The Small Business Boom |
With Washington Post reporter Margaret Webb Pressler
and venture capitalist Jonathan Silver
Wednesday, February 9, 2000 at 1 p.m. EST
It's hard to imagine a more fertile time for entrepreneurs. The economy's strong, there's money available, there are a growing number of resources for help and the cost of failure seems to be going down every year. Starting a business – even if it fails – is increasingly seen as a badge of honor in our society.
The result is an explosion of people starting their own companies in the last few years – and it's not all dot-coms, either. The IRS is expecting about 25.6 million business tax returns to be filed for last year, up from just over 20 million in 1990. And the boom in entrepreneurship is extending further into different segments of the population.
Join us Wednesday at 1 p.m. as local venture capitalist Jonathan Silver discusses this growing trend, shares stories from the entrepreneurial front and offers advice on how to get your business idea off the ground.
Submit questions early.
Margaret Webb Pressler:
Hello everyone, we're ready to get started. My guest Jonathan Silver is open to questions about getting started in your own business. We can't answer all the questions we get, but we'll try to hit as many as we can.
Severna Park, MD:
As a young entrepreneur and co-owner of Findigo.com, I'm curious how many companies you review for investment purposes on a monthly basis and of those how many do you strongly consider investing in. And of the companies you are likely to consider what are the qualifications you see as most marketable to investors?
Jonathan Silver: We see more than 50 proposals a month (which is why it can be so difficult to get a response from a VC!)
We look for many things, among the most important are the skills the managment team brings to bear, the size of the potential industry and the amount of capital that will be required.
How can we get your attention if we don't have an introduction -i.e. no inside connections-? We'd like to get early stage capital to hire a CEO to open the right doors. What we've heard is that without the "right team," even the best idea isn't going anywhere. We can't seem to get around this catch-22.
Jonathan Silver: Believe it or not, we read and review each and every proposal we receive. The best way to get our attention is to have a really, really good idea!
I'm planning to open a non dot com business and am in the process of writing my business plan. I'm frustrated, there's just so much information that goes into it, I get lost. I'm by no means a math-savvy person and I find it very difficult to establish break-even points and similar mathmatical necessities. Is there a -free or minimal cost- service which assists young entrepreneurs in writing a successful business plan, especially in the areas which require "more than basic" mathematical skills?
Jonathan Silver: There are software titles and books which will help you put together a first-rate plan. Try any of David Gladstone's books for starters.
What do you think of the coffee shop craze? Is it still a wise investment to pursue? Also what do you think of owning a franchise? I'm thinking pizza -Sir Pizza possibly-? Can you recommend a great business book to read for inspiration and knowledge?
Jonathan Silver: The franchise industry is huge...and can be quite lucrative. It depends heavily on what kind of service or pordcut you hope to franchise. Be careful of fads. Coffee is here to stay...but juice bars may not be.
Ok..if you're young and single, you can take the leap - eat rice and yogurt, live in the car or crash with friends, share a house or live with the folks - and start your own business. But what advice do you have for those of us with kids, for whom a steady paycheck means shelter, food, books, clothes, school tuition and health care? How can we benefit from this entrepreneurial boom?
Jonathan Silver: Ah, the $64 million dollar question! It IS hard to start a company. The best advice I can give a more senior person is to start a company in an industry or sector you know well, where you can leverage both your experience and your contacts. See if your current company will be come a client...or better yet, an investor!
What are some easy to find resources that can provide helpful information for individuals interested in starting their own company?
Jonathan Silver: Try the Small Business Adminstration's web site. It has wonderful resources and links.
do you have a website ?
Jonathan Silver: Core-Capital.com.
Thank you for asking!
Do you help in the feasibility study of an idea?
Jonathan Silver: We spend a great deal of time with companies helping them refine their ideas and their business models. We don't often get involved in the intial feasability analysis (although we do look at those issues during our own due diligence process).
Falls Church, VA:
Do I need to be a Tech Guru to start a new firm?
Jonathan Silver: No, but you do need to be a Work Like A Dog kind of a person!
When a VC firm invests in a start-up, what does it do apart from financing the venture? Does it become a part of the decision making, deciding the business strategies? Does it help in running a day-to-day operation of the company?
Jonathan Silver: Typically, a VC firm will take a seat on the board. More importantly, we talk with management regularly to help shape the business. We create new marketing opportunities for our portfolio companies; we assist them in finding and hiring the right people and we introduce them to bank and other sources of capital.
It seems most venture capital is going toward the technology start ups. Are there groups out there interested in going in with firms that can produce projects from overseas, that require investors/investment, that are located in this area?
