2010 Business Funding Guidelines
Content
The Rapid Response Institute
2010 Business Funding Challenges: Texas Resource Availability & Go Forward Strategies
By:
Scott M. Shemwell, D.B.A.
The Rapid Response Institute February 2010
2010 Business Funding Challenges: Texas Resource Availability & Go Forward Strategies
Copyright © Copyright 2010 Rapid Response Institute LLC and Scott M. Shemwell, D.B.A. All rights reserved. Disclaimer The Rapid Response Institute LLC, its principals, and the author make no representation or warranty as to the accuracy or completeness of the information contained herein or any other information (whether communicated in written or oral form) transmitted or made available. The Rapid Response Institute LLC, its principals, and the author expressly disclaim any and all liability related to or resulting from the use of the information herein or such other information by the recipient or third party or any of their affiliates or representatives. The information contained in this document was gathered from various sources. The Rapid Response Institute LLC, its principals, and the author do not guarantee its accuracy or completeness. Where other parties have provided information, The Rapid Response Institute LLC, its principals, and the author have relied on that information to the extent we believed prudent, when drawing conclusions, making evaluations or recommendations or expressing opinions upon it. This document is provided on the understanding that The Rapid Response Institute LLC, its principals, and the author, are not responsible for the results of any action taken or refrained from on the basis of any conclusions drawn, evaluations or recommendations made, opinions expressed or other information contained in this document; are not responsible for any error or inaccuracy in or omission from this document and are not engaged in rendering legal, accounting, professional or other advice or services. The Rapid Response Institute LLC, its principals, and the author disclaim any liability to any person or organization, whether or not that person or organizations was entitled to receive a copy of this document, in respect of any act or inaction (including any resulting consequences) by that person or organization in reliance (wholly or partially) on this document or any part of it. This document does not constitute or form part of any offer whatsoever, not shall it or part of it form the basis of any contract or commitment whatsoever. The Rapid Response Institute LLC, its principals, and the author are not registered with any financial or securities regulatory authority, and do not provide nor claim to provide investment advice or recommendations to readers of this report. This report does not constitute an offer or invitation to purchase or acquire any shares in any company or any interest therein, nor shall it form the basis of any contract entered into for the sale of shares in any company.
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2010 Business Funding Challenges: Texas Resource Availability & Go Forward Strategies
Table of Contents
Introduction .....................................................................................................................4 The Current Environment ................................................................................................4
Overcoming the Credit Crunch.................................................................................................4 What is Right for Me Today? ...................................................................................................5
Defining Your Value Proposition......................................................................................5 Support Organizations.....................................................................................................8 Financial Resource..........................................................................................................9 Bullet Proof Your Organization ......................................................................................10 Conclusions ..................................................................................................................10 About The Rapid Response Institute .............................................................................11 Contact Information.......................................................................................................11 Endnotes.......................................................................................................................12
List of Figures
TRADITIONAL METHODS OF EXPLAINING VALUE ........................................................................ 6 EXPECTED VALUE OF MARGINAL INFORMATION......................................................................... 7
List of Tables
COMPONENTS OF VALUE MATRIX ................................................................................................... 7 TEXAS RESOURCES ............................................................................................................................. 9 FUNDING RESOURCES....................................................................................................................... 10
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2010 Business Funding Challenges: Texas Resource Availability & Go Forward Strategies
Introduction
T
he Rapid Response Institute (RRI) and the author have recently been asked to provided a set of guidelines targeting small to midsize businesses and organizations seeking funding and/or various business guidance primarily in the state of Texas, USA. This document attempts to address some of the questions raised in this regard. Per the disclaimer above, no document of this nature can be deemed to be a definitive work as this sector is in a state of constant change. Moreover, no recommendation is made regarding any of the organizations herein. As always, proper due diligence is required before undertaking any business venture or acquiring partners, etc. The author has been involved with small businesses and start up companies for much of his career. Moreover, his experience with large-scale mergers, acquisitions, and divestitures provides him with a unique perspective on the technology life cycle. The challenges faced today, while daunting, are not as historically unique as if often portrayed by the media, governments, and other pundits. Challenges of this nature have been overcome before and most likely will be prevailed upon by those yet to come. For example, in the midst of the Great Depression, Howard Hughesi, Amelia Earhart and others built and expanded an aerospace industry. Flash forward to the 1970s when in the middle of Stagflationii, a small software company was born. By all accounts Microsoft is a successful company. The list can go on, but that is not the point of this document. The Austrian economist, Joseph Schumpeter, described the Creative Destruction process wherein the old order is constantly changing and giving way to the new.iii During tough times, this author believes that this normal process is accelerated as economic tectonic stresses result in plunging fractures in some segments and upward pressures in others. The case can also be made that even in normal times, the creative destruction process cycle time will decrease as well see the section Bullet Proof Your Organization for a more in-depth discussion on this point. The Current Environment It is always a challenge to raise money. Investors of all types require not just a Return on Investment (ROI), but have expectations that they will receive a Return OF Investment. Generally, frustrating to entrepreneurs with the world s next best mousetrap, the due diligence required is always onerous, or so it seems at the time. However, the process of due diligence by potential investors requires companies undertake a level of assessment, even soul searching that will serve them well in the long-run. Recognizing and defending market strategies, potential partners, licensing schemas, etc. will help the entrepreneur truly construct a company that is BUILT-TO-LAST. There are organizations such as the Houston Technology Center and the Rice Alliance that can provide entrepreneurs with assistance in understanding and preparing for the funding process. These organizations can provide business plan templates, mentoring, and access to potential investors and customers as well. Others are listed later in this document as well. Overcoming the Credit Crunch Much has been made in the media about the lack of credit for small to midsize businesses and there is a certain amount of truth this crunch from traditional sources.
