Posted in Entrepreneurial Feasibility Blog Posts

Entrepreneurial Feasibility 640-50 Reflection on Harvesting

Harvesting

For the last seven weeks, we have been discussing “Winning Angels: The 7 Fundamentals of Early Stage of Investing.” Each fundamental provided great takeaways for a novice investor like me. In the final chapter, Amis and Stevenson discuss seven harvesting methods to exit an investment deal, five being positive and two negatives. Harvesting is essentially reaping from which you’ve sown into an investment deal.

A brief recap of the six fundamentals:

  • Sourcing – refers to educating oneself in their area of expertise, gleaning sound investment advice from others, creating relationships with experienced investors, and choosing an area that you can utilize your knowledge and invest.
  • Evaluating – assessing people, business opportunity, context, and deal.
  • Valuation – choosing from one of the five approaches to value a company and determining its current worth.
  • Structuring – three common ways in which Angels claim their stake after investing into a new company; common stock, preferred convertible, or convertible notes with terms.
  • Negotiating – this stage is optional, and investors have the opportunity to allow a proxy to negotiate their interests on their behalf.
  • Supporting – investors can choose what type of role they will fill during their investment deal. Roles also have the ability to evolve and change.

According to Investopedia.com, “A harvest strategy is used regarding equity investments, where it refers to a proposed plan for investors, [i.e. Angels], to reap the profit from their investment.” (Investopedia.com, 2017). Moreover, the ultimate goal for an investor is to reap more than they have sown.

Five positive methods to harvest an investment are walking harvest, partial sale, initial public offering (IPO), financial sale, and strategic sale. Two negative methods are Chapter 11 and Chapter 7 bankruptcy filings.

Positive harvesting methods benefits and drawbacks:

  • Walking harvest – investors draw cash earnings without absolving investment relationship. Depending on the supportive role the investor may still be heavily involved in the company.
  • Partial sale – investors sell a portion of their stake in the company and may take a loss on initial investment.
  • IPO – initially have a better upside for the entrepreneur but can ultimately be lucrative for the investor when shares are sold. The downside is that the market determines the price of shares.
  • Financial sale – a cash sale in which the investor will earn what was invested and possibly more. The drawback is management is at risk.
  • Strategic sale – One of the most popular methods in which an industry rival seeking to get a competitive advantage buys more than the actual value. A disadvantage would be the competitor may make more money off or purchase.

Negative harvesting benefits and drawbacks:

  • Chapter 11 – saves the company from complete liquidation and has a chance to make an upturn, but sours the morale amongst investors.
  • Chapter 7 – there is no benefit to this method, and all assets are liquidated to pay off debts.

Sources:

Harvest Strategy. (N.d.). Retrieved June 26, 2017, from http://www.investopedia.com/terms/h/harvest-strategy.asp

Amis, D. & Stevenson, H. (2001). Winning Angels: The 7 Fundamentals of Early Stage of Investing. London: Financial Times Prentice Hall pgs. 289, 293, 294,

Posted in Entrepreneurial Feasibility Blog Posts

Entrepreneurial Feasibility 640-50 Reflection on Supporting

Having a strong support system can be integral to a person whether personally or professionally.  Research has proved that having a support system has many positive benefits, such as higher levels of well-being, better coping skills and a longer and healthier life (Williams, 2014). This is also applicable in new business ventures. Although it does not guarantee sustainability, it enables an entrepreneur to gain insight from experienced individuals and make sound decisions based on advice or participation. In “Winning Angels: The 7 Fundamentals of Early Stage of Investing.” Amis and Stevenson provide five fundamentals supportive roles investors can take in early stage investment deals.

Silent investor – is just that. They invest their funds without being an active participant in business decisions. I consider this to be the laissez-faire approach to investing.

Reserve Force investor – Although force sounds a little aggressive, this supportive role is only called upon on an as-needed basis. Preferably the investor should have a breadth of knowledge and experience within the industry when acting in this capacity.

Team member investor – An active role in assisting/working with the entrepreneur either full-time or part-time. An investor actively working within a business can either have a positive impact, utilizing knowledge and professional contacts to grow the business or adversely affect the business relationship, undermining the entrepreneur’s decisions. Comparatively, like reserve force, if the investor is acting in the team member role having an experienced knowledge base would be more useful to the company.

Coach investor – is a combination between a silent and reserve force investor. Coaches are on the sidelines giving advice and allowing the entrepreneur to execute or make their own decisions. This role reminds me of a cheerleader at a game. The cheerleader can encourage and instruct through a series of chants, but it’s up to the player execute certain plays to win the game.

Controlling investor – is probably my least favorite role that an investor can take. It’s reminiscent to a mother handing over her newborn baby.  Not only does it strip the entrepreneur from “calling the shots,” but it also changes ownership rights.

