Once you have a potential investor excited about your team, your product, and your company, the investor will inevitably ask “What is your company’s valuation?” Many entrepreneurs stumble at this point, losing the deal or most of their ownership, by having no answer, saying “make me an offer,” or quoting an exorbitant number.

I’ve written about this before, but it’s a mysterious subject, and I’m always learning more. This time I’ll use a hypothetical health-care web site company named NewCo as an example to illustrate the points.

Two founders have spent $200K of personal and family funds over a one year period to start the company, get a prototype site up and running, and have already generated some “buzz” in the Internet community. The founders now need a $1M Angel investment to do the marketing for a national NewCo rollout, build a team to manage the rollout, and maybe even pay themselves a salary.

How much is NewCo worth to investors at this point (pre-money valuation)? What percentage of NewCo does the investor own after the $1M infusion (post-money ownership percentage)? Well, if the parties agree to a pre-money valuation of $1M, then the post-money investor ownership is 50% (founders give up half interest, and lose control). On the other hand, if the pre-money valuation is $4M, the founders ownership remains at a healthy 80% level.

So what magic can the founders use to justify a $4M valuation (or even the $1M valuation) at this early stage? Here are the components and “rules of thumb” that I recommend to every startup:

1. Place a fair market value on all physical assets (asset approach). This is the most concrete valuation element, usually called the asset approach. New businesses normally have fewer assets, but it pays to look hard and count everything you have. NewCo might be able to pick up an initial $50K valuation on this item.
2. Assign real value to intellectual property. The value of patents and trademarks is not certifiable, especially if you are only at the provisional stage. NewCo has filed a patent on one of their software tool algorithms, which is very positive, and puts them several steps ahead of others who may be venturing into the same area. A “rule of thumb” often used by investors is that each patent filed can justify $1M increase in valuation, so they should claim that here.
3. All principals and employees add value. Assign value to all paid professionals, as their skills, training, and knowledge of your business technology is very valuable. Back in the “heyday of the dot.com startups,” it was not uncommon to see a valuation incremented by $1M or every paid full-time professional programmer, engineer, or designer. NewCo doesn’t have any of these yet.
4. Early customers and contracts in progress add value. Every customer contract and relationship needs to be monetized, even ones still in negotiation. Assign probabilities to active customer sales efforts, just as sales managers do in quantifying a salesman’s forecast. Particularly valuable are recurring revenues, like subscription amounts, that don’t have to be resold every period. This one doesn’t help NewCo just yet.
5. Discounted Cash Flow (DCF) on projections (income approach). In finance, the income approach describes a method of valuing a company using the concepts of the time value of money. The discount rate typically applied to startups may vary anywhere from 30% to 60%, depending on maturity and the level of credibility you can garner for the financial estimates. NewCo is projecting revenues of $25M in five years, even with a 40% discount rate, the NPV or current valuation comes out to about $3M.
6. Discretionary earnings multiple (earnings multiple approach). If you are still losing money, skip ahead to the cost approach. Otherwise, multiply earnings before interest, taxes, depreciation and amortization (EBITDA) by some multiple. A target multiple can be taken from industry average tables, or derived from scoring key factors of the business. If you have no better info, use 5x as the multiple.
7. Calculate replacement cost for key assets (cost approach). The cost approach attempts to measure the net value of the business today by calculating how much it could cost for a new effort to replace key assets. Since NewCo has developed 10 online tools and a fabulous web site over the past year, how much would it cost another company to create similar quality tools and web interfaces with a conventional software team? $500K might be a low estimate.
8. Look at the size of the market, and the growth projections for your sector. The bigger the market, and the higher the growth projections are from analysts, the more your startup is worth. For this to be a premium factor for you, your target market should be at least $500 million in potential sales if the company is asset-light, and $1 billion if it requires plenty of property, plants and equipment. Let’s not take any credit here for NewCo.
9. Assess the number of direct competitors and barriers to entry. Competitive market forces also can have a large impact on what valuation this company will garner from investors. If you can show a big lead on competitors, you should claim the “first mover” advantage. In the investment community, this premium factor is called “goodwill” (also applied for a premium management team, few competitors, high barriers to entry, etc.). Goodwill can easily account for a couple of million in valuation. For NewCo, the market is not new, but the management team is new, so I wouldn’t argue for much goodwill.
10. Find “comparables” who have received financing (market approach). Another popular method to establish valuation for any company is to search for similar companies that have recently received funding. This is often called the market approach, and is similar to the common real estate appraisal concept that values your house for sale by comparing it to similar homes recently sold in your area.

Remember that all the components, except the last, are cumulative. Even if a given investor excludes some of the components from consideration in your case, your credibility will be bolstered by the fact that you understand his interests as well as yours. In any case, the analysis will prepare you for the heavy negotiation to follow.

Precision is not the issue here – the task for the entrepreneur is to build a company that is worth at least $50M before thinking about an exit — no investor wants to spend more than five minutes arguing the fine points of the last valuation dollar.

So what is a reasonable valuation for a company like NewCo? My advice for early-stage companies like this one is to target their valuation somewhere between $1.5M and $5M, justified from the elements above. A lower number suggests that the founders are giving away the company, while a much higher number may suggest hubris or lack of reality on the part of the owners.

Of course, we have all read about the “new” company with $100M valuation, but I haven’t met one yet.

The Hype Cycle was a concept put forward by Gartner, Inc. back in 1995 meant to apply to technology product evolution and acceptance. As I was reading about it recently, it occurred to me that the concept relates directly to how investors see startup opportunities and potential success as well, at least those with technology in their offerings.

For those of you unfamiliar with the concept, the Gartner Hype Cycle characterizes the over-enthusiasm or “hype” and subsequent disappointment that typically occurs with the introduction of new technologies. Hype curves then show how and when technologies move beyond the hype, offer practical benefits and become widely accepted. A hype cycle in Gartner’s interpretation always comprises five phases:

1. Technology trigger. The first phase of a hype cycle is the technology trigger or breakthrough, product launch or other event that generates significant press and interest. This is the “truly disruptive technology” that startups often claim.
2. Peak of inflated expectations. In the next phase, a frenzy of publicity typically generates over-enthusiasm and unrealistic expectations. There may be some successful applications and startups using the technology, but there are typically more failures.
3. Trough of disillusionment. Technologies and related startups enter the trough of disillusionment because they fail to meet expectations and quickly become unfashionable. Consequently, the press usually abandons the topic.
4. Slope of enlightenment. Although the press may have stopped covering the technology, some businesses continue through the slope of enlightenment and experiment to understand the benefits and practical application of the technology.
5. Plateau of productivity. A technology reaches the plateau of productivity as the benefits of it become widely demonstrated and accepted. The technology becomes increasingly stable and evolves in second and third generations. Startups can now truly define a problem, and position their solution for rapid growth. Investors love this stage.

For the latest info, Gartner recently released their Hype Cycle Special Report for 2011, detailing some of the biggest trends in technology this year. This report evaluates the maturity of more than 1,900 technologies and trends in 89 areas. New this year are application services and outsourcing, cloud application infrastructure services, cloud security, privacy and smart cities. It’s definitely worth a look.

