How to Handle Confidentiality

- An intermediary should always sign a confidentiality or non-disclosure agreement (NDA). It is a 1 to 5 page document that acknowledges you have sensitive information that if released could harm your business and it should not be shared.

- Venture capitalists, however, will not normally sign a confidentiality agreement. They see so many companies in the same industry that they cannot sign one agreement and risk not being able to invest in other potential good deals.

For more information, visit www.EvanCarmichael.com.

Reader Question - Starting A Company

Evan,

I wanted to start a small importing/exporting company buying and selling handbags and ladies accessories. Can you give me direction as to what the best steps to take are? Also if there are any resources that I can research or use to get this going?

Thanks.

Karmela




Karmela,

Congratulations on your ambition to start a business!

My top three suggestions for you are the following:

1) Model Success. Find someone who has achieved business success who you admire. Look at people in your industry as well as outside your industry. For example, who is the most successful importing / exporting company right now for handbags? What about importers / exporters for other products? Who are some other successful entrepreneurs you look up to? By studying their stories and learning how they got started you can create a model of success for your own business. For some ideas you can visit my Modeling Masters blog at http://www.evancarmichael.com/Masters/Masters.html

2) Start Small. As an entrepreneur you�re bound to have many great ideas as to where your business can go. There are always new markets to tackle, new products to sell, and new opportunities to conquer. Many entrepreneurs, however, try to take on too much too quickly. The first year of a small business is about survival � making enough to pay the bills and ensuring you�re still going to be around next year. Most entrepreneurs who act big too quickly end up going bust. Build your foundation, dream big and take small steps today for what will soon be your outstanding company!

3) Set Goals. When you have a clear sense of what you want to do with your business, you are much more likely to achieve success. If you start driving without any destination in mind then you could spend your entire time driving around in circles! Take some time and write down where you want to take your business. Make long term goals as well as short term ones � what are you going to do this week to move forward on one of your long term goals? Set your direction and take steps every day to get closer to your goals.

Good luck in building your business and keep me posted!

Evan.

For more information, visit www.EvanCarmichael.com.

Reader Question - Selling My Invention

Dear Evan,

Claudio and I have been to some of your meetings which we enjoyed, we have developed a new wheelbarrow, it is a sort of self loading, but we are unable to find some manufacturers to take on this project, we had lot of good remarks from industries, we have corrected the negative remarks, and have a new prototype, drawings, but we don't have the necessary finances, it would be an ideal find an industry maybe in China to take over and maybe sell the all thing, we have filed in USA/ Argentina/PCT. And there should be no problems with the patent as we had some actions taken, but not really important, we have addressed them. Can you please give some advice on what next?

I thank you and hope to see you again.

All the best Maria Carosi


Hi Maria,

Moving from being an inventor to being an entrepreneur can often be a very challenging step. For an inventor to be successful he or she must be focused on satisfying a human need, which is to enhance our experience by giving us useful tools.

There are a couple of options that you can take. In terms of financing, your best bet would be to speak with angel investors (wealthy individuals like doctors, dentists, lawyers, etc.). They are usually reached through informal networks - your friends and family would be a good place to start to see if they know anyone who they can introduce you to. I've also written a section on my website dedicated to finding angel investors at http://www.evancarmichael.com/Angel-Investors/index.html.

A second option is to contact the BDC (Business Development Bank of Canada). They are a government run organization with a mandate to help Canadian entrepreneurs. They are not going to automatically approve you but they do take more risks compared to the typical banks.

You should also focus on getting some more traction with potential customers. You said that you've spoken with industries and have received good remarks. Will they purchase your product up front? Will they give you a letter of intent? Will they provide testimonials?

Often customers are great financing options for startup entrepreneurs. If they won't agree to buy up front then at least you can get their support to show potential investors. If you can show an investor or lender that you have clients lined up you've done more than 90% of the other business plans they've seen this month.

A final thought you might consider is to think about if you really want to run a business or not. Many inventors like to create but do not like the work that comes with operating a company. You need to focus on what you're the best at and bring others on who can complement you.

Good luck!

Evan.

For more information, visit www.EvanCarmichael.com.

Why the Venture Capitalist is Interested in You

Venture capitalists want to make money. They will either see you as an entry point into a new industry that that has potential or one where they are already invested in but you provide an exceptional case.

