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Would your customer pay for a systems integration deal for you to develop your technology into a custom application for them? Get them to pay for it. Negotiate a period of exclusion. Negotiate a partnership with them when you go vertical, so they will actively evangelize the product. Don't take the customer's money as an investment. That gives them way more than you need to give up. You might want to wait for equity investment until you have some customers for your vertical.
Going to a VC is out. You are not asking for enough money. Then, there is the multiple? Why are you only selling to the top 10% of the market? Because it's easier? Pricier?
Further, your $75K salary will mean that you cannot attract a good team. A good team for a startup expects that there is only one six figure income, yours. But, $75 would be low for say a marketing VP. A good team is what you need to get VC money. The idea is secondary.
Then, you are beginning your marketing too late. Why wait until you have your product finished. Your product would be better if you have customers in on determining what the product would be. Technology development is something you can do without customers, but for product development, you will need customers.
And, what happens with a no at the no/go? Revision, delay, or exit. How are you going to exit? How will the investors get their money out. If you don't intend to exit, then maybe you should deemphasize the no go decision. You are going to find a way to keep going regardless. You should, however, put your marketing gates in the plan. These are not technology gates. And, if the market says no, you need to be prepared to exit. Phase 3 and 4 seem so far away that they are almost fiction. And, there are two high risk events, those go/no goes.
Tell us what you are going to offer investors. How are you going to structure the deal, so they can invest. Your proposal makes no offer to investors, so how would an investor know what to take? Straight equity doesn't cover the investor's risk.
David
Categories: M&A and Financing
I understand the question is simplistic, that it may be impossible to answer, etc., etc. Or maybe there are answersÂ?
I am using Steve McConnell's project management, including his phased delivery system. Financial projections follow the description of the 4 phases.
PHASE 1 is 9 months, $96K. It includes investigating additional vertical markets that might become potential markets, pick the best technology for the job, get huge amounts of feedback from target market businesses, develop FULL specs (probably utilizing parts of the tools we selected to use for the development), and writing a "final" user's guide. The last weeks include developing a more detailed roadmap and budget for Phase 2.
PHASE 2 should take about 9 months (to mostly-complete release 1) and cost about $200K-$300K (I admit there's a LOT of guesswork in this). Phase 2 starts ONLY after a "go"/"no go" decision based on analysis of the specs and user's guide AND reviewing the updated Phase 2 Roadmap & Budget Â? hopefully the decision will be obvious. Phase 2 is developing the actual software to the specifications and testing. There will be several almost-shrink-wrapped roll-outs along the way for target companies to see if they like everything so far (the pre-mature roll-outs should reduce a lot of stress in the final roll-out).
The "go"/"no go" analysis for Phase 3 is done near the end of Phase 2.
PHASE 3 involves ironing out the bugs, getting marketing/sales working, and stabilizing the company. This stage should last about a year and the budget should involve making a profit (unless we sell primarily using the ASP model). But Phase 3 details and projections will be determined during the waning weeks of Phase 2 Â? and is subject to another "go"/"no go" decision.
PHASE 4 is simply "the future." It includes establishing a pervasive influence throughout the vertical industry [hee hee], flicking the switch to translate the software into other languages and expanding into other countries [si si], going after allied industries, etc. And maybe bailing out Â? it might have stopped being fun (but every step of getting and being where we are will have been laid out like a McDonald's franchise manual).
PROJECTIONS
The 3 cases are UGLY (aka break-even), OK (I consider this case pretty ugly), and GREAT (0.3% cumulative market share of our target industry Â? but I consider that 3%, because we will only target and pursue the top 10%). The numbers are all based on year 5.
Gross =________$1.2M. $2.9M, and $10.7M___UGLY___OK___GREAT
Pre-tax net =___$166K, $633K, and $2.1M
Employees =____9, 17, 50
Sales/Marketing % of budget = 48%, 59%, 68% - I add more advertising for every sale and the cost of development should only be about double with 495 sales/year vs. 66 (UGLY) and 156 (OK)
INVESTMENT
I have no money right now although we have about $350K equity in our house. We lost a house because of a bankruptcy Â? it's a very sore subject for my wife. Fortunately the source of both these problems is understood and gone, but she will remain nervous forever. I can survive on $25K/year. The projections are based on a $75K salary for me.
So I need at least $56K for Phase 1. Then proably at least $150K for Phase 2 (although the risk should be much lower for any investor with full specs and user's manual in hand). What could/should an investor get for his money? What additional information do you need to answer? Am I nuts to look for an answer?
I may have a future customer who is willing to put money into my new venture. I may seek money from several sources. Or I may brave the storm and go after half the house equitye. But I sure would love to know what's "fair" or conventional.