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2010 Business Funding Challenges: Texas Resource Availability & Go Forward Strategies
Other debt channels remain active, including the traditional credit card or friends and family loan. Moreover, the American Recovery and Reinvestment Act of 2009 (Recovery Act), signed into law by President Obama on February 17, 2009 provides additional access to SBA loans see the SBA website for current status and additional details.iv However, non-traditional debt such as raised from Life Settlement based instruments are finding favor.v This type of debt is expensive and may only be suited to specific projects or uses. Other models are available as well. It may be useful for the entrepreneur to retain the services of a financial advisor to help identify which debt instrument(s) is appropriate. What is Right for Me Today? The WEIGHTED AVERAGE COST OF CAPITAL (WACC),vi a financial metric most often attributed to the capital structure of large corporations, is also relevant for small to midsize firms. In the good ole days, a venture capital firm/syndicate would invest one or more rounds of (risk) equity ending in an Initial Public Offering (IPO). Another possible exit strategy was the sale to a larger firm, typically using the larger firm s common stock as currency. In today s environment, it is not uncommon to find the CAPITAL STRUCTURE viiof even very small firms to be complex. On the surface, this seems counter intuitive and at odds with the keep-it-simple mantra. On the other hand, the ability of the firm to issue common stock, a variety of debt series, and even preferred/convertible stock (given the right legal entity structure) enables management to attract a variety of investors, each seeking different risk/return scenarios. Of course, this approach may not be right for all organizations, the purpose of this discussion is to posit an expanded view of the organization s capital structure. Individual requirements will vary and management should seek guidance from qualified professionals before undertaking complex financial arrangements.
Issuers of debt instruments will perform due diligence with an understanding that the organization has the ability to repay. Certain collateral may be required as well.
Defining Your Value Proposition The concept of the firm s VALUE PROPOSITION is one of the most misunderstood aspects of modern business. It is also one of the most difficult constructs to articulate, especially in the so-called 30 second elevator pitch. A Google search generated approximately 2,340,000 hits for the term in quotations, Value Proposition . That is a lot of opinions; it is no wonder that entrepreneurs struggle to get this right. In this section we will briefly explore some of the salient aspects of a strong, easy to articulate and understand Value Proposition. The author believes that management must develop a value prop that his or her customers will accept. It is all about revenue generation. If the market understands and accepts your value proposition, the investment community will as well. First and foremost, a value proposition must be relevant to the customer and it must be believable. v As a general rule, the Feature Benefit approach is dated. It is focused on the product and not necessarily the needs of the customers. Moreover, it does not truly differentiate. For example, if one looks at the feature benefits of one
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2010 Business Funding Challenges: Texas Resource Availability & Go Forward Strategies
television set to another; what is the difference from one model of similar size to another? These similarities might lead one to purchase on price or how the screen looks in the perfect lighting of the store. Moreover, does this generate brand loyalty and higher margins? This may not be relative to a customer. v Decreased human errors by 100% is a recent actual statement by a midsize software company in a specific niche market. If their solution eliminates all human involvement then it might be believable, but if it does not, then is an overstatement. Either way, the statement is suspect and may raise a flag requiring the potential customer to invest emotional and temporal capital to assess its relevance to her problem.
Traditional Methods of Explaining Value
n
Feature
q n
Benefit
Product focused
This coffee cup is made of ceramic and therefore holds heat better than plastic Does NOT truly Differentiate My solution will increase your net income by 75% Often
q q q
n
q
Value Proposition
n
n
Overstated Not demonstrable Not defendable
Traditional Methods of Explaining Value
It would be nice if a value proposition could be stated so simply. It sure would make the entrepreneur s life easier. However, life in this parallel universe would knock down Barriers to Entry which is often so critical to the organization s value. The author has developed a detailed methodology designed to help management develop an ECONOMIC VALUE PROPOSITION that specifically meets your customers needs, and is defendable and easy to articulate and understand. Additional information is available by contacting the author; however, the following overview develops the process. We define Economic Value from the perspective of the dismal science. If one views the expected value through the economic lens of marginal utilityviii we can apply economic theory to what otherwise if often assessed from a hip-shoot approach.ix For example, it has been exceedingly difficult to establish the Value Proposition for an Information Technology solution. If we apply marginal utilityx as a function of likelihood which assumes a statistical range of event to an investment in IT, we can surmise that the Expected Value of Marginal Information (EVMI)xi is:
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2010 Business Funding Challenges: Texas Resource Availability & Go Forward Strategies
EVMI
=
Expected value of the best decision with new information (obtained at no cost)
minus
Expected value of the best decision without new information
Expected Value of Marginal Information
In other words, if a unit of new information produces a better decision than without that unit, the EVMI is positive and adds economic value to the firm. Using Economic Value Analysisxii we can now mathematically (read financial model) determine the impact on the Economic Profit (EP)xiii of the firm. EP is not the simple accounting profit model; it takes into consideration opportunity costs inputs as well.
Most firms do not meet the test of economic profit as they do not return the cost of capital.
