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A few questions about start ups

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February 12, 2012 – Comments (15)

1) Where do you go to get funding?  A friend of mine has a good business plan drawn up, and his partners have a ton of assetts, but banks are only going to lend  based on cash flow, which this company does not have because it does not exist yet.  I don't know if venture capitalists will lend only $2.6 million. Does anybody know any good companies/people for this in new york?

 2) When you buy a security on an exchange, it is regulated a lot.  Also a lot of those companies like to report big earnings,  But for a small business, how can you be sure the partners are making what they say they are, and not a lot more?  If they say they earned $200,000 how can you be sure they didn't earn $1 mil and keep the $800,000?

3) How much information do you disclose about your business plan to potential investors?  How do you stop them from just ripping off your idea?  Do you get some sort of disclosure agreement from a lawyer?

 

Thanks in advance

15 Comments – Post Your Own

#1) On February 12, 2012 at 7:32 PM, devoish (98.63) wrote:

1) start smaller. make money. grow.

2) go to your employees for investment as owners - a co-op.

3) prove you have the balls to go into business and sell that ton of assets to do it. (why do you want to give a bank 10-15% of your investment. It is enough to kill the best ideas).

4) pre-sell your product for some of the investment money.

5) get to work. 

6) do it in Detroit. 

Best wishes, 

Steven 

 

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#2) On February 13, 2012 at 4:01 AM, FleaBagger (29.30) wrote:

Car makers do it in Detroit.

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#3) On February 13, 2012 at 9:06 AM, JaysRage (89.10) wrote:

I've seen a couple of different successful scenarios.

1) Pitch it to a large company to fold under their umbrella.   Some companies are willing to fund start-ups with great business plans.  (Your last question is most applicable here.   Corporations are notorious for stealing ideas pitched to them)

2) Sell shares, but not on an exchange.   You really only need to be licensed to sell your shares in the state where you are headquartered.   This can be tricky legally, and a lawyer would need to help organize. 

Most investors in startups are going to require huge returns for the risk of getting involved in something so early with such a high likelihood of failure.   Businesses with great plans fail all the time.    You are selling yourself, your hardwork, your integrity and your refusal to fail as much as you are selling your business plan. 

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#4) On February 13, 2012 at 9:35 AM, SkepticalOx (99.42) wrote:

#2) Audit, audit, audit. I work at a company that was once a startup. Any outside investor required audited financial statements and at least quarterly financial updates (non-audited). 

#3) Ideas are cheap, and chances are someone else have thought of it too (there are exceptions, but these are probably rare). It's the execution of that idea that matters. I highly doubt investors are investing on the sole basis of your/your partners' ideas. If you get outside funding, they're investing based on the belief that your partners can execute it. Honestly, you'll have to spill your business plan anyway to get investors to trust you enough to invest with you.

Also, if your partners have such a great idea and they have a lot of assets, I don't understand why they want to sell any equity stake out so early if you can fund it yourself. Having outside investors will limit their freedom to do what they want (unless the VC/angel investor is very hands off). 

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#5) On February 13, 2012 at 10:11 AM, amassafortune (29.45) wrote:

1. Start small

2. If possible, start it as a side business while maintaining a job with benefits. In three very successful transitions I've seen, the owners did not quit their jobs until the job was becoming a drag on their income. 

3. Many small businesses discover a niche that moves the business into an area not in the original business plan. If you spend 2.6 million on your exact business plan, you've lost a lot of flexibility.

4. Maintain as much control as possible so you can make decisions quickly. This dovetails with keeping the enterprise small and being able to take unilateral decisions like such as #3. Having large investors is like having partners.

You'll have to negotiate with suppliers and customers all the time. Successful business are driven by customers. Large investors often come with large egos and may not always be as receptive to customer demands as you will be.

5. Skip the Small Business Administration. The SBA funds 4% of newly-created businesses. If half of them fail within five years, as is typical for start-ups, the 2% net contribution is hardly worth federal involvement. Move the SBA disbursement of emergency loans and a couple of its other worthwhile functions to another department and make some cuts. 

6. Get a mentor or be part of a local small business group. Following successes is great, but listen to their failures and learn the lessons without making the same mistakes.

7. Pay all taxes as part of maintaining control of the business. 

Good luck. This is where new jobs come from and exactly what the country needs. Bottom-up growth is lasting, unlike trickle down.  

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#6) On February 13, 2012 at 12:31 PM, griderX (96.64) wrote:

Boot strap it....let the partners put in the money since they already have some skin in the game if they believe in their idea.I briefly did some work for a startup in NYC (Well know VC backers and management)  One of the biggest mistakes they told me is that they received too much money and blew it all.  If you have to scrap up and account for every penny you will succeed more times than fail IMO.http://www.kickstarter.com/ is a pretty cool concept...haven’t used it myself...but looks interesting.Once you bring in VC money they tear apart your finances...you need an accountant, etc...Angel and  family bet on the founders (a certain degree of trusts comes along with that) 

Would be interested in hearing more about the concept...be glad to sign NDA. 