STRENGTHS (The "S" from my SWOT analysis)
I have 14 years (1965-1970) in mainframe computers, 10 years in the vertical industry, 12 years in sales/training/installation for THE high-end software company of that vertical industry (they are falling now). Because of my vertical market software experience, I have a very good handle on worst-case scenarios Â? I've made sure all my projections incorporate my real-world observations. I also have a number of excellent contacts within the vertical industry
I have brains (150 IQ, Harvard), I work hard, and I've always been healthy & lucky (with the exception of strong ADD). The WEAKNESSES are mostly the shallow pockets and the problems caused by the ADD before last year when a therapist discovered the problem.
Our software will be unique among the competition in several areas Â? solid Web Services, designed for speed (including keystroking), interactivity with other systems, a browser design will operate on any platform Â? even cell phones (with limited functions), multi-language at the core, etc., etc.
.
Thanks
Wow!
I expected to be hit with a completely different viewpoint and macro questions Â? you fulfilled those expectations, David! I'll answer your questions in sequenceÂ? But the CRUCIAL QUESTION is the LAST QUESTIONÂ?
My customer has $10K software (that I sold him years ago) that does a good job and my new software will sell for $10K-$15K (or a nickle an invoice or whatever). So I think a $75K-$200K for a custom copy will not have much appeal. And I agree that taking investment money implies equity (hence my original question).
I've done a lot of interesting reading about and by VC's, including Rob Ryan. I think the $10M gross revenue projection would be hard but is attainable. I cannot see any way it would exceed $20M. I am simply not in their arena.
I don't understand the reference to "the multiple" Â? is that referring to investor ROI? I did work out some numbers on that, but I don't know how to present that in any simple way.
The top 10% of auto repair shops (my vertical) are run like businesses Â? the other 90% are small shops where the owner thinks his job is primarily turning wrenches. I sold to this market for 12 years Â? it is VERY frustrating when a 5% productivity increase is dismissed as irrelevant (that's an extra $600 GP per week for a 3 tech shop). The FANTASY scenario is that the software WILL catch fire Â? it could, but it's not fit to use in the projections. I do not write them off, but the 1, 2, 3 man shop just isn't a promising market.
The marketing salary is $100K (+ 30% OH on all salaries), the first programmer $80K, etc. I want the plan to show my commitment to the company's success.
I have never worked with the newest technologies Â? I simply don't know how long the actual coding is going to take. I will be starting the actual coding phase with a set of remarkably solid specs. I have seen how long it takes to program a system like this in a 4GL RDBMS (Progress Software). I have talked to experts who have worked on very similar systems. I think Phase 2 (coding, testing) will take 6 months, but I have been conservative in all my estimates.
I will be staking out the top spot Â? incomplete and/or buggy software won't help us reach that goal. Or so it seems to me.
The Go/NoGo decision is really a selling tool for investors. At the end of Phase 1, I will have in hand specs, user's manual, mock up screens, and detailed roadmap for Phase 2. It should be pretty clear that this is a killer great deal Â? or not. The investor would NOT get his money out Â? but he wouldn't need to fork over any more. The strategy works really well (I would think) for internal projects in the corporate world.
Marketing Gates"? Technology Gates"? I love it! I think I can deduce what they meanÂ?
I have 12 years selling to this market. I know the competition. Over 50% of the competition is written in MS Access! My target market shops have 5 up technicians, need accounting, need interconnectivity, etc. (My potential investor has 82 employees in three very-close locations operating as 1 business.) They have very few options now. We will blow those options away (the main "threat" in my SWOT analysis is a new player entering the arena).
THE CRUCIAL QUESTION
This is my real question Â? would equity be a plausible offer for an investor?
$100K now, and the potential to loe itÂ?
$200K more in 8-9 months if he loves what he seesÂ?
$300K totalÂ?
He gets 25% (?) equity in a company netting $630K-$2.1M pre-taxÂ?
CRUD!
I guess that doesn't look very appealing! I guess I'd better figure out how to get a loanÂ? at least to get me through Phase 1. It really seems that Phase 2 would be a much easier sale to an investor.
Since you only expect to make $10M and that looks big to you, consider that VCs have billions to invest and the time it takes to manage all that money makes them focus on bigger rather than smaller deals. It costs them tons of time. A multiple is how many times the return would be given what they put into your business. If they invested $2M and they get back their portion of the $10M, saying you gave up half the equity and they get $5M, then the multiple is 2.5, which is too low a return to make it worth their time.
What you should be looking for is an angel. They have different threasholds and multiple requirements.
Rewrite your story. Focus on the business, not the technology. Don't give up, because of anything that I said. That wasn't the point of my saying it. Let some other people here speak as well.
