Category Archives: Business Financing

Mark Cuban’s Real-World Stimulus Plan

Back to Fundamentals, Bootstrapping, Venture Capital

Billionaire Mark Cuban announced his own stimulus plan earlier this week. It's sheer genius.

Here's how he describes it in his blog post, The Mark Cuban stimulus plan:

Rather than trying to be a Venture Capitalist, I was looking for an idea that hopefully could inspire people to create businesses that could quickly become self funding. Businesses that just needed a jump start to get the ball rolling and create jobs. I'm a big believer that entrepreneurs will lead us out of this mess. I just needed a way to help.

Then he lists the rules:

  1. It can be an existing business or a start up.
  2. It can not be a business that generates any revenue from advertising. Why ? Because I want this to be a business where you sell something and get paid for it. That's the only way to get and stay profitable in such a short period of time.

So far, so good. But now pay attention to these next four rules, as a group:

  1. It MUST BE CASH FLOW BREAK EVEN within 60 days
  2. It must be profitable within 90 days.
  3. Funding will be on a monthly basis. If you don't make your numbers, the funding stops.
  4. You must demonstrate as part of your plan that you sell your product or service for more than what it costs you to produce, fully encumbered.

Do you see it with those four rules? He's promising to fund companies only if they don't really need funding; only if they have real value; only if they're perfectly set up for bootstrapping. It's sheer genius. I don't think he's being cynical, or deceptive; I think he's making a point. But we go on…

  1. Everyone must work. The organization is completely flat. There are no employees reporting to managers. There is the founder/owners and everyone else.
  2. You must post your business plan here, or you can post it on slideshare.com, scribd.com or Google docs, all completely public for anyone to see and/or download.
  3. I make no promises that if your business is profitable, that I will invest more money. Once you get the initial funding you are on your own.
  4. I will make no promises that I will be available to offer help. If I want to, I will. If not, I won't.
  5. If you do get money, it goes into a bank that I specify, and I have the ability to watch the funds flow and the opportunity to require that I cosign any outflows.
  6. In your business plan, make sure to specify how much equity I will receive or how I will get a return on my money.
  7. No multi-level marketing programs (added 2/10/09 1pm).

So there you have it. This is somebody who's made it, multi-billionaire, showing a whole lot of common sense. He calls it "open source funding," which is apparently a reference to making the business plan transparent.

Not, by the way, that the country doesn't need the full formal stimulus plan as well, for about 300-some million reasons … but let's hear it for old fashioned ideas like making something people need, selling it for more than it costs to make, and minding the cash flow.

Valuation Questions, Web 2.0, Real World

Venture Capital, Weblogs

I think valuation is fascinating. What is a company worth? With the larger publicly traded companies you can easily calculate a valuation using the wisdom of the crowd, the market itself, by multiplying shares outstanding times price per share. But in the real world of small business, gulp, this is much harder.

Concretely: how much is your business worth? How much could you sell it for? How would you decide? What formulas would you use? More importantly, what formulas would your hypothetical or theoretical buyers use?

Ultimately, like it or not, just about anything is worth what somebody else will pay for it. Your business is worth what you could sell it for.

And what would that be? Well, that's really hard to know, until you go to the market. Some people talk about 5 or 10 or more times profits, but then face it, in small business, in the real world, profits is a very vague number, an accounting conceit. Some people talk about 1 or 2 or more times sales, which eliminates a lot of the accounting fiction. Others talk about valuations based on book value, or assets.

I'm amused at how much of this stuff is loosey-goosey, even though it's in the realm of finance, which is supposed to be mathematical and exact. And isn't.

I posted here last Fall about BizEquity.com, Tom Taulli's really intriguing site that's attempting to create a database of first-cut estimated valuations of businesses all over the United States. I talked to Tom last month after the big meltdown, and found, happily, he's still optimistic about the long-term value of the BizEquity site. They're working on it. I suggested he take his September data and multiply it by about 0.5 or so; and I was only partially joking. Tom knows this area very well, but of course the whole volatility burst has been a challenge. Last summer might not have been the most opportune time for Tom and his backers to start.

