Basic contention is that they grew before they figured out how to be profitable, so they are just losing money faster than ever.

The following chart helps differentiate the two concepts even further:

Opportunities, threats, and changes in the marketplace happen faster and with less predictability than they used to. They’re also becoming increasingly interconnected and interrelated in ways we’ve never had to deal with before. The result is a significantly more volatile and uncertain world – where disruptive change can occur on a moment’s notice, and where incremental change may no longer be enough to survive.

To lead your organization to even greater success in 2011, make sure you have these strategies in mind:

1. Get clear on success.

What does success look like for your company?  Ask yourself these questions:

• When we succeed, what three or four key strategic objectives will we have accomplished?
• How will we define our workplace culture in terms of attitudes, beliefs, and values?
• What skills, knowledge and abilities will be the cornerstones of our company?
• What tools, systems and technologies will we need?
• What products will we have in the market? What products in development?
• Who are our customers? How many will we have? Who are the top 100 customers we’d like to have?
• Who are our biggest competitors? What type of companies will we compete against?
• What will be our greatest competitive advantage? Our biggest threat?
• What will our brand represent?

Once you know what success looks like, communicate it often to your employees, board and others so that you never lose sight of your goals.

2.  Get good at strategic thinking.

Today’s business environment demands a workforce that can move fast with focus and flexibility. If you can’t respond quickly to changing market conditions and unforeseen events, you’ll get left behind by faster, more strategically agile competitors.

What is the differentiated value you provide to your customers?  Find out and leverage that.

Teach your people to anticipate opportunities and threats. Develop their creative problem solving skills, and help them understand how their decisions and actions impact the business today and in the future.

Make sure your company can make it through unexpected events.  Analyze the future by thinking about all the problems that could arise, and then, figure out how you can overcome those challenges.  Make sure you can get back up and going quickly if you ever get knocked down.

In the past few years, Mergers and Acquisitions (M&A) activity has been badly hit by the economic crisis. The uncertain economy and lack of credit forced many businesses to abandon their M&A strategies and focus on alliances and joint ventures as a means to enhance technology, vertical markets, and revenue growth.

Although their confidence must be shaken by recent market activity, some lawyers believe that the world economy is beginning to bounce back, and M&A along with it.  Although the deal size and volume are beginning to improve, they are still a far cry from the boom years of 2005 and 2006.

Through the end of 2010, over 21,000 deals were announced with more than $1.9 trillion in total volume. This represented a 1% increase from 2009 volume levels, and marked a sharp reversal in the two-year decline of deal making activity that began in 2008.  (Source:  2011 M&A Outlook, Bloomberg)

2011 is already looking positive for M&A activity.

Figure Source: Berkery Noyes, 2011

We won’t make it back to the boom years any time soon, but there are a number of trends that appear to indicate that 2011 and beyond, will begin to encourage new M&A activity at an increasing rate.  The top 10 trends in M&A activity for the remainder of 2011 include:

1. More companies are deciding to use M&As both for top-line growth and to expand into new areas
2. Companies will become aggressive acquisitors in the area of social media and social media platforms to expand both their customer base and the number of devices each customer accesses
3. Companies will be looking for trend-setting acquisitions that help them keep the online community online and on their websites.  There is also a huge push toward finding the newest IT technology and electronic devices.  Time is of the essence and since there is no time to build, companies will need to acquire
4. Technology, energy, biotech, healthcare, and education are areas in which we expect to see a significant increase in M&A activity
5. Mergers & Acquisitions used to focus on the huge mega deal but macroeconomic fears and market volatility are negating the mega deal today.  Those seeking to acquire will be looking towards middle market companies that can have an immediate impact on operations and create strategic value
6. Leveraged buyouts may be hiding, but they’re not dead
7. Earnouts are making a comeback.  They are, however, full of legal and business issues and must be carefully negotiated
8. Real estate is not roaring back, but debt is becoming available and so, real estate will be a focus of 2011 mergers and acquisitions
9. These days, most companies have some international component, whether it’s customers, manufacturing, sourcing or sales. Hence, many acquisitions will have some type of cross-border implication
10. Although many people believe that change is a good thing, political upheaval will likely have a negative effect near-term on completion of deals involving the Middle East and Southern Europe.

