company? How do you plan on selling your product?

Often I am amazed that the entrepreneur has focused inwardly on his hobby or invention or software and has given very little thought to the potential market. Why build a business to sell to a small market segment? Every once in a while, an entrepreneur contacts me and the product or service really hits me as a winner. That is what happened when I was contacted by Russ Notestine, an inventor with a unique product. He had many of the elements mentioned above going in his favor but was still struggling because he had little experience in actually marketing a product. One of the reasons I got interested was that Russ had created a product designed to help back pain sufferers.

Well, that was me, so I was all ears. I had tweaked my back in an athletic event, still approaching the competition with the zeal of a college athlete but trapped in a 50 year old’s body. I was in significant pain and took the usual over the counter pain killers that only reduced the pain by 10%. The next day I could hardly get out of bed my lower back pain was so intense. I called the local chiropractor and began a treatment routine that involved 3 visits per week, heat, electric stimulation and adjustments. I bought my kneeling chair so I could actually work. I even bought the inversion boots so I could hang upside down in an attempt to provide some kind of relief.

My chiropractor got me to the point where I was at least able to be productive at work, but I continued treatments for almost a year. The medical bills were expensive, totaling about $6,000. The really expensive part was the one and one half hours I took out of my work day 2 and 3 days a week. If any of you run your own company, that expense dwarfed my medical expense. Nothing was working for me and I was ready to eat spiders if I thought it could make this problem go away.

Well, Russ tells me that I am not unusual and that 50 million Americans will suffer from at least one bout of serious back pain in their lives. He had passed test number one. There is a huge market for this product. He is explaining how his Vacupractor works and I am thinking (having seen or heard it all from start up companies), oh come on. He says he has this molded plastic shell that is about the size of your back. He tells me that you spray the device with water and then lay down on it. You then pick up your legs and slowly lower them and this creates a vacuum suction as the air is expelled. The device sticks to your back almost like a hard contact lens sticks to your eye. He explained that the suction stretches your back muscles and gently aligns your spine. Given that I was ready to eat spiders, I asked him to send me the Vacupractor.

My back had been OK for a few months so the thing sat in the box for a couple of weeks with little attention from me. I then strained my back again in my next event and I was feeling the beginning of another bout of back pain. I got home and got out the device and sprayed it with water and followed the instructions to expel the air and create the vacuum. I laid on it for about 15 minutes and could feel my back muscles relax. When I got off it, the pain was not completely gone but was considerably reduced. The next morning I got on it again and as I worked that afternoon I suddenly realized that I was not thinking about my back because the pain was totally gone and the start of a potentially long and painful lower back pain bout had been avoided. I couldn’t believe it. I called Russ to tell him about my experience and he said that is pretty much what he hears from other users.
photo credit: Marco Gomes

I was so grateful that I told Russ that I would try to help him with his marketing and sales. We still do not have that solved, but in terms of the other elements for a start up succeeding our entrepreneur has several things going for him:

Huge potential market

Totally unique solution to a painful problem

Cost competitive – the device costs less than 1 chiropractor visit

The potential for a big word of mouth viral marketing boost

Good product gross margins

I don’t think Russ consciously thought about the Business 101 issues when he started. He was a back pain sufferer and an inventor and he had an unmet need because none of the existing products solved his problem. He set out to create a lower back pain remedy for himself and when he got the solution, he thought, wow, I really have something here and there must be a huge market for it. I think he is right. Now if he can figure out how to generate meaningful sales with a limited marketing budget, he has a chance to turn a great product into a great business.

Here is an examples of a business idea that did not pass the Business 101 start up test. I was contacted by a software company that had built the best system for managing the sourcing of clothing to overseas contract manufacturers. They spent $1.5 million in development before doing any research on the competitive landscape. It turns out that for them to be reasonably profitable, they would have to sell the software license for a minimum of $50,000 per company license. The competitive systems in the industry, although not as robust as this one, had 85% of the functionality. They charged a monthly license fee of $300 per month. Our guys were priced way out of the market and literally shut this division down.

