Where Does Money Come From?

Among the most common questions asked by new business owners, or those contemplating joining the group are several amount money:

  • What’s the payoff?
  • How much money will I earn?
  • What’s the risk?
  • Where do I get investment capital from?

To address this, there are dozens of articles available that help you navigate these questions – from How to Fund a Startup, to The Money Map on Canadian Business. The answer to all the questions about where money comes from fall into one of the groups below:

  • Banks
  • Friends, Family
  • Government
  • Angel Investors
  • Venture Capitalists

However, the question that is not answered by these resources is Do you even need this kind of money?

There’s a saying It takes money to make money that is widely accepted to be true. Personally, I don’t believe it is true – there are ways to make money without pre-existing money. However, the trade off will be that you’ll work hard instead – but if you’re in business for yourself, you’re used to that.

Think of an imaginary person Paul. Paul wants to make money, and he does not yet have any. However, he has an idea for a program that he believes could be the next big thing. Because Paul’s skills are marketing, not development, he believes that he needs money to hire someone to build this program.

However, there are other ways to get someone to build the program. A student might build the program in her spare time as a side job, reducing the cost of development. Alternatively, she may agree to take equity in exchange for her efforts. Paul should seriously consider this option, because it reduces his risk. If he tries to borrow money, then he will have to personally underwrite the loan. This way, if the idea fails to materialize, he doesn’t owe anyone anything.

There is yet another way for Paul to launch his idea – he can start by working for specific clients, addressing their needs, and set aside some of the income from that work to pay for development. This will provide him with a small client-base once he does launch the product, and provide him with seed capital for any expenditures he might need to make. Additionally, working with real clients will provide him with feedback that he can then incorporate into his products.

What is being taught here is not that you don’t need money, but that the money may not be needed now. Sure, it would be nice to have a large office with a secretary, private kitchen, and seventeen employees building cool applications and selling them to eager fans. But you don’t need to start there – you can start with just yourself, and eventually, you may be the owner of a company with 17,000 employees in 20 cities around the world.

Think big. Start small.

Investing and Saving

For the average person with some money to invest, a recession can be a golden opportunity. As the economy slows, prices of stocks fall across the board, even for companies not directly affected by the cause of the economic collapse. As a result, for those who can afford to do so, investing at this time can translate to getting bargain deals on various stocks.

The catch, of course, is that such investments are still a gamble, and the wise investor does not put up money that they cannot afford to lose. Perhaps that is the explanation for the survey released by RBC which I was reading about on the 680 News website. In the last year, the survey found an 8% drop in the number of Canadians saving or investing for retirement.

The article, which first appeared in the Canadian Press, suggested that this might be on account of high unemployment, resulting in less disposable income. However, I don’t believe that this can fully explain the observations.

Canadian Unemployment Rates

Canadian Unemployment Rates

First, in recent months, the unemployment rate has slowed its rise, and may be falling, albeit slowly. Looking at the history of unemployment rates, you will notice that 8.5% unemployment is not up from 0% or 1% – it’s up from 6% or so, which is a difference of 2.5% and can therefore not explain the 8% difference in the number of people saving. While I don’t mean to belittle the numbers, and acknowledge that a 2% change in the unemployment rate is significant, it is not the determining factor here.

In fact, with rising unemployment, you might expect to see an increase in savings, as people try to create a larger buffer for themselves in case they too join the ranks of the unemployed. While those who are not employed are unable to save, it would be assumed that those with a job would try to be more frugal in order to protect themselves.

I think the real issue in this case is not any concrete reason for lack of investment, but a general lack of knowledge, and fear of the unknown. Yes, the markets seem to be falling, and are therefore perceived as a high risk. However, if you’re saving for retirement, short term fluctuations in the market are almost irrelevant, as over the course of 10 or more years, the market has always gone up.

What seems to point this out to me, and to highlight this issue, is the fact that not only are fewer people investing, but they are also not saving. This indicates that there is consumer confidence, in that spending has not slowed, and in fact, may have gone up. However, with all this extra money that could be saved and isn’t, it indicates a lack of understanding of the long term effects of investments.

Are You Getting Ready To Succeed?

With all the buzz about entrepreneurship, and running your own business, many people are getting ready to succeed at starting a new business and working for themselves. However, all the effort they are placing in preparing for this may be for naught – as George Bernard Shaw said, Those who say it cannot be done should not interrupt those who are doing it. The effort put into getting ready to do anything is not nearly as useful as the effort put into doing it.

Chris Brogan of social media fame writes:

I think we’ll see more solo people tucking in with bigger organizations. I also think we’ll see smaller groups banding together to form stronger groups, not just in marketing, but in any of the newer businesses out there.

This is reality. There is safety in large companies, in that they are better equipped to handle fluctuations in the market, in the demand for their products. A small business which does $50,000 in sales per month is going to be much harder hit by a 20% reduction in sales one month – a large business can absorb that more easily (at least in the short term).