Figure Source: Berkery Noyes, 2011

Strategic planning is macro-oriented with an emphasis on the big picture and your long term goals and objectives, in approximately 3 to 5 year increments.  This type of planning guides the fundamental decisions and actions that will shape the long term direction of a business’ development.   It focuses on the core of Who (you are) What (you want to accomplish) and Why (you want to accomplish the what).

Strategic planning includes areas like your (i) business’ market share; (ii) professional career path; (iii) life and/or business vision; (iv) investment goals; (v) personal and/or professional opportunity costs; (vi) mission; and (v) the allocation of resources.

Tactical planning is micro-oriented and focuses on your short term S.M.A.R.T. goals, which usually have 1 to 18 month time frames.  SMART goals are specific, measurable, attainable, relevant & time specific.   Tactical planning is all about the How (i.e., process) of getting things going.  The focus is on operations including the creation and execution of effective, efficient action plans.

Areas covered in tactical planning include (i) monthly or quarterly sales goals; (ii) improving customer service in specific areas, (iii) reducing the number of your outside commitments so that you can simplify your life and (iv) creating action plans for your strategic (big picture) objectives.

Achieving accelerated success is all about first having a clear vision and mission (requires strategic planning) and then creating effective and efficient action plans to put the vision and mission in motion (requires tactical planning). If you don’t first have a clear vision and mission, your tactical plans will likely fail.

Please come back next week to read Part Two of this blog which will go deeper in depth about these two concepts. We will also discuss ideas on how you can get a clear view on how to achieve your successes, how you can get better at strategic thinking and how innovation is changing the ways in which businesses operate.

If you like this information, you’ll really like “Top 10 Mistakes That Cause Investors to Shoot Down Deals”.

About the author: David Brode is the Principal of the Brode Group. An economist by training, Brode has over two decades of experience helping ventures develop and communicate business strategies through financial models so they can launch, grow, and sell businesses.  Brode’s financial forecasting models have been through due diligence dozens of times and have been successful in securing over $11 billion in financing for projects worldwide.  Brode has a B.A. degree in Economics from the University of Michigan.

Strategic planning is macro-oriented with an emphasis on the big picture and your long term goals and objectives, in approximately 3 to 5 year increments.  This type of planning guides the fundamental decisions and actions that will shape the long term direction of a business’ development.   It focuses on the core of Who (you are) What (you want to accomplish) and Why (you want to accomplish the what).

Strategic planning includes areas like your (i) business’ market share; (ii) professional career path; (iii) life and/or business vision; (iv) investment goals; (v) personal and/or professional opportunity costs; (vi) mission; and (v) the allocation of resources.

Tactical planning is micro-oriented and focuses on your short term S.M.A.R.T. goals, which usually have 1 to 18 month time frames.  SMART goals are specific, measurable, attainable, relevant & time specific.   Tactical planning is all about the How (i.e., process) of getting things going.  The focus is on operations including the creation and execution of effective, efficient action plans.

Areas covered in tactical planning include (i) monthly or quarterly sales goals; (ii) improving customer service in specific areas, (iii) reducing the number of your outside commitments so that you can simplify your life and (iv) creating action plans for your strategic (big picture) objectives.

Achieving accelerated success is all about first having a clear vision and mission (requires strategic planning) and then creating effective and efficient action plans to put the vision and mission in motion (requires tactical planning). If you don’t first have a clear vision and mission, your tactical plans will likely fail.

Please come back next week to read Part Two of this blog which will go deeper in depth about these two concepts. We will also discuss ideas on how you can get a clear view on how to achieve your successes, how you can get better at strategic thinking and how innovation is changing the ways in which businesses operate.

If you like this information, you’ll really like “Top 10 Mistakes That Cause Investors to Shoot Down Deals”.

