FBN’s Charles Payne, Heritage Capital President Paul Schatz, Tea Party News Network News Director Scottie Nell Hughes, small business expert Susan Solovic, retail analyst Hitha Herzog and Penn Financial Group founder Matt McCall on the shifting demographics in the job market.
There’s a lot of talk about “early round” investors in startups, but the true “early round” honors usually go to founders, family and friends. If you include yourself in the “founder” leg of that triad, what do you need to know to get the other two legs – the friends and family – involved in the best way possible?
You have some things going for you and perhaps against you when you start to approach those who know you best for money. In many ways, what will later be important to angel investors and venture capitalists, are also important to potential friends and family investors.
First, they need to believe in you. Ultimately it is your ability, enthusiasm and commitment that they are putting their money in, so a self-check should be your first step before you approach your family and friends.
Have skin in the game?
Are you sufficiently convinced that you have put your own money into your project? If so, gauge your level of commitment. Is it at a mortgage-the-house level, or just a couple-of-months-worth-of-spending-money level? Also, be sure you and your spouse are equally committed and prepared for the journey you’re about to undertake.
Second, you need to have a minimum viable product. “Ideas” are something you mull over. Viable products are things that can warrant investment. Don’t ask your family and friends for money if all you have is an idea. Too much time can be wasted and too much money burned between having an idea and having an actual product or service that people would be willing to pay for.
If you are committed and have an MVP, you need a business plan. It may not be fully developed, but you must have a roadmap where you’re headed. It’s unfair to ask people to fund your journey if you don’t have a map; they will just be paying you to wander the desert. The business plan will give you the overview that you need to communicate to your friends and family.
For example, are you just asking for seed money to get a “mom-and-pop” venture started that won’t do much more than provide your family with an income, or are you about to launch a business that has the potential to scale up? You need to understand where your business lies on that continuum.
Loans or shares?
When all these pieces are in place, you have an important decision to make: are you asking for loans or are you selling pieces of your company? This is the point when everyone involved needs to pivot from a personal relationship to a professional relationship. Whichever route you choose to take, it is a very wise idea to get a lawyer involved. For loans, be fully agreed on terms and if you are giving away ownership, be certain you know what that means for both today and tomorrow when you may seek additional investors.
If you were to present your startup in front of a group of true venture capitalists, you would be armed with a presentation called a “pitch deck.” It’s a series of slides that covers these basic topics:
- Your company purpose
- The problem
- Your solution
- Why now
- Market size
- Business model
With family and friends you may not have to make a presentation that is quite as formal, however you need to be able to address all of the above points. If you are unclear on any of these issues, you aren’t ready to ask for other people’s money.
One final word of advice: The way you approach your friends and family will set the tone for your relationship, should they decide to invest. If you start out on a professional footing, it will be easier to maintain that kind of relationship going forward. If they see themselves as merely doing you a personal favor, your relationships will forever be haunted by personal issues.
When families in the typical American home were polled by the Pew Research Center on who makes the decisions in a number of household areas – including family finances – women came out ahead:
- 43 percent said women made more decisions,
- 26 percent said men made more decisions, and
- 31 percent said decision making was equally divided.
Another finding was even more dramatic: when it came to managing the money, women decision makers outnumbered men two-to-one – 45 percent versus 23 percent. So perhaps it should come as much of a surprise that women are making some powerful moves in the world of crowdfunding.
March is Women’s History Month, and I suspect that the increasingly important role women are playing in crowdfunding will pave the way to women making some history in commerce and beyond.
Benefits of crowdfunding
One thing I like about crowdfunding in general is that much of it is facilitated totally online. This may help to lessen the impact of gender bias in a very general way. Indiegogo, one of the pioneers in crowdfunding, reports that 42 percent of its successful campaigns are run by women. But when men and women are in the same room together, even with well meaning people, it’s sometimes difficult to look past gender stereotypes.
Newly launched websites such as Plum Alley and MoolaHoop elevate the availability of capital to women even higher. They are developing a crowdfunding niche that specializes in helping women raise money. I noted in an earlier post on MoolaHoop that between 1997 and 2014, women-owned businesses increased in number by 68 percent, which is twice the growth rate posted by men. And this was before the entry of these women-focused crowdfunding sites!
Lifting women from poverty
When I say that increased entrepreneurship from women can change history, I’m not just talking about founding successful companies. The general well-being of society is closely associated with the general well-being of women. When women live in poverty they raise children in poverty and it tends to create a cycle that is very difficult to break. Small business formation is one of the best ways to break the cycle, and it’s probably a far more cost effective and long lasting way when compared to our welfare system.
Recently, I spoke at the United Nations regarding the importance of empowering women economically. One of the organization with which I work, The Institute for the Economic Empowerment of Women, helps women in Afghanistan and Rwanda start and build businesses. Five hundred women have gone through our program during the past nine years and we have an 80 percent success rate. On average each Rwandan and Afghan graduate creates jobs for 22 and 28 people respectively. So we are witnessing significant economic development in these countries.
