Recently, we received a question from an entrepreneur: “We are a technology startup and have got to a level of mild traction with a user base that’s engaged. Now that we know that we are creating value its time to transcend to the next level and get a great set of advisers on board and we are not looking for big names but advisers who are proactive and interested in what we do. Any tips on going about and getting great advisers on board would be useful.”

Our Thoughts:

The tactics for attracting good advisors are similar to the tactics for attracting a top team. Be prepared to compensate them.

Sometimes equity is enough of a lure, but most advisors don’t get excited about a single digit or fraction of a percent ownership to really dig into an advisory role. Compensating the advisor with even a nominal consulting fee is a strong signal that the advisor is valued and is viewed as a signal that value is expected from the advisor in return.

Good advisors are usually in high demand by many more startups than can be served; therefore, it’s important to understand that relevant wisdom isn’t a commodity, but rather a scarce resource. In today’s economy, cash is king more than it used to be. Investors want to see customers paying cash, not consuming free services. Employees want to see cash, not just stock options in expectation that a small slice of equity alone will be worth something material in the future.

Establishing a solid core advisory board – formal or informal – means choosing a select few (not trying to “collect lots of names for the letterhead”) and treating them like a co-founder. Engaging them equally. Listening to them equally. Compensating them properly. Expecting value accordingly.

Founders who don’t understand this should consider just asking an occasional cold-call question to various subject matter experts, but not expecting an advisory relationship with much substance. Too often, founders don’t manage or engage or compensate advisors properly and then blame the advisors for not being useful, helpful or valuable. Too often, the founder-advisory board relationship is structured for failure or at best, it turns out to be a mild distraction to all involved.

You may find advisor candidates who are interested in what you do, but you still must find the right amount of equity and/or cash compensation to make those who are interested also proactive and committed.

Instead of a conventional perspective of “seed money is the first step towards validation”, the mantra today is likely the converse: “validation is the first step toward seed money.” In more than half of all startups nowadays, the initial validation comes from the wallets of the founders (i.e. first phase is bootstrapping). If the marginal costs of starting a business includes some compensation to key individuals in the budget, the prospects of beating out a competing startup for that same wisdom is very good, and this early tactic sets the pace for startup success, just like proper planning and preparation does.

In summary, wisdom is often a scarce resource.  Like anything of value, be prepared to pay a fair price for the advisory expertise you need and your chances of acquiring that wisdom will increase.

Make sure this book is in your own entrepreneurial library.

This book explains how the good steak can sizzle without leaving you with just an aroma. “Marketing that Works” was written by some of the best minds in startup marketing who have held prominent positions in blockbuster startups, idealab!, Wharton and venture capital: Howard Morgan of First Round Capital, Leonard Lodish of Wharton and Shellye Archambeau, former president of Blockbuster’s e-commerce division.

This book includes practical approaches (not just theoretical!) to developing business ideas, pricing, market validation, distribution and channel strategies, product launches and more.

To buy a paper copy or download a Kindle version from our bookstore partner, Amazon.com, click here.

There’s no doubt that Napoleon Hill has influenced many generations of leaders with his research and writing that stems from a 1908 encounter with Andrew Carnegie.

Hill’s principals have been artfully brought into today’s business landscape with the book, “Three Feet from Gold”. ActSeed champions books and individuals who can both educate and inspire. Sharon Lechter and Greg Reid do this well.

When you buy this book, buy a notepad, too. This is one of those books that inspire you to take notes and then muster the tenacity you need to pursue your own purpose.

As the book states, the greatest reason for failure is quitting.  Don’t even consider quitting until you have read this book.

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A great way to grow your business: find new customers using daily deals from GroupPrice.  ActSeed likes Group Price because they enable you to increase your sales with no upfront marketing expenses while cutting your costs with daily deals from other small businesses.

Problem

One of the growth problems for startups is getting more cash coming in than is going out. Cash is the fuel that powers a business. Not receivables or IOUs, but cash in the bank. You must positively impact your cash two ways:

• Increase revenues by attracting new paying customers
• Reduce expenses by finding great deals for the business services you need

Solution

ActSeed has partnered with GroupPrice to help you tap this innovative marketplace to boost your business in two important ways:

• Spark an increase in sales by tapping new customers without any upfront marketing or advertising expense.
• Find daily deals on products and services aimed at your start up or small businesses with discounts up to 80%.

How to Maximize the Benefits from the ActSeed-GroupPrice Partnership

Two steps.  Both are free.

1. Register with GroupPrice so you can buy and sell on the GroupPrice marketplace.

2. Register with ActSeed where you can access exclusive promotions and discounts from our leading partners like GroupPrice.

Like Fox Business TV, we think Group Price is like Groupon® – but dedicated to entrepreneurs, startups and small businesses.

 

Summary

ActSeed and GroupPrice are aligned in a commitment to helping you find sources of capital and streams of revenue. Cash is king. Heck, cash is also queen, prince and the whole royal court.

Forrester Research has identified that “daily deals for business is a persistent and growing trend.” Startups and small businesses – the backbone of the US economy – have been badly weakened by the recession, but sites like Group Price are helping them recover and grow.

Raise your revenue. Cut your costs. Do both using GroupPrice.

…Now that’s an obvious partnership that ActSeed can champion.

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Relax and enjoy the experience.

Let your passion come through, but keep it simple and concise, and don’t get defensive if you “cross nerves” with your audience.

Make sure you can quickly and clearly explain: what customer “pain” you’re solving, why your solution will sell, how you make money (and when), and how your investor can expect to realize their return on investment.

It’s ok to not have answers for everything. If you don’t have an answer, offer that you will get back to them with the answer. You might even acknowledge that their question is a good one and ask them if they have any insights to share toward converging on an answer.