About the author: David Brode is the Principal of the Brode Group. An economist by training, Brode has over two decades of experience helping ventures develop and communicate business strategies through financial models so they can launch, grow, and sell businesses.  Brode’s financial forecasting models have been through due diligence dozens of times and have been successful in securing over $11 billion in financing for projects worldwide.  Brode has a B.A. degree in Economics from the University of Michigan.

Financial projections are a blend of art and science.  There is always a leap of faith in the modeling process, for example, can you really gain 1% of the market? Are the industry figures from last year going to hold true for next year? No one expects you to know absolutely “for sure,” but as long as you outline the assumptions and note how you arrived at your figures, you’ve done all you can.

One thing is certain – include your assumptions wherever possible, so an investor understands how you arrived at the figures in the model.  Consider building a past performance table showing your profit and loss and balance sheet from the past 2 to 3 years, in table and graph formats, if your company already has some revenues.  Make sure you can achieve break-even within a reasonable time – say 12 to 24 months – and keep your cash at a positive balance throughout the life of the model.

One key factor that an angel investor looks for is solid return on investment (IRR).   Whether it’s capital for startup or business startup money, active angel investors are thrilled to build and finally create a thriving business model. The expectation for most investors is to be able to take out seven dollars for each dollar that’s invested into a company within five years.

Investors are always evaluating your financial sophistication before they trust you with their money.  Unrealistic financial models that have unachievable margins or grossly understated expenses, valuations and market penetration will send them running.  If your numbers don’t add up, start over.  On the other hand, if you have a realistic assessment of your competition, well-thought out cash flows and cost assumptions, you’ll prove you have a strong understanding of your market.  Investors know that you’ll have a much higher chance of success under those circumstances.
There are certain things that will kill your ability to get an angel investor.  For example:

1)       Unrealistic valuation.  If you have a pre-revenue startup and say that you’re going to raise $1 million for 10% ownership (leaving you with a $9 million ownership before the investor even puts one foot in), you’ve just shown that your valuation is too unrealistic for an angel to be interested.

2)      Unrealistic projections.  If you say that your revenues are going to grow from $0 to $50 million in your first year of operations, an investor will probably laugh and tell you to go out and get some real-world experience first.

3)      Integrity.  Whatever you do, make sure your figures are as honestly protrayed as possible.  If an investor thinks that you’re not being honest or that there is any chance you have lied about anything in your financials, they’ll never do business with you now or in the future.

These aren’t the only considerations you’ll need for strong financial projections but they will give you a start.  Just make sure that your business plan and financial model support each other as much as possible.  Paint a picture that supports your projections and if you can find average costs and income for your industry, model from those and that should give you fairly airtight financials.

If you like this information, you’ll really like “Top 10 Mistakes That Cause Investors to Shoot Down Deals”.

About the author: David Brode is the Principal of the Brode Group. An economist by training, Brode has over two decades of experience helping ventures develop and communicate business strategies through financial models so they can launch, grow, and sell businesses.  Brode’s financial forecasting models have been through due diligence dozens of times and have been successful in securing over $11 billion in financing for projects worldwide.  Brode has a B.A. degree in Economics from the University of Michigan.

The Barometer showed that during the first quarter of 2011, up rounds exceeded down rounds 67% to 16% with 17% flat.  An up round is one in which the price per share at which a company sells its stock has increased since its prior financing round while a down round is one in which the price per share has declined since a company’s prior financing round.  The Barometer showed a 52% average price increase for Quarter 1, 2011, less than the previous quarter, but still very healthy.  “This was the seventh consecutive quarter in which the Venture Capital Barometer was positive,” said Barry Kramer, partner at Fenwick & West and co-author of the survey.

From a valuation perspective, the best performing industries in the quarter were software (including a significant number of ‘software as a service’ companies and companies building applications for mobile devices) and Internet/Digital Media, followed by hardware and cleantech, while the life science industry continued to lag behind.

As a result of a number of factors (including the fact that venture capital has become harder to obtain for initial financing), the Fenwick & West initial angel/seed financing survey reported the following changes in that environment:

1)    A shift in the composition of investors, from friends and family and wealthy individuals to a larger percentage of professional angels, seed funds and venture capital funds.

