GROWING A BUSINESS IN NEW JERSEY

PRESENTED AT THE VENTURE ASSOCIATION OF NJ’s ENTREPRENEUR EXPO AND ELEVATOR PITCH OLYMPICS 5/16/2005 -Randy Harmon, Co-founder Foundations Business Development Group, LLC, Consultant-NJ Small Business Development Centers of Rutgers Business School

GROWING A BUSINESS IN NEW JERSEY

-Are you an entrepreneur?

-Research and Planning -Financing -Strategic Alliances -Business plans -Business development resources

“BUSINESSES DON’T FAIL, PEOPLE DO.”

Businesses fail because entrepreneurs and their personal characteristics, skills and experience, as well as their allocated resources fail to satisfy the requirements for a successful business.

-Step 1 is to look at yourself and your experience to identify likes and dislikes, as well as your strengths and weaknesses and see how you match up with the requirements for a successful business.

-Compensate for deficiencies.

“BUSINESSES DON’T FAIL, PEOPLE DO.”

-Honestly evaluate your motivation and suitability for launching your own business, especially when: -You were recently laid off or early retired -You fear being laid off -You have been unemployed for a period of time -Entrepreneurship generally cannot be your salvation, it has to come out of who you are and how you are made up and motivated.

INVENTORS

-Include scientists, engineers, technologists, mechanics and “tinkerers” -Creative, idea people -Love to explore and implement ideas -Tend to view every aspect of life as a problem to be solved or a product to be improved -Typically have multiple ideas for inventions Often don’t have a clue regarding how to bring them to market

ENTREPRENEURSHIP THE ACT OF CREATING A BUSINESS

-MANAGING THE DEVELOPMENT OF AN IDEA INTO A VENTURE -Perception of a market opportunity -Ability to identify markets and niches -Assessment of potential and risk -Procurement and allocation of resources -Creating value

INVENTORS/TECHNOLOGISTS BEWARE

-An inventor is not necessarily an entrepreneur -A successful entrepreneur does not have to be an inventor -An inventor may not be able to become a successful entrepreneur -GOOD TECHNOLOGIES CAN FAIL TO BECOME GOOD BUSINESSES BECAUSE THE FOUNDER WAS AN INVENTOR AND NOT AN ENTREPRENEUR AND WAS UNABLE TO COMPENSATE BY BUILDING A TEAM

CHARACTERISTICS OF THE AVERAGE ENTREPRENEUR

-Innovative -Married Need for achievement “the burning gut” -Comfortable with risk -Calculated risk takers Don’t need or like structure and definition -Comfortable with ambiguity and uncertainty -Value independence Don’t easily fit traditional company mold -Sense of control over environment and destiny -Most start several ventures before age 20 -Often the first child of a parent who was an entrepreneur

ASSESS YOURSELF AGAINST REQUISITE BUSINESS ROLES AND TASKS

-Sales -Marketing -Strategic planning -Financial planning -Accounting -Advertising -Administration -Personnel management -Research & Development -Manufacturing

SOONER OR LATER, MOST ENTREPRENEURS WILL HAVE TO BUILD A MANAGEMENT TEAM -Few people have or can develop all the skills required for a successful technology-based business -There is not going to be enough of you to go around -Management, Management, Management -Equity investors invest in people, particularly teams of people, at least as much as they do the business concept -All venture capital backed businesses will have to build a management team -Typical technology-based business is launched by technologists, with little business experience Entrepreneur’s dilemma -Business advisory boards -Creative teambuilding

I DID IT! I’VE GOT IT!

MAYBE I SHOULD GO INTO BUSINESS

-Technology Entrepreneurs and particularly inventors who think they are entrepreneurs are vulnerable to overemphasizing the technology -First step in considering a new venture is to ask yourself: Who is going to care about this and why?

-What CUSTOMER problem am I going to solve, what unmet need am I going to fill?

-Whose pain am I going to ease?

-Will they care enough to pay for my solution/product at a price at which I can afford to make it available?

-Get a marketing/sales advisor ASAP

RESEARCH, RESEARCH, AND MORE RESEARCH

-Preliminary market research including the industry you are in and the industries you are targeting, customers, and competitors -Determine approximately how much money you are going to need to launch the business and carry it to the break-even point  Begin thinking about where this money is going to come from and the requirements for accessing this money -Conduct a preliminary patent search to make sure that you are not about to set out to reinvent someone else’s wheel -Consider the legal aspects and implications of setting up a business -YOUR OBJECTIVE IS TO CONDUCT SUFFICIENTLY DETAILED AND COMPREHENSIVE RESEARCH TO ENABLE YOU TO COMPLETE A WRITTEN BUSINESS PLAN

MISSION STATEMENT

-What the company does, what business you are in -What industry you are in -Customers and markets -What the company aspires to become -Maximum of 2-4 sentences

VALUE PROPOSITION: WHERE’S THE BEEF?

