Starting A Business In Oakland

Alameda SBDC Northern California Network

Starting a Business Oakland April 7, 2009 [email protected]

www.acsbdc.org

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Welcome Northern California Network

• Holistic approach to Starting a Business • Key modules which link to core seminars offered throughout the year • Panel discussion • Q&A + Networking

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Key Modules Northern California Network

• • • • •

Business Planning Legal and Business Issues Accessing Capital Ecommerce and Web-marketing Successful Marketing & Advertising Plans

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Your SBDC Ecosystem Northern California Network

• Peralta College System • U.S. Small Business Administration • NorCal SBDC Network - CSU Humboldt • Cities across Alameda County • Corporate and non-profit sponsors

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How we can help Northern California Network

• We provide a combination of: – Expertise

– Industry knowledge – Experience – Hundreds of client engagements

– Relationships with a diverse group of lenders

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Peralta College Northern California Network

• Became center host in October 2008 • Take advantage of college resources • Tap into Peralta’s Business Certificate programs • Leverage Peralta’s community based network 6

Alameda SBDC Counseling Northern California Network

• Team of 15 professionals w/ real world experience & MBAs from top schools • Industry expertise include construction, food and beverage, retail, ecommerce • Functional expertise include sales, marketing, manufacturing, venture capital, web design, government contracting, SBA loan processing • Services are free to you 7

SBDC Impact Northern California Network

• We’re working hard for you – 10,898 clients – 79,080 hours – 3,360 trainings – 42,999 attendees

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Economic Results Northern California Network

2006 - 2008

• 7,147 Job created/retained • $245,336,496 increase in sales • Provided access to: – $89 million loans – $101 million in equity infusions

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Counseling Services Northern California Network

• For consulting services go to – www.acsbdc.org – Click on “Counseling” – Complete the online form

• Questions: – Paula Groves-Hawthorne – (510) 208-0411 10

We work as part of a team Northern California Network

• SCORE (www.eastbayscore.org) • Credit Counseling (www.operationhope.org) • Women’s Initiative (www.womensinitiative.org) • International Business (www.eastbaycitd.org) • NorCal (www.norcalsbdc.org) • SBA (www.sba.gov) 11

Northern California Network

We help get you to the right resource

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Getting Certified Northern California Network

Getting Certified Program has become a Regional event

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Getting Certified Northern California Network

• How to be an 8A Certified Small Business • What the benefits are to you • Panel with Small Business Advocates and East Bay clients

• EPA, State of CA, Alameda County, Port of Oakland, Caltrans, SF PUC, LL and Berkeley Nat’l Labs and more 14

Getting Certified Northern California Network

April 21st - Hayward

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Technology Advisory Program Northern California Network

• TAP is part of the SBA & SBDC structure • Specialty technology classes • Unique group of technology consultants • Hands on and interactive help

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TAP Northern California Network

www.sbdctap.com

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Training Programs Northern California Network

• Accessing Capital • Business Planning • Ecommerce & Web marketing • Contracting with the government • Caltrans Construction Contracting Program

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Alameda County Seminars Northern California Network

April 15

Fremont

Successful Biz Plans

April 21

Hayward

Getting Certified

April 28

Berkeley

May 7 May 19

Ecommerce & Web Mktg San Ramon Legal & Business Issues Starting a Business Hayward 19

Oakland Seminar Schedule Northern California Network

April 9

Oakland

Legal & Business Issues

April 21 & 22 Oakland

Caltrans Professional Services

May 5

Oakland

Human Resources

May 6

Oakland

Smart Office/Smart Worker 20

Stay in Touch Northern California Network

Go to www.acsbdc.org for a full calendar & sign-up for email notification

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Paula Groves-Hawthorne Northern California Network

• 15 years experience as a Venture Capital & Private Equity Investor • Wall Street Experience doing Asset Securitizations • Invested more than $100 million in start-up and expansion stage capital • SBDC consultant since 2006 [email protected]

www.acsbdc.org

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Panel Discussion Northern California Network

Nimia Ramos Beauchamp David Bokash

Wells Fargo Bank

Roberto Costa

OBDC

Rich Ohlrich

Interim Director ACSBDC

Scott Pesetsky

Lawyer

ACSBDC Technology Consultant

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Northern California Network

Why is today important for you

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Planning Northern California Network

Nothing happens without a Business Plan

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Planning Northern California Network

Starting point for equity capital, bank loans, trade credit, leases & channel partners

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Planning Northern California Network

• Who is the most important audience for a business plan? • What are they looking to get from it?