So I was interested yesterday Monday morning as I soaked in coffee and I noted — thanks to Ann Handley in Twitter — Advertising Age's Simon Dumenco's angry analysis of the Huffington Post's recent venture capital infusion at a valuation of $100 million.

His title, unfortunately, is What's $200 Million Divided by 2009 Reality. That's too bad, because the $100 million (or less) estimated valuation was widely publicized when Oak Investment Partners announced the investment last November. Simon doesn't enhance his argument by referring to the twice-as-large-as-fact figure, $200 million, that actually appeared much earlier, last Spring. The phrase "straw man" comes to mind. 

That glaring error aside, he seems offended by the VC's reported valuation. He has references to the big Internet bubble of the late 1990s. It should be only $2 million, according to him.

I think he exaggerates his point, not just by doubling the figure, but also by lowballing his real estimate. The Huffington Post has made huge (and well reported) gains in traffic. Furthermore, unlike a lot of the Web 2.0 sites he wants to knock, this one has an actual revenue model. For better or worse, the Huffington Post is almost like old-fashioned media. It generates readers with news and opinion, and it sells advertising. So somewhere in the numbers — which are not public — is a number for revenues, and a valuation based on (among other things) revenues as well as traffic.

And it all goes to illustrate my point, today: valuation is hard to figure. It's also important. And, in the end, a company is worth what buyers will pay for it. In the case of Huffington Post, it's not a vague theoretical guess. The VCs who invested in Huffington set a price, and, with that, a valuation.

Challenge of this Generation

Current Affairs, Venture Capital

I highly recommend watching this video of a conversation between John Doerr (Kleiner Perkins Caufield & Byers) and John Heilemann (New York Magazine), at the Web 2.0 summit last week

John Doerr is a smart person who's been leading Kleiner Perkins — which leads the venture capital world — for a long time. I was a vice president at Creative Strategies in 1983, and at that time he was already a leading VC.

The interview starts with some second-hand questions from president-elect Barack Obama, and stays interesting throughout.

I can't summarize this 32-minute video. Watch it. The challenge of this generation, the reference in my title, is about energy. Towards the middle, he lists 11 points for high-end startups during a period of three to four years of hard times. Things like securing cash, communicating, selling …

"While you're cutting things, above all, do not cut hope."

Meanwhile, Back on the Investment Ranch

Venture Capital

Times are tough for venture capitalists too. You may have already seen the Sequoia Capital slide show that's been circulating for a few weeks now. It's pretty stark. You may also have seen the great Survival Matrix piece Fred Wilson posted the day before yesterday.

In a nutshell, there haven't been any IPOs for a while now. Liquidity events are rare. And we know that things don't look like they're getting better for a while.

And the VCs want the companies they're into to survive.

These days they're thinking a lot about burn rate, how much the companies spend every month. And runway, which is how long they'll be able to last, given their burn rates and the capital stowed away.

It's a simple calculation. Cash of a million and burn rate of 250K is a runway of four months. The longer, the better.

TheFunded Founder Talks

Venture Capital

I remain very impressed with http://www.thefunded.com. It continues to develop as a repository of reviews and war stories related to the high end of venture capital. You can join for free, and browse through opinions about VC lenders, plus some articles, and generally useful content. I’ve posted on it several times on this blog previously, and today I received an email from vator.tv with this interview with founder Adeo Ressi.

http://www.vator.tv/embed/player.swf?videoSrc=http://s3.amazonaws.com/vator_production_out/2322_The_Founded_Pitch_08-4-Sequence_1-Default_MPEG-4.flv&fillColor=0xFFFFFF&videoMode=embed&pitchURL=http://www.vator.tv/pitch/show/TheFunded-TheFunded

20 Excellent Online Videos on Entrepreneurship

Venture Capital

This is just plain exciting to me. Online videos, free, including Guy Kawasaki, Jerry Kaplan, Eric Schmidt, Larry Page, Bob Sutton, and a great selection of topics including venture capital, entrepreneurship … this is really good stuff.