WHAT’S COMPELLING?

-What unmet need does this fill?

-Why is this important?

-Why will customers care?

-Why should investors care?

-Sustainable competitive advantage?

-Spouse test

ELEVATOR PITCH

-Generally a 45-60 second description of the BUSINESS OPPORTUNITY in LAYMAN’S terms -No more than 15 seconds on the technology and product -Entrepreneurs should also have a 10-15 second networking pitch, which can be elaborated on if the listener is interested

ELEVATOR PITCH

ADDRESS EACH POINT BELOW WITH 1 OR 2 SENTENCES AND THEN COMBINE AND SELECT YOUR BEST 10-14: -What the company does/what business you are in -Who you do it to- customers and markets -What the company aspires to become -What unmet need/customer problem do you solve?

-Brief product/service description, 2 sentences max, non-technical terms -Why this is important/why customers will care/customer benefits -Why should investors care/what is compelling?

-One or two exceptional milestones that demonstrate momentum is building.

-What you are presently looking for (i.e. financing, guidance, team members)

SET UP A BOOKKEEPING SYSTEM

-Record expenses -Keep receipts -Set up a business checking account -Get an accountant

MARKET RESEARCH

-Total demand and sales potential within targeted market -Competing products and what customers think about them -Perceptions of prospective customers regarding how your product compares with the competition -Unique value proposition -Sustainable competitive advantage -Identify market segments and niches where you can compete most effectively -Barriers to entry -Profiles of targeted customers -Distribution channels -Pricing structure

NETWORKING & INFORMATION NETWORKS

Networking is one of an entrepreneur’s most important activities  Helps get the word out about your business  Enables you to learn information and meet people who can be helpful to you in building your business  Meet prospective investors -Information networks enable you to monitor industry and market developments, as well as the competitive landscape, in search of threats and opportunities -Prospective investors are going to expect you to know, understand, and be able to discuss your targeted markets, prospective customers, and competitors at least as well as anyone

INFORMATION NETWORKS

PUBLISHED SOURCES

-Newspapers -Business periodicals -Trade press -Professional journals -Speeches and announcements -Annual reports -Testimony, lawsuits, antitrust information

FIELD/HUMAN SOURCES

-Customers -Suppliers -Trade associations -Entrepreneur organizations -Chambers of commerce -Journalists -Former employees

VENTURE CAPITAL

-Typically invest $1,000,000 or more -Fund 1% or less of the deals they see -Generally dislike early stage deals and pre-sales businesses, because of their level of risk and lack of market validation -Some firms specialize in seed and early stage investments -Seed stage and early stage funds invest smaller amounts earlier -MAKE SURE YOU ARE READY -GET REFERRED Pratt’s Guide to Venture Capital

ANGEL INVESTORS

-High net worth individuals: -Typically invest smaller sums earlier and have a higher tolerance of risk -Tend to invest $300,000 or less and like to be actively involved -Invest in industries they are familiar with -Collectively do more deals and invest more -Tend to invest within a couple of hours drive -Can be difficult to find -Often Invest as a group

HUNTING DOWN ANGELS

-Attorneys and accountants -Entrepreneur/Investor networking organizations  NJ Entrepreneurial Network-www.njen.com

 NJ Entrepreneurs Forum-www.njef.org

 NJ Technology Council-www.njtc.org

 Venture Association of NJ-www.vanj.com

-Venture fairs, forums, and expos -Flying and yacht clubs -Angel Investor Networks

REGIONAL ANGEL GROUPS

NJTC JUMPSTART NJ ANGEL NETWORK WWW.NJTC.ORG

JERSEY ANGEL NETWORK WWW.JERSEYANGELNETWORK.COM

TRI-STATE PRIVATE INVESTORS NETWORK WWW.ANGELINVESTORFUNDING.COM

DON’T COUNT ON OUTSIDE FINANCING COMING OUT OF THE GATE

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Raising debt and equity financing is all about perceptions of risk and opportunity -Early stage and pre-sales companies are generally perceived as too risky -The further along you can develop the venture before formal financing, the better your chances and the better the terms -Plan for the process of raising financing to take 3 6+months, if you are very fortunate -BOOTSTRAPPING- Everything else that an entrepreneur does to both raise and minimize the resources needed to launch their business and carry it through its early stages