The venture capitalist makes their decision on two variables: greed and the probability of failure or success. If your company presents a great deal but is accompanied by extraordinarily high risks, the venture capitalist will not invest.

For more information, visit www.EvanCarmichael.com.

What the Proposal Executive Summary Looks Like

- Make it so that your mother or grandmother can understand it. Entrepreneurs too often fill their business plans with of acronyms, tech terms, and buzz words. Intermediaries can usually tell after the first paragraph how difficult it will be to raise capital for your business.

- Condense what you do and what you want into a statement that you can make very promptly in seconds or minutes. If you cannot communicate quickly, you will lose the investor's interest.

- You need to have a logical persuasion chain. You must persuade the venture capitalist to invest in your company just as you would persuade a customer to buy your product or service.

- If you cannot explain your business on the back of an envelope, you will not get financed. You need to grab the investor's attention in the first 3 to 5 minutes. If you cannot get their basic interest, you will not get their money.

- Venture capitalists see 2 to 3 deals per day and will say no most of the time. You need to distinguish yourself through clarity.

- Prepare an elevator pitch. Imagine getting on an elevator at the 20th floor of a building with the venture capitalists and getting a commitment by the time you reach the lobby.

- Harold Ross' first prospective for the New Yorker was no more than couple hundred words. It was so clearly laid out that you could read it today, 80 years later and still recognize that it describes the New Yorker.

- The venture capitalists will also look to the people behind the company. They are looking to see what the reputations of your chairman and board of directors are. This will help create credibility and trust.

For more information, visit www.EvanCarmichael.com.

Executive Summary Review - WaterWorld - Lesson #3 - The Business Model

The business model section of a plan is important because it outlines how your company will make money. The business model has to make sense, be a win for all parties involved, and be realistic.

WaterWorld's business model is to "sell directly to media executives and wholesale buyers in exchange for advertising and publicity. We give up a percentage of the sales garnered from the particular media. They in turn will distribute our products to their customers at the retail level. In many instances WaterWorld will get the orders directly and ship straight to the end user and then remit earnings to the media that generated the sale."

The typical business model for a media company such as a television station is to sell advertising � not products. They get paid based on the amount of air time you want and during which time as supposed to how successful your advertising is.

This strategy may work with smaller outlets who are having a hard time attracting enough companies to fill their advertising spots but does not lend itself well to the larger players.

Just as you need provide proof that your product works, you need to demonstrate to investors that your business model works and makes sense � especially when you're assumptions are based on activities that are outside the norm. Have media companies already agreed to this method of cooperation? Who are they? What have they said? How many more can you get and is this enough to push the product?

Reduce the risk for the investor by showing them that the business model works and is well thought out.

Would you like your Executive Summary reviewed? Click on the "Get Your Plan Reviewed" button at the top of the page.

For more information, visit www.EvanCarmichael.com.

Executive Summary Review - WaterWorld - Lesson #2 - Have You Done It Before?

One of the most important factors that investors look at is the management team. Has the president done it before and does he or she have the team to make the company successful or not?

Investors would rather put their money behind an average business plan with an outstanding president than an outstanding business plan with an average president.

In the WaterWorld summary the reader learns that president Mark Hall has various university degrees and is a small business lawyer from Minnesota. It also states that he "has helped start several small businesses for other entrepreneurs." What are these businesses? How was he involved? Did they turn into successful businesses? These are much more important areas to focus on than the university degrees.

The plan also states "We have several trusted and reliable persons who will assume positions in the company, after funding, that will significantly enhance our ability to serve the public, media executives and wholesale buyers through their years of industry experience." Who are these individuals? Why are they interested and what will their roles be?

Again, the investor is looking to maximize opportunity and minimize risk. This is done by betting on someone who has done it before. Whatever experience you do have running a business and being successful, leverage it in your plan. Investors care much more about your previous experience than your educational background.

If you don't have all the experience yourself, bring in a team and make sure to mention who they are and what their backgrounds are. Even having a reputable and experienced board of advisors can sometimes make the difference between getting funded or not.

Next - Lesson #3 - The Business Model

Would you like your Executive Summary reviewed? Click on the "Get Your Plan Reviewed" button at the top of the page.