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The Law Northern California Network

What you don’t know can and will hurt you

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The Law Northern California Network

Organizing the right way and protecting your assets is key to long-term success

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The Law Northern California Network

“Someone who represents himself has a fool for a client”

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Capital Northern California Network

Undercapitalization is the No. 1 reason new companies fail

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Capital Northern California Network

Equity & Debt are needed for success

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Northern California Network

Patience at the beginning will save a lot of pain later on

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Northern California Network

Get the money squared away before you start

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The Real World Northern California Network

• Entrepreneurs don’t like to wait: – Spend their “free cash” early – Run up credit card balances – Lower their FICO/credit scores – Get stuck in the middle of the process

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The Real World Northern California Network

Then go looking for capital

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The Real World Northern California Network

Already invested cash doesn’t count as Equity

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Technology Northern California Network

Look, act and function much larger than you are at the beginning

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Technology Northern California Network

Leverage others fixed costs when getting started

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Technology Northern California Network

Focus on your customers – not on “reinventing the wheel”

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Northern California Network

How do you know when you are in business?

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Northern California Network

Customers are King Many mistakes are made & too much cash is spent when entrepreneurs fall in love with their product. Let me tell you about Doug . . . [email protected]

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Northern California Network

Business Planning

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Things to think about Northern California Network

• • • • •

Clarity Communication Customers Costs Execution

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Length Northern California Network

• A good business plan is: – Short – Concise – Easy to read – Easier to follow – Builds to a logical conclusion [email protected]

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Length Northern California Network

People don’t read anymore Make it easy for them to read your plan

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Northern California Network

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Proven Formula Northern California Network

S = MP5CM

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Success Northern California Network

• • • • • • • •

Mission Product Pricing Promotion Physical distribution People Competition Money

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Success Northern California Network

• • • • •

8 written pages Plus financials and supporting documents Formula works for all companies At any stage of development Easy to customize

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Northern California Network

Mission

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Mission Northern California Network

• Defines the market and your role in it • The more focused and targeted the mission, the higher the market share • The higher your market share, the higher your profits • ROI = Market Share

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Mission Northern California Network

Clearly define your market AND your role in it What is your strategic positioning? What is your competitive distinction? [email protected]

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Triggers Northern California Network

Company

Mission/Positioning

Wendy’s

Where is the beef?

Federal Express

Morton’s Salt

When it absolutely, positively, has to be there overnight Melt in your mouth, not in your hand All the news that’s fit to print When it rains it pours

Taco Bell

Think outside the bun

M&M New York Times

What comes to mind? [email protected]

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Mission Goal Northern California Network

High Growth & High Market Share would do well regardless of tactics

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Mission Northern California Network

Segment must be large enough to allow for success

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Mission Northern California Network

The greatest long-term business leverage is getting the Mission right

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Northern California Network

What is an elevator pitch?

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Focus Northern California Network

• Can you describe your business to a stranger on an elevator • 30 seconds is all you have • How do you grab their interest • Slam home the essence of your idea • Get them to want to know more [email protected]

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Northern California Network

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Mission Northern California Network

• The core of your Elevator Sales Pitch • Keep it short and sweet: – 500 words or less – Concepts – Long-term goals & objectives – Limited use of numbers [email protected]

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Mission Northern California Network

This may be all they read so make it great

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Mission Northern California Network

• • • • •

What the company will do Whom the company will serve Market size, growth rate, expectations Stage of development Noteworthy achievements which are germane to the plan • Objectives [email protected]

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Northern California Network

Cost Structure & Strategy

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Cost Structure & Strategy Northern California Network

• All businesses can be defined by their cost structure • Only 2 basic types • High Fixed Costs • High Variable Costs • Costs will drive strategy and objectives [email protected]

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High Fixed Costs Northern California Network

• Rent, people, fees, marketing & keywords • Costs that remain even if there are no revenues • Restaurants & Saturday night • Day care centers & child counts • Consulting firms & billable hours • Schools and enrollment [email protected]

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Northern California Network

High Fixed Costs = High Volume

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High Variable Costs Northern California Network

• • • • • • •

Sole practitioners Consultants Artists Out-of-pocket costs are low Consulting for $50 vs. $500/hour Sell a piece of art for $500 vs. $5,000 Teach 10 vs. 100 for $20 per person

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Northern California Network

High Variable Costs = High Price

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Northern California Network

Know your cost structure and adjust your business plan accordingly

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Northern California Network

• Undercapitalization is the Number 1 reason businesses fail • Do not to a good job of understanding the cost structure

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Northern California Network

Simplicity Wins

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Northern California Network

To get a better handle on your costs View your company as part of a “TOTAL MARKET SOLUTION” [email protected]

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Total Market Solution Northern California Network

What might be the costs of bringing a new sports drink to market?

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Simplicity Northern California Network

• • • •

Tendency to make plans complicated 3 business ideas vs. 1 Multiple channels and/or markets vs. 1 Different customers buying for different reasons

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Simplicity Northern California Network

Beware the multi-body problem Let me tell you about Janet . . .

