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Large Interest in Small Companies Arthur Andersen - Emerging Business Consulting Group The Business Plan The Advisory Board and Management Team The Summary Business Plan Investor Characteristics Early Stage Funding Market Take-away
Large Interest in Small Companies back to the top
A recent speech given by George Gendron the editor-in-chief of Inc. Magazine proclaimed that entrepreneurship is now being regarded as a legitimate vocation in the professional world. No longer are entrepreneurs being regarded as loners, non-conformists and radical risk takers who have a vision that they can build an empire from their garage workshops. The efforts of identifying a market need, conceiving a product or service concept to meet that customer need, and assembling the resources to present the offering to the market represent fundamental skills that are viewed as valuable in both emerging business ventures and established corporate organizations.
As a corporate entrepreneur, or "intrapreneur", people with these emerging business skills are looked upon to bring new life to stagnant product lines, or to expand existing product offerings into new and untapped markets to grow sales. While the environment of an established company presents situations different from a new start-up such as ready access to resources and financing, the fundamental needs of conceiving the entire product plan and marketing strategy is identical to the needs that are present in a small start-up company trying to launch its first product. But the focus of innovation in emerging business has been placed on the new organizations that are small and are struggling against the odds to revolutionize the particular market segment or industry they participate in. The public is more likely to be hearing about companies such as Netscape Communications and its rocket ship ride to the top of the internet software market than the fact that Gillette has added a new razor blade configuration to its disposable razor lines.
It is not only the media that has focused its attention on the growing wave of start-up organizations and new businesses that are being created in record numbers. Large companies and service providers that have a historical client list of large and established companies have turned their attention onto these new businesses as well. New attitudes in our country's economy about where the prosperity will be and what type of organizations will drive the most significant growth has made the small and emerging business segment very interesting. Large corporate providers of business services are beginning to search for potential clients among the many new business start ups that are dotting the landscape. Arthur Anderson, a Big Six professional service organization, has established an Emerging Business Consulting Group that focuses on small and new business ventures as clients. The objective of such a practice is to offer accounting, tax and audit, and management consulting services that are focused on the needs of emerging businesses. The benefit to Arthur Andersen is based on the anticipation of that client someday growing to be successful and prosperous so that a full-fledged service relationship can be established for the traditional services Arthur Andersen provides.
Arthur Andersen - Emerging Business Consulting Group back to the top
The Boston office of Arthur Andersen has established a unique service in its Emerging Business Consulting Group. The practice offers new business planning and strategic guidance to entrepreneurs to assist them during their very early stages of growth and operation. In particular, the practice offers guidance in assisting entrepreneurs compose and improve their business plans and strategies, as well as introduce them to various resources in the investor community to ultimately reach the financing and funding needs of their start-up.
Ron Guerriero is the director of the Emerging Business Consulting Group and spoke with the EM about his experiences in working with entrepreneurs, and the services he provides to clients. Ron has worked for twenty years offering advice to new business developers and entrepreneurs in strategic planning and investment funding. Most recently Ron has been published in the Boston Business Journal giving advice for "Cash-poor Entrepreneurs" in achieving seed capital. The discussion with Ron covered many aspects of entrepreneurship but focused on the often important element of the emerging business planning process - the business plan. He discussed the use of a business plan by a new company in attempting to muster funding, the investing audience that receives the business plan and what they are looking for in a plan, and the critical elements of a business plan that often go underdeveloped by an entrepreneur when composing a plan.
The type of client that Ron typically deals with is what he would classify as a "garage" entrepreneur. The entrepreneur has established a product or service concept, the funding for the business venture has come from informal sources such as friends and family, and the concept is in the early stages of development towards the final version. The client's need for a more structured business strategy and greater funding are driven by the potential sales leads with customers that are interested in the concept, or because of customers that have even gone to the extent of inking a contract for the product or service when commercialized. More advanced product development is needed to convince pending sales that the concept is viable, and to begin a larger marketing effort to introduce the concept to a wider marketspace. Typically the client is in need of hundreds of thousands and even millions of dollars to grow their company to the next iteration of operations.
The Business Plan back to the top
A definition for a business plan can be a document that outlines and specifies the details behind the product or service concept of a new business. The plan ties together the market the product is aimed at, the strategy that will be used for producing and distributing the product to market, the anticipated financial performance of the new business based on its plan, and the people that will be involved in executing the work.