According to the report, private cloud computing, NFC and Internet TV are at the moment overvalued. While, in the field of social media, social monitoring and activity streams as well as shopping communities, have moved into the Peak of Inflated Expectations. Other newly featured high-impact trends include big data, and natural language question answering. Disillusionment, on the other hand arises in the case of augmented reality.

There have been numerous criticisms of the hype cycle, one of which is that it is not a cycle, and that all technologies don’t really have the same outcome. Another criticism is that the shape of the line has not altered or accelerated in ten years, even though all the evidence suggests that the half-life of new technologies is getting shorter, and the number of competing technologies is increasing.

So, of course you have the option of ignoring hype cycle predictions, and pushing forward with your latest technology startup. Just don’t be surprised if you get investor pushback while early in the cycle, and be prepared with counter arguments. Great startups always beat the hype.

The first question most people seem to ask when contemplating a new startup is where they will get the money. That’s certainly a valid question, but all the money in the world won’t make your business a success if you hate what you are doing, and you aren’t prepared to do the job. I suggest that there are several other questions even more important than the money one.

The best way to assure the success of your startup is to do something you love, as opposed to something that will make you a lot of money. Of course, all these things and many more are critical, so it’s important that you keep your priorities straight. Here are the right questions to ask yourself, in the right order, before asking others about money:

• Do you understand and aspire to entrepreneur lifestyle? Being a startup founder is not a job, but a lifestyle, like getting married versus staying single. In fact, it’s more like being single, since founders usually have no one to lean on, no one to make decisions for them, no one to blame, and no vision to follow but their own.

• Do you have a passion for your idea and business opportunity? There is no joy in starting a business, if you can’t stand the people, business climate, or the day-to-day responsibilities of the job. Some people relate to service businesses, while others are more comfortable with manufacturing or construction.

• What type of business startup best fits your mentality? Beyond the traditional new product or service model, you can always buy an existing business, purchase a franchise, join a multi-level marketing (MLM) company, or simply go out on your own as a consultant. Each of these has their unique challenges and payback. Ask around.

• What level of experience and training do you have for this business? Be wary of stepping into an unknown business area, just because it looks easy or promises a big return. The real secrets of any business are not in textbooks, and you can’t believe everything you read on the Internet. Experience is the best teacher.

• Do you have real self-confidence and self-discipline? Starting a business is hard work and will require sacrifices. You will be operating independently, making all the decisions, and shouldering all the responsibility. Will you be able to persevere and build your new venture into a success?

• Do you have a viable plan? If you haven’t yet written down a business plan, you probably have no idea how much money you really need, or even if the opportunity is real. I believe the process of writing the plan is more valuable than the result, because it forces you to think through all the elements, and make sure they fit together and fit you.

• How much money do you really need? From your plan, calculate the absolute minimum amount you need to make your plan work, and then buffer it by 50%. Consider the non-cash alternatives, like offering equity instead of cash and bartering for services. Fundraising is extremely difficult, which is why most entrepreneurs do bootstrapping.

If you have made it this far, it’s fair to now start asking people where and when you can find the money you need (if any). Professionals will tell you that the sequence is friends and family first, angel investors second, and only then venture capital. Each of these has a cost in time an effort.

The process for all of these is networking (not email blasts or cold-calling investors). Start with the local Chamber of Commerce, industry associations, or investor seminars. Just attending doesn’t work. Use your entrepreneurial spirit to start some exchanges and relationships that can lead to your next step.

Starting a business is a marathon, so do your preparation and training before you ask for that bottle of water. Finding money is tough, but it’s not the hardest part. The hardest part is to do it all while enjoying the journey. Get busy, and have fun.

There is so much written these days about how to attract investors that most entrepreneurs “assume” they need funding, and don’t even consider a plan for “bootstrapping,” or self-financing their startup. Yet, according to many sources, over 90 percent of all businesses are started and grown with no equity financing, and many others would have been better off without it.

According to a new book, “Small Business, Big Vision,” by self-made entrepreneurs Adam and Matthew Toren, it’s really a question of need versus want. We all want to have our vision realized sooner rather than later, but it can be a big mistake to bring in investors rather than patiently building your business at a slow, steady pace (organic growth).

In fact, most of the rich entrepreneurs you know actively turned away early equity proposals. Too many founders are convinced they “need” equity financing, for the wrong reasons, as outlined in the book and supplemented with a bit of my own experience:

• Need employees and professional services. Of course, every company needs these, in due time. In today’s Internet world, enterprising entrepreneurs have found that they can find out and do almost anything they need, from incorporating the company to filing patents, without expensive consultants, or the cost to hiring and firing employees.
• Need expensive resources up front. Many people think that having a proper office and equipment somehow legitimizes their business, but unless your business requires a storefront, everything else can be done in someone’s home office, or a local coffee shop, on used or borrowed equipment. Consider all the alternatives, like lease versus buy.
• Need to spread the risk. Some entrepreneurs seem to get solace and implied prestige from convincing friends, Angels, and venture capitalists to put money into their endeavor. If nothing else, these make good excuses for failure – no freedom, wrong guidance, etc.

On the other hand, there are clearly situations where your needs call for investors. Even in these cases, all other options should be explored first:

• Sales are strong – too strong. If you are not able to keep up with demand due to lack of funds for production, and your company is too young for banks to be interested, you will find that investors love these odds, and are quick to go for a chunk of the action.
• Your company has outgrown you. Some entrepreneurs are quick with creative ideas, and even excellent at managing the chaos of initial implementation. That’s not the same as instilling discipline in a larger organization, where most the challenge is people.
• You need a prototype. When you have invented a new technology, you need expensive models and testing, including samples for potential customers. If you don’t have the personal funds to make these happen, investors might be your only option.
• You need specialized equipment. If your solution depends on high-tech chips, injection molding, or medical devices, and you can’t get financing from suppliers, giving up a portion of the company to investors is a rational approach.
• General startup expenses are beyond your means. Investors are not interested in covering overhead, unless they are convinced that you have already put all your “skin in the game” (not just sweat equity), and have real contributions from friends and family.

When deciding whether and how an investor can help you, remember that finding outside investors requires a huge amount of time and work, perhaps impacting your rollout more than working with alternate approaches and slower growth. Perhaps you really need an advisor rather than an investor.

Even under the best of circumstances, working with an investor requires give and take. More likely, you now have a new boss – which may be counter to why you chose the entrepreneur route in the first place. Maybe that’s why bootstrapped startups are the norm, rather than externally funded ones. You alone get to make the big decisions on your big vision.

Over the years, I’ve had the privilege of working with some of the best entrepreneurs in Silicon Valley and elsewhere. On the average, the entrepreneurs I know are struggling. But one thing they all seem to have in common is a love for learning and change. They rush in with a passion to better the world, and money is just an indication of their progress.

The successful ones then invest their time and money in furthering their knowledge base. I’m not talking about academic classes, because at best these only teach you how to learn. In these days of rapid change, most experts believe that the facts college students learn as a sophomore are obsolete before they exit their senior year.

Learning should be viewed as an ongoing part of everything you do, and one of the most important things. It’s an unfortunate artifact of our educational system that young people spend a dozen years focused more on memorizing facts than the learning process, and then thinking that they will have all they need to know for the rest of their lives by the time they graduate.