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Simplicity Northern California Network

Getting 1 new business idea to work is hard enough

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Simplicity Northern California Network

Failure is inversely proportional to the Square of the number of moving parts

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Simplicity Northern California Network

• A business with 3 moving parts is only 1/9th as likely to succeed • Simplicity always wins • Follow the KISS principal

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Simplicity Northern California Network

Get to cash flow breakeven and then add complexity

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Northern California Network

Simplicity is part of all Venture Capital & Risk Equity investments

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Northern California Network

The rest of the plan will flow easily if you get the Mission right - Clarity – - Execution [email protected]

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Answer these Questions Northern California Network

• • • • •

What is your product How is it different from the competition Who will buy your product How much will they pay How will you find your customers & how much will it cost? • How much will it cost to make the product? www.acsbdc.org

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Northern California Network

Legal and Business Issues

(Next program - Thursday April 9 - Oakland ) [email protected]

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Things to Think About Northern California Network

• Will there be more than 1 owner? • Do you plan to raise capital from outside investors? • How will you deal with liability concerns? • Have you considered taxes?

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Business Structures Northern California Network

• • • •

Sole Proprietors Partnerships Limited Liability Companies Corporations

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Northern California Network

Sole Proprietorships vs. Corporations

• What exactly is a Corporation • When to form a Corp. vs. operating as a Sole Proprietor • Advantages and Disadvantages • Costs • Operating implications [email protected]

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When to Go Legal Northern California Network

• Forming a company separates risks: – Business – Personal

• Compartmentalize risks • Known downside of failure

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When to Go Legal Northern California Network

• As a Sole Proprietor: – Business and personal liabilities – Assets & Wealth – Are one and the same

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When to Go Legal Northern California Network

• Sole Proprietor is the “default” setting in the system • If you don’t incorporate you are a SP • Get 1099s • Complete the IRS Schedule C • Operate as a “person” only [email protected]

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When to Go Legal Northern California Network

Business failure can also mean personal failure, with all personal assets at risk

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When to go Legal Northern California Network

Corporate structure can protect private assets

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When to go Legal Northern California Network

Does your business contain meaningful liability risks

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When to go Legal Northern California Network

The greater the inherent business liability the more one needs a form of organization that ensures limited liability

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When to go Legal Northern California Network

• Generally easier to insure for risks through a corporate structure: – Errors & Omissions – Directors & Officers – Liability of all kinds

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Northern California Network

Often easier to finance growth

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Northern California Network

Necessary if one is to raise equity or any outside capital

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Northern California Network

“Corporate Veil” can be Pierced

• Exceptions would be: – Gross negligence – Trust fund violations – Fraud – Felonies

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Northern California Network

Maintaining “The Corporate Veil”

Must consistently use the corporate structure for business purposes

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Northern California Network

Maintaining “The Corporate Veil”

• Observe important corporate forms: – Annual meetings – Minutes – Minute books – Board of Directors – Corporate bank accounts [email protected]

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Northern California Network

Maintaining “The Corporate Veil”

No co-mingling of corporate and personal assets

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Northern California Network

Maintaining “The Corporate Veil”

You and your company are separate legal people

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Northern California Network

Maintaining “The Corporate Veil”

• Loans, contracts, vendor relations are with the company and not you • Intellectual Property is owned by, or leased to, the company • If the company needs funds then you make a formal loan to the company [email protected]

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Northern California Network

Maintaining “The Corporate Veil”

Document all transactions between you as an individual and you the company

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Northern California Network

Need an EIN anyway if you have even 1 full-time employee

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Choices Northern California Network

• Match the type of legal structure to the business • Growth vs. stability • External vs. internal cash • Corporate vs. personal guarantees • Outside funding vs. internal cash • Build wealth vs. tax efficient cash flow [email protected]

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Choices Northern California Network

Shareholders are equally protected in all corporate forms

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Choices Northern California Network

All are better than SP for protecting your personal assets

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Northern California Network

Intellectual Property

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What is IP Northern California Network

• • • • • • •

Intangible assets Often at the core of a business Patents Logo Trademarks Brand names Unique images and visual treatments

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Northern California Network

Logos and Trademarks

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Logos Northern California Network

• • • • • •

Core of the business identity Face to the customer Very difficult to trademark Look and Feel Spelling and Treatment Worth the effort

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Trademarks & Brand Names Northern California Network

• • • • • •

Separate legal process and specialists Trademark & copyright search The name itself The look & feel The packaging design Color schemes

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Trademarks Northern California Network

• Tough to come up with a unique: – Name – Logo – Design – Total brand image

• Lots of work needed to make it a reality [email protected]

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Dilbert Knows All Northern California Network

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Non Disclosure Agreements Northern California Network

• Protects you from others using your idea • Secrets disclosed without an NDA aren’t secrets • Document must be enforceable in construct • Get it done by a professional • Discipline in getting it signed [email protected]

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Protecting your Name Northern California Network

• Trademarks, Copyrights and “Look” are easy to litigate but hard to win • All subjective issues are tough to defend • Names spelled differently • Alternative color schemes • Often market and use specific [email protected]