Moreover, roles can evolve and change (Amis & Stevenson, 2001). Investors do not have to maintain a certain supportive role throughout the duration of the investment. In new start-ups, entrepreneurs need a sounding board that encourages them and steers them in the right direction. Depending on what stage the start-up is in could determine what capacity the supportive role the investor should take.

Sources:

Williams, Cathy (2014, December 10th) The Importance of Developing a Support System retrieved 6/26/2017 via https://www.bjceap.com/Blog/ArtMID/448/ArticleID/139/The-Importance-of-Developing-a-Support-System

Amis, D. & Stevenson, H. (2001). Winning Angels: The 7 Fundamentals of Early Stage of Investing. London: Financial Times Prentice Hall

Posted in Entrepreneurial Feasibility Blog Posts

Entrepreneurial Feasibility 640-50 Reflection on Negotiating

Negotiating can either be quick and easy or brutal and frustrating. It all depends on one’s approach. If you are like me, negotiating can be intimidating, but it’s also a necessary evil. I loosely use the term evil since negotiating is not a terrible thing it just typically has a negative connotation. In “Winning Angels: The 7 Fundamentals of Early Stage of Investing,” Amis and Stevenson discuss how some investors choose not to negotiate but allow a proxy on their behalf. How much power the entrepreneur has over the terms of a deal. And the objectives of negotiating.

John F. Kennedy said it best, “Let us never negotiate out of fear. But let us never fear to negotiate.” Typically, how you perceive something to be, whether right or wrong, it will be. Whether an entrepreneur or an investor it is important to know that at some point you will have to negotiate on behalf of your interests. It’s important not to assume that negotiations will not work in your favor. Being confident in your abilities and what you bring to the table will make all the difference.

If negotiations still aren’t for you then as Winning Angels stated, consider getting a proxy. Many Angels choose to use legal counsel or someone else that is familiar with the deal. “Some investors like to see a Venture Capitalist take the lead and do negotiations” (Amis and Stevenson, 2001).

Entrepreneurs must understand that just because you are offered a deal does not mean you must take it. Be willing to compromise, but also stay true to what type of investment terms you seek. In addition, to what type of investor you are willing to work with. If your desire is to have a silent partner, then that needs to be a condition of the agreement, or you and the investor will have to agree to how involved they can be.

Amis and Stevenson state that the objectives of investment negotiation vary but generally include these four categories:

  • The price
  • The structure of the deal
  • How much money will be invested
  • What role will the investor play, if

Ultimately, either party can take an active approach in negotiating or decide if the structure of the terms meets their requirements. If not, they can pass and educate each other as to why and compromise either on price or role without further negotiation.

Sources:

Amis, D. & Stevenson, H. (2001). Winning Angels: The 7 Fundamentals of Early Stage of Investing. London: Financial Times Prentice Hall

Posted in Entrepreneurial Feasibility Blog Posts

Entrepreneurial Feasibility – 640 Reflection on Structuring

Structuring in early stage investments is the meat of a deal. Some Angel investors know right away whether or not they would even consider making an investment based on the structured details. Many will cut to the chase during evaluation and valuation to gauge if further discussion is required. There are three fundamental types of structuring, common stock, preferred stock, and convertible notes. Each has its own level of risk and gain. Consequently, structuring can make or break a deal.

As previously stated in an earlier post, Shark Tank is a great example for explaining how fast paced structuring works. Essentially on the show entrepreneurs seek early stage investments from one or more of the “Sharks.” The entrepreneurs state their evaluation, valuation, and structure in which they are offering a “Shark” to invest. On some occasions, entrepreneurs value high and can tend to be uncompromising when it comes to structure. Leveraging equity against their “baby” is a hard pill to swallow. However, others know that relinquishing a portion of their business will ultimately be a better gain, whichever in turn gets them their investment funds and “Shark” expertise.

Here are three common ways entrepreneurs leverage their business for investment funds:

Common stock is known as the “complete faith” option, which is often used by family, friends, and fools (Amis & Stevenson, 2001). It is typically the quick and easiest form in structuring. However, there are ways in which to make it more complex. Nevertheless, this structure is perhaps the riskiest for the investor because of no liquidation rights (Amis & Stevenson, 2001).

Preferred Convertible with various terms is not that simple and will require significant interaction with an entrepreneur in the hoped-for event that additional capital is raised or an exit obtained (Amis & Stevenson, 2001). Most Venture Capitalists prefer the PC option with terms because it enables the investor liquidation rights among others if the exit is imminent.

Convertible notes with terms enable the investor to keep it simple because the price is non-negotiable, however, able to liquidate exit becomes necessary, unlike common stock. Convertible notes are positioned for future round investing. Although, it is not as commonly used as Preferred Convertible because it operates as a loan note.