In business, as in most other disciplines, there are practical steps towards learning what you need for the next stage of your company and your life. These include the following:

• Networking with people who know. A question I sometimes get from startup founders is “What do I talk to these guys about?” I say you can’t learn much if you are doing all the talking. Just ask investors what they look for in successful companies. I’ve never known any successful entrepreneurs or investors who were not happy to share their secrets.

• Read entrepreneur stories. Most successful entrepreneurs have been written up on the Internet, or in magazines, or books. Spend some time with these biographies and soak up the insights and inspiration. Follow up online with social networking to make contact, dig deeper, and maybe even line up a mentor.

• Adopt a mentor. Boomers who have been there and done that make great mentors. They have the time and interest in “giving back” some of what they have learned to the next generation. Gen-X executives are too busy running their own companies to be mentors. A mentor is someone who doesn’t let ego or money get in the way of helping.

• Formal learning. Some formal learning is always advisable, but get beyond university MBA courses to professional seminars and case studies. Formal courses work best for basics, like a business start-up course or financial accounting. Go with topics you are interested in and need today.

• Volunteering with local organizations. Work is highly valuable in any environment of universities and professional organizations. The payback is that you can get experience for free, while working on real stuff. I’ve done business plan judging at local universities, and learned more than I contributed.

• Just start a business. There is no better way to learn about being entrepreneurial than starting a business. No matter how much advice and counsel you have been given, I guarantee that you will encounter new challenges daily, to enhance your learning opportunities.

If you are one of those people who likes structured classes for learning, and counts on spending at least two weeks per year in the classroom to “catch up,” that’s laudable, but don’t try to start a business at the same time. It won’t happen.

If you have decided to become an entrepreneur solely to make more money, you are also likely to be disappointed. It’s that double challenge of learning to overcome all obstacles, while still surviving on the financial front, that keeps a good entrepreneur motivated to face a new day. Join us if you dare.

A question that I often hear debated these days is whether a new startup should focus on growth or profits. First of all, the glory days of “dot.coms” are gone, when investors “didn’t care” about profitability, and all the money went to growth.

In the long run, everyone wants both profitability and growth, but the question is still which comes first. Most startups and investors I know don’t have unlimited funds, so the first question they should ask and do ask today, is “When is your company going to be profitable (self-sustaining)?”

Of course, growth is implied in that equation, and is also required for maintaining a sustainable competitive advantage. The challenge is not to undermine growth by a blind focus on profits. You might sell one of two of your widgets for $1M each, entering profitability immediately, but then die because you can’t grow sales at that price.

I think you will find that most investors will relate to the following formula for keeping the right perspective and getting the profit versus growth balance right:

• Pick an idea that has the potential to make money. That means it solves a real problem for real customers who are ready and able to spend real money. The number of current potential customers is large and growing. Solutions that may be viewed as “nice to have” or “satisfies a higher-level need” won’t get funded.

• Design a product or service that you can sell. Sure, you may need to give the product away for free to get traction, but assume you will have to sell something some day to get profitable and stay alive. Twitter, for example, doesn’t have a real revenue model today, and they are growing, but I’m not sure who can ever sell 140 character tweets. Don’t count on finding investors for that model on your new startup.

• Build a business plan for profitability in your lifetime. This simply means you need to be sensitive to costs, revenue projections, and a timeline, such that there is light at the end of the tunnel. Most Internet businesses should show profitability in two years, while new medicines may take ten years to pass FDA and other safety tests. Investors will look at competitors in your industry for the norms.

• Identify the total investment required for profitability. A very common mistake of early stage startups is to request a small investment to get started. They are usually thinking only of costs required to get “in business,” rather than the total costs of marketing, scaling up, and going international. Be ready to answer the investor question “Is that all you need to get profitable?”

So unless you are building a non-profit, I say focus on profit all the time, every time. Of course, growth is implied in every focus, and profit enables growth. But some of you will surely say “What about Facebook and Twitter, who focused on growth first and are clearly successful?” So let’s take a look.

Facebook is indeed the largest growth site on the web, with more than 750 million user accounts, all free. It actually is still only marginally profitable, with revenue only from advertising. What most people don’t realize is that the total outside funding so far is estimated at over $800M, which is a bit more than you will get from any Angel investor.

Yet I can’t argue their success in the value proposition, since they turned down a billion dollar offer from Yahoo way back in 2006, and value themselves today internally at $4B or more. It has taken them six years to get to this point, and some very deep pockets, so now you know why I smile when you tell me your plan emulates the Facebook model. Twitter has no model.

I’ve heard all the arguments that a push for early profits on new business models will lead a company to fall back to a lesser model that provides short-term results, but stunts risk-taking that could lead to more long-term value creation. That’s a great argument if you have unlimited means, but if you are just one of the “rest of us,” I suggest you focus on getting to cash-flow positive first.

Fundraising is brutal. Actually, according to Paul Graham, “Raising money is the second hardest part of starting a startup. The hardest part is making something people want.” More startups may fail for that reason, but a close second is the difficulty of raising money.

A while back, I outlined “Most Startups Get No Professional Investor Cash” for startups, listing angel investors as alternative #6. I still get a lot of questions on these mysterious and often invisible investors, so here is another attempt to bring them out of the ether.

By definition, an angel investor is not an “institutional investor.” Venture capitalists (VCs) are paid to invest other people’s money, and measured on the rate of return they get. Angels are typically high net worth individuals who are investing their own money, for a wide range of motives.

So “good” angels are ones with motives that are consistent with what you bring to the table. This means they usually invest in people who have the right “chemistry”, and areas of business they already know. They tend to work locally, so they can “touch and feel” their investments.

Angel investors also tend to limit the size of individual investments to $250K or less. If you need more, you need VCs or a flock of angels. So how do you find those good angels?

1. Use personal networking. The best angels you will find are the ones who know you personally, or know a member of your team or advisory board. If a potential investor gets to know you BEFORE you are asking for money, your credibility and investment probability will be improved by an order of magnitude.
2. Entice angels to play along. Of course, angels are really mortals. They want to make a difference. Asking an angel to work with your company in an advisory role is a great way to establish a relationship that may lead to a cash investment. If you impress the angel, it will likely make her at least an archangel (advocate) when it comes to funding.
3. Court local angel groups. Since angel investors most often focus only in their own geographic area, it’s most effective to court the local group, or even make a guest appearance with an archangel. If you can earn an archangel’s confidence, he or she will invite you to pitch the group, and you’ll have an edge in the voting.
4. Mine national databases. If you are still alone, submit your application to the leading online website national databases of angel investors, AngelSoft (USA) and National Angel Capital Association (Canada). These sites have arrangements with hundreds of local groups and individual investors that you might otherwise have missed.
5. Remember angels beget angels. That means that once you get the first one, he or she becomes your best advocate for finding more. Investment angels don’t like to travel alone, so they will bring in others if they can (it’s called share the risk).
6. Don’t forget passive angels. These are angel investors who are private, meaning they don’t go to meetings, but will invest if someone they trust brings them an attractive opportunity. Find the right investment advisor, or member of your advisory board, and the “match-making” will happen.

Remember that angels have a culture all their own, and it pays to understand how to deal positively with them after you find one. There are some good books out there to help, like “Attracting Capital from Angels”, by Brian Hill and Dee Power, and “The Art of The Start”, by Guy Kawasaki.

Even if you follow this recipe, you are likely to find that fundraising is a brutal challenge. But if it results in a good angel or two watching over your startup, you will definitely be one step closer to heaven.