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Protecting your Name Northern California Network

Must consistently enforce all rights or lose them

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Value Northern California Network

Fully protected trademarks will increase the value at time of sale

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Value Northern California Network

Unprotected IP may make selling the business impossible

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Value Northern California Network

The higher the brand equity value the greater the need to protect that asset

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The Name Game Northern California Network

Match the Company & Domain names (this can influence your name decision) [email protected]

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Who Owns Your Name Northern California Network

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Northern California Network

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Big vs. Big Northern California Network

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Northern California Network

Accessing Capital

(Next program – June 2 - Oakland) [email protected]

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Things to think About Northern California Network

• • • • •

Do you have your house in order? Do you meet the qualifications? How much capital do you need? What will you use the capital for? Do you need debt or equity?

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Northern California Network

Banks

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Accessing Capital Northern California Network

How Do Banks Make Money?

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How do Banks Make Money Northern California Network

• • • • •

Interest income Transaction fees Loan servicing fees Loan origination fees Money management fees

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How do Banks make Money Northern California Network

Interest income covers costs

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How do Banks make Money Northern California Network

Fees generate profit

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Northern California Network

Where do banks get money to lend? Deposits yes, But where else?

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Northern California Network

By selling loans through a process called “securitization” These loans are the “goods” banks sell in the marketplace

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How securitization works 13 Northern California Network

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Securitization is the transformation of a illiquid consumer mortgages, credit cards and other loan assets into more liquid i.e. tradable securities

How securitization works 13 Northern California Network

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Banks pool together individual consumer and small business loans into a large packages that are sold to buyers or investors

How securitization works 13 Northern California Network

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This “buyer’s market” is often referred to as the “secondary market” for consumer debt.

How securitization works 13 Northern California Network

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Selling loan packages gives banks the cash to make more loans to consumers

What does this mean for you? Northern California Network

What is one large (but not sole) component of the economic crisis?

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Northern California Network

Banks have stopped lending But Why?

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Northern California Network

The economic slowdown has lead to an increase in consumers falling behind on debt payments and foreclosures

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Northern California Network

This basically means that there is a decline in the “quality” of the goods the banks are selling

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Northern California Network

If you were someone buying “goods” or loans from the bank, what would you do?

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Northern California Network

Stop buying Or . . .

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Northern California Network

Decrease the amount you would pay for the goods . . . this causes an increase in the spreads

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Northern California Network

The less buyers purchase & the less they pay for goods, the less cash the banks get for the goods they are selling [email protected]

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Northern California Network

The less cash the banks get for the goods they are selling The less cash they have to make new loans

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Northern California Network

Thus . . . Bank lending has significantly decreased due to the decline in loan quality and the lack of secondary market buyers [email protected]

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Northern California Network

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Northern California Network

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Northern California Network

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Northern California Network

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What is the Government doing? Northern California Network

EESA: Emergency Economic Stabilization Act – approved September 28, 2008 allocated $700B with wide discretion Establishes TARP . [email protected]

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Federal Government Actions Northern California Network

TARP – Troubled Asset Relief Program: Program under which Treasury was going to acquire troubled assets. Evolved into the Capital Purchase Program, TALF & other programs to buy government guaranteed issues. [email protected]

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Federal Government Actions Northern California Network

TALF: Term-Asset Backed Securities Loan Facility $200B facility to provide cash/loans to buyers willing to purchase troubled consumer loans from banks. First funding projected to be February 2009. [email protected]

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What’s in it for you? Northern California Network

US Small Business Administration has been empowered to increase its lending to small businesses

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Northern California Network

What’s in it for you? Northern California Network

SBA will reduce its fees on small business loans

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What’s in it for you? Northern California Network

SBA will increase its guarantee amount from 75% to 100%, thereby increasing the quality of its loans and more appealing to buyers

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What’s in it for you? Northern California Network

SBA will increase its micro-lending program to provide help top businesses in crises.

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Northern California Network

SBA Program must undergo regulatory approval. Therefore, changes not expected to take effect until later in 2009.

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Northern California Network

Northern California Network

SBA PROGRAM

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SBA Backed Loans Northern California Network

Banks will incorporate an SBA guarantee when the loan doesn’t meet their stand alone lending criteria

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Process Northern California Network

 Applicant

 SBA Participating Lenders  SBA  Loan closing www.acsbdc.org

When You Apply for A Loan Northern California Network

 Talk with your bank first  Meet with the loan officer  If your bank will not provide you with an SBA loan check the lenders on the SBA loan list  http://www.sba.gov/localresources/district/ca/sf/fi nancing/index.html www.acsbdc.org

Be Prepared Northern California Network

 How Much Money ?  What is it used for?  How will affect the financial position?  What will be pledged as collateral?  How will the loan be repaid? www.acsbdc.org

 When will the loan be repaid?  When is the money needed?  Are the projections reasonable and well researched?  What if things don’t go as planned?