For more information, visit www.EvanCarmichael.com.

How to Introduce Yourself to a Venture Capitalist

- The first option is to approach venture capitalists yourself. This is a very time consuming process and you risk taking your mind and attention away from your business.

- The best way to find a venture capitalist is through an intermediary. They know the important players on the street and what they are looking for and investing in. The venture capitalist relies on recommendations of the people they trust. If the intermediary has established friendly relationships with them, it will boost your chances of getting in.

- Going after a venture capitalist without an intermediary is like going to court and trying to represent yourself instead of having a lawyer.

For more information, visit www.EvanCarmichael.com.

How Long it Takes to Get the Money

- It will usually take between 3 and 4 months. It is very rare to obtain the money in under this 3 to 4 month period.

- Raising money is not like hiring people or purchasing new machinery. It is about building confidence between yourself, your company, and the investor. There is a certain of amount of due diligence that will be needed to build this confidence.

- Your ability to project your company in both a strategic and factual way will be critical to your success.

- The timing also depends on the sophistication of the entrepreneur. It the financing presentation is well laid it, it will make it much easier for the intermediary to get you in front of a venture capitalist.

- Make contact with intermediaries and venture capitalists before you need the money. This way they can track your progress, they know you before you need it and it will make it easier for you to obtain the necessary capital. Nobody likes to be rushed, especially venture capitalists.

For more information, visit www.EvanCarmichael.com.

Executive Summary Review - WaterWorld - Lesson #1 - Does It Work?

The summary provides the reader with information on what the benefits of the drinks are. For example, the company claims that the Victory drink can restore energy lost through exercise, training, and game time exertion, allow the heart muscles to withstand vigorous and strenuous exercise, fight and prevents lactic acid build-up, reduce and eliminate cramping, and boost energy reserves and accelerates muscle recovery time.

What is missing is the proof that it works. You need to demonstrate to potential investors that what you have is real. Show test studies, include testimonials, provide lab reports, have supporting quotes from respected individuals in your market. In other words "Show me the money!"

The problem is, while your product is probably excellent and can deliver on all the promises you are making, you need to remember that most of the other companies seeking capital out there are not marketing such reliable products. Unless you demonstrate that the product actually works then you are immediately lumped in with all the other "junk" business plans.

Investors see so many business plans every day that they are looking for reasons to say no. Don't make it easy for them to turn you down by not having supporting evidence for your claims.

Next - Lesson #2 - Have You Done It Before?

Would you like your Executive Summary reviewed? Click on the "Get Your Plan Reviewed" button at the top of the page.

For more information, visit www.EvanCarmichael.com.

Valuating a Business Examples

- Over the past 3 to 4 years, venture capitalists have been very conservative with their investments. This is because they have had so many problems within their current portfolios that they cannot afford to take the same risks on new companies.

- The method of valuation will also depend on your industry. In a traditional, or smokestack, industry there are typically many comparative examples. Here you can work from the earnings before interest, tax and depreciation (EBITDA) of similar companies and apply a ratio to your own business.

- New products and technologies pose a valuation problem due to the lack of comparative companies. It is much more difficult to valuate these businesses.

For more information, visit www.EvanCarmichael.com.

Executive Summary Review - WaterWorld - Highlights - A Ready Market

What's good about this company is that it is attacking a ready market. Many companies seeking capital can only really be successful when a new technological breakthrough has been made, government approval has been granted, or an entirely new market has been developed.

This increases the risk for the investor as there is uncertainty if the necessary changes will occur or not. Before making a decision, investors will weigh the opportunity of putting money into a company against the risk of losing it all. Most entrepreneurs do their best to show the opportunity of investing in their company but do not focus any energy on demonstrating how the investor's risk will be minimized and money will be safe.

The markets that WaterWorld is targeting are existing, multi billion dollar industries which are looking for new, innovating products to solve their pain.

Next - Lesson #1 - Does It Work?

Would you like your Executive Summary reviewed? Click on the "Get Your Plan Reviewed" button at the top of the page.

For more information, visit www.EvanCarmichael.com.

