Sifting through my email, I noticed a recurring question: "What the hell have you been doing?" Sorry the posts have been few and far between. This is primarily due to several business-related reasons. The largest time-sucker has been my involvement in a super-secret company. I've partnered with a friend of mine to put together a software company to sell a unique software package to a specific industry. That's all I'm going to say about the specifics of the company itself. What I do want to share is what's like travel through the bureaucratic swamp when trying to attract investors.
So this business idea came to my friend a couple of years ago. He didn't know me at the time. He believed in his vision so much, I was on a list of random calls he made looking for advice, help, or anything. What struck me was his passion. He was dismissed by many people. However, my friend is the picture of tenacity and he started climbing the mountain of his first venture.
It first started with an accountant who wrote the first draft of the business plan. This was twelve pages that didn't do much other than draw ridicule. I took that plan and tried to build it out some more, but it was a pathetic attempt at best, primarily because the real research hadn't begun.
Lesson One: Don't have your accountant write your business plan.
My friend began to meet with many different people seeking money and advice. I tagged along to many of these meetings. Keep in mind that while I run my own consulting business, I've never sought capital before. My experience with startup companies in the past was after the companies were operational. I was never in on the ground floor of seeking investment, and as a result, I had a lot of misconceptions that I shared with my friend. I go way back to an earlier post about how the 90s ruined our expectations. During the 90s, all you had to do was find some fat, rich guy at a cocktail party with the mayor and tell him you had a great dot com idea in your head. You could walk out of that party with a check and a couple of girls' phone numbers--everybody wanted in on the action.
Since the bubble burst, if you say "dot com" in the wrong crowd, you might end up on a stretcher, so you have to do your research and we did. There were many revisions of the business plan as I pulled in marketing data and another friend helped with the editing of the copy. We continued to meet more people, including some freaky ones; one in particular was really weird about taking notes but then would tell us if he didn't write it down it wasn't said in a meeting. "You didn't say that. It's not in my notes."
The dizzying effect of dozens of people giving you advice on starting a company reminded me of when my wife was pregnant the first time and everybody was suddenly the best parent, even if they never had children. Everybody has business advice on starting companies. Here is a list of people not to seek advice from:
- MBAs fresh out of school
- Consultants (other than me)
- Personal injury attorneys (in other words, just because they have a law degree doesn't mean they know business law)
- Personal accountants
- Businesses for Dummies type books
- Anybody living in a mobile home
- Mr. Tony Robbins (he scares me)
Lesson Two: Seek counsel wisely; too much advice from too many different people will confuse and discourage.
In the long run, if you're seeking private funding for a corporation or partnership of some sort, your business plan, while important, is second to the Private Placement Memorandum. This is an important point because investors will want to see a business plan and a marketing plan, but they won't open those unless the Private Placement Memorandum is there. It's like your college degree when getting a job. You need it to walk in the door because it's proof you are serious about a career. The Private Placement Memorandum should not be written from a template. It must be completed by an attorney (as much as I loath the prospect). A good business lawyer will tear apart your business and marketing plans and scrutinize your concepts in such a way that you will be completely prepared for any investor. This is because not just any law firm will create a Private Placement Memorandum. It's a document that states all of the risks. If not properly done, everybody involved could be sued.
Lesson Three: There are times that attorneys are useful, and one of those times is when you need a Private Placement Memorandum.
The final point is that if you have no cash, don't start your business. A Private Placement Memorandum will cost between $10,000 and $50,000, depending on the complexity of the business and the risk factors to be researched. You will need cash for your escrow account and you will still need to eat during all of this. I learned the hard way that people will not easily give money to a business, especially if they were burned during the bursting of the dot com bubble. They want fundamental proof that you can pull off your ideas and give them a reasonable expectation of return on investment.
Lesson Four: It still takes money to make money.
In the coming months, I will discuss some of these issues in more detail, especially the parts on seeking counsel and what is in a Private Placement Memorandum.
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Wretched Human Mirror by Bloodbath