2)    The amounts raised can exceed $1 million due to the fact that investors in these financings have deeper pockets.

3)    Financing terms are currently more sophisticated since investors wish to be more active in overseeing their investments.

The Barometer also found that in the first quarter, 2011, there was a significant increase in commitments to venture capital funds and that the monies raised were concentrated in a few large funds such as Bessemer, Sequoia and JP Morgan, all together accounting for over 55% of the total amount raised.

According to Dow Jones’ VentureSource, VCs invested $6.4 billion in 661 deals in the U.S. in Quarter 1, 2011, compared to $7.6 billion in 735 deals in Quarter 4, 2010.

If you like this information, you’ll really like “Top 10 Mistakes That Cause Investors to Shoot Down Deals”.

About the author: David Brode is the Principal of the Brode Group. An economist by training, Brode has over two decades of experience helping ventures develop and communicate business strategies through financial models so they can launch, grow, and sell businesses.  Brode’s financial forecasting models have been through due diligence dozens of times and have been successful in securing over $11 billion in financing for projects worldwide.  Brode has a B.A. degree in Economics from the University of Michigan.

Due diligence is a procedure where an investor considering making an investment is provided with an opportunity to examine the asset concerned in some detail prior to providing funds in exchange for shares.   Investors need to be provided with a level of comfort that material information accurately reflects the assets and liabilities of the target as well as the company’s future prospects.  Because a wide range of risks exist, due diligence for many investors is all about risk management.

Some investors don’t perform due diligence until they are already sold on the company.  They want to verify what you said in your business plan is the truth.  They might be looking for undisclosed litigation, that taxes have been paid, that any major contracts or other agreements are as represented, and, since most investments are based on the credibility of management,  that management is who they say they are.  (On one deal I worked on in the last two years, a founder was revealed to have lied about attending the elite university he claimed on his resume.  In another deal, a founder was dropped due to prior censure by the SEC which he had not revealed.)

There is not one way to perform due diligence, and the process may vary depending on the product and people involved. Some investors will look at the product or service first.  If it is attractive, they will then proceed to inquire further. Others will look at issues such as valuation first, and if satisfied, will proceed. For example, if the company indicates it will sell 1% of its stock for $1 million, the investor may believe it is overvalued and there is no point in pursuing due diligence any further.

Due diligence is all about verifying the accuracy of representations made.   If management claims to own certain intellectual property, investors can search patent and trademark records to see if that’s true.  If the unique features of a company are the product of certain creative talent, investors can verify that they are under contract and the company is protected by restrictive covenants.  If the financial model claims that the target market has 10,000 companies, investors can review the documents supporting this claim.  If there are financial representations being made, investors can investigate and analyze the accuracy of them. Even if the entity has audited financial statements, there are a great many schemes which somebody shopping a company can do which might not be caught by auditors. Using data management software, investors can analyze trends in transactions and highlight inconsistencies. While no investigation is guaranteed to catch all schemes, one thing is certain.  If the acquisition target refuses to permit an independent investigation, or attempts to restrict the scope of an investigation, it’s an automatic red flag that this is an ill-advised deal.

Closing deals means submitting to due diligence.  We have been there and can help you pull together the information needed to speed up this essential part of the process.  And if you’re on the buy side, we have extensive checklists on areas to consider.

If you like this information, you’ll really like “Top 10 Mistakes That Cause Investors to Shoot Down Deals”.

About the author: David Brode is the Principal of the Brode Group. An economist by training, Brode has over two decades of experience helping ventures develop and communicate business strategies through financial models so they can launch, grow, and sell businesses.  Brode’s financial forecasting models have been through due diligence dozens of times and have been successful in securing over $11 billion in financing for projects worldwide.  Brode has a B.A. degree in Economics from the University of Michigan.

Why is cash flow so important? If the cash inflows exceed the cash outflows, the business can continue operations. If the cash outflows exceed the inflows, the business RUNS OUT OF CASH and grinds to a halt. Even if the imbalance is only for a short period, it can spell disaster.  You simply cannot present a plan that shows the business going cash negative.