A Value Proposition developed using this methodology meets the test of Believable and Defendable. Moreover, it can create a strong Barrier to Entry. Seemingly a challenge for the time crunched executive, tools are available that reduce the pain of developing a robust value proposition. For example, the following Value Matrix enables management to build their Economic Value Proposition as a function of four major components; Cost Takeout, Cost Avoidance, Productivity & Efficiency Gains, One-time Cash Flow Impacts, and Intangibles. Readers will note the matrix also provides a working definition and examples.
Components of Value Matrix
Category
Cost Takeout
Definition
Completely eliminating a specific activity or proc ess
n
Example
Redeploying a resource from a non value-added activity to a valuea dded activity Correcting an engineering design flaw be fore the flaw goes into production. Removal of a bottleneck that is c ausing capacity restraint Correcting a process to allow more productive time by shifting from wait time to production ti me Elimination of redundant information/data stores Monetize Capital Improvement of communications between different operational units/supply chain Reduced small equipment shrinkage
Cost Avoidance
Identifying and correcting an error that was not budgeted for correction but would have caused an expense had it not been corre cted Increase in produc tivity that improves existing resource utilizati on.
n
Productivity & Efficienc y Gains
n
n
One-time Cash Flow Impact Intangible
Decreasing and or eliminating one-time cash flow impa ct Benefits that improve operations of the business and /or are necessary to control, protect and enhance company assets, but are not quantifiable due to the nature of the area being improved
n
n n
n
Components of Value Matrix
Statements along the lines of we can save 75% are not believable unless they are derived as a function of a series of smaller, cumulative positive impacts. Applying the techniques herein can lead to statements of major impact.
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2010 Business Funding Challenges: Texas Resource Availability & Go Forward Strategies
Arguments that entrepreneurs do not have time to construct valid and reliable Economic Value Propositions fall on deaf ears. What else is more important? Nothing else matters to your customers and by extension, your investors.
If you do not have time to prepare for a meeting with me, a key executive decision-maker, and show me how you can add value to my firm, then I do not have time to meet with you.
This writer predicts that entrepreneurs who do not take the time and expend the energy to develop believable and defendable Economic Value Propositions will not be successful and their investors will not realize a Return OF their Investment. People respond to PAIN! Today, management has lots of pain. If your Value Proposition addresses their discomfort, you have their attention. If it does not or they do not believe it does, then he or she has other more pressing issues. This is a challenging area, not fully addressed in this space. Readers seeking additional information or assistance are invited to contact the author directly. Support Organizations The Rapid Response Institute LLC, its principals, and the author do not endorse, or have a financial relationship with any of the following organizations This material is provided for informational purposes only. By way of disclosure, Dr. Shemwell, serves as a non-paid, volunteer to the Houston Technology Center (HTC) as an Energy Advisor; however, he does not, nor does he have the authority to represent HTC in any way. Interested readers are invited to contact these organizations directly. However, Dr. Shemwell will introduce interested parties to these organizations to the extent he can if you desire at no cost or obligation. The following table presents some of the resources and organizations available to support and help develop business in the state of Texas and possibly by extension those seeking to do business in Texas or with Texas firms. The Rapid Response Institute LLC, its principals, and the author do not represent that this list is complete or all inclusive. The Rapid Response Institute LLC, its principals, and the author do not warrant these organizations in anyway, either explicitly or implicitly. Organization
Houston Technology Center
Website
http://www.houstontech.org/
Brief Description
(taken from the individual website)
HTC is a nonprofit organization enabling and accelerating the growth of emerging technology companies for the purpose of creating jobs and promoting economic development in the greater Houston region. Our mission is to foster successful growth of innovative technology oriented enterprises in the South Texas area by providing access to MIT resources and through services and programs that inform educate and support these business endeavors.
MIT Forum
http://alumweb.mit.edu/groups/eftex as/
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2010 Business Funding Challenges: Texas Resource Availability & Go Forward Strategies REPSEA http://www.rpsea.org/
RPSEA is a multi-purpose entity established to facilitate a cooperative effort to identify and develop new methods and integrated systems for exploring, producing, and transporting-to-market energy or other derivative products from ultra-deepwater and unconventional natural gas and other petroleum resources, and to ensure that small producers continue to have access to the technical and knowledge resources necessary to continue their important contribution to energy production in the U.S. The Rice Alliance supports entrepreneurs and early-stage technology ventures in Houston and Texas through education, collaboration, and research. It shall be the mission of the TBIA to advance the business incubator industry in Texas. Google search, generating thousands of hits. Readers are invited to do their own assessment as to the applicability to them of these firms.
Rice Alliance
http://alliance.rice.edu/alliance/Defa ult.asp
Texas Business Incubator Association Texas Incubators (not an organization, but a web search)
http://www.tbiaonline.org/
http://www.google.com/#hl=en&sou rce=hp&q=texas+incubator&aq=0& aqi=g1gm1&oq=texas+incu&fp=baa94940e dcea411
Texas Resources
Readers will note that there are many Texas focused resources available. The intent of this section is to stimulate thinking, not to provide a definitive list. Readers are invited to do their own research as to whether or not these organizations are appropriate to their individual requirements. Financial Resource The Rapid Response Institute LLC, its principals, and the author do not endorse, or have a financial relationship with the following organizations. This material is provided for informational purposes only. Interested readers are invited to contact these organizations directly. There are numerous sources of funding available. Ranging from equity to collateralized debt, the funding landscape is actually greater today than in recent history. As discussed earlier, the capital structure of even the smallest firms is now more dynamic. Type of Organization Angel Finance Description
A wealthy individual or group of individuals willing to invest relatively small amounts in early-stage firms. An example is the Houston Angel Network http://houstonangelnetwork.angelgroups.net/ Traditionally a source for collateralized lending. Lately, non-players, but long-term these institutions will most likely fill their historic roles. Hedge fund like there are emerging sources such as the Life Settlement based funding discussed herein. Firms that invest in private, non-public firms
Banks Non-Traditional Private Equity
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2010 Business Funding Challenges: Texas Resource Availability & Go Forward Strategies
although capital infusion as PIPE are done as well.