Look at Dave Gladstone's "Venture Capital Handbook." It talks about what to write, how to structure a deal, and where to look for financing. Structuring the deal is what you haven't talked about yet.
In Presenting to Win, Jerry Weissman talks about how to present things like IPO roadshows. He talks about persuasion and the necessity of tying everything to a "What's in it for you (WIIFY)" (you the investor) statement. What's in it for the investor is the important thing. Everything get's tied to a WIIFY. The investor is a business man. They see technology talk as immature. Talk business. Talk about the business. It's the business that makes the money not the technology. VCs have people who can do the due diligence on the technology and development plans. A development plan is not a proposal.
They will want to have a schedule that says "you promise to do this by that date." But, this is a rough thing. You will be expected to meet it without excuses. So this no go stuff doesn't get mentioned even if you do it, and yes, do it. Do it first. Know what the money will get you as it get's spent.
Asking for too little money is a big problem. To VCs, it means that their holdings will get diluted. They don't want that to happen. So ask for too much rather than too little.
When you structure your deal know that you have different mechanisms like preferred stock and warrants, not just straight equity to work with. Talk to your CPA and maybe your contract lawyer.
Someone will see the value in what you want to do. Be a business.
David Locke
You could productize that first custom application and sell it now. This would let you build a customer base without taking any development risk.
You would have to negotiate a deal with your first customer, since technically, he owns the work, aka work for hire, unless your original contract with him preserved your rights. Systems integrators typically do not retain rights to their work.
You could build a market, and marketing and sales capabilities with the first application, before going further. You could do this as you develop your second application.
It would increas the amount of money you needed as well. But, having customers is attractive to VCs.
David Locke
David Â?
Thank you very much. Your words are very educational and provocative.
If my 25% angel's multiple would be 4 to 12 (correct?) - $1.2M-3.8M for the 5 years on his $300K investment
[list]
[/list]
"That first custom application" will take the full 15-18 months Â? plus its maximuum selling price to the customer is probably $50K (I could be wrong Â? but not by a factor of 5 or 6).
My story is written for this forum only, NOT the investor. I figured the gulf in technology between us and the competition would add some plausibility to our typical contention that our ideas are better.
Thanks for the references, Dave Gladstone's "Venture Capital Handbook" and Jerry Weissman, "Presenting to Win" Â? I have not done much reading on VC's because I think they are irrelevant for me. I have read Ryan's "recruitment" book and a lot of the content on ventureblog.com, but mostly just for curiousity.
For the same reason I have NOT pursued the mechanics of distributing the profits - equity, stock, etc.[I haven't even heard of "warrants"].
- member since: 11/05/2001
- rank: 55 of 53435
- 58 articles authored
- 61 forum threads started
- 1023 comments
Dave45000's advice is not wrong -- in fact, it's good -- but, personally, I don't think you should be chasing investors at this point. I don't think you should even be wasting time trying to come up with an equity formula for investors. I think you should be chasing customers.
Any investor, of any size, is first going to ask, Who's using it? (I.e., your software.)
Second question: Can I talk to them? (I.e., your customers.)
His third question (when he talks to your customer) is, So, what's this software doing for you? At that point, your customer (NOT you) had better talk about tangible improvements in profit, performance, efficiency, health, happiness, etc. etc.
An alternative: Instead of looking for an investor with cash, maybe you should look for an investor with time and skill -- i.e., a partner. Risky business, I know, but if you could concentrate on the techie stuff and had a 1/3 partner, also working for $25K, who knew marketing and sales inside and out, and could go get those first customers -- and another 1/3 partner, also working for $25K, who knew admin and accounting and ops inside and out, and could finagle lines of credit and tax breaks and etc. -- well, now you're talking TEAM, and you ought to be able to get to a point (in 1-2 years) where you've got a success story that WILL attract investors.
This is what I was referring to as your first product:
My customer has $10K software (that I sold him years ago) that does a good job ...
Sell this puppy to the market.
David
- member since: 11/05/2001
- rank: 55 of 53435
- 58 articles authored
- 61 forum threads started
- 1023 comments
...and if you can't sell it, give it away.
Seriously: If you want growth, you need customers. Multiple customers. No one -- investors, potential hires, and potential new customers -- will take you seriously without that.
(Now, when I say "give," I mean sans cash -- you should always extract something: a reference, a story, beta testing, a wee spot o' cash, etc.)
Oops! My clarity fails again...
The product I sold him was the biggest, baddest, costliest vertical market system for the independent auto repair shop. This is what I was selling for 12 years for ANOTHER company. So there is no FIRST product - it's not mine to sell.
