Generating cash

At some point during a company’s growth there may be an opportunity to improve its position and/or valuation with a cash injection.  Examples of this could be:

  1. Selling more products or services
  2. Developing new products or services to sell
  3. Changing company ownership structure
  4. All or some of the above

There are three main ways to generate cash.

  1. Profit
  2. Debt
  3. Investment

This is what we will explore in this blog.

Profit results from successfully solving customer’s problems with your product or service for less money than they paid you to do it.  Every time you successfully sell a product or service you add to your cash balance, which grows on your balance sheet as an asset.

Debt is money you get now to be paid back with future profits or investment.  This works well as long as you can accurately project future profits.  Inexperienced business owners often overestimate sales and underestimate the cost of those sales.   This leads to decreased profit and a potential inability to pay back debt or attract investment.

Debt can also be in the form of sweat, which means people can contribute their time and effort anticipating being paid in the future when the company starts making a profit or attracts investment.

If the company succeeds, it may pay back people’s contributed effort with cash or it may convert that contribution into an investment into the company.  This depends on what was agreed to by the two parties before the contribution was made.

Investment comes either from selling a slice of all your future profit and/or securing a grant.  These things can be pursued together making each other more attractive.  This works best when your business plan aligns the grant with cash investment.

To sell a slice of your business, you need to create a present day value for your future profits and then decide how much you are prepared to sell a fraction of it for.  There are a bunch of ways to value your business and you should get advice from your accountant at a minimum on this.

If you are going to sell a slice of all your future profits you need to consider who is going get it and what will they do with it.  I once sold a percentage of a business to its largest customer, which mostly worked out.

If your business hasn’t proved itself to gain a sufficient valuation, you may be able to get people you know — typically friends and family — to invest in your business.  These investors are usually backing you because they know and trust you.

Don’t break the trust and be really straight with them about the probability of them losing their money.

Don’t ask anyone close to you to invest in your business if you haven’t put everything of your own in first.  You are pitching for people to take a leap of faith in you.  You may only get to do that once in a lifetime with some people.

Be aware that this can go horribly wrong and I have seen many families and friends fall out over ideas that didn’t work out.   Then again, Jeff Bezos borrowed money from his parents and created Amazon, but nothing is certain.

If you can demonstrate in a clear plan how money can be made from investing in your business, you could be ready to pitch to real investors.  No warm and fuzzies here.  These people will like you as long as you are doing what you said you would and your company is delivering what you stated in your business plan.

It’s not likely they’re going to be the same type of person who will invest in your early stages.

Real fundraising is much harder than it looks.  Well it’s easy to do badly and hard to do successfully.

I’ve done both and this is what I learnt.

Don’t do it too early.

It’s too hard to really know maybe even in the first year whether people should be investing in this company.

You’ve got to prove your idea at some level; you need some evidence enabling you with good conscience to ask people to put money into your company.

It’s not hard to get a bit of evidence like an anchor sale, which demonstrates if you think you’re going to be able to sell a hundred of them, show me how you can sell one.

Study your first sale, see what the real cost was and then show me how you can sell a second and a third.  Hopefully by the time you’re at a hundredth sale you’re actually making more profit, which is usually what you promised was going to happen.

Create your investment pitch with a process in a defined time.

My advice is have an absolute clear business plan — clear, clear, clear, clear, clear. The narrative’s clear, the logic’s clear, and the numbers are accurate.  It may be describing something out there!  But at least it adds up.

Create the narrative, logic and model of numbers that join the dots to a path of a valuation.

Know all your multipliers driving the numbers supporting valuation and make certain anybody considering buying in understands what you are trying to do mathematically.

Investors

The difference between friends and family, angel and professional investors is huge.  It moves on a spectrum of deep investment in people at one end and strictly business at the other.

The rigor required to move along the investor spectrum from family to professional increases significantly at each stage.  The due diligence your plan will be subjected to is designed to stress test everything, including strategy, performance and people.

About this picture

When you visit the United Emirates you know you have landed in a cash creating region.  Building a Ferrari theme park in the desert is a sign that there could be way too much cash around.

You know you have a good travel buddy when you inevitably start fighting with each other on a travel adventure and not let that interrupt your hectic schedule.   This day was one of those days.  An argument had been brewing and we were going to have it out and I am sure we became one of the attractions at the theme park.

We laughed about this later recalling the looks on peoples faces.  I am grateful to have had such a great companion who could stop mid argument and say stand there, I think this would make a great pic.

 

 

Confessions of a blogger

When I first started this blog I built the WordPress site myself and I was very enthusiastic about it.