Venture Capitalist
Professional early stage investors.
Government Sponsored Loans and Grants Texas Emerging Technology Fund
The ETF, created by the Texas Legislature at the urging of Governor Rick Perry, provides Texas with an unparalleled advantage by expediting the development and commercialization of new technologies, and by recruiting the best research talent in the world. Matching and commercialization funds coupled with additional federal and outside investments mean new technology is emerging in Texas http://members.texasone.us/site/PageServer?pag ename=tetf_homepage
Small Business Administration Other Federal Government
As discussed above. SBIR and STTR Grant Programs
Funding Resources
While not exhaustive by any measure, the number of organizations supporting early stage and midsize corporations is extensive. It is hoped that entrepreneurs will develop an appreciation for the resources at their disposal. It all boils down to the Economic Value Proposition put forth. All of these organizations assess this as a critical function of the overall business plan. Bullet Proof Your Organization Some may yearn for the good ole days, when oil was over $100 or Information Technology was king. A victim of our own success, we live in a world where the Velocity of Informationxiv is high and accelerating. The Velocity of Information, defined as the exchange rate of information enabled by today s information and communications technologies, has forever changed that landscape.xv Recognizing that organizations of all sizes, across all industry sectors, for profit or not, across the globe need new tools to address today s volatile markets, the author released his seminal work, Rapid Response Management: Thriving in the New World Order. This document provides management with a useable set of guidelines to transform existing processes and organizational structure to meet challenges without implementing some of the crushing dictums required by some change regiments. Interested readers can download this white paper at no cost and without obligation from http://www.scribd.com/doc/11792098/Rapid-Response-Management-Thriving-in-theNew-World-Order-20-January-2009 Additional support and implementation templates are available from the author. Please contract him for additional detail. Conclusions This document is the result of a number of conversations and email exchanges between the author and a numerous of individuals interested in furthering the development of small and midsize firms with a Texas connection. These firms are defined as all organizations interested in the Texas economy. In the author s recent experience this universe includes organizations across the United States as well as Europe.
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No representation is made that this is a definitive work. Albeit it is a simple guide, designed to help small and midsize business management to navigate the troubled waters of the current environment. The author s contact information is provide below and questions, comments, and input are invited. In the writer s opinion, despite current economic hardships, the bow of the vessel is pointed forward, a bit into the wind, but making way. According to Louis Pasteur, Chance favors the prepared mind.
So go forth prepared!
About The Rapid Response Institute The Rapid Response Institute LLC provides its clients with tailored strategic behavioral economics based programs designed to provide organizational flexibility, rapid operational response, and cultural adaptability. The firm s clients include Fortune 500 global firms and non-profit organizations, as well as mid-size companies faced with the need to swiftly transform when confronted by global business dynamics.
Principal & Author
Scott M. Shemwell http://www.linkedin.com/myprofile?trk=hb_tab_pro Dr. Shemwell is the Managing Director of the Rapid Response Institute. The firm provides its clients with Quantitative and Qualitative analysis and insight throughout the major decision process. It can also arrange funding. For over 25 years, Dr. Shemwell has led the turnaround and transformation process for global S&P 500 organizations as well as start-up and professional services firms. His specific experience includes Executive Management, Information Management, Mergers and Acquisitions, Change Management, and International Business. He was business unit head with P&L responsibility and member of the Executive Leadership Team for an S&P 100 firm. He had led or been a key individual in over $5 billion in mergers, acquisitions, and divestitures. As the Managing Director for a major consulting firm, he assisted clients in transforming themselves throughout the globalization process. He is a leading authority (frequently quoted & referenced) on information management, business processes and industry change, as well as organizational structure analysis, with over 250 publications and speeches. Contact Information For further information: Dr. Scott M. Shemwell
[email protected]
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Endnotes Definitions of terms and references to other works used in this document are provided below.
i ii iii iv v vi vii viii
http://history1900s.about.com/od/people/p/hughes.htm http://www.investopedia.com/terms/s/stagflation.asp http://transcriptions.english.ucsb.edu/archive/courses/liu/english25/materials/schumpeter.html http://www.sba.gov/recovery/ http://en.wikipedia.org/wiki/Life_settlement http://www.investopedia.com/terms/w/wacc.asp http://www.investopedia.com/terms/c/capitalstructure.asp
Shemwell, Scott M. & Murphy, D. Paul. (2004, November). Knowing the economic value of information. World Oil. pp. 63-66.
ix
Shemwell, Scott M. (1997, September). The Economic Value of Timely Information and Knowledge, Key to Business Process Integration Across Boundaries in the Oil & Gas Extended Value Chain. Proceedings of the Gulf Publishing 3rd International Conference and Exhibition on Exploration & Production Information Management. Houston.
x xi xii
http://wordnetweb.princeton.edu/perl/webwn?s=marginal%20utility Ibid. Gouillart, Francis J. and Kelly, James N. (1995). Transforming the Organization. New York: McGraw-Hill. http://financial-dictionary.thefreedictionary.com/Economic+Profit
xiii xiv
Shemwell, Scott M. (2009, January). Rapid Response Management: Thriving in the New World Order. Author.
xv
Ibid.