I agree with several comments saying "develop your product before getting money." But that just isn't possible - I'm trying to create a better WORD program, not a better NOTEPAD. The steps necessary to create this vision are numerous and hard - my rosiest pprediction of 15 months to the first sellable release couldn't be done by one person or within 40-hour weeks. My worst case scenario is 24 months. A management system that can't handle parts, or doesn't have the accounting yet, or doesn't do reminders, just isn't very marketable (although those could be showed and tested). At least that's what I think now.
CONFESSIONS [list=1]
But the sum of my honest solution selling, effective training, and occasional problem solving produced several shop owners who like and respect me very much. There are as many as 6 owners who are potential investors [they need to have money as well as like me :) ], including one who has actively expressed interest.
The 4-12 multiples for 5 years that would not impress a VC might impress these people.
[/list=1]
In sum, your comments and advice have truly been taken to heart and are appreciated.:D
And I encourage MORE! I have LOTS and LOTS MORE to learn. :confused:
What is the absolute minimum capability in your feature set that would help your customers? Think about the product in terms of a technology platform on top of which you will build your product(s). Think about n-tiering the delivery of those capabilities. Think about what capability you will deliver first once your technology platform provides something useful, minimally useful. You are not going to work on everything and then one day throw the switch. Architect to the market not the technology.
Minimally, would be a customer database that indicated when they had their last routine care done. It would provide a list of customers to call on a given day. It would drive up revenues a little if done with care. Then, two weeks later, add a list of preventative maintenance items, so that the call becomes more intelligent. Become the big thing, one capability at a time.
EXtreme programming is useful, because you have to build something useful for the first delivery. The deliveries happen on a very short time period like two weeks. At the end of the first two weeks, the customer has something. Not everything. Not even something with a "correct" architecture. But, definately something the customer can play with and comment on. Then, every two weeks deliver another piece. You will have to refactor. Beyond the methodology and technical aspects, you are delivering value and demonstrating your commitment to your customers. For eXtreme programming to work, however, you need customers, real users. You have those.
Once you have your development path lined out and know what chuncks get delivered when, use a price-to-value scheme and start getting paid comiserate to the value provided, and get paid sooner rather than later. This is the essence of product strategy.
Get paid as soon as something works. Then, keep getting paid. When you are finished and the customers have learned how to use the software, get paid more. Listen to your customer constantly, then making those no-go decisions will be continuous as well. React to the feedback. Meet the need.
Make your service a collection of ever improving services, then you'll be ok.
A twelve multiple would make a VC happy. It's the four or five that doesn't.
David Locke
Excellent ideas.
There are some serious problems with the piece-meal delivery approach for this vertical. Virtually no one is going to double enter info and my potential clients are already computerized. So they are not likely to adopt any system unless it is complete enough that it can replace their old system, even if they realize there are a lot of holes that will be filled shortly.
The first release I envision would do this but only be about 50% complete. I anticipate encouraging early adopters by offering lower prices (maybe 25% [$100/mo]) AND greater input on shaping the final product AND promoting a sense of getting in on a grass-roots enterprise. I have toyed with methods to have users vote on questions about what they want next, etc. [questions that I have crafted and presented on a schedule that I choose]. There is a fairly strong sense of community within the auto repair industry - they feel [correctly, IMO] that they are "different."
I also am playing with dozens of pricing models, adjusting units sold to reflect attractiveness of pricing. All the projections I have quoted in earlier posts are based on conventional (in this industry) licensing with yearly mainenance fees, average attrition, and pricing at the SAME level as our major competitor.
But the price will go up to about 33% as soon as the software is mostly complete. It WILL increase shop profits and the software will prove those claims. Every shop will receive a monthly report detailing their increased profits and the months "hot tip." The report will include statistics showing how well your numbers are looking compared to the rest of the "community." We may market via lease/ASP/rent [I have not figured out the correct words yet]. [list]
From experience I know customers will typically show about a ten to one ratio of ratio of net profit to software costs. And typical net profit numbers really stink in auto repair, so emphasizing that change will maximize the visibility of our benefits.
I obviously have LOTS more learning, planning, writing, and presentations to do. It's hard to rein myself from diving into Phase 1 which starts by investigating similar industries - it's perfectly possible that the best target market for the initial roll-out will be bus/truck repair shops or French language auto body shops [the "language" displayed on screens, help, and forms will all be table driven, so it will be very easy to change]. I am really looking forward to picking the best technology to use, but that's mostly so I can dive into developing the detailed specs - I already have a mechanism worked out for getting future-customer feedback on the specs as I identify them [I have some VERY impressive people on tap].
I am embarassed that I don't have the ability to finance at least Phase 1 by myself. I keep reminding myself about the value of having some oversight by an interested party to keep me on path [ADD makes it easy for me to stray from a straight path :rolleyes: ].
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