I really love to write but I guess I write like somebody who doesn’t work full time as a musician but likes to play an instrument.  It’s a hobby and not my day job.

I get to write a lot of business plans, marketing communications, sales communications and things like that.  It’s a better creative outlet than it sounds.

Writing the narrative of a great strategy is very satisfying.  I love generating a picture of today and a view of the future in words; it is very powerful.

As I was learning and building this site, I had this vision of getting up every day and my thoughts exploding on the page.  I saw myself blogging my way around the world and capturing everything in real time.

The reality was that I got as far as San Fran, first leg, met one of my favourite travel buddies and next thing, we are in Mexico, off the grid, drinking tequila on the beach.

Everything was happening quickly and I wanted to focus on being in the moment and not writing about the moment.  I realised what I had set up for my blogging adventure was insufficient and I wasn’t stopping to fix that.

Having abandoned my plan, I thought I would just take as many pictures as I could and collect as many thoughts as I could and work it all out later.

Then later comes along and it’s, man!  How am I ever going to make anything out of all this stuff?

So then nothing happens and I decide I am a pretty bad blogger.  As much as I like writing, I wasn’t prepared to do it like a job.

You are reading this now because I found a better way to do it, which I will explain as I go and hopefully you will find it useful.

About the photo

Circa December 2015, me in Panama, on the Panama canal, in a Panama hat, drinking a Panama beer.  By the dopey look on my face it may have been my sixth beer.

What I loved about this experience was the sense of accomplishment achieved by the construction of the canal.

Somebody had a big idea and then generated it with such force that a path was cut through a continent to allow us humans to get where we need to go faster.  We did that.

 

 

Web Money from the 90’s

 

Around this time of year, in Feb 2000, I was doing my best to sell the idea of on-line advertising to anyone who would listen to me.

We were a month into our successful IPO, we had a top 50 Australian website, number 1 in its category, and cashed up bunch of nerds who thought we knew what was going on, and that we knew what we were doing.

Everything was happening so quickly that every strategy seemed necessary to manage as it was happening.

With hindsight, we understand the impact the Internet has had on the world, back then it was happening for the first time and in real time.

One of the ideas we sold our Investors on was the potential of on line advertising for unique content creators.

What made me think of this today was reading an article from #Rueters on #Facebook regarding #Google generating $US22.4 Billion dollars in on line ad revenue for one quarter.

It occurred to me that this is a lot of money for an industry that did not exist for half my life.

On Line advertising, even in the 90’s made sense me.  Do more for less and better.

With my zero experience in the advertising world, I was reading everything i could get my hands on and working with people whom I thought knew more than most.

The smartest people I knew were telling me the strategy of selling banner ads on our highly trafficked website would start making money.

We could produce advertising space on the website visited by by circa 15 thousand investors a day for next nothing.  It was easy to set up and manage, all we needed to do was sell it.  What could go wrong?

What I didn’t think about at the time was all the people who were already making money advertising in older mediums, such as print or broadcasting.

There was a whole economy based around things staying as they were.

Every time I spoke to a business I was learning how they did all their advertising through an agency and the agencies always wanted their cut.

Today we deal in a percentages of a cent if necessary to charge for on line advertising.  Back then there were few tools to work with for the agencies and they were trying to protect their positions.

The bottom line was that it was slow movement to new media, well slow if you are living in a quarter to quarter start up.     So much was  happening so quickly, it made no sense to me that on line ads weren’t being picked up faster.

Because we would rotate adds every 20 seconds if wanted to, we could produce endless inventory.

All the agencies combined couldn’t sell it the way there were trying to do back then.  There had to be a better way.

Today buying on line advertising, particularly via Google or Facebook, and it is pretty straight forward.  It is cheap, compared to what you could buy before online ads, and it is measurable.

So there we were at peak of the tech bubble with a perfect product, offering huge profits, with very few buyers and some commentators calling it all BS.

One thing I was clear about, having no adverts on our website wasn’t a good look.  I asked our banner provider at the time what our options were and they suggested fillers, like Red Cross, Greenpeace, and World Vision.

We ended up selling the company in the same year and I  never got to play out the online ad game.

I did however get to endlessly promote all my favourite socially important institutions for about 12 months to about 50,000 active stock traders, which in hindsight was a great out come.

About the photo.     Circa 10:15am, Dec 22, 1999, the moment I realised we had successfully listed on the ASX.  2 minutes before this picture was the fist time since I started I thought, “what if nobody buys our stock?”     The photo was courtesy of the AFR, who after taking some more conservative photos, I asked if I could get one for myself with my sunglasses on in front of the exchange board.  Guess which one turned up in the paper, which I now think is great.