What an expensive lesson that should have been avoided before the start. If you are thinking of creating a company, make sure the economics are in your favor before you start. Are your margins going to be high enough to make the company viable? Another huge oversight by these very optimistic entrepreneurs is they figure like in Field of Dreams, if you build it they will come. Save that one for the field of fiction. In business, if you sell it they will come. Even the best ideas and the best products will die if you are not able to achieve meaningful distribution in a cost effective fashion. Go through this little exercise before you start. Who is in my space? How do they sell their product? Is it through a direct sales channel? What does it cost for a salesman to sell the product? What volume can a salesman reasonably expect to sell in a year? What revenues and profits are generated by a salesman at 100% of quota? What is the company’s cost for a salesman at 100% of quota? Does it make economic sense?

The Internet has been a game changer for start-ups with very few barriers to entry. These companies are very easy to start, but almost impossible to scale without some big funding. The sad truth is that the guys that are starting these businesses and getting the funding are guys that have done it before. A great article was recently published in Fortune Magazine about the original founders of Pay-Pal. Well these folks have made investors a lot of money before and the odds are very good that if they did it once, then they can do it again. That theory has been validated with these wizards founding Digg, LinkedIn, Slide, Mozilla, Technorati, and having a significant investment in Facebook.

The VC’s line up to give these guys money. For others it is a painful process of endless meetings and presentations and no money. As a start up company, you have many things going against you. Make sure you are not blinded by your great idea. Think about the market demand, your competition, your margins, your sales and marketing, and getting your company to break even. Do not get distracted trying to attract VC financing at this point. If you can generate enough sales to fund your operations through bootstrapping, you have passed a big test of market validation. If you now need financing to take the company to the next level, then the professional investors will start to listen.

Dave Kauppi is the editor of The Exit Strategist Newsletter, a Merger and Acquisition Advisor and President of MidMarket Capital, representing owners in the sale of privately held businesses. We provide Wall Street style investment banking services to lower mid market companies at a size appropriate fee structure.

photo credit: zhushmanson

Starting a small business has proven to be on e of the best ways to build wealth in America. Over 90% of all millionaires are small business owners. Taking the first step towards financial freedom is the most important thing you can do.

Now, financing your business venture can prove to be more difficult than many imagine. The good news is that there are thousands of grant programs available to people looking to start or expand a small business.

Many grant websites out there would like us to believe that it’s as easy as locating an obscure federal grant program and then sending them a letter and wait for the check in the mail. Furthermore, they’ll charge $59 for this info and provide no guidance on how to apply for the grant. It is important to realize:

(i) It is NOT that easy to get free money from the government
(ii)…but it IS absolutely possible, with a little research & work, to get truly free money from the government (or any one of several private foundations).

Now, most US government grants for businesses are targeted at larger corporations or non-profits organizations, particularly those specializing in education or medicine. The best-bet for getting money for a small-business is from private organizations and state agencies.

The process of finding a small business grant program to apply for and reviewing the requirements to getting is very time consuming. After conducting a two-week search for a medical publisher, I found the requirements to be very specific and difficult to meet.

Eligibility can be based on your location, and your business’ sales revenue to the application date, years in business, sex, race, and even for the purpose of funding. If your business sets out on a small business grant seeking mission there are some questions that you will have to answer which are:

1. Do you have the time and the resources available so that you can search for a small business grant program and apply for it?

2. Can you afford to hire a consultant if you are unsure of how to do it, or can you learn the grant application process by yourself?

3. Does your business need the money right now for expansion or can you wait up to a year?

If you want to take a look at the small business grants available, the best place to start is the Catalog of Federal Domestic Assistance (CFDA). The CFDA lists thousands of grants from all government agencies for free. Many business grants will be geared towards minority business development or rural business opportunity grants. Do not overlook the other assistance programs available such as equipment and training.

When you do locate a small business program, you will need to be ready to go through the, approval process. Most beginners spend too much time searching for a grant program then not enough time preparing and writing the grant application. This is crucial to your success as getting grant money. Our goal is to help people spend less time finding grants and providing them with a detailed approach to preparing a successful grant application.

