plura Financial Blog

blog for plurafinancial.com, an online matchmaker between banks & small businesses

Archive for February 2012

How to Win a Business Plan Competition

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Several people have asked me about the process and lessons learned from our success in national business plan competitions…here are my takeaways:

1)      Be passionate.  I’ve seen a lot of brilliant ideas pitched by brilliant people that absolutely put the judges to sleep.  A successful VC once told me that judges want to know that that an entrepreneur has  enough passion that he will find a way to be successful, or die trying.

2)      Give the judges an analogy.  Make sure the judges understand your business from the beginning.  Don’t just tell them what it is, but also tell them what “it’s like” through analogies.  For example, we say we’re like lendingtree.com but for small business loans.  This works well for us, but just be sure you have an analogy that works for you.  Rule of thumb : try it on your mom.

3)      Have a good reason for your business to exist.  This is something that I learned in my career as an underwriter, but is even more important when it comes to venture capital pitches and business plan competitions.  Solve a big problem or help someone get a job done…otherwise, the judges will pick your business apart.

4)      Define your market size, the bigger the better.

5)      Include a go-to-market strategy (illustrate how you will penetrate the market).  Don’t give a canned answer (SEO, magazines, radio, etc.)…have a creative way to attract customers.

6)      Be a compelling equity investment.  This is also known as the “Investment Rationale” slide.  To start, build a bottoms-up financial projection model and calculate an IRR for investors.  Be prepared to defend every assumption of your projections.  I cannot emphasize this enough.  Include a breakeven analysis. Make sure the judges fully and clearly understand how you’re going to make money.  Include the IRR, but do not focus on the IRR (focus on profit drivers).

7)      Calculate your cost to acquire each customer.  We got in trouble with this one, as we don’t think internet businesses like ours are as easy to calculate as some other businesses; wrong answer.  Some judges are hell-bent on this metric.  If click through rates are part of your pitch, be sure to also justify the “conversion ratios” built into your assumptions.

8)      Beware of trap questions.  Many judges in these competitions are like lawyers…they love to bait and trap you with their questions.  For example, a judge might say…”so you’re an ASP model, right?” or “so you’re just a lead generation business, right?”.  It’s tempting to say, “yes, you’re right”…problem is that this is a classic trap.  If you agree wholly to this assumption than you put your business in a defined little box, giving the judge ammo to shoot your business plan down, without leaving yourself any “outs”.  Unfortunately, the best way to answer these traps would be similar to what a politician does…don’t answer it, dodge it, and thank the judge for their good question.  Make no mistake, I hate this.  I like answering questions with an answer, but unfortunately judges love setting traps and those that don’t leave themselves an out will get killed by the judges.

9)      Know your competitors – existing and potential.  Even if your business doesn’t have competitors, it will.  Do not ever try to tell the judges you don’t have competitors because they will (i) assume you haven’t don’t your homework, and (ii) pick you apart.  Build a chart that shows your existing and potential competitors, and measure them across a 2D chart based upon points of parity and points of differentiation.  For example, we measure our competitors based upon ability to generate leads and the ability to increase efficiency for customers.  Know your customers, find out their strengths and weaknesses, and demonstrate why you’re building a better mouse trap then they could.

10)   KISS it.  Keep It Simple Stupid.  Make the slideshow aesthetically pleasing, don’t litter with lots of words because the judges will be trying to read the slide, and will get annoyed that you’re talking while they’re trying to read.  Demonstrate the business is the right horse and that management is the right jockey, but don’t try to fit in too much into the pitch.  Save it for the Q&A.  Business Plan competition winners and losers are made in the Q&A session – if you can anticipate all the questions and answer them concisely you’re chances of victory will go up exponentially.  In other words, you don’t need to talk about every aspect of your business in the core pitch, it’s beneficial to save some ammo for the Q&A session in my opinion.