Each has its own level of risk and gain. Consequently, structuring can make or break a deal. It’s up to the individual as to which structural method they are willing to agree to.

Sources:

Amis, D. & Stevenson, H. (2001). Winning Angels: The 7 Fundamentals of Early Stage of Investing. London: Financial Times Prentice Hall pg.

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Entrepreneurial Feasibility – 640 Reflection on Valuation

Before reading “Winning Angels: The 7 Fundamentals of Early Stage of Investing,” the word valuation was semi-foreign to me. Contextually I knew it referred the value of a company, but how one arrived to stipulate valuation for investors adequately, I was at a total loss. Nevertheless, after reading the chapter, it gave me a sense of clarity on how valuation works and why. I will attempt to break it down in laymen terms using the Five W’s and One H.

What – Valuation means “The process of determining the current worth of an asset or company; there are many techniques used to determine value. An analyst placing value on a company’s management, the composition of its capital structure, and the prospect of future earnings and market value of assets.” (Investopedia, 2017)

Who – Valuation is needed for business owners, Angel investors, or Venture Capitalists typically to decide the value of a new or existing company.  “Winning Angels” reiterates over and over for those who are just starting out in Angel investing to link up with an experienced Angel to limit risk and loss.

What – There are five approaches to valuation

  • The Quick and Easy approach includes predefined investment limits, evaluation how much will be invested using a set of guidelines, and a rule of thirds.
  • Academic/investment banker approach assesses based on market industry standards using assumptions.
  • Professional venture capitalist approach is detailed, to say the least; it serves to anticipate future risks through a series of calculations.
  • Compensated advisor approach includes the virtual CEO and start-up advisor methods
  • Value Later approach puts off valuating the company in good faith that the company will succeed.

 

When – Most entrepreneurs seek funding in the early stages of their business or when they are trying to expand.

Where – “Winning Angels” encourages investors to be in driving distance to their investments, however, investing online has become a norm within the industry.

How – Entrepreneurs will either seek you through networking or angel investing websites such as http://www.sbtdc.org/programs/private-equity/nc-angel-funds-and-networks/, https://angel.co/north-carolina/investors, and https://www.angelinvestmentnetwork.us/.

If you are familiar with the show Shark Tank, then you may be familiar with the term valuation. If you are not, the show is comprised of highly successful businessmen and women who are interested in investing in early stage companies. The investors are known as the “Sharks,” which assess the companies seeking investment money using a series of questions and data provided. The “Sharks” decide if they will individually invest or partner up. If the company is of high value to the “Sharks”, then the owners choose which deal they like best. If none of the “Sharks” want to make an investment, they educate the owner(s) of what could make their company more marketable to investors. If you are interested to see how companies can fare through fast paced investment negotiation, I would definitely check this show out.

Sources:

Valuation. (N.D.). Investopedia: Valuation Analysis Retrieved June 12, 2017, from http://www.investopedia.com/terms/v/valuation_analysis.asp.

Amis, D. & Stevenson, H. (2001). Winning Angels: The 7 Fundamentals of Early Stage of Investing. London: Financial Times Prentice Hall pg.

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Entrepreneurial Discipline

If you are anything like me then scattered papers, running late to important meetings, phone ringing incessantly, and not being able to find your keys will have you in a complete state of agitation. Establishing discipline in your workflow early in your career can be integral in maintaining proficient work habits. I have found that efficiently using a calendar, having a good filing system, dedicating time for follow-ups, and not putting off small tasks can limit mishaps. As the adage goes, “Time is money and money is time.” Being an entrepreneur requires discipline in time and effort. A lack thereof can affect how others see you, create missed business opportunities, and cost monetarily. Ultimately, discipline is instrumental to being a successful entrepreneur.

Use a calendar – either manual, digital, or both. Check and update it every day. Being organized is essential to entrepreneurial discipline. Set reminders for yourself and make sure you read them. Distractions will arise throughout the day which may cause you to glance over things. An overlooked appointment can mean a missed business opportunity; it can be hard to get second chances when there is competition lurking around the corner.

Have a good filing system. Locating important papers or tracking your follow-ups is extremely hard to do if you do not have a good one in place. If you are working alone or have limited space, file items in order of importance, set reminders to review them and be sure to mark them as complete. Consequently, this will help you remember what you are currently working on or what has yet to be started, especially if you easily get distracted. Marking items as complete also provides a sense of accomplishment. Trust me; a check mark can go a long way when your to-do list seems to get longer and longer.

Dedicate at least one hour of your peak time (the time when you get your best work done) to follow-ups. Good follow-ups instill confidence with your business partners or clients because they can count on you for a timely response. Even if you do not have a definitive answer, the fact that they know you are working on it speaks volumes. Following up also ensures that you and your clients are on the same wavelength in regards to their products or services.