Every startup founder I know talks about the chaos of their business, which they usually attribute to that burst of growth that is required to get to positive cash flow. They envision a stable environment after that point, and may have convinced themselves that they will be safer and happier with a livable income, maintaining a loyal but flat customer base.

Sadly, this false perception often leads to the death of their business, or at least the end of their tenure as CEO. I second the message that chaos never subsides, from a couple of successful entrepreneurs, Clate Mask and Scott Martineau, in their book “Conquer the Chaos.” Your only choice is to live with it, and find a way to conquer it.

Some small business owners hope to reduce stress by keeping their business static, and believe that they can rely on referrals and repeat business to keep a consistent customer set. Even with this, there are important reasons why not innovating, or going into maintenance mode, will lead to your demise:

• Competitors swoop in and take your space. There are always people around with deeper pockets that can find synergy between your space and theirs. Once they see you have developed credible traction, they can grab your space with less cost (meaning lower price) than you had to put into developing it. Don’t count on your IP to save you.

• Employees stop innovating. Employees are human, and a static known environment is more comfortable than a dynamic one. Innovation requires venturing into the unknown, causing more dreaded chaos. The easiest way to reduce chaos is to buffer all your activities (slow down), define safer generic processes, which spiral down productivity.

• Your products quickly become outdated. Change is the only constant in a successful business. Technology keeps improving at a rapid rate, so you fall behind in technology, driving costs up, and you become non-competitive.

• Your income drops. With decreased employee productivity and outdated technology, your costs go up, and income drops. Even great entrepreneurs are amazed at how fast this can lead to a non-recoverable situation.

The only real solution is to conquer the chaos, while continually expanding your reach into the available market, and into the improvements in technology. Conquering chaos requires two key strategies:

1. Mindset strategy. Your mindset is your emotional capital, bolstered by disciplined optimism and entrepreneurial independence. These give you the capacity to grow your business without getting consumed by it. You need to find ways to replenish these on a regular basis, and find your balance of pain versus rewards to keep your company vital.
2. System strategies. These are the processes and tools you implement to grow your business and keep it running smoothly and profitably. Key ones include centralization, automation, and follow-up. Again, balance is the key, with some measurements along the way to keep you on track.

Even after you bring chaos under control, you face an ongoing challenge to avoid back-sliding. Once your systems are in place, you have to give yourself the time you are saving. Make sure your own ambition doesn’t send you back into chaos. Don’t fall for the belief that your business will fail without you. Relax, let go, and enjoy the freedom you have earned.

Only now can you become the liberated entrepreneur that you set out to be in the first place. Your business will grow, you will make more money, have more time, more control, more purpose, and less chaos. Do you have what it takes to achieve the real entrepreneur lifestyle?

Startups ask me “How much money should I ask for?” The simple answer is the absolute minimum amount you need to make your plan work. Some entrepreneurs try to start with a huge number, hoping they can negotiate and close on a smaller one, while others understate their requirements, in hopes of getting their foot in the door with an investor.

Neither of these strategies is a good one, as both are likely to damage your credibility with potential investors, even before they look hard at your plan. Here are the parameters you should use in sizing your request, and be able to explain in justifying your request to investors:

1. Consider implied ownership cost. If your company is early stage and has a valuation under $1M, don’t ask for a $5M investment. The investor would be buying your company five times over, and he doesn’t want it. If your valuation is around $1M, you can validly ask for $200K-$300K, and offer 20%-30% of your company in exchange.
2. Type of investor. Angel investment groups usually won’t consider a request over $1M, while venture capitalists won’t look at anything under $2M. Amounts of $100K or less, are usually relegated to “friends and family.” Approaching any one of these groups with a funding request outside their range is a waste of your time and theirs.
3. Company stage. If your company is still in the “idea” stage, you have no valuation, so size your investment request on the basis of “goodwill” that you have with your rich uncle, and your business track record. Angels might be interested during “early stage” if you have a prototype, but VCs won’t bite until you have a product, customers, and revenue.
4. Calculate what you need, and add a buffer. Do your financial model first with the volume, cost, and pricing parameters you want. See where your cashflow bottoms out. If it bottoms out at minus $400K, add a 25% buffer, and ask for $500K funding. The request size must tie into your financials to be credible.
5. Investment terms. The most common case is an equity investment, but there are many terms that can impact what request size is credible. I’m talking about things like anti-dilution clauses, preferred versus common stock, valuation tied to later round, warrants, and bridge loan options. More restrictive terms reduce the credible investment amount.
6. Single or staged delivery. In many cases, a single investment request may be scheduled for delivery in stages, or tranches (often misspelled as traunchs or traunches), based on milestone achievement. Obviously, this reduces investor risk and allows a larger commitment, since they can limit their loss if you fail to meet key objectives.
7. Use of funds. Investors expect to see a “use of funds” list, and they expect the uses to apply only to your core mission. In other words, don’t tell investors that you intend to buy a fancy office building or executive cars with your funding. Even executive salaries should be minimal at this stage.
8. Projected return on investment. Most entrepreneurs skip this step, but it helps your credibility to include it. Estimate a return on investment (ROI) by projecting company valuation at exit, to show the investor who has 20% what he will get back for that initial investment. He’s looking for a 10x return, since he assumes only one in ten survive.

Obviously, determining the proper size of your investment request is a non-trivial exercise, but it’s one of the most critical factors for investors in making a decision to invest or not to invest in your company. You need to get it defensibly right the first time, because changing your request under pressure definitely will kill your credibility.

The days are gone, if they ever existed, when you could present an idea and a vision, and have investors throw money at you. Now you have to do your homework. Get busy, and have fun.

Angel investors and venture capitalists don’t invest in non-profits. The simple reason is that it’s impossible to make money for investors when the goal of the company is to not make money. Yet I still get this question on a regular basis, so I’ll try to outline the considerations in common-sense terms.

A non-profit organization is generally defined as an organization that does not distribute its surplus funds to owners or shareholders, but instead uses them to help pursue its goals. Examples include charitable organizations, trade unions, and public arts organizations. In the US, a non-profit is technically any company who qualifies as tax exempt through IRS Section 501(c).

Obviously, these companies still need money to get started, or finance growth, just like a for-profit company. What options do they have available to them, since they can’t sell a share of the company (no equity investment)?

1. Individual and institutional donations. For a non-profit, bootstrapping is self-funding from donations and fund-raising. The advantage is no time and effort is spent searching and preparing for the other alternatives, and no repayment terms or collateral are required. There is no discussion of equity, or return on investment.
2. Loans from a bank or other financial institution. Non-profits can apply for a bank loan or line-of-credit, just like any other individual or company. However, like anyone else, they will first need some collateral, or someone to guarantee the loan, and some evidence of a viable business, like receivables and inventory.
3. Personal loans from individuals, employees and board members. Personal loans are certainly an option, but should be avoided if possible. As in any company, they can lead to employee problems, or messy legal issues. A non-profit can also issue bonds to board members and members as a way of borrowing funds from those same people.
4. Government grants. The grant source often gets overlooked, but it should be a major focus these days when relevant due to the Obama administration initiatives on alternative energy and healthcare. The down side here is that real work is required to put in a winning application, and the award may be a long time in coming.
5. Private endowments. This is a funding source for non-profits that is made up of gifts and bequests subject to a requirement that the principal be maintained intact and invested to create a source of income for an organization. Endowments are usually limited to a specific area of interest by a philanthropist, and have many qualifications, so be careful.
6. Bartering services. Bartering occurs when you exchange goods or services without exchanging money. An example would be getting free office space by agreeing to be the property manager for the owner. This could work to get you legal or accounting services, but won’t get you cash to pay employee salaries.

