Entrepreneurship. It conjures images of twenty-something graduate students hacking code in a Silicon Valley dorm room, fueled by a steady supply of Red Bull and Ramen. Starting a tech company requires youthful vigor, endurance, freedom from obligations like mortgages, imagination, and an intimate understanding of what’s trendy and hip. Right?

To be sure, a number of tech titans started more-or-less this way: Facebook, Google, Microsoft, Yahoo, and Hewlett-Packard, to name a few.

However, a new study published last week by the Ewing Marion Kauffman Foundation – the group devoted to fostering entrepreneurship around the world – suggests that the age distribution among company founders is much broader than we might have imagined.

The study offers several findings:

• Technology company founders born in the U.S. had an average age of 39 when they started their companies.
• Among a sample of companies started in 2004, two-thirds of founders were in the 35-54 age bracket.
• The 55-64 age bracket exhibited the highest rate of entrepreneurial activity from 1996 to 2007, while the 20-34 bracket actually had the lowest rate.

However, these findings don’t come as much of a surprise to us here at Cayenne Consulting. We’ve spoken with thousands of entrepreneurs, and although we don’t ask people their ages, we do witness the experience they bring to a new venture. Those who succeed at generating interest from investors tend to have decades of business and technical experience.

The study’s author argues that the shifting age distribution in the U.S., coupled with a continued decline in job security, will put more middle-aged people in this entrepreneurial sweet-spot. As a result, “we may be about to enter a highly entrepreneurial period.” I hope she is right, because entrepreneurship will clearly play an important role in our return to economic prosperity.

But perhaps the most encouraging insight for those who’ve ever thought “I’m too old to start a company” is simply this: No, you’re not!

We can measure success in many ways. In business, one important measure is the value of the company. That’s because a company’s value is a composite of all of the quantitative and qualitative factors that comprise a company: revenues, expenses, risks, growth prospects, quality of the management team, competitive advantages, strength of the intellectual property, and so forth.

In general, we want to do the things that increase the value of the business, and we want to avoid doing the things that reduce it. The problem is that we often lose sight of the big picture, and get mired in everyday distractions.

One useful technique for keeping your eyes focused on what really matters is Cayenne Consulting’s Venture Value Scorecard™. It’s human nature to prioritize the metrics that get measured, so the simple act of keeping track is often enough to have a significant positive impact.

The Venture Value Scorecard is a one-page summary of your company’s achievements and assets: the factors that contribute to the value of your organization. It should be updated monthly so that you have a regular reminder of where you’re making progress, and where you may have become complacent.

You can structure your Venture Value Scorecard any way you like, but I suggest organizing it into the following sections:

• People: A strong team is obviously central to value creation. Your Venture Value Scorecard should highlight your recent successes in recruiting highly qualified team members to fill the most important gaps in your organizational structure. You can also use this space to keep track of innovators (R&D personnel) and rainmakers (sales & marketing personnel).
• Products: You obviously can’t create value without a viable product (or service) to sell. This section of your Venture Value Scorecard should summarize the important advances you have made recently in research and product development.
• Customers: A company’s only sustainable source of cash is sales, so you need to keep track of your business development efforts. You should inventory your best accounts and prospects, as well as the status of any pending major sales.
• Partnerships: Relationships with larger firms not only confer legitimacy to your business; they can be an important source of intellectual property, distribution channels, and marketing clout. You should document the status of your partnership negotiations so that you can easily gauge progress.
• Competitive Advantages: Your ability to create value depends on your ability to grow and protect your market share. This requires the continuous development of competitive advantages, whether through intellectual property, new innovation, exclusive distribution partnerships, key endorsements, brand building, corporate culture, or other factors. Keep track of what you’re doing to develop and enhance your sustainable competitive advantages.
• Net Income: The five factors listed above all contribute to something that is directly measurable: net income. Part of your Venture Value Scorecard should be devoted to summarizing your income statement. Detail isn’t important; tracking your progress is. Items that paint a big picture include revenue by major product area, cost of goods, and operating expenses by category. If you have a lot of non-cash items such as amortization or depreciation, or if you have unusually long receivables cycles, you should also include adjustments to reconcile net income to cash flow.
• Assets: Your assets add to your venture’s value, so any recent or pending changes in your assets should be recorded in your Venture Value Scorecard. These assets include things like cash (say, from a pending investment), facilities, inventory, and other property.
• Liabilities: Your liabilities detract from your venture’s value. Any recent or expected reductions in your liabilities should also be recorded in your Venture Value Scorecard.
• Risks: Unexpected events can kill a firm (of any size), and can therefore detract from its value. This is an opportunity to demonstrate that you recognize the greatest sources of risk facing your company, and that you’re taking prudent steps to mitigate the greatest hazards. Use your Venture Value Scorecard to summarize your major risk management initiatives.
• Other: Every company is different, so you’ll need to customize the Venture Value Scorecard for your own circumstances. I suggest you try to figure out the 3-5 key metrics that are used to judge the health of companies in your industry, and keep track of these somewhere in your scorecard.