Let’s face it; we have all had those days where we wanted to push the reset button and restart the day. Unfortunately, that button does not exist (I have tried looking). Having a good regimen when preparing for the day or even the week could not only save you time but potentially money. Laying out your clothes and items that you will need gives you a sense of structure and focus.

“Get ’r done.” A popular phrase coined by Larry the Cable Guy. Do not put off something that can be done today for tomorrow, no matter how small. Putting off small items today can have a significant impact tomorrow. Taking care of little details can make all the difference in completing bigger tasks. Refusing to put off tasks will probably be your biggest challenge of all. Principally, it is something that will require the most discipline. Mel Robbins, a renowned speaker and CNN commentator, came up with the “5 Second Rule,” which states, “If you have an impulse to act on a goal, you must physically move within 5 seconds, or your brain will kill the idea.”

Ultimately, maintaining discipline in all these areas is vital to being a successful entrepreneur. Having a good workflow and regimen will enable you to work efficiently, refine your products or services, and free up your mind to think of new creative and innovative ideas. Some say they can thrive in chaos, but for me and the vast majority, we cannot! I cannot guarantee things will instantly change, but with time and effort, I believe you will see the fruits of your labor. I challenge you to act, respond, and to accept the mission of being more disciplined in your business tasks. I am confident that it will make all the difference.


Tosh R. Comer is a proud graduate of North Carolina Central University, presently working at Fayetteville State University, and actively building EPICS Small Business Consulting. She is also currently enrolled in the Masters of Entrepreneurship Degree Program at Western Carolina University. Webmasters and other article publishers are hereby granted article reproduction permission as long as this article in its entirety, author’s information, and any links remain intact. Copyright 2017 by Tosh R. Comer. You can reach her via email at epicssbc@gmail.com or her website www.epicssbc.com.


 

Posted in Entrepreneurial Feasibility Blog Posts

Entrepreneurial Feasibility – 640 Reflection on Evaluating

The Evaluating chapter from “Winning Angels: The 7 Fundamentals of Early Stage of Investing,” was lengthy. It covers a gamut of information from the “Entrepreneurial Evaluation, Harvard Framework” written by William Sahlman to key factors that Winning Angels use. Undeniably, the evaluating process is an important part of establishing a business or investing sums of money.

Evaluating is defined as, to determine or fix the value of; to determine the significance, worth, or condition of usually by careful appraisal and study (Merriam-Webster, 2017). When starting a new business or considering being an Angel investor, this is the stage where you will do the must grunt work. In “Winning Angels,” evaluating is a single isolated entity, but bow to the correct idea that evaluation occurs throughout sourcing, valuing, structuring, and negotiating (Amis & Stevenson, 2001). It is a continual process that allows the entrepreneur or investor an opportunity to gauge the feasibility of their business or potential investment.

           The “Entrepreneurial Evaluation, Harvard Framework” written by William Sahlman is broken down into four elements:

  • People
  • Business opportunity
  • Context
  • Deal

With Angel investing, assessing people is primarily focused on the entrepreneur. What is their area of expertise? What are their goals? Are their goals realistic in time and effort? What are their capabilities?

Business opportunity relates to how big or small the organization? Do you like premise and model of how the business will function? Is the business customer-focused? What is the customer’s buy-in? Would you buy this product or service?

Context is related to the industry. What area as an entrepreneur or Angel are you focused on? Does the opportunity fall within your scope of interest? How is the economy? Where is technology headed, will the company be able to keep up or be a leader? How is the competition, is the market overly saturated? How do industry regulations impact the business?

The Deal conveys the price and structure (parameters) for funding the business or investments. There is a lot of risks involved with new business ventures and investments, so the terms of a deal need to be clear and concise as possible. Typically “many Angels use their “gut” when deciding on an entrepreneur, or they chose to invest with people they have worked with before, people they know in some other way, and people that are known to someone they know (Amis & Stevenson, 2001). This is where being amongst seasoned investors really comes into play. Especially, steering the novice investor in the right direction.

Undeniably, the evaluating process is an important part of establishing a business or investing sums of money. You will need have established Sourcing methods as Sourcing and Evaluating go hand in hand. Utilize the Entrepreneurial Evaluation, which can weed out a lot of minutiae and provide a clear focus to who you are interested in investing with.

Sources:

“Evaluate.” Merriam-Webster.com. Merriam-Webster, N.D., https://www.merriam-webster.com/dictionary/evaluate 6 June 2017.

Amis, D. & Stevenson, H. (2001). Winning Angels: The 7 Fundamentals of Early Stage of Investing. London: Financial Times Prentice Hall pg. 76

Amis, D. & Stevenson, H. (2001). Winning Angels: The 7 Fundamentals of Early Stage of Investing. London: Financial Times Prentice Hall pg. 85