The purpose for the creation of the business plan is twofold. The first is to create an outline of how a new business intends to proceed in its operation for all the critical aspects such as target market, market opportunity, resources to be utilized and pro forma financial planning and estimates. This organization of thoughts can facilitate the efforts of the entrepreneurs so they have a plan to assist them in moving along. By no means is a business plan ever static or ever in a final version. It is a dynamic document that needs to be flexible in how it can address changing market or customer needs, as well as adjust to the influences the entrepreneur experiences as they proceed along their business growth. The second and main use for the business plan is to introduce a new business venture to the investor population to present the new company and business concept, and to outline the new business opportunity to acquire funding for the business to proceed. As Ron describes this use of the plan, "It is not a solicitation to buy anything. It's not a capital offer. The capital need for the venture is stated in the plan, and the intended applications for the funds that are being sought."
There are many products on the market today that readily outline the structure and contents of a business plan for even the most inexperienced beginner to understand. Software applications and numerous text exist from many industry experts that itemize all of the important elements of the plan and offer an approach to constructing one. But as the discussion with Ron proceeded, it became evident that there are many more important aspects in composing an effective business plan than simply understanding the typical outline and structure of the plan.
The Advisory Board and Management Team back to the top
Without a doubt the most important aspect of the business plan is the product or service itself. A viable business must be able to have the cornerstone of their reason for being intact which is a clear understanding as to what their product is and how to articulate it. What Ron adds is that the next most important aspect of the business plan is the management team. "The management team is the second most important thing in the entire business plan. Some people say no matter what the product is, if you put the right team together the business can succeed." Ron agrees with this to the extent that it is partially but not wholly true. "It's a nice theory and works from time to time. But essentially investors are buying concepts and people together." As for Ron's efforts with his clients, a fundamental aspect he conveys to them is the importance of a chorus of people in building a successful business. "Internal and external team are important. Sometimes it is easier to build the external team (e.g., advisory board). It is an intelligent use of time. If you can find intelligent people who are willing to give you advice, perhaps for free, you'd be a fool to say no."
Part of what Ron offers to his clients is a network of professional and individuals that can act as members of an advisory board to augment the size and team of persons working with the new business venture. This aspect is one that Ron takes very seriously because he is introducing people he is associated with to assemble and effective team, and the ability to match the right people to make the right chemistry will benefit his clients and professional associates. "When the Lone Ranger comes in the door, he leaves a month later and is no longer the lone ranger. In fact that is typically what they need part of their funding for which is to retain the senior people to help make this work."
The root of the importance of an advisory board and management team comes from his experience with investors and what it is the wish to see in a new business venture that helps mitigate their risk. "No serious investor is just going to hand an individual dough. Not unless there is an immediate plan to hire people or to have the team grow."
The Summary Business Plan back to the top
Even as Arthur Andersen is attempting to build a client base to assist new business ventures, they themselves are innovating their service offerings to try and assist their efforts. A strategy that Ron utilizes in introducing new business ventures to the investor community is the utilization of a summary business plan as the first introduction of the opportunity to the investors. Simply put, the summary business plan is a shortened version of a comprehensive business plan that summarizes the critical sections of the full plan to give the reader a quick overview of the entire concept that they can read in a short period of time and have their most important questions answered right away. However, this is more complicated than it sounds. The construction of the summary plan is based on the knowledge Ron has developed over his years of experience to understand what it is the investor community is looking to learn from a business plan, and what their evaluation processes and points of interest are like. From this he has constructed a summary plan outline that takes into account a venture capitalist's or private investor's busy schedule, their inundation with dozens of business plans a week, and their desired investment type and risk aversion.
"In a couple of paragraphs I can put together a quick synopsis that tells the whole story to the plan audience. For example, one paragraph can address the market size, one can discuss the competition, and another can explain the resources to be utilized and the people that are involved. All the sections of a business plan can be covered, complete, comprehensive and concentrated in short form. That's how you keep it under twelve pages."
Brevity seems to be the key in trying to communicate the new business opportunity to the investors. A typical business plan that ranges from forty to sixty pages holds a tremendous amount of information that would take a lot of reading and time to comprehend. Ron knows this and uses it as support for the use of a summary plan for a first step to the investor. "A very well known venture capitalist told me that when he gets a seventy page business plan the first thing he does is turn it over to an associate and says 'give me a five page summary.' This summary plan format will tend to make it a higher probability that they will read the whole thing because they can get through it in a half hour. The objective is to get that first reaction of, 'Okay, I understand the technology being talked about, we've done work in that marketspace, the size is reasonable for their investment style, and all the important points are addressed.' From this you attempt to generate the results of 'I want to meet this guy' and 'I need more.'"
This summary plan is the introduction for the larger more comprehensive plan that addresses all the same sections in the summary plan, yet with more comprehensive and extensive content in each section. "Certain sections stay the same such as the company name and history, but sections like the target market are bigger. Market segmentation needs big augmentation and cannot be ignored. When you are invited to see the venture capitalists they not only want to see these sections expanded in the business plan, but they expect the entrepreneur to be completely up to speed on them."
This approach has been very successful for Ron and his consulting group. According to Ron venture capitalists have told him that he is doing them a favor by creating this summary plan format.