Things we suggest not saying:

• “We have no competition.”
• “Our revenue projections are conservative.”

1. Investors may only listen when you tell them about a good idea.

however…

2. Investors may “open their checkbook” if you (A) have a good idea and (B) can demonstrate that you have a plan to implement that good idea and turn it into a profitable one.

We champion all of this and more within our ActSeed.com community.

This note was originally a reply to a young entrepreneur on LinkedIn who was about to make his first investor pitch and was looking for advice about pitching.

In addition to our quick response to “making the first pitch count”, we also recommend buying the book, “Pitching Hacks“.

Now, go out there and make every pitch count!

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If you’ve never drafted a business plan (and need to), “Hit the Deck” is a great investment.

The title of Chapter 1 is “You Need a Business Plan. (Yes, This Means You)”. We absolutely agree, so we read further.

We’re glad we did.  Ronick really “cuts to the chase” about what a business plan of the 21st century should look like and why it’s important not only for pursuing investors, but even more for the entrepreneur to set a solid foundation to enter the marketplace and complete.

Lots of step-by-step guidance and examples.

If you’re new to investing, it’s a great book for you to read as well; here, you can learn what you should be understanding and what you should be seeing from the entrepreneur pitching you an idea.

The days of a business plan looking like a 48 page master’s thesis are gone. David shows you how to craft a solid plan quickly and with both internal and external impact.  Again, it’s a book you should add to your library, a quick read, and won’t set you back more than $15 or so. 

You can buy “Hit the Deck” by clicking here.

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This quote could likely come from most of us entrepreneurs at one time or another. However, most of us may be surprised that it very recently came from one of the most successful entrepreneurs of our time: Oprah Winfrey*.

We should be encouraged that even Oprah shares common entrepreneurial fears when launching a new venture. Fear is often part of the equation, but like risk, you shouldn’t try to ignore it or pretend it’s not there.  You should be willing to manage both fear and risk and be able to absorb a higher dose of each, or seriously consider not taking the plunge into a new venture until you’re ready for this reality.

Again, you are not alone with this emotion, and there are many resources like ActSeed and local organizations in your own neighborhood that can help you confront the issues that “keep you up at night”.

Below are two video testimonials on how a couple of ActSeed Entrepreneurs deal with their professional fears:

*This quote comes from Oprah’s upcoming interview on ABC television with Barbara Walters tonight (December 9).  Click here to learn more.

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Angel and venture capital investments are traditionally defined as an equity stake in an early stage company where the investor provides funding when the business risks are high but the potential payout is also very large.  While VC still is largely a “home run” investment approach, angels and some smaller funds are applying an innovative approach to early stage investing that still includes higher risk and reward, but is more of a “base hit” investment approach.

Royalty-based deals are not new, but the use of this funding approach for early stage companies is somewhat novel.  For decades, oil and gas companies have used this deal structure to finance prospecting activities.

How It Works

In a nutshell, a royalty-based investment is more of a debt instrument (liability) instead of equity.  While the actual financial structure may vary, the gist of the deal is a company borrows money and agrees to pay a royalty (percentage of its gross revenues) until a defined multiple of the original investment has been repaid. 

One example: a company borrows $200,000 and agrees to pay 10% of its gross revenues to the lender until $800,000 has been repaid.  This may take one year or ten years.  The return of 4x may seem excessive to a borrower, but it may take many years to repay, so there is more risk to the lender than a typical commercial loan, and unlike a conventional angel investment, the company may not be giving up any or much equity (yes, an equity component could be incorporated into this structure).

Ideal Candidates (Early Stage Companies) for This Type of Financing

Royalty-based deals typically require the company to already be generating a reasonable stream of revenue.  If a startup is still in the “pre-revenue” stage, most of the royalty-based venture financing firms will not be interested.

More Information:

Royalty Capital New England (http://www.royaltycapital.us) from Boston does these types of deals

Revenue Loan (http://revenueloan.com) based in Seattle also does these types of deals

GigaOM Article from 2009 that talks about revenue based financing and coins the term “Class R Stock” (http://bit.ly/ClassR_Stock)

A video of a presentation from Growth Science International (http://www.growthsci.com) that discusses royalty-based financing:

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Apparently, the US legislature recently adopted new Act that effects small business investments.  Within certain limitations (see some below), investments between September 27, 2010 and December 31, 2010 may qualify for a 100% exclusion of gain from the sale of small business stock.

From an investor’s standpoint, this could be HUGE and from an entrepreneur’s standpoint, anything that is this beneficial to an investor certainly has to factor positively in a decision to complete the deal.

The limitations on a qualifying deal may include:

• Must be made before year-end
• Company must be a C Corporation
• Investment must be held for 5 years
• Available only to non-corporate taxpayers
• Direct /original issue by the C corporation (can be through underwriter)
• The business must have assets of less than $50 million
• The business must also use 80% of its assets in a qualifying active business (no financial institutions, hotels, restaurants, farms, professional service firms) for substantially all of the holding period

Again, this may be helpful in raising capital by year end if you have potential investor “on the fence”, but here’s where ActSeed provides its disclaimer:  While this interesting tip may be useful for you to explore, you should do it with an attorney and possibly even an accountant. 

If you don’t already have an attorney, the folks who shared this information with us may be able to guide you and one of their specialties is working with small businesses and startups around the USA.  For more information, contact Cliff Spencer at Roberts Kaplan: 503.221.0607.  ActSeed is not compensated for referrals, but as always, we want to continue our mission to bridge capital from where it resides to where it is needed.

Monique Reece is a creative subject matter expert, and her integration of social media as a component of market development is current and relevant. Her presentation of the PRAISE methodology is easy to understand, explain, and implement across the organization.

You can purchase it from ActSeed’s Amazon Store now (Kindle version also available) by clicking here.

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