4 Things to Help Keep Your Business Fit for Purpose

There are a number of things we can learn from observing the ways that VCs (Venture Capitalists) and angel investors manage the relationship with their protégés. Chris Hudson, writing in '4 Things to Put In Your Monthly Update to Investors' isolates a few gems from the world of venture capitalism.


The article itself is well worth a read, but it also offers some controls that any start-up would be advised to consider implementing.


Control #1 : Cash


Investors need to know if the fledgling business has enough cash. Not necessarily to give them more (after all, even Steve Jobs, after investing in NeXT, had to face the reality of cuts in expenses) but to find out how healthy the company is.


Cash is important - it lets you do business on a day-to-day basis, gives you a buffer for unexpected bills, and is the lifeblood of your company. Keeping a constant check on the cash position, and recognizing the danger signs of running dry will help you manage your business more effectively.


There are always options when the inevitable happens - cut costs, sell stock or other assets, ask the bank for an extension to any existing loans or overdrafts, go on a fundraising drive, offer the employees shares in return for an investment : the list is almost endless.


Of course, there may be an underlying reason for the diminishing cash position, and part of that may be that the product or service just isn't popular.


Control #2 : The Target Market


The initial strategy may no longer be appropriate to the target market. The target market may not even exist any more. It's important to always adjust and refine the strategy and approach to the target market depending on how that market evolves.


PayPal, for example, started out as a device to device payment method, but evolved into a person to person web based payments provider over time. The target market wasn't big enough to support the investment, but the new market was crying out for their services, and the technology was much the same.


Following the changes in the market will often lead to some critical decisions. Key among those its likely to be related to staffing or team membership.


Control #3 : Corporate Structure


People drive companies, and nowhere is this truer than in a start-up. Many, if not most, start-ups exist purely on the drive of the individuals to create something from nothing. Without that drive, the company ceases to perform.


That's part of the reason that Apple re-hired Steve Jobs, why Google remains at the forefront of the Internet, and, in my opinion, at least, why most companies fail. They lose the people who have the drive.


So, as much as the money and the market will affect the direction that the start-up takes, the people involved in it will also affect the products and services that are created for that market.


New people often bring new ideas. People who leave inevitably take their ideas with them. Both of these need to be monitored, and measured against the performance of the company.


Control #4 : Metrics


I don't like the term KPI (Key Performance Indicator) as it seems to indicate a lack of flexibility. My own take on KPIs is that everything must be measured, and the resulting metrics need to be analyzed in order to determine:

• exploitation of existing opportunities
• new and emerging opportunities
• decline of current opportunities

Measurement needs to be easy to do, and easy to analyze. If it's hard it won't be done well, or indeed at all, in a timely fashion. Sales, leads, profits per customer, repeat sales levels, and so on, are all easy metrics to measure, track and analyze.


They show the health of the company, and whether the core business is working. Each company will also find things to measure outside the health of the company, which covers the market - trends and competitors movements being some of the easiest to track - and helps to isolate new opportunities.


So, these four areas, derived from how Chris Hudson describes communication between investors and start-ups, ought to help you keep focus, and makr your business a success.

How Much is my Business (Idea) Worth, and How to I Get Out?

Serial entrepreneurs often start up companies thinking about one thing, and one thing only : what is my exit strategy?

Put another way – how are they going to get out of the company when they either get bored, or have realized enough value that it becomes more worthwhile to sell it on (or shut it down and dispose of the assets accrued) than keep it ticking over.

The most clinical approach is to build the exit into the business plan, and use that as a way to see (indeed, test) whether the whole venture is actually viable. If the exit strategy is to sell the whole company on as a going concern for a value of 1 million pounds (Euros, dollars, etc.) in five years time, it becomes relatively easy to work backwards through the numbers to test for feasibility.

Other exit strategies also include going public (selling shares on a stock exchange) or selling the company purely on the basis of its value to a competitor or related business – think of Google’s acquisition of YouTube, or Twitter buying TweetDeck, for example – where the classic measures of revenue, profitability, etc. don’t really apply.

However, these are subject to specialist knowledge, market awareness and probably a healthy dollop of good luck, so to provide an empirical example, we shall assume that the business valuation is designed to provide value to an investor – be it 100% (disposal) or some fraction thereof (to garner investment, or when going public.)

This kind of valuation is usually based on current performance. Examples of companies valued on potential performance (the most famous being PayPal) can also be found, but these are relatively special cases : for those that manage a PayPal, there are many, many, successful serial entrepreneurs who never see that level of IPO success.

On the other hand, many start-up investors will also be looking at potential. However, given that it has to be grounded in the figures that reflect believable performance, the discussions about exit strategies also apply here.

There are many, many approaches to valuing a company:

• Wikipedia : Business Valuation
• How to value a Business on BusinessLink
• ‘How to Value a Young Company’ by Martin Zwilling (Forbes.com)

Some reasonable, simple, valuations use trading figures and investor returns on equity to prepare a business plan that will provide targets that can be realized, and also help in the preparation of documentation for potential investors, from banks to angels.

A common measure is to take three to five times profit, and use that as a nominal value to establish targets for exit or investment. From the other side of the table, so to speak, if an entrepreneur needs 10,000 pounds (dollars, Euros, etc.) investment, for a 20% stake in their company, the investor will be expecting to be able to see at least 50,000 pounds worth of company value, as well as a return of 5-10% (using a better than bank rate) on their investment.

Using these techniques, it should be relatively easy for budding entrepreneurs to appropriately value their business idea, and potential of their start-up company.