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February 2010
2010 Business Funding Challenges: Texas Resource Availability & Go Forward Strategies
By:
Scott M. Shemwell, D.B.A.
The Rapid Response Institute February 2010
2010 Business Funding Challenges: Texas Resource Availability & Go Forward Strategies
Copyright © Copyright 2010 Rapid Response Institute LLC and Scott M. Shemwell, D.B.A. All rights reserved. Disclaimer The Rapid Response Institute LLC, its principals, and the author make no representation or warranty as to the accuracy or completeness of the information contained herein or any other information (whether communicated in written or oral form) transmitted or made available. The Rapid Response Institute LLC, its principals, and the author expressly disclaim any and all liability related to or resulting from the use of the information herein or such other information by the recipient or third party or any of their affiliates or representatives. The information contained in this document was gathered from various sources. The Rapid Response Institute LLC, its principals, and the author do not guarantee its accuracy or completeness. Where other parties have provided information, The Rapid Response Institute LLC, its principals, and the author have relied on that information to the extent we believed prudent, when drawing conclusions, making evaluations or recommendations or expressing opinions upon it. This document is provided on the understanding that The Rapid Response Institute LLC, its principals, and the author, are not responsible for the results of any action taken or refrained from on the basis of any conclusions drawn, evaluations or recommendations made, opinions expressed or other information contained in this document; are not responsible for any error or inaccuracy in or omission from this document and are not engaged in rendering legal, accounting, professional or other advice or services. The Rapid Response Institute LLC, its principals, and the author disclaim any liability to any person or organization, whether or not that person or organizations was entitled to receive a copy of this document, in respect of any act or inaction (including any resulting consequences) by that person or organization in reliance (wholly or partially) on this document or any part of it. This document does not constitute or form part of any offer whatsoever, not shall it or part of it form the basis of any contract or commitment whatsoever. The Rapid Response Institute LLC, its principals, and the author are not registered with any financial or securities regulatory authority, and do not provide nor claim to provide investment advice or recommendations to readers of this report. This report does not constitute an offer or invitation to purchase or acquire any shares in any company or any interest therein, nor shall it form the basis of any contract entered into for the sale of shares in any company.
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2010 Business Funding Challenges: Texas Resource Availability & Go Forward Strategies
Table of Contents
Introduction .....................................................................................................................4 The Current Environment ................................................................................................4
Overcoming the Credit Crunch.................................................................................................4 What is Right for Me Today? ...................................................................................................5
Defining Your Value Proposition......................................................................................5 Support Organizations.....................................................................................................8 Financial Resource..........................................................................................................9 Bullet Proof Your Organization ......................................................................................10 Conclusions ..................................................................................................................10 About The Rapid Response Institute .............................................................................11 Contact Information.......................................................................................................11 Endnotes.......................................................................................................................12
List of Figures
TRADITIONAL METHODS OF EXPLAINING VALUE ........................................................................ 6 EXPECTED VALUE OF MARGINAL INFORMATION......................................................................... 7
List of Tables
COMPONENTS OF VALUE MATRIX ................................................................................................... 7 TEXAS RESOURCES ............................................................................................................................. 9 FUNDING RESOURCES....................................................................................................................... 10
Page 3 of 12
February 2010
2010 Business Funding Challenges: Texas Resource Availability & Go Forward Strategies
Introduction
T
he Rapid Response Institute (RRI) and the author have recently been asked to provided a set of guidelines targeting small to midsize businesses and organizations seeking funding and/or various business guidance primarily in the state of Texas, USA. This document attempts to address some of the questions raised in this regard. Per the disclaimer above, no document of this nature can be deemed to be a definitive work as this sector is in a state of constant change. Moreover, no recommendation is made regarding any of the organizations herein. As always, proper due diligence is required before undertaking any business venture or acquiring partners, etc. The author has been involved with small businesses and start up companies for much of his career. Moreover, his experience with large-scale mergers, acquisitions, and divestitures provides him with a unique perspective on the technology life cycle. The challenges faced today, while daunting, are not as historically unique as if often portrayed by the media, governments, and other pundits. Challenges of this nature have been overcome before and most likely will be prevailed upon by those yet to come. For example, in the midst of the Great Depression, Howard Hughesi, Amelia Earhart and others built and expanded an aerospace industry. Flash forward to the 1970s when in the middle of Stagflationii, a small software company was born. By all accounts Microsoft is a successful company. The list can go on, but that is not the point of this document. The Austrian economist, Joseph Schumpeter, described the Creative Destruction process wherein the old order is constantly changing and giving way to the new.iii During tough times, this author believes that this normal process is accelerated as economic tectonic stresses result in plunging fractures in some segments and upward pressures in others. The case can also be made that even in normal times, the creative destruction process cycle time will decrease as well see the section Bullet Proof Your Organization for a more in-depth discussion on this point. The Current Environment It is always a challenge to raise money. Investors of all types require not just a Return on Investment (ROI), but have expectations that they will receive a Return OF Investment. Generally, frustrating to entrepreneurs with the world s next best mousetrap, the due diligence required is always onerous, or so it seems at the time. However, the process of due diligence by potential investors requires companies undertake a level of assessment, even soul searching that will serve them well in the long-run. Recognizing and defending market strategies, potential partners, licensing schemas, etc. will help the entrepreneur truly construct a company that is BUILT-TO-LAST. There are organizations such as the Houston Technology Center and the Rice Alliance that can provide entrepreneurs with assistance in understanding and preparing for the funding process. These organizations can provide business plan templates, mentoring, and access to potential investors and customers as well. Others are listed later in this document as well. Overcoming the Credit Crunch Much has been made in the media about the lack of credit for small to midsize businesses and there is a certain amount of truth this crunch from traditional sources.