Jonathan Silver: There are VC funds for almost anything you can imagine. Look at Pratt's Guide to Venture Capital which breaks out funds by the kinds of areas they invest in.
Herndon, VA :
...how important is a business plan for an idea that can be duplicated by others ? Is it not possible to develop the product -like Ebay in secrecy- and go online when it is ready ?
Jonathan Silver: Business plans are both sales documents and operating blueprints. The reason to do a plan is to secure capital and to understand how to put the business together once you have it. I strongly encourage you to do a plan ...and most VC's won't fund without on.
The issue that most concerns VC's is what the potential barriers to entry for a competitor might be.
Severna Park, MD:
WOW, if you review 50 proposal a month...what percentage are worthy of serious considerstion? Is a great idea -if still in the concept form- better than a very small company that has shown it knows how to turn a profit?
Jonathan Silver: Typically, for every 100 proposals we see, we invite management in on 20. We do due diligence on 10, make offers on 5, and fund 2.
We've gotten conflicting advice from so-called "helpful" groups -ie, the ones you pay to hear advise you, as well as the ones who are free via local business organizations, SBA, etc- about eligibility for small and disadvantaged set asides. Specifically: is it or isn't it true that you have to be in business two years before you can apply for certification or 8-a-? And where do we find the actual answer out? Seriously, we get different answers no matter who we ask!
Jonathan Silver: The SBA has a website which should help you answer all these questions.
I own an IT Consulting company with two other people and having been operating for nearly a year. We never established an operating agreement, but now we're at a point where I feel we need it. How do I convince the others to sign it?
Jonathan Silver: Tricky.
The best advice I can give you is to be upfront with your partners. Use the opportunity to air - and resolve- any open issues among you. The operating agreement wiil then serve as a consolidating document you can use to grow the business.
I'm looking to open a dot com business and am writing a business plan. I could possibly qualify as an "8.A" company -- how does that mesh with getting traditional financing?
Jonathan Silver: 8a financing is government sponsored. It should not interfere with your private capital raise, and, indeed, you will be required to have some private capital in the company to qaulitfy.
Okay, I have a great idea. It's currently not on the market and, most importantly, there is a consumer need. However, right now it's just one woman's idea. I don't have the money, the contacts or the skills to really pull this thru. Eventually, I'm confident I can get the above - but valuable time is being wasted. Q: should I 'give' my idea to others and take only a minor role in my dream? Or should I wait until I build myself up and retain control?
Jonathan Silver: I believe that it is far better to own a small part of a big pie than a big part of a small one. If you feel you are not the right person to make this happen, why wouldn't you want to bring others in who could help?
rockville, md (again):
OK, you said you'd look at our plan. But you reiterated that we need a great management team. To hire a convincing CEO, we need to have some seed capital. Any chance of a VC investing in a good idea with a rudimentary team?
Jonathan Silver: Sure. We do it all the time.
Chevy Chase, MD:
I have my own business which consist of home-baked goods and customized gift baskets. I have been running my small business for approximately 4 years and it does pretty well, especially during peak times such as Thanksgiving, Xmas, Valentine's Day and Mother's Day. I would really like to write a winning business plan to present to an investor, but I really need help writing it. Are there any suggestions as to where I can go without paying an arm and a leg for the service? Also, what can you suggest that I do in order to keep the business busy all the time. I would really like to quit my full time day job to really focus on my business. I do know that there is a market out there and I need to be there to capture it. Your help would be greatly appreciated.
Jonathan Silver: There are indiviudals who will help you write a plan, even some who will do the whole thing for you.
That, in my opinion, is a terrible mistake. Only you know what works and what doesn't, what you want to do and why.
If you don't take the time to write a plan, why should I take the time to read it?
I have a company that needs an infusion of capital in order to take the company to the next level. The idea has been researched and is being implemented with the limited resources available. How do I get the financing needed to get the show on the road ? The business will primarily be an internet based outift with no present competition
Jonathan Silver: There are many different kinds of capital available to the entrepreneur. If your company is up and running, you may qualify for bank debt. If not, there are "angel" investors you maigh be able to convince. Talk to the Private Investors Network or New Vantage Partners or any one of the many angel dinner clubs in the region.
How can I get a start-up loan and step by step instructions to get started on a small in-home business that will service everyone around the country?
Jonathan Silver: Loans for start-up conmpanies can be hard to come by. I think you will make more progress if you can convince friends and family members to support the venture directly first.
Isn't it funny how banks only want to loan you money when you don't really need it?