As noted earlier, your Venture Value Scorecard should be updated monthly. Keep an archive of your old scorecards. That way, you can go back and review the progress you’ve made. I think you’ll be pleased by the momentum you maintain by keeping score.

© 2009 Cayenne Consulting LLC. The Venture Value Scorecard™ is a trademark of Cayenne Consulting LLC.

ABC and Mark Burnett Productions are developing a new reality program putting entrepreneurs through the fundraising hoops. There’s still time to make the casting call if you’re interested in applying. Here’s what they have to say:

The producers of the new ABC reality series Shark Tank are on a nationwide search to discover the next successful – and possibly wealthy – entrepreneurs, inventors, businesspersons, dreamers, promoters, creators and innovators. In each episode, budding entrepreneurs are given the unprecedented chance to make their business ideas come true.

If you feel you have a lucrative business idea but just can’t seem to secure the financial backing to get it off the ground, then Shark Tank is just the show for you. Casting is looking for aspiring entrepreneurs who can pitch their breakthrough business concepts, products, properties and services to moguls in hopes of landing investment funds. If selected, five real-life, tough investors could be willing to part with their own hard-earned cash and give you the funding you need to jumpstart your idea. But the investors, also known as Sharks, aren’t just out to invest; they too have a goal — to own a piece of your next big idea.

Your business idea should be top-notch and something the Sharks will really want to sink their teeth into and might even spark a bidding war between them. Who knows – you could be the fortunate entrepreneur who gets the Sharks to reveal the true level of their interest and bid up the price of your investment!

All interested parties should email Lindsay Spaulding at lindsaycasting@gmail.com with the following information: Name, Age, Hometown, Phone, Photo; Are you an: Inventor, Entrepreneur or both?

Entrepreneurs are, by definition, risk takers. Thus, strong risk management is an important source of competitive advantage. Although over half of all startups fail within their first five years, you can beat the odds and build a thriving and rewarding venture by learning to recognize and manage risks.

“What Kills Startups” provides a framework for identifying, thinking about, and mitigating the biggest risks ahead of you. So roll up your sleeves and dig in!

• Read the HTML version of “What Kills Startups?”
  
• Read the PDF Version of “What Kills Startups?”
  

When you’re done reading, please come back to the blog to leave your feedback – we look forward to hearing your thoughts!

The Center for Venture Research has published their 2008 report of angel investor activity in the U.S. The report contains both good news and bad news.

• The Good News:  The number of active angel investors in 2008 and the number of deals they invested in remained comparable to 2007. In 2008, a total of 55,480 ventures received angel investment, down only 2.9% from the previous year. The number of active individual angel investors remained steady at 260,500.

• The Bad News:  The total dollars invested in 2008 fell 26.2% to $19.2 billion. This indicates a contraction in average deal size, presumably due to lower valuations.