Hopefully you can see from this list that the people and processes involved in financing a non-profit have little in common with angel investors, or the venture capital process. You still start the process with a business plan, but then you look for a philanthropist rather than an investor.

Some non-profit entrepreneurs think they can skip the whole plan, rather than just the sections on valuation, equity offered, and exit strategy. All other sections, starting with a definition of the problem and the solution, opportunity sizing, business model, competition, executive team, and financial projections, are just as critical for non-profits as for-profits.

A non-profit is still a business, maybe even tougher than for-profit to run successfully, so the best angel is a great entrepreneur at the helm for fund-raising, as well as operations. In addition, the best non-profits turn out to be the angel, rather than require one. That’s a higher calling.

Most entrepreneurs tend to avoid this area of the business, and as a result are badly surprised by cost realities, and investor expectations. They seem to think that financial projections are simply invented numbers for investors, and not useful. In reality, it’s like jumping in your car for a long hard drive with no destination in mind. Chances are, you won’t enjoy success from the trip.

What is a business financial model, really? In most cases, it is merely a Microsoft Excel spread sheet loaded with your cost and revenue projections for your startup, starting now in time and extending at five years into the future. For more value, a few variables can be added, like product volume growth rate, and number of salesmen, for “what if” analyses.

Why? For you to make decisions and manage the business – because we are all mere mortals and can’t possibly keep all these numbers and calculations in our head – to decide whether and when the business is going to be profitable given rational projections of costs and income (these assumptions are referred to as your business model). Secondarily, it will be required by potential investors to validate how much money you need to get started, and how much return they can expect on their investment.

When? The financial model should be running even before you incorporate the business and build prototype products (would you start driving your car on a long trip before you knew where you were going?). If you can’t make that objective, then at least don’t approach potential investors until your model is working – investors have little tolerance for startups with no financial plan.

How? Start with a “sample” business model, available in generic form or customized for specific industries, from many sources on the Internet. Another alternative is to download from my website a free sample model that I built for a specific startup, with elements suggested by Angel investors and venture capitalists, ready to be customized to your business.

If you are not computer literate in Microsoft Excel, your first task is to find someone who has the time and expertise to convert your base set of costs and revenues into projection formulas, cash flow summaries, and a profit and loss statement.

Do your own, if you can, because you know the numbers. In fact, this is the easy part. More challenging is ‘defining’ the business model (assembling all the real variables of your projected business, pricing assumptions, staffing requirements, marketing costs, sales costs, and revenue flows).

This business model can then be used for many purposes, such as risk and profit assessment, projecting the values of assumptions that are made based on existing market conditions, calculating the margins that are needed to avoid adverse situations, and various forms of sensitivity analysis. These are necessary to estimate capital investment requirements, plan capital allocation, and measure financial performance.

Creating financial projections allows you to see areas of strength and weakness in your proposed business model, enabling you to make critical changes that will allow your business to run more successfully.

While people start businesses for many reasons, making money is usually important. Even a non-profit can’t afford to lose money. You won’t know if you can meet these expectations until you build a financial model with reasonable financial projections.

It’s a great learning experience, and you can do it yourself, but don’t hesitate to ask for help from a professional if you need it. You will be amazed at how clear the relationship becomes between pricing, cost, and volume. When you lose money on every item, it’s hard to make it up in volume.

Presenting your startup vision as a founder to a potential investor, or presenting an idea as an employee to an executive, requires that you effectively communicate, or “translate”, the value proposition into terms that the receiver can fully understand and appreciate. If you fail, it’s your loss, not theirs, no matter what the reason.

For example, if your investor has been a senior business leader, you need to transform your message so that it addresses the issues that senior business leaders have experienced as priorities. For the business leaders I know, these priorities almost always include the following:

• Business agility. How can my company keep up with the ever increasing rate of change in technology, core business strategies, and culture trends? Implicit in agility is increased productivity on change initiatives. This applies to startups as well as big companies.
• Data security. In today’s world of distributed data, global reach, and powerful incursion technologies, how do I protect my data and my customers’ data? Executives need more data accessible to their team everywhere, but at what cost?
• User privacy. Customers are bombarded from all angles today for information to improve their user experience, yet they need to protect highly personal things. How does your proposition address highly targeted advertising without a privacy backlash?
• Risk reduction. Especially in this world of constant litigation and hackers, how can I as an executive manage the risk to my personal future, as well as the future of my company? How can I control a highly distributed technical operation, which changes every day?
• Return on investment. How do I measure the return on my development and marketing investments? These business leaders get demands from all organizations for more, more, more, with little ability to quantify payback.
• Integration. Too many applications out there today are “silos,” built outside the existing organization without an overall architecture, or even a maintenance plan. How do I integrate these to maximize my return?

Your message better hit one or more of these priorities dead on, if you hope to get some traction. Too often what an executive hears is a pitch on some grand new technology that they can’t even understand, or certainly can’t see as directly applicable to their priorities. Remember they have heard similar technology stories for the last twenty years, usually expensive, with poor results

Consider this real example I heard a while back from some MBA students – “Let me introduce our newest tool, which we developed from ‘mashup’ technology, made popular by Facebook and MySpace.” This entry line, as well as a long presentation which followed, was missing not only the translation to receiver priorities, but also assumed that the executive had the same background and view of the world as the presenters.

This is called the generation gap. These young technologists didn’t consider that most executives today are a few years older, and would probably translate ‘mashup’ to mean some version of a train wreck. And the mention of MySpace would raise some vague fears of their granddaughter being accosted through the Internet. You won’t close the deal with that pitch.

Obviously, if you are communicating to peers, or any other generational group, the rules change. But the message is the same – if you want to win, then the onus is on you to communicate the value of your argument in terms the other party understands.

Some entrepreneurs, perhaps because of their sense of entitlement, sometimes arrogantly assume the other party should shoulder most of the responsibility for any translation required. If you had one chance to present to Warren Buffett, how would you present your new technology to prevent your own mashup?

Deciding to be an entrepreneur is a lifestyle move, and should be part of a long-term strategic plan. You shouldn’t be making this decision just because you are mad at your boss, you would like to be rich, or someone else thinks it’s a good idea. In these changing times, if you already have a startup, with no plan, maybe it’s time to think ahead for a change.

