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The Geography of Funding Inequality.

Around the country, incubators are popping up. Tech incubators, health incubators, manufacturing incubators. Venture capitalists continue to create to new opportunities to attract the next big tech company and angel investors sit poised, ready to be mentors and investors to new entrepreneurs.

Every start-up at some point in their existence, considers chasing venture capital. The funding may be a life-line to emerging companies, who have been boot-strapping to just get by. Location plays an irrefutable role in the ability of these firms to get funding. Location determines both the likelihood and the amount that start ups are likely to receive. Consider that start-ups in Vancouver receive typically receive 80% less funding than start-ups in silicon Valley?

Where is a Firm Most Likely to succeed?

Several studies have examined the likelihood of venture capital success. In a 2009 study in the Harvard Review by Chen, et al, and another in 2010 by Josh Lerner, found that start-ups who received funding that were OUTSIDE of the geography of their venture capitalists, significantly outperformed, those closer to the VC’s office.

This posits an interesting phenomenon, why is that investors continue to be scared of secondary markets? Start-ups are naturally attracted to cities where VC’s exist. VC’s often set higher hurdle rates for firms that are outside of their area due to increased monitoring costs for items such as travel time. Do those firms, because of their higher hurdle rates, outperform start-ups in NY, Silicon Valley and Boston? Or, to actually attract VC attention, are these firms better to start with?

How does this affect firms seeking VC funding?
Is it better for firms who are seeking VC funding to pack up and head to a larger tech center?
The  propensity of these firms receiving funding would increase. What does this mean for firms located in smaller cities? Should local governments invest more in encouraging more VC’s and investors in an area?

We will examine these topics in the coming weeks and provide insight and recommendations for firms looking for VC investment.

5 Trends Why SME’s will Continue to Grow.

In the wake of massive lay-offs in the manufacturing sector, downsizing across all industries and renewed vows to create sustainability, SME’s are a powerful way to counter large Corporations and create REAL, SUSTAINABLE, solutions. Here are 5 Trends why we think  SME’s will grow in the future…..

1. Generation Y– brought up to value their own individuality, their talents and skills, as this generation matures research has shown that they are more entrepreneurial than those before them They value the flexibility of entrepreneurship and bring passion and savvy tech skills that allow them to work anywhere at anytime.  In addition, this generation has lived at home longer, and has been less likely to purchase major assets (from cars to homes) permitting them to bootstrap and live on less income than generations before. In pure numbers,  they represent a major “wave” of demographics, and the impact of their generation is just beginning to be felt.

2. 3-D Printing and Changing Nature of Manufacturing

The changes quietly started over 50 years ago with the advent of the CNC machine, and within a decade you may have one of these little machines in your home.  Imagine printing up toys that your children have designed, a new component for a broken piece of equipment or a piece of art for your home. The possibilities are endless. Greater still, is the impact that this will bring to the nature of manufacturing. No longer will massive warehouses dot the landscape, but a manufacturing facility could sit on 2500 square feet or less, producing made to order components, warehousing only enough to fill a small truck. These shops will not employ thousands or even hundreds, but scores.  This will change the nature of our suburbs and create opportunities for new buildings, space sharing and collaboration.

3. Increased Environmentalism & Sustainability Awareness

Environmentalism over the last hundred years has come and gone. However, over the last two decades, the awareness and trend towards  “green” has not diminished, but increased in importance. Corporations are adopting “sustainability” as a way of life, incorporating these concepts into their Strategy Maps and Balanced Score cards. Consumers are demanding that the companies they do business with be environmentally aware and sustainable.  It is far easier to develop a sustainable operation as a small entrepreneur and to maintain a low carbon footprint.  Many small businesses start off as home based businesses, and these offer shorter commutes, lower electricity consumption from smaller machines and growth in  internet communications technology (email and social media) that permit SME’s to connect to the world from a smartphone.

Beyond this, there is growing dissatisfaction with the income that CEO’s earn. The erosion of our middle class, has created calls for for egalitarian pay distribution which recognizes the value that all bring to our workplaces and society. Generally speaking, most founders are not making millions, but earn incomes far more modest than the CEO of Goldman Sachs or Citibank.

4. Increased Social Responsibility

SME’s are connected to their local communities. Many times entrepreneurs are involved community leaders and advocates, volunteers for local charities and non-profits and catalysts for local change. SME’s are tied to their local communities because these communities support them and are where they work and live.  Large corporations try hard to stay connected to the public-via technology such as Twitter and Facebook, they interact with their customers. However, the public demands more. They want to know who is behind the nameless corporations and want to ” know” those they are doing business with.