Here are some tips:

Small Business Grant Tips

- Provide the grant company with all of your complete and accurate information in the application. An incomplete application will likely not make the review process or it can add delay your grant form getting approved.

- Get to know your grant officer and their constraints, budget and concerns with approving your grant.

- Stand out among the crowd with a well-prepared business plan if required. You will have to demonstrate your understanding of the business. Show how the money will bring the benefit the government agency wants.

If you find that you are willing to go through the steps that will be needed in order for you to get your grant, then this will be your comprehensive guide to making it happen. Visit our website for some free resources such as state funding agencies and more grant writing resources.

Two years ago I went through the agonizing process of getting a grant to buy a local business. A lot of Grant sites out there will charge you $50+ for the info in this article… There are a couple of things to remember when shopping for a grant program. Let this article point you in the right direction and read more at http://www.OfficialGovernmentGrants.com

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“Get an introduction to the venture capitalist.” It’s good advice. It just isn’t always possible, or even likely. Many outstanding entrepreneurs with equally outstanding financing proposals simply don’t have The Introduction.

Unsolicited, and un-introduced, financing proposals are typically tossed into the dog pile or slush fund or circular file. In most venture capital firms it is the job of a new member of the firm, typically someone with a freshly scrubbed MBA, to weed through that pile, toss out unlikely candidates and pick out any projects that are worth looking at. So the first barrier is a young, ambitious, very well educated, inexperienced person who wants to make a good impression on the partners in the firm.

Getting out of the Dog Pile

About 90% to 95% of the proposals in the dog pile are tossed. Some of the top reasons for tossing proposals at this stage include:

Sloppy appearance. Loose pages held together with a paper clip, smudges on the pages, yucky colors – these are all quick “toss me” clues. This is typically the very first thing that the reviewer notices, so the appearance has to be commanding.

Too little information. A 1-2 page summary is very nice IF it has been specifically requested by the venture capital firm and IF it really does include the information requested by that venture capital firm. A generic 2-page summary sent to 200 venture firms is pretty much a waste of time. A 50-page dissertation on a new patent is equally ineffective – it just doesn’t provide all the information that a venture capital firm needs. The length of the proposal is considerably less critical than the quality of the information provided. Rarely can sufficient information be provided in less than 20 pages, and rarely is it acceptable to present more than 30 pages. And all of the pages – no matter how many pages there are — must be responsive to the needs of the specific type of venture capital firm.

Too much information. There’s a myth with some truth to it: When confronted with a huge pile of proposals to read, the reader will toss them up in the air, and the heavy ones that fall to the bottom of the heap will be read last. A financing proposal with three binders attached, with everything from incorporation documentation to copies of patents for competing companies, is too much. Like Scheherrazade’s stories, the financing proposal entices the reader to want more. Dumping everything in the venture capitalist’s lap before ever meeting him gives the venture firm no reason whatsoever to ask for more. In fact, presented with such an overwhelming glump of information, most venture firms would be extremely leery about asking for more.

Wrong format. There is a structure to a financing proposal: the beginning (the cover sheet, the Front Page and the Table of Contents), the middle (the guts of the information divided into logical sections), and the end (absolutely essential attachment, such as copy of critical patent). Omitting sections, or writing in the format of a novel, does little but confuse the issue. Leave the creativity to the presentation itself and keep the structure pretty basic.

Information that is too technical. Scientists and engineers waft poetic about inventions that are all but incomprehensible to everyone else. While it is safe to assume that the venture capitalist is intelligent (and he is!), remember that the first line of defense is someone who isn’t terribly experienced. So explanations really help. Pretty basic explanations help even more.

Lack of a concise Summary Page, with specific funding needed specified. The Front Page, or Summary Page, contains very specific information: the industry, the status of the company, the amount of money needed, the type of funding requested, and The Hook. The Hook is a brief note of whatever it is that distinguishes this company/invention/concept from the thousands of others on the market. Lacking ALL of this information on the Front Page, most venture capitalists won’t go further.