Formally, that’s called developing and maintaining a strategic plan. Usually that means writing something down, since it’s hard to maintain something, or track yourself against it, if it’s not written down. From my experience, and the experience of other entrepreneurs, here are the key elements you should think about as part of the process:

1. Personal interests and aspirations. Do you love managing your own schedule, overcoming obstacles, starting a new adventure, facing financial risk, and relish the opportunity to change the world? Money should not be the big driver here.
2. Right idea at the right time. Do you believe that you have an idea for a company that you can implement better than anyone, and maintain a competitive advantage? If you are thinking non-profit (social entrepreneur), can you rally the world around your cause?
3. Take inventory of what you have. Look critically at yourself and your existing organization for strengths, weaknesses, opportunities, and threats (SWOT). What resources do you have, skills and functions, and what do you do best?
4. Assess customer demand. Do customers really need what you want to do, or might they see it as “nice to have?” In the relevant market large enough, and growing fast enough, to make it a profitable opportunity?
5. Providing minimal resources. One of the biggest stumbling blocks for all entrepreneurs is time and money for the ramp-up period. Do you have money saved, or available from friends, or current employment to support the transition?
6. Visualize the future. What do you envision your business looking like in five to ten years? Is your mind full of ideas for repeating the experience, or are you looking to build a family business that you make your legacy?
7. Manage existing relationships. How important to you is the balance between family, outside relationships, and work? Do you have dependents that must be factored into every career and lifestyle equation? What personal support resources are available?
8. Education and training roadblocks. Does your dream require additional time and money for training or academic credentials? If so, can these be done concurrently with an entrepreneurial rollout plan? What other roadblocks exist?
9. Location, location, location. Most entrepreneurial efforts can best be done, or can only be done, in a specific geography or country. Are you willing to relocate as part of your strategic plan? Can you start where you are and relocate later?
10. Willing and able to measure. Can you define measurable milestones to help you track progress and provide feedback? Strategic plans that cannot be measured will never be accomplished. Are you committed to achieving milestones and measuring progress?

I’m not suggesting here that a strategic plan is a one-time set-in-stone effort. In fact, quite the opposite, every plan must be improved and adapted as you learn more and the world changes around you.

On the other hand, if your way of doing business might be described as “fire” first and “aim” later, to seize today’s opportunity, you are charging into the future on only a wish and a prayer. The crash landings can be tough, and definitely won’t feel good as a long-term strategy.

A good entrepreneur is not necessarily born a good salesman. In fact, they are often the opposite, more focused on building things rather than selling them. Yet, in today’s world of information overload, marketing and selling skills are critical to the success of every startup.

The alternative “If we build it, they will come” approach has long been relegated to the field of dreams, after Kevin Costner’s movie by the same name. In my own effort to keep up with the times, I just finished a new book by Julie Steelman, “The Effortless Yes: Demystifying the Selling Process.” Julie is known as the entrepreneur’s selling mentor, for both men and women.

Steelman does a good job of outlining the key selling steps that separate great salesmen from the rest of us. In my view, every entrepreneur has to be a great salesman to succeed (among the many other required skills), so you should take a hard look at these points:

• Dust off your moxie. Don’t hope that a miracle will happen and your products and services will sell themselves. Be passionate about what you are selling, and decide to be of service, by providing your customers with something of value in exchange for deserved payment. Set aside fear and doubt, and stand tall with your message.

• Claim your sweet spot. The sweet spot if the essence of your brand. The way to claim it is to name your expertise or specialty, describe for whom it’s meant and clearly state how it delivers on its promise (or what is called your unique payoff proposition). Make it real for you and your customers.

• Craft your irresistible pitch. An irresistible pitch is a clear and concise explanation of what you do best, benefits to your customers, an honest statement of why you do what you do, a question that pulls the listener in, and words and language that engage the hearts and mind of your ideal customer.

• Socialize your message. Generate leads using social media, but don’t rely on it alone to make sales. Use the media to initiate contact, highlight your human element, and communicate your specialty or expertise in a way that anticipates what your customers might be thinking about. Facilitate a transition to a private environment for closing a sale.

• Engage graciously. Always treat customers with respect, honesty, and warmth to make the selling process more enjoyable, fun and delightful. The goal is to deepen the relationship, and discover if their needs match your offer. Listen closely for what they are saying and expressing. Don’t forget to follow-up. Skip the cold calling – it’s just too cold.

• Discover your signature selling style. Learn to sell in a way that matches your personality and your strengths. Check the definitions in this book or other sources to see if you are the humanitarian, visionary, maverick, romantic, nurturer, mentor, or one of a dozen others. Tune your approach and you will find yourself enjoying the selling process.

• Perfect your natural ask. As you go through the sales cycle with your customer, there comes a point when it’s natural for the transaction to conclude. Asking the customer for their decision demonstrates leadership on your part, shows you have confidence in your offering, and prompts them to make a final decision. You can’t win if you don’t ask.

I’m not suggesting that a startup founder has to do all the selling, and doesn’t need to find or hire people whose focus is marketing and sales. In a startup, everyone has to sell – you can’t afford to rely on specialists for everything.

Just recognize that if you are in business for yourself, you are in the business of selling. Selling well is about creating relevancy with customers and aligning your product suite with their needs. That has to lead to a win-win close where the customer satisfies a need and you make money, or you don’t have a long-term business. Are you comfortable with your selling skills?

Viral marketing and word-of-mouth are not enough these days to make your product and brand visible in the relentless onslaught of new promotional media out there today. Innovation in marketing is perhaps more important than product innovation. Yet in the business plans I see, the marketing content and budget are smaller than ever.

More than just spending, you need to create an “experience” in this digital age which sets you apart from the banner ads, email blasts, and old-school websites out there today. According to a recent book by Rick Mathieson, these have morphed into a digital universe of augmented reality, advergames, and virtual worlds – that are highly personalizable and uniquely shareable.

His title “The On-Demand Brand: 10 Rules for Digital Marketing Success in an Anytime, Everywhere World” characterizes the challenge of demanding attention from a new generation of consumers who want what they want, when they want it, and where they want it. Here are the new marketing rules I support:

1. Insight comes before inspiration. Innovative marketing starts with customer insights culled from painstaking research into who your customers are, and how they use digital media. Then it’s time to innovate through the channels or platforms that are relevant.
2. Don’t repurpose, re-imagine. Digital quite simply is not for repurposing content that exists in other channels. It’s about re-imagining content to create blockbuster experiences that cannot be attained through any other medium.
3. Don’t just join the conversation, spark it. Create new online communities of interest, rather than joining existing ones. Ask why it should be, and why customers should care. Then give them a reason to keep coming back. Keep it real, social, and events-based.
4. There’s no business without show business. Remember Hollywood secrets. Your brand is a story; tell it. Accentuate the personalizable, own-able, and sharable. Viral is an outcome, not a strategy. Make people laugh and they will buy.
5. Want control? Give it away. Several companies, including Mastercard, Coca-Cola, and Doritos have let customers build commercials and design contests, with big rewards for the customer and for the company. That’s giving up control, with some risk, to get control.
6. It’s good to play games with your customers. Games are immersive, but shouldn’t be just a diversion. They need to drive home the value proposition. Don’t forget to include a call to action, like leading people to the next step of the buying process.
7. Products are the new services. Startups need to realize that products are the jumping-off point for building relationships with customers. Digital channels enable you to turn products into on-demand services that help customers reach their goals, and add value.
8. Mobile is where it’s at. In addition to thinking of mobile as a new advertising distribution platform, remember it’s far more powerful as a response, or “activation mechanism,” to commercial messages we experience in other media – print, broadcast, and more.
9. Always keep surprises in-store. Social retailing is the new approach, where real-world shopping allows customers to connect with friends outside the store, and try on virtual versions of fashions friends might recommend. Make your in-store services add value.
10. Use smart ads wisely. The new generation of “smart advertising” enables the creation of an Internet banner ad to fit each viewer’s age, gender, location, personal interests, past purchase behavior, and much more. The trick is to do this without being invasive.