In its simplest form, cash flow refers to when you will collect and spend money. Think in terms of actual cash, dollar bills, flowing in and out of the business, and then identify both their sources and uses. This is cash-flow analysis.

The main items in a cash flow are:

• Cash flow from operating activities (this includes all revenue, cash expenses, changes in working capital, cash interest paid, cash taxes paid, etc.)
• Capital expenditure on equipment
• Acquisitions of other companies
• Repayment of debt or equity dividends paid
• Financing received, whether as debt or equity

If your projections are carefully prepared and convincingly supported, they become one of the most critical yardsticks by which your company’s value is measured by potential investors. Since the merit of your business ultimately depends on what it will accomplish in the future, reasonable estimates of future cash flows will help in arriving at a value. So when your team produces convincing financials it will likewise command a higher value than one that does not.

How much cash a company can generate is one of the more important measures of its health. Yet, you will hear more about P/E (price earnings ratio) than almost any other metric on valuation, but it does not give you an accurate picture of a company’s ability to generate cash.

For a new company, you must produce the most accurate cash flow projections you can if you expect to obtain financing.  What investors really want to see is that you know when and where money will be made, you know what items will affect revenue and cost,  and that the business can grow to the size investors require in order to get the return they want. Creating a model for your business and using it to forecast your financials helps them understand these numbers, and again be confident that you understand them. If you are pre-revenue, the best thing your forecasts should show is how long it will take before you can start generating revenue, how much money you need to get there, and then, how much you’ll need to get again to cash flow positive.  Finally, a sense of scale and margins allows investors to estimate a long-term exit value for their investment.

If you like this information, you’ll really like “Top 10 Mistakes That Cause Investors to Shoot Down Deals”.

About the author: David Brode is the Principal of the Brode Group. An economist by training, Brode has over two decades of experience helping ventures develop and communicate business strategies through financial models so they can launch, grow, and sell businesses.  Brode’s financial forecasting models have been through due diligence dozens of times and have been successful in securing over $11 billion in financing for projects worldwide.  Brode has a B.A. degree in Economics from the University of Michigan.

If you are an entrepreneur, you are probably wrong about how much money your startup will need, and you are almost certainly underestimating your capital requirements. The stuff you want to do will likely take more money, and more time, than you estimate. Products will launch late (they always do), partnerships will take longer to implement and will launch later than you forecast.  More importantly, opportunities to spend and invest will come along that you couldn’t foresee when you built out your plan — whether that’s a product opportunity you see, a great VP to hire, or a new marketing strategy to deploy, it will be easier to adapt to circumstances if you have the capital to take advantage of them.  Unfortunately, most founders don’t have a clear picture of how much to raise, how much to spend, investor management or the laws that affect the raising of capital.

Here’s a brief look at 5 errors founders make.

1. Raising too little money

Most successful startups take funding at some point.  But the real question is: How much should you take?  Every startup that isn’t profitable (meaning nearly all of them, initially) has a certain amount of time left before the money runs out and they have to stop operating. This is often referred to as runway, as in “How much runway do you have left?” It’s a good metaphor because it reminds you that when the money runs out you’re going to be airborne or dead.

Too little money means not enough to get airborne. What airborne means depends on the situation. Usually it means advancing to the next level, i.e. if you have an idea, the next level is a working prototype; if you have a prototype, the next level is launching; and if you’re already launched, the next step is significant growth. It depends on investors, because until you’re profitable and cash flow positive that’s who you have to convince.

So, bottom line, how much runway?  12-24 months of runway is a common answer. But remember, raise it when you can, not when you have to!

2. Spending Too Much
It’s hard to distinguish spending too much from raising too little. If you run out of money, you could say either was the cause. The only way to decide which to call it is by comparison with other startups. If you raised five million and ran out of money, you probably spent too much.

Burning through too much money is not as common as it used to be. Founders seem to have learned that lesson. Plus it keeps getting cheaper to start a startup.
The classic way to burn through cash is by hiring a lot of people. This bites you twice: in addition to increasing your costs, it slows you down—so money that’s getting consumed faster has to last longer.