Opening up a new front
In the 1960s the United States declared “war on poverty” and we have spent trillions of dollars fighting that war. I don’t think too many people would argue if I said that so far our success has been fairly limited.
Perhaps providing better access to funds for women-owned startups and business expansion projects will be like sending in fresh troops to fight the battle anew and bring victory into sight.
BN’s Charles Payne, NewOak Capital President James Frischling, Tea Party News Network News Director Scottie Nell Hughes, small business expert Susan Solovic, retail analyst Hitha Prabhakar and Penn Financial Group founder Matt McCall debate the role of government in education.
FBN’s Charles Payne, Heritage Capital President Paul Schatz, Tea Party News Network News Director Scottie Nell Hughes, small business expert Susan Solovic, retail analyst Hitha Herzog and Penn Financial Group founder Matt McCall on Uber’s mounting PR woes.
FBN’s Charles Payne, NewOak Capital President James Frischling, small business expert Susan Solovic, Tea Party News Network News Director Scottie Nell Hughes, retail analyst Hitha Prabhakar and Penn Financial Group founder Matt McCall on the economic impact of divorce.
And it gets worse when public policy makers become involved. They find academics who take opposing views and try to shape the debate in the way that is most beneficial to their bigger supporters. And folks, small business owners don’t have a lot of clout with policy makers, which we’ll examine by looking at some recent news items concerning small business loans.
I find that common sense trumps “expert opinion” everyday and common sense says that the majority of jobs in your community have been created through the efforts of small business owners. On top of it being common sense, statistical data backs it up.
Standing against small business?
However, in recent years some academics have been arguing that small business owners are not the job creators we all thought they were and recently a group of four profs at West Virginia University and Georgia Institute for Technology have carried that a little further claiming that Small Business Administration backed loans are actually holding back economic growth. By the way, I love the headline Bloomberg Businessweek gave their article on this study: Small Business Owners and the Economists Who Hate Them.
Unfortunately, it seems that these anti-small business economists are joining elected officials who have a distinct preference for big business. While the economists are arguing against financial support for small businesses, there is no doubt that our lawmakers have been more than willing to financially support big business.
We have heard the phrase “too big to fail” used repeatedly in the last several years. I supposed the corresponding, unspoken phrase for small businesses is “too small to matter…politically.” And sadly, as the Wall Street Journal points out, an upshot of the too-big-to-fail philosophy has been to create a financial environment where huge cash reserves are tucked away in the vaults (or balance sheets) of the big banks where it will never be loaned out to small business owners – they just aren’t in that business.
The bankers in the white hats
But with all of this said, there are some good guys in the picture: your regional bankers. The small and medium sized banks are picking up the slack and lending to small business owners with little or no help from Washington. Why? Because they know local conditions.
Surprise! Common sense trumps the academic experts and the policy makers. The bankers who are close to the situation can recognize credit worthy businesses and opportunities for growth when they exist. And fortunately, more and more local bankers are seeing positive developments.
So what’s the takeaway here? It’s two fold:
- Follow the college professor’s advice and don’t trust academic “experts,” and
- Develop a relationship with a good local banker; that’s where you’ll find help when you need it.
Between 1997 and 2014, women-owned business rose by 68 percent – twice the growth rate posted by men. And here’s the kicker: this tremendous growth has happened without very much support from the traditional lending and investing world.
Lenders and investors are woefully reluctant to back a project by a woman entrepreneur, despite federal programs and laws designed specifically to encourage lending to women-owned businesses.
Studies have shown the bias. Given identical pitches from men and women, lenders and investors favor men by a large margin. However, I don’t want to focus on the negatives, I want to applaud women for overcoming these obstacles and posting such a tremendous growth rate. I also want to point out a new crowdfunding platform that aims to do its part to fix this inequity: MoolaHoop.
To be totally honest with you, I think women have a lot of advantages in the entrepreneurial world, and as others recognize this, MoolaHoop should become a great tool for women startups. For example, anyone who’s hardwired to cope with the pains of child birth, can easily manage the stress dished out by a startup, don’t you think?
Further, I believe women tend to be excellent – if not superior – networkers, and this is an attribute that is mandatory for success on a crowdfunding platform. Let’s look at how MoolaHoop works.
Entrepreneurs post videos, photos and information about their projects on MoolaHoop. They list “rewards” given at various support levels. The rewards can be anything from products and discounts to t-shirts and thank-you cards. The businesses have 21 days to make their fundraising target.
Once a project is up on MoolaHoop, its organizer needs to get busy networking and encouraging friends, family members and existing customers to pledge their support. Supporters enter a credit card number and support amount. If the goal is met within 21 days, credit cards are charged. If not, the project fails and no one is charged.