 

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#7) On February 13, 2012 at 12:46 PM, Rehydrogenated (32.23) wrote:

1) If you can't tell me where the $2.6 million is going, down to the last penny, I would laugh you out of the office. Loans for equipment are worth a taking a look at. Giving you a loan to help you pay payroll, so that you can hire an engineer, will not happen. If the partners have such huge assets why haven't you already started making money?

2) This is why partnerships often fail. Owners and investors are easy to trust when things are doing well, but when they start to see red, those with the power take all the money and run.

3) No banks or companies, and very few investors will sign an NDA. Everyone will see your idea when you go into business and if you are successful every detail about how you run your business will eventually leak out. If your business can't handle that I wouldn't invest in you. 

 

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#8) On February 13, 2012 at 2:36 PM, Melaschasm (57.38) wrote:

Collateral is the best way to get a loan.  If you borrow less than the resale value of the equipment, banks will be much more comfortable making a low interest loan.

I prefer the idea of starting a small side business and building it up to the point where you will make more money by quiting your job. However, I used a substantial amount of debt to start my real estate business. 

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#9) On February 13, 2012 at 4:11 PM, Jbay76 (< 20) wrote:

What about SCORE?  Has anyone used their services to get their business off the ground?

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#10) On February 13, 2012 at 7:36 PM, ajm101 (31.91) wrote:

If it's a software startup, I would consider looking at one of the well-known software incubators like ycombinator (or TechStars in NY, I think).  Typically they take a fair share of equity in return for $100K in funding, or enough for a few founders to get something off the ground while running lean.  They also frequently have 'office hours' with parters (who may be former founders that went through the incubator) as well as have a large network of potential customers/partners.

I would not take it directly to a large company for funding, they could easily take it (even if you get an NDA).

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#11) On February 13, 2012 at 7:40 PM, ajm101 (31.91) wrote:

Also, if you get your idea off the ground from an incubator or by bootstrapping (another great idea) and are looking to bring in a well known venture group for a funding round, General Catalyst in Cambridge, MA has a good group of partners and portfolio of tech companies.

Also, find a good lawyer if you're serious about it, and run everything by them.

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#12) On February 13, 2012 at 8:57 PM, NOTvuffett (< 20) wrote:

Valyooo, this is a very complex topic.

Does anybody remember the dot com bubble?  Everybody was making crazy money trading these businesses.  Most of them had no plan on how they would actually make money.  So if your friend actually has a decent business plan he is actually ahead of the curve.

amassafortune said "5. Skip the Small Business Administration.".  I agree with that in general.  Unless it is a minority or woman owned business it is very hard to get them to loan you money unless you have a proven record of profitability, in that case you don't need a loan anyway.

It would be helpful to know the kind of business it would be.  You seem concerned about protecting intellectual property.  This is usually handled with an NDA with venture capital.  However, can tell you from my own experience that patents in some fields are just about useless.

To illustrate this point consider this- if a software company sees a competitor's product that they consider a threat to their profitability, they pay senior engineers to study it.  Then those engineers write specifications on how to implement a similar product.  Then they pay lawyers to draw up an agreement that the software guys have to sign saying they have never used, seen or thought about something like the competitor's product.  Then they are given the spec from the senior engineer and they go to work, lol.

Since they are trying to catch up to the competition, the company issues anouncements about their vaporware, lol.

If the competition decides to sue for infringing their intellectual property, each side needs a gang of lawyers and will take years to resolve, and justice won't always be served.

If brevity is the soul of wit I am pretty stupid, lol.

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#13) On February 13, 2012 at 9:44 PM, TMFDiogenes (80.37) wrote:

If you decide to go the VC route, you should be able to find one that will give you as little as $100k or lower if you're in a big enough city and depending on what your project is. They may want you to have something to show first to see how it's going. Also, you'll probably get a better price for equity the longer you wait until it's needed.

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#14) On February 13, 2012 at 10:38 PM, NOTvuffett (< 20) wrote:

Just about everyone in this thread has said to start small and grow, probably good advice although without knowing what kind of business this is could be problematic.  If the business model requires a large amount of capital to get started, etc.

I have been an infrequent visitor to this site for several months because of some health issues.  SkepticalOx probably made the best points, and it reminded me why I come to this site.

He said "#2) Audit, audit, audit".  This may sound simplistic but it is a great point.  I studied things like chemistry, biology, physics etc.  The first real job a got was in programming.  It was doing accounting software, so I did a crash course on accounting.  The texts said the best thing ever invented was the dual entry accounting system.  But the most important thing I took away from the texts was that it is important to be able to quantify the results of your business.

SkepticalOx also said "#3) Ideas are cheap".  This is also true.  Even if you are honest and think you have the best idea ever, chances are somebody thought of it before.  My own father tried to patent something and found out a guy did a patent in the 1800's for the same thing.

Chemical patents are basically useless unless something really novel.  The patent office has been issuing patents for products already on the market for years, etc.

And the people that get these ideas seldom follow through to fruition.

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#15) On February 16, 2012 at 6:19 PM, TheDumbMoney (38.51) wrote:

One place to look:

http://www.kauffman.org/FactSheets.aspx?id=9658

There are also a lot of "business plan competitions" affiliated with various foundations and universities, which you can find on Google.

There is also a list somewhere of private equity companies and angel investors.  It's like a pamphlet, I think available onlien.  I'll see if I can find it.

 

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