Investor Characteristics back to the top
The audience has been mentioned many times already. It is clear that an advantage to composing a successful series of business plan documents as well as an effective way to present them is to know who the audience is and what they want to see and hear in considering a new venture opportunity. Ron's typical clients are seeking six to seven figures in investment capital. The audience consists of venture capitalists in charge of millions of dollars in investment funds, or wealthy individuals trying to seek out a new and interesting business venture. But in as much as they have money to invest, they also have their objectives with their investments. Having a new business concept stand out and be clearly understood by the investor, and reducing the risk in the investment is a major goal of the business plan and thus of the summary plan as well.
"The audience is a risk averse party that is busy and inundated with a lot of useless information and plans that are off the mark on fit with the firm's goals. They want a document that they can read and understand easily, that hits the points that will help to begin to mitigate the risk. It is a 100% risk to the investor...they have money in a CD that is safe but not gaining tremendous return. Entrepreneur's come around to ask for that money to put it at 100 percent to the tenth power of risk."
Another interesting characteristic of the investor population that is necessary to consider is the technical knowledge they possess. When ascertaining the merit of a new business venture for a software product for example, their interest does not lie in the detail behind every line of computer code written. "A reader that had no technical background that is an investor will not be assisted by too much technical jargon. Better to say in one sentence that this product is based on proprietary technology, we have obtained adequate legal counsel to protect the intellectual property, we have begun the process of filing patents... THEN, this product is used in the following way and this product is used by the following buyers." Essentially tell them who buys it and why, the customer proposition as Ron likes to call it. "Have the reader appreciate who the customer is and why they are going to buy it, then they can come to appreciate the dollar amounts and the sales amounts later. If not, the rest is hogwash."
Early Stage Funding Market back to the top
Ron's practice focuses around the New England area so his attention and feel for the investor marketplace is focused on this region. This is understandable based on the fact that the Boston area is regarded as the second most conducive area in the world to fostering entrepreneurial ventures, second only to Silicon Valley in California. By concentrating at this area, Ron demonstrates a keen understanding of the investor market and the needs that exist from new business start-ups for funding. What he sees is that entrepreneurs are seeking smaller amounts of money than venture capitalists are used to working with, and thus the venture capitalists are shying away from getting involved with such small investments because they do not match the VC's investment intentions. "There are very few VC's that do early stage deals with smaller financing...An entrepreneur that needs $500K to validate his product in the marketplace and approaches an investor with $100 MM is going to have a problem." This trend can be evinced from what Ron calls the institutionalizing of venture capitalists, "VC's need overall return on investment. VC funds have become institutionalized with investment guidelines and investor expectations, so they follow the rules. The investor in the VC fund is betting on the team of venture capitalists that manage the money to do a good job."
Ron feels that the shift towards entrepreneurs needing less money is a sign of the industries that are pushing the economic growth, and thus where entrepreneurs are focusing their efforts on developing new products. A clear example is the software and internet industries. The capital requirements for funding such companies is rather modest when it comes to the availability of powerful computing technology at a reasonable price. If products in these areas are going to show significant opportunity for growth and profitability, there is going to have to be a change in the attitudes of the investor community to be willing to work with smaller investments, or a new investment structure will have to evolve that will capitalize on the new business ventures. "There is a crying need for early stage money...There is a need for those investors that can offer a pool of $250K, and for certain types of technologies that is plenty. The message to the VC community is that you need to adjust your level of participation to play in these new arenas."
So where does the entrepreneur go that is in need of smaller amounts of early stage funding? "At this level they are not bankable regardless of what they have. The SBA loans may work and those routes should be pursued. It is easier to go through these routes nowadays as long as you go through these procedures and you qualify. Also, there are ways to get relatively cheap money as opposed to equity costs such as prepaid sales, licensing something off, prepaid royalties or strategic alliances to get funding for R&D." But Ron also sees the opportunity to construct a network of private investors that will be able to be called upon to muster smaller sums of money for viable smaller business venture. "More people are starting to show up but the effort lies in uncovering them, keeping in touch with them on a regular basis, and bringing them together in a systematic way." It is this private investor network that will be the focus of Ron's attention in the near future of his practice.
Take-away back to the top
An industry expert such as Ron Guerriero can offer an exceptional advantage to an entrepreneur that is seeking to grow their organization with outside investments. Knowing the behaviors and expectations of the people that the entrepreneur must work with to seek outside funding can help shape the entrepreneur's business plan and strategies to most appropriately meet the investor's needs. With such understanding and strategies established in the beginning of the process, an entrepreneur can work to add to the legitimacy and influence that a prospective business plan can posses as it sits on the desk of a venture capitalist with fifty other plans trying to stand out and gain further interest. - ###
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