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2010 Business Funding Challenges: Texas Resource Availability & Go Forward Strategies
Other debt channels remain active, including the traditional credit card or friends and family loan. Moreover, the American Recovery and Reinvestment Act of 2009 (Recovery Act), signed into law by President Obama on February 17, 2009 provides additional access to SBA loans see the SBA website for current status and additional details.iv However, non-traditional debt such as raised from Life Settlement based instruments are finding favor.v This type of debt is expensive and may only be suited to specific projects or uses. Other models are available as well. It may be useful for the entrepreneur to retain the services of a financial advisor to help identify which debt instrument(s) is appropriate. What is Right for Me Today? The WEIGHTED AVERAGE COST OF CAPITAL (WACC),vi a financial metric most often attributed to the capital structure of large corporations, is also relevant for small to midsize firms. In the good ole days, a venture capital firm/syndicate would invest one or more rounds of (risk) equity ending in an Initial Public Offering (IPO). Another possible exit strategy was the sale to a larger firm, typically using the larger firm s common stock as currency. In today s environment, it is not uncommon to find the CAPITAL STRUCTURE viiof even very small firms to be complex. On the surface, this seems counter intuitive and at odds with the keep-it-simple mantra. On the other hand, the ability of the firm to issue common stock, a variety of debt series, and even preferred/convertible stock (given the right legal entity structure) enables management to attract a variety of investors, each seeking different risk/return scenarios. Of course, this approach may not be right for all organizations, the purpose of this discussion is to posit an expanded view of the organization s capital structure. Individual requirements will vary and management should seek guidance from qualified professionals before undertaking complex financial arrangements.
Issuers of debt instruments will perform due diligence with an understanding that the organization has the ability to repay. Certain collateral may be required as well.
Defining Your Value Proposition The concept of the firm s VALUE PROPOSITION is one of the most misunderstood aspects of modern business. It is also one of the most difficult constructs to articulate, especially in the so-called 30 second elevator pitch. A Google search generated approximately 2,340,000 hits for the term in quotations, Value Proposition . That is a lot of opinions; it is no wonder that entrepreneurs struggle to get this right. In this section we will briefly explore some of the salient aspects of a strong, easy to articulate and understand Value Proposition. The author believes that management must develop a value prop that his or her customers will accept. It is all about revenue generation. If the market understands and accepts your value proposition, the investment community will as well. First and foremost, a value proposition must be relevant to the customer and it must be believable. v As a general rule, the Feature Benefit approach is dated. It is focused on the product and not necessarily the needs of the customers. Moreover, it does not truly differentiate. For example, if one looks at the feature benefits of one
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television set to another; what is the difference from one model of similar size to another? These similarities might lead one to purchase on price or how the screen looks in the perfect lighting of the store. Moreover, does this generate brand loyalty and higher margins? This may not be relative to a customer. v Decreased human errors by 100% is a recent actual statement by a midsize software company in a specific niche market. If their solution eliminates all human involvement then it might be believable, but if it does not, then is an overstatement. Either way, the statement is suspect and may raise a flag requiring the potential customer to invest emotional and temporal capital to assess its relevance to her problem.
Traditional Methods of Explaining Value
n
Feature
q n
Benefit
Product focused
This coffee cup is made of ceramic and therefore holds heat better than plastic Does NOT truly Differentiate My solution will increase your net income by 75% Often
q q q
n
q
Value Proposition
n
n
Overstated Not demonstrable Not defendable
Traditional Methods of Explaining Value
It would be nice if a value proposition could be stated so simply. It sure would make the entrepreneur s life easier. However, life in this parallel universe would knock down Barriers to Entry which is often so critical to the organization s value. The author has developed a detailed methodology designed to help management develop an ECONOMIC VALUE PROPOSITION that specifically meets your customers needs, and is defendable and easy to articulate and understand. Additional information is available by contacting the author; however, the following overview develops the process. We define Economic Value from the perspective of the dismal science. If one views the expected value through the economic lens of marginal utilityviii we can apply economic theory to what otherwise if often assessed from a hip-shoot approach.ix For example, it has been exceedingly difficult to establish the Value Proposition for an Information Technology solution. If we apply marginal utilityx as a function of likelihood which assumes a statistical range of event to an investment in IT, we can surmise that the Expected Value of Marginal Information (EVMI)xi is:
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EVMI
=
Expected value of the best decision with new information (obtained at no cost)
minus
Expected value of the best decision without new information
Expected Value of Marginal Information
In other words, if a unit of new information produces a better decision than without that unit, the EVMI is positive and adds economic value to the firm. Using Economic Value Analysisxii we can now mathematically (read financial model) determine the impact on the Economic Profit (EP)xiii of the firm. EP is not the simple accounting profit model; it takes into consideration opportunity costs inputs as well.
Most firms do not meet the test of economic profit as they do not return the cost of capital.