Where can I go for funding for a start-up intenet company?
Jonathan Silver: If you have a business plan, you should consider sending it to any of the area's many venture capital firms. YOu can find a list of them in both the Washington Post and the Washington Business Journal.
What are the basic steps to starting a dot-com company?
Jonathan Silver: The same as they are for any company. Come up with an idea; research the market; write a plan; put together a group of people with the skills and experience to do it and go hunt for money.
In theory, despite the wild valuations of the last few years, running an internet company follows the same rules as running any other kind of company.
I would like to pursue the purchase of an Internet service provider who is beginning to have difficulty being competitive in the market because of their inability to provide DSL services. They claim to be asking in the neighborhood of $300,000 for the business...How might I determine the value of the business? Furthermore, how might I pursue funding for this kind of venture? I have excellent credit, have owned a 6 family building for about 13 years ...
Jonathan Silver: I can't really answer the valuation question here (except to say that you should look at market comparables and at industry trends...and at cash flows and revenues). What I can do is suggest that if you are serious, you consider hiring someone - even your accountant - to help you with the valuation exercise. It is both an art and a science.
Also, make sure you really want to own a small ISP!
Severna Park, MD:
what is "due diligence"?
Jonathan Silver: DD refers to the work investors do to investigate the investment opportunity. We look into the management team's background and experience; we try to understand the indutray and what drives sales in that sector; we review the financial models and try to refine and improve them.
Basically, we are trying to learn everything we can to make a wise and informed - and profitable- investment decision.
Does that help?
I also have an idea for a business that I believe would do very well, that is, there is a strong market for it. How does one go about verifying this gut instinct? Is there a good way to do a market analysis for a business idea that is national in scope?
Jonathan Silver: MArket research is the generic name for what you do to figure out if you have a good idea. Do people want to buy your stuff? Will they pay for it? Should it be in balck or red? etc.
There are a number of ways to do market research and many books written on the topic.
Here' s a simple idea. Buld a prototype of your product and ask your friends if they like it. Then ask them how much they would pay for it. Csn you make it for under that price? If so, you may be on your way!
Do you have any views on the prospects for health-care related dot coms? It seems to be an area ripe for streamlining and innovation via the web, though I assume barriers to entry might be higher than in other areas.
Jonathan Silver: I bet we get 10 proposals a week for health care related ideas...and we don't even fund health care start-ups! They require a uniqies set of investor skills.
There are so many ideas out there because, as you note, the area is ripe for improvement. Just make sure you're not doing what somebody else has already gotten funding to do. Surf the medical areas of the web before you launch.
can you recommend a company that can help me in getting a business plan written for a fee ?
Jonathan Silver: No because I don't think you should go that route. I urge you to write your own..it will force you to think through the many issues that lurk below the surface that you think you don't need to worry about, but I assure you that you do!
Get an editor if you like, or a friend to help you think it through. But the business plan is a critically important tool for you.
Can you talk about particular details in a typical deal? Like how much equity can we expect to sign away in exchange for first round funding? How much do terms vary between VCs? How long do we typically get to shop around?
Jonathan Silver: Terms can vary by a great deal, in part because there is so much capital available and in part because different VC's see different possibilities in the same opportunity. Most firms will ask you not to shop their deal and not to talk to other VC's for a period if you accept their term sheet (its expensive and time consuming for us to do due diligence).
How do you weigh the plan of a dot.com company vs. a physical company - would it be better to start an idea right now on the web only or start a business from the ground up and then move to the web?
Jonathan Silver: The web is changing the world...and people want to be part of - and fund - that change.
But, you should do what motivates you. Start a business you believe in and want to be part of. There is always funding available for that.
Can you suggest ways/sources I can use to recruit quality people to my [startup] business? I prefer to stay away from hiring my friends/family. Also, any suggestions on ways of [evaluating] candidates?
Jonathan Silver: Over the last few years, there have been a number of online job sites that have started on the web. Check out monster.com, carrebuilder or hotjobs
Margaret Webb Pressler:
One participant just asked me what happens to the online chats on Washingtonpost.com when they're done. They are archived and stay on the site indefinitely. So if you miss one you're interested in, you can always go back and look at it after the fact.
I don't necessarily want to start a company, but I do have an idea for a multi-media project that would be a hit. How do I go about marketing this idea? Should I contact a VC firm first and see what kind of interest there might -or might not- be?
Jonathan Silver: Generally, VS want to fund companies because they have sustaniable reveues. You might try to interest a non-profit group or a foundation.