What does this have to do with preparing to succeed? The fact that many people (myself included) do not want to live under the fear of their business going under. We like the security, we like shifting the risk to someone else. Therefore, before we dive into a new venture, we will work as hard as possible to reduce the risk as much as possible. But as Robb Sutton says, ‘One Day’ is too late.

At some point, you need to jump, you need to take some risk. All the time spent preparing could be better utilized by doing. Take the following as an example:

On the CBC show Dragons’ Den, Claire Copp of Vancouver, BC came on the show looking for an investment in her software product, Trader II. One particular point that Claire made was that she had been working on this program for 20 years and had yet to sell a single copy. Now, there are a lot of lessons that can be learned from her presentation, but I’m just going to talk about one. Claire Copp had spent 20 years preparing to succeed, instead of going out there, finding out if there’s a real demand for her product, how much people would pay for it. (As a side note, if you search for “Trader II” Claire Copp, the first two results are Dragons’ Den, and my other blog where I posted a review of the episode.)

Of course, Claire is an extreme case, but the lesson remains. If you want to succeed, then you need to act now. If you keep waiting until all the risk has been removed, you may find that you’re left with nothing at all.

Goals for 2010

It’s that time of year again. With the holidays fast approaching, it’s time to think about where you’re going in life, whether that be personal, professional, or any other aspect of your life. Many people make New Year’s resolutions, but how many of you actually follow through on those resolutions?

Some people dream of success, while other people live to crush those dreams.

Some people dream of success, while other people live to crush those dreams.

What I did last year was to post some of my professional resolutions for all to see. Whether or not that was a good idea is debatable. There is a study that shows that the more you share, the less likely you are to do. I don’t agree completely with that study, and so I’m going to do it again.

First, however, a follow-up to the goals for 2009:

  • Only one of my contracts from the start of 2009 is still in development, and it is scheduled for completion with two weeks.
  • I have not picked up one new contract per month, however, the past 3 months have been very good to me with 2 new clients and one returning client.
  • I haven’t taken any courses this year, but am in the process of learning PHP and the Zend Framework.
  • I have continued to use C# for some development, and am increasing my level of proficiency.

All in all, I feel good about what I’ve accomplished in 2009. While I haven’t met all my goals, I did strive to do so, and had I met all my goals, it would be an indication that I had not set my sights high enough. So, without further ado, here are my goals for 2010:

  1. Learn PHP and Zend to a degree of proficiency whereby I can construct an entire website based on those technologies in a reasonable amount of time (i.e. in under 250 hours for a fully-functional site, and not including the design of the interface).
  2. Launch the product I’m currently working on, Client Data Tracker, to beta in January 2010 and live to the public before the end of March 2010.
  3. Continue developing my consulting to the point that I am putting in 30+ hours per week in billable time on various projects.
  4. Complete the work required for KNIRL.COM and get the site up and running.

These are my goals that I’ll be using to measure my success against in 2010. What are your goals? How do you intend to measure success?

Dragons' Den Special Holiday Episode

I watched the holiday special episode of Dragons’ Den, and it a great way to end Season 4. In case you’re wondering, Season 5 will start January 6, 2010 and looks to be even better than Season 4, and I’m really looking forward to it.

There were, as usual, two deals on the Den. The second was a case of Brett Wilson helping to boost creativity and dreams on the part of two girls, 11-year olds Abby Somer and Megan Boudreau who invented a game called Let’s Dance Board Game and came on the show asking for $10,000 for 50% of their company. Rather than invest in the abilities of the two girls to sell their product, who had yet to sell a single unit, Brett gave them $500 to get them started. If they made money within a year, they could pay him back, but if not, he would write it off. This went against the rules of the Den, which state that you have to get all the money you ask for in order to get a deal, but hey! it’s the holiday spirit!

The other deal, which actually happened first, was presented by Allan, Patricia, Melissa, Jordan, and Amanda Kotack for their company, Cosy Soles. Retailing at about $40 a pair, the family developed the product in response to a need for heated slippers, and have created a second product, heated mittens, which retail at about $25 a pair. Their business was growing, with a steady increase in sales over the last couple of years.

They came on the show asking for $150,000 for 35% equity. The problem, however, was not in the valuation, which seemed fairly accurate, but in the fact that none of the 3 children would get involved full-time in the business. This aversion to taking risk drove most of the Dragons away from the deal. It was as though the family wanted someone to come in and take over the business, and pay them a salary for their work.

Brett did give them a deal, but on different terms. He gave them $30,000 in exchange for 10% equity in their company. The balance of the money, $120,000 was given as a line of credit to help them offset their expenses in the short term. He made a clear point, however. The family would not be getting his time.