A Value Proposition developed using this methodology meets the test of Believable and Defendable. Moreover, it can create a strong Barrier to Entry. Seemingly a challenge for the time crunched executive, tools are available that reduce the pain of developing a robust value proposition. For example, the following Value Matrix enables management to build their Economic Value Proposition as a function of four major components; Cost Takeout, Cost Avoidance, Productivity & Efficiency Gains, One-time Cash Flow Impacts, and Intangibles. Readers will note the matrix also provides a working definition and examples.
Components of Value Matrix
Category
Cost Takeout
Definition
Completely eliminating a specific activity or proc ess
n
Example
Redeploying a resource from a non value-added activity to a valuea dded activity Correcting an engineering design flaw be fore the flaw goes into production. Removal of a bottleneck that is c ausing capacity restraint Correcting a process to allow more productive time by shifting from wait time to production ti me Elimination of redundant information/data stores Monetize Capital Improvement of communications between different operational units/supply chain Reduced small equipment shrinkage
Cost Avoidance
Identifying and correcting an error that was not budgeted for correction but would have caused an expense had it not been corre cted Increase in produc tivity that improves existing resource utilizati on.
n
Productivity & Efficienc y Gains
n
n
One-time Cash Flow Impact Intangible
Decreasing and or eliminating one-time cash flow impa ct Benefits that improve operations of the business and /or are necessary to control, protect and enhance company assets, but are not quantifiable due to the nature of the area being improved
n
n n
n
Components of Value Matrix
Statements along the lines of we can save 75% are not believable unless they are derived as a function of a series of smaller, cumulative positive impacts. Applying the techniques herein can lead to statements of major impact.
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Arguments that entrepreneurs do not have time to construct valid and reliable Economic Value Propositions fall on deaf ears. What else is more important? Nothing else matters to your customers and by extension, your investors.
If you do not have time to prepare for a meeting with me, a key executive decision-maker, and show me how you can add value to my firm, then I do not have time to meet with you.
This writer predicts that entrepreneurs who do not take the time and expend the energy to develop believable and defendable Economic Value Propositions will not be successful and their investors will not realize a Return OF their Investment. People respond to PAIN! Today, management has lots of pain. If your Value Proposition addresses their discomfort, you have their attention. If it does not or they do not believe it does, then he or she has other more pressing issues. This is a challenging area, not fully addressed in this space. Readers seeking additional information or assistance are invited to contact the author directly. Support Organizations The Rapid Response Institute LLC, its principals, and the author do not endorse, or have a financial relationship with any of the following organizations This material is provided for informational purposes only. By way of disclosure, Dr. Shemwell, serves as a non-paid, volunteer to the Houston Technology Center (HTC) as an Energy Advisor; however, he does not, nor does he have the authority to represent HTC in any way. Interested readers are invited to contact these organizations directly. However, Dr. Shemwell will introduce interested parties to these organizations to the extent he can if you desire at no cost or obligation. The following table presents some of the resources and organizations available to support and help develop business in the state of Texas and possibly by extension those seeking to do business in Texas or with Texas firms. The Rapid Response Institute LLC, its principals, and the author do not represent that this list is complete or all inclusive. The Rapid Response Institute LLC, its principals, and the author do not warrant these organizations in anyway, either explicitly or implicitly. Organization
Houston Technology Center
Website
http://www.houstontech.org/
Brief Description
(taken from the individual website)
HTC is a nonprofit organization enabling and accelerating the growth of emerging technology companies for the purpose of creating jobs and promoting economic development in the greater Houston region. Our mission is to foster successful growth of innovative technology oriented enterprises in the South Texas area by providing access to MIT resources and through services and programs that inform educate and support these business endeavors.
MIT Forum
http://alumweb.mit.edu/groups/eftex as/
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2010 Business Funding Challenges: Texas Resource Availability & Go Forward Strategies REPSEA http://www.rpsea.org/
RPSEA is a multi-purpose entity established to facilitate a cooperative effort to identify and develop new methods and integrated systems for exploring, producing, and transporting-to-market energy or other derivative products from ultra-deepwater and unconventional natural gas and other petroleum resources, and to ensure that small producers continue to have access to the technical and knowledge resources necessary to continue their important contribution to energy production in the U.S. The Rice Alliance supports entrepreneurs and early-stage technology ventures in Houston and Texas through education, collaboration, and research. It shall be the mission of the TBIA to advance the business incubator industry in Texas. Google search, generating thousands of hits. Readers are invited to do their own assessment as to the applicability to them of these firms.
Rice Alliance
http://alliance.rice.edu/alliance/Defa ult.asp
Texas Business Incubator Association Texas Incubators (not an organization, but a web search)
http://www.tbiaonline.org/
http://www.google.com/#hl=en&sou rce=hp&q=texas+incubator&aq=0& aqi=g1gm1&oq=texas+incu&fp=baa94940e dcea411
Texas Resources
Readers will note that there are many Texas focused resources available. The intent of this section is to stimulate thinking, not to provide a definitive list. Readers are invited to do their own research as to whether or not these organizations are appropriate to their individual requirements. Financial Resource The Rapid Response Institute LLC, its principals, and the author do not endorse, or have a financial relationship with the following organizations. This material is provided for informational purposes only. Interested readers are invited to contact these organizations directly. There are numerous sources of funding available. Ranging from equity to collateralized debt, the funding landscape is actually greater today than in recent history. As discussed earlier, the capital structure of even the smallest firms is now more dynamic. Type of Organization Angel Finance Description
A wealthy individual or group of individuals willing to invest relatively small amounts in early-stage firms. An example is the Houston Angel Network http://houstonangelnetwork.angelgroups.net/ Traditionally a source for collateralized lending. Lately, non-players, but long-term these institutions will most likely fill their historic roles. Hedge fund like there are emerging sources such as the Life Settlement based funding discussed herein. Firms that invest in private, non-public firms
Banks Non-Traditional Private Equity
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although capital infusion as PIPE are done as well.