Silver Spring, MD:
Do you provide funding to start-ups only after contracts for work are signed? My concern is that I'll have 6 contracts come in at once, with no office, no salary money. Is a VC firm the way to go?
Jonathan Silver: We often fund without signed contracts, but we prefer to fund once they are in hand. A good VC will work with you to give you the financial resources you need to handle the business as it comes in.
Bethesda Venture Capital Fund funds start-ups -companies with less than $2 million in sales-and is hosting a free informational seminar on Thursday, February 17th at 7:00. Would you like to attend or speak? Call Nick at -301- 652-6714.
Jonathan Silver: Thank you for the invitation! If you'll contact us offline, we'll try to accomodat you.
What are some of the pitfalls when looking into investor possibilities. Can you give some advice on what not to do?
Jonathan Silver: I'm not sure I understand the question. As an investor?
Well, certainly, you should make sure you know the managment team and what qualifies them to launch the company. Do you know them well? Do you know them REALLY well?
Then, how much do you like the idea? How much reseacrh have you done. I am always amazed that people will invest in a company or in a stock and do less work than they would do to buy a refrigerator!
Jonathan: I haven't seen this question yet, so: I have a job that I like, the people are nice, etc., but I recently produced, on a volunteer basis, a publication that has met with great response. How would I go about publicizing the fact that I am available to do other such ventures, but obviously for a price?
Jonathan Silver: First, congratulations! Quite a tribute to your skills.
You might consider signing up with one of the expert sites. There you can post your qalifications and people looking for what you do can email you for help.
Severna Park, MD:
Yes that helps.Thanks.
We are currently looking at corporate sponsors and personal loans trying to put off going after VC's as long as possible. We don't want to sell equity until we have no other options. If Core Capital invested $1 million in a start up, what percentage of a compnay would they typically expect to own?
Jonathan Silver: I think I may have answered this before, but ...
it depends on how big we believe the opportunity is, how much experience the management team has and how much capital the company will require.
Remember we are in the business of grwoing companies AND managing risk!
Tysons Corner, VA:
Apart from business plan, I do not know various steps involved in starting a business. Can you suggest a good start-up reference book-website?
Jonathan Silver: There are so many its hard for me to pick one. Try Lauching a Business by Allen or the Barron's version of The Complete Entrepreneur.
Do know of a listing of small business incubators on the east coast?
Jonathan Silver: Good question..and, unfortunately, no. I don't know of a formal list.
Might be a nice product!
I happy to hear that the POST has targeted the potential for small businesses the local area. I have just started I home-based business, but I feel I'm going no-where fast. I am particularly curious about finding resourcestin the No.VA area that could offer business development services ...I would also appreciate any related services that target minorities. Can YOU help?
Jonathan Silver: The Post has recently expanded its local business coverage...and their timing is good becasue the local business community is booming!
For information on minority financing, you might try the 8a program at the Small Business Admionstration or find a MSBIC, a SMall Business Investment Company that invests specifically in minority-owned companies. Most government agencies also have set aside programs for small comanies that fit their parameters. Good luck!
I asked about typical equity figures earlier. what percent can we expect to hand over in the first round of financing? If we don't know what a typical deal is, we may find we gave away too much, and have difficulty obtaining expansion capital. i.e. would you fund a company that only has 60% equity left?
Jonathan Silver: VC's want the management team to remain incentivized and they want to protect themselves at the same time. There is no sigle percentage that does that. It is subject to negotiation between the entrepreneru and the VC.
Maple Shade, NJ:
Do you believe that the market is ripe for a small to medium sized day care center that caters to middle class working families and provides a safe and stimulating environment for infants age 3 months to 4 years? I have heard that there really aren't enough centers.
Jonathan Silver: You are right there are not enough centers, but the investment community is not very interested in this space that the moment (like anyting else, our interests come and go). There are lots of problems with these kinds of investments (lots of capital for brick anfd mortar, liability, etc.) For now, not much interest.
Severna Park, MD:
Does Core-Capital invest in e-commerce retail and do the business plans that you typically review span 1, 3 or 5 years?
Jonathan Silver: We do, and most plans provide 5 year projections (which we typically disregard). Who would have predicted all this is 1995? Still, the exercise is important and the fuirst few year numbers do matter.
Margaret Webb Pressler:
We're wrapping this up. If you want more information about my guest Jonathan Silver, you can check his website at Core-Capital.com. Also, one note to the person who asked about business incubaters: there is a national association you might try. It's the National Business Incubation Association in Athens, Ohio. Thank you everyone.
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