What Documents to Bring Northern California Network

 A current Profit and Loss Statement and Projected Cash Flow  Current Personal Financial Statement  Itemized Use of Proceeds  List of Collateral and estimated value. www.acsbdc.org

 Business Plan  Schedule of Business Debt  Personal and Business Tax Returns last 3 years  Copy of leases and all pertinent agreements

Northern California Network

5 C’s of Credit

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Character Northern California Network

 Lenders are very interested in the type of person you are.  They are lending you money and, of course want to be repaid.  Do you honor your agreements?  Credit reports are the major source of information on character. www.acsbdc.org

Capacity Northern California Network

 Lenders will always look to see if the business is in a position to succeed.  The will look at the owner and the management team.  Experience  Education  Get the experience! www.acsbdc.org

Coverage Northern California Network

 The basic question is: Will the business earn enough revenue to pay all the bills and still have money left over to service the loan and leave profit for the owner.  Prepare a cash flow statement showing how the loan can be repaid from the operations of the business. www.acsbdc.org

Capital Northern California Network

 No lender will lend all of the money needed to operate the business.  The business owner is expected to contribute some of the money- this is called equity or owners capital.  Expect to provide approximately one-third of the funds needed to start a new business. www.acsbdc.org

Collateral Northern California Network

 While cash-flow is the primary source of loan repayment, lenders also want a “back-up” or secondary source of repayment should anything go wrong.  Collateral is anything of value used as security for a loan.  Examples: real estate, bonds, inventory, equipment, accounts receivables. www.acsbdc.org

SBA Loan Programs Northern California Network

 SBA Standard Guarantee Loan Program (7A)  SBA Certified Development Company Loan Program (504)  SBA Express and Community Express  Micro-Loan Program

www.acsbdc.org

7a Northern California Network

• • • • •

Guarantee for portion of the loan Not an interest rate subsidy Up to $2MM but soon going to $3MM General corporate purposes SBA will require & take second position in other assets 176

7a Northern California Network

• • • • • •

Designed to help owner/operators grow The very best kind of capital Not designed for refinancing Variable rate tied to prime Longer term mean lower payments Best for equally long term assets 177

Northern California Network

SBA Guarantee Loan Program (7a)

 SBA guarantees up to 85% of the total loan amount up to $150,000 and 75% on loans exceeding $100,000

 NEWS FLASH…. SBA Guarantee now 90%  Loan range from $25,000 - $2,000,000 www.acsbdc.org

504 Northern California Network

• • • • •

Real estate & fixed asset specific Fixed rate lending Up to 90% fixed rate financing 20 year fully amortizing loans Lower down payment conserves working capital • Capital markets means low rates – 6.15% 179

504 Northern California Network

• $2MM or $4MM for manufacturing companies • 40% of the financing means $5 to $10MM • Also for owner occupied companies • Reasonably quick decision process

180

Loan Limits Northern California Network

 SBA can guarantee up to a maximum of $2,000,000  SBA guarantees a percentage of the loan amount to the lender  Many lenders do not make loans under $25,000

www.acsbdc.org

Use of Loan Proceeds Northern California Network

      

Working capital Inventory Purchase of machinery and equipment Leasehold improvements Purchase of business Purchase of franchise Acquisition or construction of commercial business property

www.acsbdc.org

Terms of Loan Northern California Network

 Term of loan depends on use of loan proceeds  Working capital--5 to 7 years  Fixed assets -- 10 years  Acquisition of commercial property--25 years

www.acsbdc.org

Collateral Northern California Network

 May be in the form of business or personal assets  Personal guarantees required of anyone owning 20% of the business as well as from the chief executive officer

www.acsbdc.org

Northern California Network

Criteria for Eligibility

 For-profit business  Qualified as a small business under SBA size standard criteria  Business must show profitability or potential.  Capital injection of 33 of project cost  Applicant must be a U.S. citizen or legal alien  Applicant must have good credit history

www.acsbdc.org

Northern California Network

New SBA Lending Rules

www.acsbdc.org

186

SBA Loan Fees Northern California Network

 SBA charges a loan guarantee fee that ranges from 2% to 3.75% depending on the size of the loan. Larger loans have a larger guarantee fee.  Banks will charge additional fees for loan packaging, title search, credit reports etc.

SBA Loan Fees Northern California Network

 SBA is temporarily waiving the loan guarantee fee from February 17, 2009 on…  Banks will still charge additional fees for loan packaging, title search, credit reports etc.

SBA Micro Loan Northern California Network

 Loans made from $1,000 to $35,0000  Interest Rate ranges from 10-13% depending on risk  Easier requirements.  Apply through SBA Intermediary.

 NEWS FLASH…. Micro Loan Expanded!!!! www.acsbdc.org

ARC Loan Program Northern California Network

 Still under development  Bridge loan to the business  Assist them through a period of time to make payments on terms loans.  Should be available by end of May.