The six sectors receiving the most angel investment are as follows:

• Healthcare: 16%
• Software: 13%
• Retail: 12%
• Biotech: 11%
• Industrial/Energy: 8%
• Media: 7%

In 2008, 45% of angel investments occurred at the seed or start-up stage. Only 10% of the deals brought to the attention of angel investors succeeded in obtaining an investment.

Note that the study only includes accredited or “sophisticated” angel investors who invest through angel investing groups; the study excludes investment activity by informal “friends and family” investors.

AIG, Bear Stearns, Lehman Brothers, Merrill Lynch, General Motors, the Dow Jones, the sub-prime crisis, and Stanford Financial Group. What do these all have in common? Answer: the experts all totally misread them, months or just days before they all imploded. Here’s Jon Stewart to take you on a guided tour.

Valuing a business is always an imprecise science, even with large-cap public companies. For example – Is the true value of a large public company based on its market price? It’s book value? It’s potential worth if broken into parts that have more perceived value than the whole? The answer is that there are many ways to determine the value of a company. Perhaps the best way to understand the “value” of any business, large or small, is to look at who’s doing the valuing and for what purpose. For example, we’ll wager that you would value your family business differently for estate purposes verses for a sale of the business.

Regardless of how a business is valued, there are both quantitative and qualitative factors that play a role in a comprehensive appraisal. Many of the elements that go into a business valuation can be classified into three categories:

• “Hard numbers” such as historical profits, assets, cash flow, and liabilities are always important in determining the worth of a business.
• “Soft figures” such as income and cash flow projections can be very important to a buyer or investor interested in the company
• “Intangible assets” such as patents, brand names, quality or reputation of management, location, recipes, customer lists, or goodwill often contribute to the overall value of a business.

There are many reasons to value a business, and “the reason” for the valuation is typically an important factor in deciding how an appraisal will be performed. This is why in many instances, more than one value can be correct. As indicated above, two of the more common reasons to value a company are for a sale or for estate tax purposes. Other purposes for performing a valuation might include acquiring insurance coverage of various types, attracting a new investor or seeking a credit facility from a bank or finance company.

The key considerations that go into any valuation include:

• Company, competitor, and industry information. How is your business performing and how does it compare to your competitors? What is the state of your industry? Is your business in a growth industry or a declining one?
• Analysis of historical financial statements. Ratio analysis such as return on equity or gross margin is often helpful.
• Projected financial statements going out three to five years can be particularly significant, especially if they are recast to reflect the business without owner compensation. By recasting statements, the value can be estimated as if the business were under different ownership or managed under different circumstances.
• Using a method of valuation that is appropriate for the purpose of the valuation.

Three popular approaches to value a privately held company include:

• Balance Sheet Approach. This is the easiest way to value a business. It will more often than not, however, produce the lowest valuation. A company’s book value is simply a firm’s liabilities subtracted from its assets. Banks and insurance companies are often valued on this basis. Many analysts believe that using an “adjusted book value” formula will produce a more accurate picture because this method takes into account the fair market value of assets and liabilities rather than a firm’s “historical book.” Liquidation value is another way of using a company’s balance sheet to arrive at a value. In this method, you simply calculate what’s left after the assets are sold and the debts are paid. What’s left is the value.
• Market Comp Approach. In this approach, private companies are compared to comparable public companies. For example, if a similar public company is valued at say, 23 times current earnings, then that yardstick can be applied to estimate the value of the private company. When using multiples, private companies are usually adjusted downward because of the lack of liquidity in exchanging shares for cash. Non-financial comparisons might include companies with similar products, markets, or industry criteria. Financial comparisons might include size (revenues), EBITDA, cash flow, price to book, price to earnings, or M & A comps.
• Discounted Cash Flow Approach. Simply stated, this means that an analyst capitalizes an anticipated income stream or cash flow in the future. This is accomplished by discounting a company’s future income or cash flow at an assumed opportunity cost of capital, which takes into account the risk or uncertainty in future cash flows. This is called bringing future anticipated income to “present value.” This approach will generally, but not always, produce the highest value.