Remember everything you do, or don’t do, in the digital world is visible to your customers, and everything they say about you is visible on demand, all over the world. That means marketing can no longer be an afterthought, or something you can postpone until later, when you have more resources. Without effective and innovative marketing, you don’t have a business.

It seems to be an accepted fact these days that big companies normally innovate by buying a startup with innovative products, rather than focusing on in-house innovations. This is a good thing for entrepreneurs and investors, who can win big, but it’s not a given. I see many startups who seem satisfied with a “me too” approach, building yet another social network or e-commerce site, rather than being truly innovative.

Much has been published on this subject, including a new book “Look at More: A Proven Approach to Innovation, Growth, and Change” by Andy Stefanovich, which is really a guide to established companies for unleashing creativity within their organizations. He asserts that the problem is lack of inspiration, and he supports this with twenty years of real case studies from his own experience.

The good news is that most entrepreneurs and startups have more inspiration than almost anything else, and it sometimes leads to success despite their lack of resources and business skills. Yet even entrepreneurs need to focus on the most effective way to unleash innovation, and maximize their chances for success.

Andy offers a simple mantra for innovation, expressed as “Look at more stuff; think about it harder.” This mantra is complemented by a framework known as the five M’s, which are five key principles for unleashing creativity in any environment:

• Mood. Inspiration and creativity requires the right context of attitudes, feelings, and emotions. Every business leader who wants innovation must constantly monitor and set the proper mood for the environment. You can set the right mood by purposefully disrupting the status quo, initiating change, asking provocative questions, and listening.

• Mindset. This is the intellectual foundation of creativity, the baseline capacity each of us has for getting inspired, staying inspired, and thinking differently. Four thinking disciplines which produce a creative, inspired mindset include changing your perspective, taking risks, finding your passion, and challenging assumptions to embrace ambiguity.

• Mechanisms. These are the tools and processes of creativity that help you engineer inspiration into the way you work and empower your organization to embrace the kind of behavior that fosters innovation. Four key steps include building a context, generating ideas, filtering ideas, and building a blueprint for implementing the best ideas.

• Measurement. Even creativity needs guidance and critical feedback on the qualitative and quantitative performance of individuals and organizations. Measurements send a strong signal of what is important and where people should focus their passion and energy. In addition to measuring results, you need to measure mood, mindset, and the mechanisms above.

• Momentum. This is accomplished by the active championing and celebrating of inspiration and creativity that foster a self-reinforcing cycle for increasing innovation. Momentum is an organizational priority for inspired leaders who have a clear understanding of the other four M’s.

Not everyone has to be a leader for innovation to work. Research has indicated that followers are just as important to consider as leaders when thinking about creating the mood and momentum for creativity, inspiration, and innovation. Likewise, the right mindset alone isn’t enough. You have to be able to convince others and sell your ideas.

Thus, even entrepreneurs must not assume that their efforts and their team will be creative and innovative. “Me too” startups don’t get funded, and they certainly don’t get bought for a premium by the sleeping giants who are looking for outside innovation to kick-start their growth again. Thus I suggest that every entrepreneur and every startup review their own environments for the five M’s, to avoid getting tagged as a “has been” before they even “have been.”

People ask me if they really need ANY business plan, unless they are looking for an outside investor. In fact, a business plan is needed more by you than investors, as the blueprint for your company, team communication, and progress metrics. Things that make it investment-grade for outside investors will also benefit you, since you are the ultimate investor.

First of all, any good business plan should demonstrate that you have done the homework to be an expert in your industry, and in what it takes to build a successful business from your idea. I’ll skip the basics here, and highlight only key elements that investors focus on:

1. Define the problem.Every plan must start with the problem you are solving, not a description of your company and product. Explain in terms your mother could understand, and quantify the “cost-of-pain” in dollars or time. Terms like “every customer needs this” and “next generation platform” are far too soft, and should be avoided.Many entrepreneurs scare away potential investors by claiming that their technology represents “truly disruptive technology.” What that may mean is that you haven’t figured out yet what problem it solves, or it may take many years for people to get it. No investor wants to wait that long for his payback, or fund the years of waiting.
2. Solution and benefits.This is not the place for a detailed product specification, but an explanation of how and why it works, including a customer-centric quantification of the benefits. Skip the technical jargon and hyperbole. Do describe your intellectual property and “secret sauce”.Focus is the keyword here. Pick a specific solution that you have built or prototyped, rather than rambling about all the possible things that could be done with your idea. Clearly define the customer, channel, and revenue model associated with this solution.
3. Industry & market sizing.Start with the evolution of the overall industry, market segmentation, market dynamics, and customer landscape. Remember that investors like industries that have a billion dollar opportunity, and a double-digit growth rate. Data from accredited market research groups like Forrester or Gartner is required for credibility.It always amazes me how an entrepreneur can define his market opportunity so broadly, and then assess his competition so narrowly in the next breath. You won’t impress investors by claiming that everyone in China needs one, and nobody else has exactly the right features to compete with you.
4. Explain the business model.This is how you will make money, who pays you, and gross margins. In this section, you need to be passionate about revenue, profit, and volume growth. Many people seem to use the social network advertising model for revenue, but forget it assumes at least 100M users and $50M investment.Avoid any statements like “All we have to do is get 1% of the market.” There are two problems with this assertion. First, no investor is interested in a company that is only looking to get 1% of a market. Second, that first 1% is the toughest of any market, so you look naïve implying it’s easy to get.
5. Competition and sustainable advantage.List and describe your competition, direct and indirect, including customer alternatives. Asserting you have no competition is not credible. Then detail your sustainable competitive advantage, and highlight barriers to entry which will keep your competitors at bay.Often I see statements like “Microsoft is too big/slow to be a threat.” Usually the reason the big companies are no threat is because the market is too small. But investors know that sleeping giants do wake up, the moment your company shows some traction. Competing with IBM, Microsoft, and other large companies should never be minimized.
6. Marketing, sales, and partners.Describe your market penetration strategy, sales channels, pricing, and strategic partnerships. Here is also a good place for a rollout timeline with key milestones. Convince investors that you have lined up sales channels, strategic partners, and a viable marketing strategy.Be careful with assertions like “We have strong interest from a major customer.” The mention of unsigned contracts normally takes away more credibility than it adds. You can bolster this position by including a Letter of Intent (LOI), contract summaries, or even testimonials.
7. Executive team.Investors invest in people – not just ideas. Convince investors that your team is experienced in starting a new business, and have great expertise in the selected business domain. Include Advisory Board members and key industry people connections.Sometimes I see statements like “A world-class CEO will be joining us after funding.” Rest assured that potential investors will ask for names, and place some calls. Soft responses from your candidates will definitely kill your credibility.
8. Funding requirements.Explain how you calculated the funding requirements, and show details on planned use of funds. Quantify existing skin-in-the-game, by insiders and outsiders, including sweat equity and capital. Include a current valuation estimate.The most credible sizing approach is to do your financial model first with the volume, cost, and pricing parameters you want. See where your cashflow bottoms out. If it bottoms out at minus $400K the first year, add a 25% buffer, and ask for $500K funding.
9. Financial forecast and metrics. Project both revenues and expense totals for next five years, and past three years, if relevant. Show breakeven and growth assumptions. Details should be available in a separate financial model, but not included here.Remember that investors are looking for large, scalable, high-growth opportunities. Attractive deals show double-digit positive growth per year, and revenues that are projected to $20M or more within five years.
10. Exit strategy.This section is only required when you expect outside investors. These investors want to know that you are thinking about a liquidity event – when and how they will get their money out, with ROI. For a family business, don’t project an exit.Otherwise, identify your preferred exit strategy, including specific candidates for merger or sale, and timeframe. “Going public” (IPO) is another alternative, but not common. Show how your rate of return would be attractive to investors.