There are tons of books and blogs that probably provide better guidance to winning business plan competitions, but these 10 takeaways are what I’ve seen to be the key factors to success.  In summary, demonstrate you’ve built the right horse, you are the right jockey, and that you’re solving a big problem.  If you can do that, and if you can anticipate the questions in the Q&A, you’ll do well in any business plan competition.

pluraFinancial won Runner-Up in the 2010 DFJ-Cisco Global Business Plan Competition and won the Citi Foundation Business Plan Competition in Chicago in 2011.  For further information, contact Brandon Hinkle at bhinkle@plurafinancial.com. Brandon is the Co-Founder and CEO of www.plurafinancial.com, a free online matchmaker between banks and small businesses seeking debt financing.

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How to Hire the Right People

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Each job requires a different skill set, but the highest achievers tend to have some common characteristics: Passion, Loyalty, Utility, Reliability, and Achievement.

Passion.  Jim Collins, author of the venerable Good to Great once said “…the best performers across virtually every field have a single-minded passion for what they do”.   During his famous Stanford commencement speech, Steve Jobs said passion was the reason he returned to Apple, the company he created, after they fired him: “I’m convinced that the only thing that kept me going was that I loved what I did. You’ve got to find what you love. And that is as true for your work as it is for your lovers. Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do.”  There are countless quotes on this, and it’s nearly cliché to say, but it’s no coincidence that “passion” runs throughout every great organization.   Hire someone that seems genuinely passionate about what the job entails.

Loyalty.  Long stays at prior employers is a sign that candidates are valued.

Conversely, if a resume shows 6 different jobs in the last 5 years it’s obviously a giant red flag; the candidate left either because the companies asked him to do so, or because he’s an opportunist.  Either way, pass on these resumes. Hire someone with a track record of loyalty.

Utility.  Particularly for small businesses it’s important to hire someone with experience, who can hit the ground running.  Think of this as the Swiss-army-knife of employees; you can plug them into nearly any role and they will have the tools required to get the job done.  Hire someone with experience that can be used interchangeably in many different roles.

Reliability.  Many managers take for granted those employees that always show up every day to work, and always find a way to say “yes” to special projects/requests.  Hold onto those people because there are fewer of them than you think.  The best way to confirm this is by calling each of their past two managers and asking candid questions.  Hire someone with a track record of reliability and flexibility.

Achievement.  “Past performance predicts future behavior.”  In sports, the best players find a way to win games.  In business, the best employees find a way to succeed in tough situations; they are usually smarter, luckier, and more driven than their competitors…none of which can be taught.  Average candidates will say “I helped the company grow revenue 12%”.  Strong achievers say “I managed a team of 12 that received an Impact Award after generating a 12% increase in revenue and a 15% increase in contribution margin due to SKU rationalization”.  People that have a track record of achievement always seem to find a way to win and repeat their success.  Hire someone with a track record of winning.

For further information, contact Brandon Hinkle at bhinkle@plurafinancial.com. Brandon is the Co-Founder and CEO of www.plurafinancial.com, a free online matchmaker between banks and small businesses seeking debt financing.

Five Tips for Successful Business Networking

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1. Love people. The most successful salesmen all have one thing in common: they genuinely love people. This innate love for people will translate to customers loving you back. And customers ultimately do business with people they like. In the blockbuster movie Gladiator, Proximo told Maximus before battle: “I was not the best because I killed quickly. I was the best because the crowd loved me. Win the crowd and you will win your freedom.” This is as true in the business world as it is on the battlefield.

2. Help others, without asking anything in return. The situation goes something like this: John and Sue meet at a networking event. John sells insurance, Sue is an accountant. Sue demonstrates genuine interest in what John is trying to sell and gives him multiple contacts without asking for anything in return. John closes a deal from one of those contacts and is forever indebted to Sue, feeding her a continuous flow of leads.

3. Never turn down a speaking opportunity. Public speaking helps create brand awareness and establishes you as a trusted industry expert.

4. Leverage technology. The conventional way of networking (lunches, golf outings, industry events, etc.) is effective, but inefficient. To scale your business efficiently, you must embrace technology. Create a facebook & twitter account, giving you & your business a ubiquitous voice in the marketplace. Create a nice looking website with valuable, informative content that people are looking for. For example, Sue the accountant knows that many prospective customers want to learn more about how to calculate EBITDA. She can write a blog entry on the subject, with the hope her blog pops up first when people type these words into Google. Once the user clicks on the link to Sue’s blog they become delighted to get the information they were looking for and will keep Sue top-of-mind when looking for a qualified accountant. CDW’s successful ad slogan is “the right technology, right away”. Leverage technology to give prospects the right information right away. A great example of this can be found here: http://bit.ly/t6FJ8w.