The lesson here to future entrepreneurs – going on Dragons’ Den is not like going to the bank with a pitch for a business. At the bank, all you want, or can expect to get, is money. On Dragons’ Den, the coveted deal includes expertise.

Getting Your Questions Answered

I was recently introduced to a new website while reading Bob Walsh’s book, The Web Startup Success Guide. Although I’ve had that book for several weeks now, and have, in fact, read through it three times already, I’m still only scratching the surface of what that book has to offer. You can read my original review of the book, if you like, although I must say, in hindsight, the review doesn’t do the book justice.

The site in question is OnStartups, and the section in particular which I find especially useful, is the answers section. This is a great resource for people running businesses, and while the focus is small businesses just getting off the ground, there are other questions being asked which relate to larger businesses.

If you’re looking for answers to questions about the business of business, then that’s the place to go. If you want to contribute in some way to the next generation of entrepreneurs, then that is also a place where you can provide your knowledge and experience to helping the next entrepreneur.

Dragons' Den Episode 10 – A Review

Having watched Dragons’ Den for a few months now, I’ve developed a certain expectation for the show, and each episode in particular. There’s a certain sense of drama that is played out over the show, with the entrepreneurs fighting to win the coveted deal from one or more of the Dragons. As usual, there were 8 pitches on this week’s episode, and as is also becoming the fashion, there were 2 deals, and 2 follow-ups to past pitches on the den (one going back to last week and the holistic healer).

I’ll briefly recap the two deals here, but then I intend to focus on one pitch in particular which highlighted a potential pitfall for hopeful entrepreneurs.

The first deal was for a smoothie company (Euphoria Smoothies) which was started by a husband and wife team, Sam and Bisma Haider from North Bay, Ontario. They asked for $500,000 for 20% of their company in order to grow from 40+ stores internationally to hundreds of stores. Unfortunately, their product was not unique enough to interest most of the dragons, as there was a strong risk of another company starting up with a similar product. However, their pricing model was different, charging licensing fees instead of franchise fees, and making a margin on their branding. Different enough to interest Jim Treliving of Boston Pizza to invest, but for 50% of the company. While they had $2,500,000 in sales in 2008, the market for their product is quite flooded, the risk high, and sales alone don’t dictate a valuation.

The second deal reeked of sleaze. Mark Chadwick and Neil Currie of Vantage Wire, a company which provides real-time stock quotes, came out with 2 girls and a pitch targeted directly at Kevin O’Leary. The girls had nothing to do with the product, which insulted the other dragons, and showed the entrepreneurs to be out for the quick sale. It also undermined their integrity, which caused the other dragons to bow out.

Kevin, however, wanted to hear more – they had sales numbers to back up their valuation. However, Kevin looked past the girls and saw their lack of integrity, and therefore refused to trust them with his name. He therefore offered the $150,000 for 50% of the company, plus a 5% royalty to be paid until the investment had been repaid. This would allow him to protect his name from being mis-used (Kevin suggested he would likely rebrand the product entirely). Mark and Neil took the deal.

Now comes the more interesting part of the episode – two deals that failed.

Eric Brideau of Augenstern Diamonds came on the show asking for $275,000 for 30% of his company, which manufactured diamonds from human hair. In addition to having the dragons find his product creepy, he also made a crucial mistake – he claimed to have a personal net worth in excess of $10 million. With that kind of personal finances, his need for the dragons is highly questionable. While he claimed that the dragons could provide him with contacts that would help him rapidly grow his company, this also shows that he lacks a certain degree of trust in his own idea.

The other failed deal that provides an even greater lesson is that taught by Claire Copp from Vancouver, B.C. and her software called Trader II. She walked on the set without a demo, a valuation of $3,375,000, and no sales. She talked about the size of the market. She talked about growth forecasts. But she couldn’t talk about her product.

When pushed by the Dragons to explain her product, and how they would make back money, Claire explained how sales of a certain degree would earn back the investment. But she couldn’t explain why anyone would buy the product, nor why she had been unable, in the 20 years she had been working on the product, to sell any copies.

The lesson here is fairly simple. When an entrepreneur comes onto the Den, (s)he needs to be prepared to state the following:

  1. How much money do I want, and what am I prepared to give up to get it
  2. What is my product, and why would anyone pay for it
  3. Who is using my product today, and what are past sales numbers
  4. What is the investment money to be used for

An entrepreneur who cannot answer these questions should be asking themselves whether they’re in the right business in the first place. They can also expect that even if a deal is offered on the Den, it will likely cost them at least 50% of the company, because these questions are of the type that any leader of a company can answer about the company they run.

10 Questions to Keep Asking About Your Business

Since this morning, I have seen several posts on Twitter in regard to the Forbes list of 10 Questions You Should Never Stop Asking published on November 20, 2009. A summary of those questions is copied below, for the full commentary, I recommend you read the original article.