An investment-grade business plan is a professionally prepared document, preferably about 20 pages, to satisfy both angel investors and venture capitalists. In preparing it, try to look at your project through the investors eyes. If your plan is missing one or more of the above elements, it will likely be deemed not “fundable”, and rejected.

The best plans are not usually the fanciest or the longest. They are not measured by the quantity of impressive graphics or the size of the revenue projections. Investment-grade ones attempt to answer every question an investor could possibly ask, except maybe “where do I sign”?

Every entrepreneur wants to know how they can improve their odds on the road to success, and why some entrepreneurs seem to be able to squeeze success out of even a marginal business case. Most experts agree that is has lot to do with your level of passion, determination, and innovation, modulated by a strong focus on reality, common sense, and street smarts.

John Bradberry, in his new book “6 Secrets To Startup Success” explores many of these attributes, especially passion, and defines some useful principles to help enthusiastic entrepreneurs squeeze the most out of their passion, while not being trapped by it. Every existing and budding entrepreneur should internalize these reality principles:

1. Ready yourself as a founder. Too often, passionate entrepreneurs leap head first into a venture before thinking it through. To improve your readiness to succeed as a startup founder, take an honest look at yourself as a founder before leaping. Reality-check your goals, then focus on ways to leverage your skills, assets, resources, and relationships.
2. Attach to the market, not your idea. Passion is an inner phenomenon, but all healthy businesses are rooted outside the founder, in the marketplace. To turn your passion into profits, emphasize the market, and always think about your business relative to the customers you serve. Know your markets and execute on your market opportunity by placing a priority on your customer’s experience and perception of value.
3. Ensure that your passion adds up. Passionate entrepreneurs tend to develop rose-colored plans, over-estimating early sales and underestimating costs. To convert your passion into tangible business value, write a business plan that makes financial sense for the needs and future goals of your startup, and have it checked by an expert.
4. Execute with focused flexibility. No amount of startup planning can accurately predict the unexpected twists and turns imposed by reality. To succeed, a new venture needs both iteration and agility. Establish an ongoing process for translating ideas into actions and results, followed by evaluation.
5. Cultivate integrity of communication. Passionate commitment to an idea can breed reality distortion. That is, aspiring entrepreneurs often see only what they want to see and rely on “feeling good” about their venture as their only measure of success. Commit to building the skills essential for high-integrity communication: curiosity, humility, candor, and scrutiny.
6. Build stamina and staying power. Contributing factors aside, most startups fail because they run out of money or time. To lengthen and strengthen your venture’s runway, aim to launch close to the customer and raise more money than you’ll think you need. Focus on building personal staying power, maximize learning, and improvements.

These principles will help keep you from falling into the passion trap. Bradberry defines this trap as a self-reinforcing spiral of beliefs, choices, and actions that lead to critical miscalculations and missteps which result in rigidly adhering to a failing strategy until it’s too late to recover. Entrepreneurs who fall into this trap usually don’t even see it coming.

According to Small Business Association figures, about six million Americans a year make the bold leap onto the startup path, with many more worldwide, and many have no corporate safety net to fall back on. Unfortunately, less than half of these new ventures survive beyond a few years. Too many of these have fallen into the passion trap.

Of course, passion is what real entrepreneurs live for, and they sometimes assume it can take them anywhere they want to go. But those who continually temper their passion with reality principles, and adjust their course, are much more likely to see success in getting there. Like the line from a country song, “if you don’t where you’re going, you might end up somewhere else.”

That means the target market must be large (at least $500M), proven and growing, with revenue potential of at least $50M within five years. Initial investment targets are usually larger than $2M, sometimes up to $25M or $50M. To make this work, you will need an initial valuation of at least $5M.Current market conditions should still convince you to be totally thorough, thoughtful and aggressive in your approach and presentations. But now is the time to get started, and remember to work friends, family, and angels before you tackle the big boys.

The best survival guides tell you how to be proactive and avoid the probabilities of ending up in a worst case scenario. Of course you need to learn how to recognize a bad situation before it bites you, and you need to know all the secret ways to wiggle your way out, before you succumb.

The challenges stem from the simple fact that every entrepreneur is starting something new, where things are predictably unpredictable. There are unknowns at every turn, leading product development, attracting customers, managing cash, and dealing with human resources and office politics.

Several whole books have been written on this subject, such as “The Worst-Case Scenario Business Survival Guide” by David Borgenicht and Mark Joyner, so you should consider this article a simple introduction. Here is their and my perspective on the most common problems that will threaten your survival:

1. People are the problem and the solution.Probably 80% of the startups I know have found human resource issues to be the most treacherous. Trusted partners quit, personal friends become enemies, and staff management becomes a huge burden. Some say that if we could only run a company without people, the entrepreneur’s job would be easy.The proactive solution is to hire sparingly, and spend the time and effort needed to hire existing experts in all cases. Don’t hire your friends and family, don’t assume they can learn on the job, and don’t assume that cheap is best. The best will save your sanity, avoid most potholes, and pull you out of disasters you never anticipated.
2. Missed or no target expectations.Setting the wrong or no expectations is another of the most consistent problems I see with every startups. Missed milestones de-motivate the team, unrealistic financial projections will put you in crisis with investors, and you find you need to double every product development timeframe when talking to sales and marketing.Add an advisory board or experienced mentor to reality-check your financial projections, timeframes, and milestones before you publish them. But not defining or publishing expectations is not the solution; that leads to quick disasters as everyone sets different ones, based on their own experience, or lack of it. “Stretch” goals in early-stage are not advised.
3. Too slow or too fast to change.Ironically, startups that are all about change often are slow to see the need, or slow to implement. Yes, it’s your vision, and it’s good to be relentless, but don’t be blind and stubborn. The other side of this coin can be equally disastrous; the change of direction based on every customer or investor comment.Maintain your focus, but assume that changes in your plan will be required. Make it clear that you intend to re-forecast your plan every three months, and communicate changes proudly to your team, rather than apologetically. Build a learning organization that shares your vision and drive.
4. Strategically timid and haphazard marketing.To get competitive leadership, you can’t be an industry follower. Too many startups simply follow the standard distribution channels, use standard pricing, and count on their one extra feature to give them the market. Marketing is done in fits and starts.Instead, you need to undertake an aggressive campaign in the new media, with creative selling messages and promotions. Don’t wait until you are in crisis mode to think about doing something new. Look for ways to offer additional value, rather than slash prices.

Overall, there are no silver bullets, and the entrepreneurs who recover from the most worst case scenarios are the ones with the most drive, determination, and positive mindset. Experience helps, so every worst case you survive makes you stronger for the next one. If you really believe that failure is not an option, you can make success happen, despite the odds.