One general suggestion about hiring: pay people with equity rather than salary, not just to save money, but because you want the kind of people who are committed to the success of your company.

3. Raising Too Much Money

It’s obvious how too little money could kill you, but is there such a thing as having too much? Yes and no. The problem is not so much the money itself as what comes with it. VCs will tell you that once you take several million dollars of their money, the clock starts ticking.  If VCs fund you, they’re not going to let you put the money in the bank and take a vacation. They want that money to go to work.
Perhaps more dangerously, once you take a lot of money it gets harder to change direction. Suppose your initial plan was to sell B2B.  After taking the money you decide that you should be selling B2C – what happens then?
Another drawback of large investments is the time they take. The time required to raise money grows with the amount.  When the amount rises into the millions, investors get very cautious and you end up spending more time talking to the VCs than you spend working on your startup. Unfortunately, while you’re doing that, your competitors are moving ahead of you by leaps and bounds.
The best advice is probably to take the first reasonable deal that comes along – assuming it’s from a reputable firm, at a reasonable valuation and no onerous terms.  Go ahead and take it and get on with building your company. Who cares if you could get a 30% better deal elsewhere?  Bargain-hunting among investors is a waste of time.

4. Taking Money From The Wrong Investor and Letting Them Run Your Company

Here’s an important rule:  Only take money from someone you like and respect.  You will be with your investor for two to seven years. You will go through heaven and hell together. Make sure he/she will be good company in both situations. In addition, you need a partner who understands the industry sector your company serves.

Make a list of 10 financiers who understand your market or product and have worked with companies at the same stage as yours.  To find financiers, search the Internet for “venture capital,” “micro loans,” “business loans” or “angel investors (in your geographical area)”. Approach the top five on your list.

As a founder, you have to manage your investors. You shouldn’t ignore them, because they may have useful insights. But neither should you let them run the company. That’s supposed to be your job. How hard you have to work on managing them depends on how much money you’ve taken and if it’s a lot, the investors get a great deal of control. If they have a board majority, they’re literally your bosses.   Bottom line, be careful who you choose as your investors!

5.      Running Afoul Of The Law

There are a few things you should pay serious attention to when raising capital for your company.  You can lose everything you’ve worked hard for if you violate Federal SEC laws.  For example:

A)      Advertising/Soliciting Investors: With very limited exceptions, startups are prohibited from “general advertising” or “general solicitation” in connection with raising capital. “General advertising” includes any ad, article, notice or other communication published in a newspaper, magazine or on a website or broadcast over television, radio or the Internet.  “General solicitation” includes any requests via mail, e-mail or other electronic transmission, unless there is a “substantial and pre-existing relationship” between the startup and the prospective investor.

B)      Selling securities to non-“accredited investors”: The rule of thumb for startups is to only offer and sell securities to “accredited investors” under SEC Rule 506.  There are eight categories of investors under the current definition of “accredited investor.” The most significant of these for startups is an individual who has a net worth (or joint net worth with his/her spouse) that exceeds $1 million at the time of the purchase or income exceeding $200,000 (or joint income with a spouse exceeding $300,000 ) in each of the two most recent years  – and a reasonable expectation of doing so again in the current year.

C)      Using an unregistered finder to sell securities.  Startups often make the mistake of retaining unregistered finders (known as consultants, financial advisors or investment bankers) to raise capital for them. If the finder is receiving some form of commission or transaction-based compensation (which is usually the case), he will generally be deemed a broker.  If he’s not registered with the SEC and sells securities on behalf of a startup, though, the offering may not be valid and the startup will have violated applicable securities laws.

If you like this information, you’ll really like “Top 10 Mistakes That Cause Investors to Shoot Down Deals”.

About the author: David Brode is the Principal of the Brode Group. An economist by training, Brode has over two decades of experience helping ventures develop and communicate business strategies through financial models so they can launch, grow, and sell businesses.  Brode’s financial forecasting models have been through due diligence dozens of times and have been successful in securing over $11 billion in financing for projects worldwide.  Brode has a B.A. degree in Economics from the University of Michigan.