Add to this, the enormous growth in social entrepreneurship over the last decade and the awareness that you can do good, while earning a living.  Very few large social enterprises exist. This domain is nearly all dominated by SME’s and micro-enterprises.  This continued demand for Corporate Social responsibility (CSR) will continue to drive the growth of SME’s.

5. Worsening Financial State of Western Governments

Everywhere we look, from the USA and Canada to Europe, governments are increasingly facing fiscal pressures and inabilities to manage their own budgets. In Canada, government funding for social programs and welfare are decreasing. Cuts further erode the quality of life of individuals caught in cycles of poverty. Social justice advocates will always secure some funding for those most in need, but many will fall between the cracks. Consider the role of microenterprise and SME’s can play in alleviating poverty.

Studies show that median household income of self-employed microenterprisers increases 78% in two years, and 91% over five years. In another guided program (Welfare to Work) participants’ business assets and their net worth grew by nearly 250% during a two year period, and home ownership increased from 14% to 22%. Finally, in Washington State a study by the Center for Economic Opportunity showed that over 50% of microenterprises moved toward self-sufficiency by completely reducing all forms of public assistance over 3 years. This reduced reliance on government programs has a significant impact on the burden the state carries to support low-income families. In this study participant  unemployment decreased by 24% in the first year. Strong local economies can be created by fostering microenterprise in low income communities and encouraging the break from the cycle of poverty.  Given that governments have less and less money to give, the growth of microenterprise and SME’s is predicted to grow at increasing rates in the coming years.

 

Business Plans for Newcomers – Part 1

I cannot tell you how many times, I have heard of newcomers turned down for loans simply because they could not produce a business plan.

In our lending systems, as covered in a past blog, it is customary to ask for a business plan. In many cases, lenders will not even look at your business idea without it.
So what is an immigrant, with poor English skills to do? Many will pay consultants to prepare plans for them.
Sometimes the immigrant will just stop the application process right there. Others will attend month long classes where they will be guided through the business plan process.

While both of these are good in principal, consultants can be expensive. Classes that drag on for months and months, are not only time wasters, but not effective at teaching what a business plan should be.

A business plan should be a guide-NOT a ROADMAP, but a guide, that gives general direction, provides some estimate of costs, and demonstrates an understanding of the market and the steps you need to get where you want to go with your business.

Many, expect business plans to be “gospel truth”, but they are not. There are those in the business world who will tell you never to plan or that they are a waste of time. I prefer a more democratic approach and believe that a general document should be prepared, but that document should never be taken as the Road Map for a new business.

For newcomers, understanding what to put in a plan, how to obtain market research, estimates of business costs and mission and vision statements, can be beyond not only their language, but also their cultural skills. Remember, Business Plans are largely a North American invention. To do them properly requires insight into Business Culture.

So what is an immigrant to do? My advice is to find a plan/template/program you are comfortable with and use that to develop a basic business plan. More important are items like personal credit and financial holdings. Also, getting a mentor in the industry would be a great asset, for immigrants or those new to an industry. In the next blog we will discuss finding a Mentor.

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Demographics for Small Business: market segmentation and counting customers

The last couple of entries have focused on stories of entrepreneurs who have either not cared about customers or who believed that the entire world was a prospective client base.

While these strategies may work for some entrepreneurs, generally speaking, we need to have some understanding of the size of the market and what we can expect to sell. This understanding increases dramatically if you are a “product” based business, where you make or manufacture a product. Making too much can result in excess inventory and wasted operating funds, making too little and you forego potential profit.

I’ve created a 5 step process to help you segment your market and more accurately predict potential sales:
Go through this exercise – even in your head, and I guarantee you will have a better understanding of your potential customers and will be better able to quantify your market research to an investor, funder or partner.

1. Who will buy your product and why?

Most entrepreneurs create a product to fill a need or to improve. Who will buy your product and why they will buy is the first step in calculating your customer base.

2. How many of these individuals/group/needs exist?

For most people this is the hardest part of market research. Calculating the number of people in the “market” can be a daunting task. However it need not be that bad. If you determine that your product is aimed at young professionals who live with their parents, you would first need to consult the Census in your country to determine the number of professionals, then most censuses narrow these by age, so you can further segment professionals say in the 24-34 range.