Most companies are valued for the purposes of a sale, merger, or investment. For this reason, we must mention the concepts of fair market value and investment value. Fair market value is the value established between a willing buyer and a willing seller – it’s just that simple. And even though a seller and buyer may arrive at fair market value in entirely different ways, in essence, it doesn’t matter. Investment value on the other hand, is generally regarded as FMV adjusted (upward) for the special benefits that a buyer accrues from acquiring the new entity. These benefits might include cost savings or added purchasing power.

The good news is that regardless of the valuation method employed or how the value is determined, no one can claim, “You’re Wrong.” But, do keep in mind that not everyone will necessarily agree with your assessment, and may question the underlying assumptions that led to your valuation. For serious valuations, there are a number of professional services providers throughout the United States that specialize in valuing private companies.

In the current economic storm, it’s easy to lose sight of the bigger picture.  Even the biggest storm will eventually pass.  We will emerge from our shelters, pick up the pieces, rebuild, and move on.

When this storm blows over, all of the world’s problems — and attendant opportunities — will still be there.  Except this time, the landscape will look a little different.

On January 20, 2009, a new administration took office.  In his inaugural address, Obama expressed strong support for entrepreneurs, saying:

“…it has been the risk-takers, the doers, the makers of things – some celebrated but more often men and women obscure in their labor, who have carried us up the long, rugged path towards prosperity and freedom.”

The incoming administration is a strong proponent of innovation in science, technology, healthcare, and the environment.  On the agenda: a long-term plan for U.S. leadership in five critical areas, supported by heavy investment.

Here’s what the administration has to say on whitehouse.gov:

21st-century technology and telecommunications have flattened communications and labor markets and have contributed to a period of unprecedented innovation, making us more productive, connected global citizens. By maximizing the power of technology, we can strengthen the quality and affordability of our health care, advance climate-friendly energy development and deployment, improve education throughout the country, and ensure that America remains the world’s leader in technology. Barack Obama and Joe Biden will:

• Lower Health Care Costs by Investing in Electronic Information Technology Systems: Use health information technology to lower the cost of health care. Invest $10 billion a year over the next five years to move the U.S. health care system to broad adoption of standards-based electronic health information systems, including electronic health records.
• Invest in Climate-Friendly Energy Development and Deployment: Invest $150 billion over the next ten years to enable American engineers, scientists and entrepreneurs to advance the next generation of biofuels and fuel infrastructure, accelerate the commercialization of plug-in hybrids, promote development of commercial-scale renewable energy, and begin the transition to a new digital electricity grid. This investment will transform the economy and create 5 million new jobs.
• Modernize Public Safety Networks: Spur the development and deployment of new technologies to promote interoperability, broadband access, and more effective communications among first responders and emergency response systems.
• Advance the Biomedical Research Field: Support investments in biomedical research, as well as medical education and training in health-related fields. Fund biomedical research, and make it more efficient by improving coordination both within government and across government/private/non-profit partnerships.
• Advance Stem Cell Research: Support increased stem cell research. Allow greater federal government funding on a wider array of stem cell lines.

The proposed $800+ billion stimulus package goes several steps further.  In his first weekly video address, President Obama stated:

“This is not just a short-term program to boost employment. It’s one that will invest in our most important priorities like energy and education, health care and a new infrastructure that are necessary to keep us strong and competitive in the 21st century.”