Executive Summary Review - WaterWorld - Overview

WaterWorld Enhanced Drinking Water (http://www.waterworldedw.com) is a manufacturer of energy drinks and spring water. The company has three functional energy drinks as part of its Peak Performance line of products. The three drinks are:

Amore', a sexual enhancement beverage with a natural aphrodisiac with a cherry/grape flavor that keeps him up and her feeling flush with a gentle warm feeling.

Trucker's Fuel, a tea flavor with a mild lemon twist drink for those who drive for a living or need to stay awake during a long day or need to study all night.

Victory, a lemon tasting beverage that can greatly reduce muscle fatigue, joint soreness, cramping, energy loss, and will speed energy recovery and increase energy reserves.

The company is in the startup phase and is run by Mark Hall, a Minnesota based small business lawyer. It is projecting to break even 6-12 months after funding and is searching for $1-4 million in capital at a $10 million valuation.

Next - Highlights - A Ready Market

Would you like your Executive Summary reviewed? Click on the "Get Your Plan Reviewed" button at the top of the page.

For more information, visit www.EvanCarmichael.com.

How Northern Crown Capital Valuates a Business

2009 Financial Projections
Earnings Before Tax $5,865,000
Tax Rate 42%
Taxes $2,463,300
Net Earnings $3,401,700

Amount Seeking to Raise Today $3,500,000

Discounted Value of Future Opportunity, 5 Years Out
2008 P/E Ratio 15
Value of Company in 2008 $51,025,500

Discount Rate Applied 30%
Year 2009 $51,025,500
Year 2008 $35,717,850
Year 2007 $25,002,495
Year 2006 $17,501,747
Year 2005 $12,251,223

Value of Company at Investment in 2005 $12,251,223
Less: Investment Amount $3,500,000
Present Value $8,751,223

Discount for Risk & Private Company 40%
Less: Discount for Risk & Private Company $3,500,489

Private Company Value $5,250,734


Present Value (What the Owner Keeps) $5,250,734 60.00%
Financing (What the Investor Gets) $3,500,000 40.00%

Total $8,750,734 100.00%

For more information, visit www.EvanCarmichael.com.

Reader Question - Finding Investment Capital

Good evening, my name is Chris and I am looking for some information on angel investment or venture capital for a future investment. I am looking at purchasing a bar/restaurant in Dutch St Maarten. The business is already up and running and has been very sucessful for a many number of years. The business is being sold well below market value and is not currently on the market. I am looking at moving on this business very quickly because once it hits the market it will not be on there very long. I am a little bit shy on the total investment which is why I am contacting you. Any information you have would be of great help. And if you are unable to help, any information you have on anyone who would help would be greatly appreciated.

Thanks for your help.

Chris


Hi Chris,

There are a number of ways to valuate a business. The model we typically use is discounted cash flow (DCF). In DCF, you take an estimate of the company's future earnings and discount it back to today to get the present value. Investors will often add a risk premium as well as a premium for being a private company.

The restaurant business is not one that lends itself to venture capitalists very well. VCs are looking for an average return of 30% per year which is hard to create in restaurants unless you are planning very serious expansion.

It could be of interest to the right angel investor. You would have to show what their return on investment would be and how quickly they will be able to recoup their investment. Other elements to keep in mind are how they might be able to exit the investment and how involved do you want them to be in the management of your business. For a more complete guide on Angel Investors visit: http://www.evancarmichael.com/Angel-Investors/index.html

If the business has been successful for a number of years they should have a healthy balance sheet and historical financials. This could lend itself to a leveraged buyout situation where you finance the acquisition through a heavy debt load. The cash flow would obviously have to be enough to cover your debt payments. You can discuss this with your bank as well as work with private firms provided that the numbers make sense.

Good luck!

Evan.

For more information, visit www.EvanCarmichael.com.

How to Valuate Your Business

- The venture capitalists will usually look at your projected, or pro forma, earnings 3 to 5 years from the point of their investment. From there they will deduct a 30% annual return that they expect to receive and will subtract a further percentage for the fact that you are a private and therefore non liquid company. This is known as the pre-money valuation.

- Right now, investment money is scarce and the venture capitalists are dramatically lowering business valuations.

For more information, visit www.EvanCarmichael.com.

How Much Money To Ask For

- There is no such thing as an overcapitalized small company.


How to Select the Right Venture Capitalists for Your Firm

- Some venture capitalists have highly targeted funds. These fund managers would have a full knowledge of your industry and be able to help spot the opportunity for your business.