Major Advantages With SBA Northern California Network

    

Start-ups Cash Flow Lender Favorable Interest Rates Favorable Repayment Terms More Liberal Than Conventional Bank Financing

www.acsbdc.org

Things to Remember Northern California Network

• • • • •

Some debt increases ROI Frees cash for other uses Provides a valuable cash flow cushion On or off balance sheet Debt is still debt

[email protected]

www.acsbdc.org

192

Start-ups Northern California Network

• • • • •

Always a special case No operating history No profits or cash flow Start-ups always have short-term losses Higher than normal failure rates

[email protected]

www.acsbdc.org

193

Northern California Network

Most banks in most situations won’t lend to start-ups

[email protected]

www.acsbdc.org

194

Start-ups Northern California Network

Not all types of funds are available or appropriate to start-ups

[email protected]

www.acsbdc.org

195

SBA Backed Loans Northern California Network

Banks will incorporate an SBA guarantee when the loan doesn’t meet their stand alone lending criteria

[email protected]

www.acsbdc.org

196

SBA Backed Loans Northern California Network

Process starts at an SBA banking partner

[email protected]

www.acsbdc.org

197

Things to Remember Northern California Network

Don’t want the loan to “go bad” any more than the borrower does

[email protected]

www.acsbdc.org

198

Northern California Network

• Many uses for the 7a loans: – Start-ups – Expansion – Acquisition – Buy-out – Refinancing [email protected]

www.acsbdc.org

199

SBA Backed Loans Northern California Network

• Hard assets are easier to finance • Services can be funded as well • Often the only way to finance high failure rate businesses such as restaurants • Find the bank that knows your business • They will be the lead in the deal [email protected]

www.acsbdc.org

200

SBA Backed Loans Northern California Network

• Keep track of your start-up expenses • Separate business credit card • SBA loans can be used for recapping start-up expenses but only if you can itemize the costs • Keep good records from the start [email protected]

www.acsbdc.org

201

Northern California Network

Some stuff you need for a loan

• Business Plan • 2 years monthly financial projections including cash flow • 3 Years historical tax returns • Strong credit score • Direct industry experience [email protected]

www.acsbdc.org

202

Pro-forma Financials Northern California Network

• • • • • •

Important part of any plan Demonstrates financial acumen Show impact of the new cash How will the $$$ help the business How the debt can be serviced & repaid Work the pro-forma numbers into the plan www.acsbdc.org 203

FICO Northern California Network

• The higher your score the lower your cost of capital • The more likely the loan will be approved • The higher the credit line offered • Understand your score before you start

[email protected]

www.acsbdc.org

204

FICO Northern California Network

• Fair Isaac Corporation (FICO) • Defacto industry standard for financial institutions • Know your FICO score before you start • www.myfico.com • Free trial is all you need [email protected]

www.acsbdc.org

205

FICO Northern California Network

• Virtually all lenders use FICO • Above 680 is typically considered a bankable score • Between 640 and 680 it will be an SBA loan if all else is “good” • Below 640 means other sources of more expensive capital or no capital at all [email protected]

www.acsbdc.org

206

Direct Industry Experience Northern California Network

• Experience in the business • The more operational the business the more experience counts • Start-up risks + lack of experience is always deadly • True for all sources of funds [email protected]

www.acsbdc.org

207

Northern California Network

A high credit score is an asset Protect it at all costs

[email protected]

www.acsbdc.org

208

Northern California Network

Work with a professional credit counselor if your FICO score is below 640

[email protected]

www.acsbdc.org

209

Northern California Network

Equity Sources

[email protected]

www.acsbdc.org

210

Equity Sources Northern California Network

• • • • • • •

Savings Existing successful business Other real estate assets Family Friends Channel partners Angels

[email protected]

www.acsbdc.org

211

Your Network Northern California Network

• Ask your Family, Friends and Business Associates about investing • At the very beginning • Equity commitments the lender can verify before starting the loan process • The more equity the “safer” the venture [email protected]

www.acsbdc.org

212

Channel Partners Northern California Network

• • • • •

Companies you buy from and sell to Go over your business plan with them Probably won’t make a direct investment Negotiate for preferable trade credit terms Lower deposits, more days before bills are due and/or higher credit lines • Better terms translate into less cash [email protected]

www.acsbdc.org

213

Other Equity Northern California Network

• Another business with 3 years of operating history, profits and positive cash flow • Commercial or rental real estate • The equity in your home • Loan guarantees from family and friends

[email protected]

www.acsbdc.org

214

Other Equity Northern California Network

Move savings to your new bank as collateral rather than depleting your account

[email protected]

www.acsbdc.org

215

Northern California Network

Angel Networks

www.acsbdc.org 216

Angel Networks Northern California Network

• • • • • • •

Groups of individual investors Common investment theme Often invest based on industry experience Individual decision making One term sheet and deal Tend to be early but generally flexible Before institutional capital www.acsbdc.org 217

Angel Networks Northern California Network

• Investment size can be a $100K to $3M+ • Multiple rounds as needed • All have their own application and due diligence processes • Hope that VC funds invest later • Exit is a sale, recap or IPO www.acsbdc.org 218

Northern California Network

Venture Capital Partnerships

www.acsbdc.org 219

Northern California Network

Where do VC’s get their Money?