3. Narrow, narrow, narrow that customer base

One of the core mistakes in research is that many people want as large a customer base as possible. This is a mistake. While some lenders will let this pass, to the trained business person, the more narrow a target market, the more I know that the individual has thought about his product and who will buy it. The trick here, is to tie the narrowed slice of the target group back to question 1 – who will use your product and why?
So in our example above, we decided that young professionals who live at home with their parents are your target market. You know that not all young professionals still live at home. However you saw a recent stat in a newspaper that said about 20% of these individuals lived at home until the age of 34. So if we determined that in our City, there are 200,000 young professionals, and we estimate that 20% of them live at home, then our market segment would be 40,000. (200K*20%)

4. Market penetration rates: The world is not your oyster.

The next biggest mistake people make is that they assume either naively or optimistically that they will sell to the entire market. Either this, or they assume a far too low market penetration rate. A general rule, the smaller and better defined your market, the larger your market penetration rate can be. The larger your prospective market size, the smaller your number.

Let’s clarify with an example.

So if I was going to sell business plans, and I know there are over 3,000,000 global searches a month in Google for business plans, I could say that I could sell to half of the market (50%) and I would have generous predictions indeed. Trust me, if I was selling 1,000,000 business plans a month I would not be here blogging!

Rather, I know that the 3,000,000 can represent less than the total market. Why? Because many individuals do a search more than once. Particularly for something like a business plan. Also, they may search on more than one device. Finally, this represents global searches and my market is the English speaking world of do-it yourselfers or those for whom English is not a first language.

So if I were to limit my search to Canada, there are over 12,000 searches in Canada. Assuming that half of these are repeat queries, and then taking the percentage of the general population that are do-it yourselfers, (perhaps in the 5-10% range) might provide me with a realistic size of the market that I am targeting.

(12,000*50% for repeat queries) = 6000*10% DIY market= 600 = the number of business plan writers that are DIYers

My target capture rate of 35% = 210 Plans per month – my sales at maturity.

Now compare this number with saying that I plan to capture 0.1% of the global business plan market – that would be 30,000 plans per month – still much to high, particularly since many of those searches are in a language other than English. Numbers below 1% make no sense to anyone, so segment, segment, segment I say.

5. What will your sales be in year one?

The third and final biggest mistake that people make, is that they assume they will sell their predicted sales at maturity in year 1. Remember, that your size of the market is once your sales reach maturity. For the majority of businesses, this can be a minimum of 3-5 years. How quickly you reach your sales will include how quickly the industry is growing, the number of competitors and the quality of your product. Anyone of these can change your sales forecast.

For myself, I know that I will most likely achieve 15-25% of sales at maturity in year 1 and then predict that sales will increase by 20-35% every year thereafter.

So, to all the prospective entrepreneurs out there, good luck and start selling!

#waystokillanidea – It is too expensive.

Ways to Kill an Idea – #4. It is too expensive

Here is part 4 on my blog series of how to kill an idea. I’ll quickly recap three ideas from a recent conference that motivated me to write these posts:

1. Fail fast, fail forward.
2. Do not be afraid to think big.
3. Do not automatically say no.

We love to say no, even when it shouldn’t be our first response. We do need to be cautious, but a quick “No” is a great way to stifle innovation and kill ideas. Whether we are scared, unsure, or uncertain, we quickly come up with some great (and not so great) excuses, which often are just ways to kill ideas. While the entries in this series are independent, I do encourage you to go back and read the previous ones. For those that have been following along, here goes #4: It is too expensive.

To me, too expensive isn’t something that should be thrown out immediately or thrown around lightly. While a luxury car may be deemed too expensive, so might a heart transplant. Before writing off something as too expensive, I like to follow these golden rules:

1. Do you know the actual cost, or are you just guessing?
2. Have you measured the benefits or returns? (Remember, gains need not be solely financial!)
3. Expensive usually implies something big – is this project/undertaking/thing as big as you think, and if so do alternatives exist?

While these may be oversimplified criteria, I do believe that they can be used to narrow down if something is truly expensive, or if we are just being truly lazy or truly un-creative. Either way, a bit of analysis can’t hurt, especially if we are being presented with something completely absurd. Of course, if I present to my team that I’d like to fly to Mars, that isn’t quite the same as asking to launch a new campaign. Yet, our knee-jerk reaction may be to treat these as the same thing and quickly dole out a “It’s too expensive”. In order to clarify, I’ll talk a bit more about the rules mentioned above.

1. Do you know the actual cost, or are you just guessing?

I know that a Porsche is expensive. But I don’t know exactly how expensive. I also know that a consultant may sound expensive, or that a marketing campaign may sound expensive, but do I really know? You may be surprised how little something actually costs. Alternatively, consider that this can go both ways: don’t be afraid to ask a lot of questions to make sure that you have ALL of the costs before green-lighting something. Costs are more then just dollars and cents – consider lost time, impact on your operations, your team and maybe even your image. A lot of the little details and extras can add up – and quick.