- Be comfortable with the venture capitalists. Seeking their money is only the beginning of a relationship with them. They will become board members and have a major say in the development of the company's strategy and policies. It is important that you have good chemistry together, respect each other, and can get along.

- An intermediary such as Northern Crown Capital can help you determine the right venture capital company for you.

For more information, visit www.EvanCarmichael.com.

Executive Summary Review - Howling Moon Designs - Lesson #3 - Get A Management Team

One of the most important rules for venture capital investors is make sure the company has a solid management team. Investing in early stage companies is as much about the team as it is about the idea, if not more. Venture capitalists want to see that you have some experience and that you have competent people around you.

Howling Moon Designs lays out an organization structure and identifies the team members they will need to make the project a success, but at the moment the company has only one person.

In the plan it is also unclear as to what the founder�s previous experience has been and what other companies he has helped to success.

A venture capitalist is unlikely to invest in a company with one person and a limited track record.

You need to build a team around you with complementary skills. If you do not have much experience in running companies then build a board of advisors with people who have. You want to show as much as possible that you have the existing personnel in place already to make this business a success.

Would you like your Executive Summary reviewed? Click on the "Get Your Plan Reviewed" button at the top of the page.

For more information, visit www.EvanCarmichael.com.

The Types of Businesses Venture Capitalists Prefer

- Venture capitalists will not invest in anything illegal or immoral. Anything that involves laundered, dirty, or offshore money will not attract venture capital investment.

- Otherwise, a venture capitalist will look at any business providing that it meets their criteria of providing a return on investment, having good management, supplying a sound business plan, and demonstrating a developed product or service with revenues.

- Some venture capitalists as a matter of policy will restrict themselves to investing in a specific industry. It is the role of the intermediary to know which firms would be willing to invest in your company.

For more information, visit www.EvanCarmichael.com.

Executive Summary Review - Howling Moon Designs - Lesson #2 - Very Early Stage

The further along a company has gone towards generating real revenues and income, the easier it is to attract capital.

Howling Moon Designs has yet to deliver a prototype and is asking for enough money for the 3-4 years it will take to build the game.

Unless you've make a lot of money for investors doing it before or have a big customer lined up, investors are highly unlikely to risk a large amount of money for 3-4 years of development work.

Investors would rather finance marketing and expansion instead of research and development. You need to show as much as possible how the money will go towards sales and marketing and crunch down on your research and development timeline. There aren�t that many venture capitalists who are interested in funding ideas anymore.

Next - Lesson #3 - Get A Management Team

Would you like your Executive Summary reviewed? Click on the "Get Your Plan Reviewed" button at the top of the page.

For more information, visit www.EvanCarmichael.com.

Executive Summary Review - Howling Moon Designs - Lesson #1 - How Are You Different?

You have to be different to attract investment dollars. A common question venture capitalists will ask is "what is your unfair competitive advantage?" They want to see not only that you have an edge over your competitors but that it's such a big advantage that it's almost unfair.

The description of Destiny Online sounds extremely similar to that of Project Entropia, the leading competing game in this market. The competitive advantages listed are:

"The character you create will allow the player to have the ability for full customization. We will gain the rights of a high quality engine to use for the game. Inside the game world we are able to show over 15 different revenue streams that allow us to make money. The game world will always be changing and offer main new areas for the players. As well the partnership with Vognesvit helps provides us with an engine and a well experienced team."

One of the main benefits of Project Entropia is that players can create a truly unique character through an intuitive user interface. In addition, Project Entropia does offer a number of revenue streams for its players. I'm left unclear as to how this game will be excitingly different.

You will always be compared to the gorilla in the market � the company that is leading the industry. You need to make sure that you clearly differentiate yourself from your competition. A simple table which highlights the different characteristics is usually a great visual to include in your plan.

Next - Lesson #2 - Very Early Stage

Would you like your Executive Summary reviewed? Click on the "Get Your Plan Reviewed" button at the top of the page.

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What to Consider Before Raising Venture Capital

- Venture capitalists want to see more than an idea. They want to see that you have a client list, a finished product that is beyond the beta stage, a clearly defined need in the market place, and sales. They want to see that you have significant traction in place.