Venture Capitalist
Professional early stage investors.
Government Sponsored Loans and Grants Texas Emerging Technology Fund
The ETF, created by the Texas Legislature at the urging of Governor Rick Perry, provides Texas with an unparalleled advantage by expediting the development and commercialization of new technologies, and by recruiting the best research talent in the world. Matching and commercialization funds coupled with additional federal and outside investments mean new technology is emerging in Texas http://members.texasone.us/site/PageServer?pag ename=tetf_homepage
Small Business Administration Other Federal Government
As discussed above. SBIR and STTR Grant Programs
Funding Resources
While not exhaustive by any measure, the number of organizations supporting early stage and midsize corporations is extensive. It is hoped that entrepreneurs will develop an appreciation for the resources at their disposal. It all boils down to the Economic Value Proposition put forth. All of these organizations assess this as a critical function of the overall business plan. Bullet Proof Your Organization Some may yearn for the good ole days, when oil was over $100 or Information Technology was king. A victim of our own success, we live in a world where the Velocity of Informationxiv is high and accelerating. The Velocity of Information, defined as the exchange rate of information enabled by today s information and communications technologies, has forever changed that landscape.xv Recognizing that organizations of all sizes, across all industry sectors, for profit or not, across the globe need new tools to address today s volatile markets, the author released his seminal work, Rapid Response Management: Thriving in the New World Order. This document provides management with a useable set of guidelines to transform existing processes and organizational structure to meet challenges without implementing some of the crushing dictums required by some change regiments. Interested readers can download this white paper at no cost and without obligation from http://www.scribd.com/doc/11792098/Rapid-Response-Management-Thriving-in-theNew-World-Order-20-January-2009 Additional support and implementation templates are available from the author. Please contract him for additional detail. Conclusions This document is the result of a number of conversations and email exchanges between the author and a numerous of individuals interested in furthering the development of small and midsize firms with a Texas connection. These firms are defined as all organizations interested in the Texas economy. In the author s recent experience this universe includes organizations across the United States as well as Europe.
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No representation is made that this is a definitive work. Albeit it is a simple guide, designed to help small and midsize business management to navigate the troubled waters of the current environment. The author s contact information is provide below and questions, comments, and input are invited. In the writer s opinion, despite current economic hardships, the bow of the vessel is pointed forward, a bit into the wind, but making way. According to Louis Pasteur, Chance favors the prepared mind.
So go forth prepared!
About The Rapid Response Institute The Rapid Response Institute LLC provides its clients with tailored strategic behavioral economics based programs designed to provide organizational flexibility, rapid operational response, and cultural adaptability. The firm s clients include Fortune 500 global firms and non-profit organizations, as well as mid-size companies faced with the need to swiftly transform when confronted by global business dynamics.
Principal & Author
Scott M. Shemwell http://www.linkedin.com/myprofile?trk=hb_tab_pro Dr. Shemwell is the Managing Director of the Rapid Response Institute. The firm provides its clients with Quantitative and Qualitative analysis and insight throughout the major decision process. It can also arrange funding. For over 25 years, Dr. Shemwell has led the turnaround and transformation process for global S&P 500 organizations as well as start-up and professional services firms. His specific experience includes Executive Management, Information Management, Mergers and Acquisitions, Change Management, and International Business. He was business unit head with P&L responsibility and member of the Executive Leadership Team for an S&P 100 firm. He had led or been a key individual in over $5 billion in mergers, acquisitions, and divestitures. As the Managing Director for a major consulting firm, he assisted clients in transforming themselves throughout the globalization process. He is a leading authority (frequently quoted & referenced) on information management, business processes and industry change, as well as organizational structure analysis, with over 250 publications and speeches. Contact Information For further information: Dr. Scott M. Shemwell
[email protected]
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Endnotes Definitions of terms and references to other works used in this document are provided below.
i ii iii iv v vi vii viii
http://history1900s.about.com/od/people/p/hughes.htm http://www.investopedia.com/terms/s/stagflation.asp http://transcriptions.english.ucsb.edu/archive/courses/liu/english25/materials/schumpeter.html http://www.sba.gov/recovery/ http://en.wikipedia.org/wiki/Life_settlement http://www.investopedia.com/terms/w/wacc.asp http://www.investopedia.com/terms/c/capitalstructure.asp
Shemwell, Scott M. & Murphy, D. Paul. (2004, November). Knowing the economic value of information. World Oil. pp. 63-66.
ix
Shemwell, Scott M. (1997, September). The Economic Value of Timely Information and Knowledge, Key to Business Process Integration Across Boundaries in the Oil & Gas Extended Value Chain. Proceedings of the Gulf Publishing 3rd International Conference and Exhibition on Exploration & Production Information Management. Houston.
x xi xii
http://wordnetweb.princeton.edu/perl/webwn?s=marginal%20utility Ibid. Gouillart, Francis J. and Kelly, James N. (1995). Transforming the Organization. New York: McGraw-Hill. http://financial-dictionary.thefreedictionary.com/Economic+Profit
xiii xiv
Shemwell, Scott M. (2009, January). Rapid Response Management: Thriving in the New World Order. Author.
xv
Ibid.
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