2. Have you measured the benefits or returns?

Again, this can often be more then dollars and cents! Some initiatives can have a strong positive impact on your organization’s image, and sometimes if just feels nice to do some social good. Don’t be afraid to start adopting triple-bottom line metrics, and of course, there’s the classic ROI. Sure, something might sound like a lot of money, but if it gives massive returns, then why not invest?

3. Is this too big or are their alternatives?

Sometimes, things DO cost too much, regardless of potential returns. However, we can often make things more complicated or bigger than they should be. If you like an idea but don’t like the cost, consider evaluating both the scope and scale, and how they may relate to your strategic goals. Maybe you can roll something out in phases, or maybe you only need a piece. And even if you do need the whole thing, are their alternatives?

This may sound silly (and overly obvious), but google is your friend. It really is. You would be amazed at what you can find, and the alternatives that it may present. It is entirely possible to build your own social network, fund a venture without the use of traditional lenders, outsource part of your business, and even build your own mobile apps. This is just a short list of some of the great initiatives that the Internet has made accessible to us. The average cost of these? Less than $500.00.

I do want to reiterate that costs are important and must be monitored. Money is too important to throw away, but we need to carefully evaluate opportunities. Don’t be afraid to ask questions, explore alternatives and do some real thinking before saying “No”.

Don’t let the “too expensive” mindset kill a good idea.

– Rodolfo Martinez

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#waystokillanidea – We Have No Time.

Ways to Kill an Idea – #2. We Have No Time.

As I wrote previously, at a conference I hosted, we focused on 3 key ideas:
1. Fail fast, fail forward.
2. Do not be afraid to think big.
3. Do not say no.

We are too often quick to say no, even when it doesn’t make sense. While sometimes we need to be cautious, we let “No” kill ideas, and ultimately innovation. We come up with some great excuses and ways to kill ideas. I’d like to talk about Way #2: We Have No Time.

I recently re-read The 4 Hour Workweek and the 80/20 Principle. These are two excellent reads, and I can’t recommend them enough. These books have taught me some valuable life and business lessons. Above all else, if we allow ourselves to, we have an abundance of time.

That’s right – not a little, not just enough, an ABUNDANCE. If you have an idea that is worth capitalizing on, don’t find excuses, find time. Great innovators don’t allow an excuse like this to kill great ideas. Great innovators don’t allow ANY excuse to kill an idea.

We have no time. I’ve heard this one so many times. I’ve heard it in large corporations, small non-profits and startups. No one is immune to this one. While resources are limited, don’t be afraid to try new things. Often, low-cost, short-term initiatives can have superior and long-lasting impacts.

I know that it’s not easy, and that we do need to examine what is most important, and to give priority to activities that generate the greatest rewards. And remember: rewards do not need to be (and often are not) financial.

Remember, this excuse is good for one thing: killing ideas.

– Rodolfo Martinez

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Ways to kill an idea - #1 it cant be done

Ways to Kill an Idea – It Can’t Be Done

Ways to Kill an Idea – #1. It Can’t Be Done

I recently hosted a conference on immigrant entrepreneurship, which was meant to drive home three key ideas:

1. Fail fast, fail forward.
2. Do not be afraid to think big.
3. Do not let your immediate response to a new idea be “no”.

Obviously, there are some things we should all say no to, but generally speaking, we are often to quick with the dreaded “no”. Specifically, we are far too quick at killing ideas. Our keynote (who did a fantastic job) left us with some ways as to how ideas are killed. While everyone began laughing at each item, it became clear that we’ve all heard them before for either one of two reasons:

a) We heard someone say them, and couldn’t believe that they did, or;
b) We said them ourselves, and looking back we weren’t entirely sure why.

After this exercise, I felt that it would be fun to share some of these with you. While BCG originally entitled this “120 Ways to Kill an Idea”, I’ve trimmed this down to my favourites. Be sure to follow our blog for #waystokillanidea.

Here goes #1: It Can’t Be Done.

I can’t remember how many times I’ve heard this. A part of my gets quite upset when I hear this; another part wants to prove people wrong. Sure, some things can’t be done – i.e. I can’t flap my wings and fly to Mars, but most often we use this excuse in a poor context:

This technology can’t be developed; This product can’t be marketed; This book/movie/game can’t be made appealing. Either way, this excuse is good for one thing: killing ideas. Remember, if you have a great idea, don’t let it be killed!

– Rodolfo Martinez

Do you have a business question for one of our experts? Be sure to tweet @carmenreis or get in touch with us – we would love to hear from you!