- Although during some periods, venture capitalists were willing to take a long-term perspective; this is a very rare phenomenon. Most venture capitalists want to see a return in a very short period of time.

- An essential characteristic of a successful entrepreneur is the ability to raise capital.

- Develop a relationship with your banker before you need the money. The final decision of whether to give you a loan or not rests with the loan officer. If she knows you and understands your business, your chances of receiving the money increase dramatically.

For more information, visit www.EvanCarmichael.com.

Executive Summary Review - Howling Moon Designs - Highlights - A Growth Market

Online gaming is big business and while the online gaming market for PCs is expected to drop over the coming years, one exciting and rapidly growing area is Massive Multiplayer Online Role Playing Gaming.

According to Wikipedia, "a massively (or massive) multiplayer online role-playing game or MMORPG is a multiplayer computer role-playing game that enables thousands of players to play in an evolving virtual world at the same time over the Internet. MMORPGs are a specific type of massively multiplayer online game (MMOG)." An estimated 20 million people worldwide are spending time in massively multiplayer online role-playing games.

Project Entropia (http://www.project-entropia.com/) is a popular MMORPG where players can construct buildings, create businesses and make investments to build their in-game wealth, which they can then cash out back into hard currency. The projected GNP for the Project Entropia universe in 2005 is 1.5 billion PED, or US$150 million.

This is definitely a growth market and, while still very early stage, could be a big money-maker for savvy investors.

Next - Lesson #1 - How Are You Different?

Would you like your Executive Summary reviewed? Click on the "Get Your Plan Reviewed" button at the top of the page.

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Angel Investors - Where To Find Angels

Informal networks (Accountants, lawyers, business associates etc.)

6 degrees of separation

$100-250k income individuals

Retired professionals / entrepreneurs

Angel groups

For more information, visit www.EvanCarmichael.com.

Executive Summary Review - Howling Moon Designs - Overview

Howling Moon Designs is a gaming company proposing to create a Massive Multiplayer Online Role Playing Game (MMORPG), Destiny Online. Destiny Online will be a real world economic system that allows players to get jobs in the game, open stores, enter tournaments, sell items on a website, go on quests, and be part of teams.

The company is in the startup phase and projects that the game will take 3 to 4 years to complete. It is run by Lee Ing from Ontario.

Next - Highlights - A Growth Market

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Stages of Financing

- The first stage of financing is to raise money from personal savings, credit cards, friends, and family. It is sometimes known as "golf-course preferred" when you ask people to invest in your company after meeting socially or playing a round of golf together.

- You need to build significant critical mass before you can attract an outside angel or venture capital investor and eventually to secure an initial public offering (IPO). The developing of the necessary critical mass can take years of hard work.

- There are some companies called incubators that will take an early stage business and guide them through the entire process of building an enterprise but will take a large percentage of your company in return.

For more information, visit www.EvanCarmichael.com.

Reader Question - Business Plan Guide

Hi - I'm interested in writing a business plan and would like to know what you would suggest as a good guide. I'm financially literate and have been involved in a number of different industries, so this guide doesn't necessarily have to be from a "beginners" perspective. Hope you can help.

David


Hi David,

This is one of the most frequently asked questions that I get. Having a solid business plan is critical for arranging the financing you need to grow your business as well as establish the confidence for yourself and your partners that your idea really could take off.

In response to a lot of feedback from website visitors, I put together a Sample Business Plan. It covers the important areas including:

1. Executive Summary
2. Company Description
3. Market Analysis
4. Marketing and Sales Activities
5. Products and Services
6. Operations
7. Management and Ownership
8. Funds Required and Their Users
9. Financial Data
10. Appendices or Exhibits

It can be found at: http://www.evancarmichael.com/Sample-Business-Plan/index.html

Another useful resource is the Business Development Bank of Canada. They have a free sample guide available as well. Since the link changes, simply type in BDC business plan into Google and it will pop up.

Good luck!

Evan.

For more information, visit www.EvanCarmichael.com.

Angel Investors - What To Do

Lose your ego.

Ask for help, not money.

Get them involved, show them, let them get hands on instead of just reading a business plan.

Listen, don't sermon.

Respect their money.

Respect their time.

For more information, visit www.EvanCarmichael.com.