I just discovered the top 20 videos at the Stanford Technology Ventures Program educator’s corner. Some of them are 2-3 minute snippets, some 5-10 minute cuts.

Is That Solar Coming? Or Was it Hot Already?

Technology, Venture Capital

The right solar panels spread over a 10 mile by 10 mile square of Eastern Oregon desert could provide enough power to run the United States. Or so I was told last week by Scott Pope, of Sustainable Wealth, who makes a living investing other people’s money in stocks and chooses those stocks based on qualities like sustainability, social conscience, governance, and environmental impact.

Meanwhile yesterday’s Sunday New York Times has a piece called Silicon Valley Starts to Turn Its Face to the Sun about a rush to invest in solar technologies.

Given the valley’s tremendous success in recent years with such down-to-earth products as search engines and music players, tackling solar power might seem improbable. Yet some of the valley’s best brains are captivated by the challenge, and they hope to put the development of solar technologies onto a faster track.

There is, after all, a precedent for how the valley tries to approach such tasks, and it’s embodied in Moore’s Law, the maxim made famous by the Intel co-founder Gordon Moore. Moore’s Law refers to rapid improvements in computer chips — which would be accompanied by declining prices.

A link between Moore’s Law and solar technology reflects the engineering reality that computer chips and solar cells have a lot in common.

“A solar cell is just a big specialized chip, so everything we’ve learned about making chips applies,” says Paul Saffo, an associate engineering professor at Stanford and a longtime observer of Silicon Valley.

I’m certainly no expert, but I wonder if the NYT doesn’t have cause and effect slightly off on this one. I’ve heard — I think Scott mentioned that during our talk last week — that venture capital investment has been driving progress in solar energy for 5-10 years already.

And then there’s the near rant on climateprogress.org, suggesting, not altogether politely, that it doesn’t take the New York Times notice to make Solar hot:

NOTE to NYT: Solar has gained traction already. And further growth won’t be driven by “will,” it will be driven by, uhh, the growing consensus on the need to price carbon dioxide emissions to fight global warming and, uhh, record high energy prices that will no doubt be even higher in a decade, coupled with technology improvements and mass production techniques, some (but probably not most) of which will come from Silicon Valley. But I guess the real story is not sexy enough for the Gray Lady.

Does it matter who was there first? I think what does matter is lots of people having the same kind of idea at the same time, and that, finally, people are starting to see newer cleaner energy as a money-making opportunity.

Tim Draper: Big Changes in the VC Model

Technology, Venture Capital, Web/Tech

Tim Draper is one of the most influential and best known venture capitalists in the world, founding partner of Draper Fisher Jurvetson, and he’s looking at a brave new world of new media, content, and new opportunities. This is from vator.tv late last week.

http://vator.tv/embed/player.swf?videoSrc=http://s3.amazonaws.com/vator_production_out/1871_Tim-Draper-edited-and-compressed.flv&fillColor=0xFFFFFF&videoMode=embed&pitchURL=http://vator.tv/news/show/tim-draper-talks-about-a-new-vc-model-for-new-media-investing

He’s saying that the new Web 2.0 landscape will change the way venture capital does business. Despite a lot of background noise — and it’s only 2-some minutes long — it’s a very interesting snippet.