• Committed pool of funds • Limited Partners: – Endowments – Pension funds – Family trusts – High net worth individuals

• 10 year term • Strong Fiduciary obligation www.acsbdc.org 220

Pension Fund Asset Allocation Northern California Network

www.acsbdc.org

221

Current VC Environment Northern California Network

• • • •

Toughest in 30 years Q2 2008 – no IPOs First time ever Q3 2008 – lightest IPO calendar in memory

www.acsbdc.org 222

But Fund Raising is Tough Northern California Network

Investment in U.S. start-ups dropped 71 % From January 2008 to 2009

Source: Thomson Reuters www.acsbdc.org

But Fund Raising is Tough Northern California Network

Venture capital funding dropped to $1.3 billion in January 2009 from $4.5 billion in January 2008

Source: Thomson Reuters www.acsbdc.org

But Fund Raising is Tough Northern California Network

Number of companies which received funds dropped by more than half to 203 from 466

Source: Thomson Reuters 225

www.acsbdc.org

But Fund Raising is Tough Northern California Network

Funding per company dropped on average to $6.6 million from $9.8 million

Source: Thomson Reuters

Northern California Network

www.acsbdc.org

Current VC Environment Northern California Network

• • • •

No IPO market means no liquidity More $$$ for existing portfolio companies Fewer $$$ for new deals Impact is negative across all facets of the private equity market

www.acsbdc.org 228

Current VC Environment Northern California Network

• No IPOs + Lack of liquidity + Recession = Fewer private deals at lower valuations • Expect a slow process from all institutional investors • VC’s looking for more complete deals to reduce risk www.acsbdc.org 229

Investments Northern California Network

The Next Big Thing

www.acsbdc.org 230

Severe Winnowing Process Northern California Network

• Axxon Capital: – 1000 deals in per year – Review 200 – Some work on 50 – Serious work on 25 – Due Diligence on 10 – 6 offers – 4 closed deals www.acsbdc.org 231

Investments Northern California Network

• Significant IP • Leverage the General Partners knowledge and networks • Management skills and experience specific to the goals • Co-investment potential • Specific portfolio focus www.acsbdc.org 232

Where The VC Money Goes Northern California Network

• • • • • •

55% 21% 6% 6% 4% 8%

-

Technology Medical & Bio-tech Industrial Media Technology Services Other www.acsbdc.org 233

Investing Northern California Network

Strong preference for a product vs. a service Don’t want assets to drive home at night

www.acsbdc.org 234

Management Northern California Network

• Team knows the market and will drive: – The first product – Alpha and Beta sites – Money raising – Done it before – Knows what a large public company must be

www.acsbdc.org 235

Markets Northern California Network

• • • • •

Rapidly growing markets Open to new products and services Customers eager to find new vendors Intact management team Or a 10X cost reduction www.acsbdc.org 236

Northern California Network

Why do some VC’s only invested in people they have invested in before?

237

Returns Northern California Network

• • • • •

10X+ cash on cash in 5 years 50%+ targeted IRR 22% - 35% IRR is excellent IRR always driven by top line growth Need to show valuation “progress” via interim financings www.acsbdc.org 238

Control Northern California Network

• No ambiguity at all • The investors will be in control • As fiduciaries they must protect their investors’ interests • Actively change management

www.acsbdc.org 239

How Should you Decide? Northern California Network

Banker’s payback

Equity Investor payback

• Get $1MM loan • Assume 10% annual interest for 10 years • 20 year balloon • $1.0% Fee • Payment to banker: • $2,001,000

• • • •

www.acsbdc.org

240

Get $1MM investment Demands 10X return Payment to Investor: $10MM

Value Creation & Distribution Northern California Network

Investor Pie

Banker Pie

www.acsbdc.org

241

Northern California Network

Technology

(e-commerce and Web Marketing April 22 in Oakland) [email protected]

www.acsbdc.org

242

Things to Think About Northern California Network

• Everyone is doin’ it • Quick efficient way to get information out about your business • Collaboration with Colleagues • Ossifying customer relationships • Freedom and responsiveness