As I mentioned above, over the years Congress has enacted legislation to increase loans and contracts to women-owned businesses. The results have been less than spectacular.
In the long term, I see a lot more potential in MoolaHoop. It is easy to use, easy to find and a woman can get funds for a new business or the expansion of an existing business in three weeks. Government programs, ahem, don’t typically move that fast.
And beyond the immediate financial impact of MoolaHoop, I think it will demonstrate to the larger lending and investing world that women businesses are just as worthy for funding as businesses owned by men.
Ultimately, that may be MoolaHoop’s biggest contribution to our economic future.
“How can you be a millionaire and never pay taxes? First, get a million dollars…”
Every small business owner sets out hoping to make good money, but it doesn’t always go that way—especially in the beginning. So the question becomes: How can you survive while your business gets on its feet?
We could take Steve Martin’s advice – first get a million dollars – but aside from some trust-fund kids, that’s usually not an option. However, many start with a significant savings and plan to burn through some of it. You need to know how much of that you’re willing to spend to underwrite your startup.
No single answer fits everyone. If you’re young, you may want to take the balance down to zero; you have time to rebound. If you’re at a later stage in life, you need to play it much more conservatively.
When I left my first corporate job to start a boutique PR and advertising agency, I was single and carrying a significant burden of monthly payments. I had several clients lined up…or thought I did. A few dropped out. That leads me to the first item on my list of ways to make it through your first months:
Get a part time job. I worked part time with a meeting and event planning company. Between that work and my business, it kept enough cash flowing to pay bills.
Don’t quit your job. A time-honored way to survive a startup is to start up before you quit you current job. Folks, successfully piloting a startup to profitability is a time-consuming ordeal and your willingness to hold down two gigs at the same time is a good measure of your commitment.
Simplify and downsize. Reduce your overhead. Take a cold, calculated look at your monthly expenses and cut anything that’s not a necessity. Rent out your spare room. Move to a smaller apartment.
Sell assets. Can you survive in a smaller, less cool car? If you’ve managed to gather significant assets that you’re willing to unload, there are local places to sell and at least one online source, Borro, will lend against or work with you to sell your luxury valuables.
Loans. Family and friends are traditional sources of startup funds, but many entrepreneurs prefer to stay away from these entanglements. Much has been written on crowdfunding, and other new nontraditional ways of getting funds are springing up all the time. Your local bank will probably offer business loans underwritten by the Small Business Administration. Local agencies may also kick in some money. Check your state, county and city governments. Finally, I know a lot of startup owners who end up borrowing from their credit cards. However, that’s not where you want to start your entrepreneurial journey.
Bring a partner onboard. Often a person with an idea and knowhow will find someone else with the money to fund the project. There are a lot of ownership issues to iron out, but it can work.
If you scan this list one more time, you’ll see that several of these strategies can be combined. Do that and there’s a good chance you’ll survive until the cash flow begins to meet and exceed expenses.
Oh, by the way for the second part of the question I started this with – How can you be a millionaire and never pay taxes? – Steve Martin suggested saying two simple words when the guy from the IRS arrives at your door asking why you haven’t paid your taxes: “I forgot.” (Don’t try this at home.)
If you have any luck with that, let me know.
A recent headline said, “Small Business Lending Reaching ‘New Normal.'” The story outlined how the Pepperdine Private Capital Access Index for small businesses rose to 27.7 from 27.1 in February. It gives us a measure of demand for and ease in getting financing, including loans.
Further, 44 percent of the small businesses surveyed last month said they received bank loans during the previous three months. That’s a pretty big jump from 39 percent in February and 34 percent last fall.
This is being called the “new normal” and it’s good to see banks easing up somewhat on the lending restrictions that have been in place since the recession. However, it’s not the only change the lending industry is experiencing that define a “new normal.” New sources of financing are emerging as well as new places small business owners turn to when they need an influx of cash.
A solopreneur friend of mine just received an unsolicited offer from PayPal for a cash advance. Most of his clients pay through the online payment provider, so he has a long history of pumping cash through his PayPal account. So far he hasn’t taken them up on the deal, but if he does, they’ll just take a percentage of his cash flow until the debt is repaid. This is similar to the Square Reader cash advance program we discussed here recently.
Lending Club has pioneered the peer-to-peer loan model, including loans to small businesses. Unlike the Square Reader and PayPal cash advances, Lending Club loans are more conventional, with fixed monthly payments. Other online lenders include Kabbage, CAN Capital, Swift Capital, and OnDeck.
Perhaps it’s increasing competition from these newer lenders that is pushing traditional banks to loosen up the purse strings a bit on small business loans. But, whatever forces are driving the changes, I’m glad to see that it’s getting easier to obtain credit and I’m overjoyed to see more options for small businesses when it’s time to take out a loan.