10 Rules for Valuation

Business Planning, Planning Fundamentals, Venture Capital

(Note: I posted this on Up and Running yesterday. I’m crossposting it here for reader’s convenience. – Tim)

I really don’t like the word "valuation"; it sounds too much like an MBA buzzword. But I like even less the general confusion about the concept. We talk about starting businesses, we talk about running businesses, getting investment, getting financed, and we should take discussion of valuation for granted. Valuation is at the same time frequently necessary, obvious and extremely arcane. It is nothing more than what a company is worth. It becomes necessary more often than you’d realize, with buy-sell agreements and tax implications after death and divorce, plus financing and investment. It’s obvious because a business is worth what a buyer will pay for it. And then it breaks down into complex formulas and negotiations.

So here are 10 (I hope simple) rules for valuation.

  1. Valuation is what a company is worth. It’s like what a house or a car is worth–less than the seller says, more than the buyer says.
  2. A company’s ownership is almost always divided into shares. Let’s say your company has 100 shares, 51 yours and 49 your co-owner’s.Valuation
  3. Valuation equals shares outstanding times the price of one share. If the company is worth $500,000 and there are 100 shares, then each share is worth $5,000. (OK, there are exceptions, preferred shares and such, but leave the fine tuning for later.)
  4. Tax authorities say the price of a share is whatever it was at the last transaction. (There, too, there are exceptions, but let’s keep this simple.)
  5. When startups offer shares–equity–to investors, then that, too, is simple math. If you sell 20 percent of the company for $100,000, that means the company is worth $500,000.
  6. Investment deals frequently revolve around valuation. When investors question your valuation, they’re saying they want more ownership for their money, or want to invest less money for their ownership.
  7. Analysts often apply formulas. The most common formula is called "times profits" because it multiplies profits times some number. Another common formula is "times sales." Companies might be worth two times sales or 10 times profits. There’s also book value, which is assets less liabilities. And there’s the estimated sale value of assets.
  8. Privately held companies are worth less than publicly traded companies. They get discounted for the disadvantage of not being able to convert ownership to cash easily.
  9. Growing companies are worth more than stable or declining companies.
  10. As with real estate, comparable sales matter. Analysts look for recent transactions involving similar businesses.

What’s a Visionary Sheep VC?

Venture Capital

What’s a visionary sheep? Is that a good thing (visionary) or a bad one (sheep)? The person using the phrase at www.thefunded.com followed that phrase with "Only one of them has the guts and the vision to try something new and then the rest follow." sheep

That’s part of a "heated debate" at the venture capital review site http://www.thefunded.com, where my post Is There a Catch 22 of VC Funding? highlighted an interesting and very well written open letter to the VC community. That was on my new Up and Running blog at Entrepreneur.com (companion and complement to this blog, by the way, not a replacement). The debate is front page news at thefunded.com today.

It started with an open letter from Mike Glanz of hireahelper.com, who complained that he was stuck in a very slow ("stuck in pudding") process of raising money for a pretty interesting concept that has already launched and been able to generate traffic and sales growth in its first few months. Sales doubled from month two to month three. He says VCs aren’t interested in his venture but are interested in one he posits as a straw man, which has a team member who was an executive at Realmedia. He’s frustrated.

The "VCs are visionary sheep" is only one of several threads coming out of that open letter and the comments that followed. Aside from that, several people point out that the VCs are running a business and the experienced team is a major factor, explaining why Mike got less interest than the other comparison venture. Some suggested getting one star with experience on the team, some suggested aiming more strategically at lesser funding to prove the concept, and several thought hireahelper might be able to fund itself by bootstrapping, without needing venture capital.

I don’t buy the whole "sheep" complaint because VCs are supposed to invest in a way that minimizes risk. Favoring experienced management teams, and almost always investing in groups, is good business for them. The management team track record is a critical factor in risk. And investing in groups helps investors assure their funds that the startup management will share basic financial goals for investors.

Still, Mike Glanz may ironically succeed in finding startup financing while proving himself wrong with his complaint, because his letter is very well written and has clearly struck some nerves. I’ve never met him, and I know nothing about his business, but he did get some attention where it matters. I’ll be following up here with updates when I get them.

-Tim