[email protected]

www.acsbdc.org

243

Web Site Northern California Network

• Simple but professional web site from the start • Business email for business communications • Straight-forward and easy to read • Part of your Business Identity [email protected]

www.acsbdc.org

244

Ways to get started Northern California Network

• ISP with easy to use templates & website development tools • Borrow/buy as much technology as possible • Fit your design into their template • Save money and time at the beginning [email protected]

www.acsbdc.org

245

Web Based Applications Northern California Network

• • • •

The next big step in virtual operations Data stays on a server You’re mobile Work on files, reports, presentations from anywhere • Simplified collaboration and training [email protected]

www.acsbdc.org

246

Web Based Applications Northern California Network

• • • •

Virtually unlimited memory Interactive process 99.99% uptime Steady flow of updates (no need to buy the new shrink wrap) • 1-800 help lines [email protected]

www.acsbdc.org

247

Northern California Network

• • • • •

Collaborative Work Environment

Microsoft hosted exchange server $10/month/email account 200MB of memory or more Shared files, contacts & calendars Work together even when you’re not

[email protected]

www.acsbdc.org

248

Some sites to look into Northern California Network

• • • • • • •

Salesforce.com Gotomeeting.com Freeconferencecall.com J2 communications Dell Safe On-line backup Freefax.com MS Live One virus protection

[email protected]

www.acsbdc.org

249

Web Based Applications Northern California Network

• Client in SF has all files on web based applications • His customers can look up orders, check shipping dates and invoices 24/7 • Clients often correct problems before they happen • Cheaper to have the client do the work [email protected]

www.acsbdc.org

250

Web Based Applications Northern California Network

• Financial solutions moving to the web • Most of the major small business accounting packages now offer a web based alternative • More will follow • Find an accounting partner who offers the service [email protected]

www.acsbdc.org

251

Web Based Applications Northern California Network

• Customer Relationship Management • Now available via Office 2007 as Business Contacts Manager • CRM Live from Microsoft

[email protected]

www.acsbdc.org

252

Northern California Network

Migration

[email protected]

www.acsbdc.org

253

Migration Northern California Network

• Most businesses will eventually migrate to their own systems • Even small companies can afford their own server based applications • Servers can be in a shared facility • Usually a function of security and costs [email protected]

www.acsbdc.org

254

Solutions Northern California Network

Mobile and wireless solutions

[email protected]

www.acsbdc.org

255

Solutions Northern California Network

• • • •

Future is in the PDA Japanese are using their PDAs exclusively PDA related accessories Flash memory like a camera for presentations & data • Functionality will only increase as costs drop [email protected]

www.acsbdc.org

256

Northern California Network

The Web

[email protected]

www.acsbdc.org

257

Pay per Click Growth Northern California Network

• May 20th San Francisco Chronicle Business section • $8.3B in 2007 vs. $1.0B in 2002 on PPC • 53% CAGR • 1% for all media

[email protected]

www.acsbdc.org

258

Northern California Network

New businesses twice as likely to use Pay per Click

[email protected]

www.acsbdc.org

259

Web Marketing Northern California Network

A skill everyone needs to learn

[email protected]

www.acsbdc.org

260

Northern California Network

Goal is to create a dialogue with your potential customers

[email protected]

www.acsbdc.org

261

Northern California Network

Dialogues lead to Relationships

[email protected]

www.acsbdc.org

262

Northern California Network

Relationships to closed business

[email protected]

www.acsbdc.org

263

Things to Remember Northern California Network

• Stay connected • Move data effectively and efficiently • Network in customers, vendors, partners and employees • Website as your virtual marketing tool • Collateral material for the physical world • Upgrade and adapt [email protected]

www.acsbdc.org

264

Northern California Network

Investment in technology isn’t Fixed Costs

[email protected]

www.acsbdc.org

265

Northern California Network

Things to Remember

[email protected]

www.acsbdc.org

266

Things to Remember Northern California Network

• Without a plan you’re not managing the business • Get the Mission right • S=MP5CM • 8 page plan

[email protected]

www.acsbdc.org

267

Things to Remember Northern California Network

• Corporate structure can protect private assets • Don’t intermingle corporate and personal assets • Don’t sign anything until it has been reviewed [email protected]

www.acsbdc.org

268

Things to Remember Northern California Network

IP must be protected at all times or you risk losing it

[email protected]

www.acsbdc.org

269

Things to Remember Northern California Network

• Raise the money first • Equity covers losses and other start-up costs

[email protected]

www.acsbdc.org

270

Things to Remember Northern California Network

• Website is a key part of your business system • Be professional from the beginning • Leverage technology to be operational fast • Focus on customers and marketing

[email protected]

www.acsbdc.org

271

Northern California Network

Panel Discussion

[email protected]

www.acsbdc.org

272

Panel Discussion Northern California Network

Nimia Ramos Beauchamp David Bokash

Wells Fargo Bank

Roberto Costa

OBDC

Rich Ohlrich

Interim Director ACSBDC

Scott Pesetsky

Lawyer

ACSBDC Technology Consultant

273

Northern California Network

Please complete the Class Evaluation forms

[email protected]

www.acsbdc.org

274

Thanks Northern California Network

• To our panelists • Peralta College System

Thanks to all of you

[email protected]

www.acsbdc.org

275

Networking Northern California Network

Meet Great People Time to Network

[email protected]

www.acsbdc.org

276