The stimulus bill also includes hundreds of millions for SBA loan guarantees and direct lending to entrepreneurs.  Furthermore, the administration proposes added funding to incubate new ventures. The National Business Incubator Association says:

In today’s economic climate, there’s a new focus at both the state and national level on entrepreneurship and entrepreneur support. In the U.S., there’s talk at the federal level about increased support for and possible development of new business incubation programs to help those who have lost employment. A portion of President-elect Obama’s Small Business Emergency Rescue Plan is focused specifically on “creating a national network of public-private business incubators” and states that his administration “will invest $250 million per year to increase the number and size of incubators in disadvantaged communities throughout the country.”

Entrepreneurs working to solve fundamental problems in fields such as healthcare, green energy, education, and telecommunications will see unprecedented financial support and opportunities for bringing their innovations to market.  The biggest winners will be those who start now, while others wait for the recession to pass.

These are turbulent times, to be sure, but just over the horizon is a sea of opportunity awaiting those who stick it out.

The World Economic Forum in Davos, Switzerland kicked off on Wednesday. World leaders gathered to discuss and seek solutions to our global economic challenges.

Maria Bartiromo of CNBC just interviewed Duncan Niederauer, CEO of NYSE Euronext. Niederauer shared a few observations:

• NYSE company CEOs seem to see “a turn for the positive” in 2009. “People are starting to be more constructive.”
• “The [IPO] pipeline is very strong and it’s all over the world” but it might be another quarter or two before a lot of companies come to market.
• IPO strength will initially be in Asia, emerging markets in general, and some technology and biotech companies.
• Growth rates in places like China and India will be a bit lower, but latent domestic demand in those markets will keep those economies moving forward.

It’s nice to hear a tiny glimmer of optimism in these difficult times.

The product, service or technology that serves as the foundation of your new business enterprise must be more than a good idea or cool science project. It must solve a critical problem or respond to a compelling market opportunity. Indeed, lenders, investors and potential employees will want to understand the size and scope of this opportunity. And, so must you. When it comes to assessing your market opportunity, your opinion might be interesting but it is no substitute for documenting in a serious and professional manner the market landscape in your space. In fact, many experienced entrepreneurs will tell you that during their initial assessment of the market opportunity, they determined that they were focusing on the wrong market. So, what is the best course of action that will enable you to document your market opportunity?

Step one is to simply list the questions that must be answered as you validate the opportunity. For example, questions that you might want answers to include:

• What customer needs will your product, service or technology address?
• Who is the customer (profile) that will benefit?
• What is the size of the customer base?
• Who are some potential customers by name?
• How does the customer currently meet the needs to be addressed?
• Have customers said that they will purchase your product, service or innovation?
• How much can you sell annually?
• How much will customers pay for it?

So, now that you know the questions, it is time to get the answers. This is the tough part of the job. The answers should be quantitative and verifiable whenever possible. Keep track of your sources. Here are some useful ways of researching your market opportunity.

Web Search – Using your favorite search engine and your favorite search words, begin a careful search of everything you can find on the internet that pertains to your product, service or technology; your intended target market; your presumed competition and your prospective customers. Sophisticated research reports, studies and analysis may be purchased online from firms such as Frost & Sullivan and Forrester Research.

Public Company Documents – If you haven’t done this already, you want to review websites and public financial information of possible competitors and customers. In one place you might find that a competitor brags that it has captured 17% of the market and in another place you might find that it will book revenue of $15 million in the current year. Some simple arithmetic will tell you one competitor’s assessment of the total size of the market.

Industry Meetings & Trade Shows – People love to talk about themselves and their companies. By attending targeted industry gatherings, you will be amazed at how much you can learn. Remember to document who you speak with and what they say.

Interview Potential Customers and Partners – This is often the most time consuming and most difficult to accomplish but it is always going to be your most effective form of market research. Talk to customers and find out if they will buy what you hope to sell. If so, how much will they buy and what are they willing to pay? We know how hard this is but we also know how important this information is to your success.

Successful entrepreneurs really understand their markets. This knowledge will allow you to execute with focus and precision. But don’t worry. If you don’t want to make the market research investment upfront, the market will teach you everything you need to know. The only problem is that by then, it will be too late.