  1. What is our purpose for existing?
  2. Who is our target customer?
  3. Why does anyone need what we’re selling?
  4. If there is a need, is it enough to support a profitable business?
  5. What were our competitors up to?
  6. Can you reduce expenses–without harming the product?
  7. Do we have the right leadership?
  8. Do we have the right employees?
  9. How will we continue to drive revenue?
  10. How are your employees holding up?
Courtesy of Flickr.com by misallphoto

Courtesy of Flickr.com by misallphoto

This list, however, is targeted to a business of a certain size and upward. What should you be asking if you are a one-person shop? To complement this list, I’ve prepared some additional questions that you may find useful, that will hopefully lead you to being in the position to use the list from Forbes.

  1. What am I trying to accomplish?
    Similar to the first question on the Forbes list, this question makes you look at your goals. If you don’t have any yet, then you should sit down and write a few down. It’s hard to get somewhere in particular if you don’t know where you’re going. Alternatively, the answer to this question might be “nowhere in particular” and “let’s see where this takes us”. Both of these are valid, but you should be aware of the answers.
  2. How am I going to reach my goals?
    This question addresses both short-term and long-term goals. If the answer to your first question was to build an application soon to be included on all mobile devices, then the answer to the second question will include points such as:

    • Develop the key components to the application
    • Contact mobile device manufacturers
    • Monitor available applications for those devices for possible improvements
  3. Do I have all the skills needed to reach those goals?
    No one person is perfect for all tasks involved in running a business. You may be really business savvy, but lack some technical skills, or you might be an expert salesman, but don’t know how to deal with copyright laws. You’re either a Jack-of-All-Trades, Master of None, or, more likely, you are the Master of One. If you don’t have a needed skill, how are you going to fill in the gap? (The answer might be that you’ll hold out for a little while.)
  4. Who will pay for my skills or product?
    This corresponds to questions 2 and 3 on the Forbes list. Your idea might seem to be really good to you, but do you know whether or not it’s viable as a business? Have you spoken to any potential clients about it?
  5. Who am I competing against?
    If you don’t understand your competition, then you might not understand your own product. Be aware that your clients will know about your competition and ask you about them. You can demonstrate your expertise by being aware of the differences between what you offer and what your competition offers. If it’s exactly the same as what the competition is offering, however, most potential clients will prefer the business that’s been around longer. Which leads to the next point:
  6. How do I expect to succeed against them?
    This is also known as your Secret Sauce by some business writers. This is the factor that makes you, or your business, different. It might be a customized algorithm. It might be a new approach to an old concept. Whatever it is, this is what will set you apart from your competition.
  7. How am I spending money, and can I reduce that?
    It is incredibly important to keep track of your expenses and revenues, and to constantly review that record. You should know where every dollar is coming from, and where it’s going. For example, if you have a small office with a coffee urn, do you know how much it’s costing to run it? How much did you pay for your business cards? Who owes you money, how much, and for how long? What does it cost you to keep your website running? Are you getting good value for your dollars?
    Only by keeping track of your budget can you hope to keep your business profitable, and be able to grow. How else will you be able to reduce your expenses without compromising your product?
  8. Is it time to hire someone?
    Hiring your first employee can be an extremely difficult decision to make. You become responsible to pay them, and they will get paid before you do, always. In order to make your first hire, you should know what it is that employee should be bringing into the company. Do you want someone with the same skills you have, or do you want a specialist? If you find yourself spending excessive time on administrative tasks instead of working on your clients’ projects, your first hire might be an administrative assistant who can do most of that work for you.
    What’s important to remember is that the hire needs to be worth the investment. If you pay them $40,000 a year, then they need to be adding that much value to the company and then some. In other words, you should see as a result of hiring that person your revenues go up by more than $40,000 per year. Some would say that this number should be around 3 times their salary, or $120,000 per year. The exact number is not relevant, though, but what is relevant is that the employee be worth their salt.
  9. What are my clients saying about me?
    In the age of social media, word about you and your business can spread extremely quickly. It’s important to be listening to what your clients are saying about you. This will let you address issues before they become problems, or to head off potentially damaging rumors (which are not, in fact, correct, or at least, not correct anymore). Gone are the days where customers and clients could be treated with impunity, as they now have outlets to vent against individuals and companies. Make sure you’re listening! (Chris Brogan talks about how to do this.)
  10. Am I balancing my work life with my personal life?
    Too often overlooked, it’s important that you don’t lose track of the bigger picture. Are you spending some time on your family and friends, or are they all forgetting about you? Yes, you’re busy running a new business, but remember to set aside some time on a regular basis to keep those aspects of your life strong.

This list is by no means complete, but hopefully, it will give you a start on keeping your business strong and growing. If you have a question that you think belongs here, please let me know in the comments. I would love to hear what you are doing to ensure that your business is on track to success!