Lack of information on the principals. It is axiomatic that venture capitalists invest in people, not in ideas. There are tens of thousands, if not hundreds of thousands, of patents languishing in the Patent and Trademark Office. There are very few unemployed skilled leaders. Make certain the venture capitalist knows how truly talented your management team is.

Wrong level of investment or wrong industry for venture capital firm. Venture capital firms receive dozens of business plans every day that are simply inappropriate for them. Venture capital firms specialize. Some like small startups; some only invest in mezzanine stage companies. Some prefer investments under $2.5 million; some will only invest over $2.5 million. Some specialize in communications or biotech or energy. Find out what the venture capitalist wants before sending the proposal – you will save yourself a bundle in printing and shipping costs, not to mention the time saved in going after the true targets.

Accentuate the Positive

There are some things you can do that act as a catalyst in getting your proposal noticed (in addition to having a great business plan, which I assume you do have).

First, address the plan to a person, not to the company. In your research, you learned about which partners sat on which boards, which ones gave speeches at which industry event. Use that knowledge now to target the proposal to just the right person.

And, perhaps most importantly, in your cover letter tell why you are sending this business plan to this lender/investor at this point in time. Perhaps it’s because they funded a company that will be a major supplier of yours. Perhaps an associate recommended that firm. Perhaps you heard the principal speak at a convention. The fact that you got his name out of a book doesn’t count. Make the reason real.

Making the Second Cut

Depending on the size and culture of the venture capital firm, the initial reader, a mid level associate or even top partners may make the second cut. Criteria here focus on the specific needs of the venture capital firm, such as:

Emphasize symbiotic relationship with existing portfolio companies. Any company that can demonstrate a strong relationship to a successful existing portfolio company, or provide a means of creating profit in existing portfolio companies, is way ahead of the game. Not only will the venture capital firm be well aware of the industry, but it will welcome the influx of influence on the bottom line of its other companies as well.

Create strong ties where slender threads exist. So an Advisory Board member and the venture capitalist went to the same graduate school. It’s a slender thread of connection. But that graduate school needs to be listed prominently in the bio of that Advisory Board member. (As an aside, contact the department chair or known professors to see if there is a direct introduction available somewhere.) Create a database of all advisory boards, schools, publications, companies and associations that all of your key people, contacts and potential investors have. Cross reference those to everything you can discover about the venture capitalist. There probably are slender threads that can be brought to the forefront.

Demonstrate an in-depth knowledge of the industry and its profit structure. It never ceases to amaze me how many people think they know the retail business without ever having sold so much as a pair of shoes. The same holds true for every industry. Each industry has its quirks and foibles. Each industry has unique profit centers and modes of operation. Each industry has its true leaders and its falsettos, those who talk loud but don’t truly know anything. Nothing can beat actual experience in the industry.

The Final Cut

The top 2-10% of the proposals remain in contention here. About half of the entrepreneurs will be invited to present a dog and pony show. While the early stages of elimination are driven by industry standards, at this level it gets very personal. The selection process here caters to the needs of the specific venture capital firm at that specific point in time, and can change from day to day, or from week to week.

You can do everything absolutely right and be eliminated here. Perhaps the other companies in their portfolio have hit snags that haven’t reached the public yet. Perhaps the venture capital firm is in the midst of over committing to certain industries. Perhaps an IPO that was previously scheduled got pulled back, so the venture capital firm doesn’t have the money it expected to have.

Perhaps there truly is something amiss in your financing proposal that one of the partners picked up on.

The one consolation is that, if you have reached this high, you will likely get a call from someone at the venture capital firm expressing some type of explanation for not proceeding. At the earlier levels of elimination you probably heard nothing at all. Listen carefully to what the venture capitalist has to say, and proceed accordingly. And be encouraged. You ARE in top contention, even if this is not quite the right firm.

Look at your financing proposal again – this time from the perspective a first reader, and then from the perspective of a top partner in a venture capital firm intent on making money. Revise. Target. Send it again.

MaryAnn Shank, a recognized expert in the business plan field, devoted many years to sifting through business plans to find the real gems. She regularly contributes to http://www.businessplanmaster.com with advice to emerging entrepreneurs.