5. Be an interesting person. Too many people go an inch deep and a mile wide with conversations at networking events. Handshake, fake smile, pitch, fake smile, exchange business cards, repeat. Similar to the dating world, in the networking world you must have something interesting to say and you must be a genuinely interested listener to succeed. And don’t forget to follow-up for a second date!

For further information, contact Brandon Hinkle at bhinkle@plurafinancial.com. Brandon is the Co-Founder and CEO of www.plurafinancial.com, a free online matchmaker between banks and small businesses seeking debt financing.

Written by entrabanker

February 9, 2012 at 10:50 pm

How to Value a Business

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Valuing a business is complex.  Experienced practitioners have written novels on the subject, but we don’t have time for that here.  Instead, this represents a high level crash course in business valuation using the “EBITDA multiple” method, which is the most common valuation methodology used by private equity firms, strategic buyers, etc.

Q: How are businesses similar to homes and baseball cards?

A: They are all worth what the highest bidder is willing to pay for them, no more – no less, regardless of what any book says.  As a result, businesses are typically valued based on sale prices of comparable companies (“comps”).  Just as homes in your neighborhood of similar size represent a “comp” for your home, a business comp is roughly defined as another company in your industry, of similar size and similar cash flows.

Valuation Step 1: Calculate EBITDA:  The most basic reason companies have value is because they generate cash; they are an investment that returns cash.  The starting block of every company valuation is calculating its cash flow, or “EBITDA”.   EBITDA is a quick & dirty estimate of the company’s free cash flow; the pool of cash generated by the company’s normal operations, available to make investments and service debt after all other operating expenses have been paid.

Valuation Step 2: Calculate the EBITDA Multiple: Once you calculate the EBITDA, it should be multiplied by a factor, generally between 4x-6x (the “EBITDA Multiple”) for small businesses.  For example if you have a high growth company that spews $100k of cash like clockwork each year, you might be able to sell your business for $600k ($100k EBITDA * 6.0 EBITDA Multiple).  Conversely, if your EBITDA bounced unpredictably between $10k and $150k over the last 10 years, your company is probably worth much less than $600k because a buyer cannot accurately predict how much cash your business will generate going forward.  Here are some key factors that influence your EBITDA Multiple:

Comps:  The starting point for your EBITDA Multiple is likely to be whatever Multiple was used in the last few competitors that were sold in your industry.  This can be difficult to find for smaller businesses, which have much less data available to the public.

EBITDA Predictability: The more predictable your EBITDA, the better “valuation” you will receive.  For example, if your customers are obligated to pay you $X every month (a “subscription model”), than you will receive a valuation boost; there is comfort that the company will continue to generate cash in a predictable way.  If you have “lumpy” sales that rely on winning new, large one-time contracts each year than your valuation will be discounted significantly relative to those that generate more predictable cash flows.

Growth & Market Share: If your EBITDA has been growing each year at significant (e.g. 10%+) rates and are expected to continue to do so, you will receive a higher multiple (e.g. 6x-7x).  If you also have a huge piece of a growing market (e.g. Apple) you may receive an even higher multiple.

As a practical matter, the ability to find debt to finance a portion of the buyout can also impact valuation.  Analogy: if one home is ineligible for mortgage financing, it won’t be as in demand as one that’s debt eligible.

The takeaway here is that each $1 of expense costs you $4-$6 of valuation, so spend wisely.  Focus on EBITDA.  And the more predictable and sustainable your cash flow, the better!

For those looking for a more detailed valuation crash course, I recommend reading “Valuation” by Copeland, Loller, and Murrin at McKinsey & Co.  Disclaimer: nobody knows how to value a startup.

For further information, contact Brandon Hinkle at bhinkle@plurafinancial.com. Brandon is the Co-Founder and CEO of www.plurafinancial.com, a free online matchmaker between banks and small businesses seeking debt financing.

Written by entrabanker

February 9, 2012 at 10:48 pm