BOOTSTRAPPING

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Cleaning out your personal savings or retirement accounts -Home equity loans and second mortgages -Credit cards -Friends & family plan/4 Fs -Research and development grants -Strategic alliances -Outsourcing activities requiring large up-front investments -Purchasing used equipment Bartering your product/service for someone else’s -Advances from professional service providers -Suppliers -Advance payments from customers DOWNSIDE- There is often a trade-off between time and money and the delay can sometimes be detrimental or fatal

STRATEGIC ALLIANCES

BUSINESS PARTNERSHIPS -You partner with another company to gain access to resources that you need but don’t have -For most young businesses this typically means partnering with a larger, more established business -More important than ever given current risk adverse venture capital environment -SPEED ENTRY TO MARKETPLACE AND REDUCE REQUIRED FINANCING -Loss of control -Several Types  Financing   Marketing and sales Manufacturing  Licensing

FINANCING

-Large companies may invest in smaller entrepreneurial ventures to supplement or substitute for their own R&D -Less risky and more cost effective means of accessing cutting edge technology -Strategic partners most likely to understand and appreciate value -Potentially more favorable terms of investment

MARKETING AND SALES

-Partner with a company selling similar but non competing products to your prospective customers -No marketing/sales employees to recruit, hire and train; no payroll Access to partner’s network of customer contacts -The value to the larger company is that your product may fill a gap in or extend their product line.

Downside: Less control, lower priority

MANUFACTURING

-Identify regional manufacturer -Eliminates or defers costly equipment purchases -No manufacturing employees to recruit, hire and train; no payroll Downside: Less control

LICENSING

Transfer of rights to commercialize a technology, or an application of a technology to another company in return for financial consideration -Typically some combination of up front cash, consulting contract and longer term royalty payments -There is typically a tradeoff -Particularly useful for first application of a platform technology or the first technology of a company with multiple technologies -Use cash and validation generated from the license to commercialize other applications and build a company Downside: Lower rate of return, loss of control, time lag before royalty payments flow -Build in performance milestones

MUST BE PREPARED

-Entrepreneurs often approach prospective partners too early A good idea won’t be enough, strategic partners will want to see many of the same milestone achievements that equity investors look for -Typically will want to see at least a prototype and often some testing and market validation

SMALL BUSINESS INNOVATION RESEARCH PROGRAM (SBIR)

Largest Federal R&D grants program targeted to small business-more than $2 billion annually -Best source of risk capital -Pathway to equity -All Federal agencies with large external R&D budgets participate -Authorized through 08            Dept. of Agriculture Dept. of Commerce Dept. of Defense Dept. of Education Dept. of Energy Dept. of Health and Human Services (NIH) Dept. of Homeland Security Dept. of Transportation Environmental Protection Agency NASA Nat. Science Foundation

THREE PHASE PROGRAM

-Typically annual solicitations in which agencies define areas in which they are interested in sponsoring research -Phase I- up to $100,000, runs 6 months -Demonstrate technical/scientific merit and feasibility Phase II- up to $750,000, runs 2 years -Continue research or R&D efforts -Development of a prototype Phase III- no new funding -Commercialization of the technology

ELIGIBILITY FOR SBIR PARTICIPATION

-Must be for profit business operating primarily in U.S.

-Can be proprietorship, partnership, LLC, corporation, joint venture, association, trust or cooperative -51% owned and controlled by individuals who are U.S. citizens or permanent resident aliens -Not more than 500 employees, including affiliates -All Phase I and Phase II work must be performed in U.S.

Don’t have to have company in place to submit successful proposal

PRINCIPAL INVESTIGATOR INVOLVEMENT

-As the SMALL BUSINESS Innovation Research Program, SBIR is faculty unfriendly -Must be primarily employed by the company (>50% of time during the contract, but not necessarily all on this project) -Cannot work full time for another organization -Co PI’s not allowed -Other agency-specific requirements

SMALL BUSINESS TECHNOLOGY TRANSFER PROGRAM (STTR)

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Younger, poorer sister of SBIR program -5 largest Federal Agencies participate  Department of Defense  NASA  Department of Energy  National Science Foundation  Department of Health & Human Services -.03% set aside -3 Phase program similar to SBIR -More faculty friendly-requires 30-60% of contract to go to a collaboration with a nonprofit research organization -NIH and NASA remove restriction on Principal Investigator

CLOSEST THING TO “HOLY GRAIL” OF FREE MONEY

No loans, no equity -Entrepreneur maintains ownership of the technology -Good odds  1 in 8 Phase I proposals are funded  2 in 5 Phase II proposals are funded  Odds currently better under STTR

PATH TO EQUITY FINANCING

-SBIR/STTR provide up to $850,000 in financing over approximately 3 years to develop a technology reduce its technical risk.

-If the company simultaneously works to reduce market and business risk it can become a prospect for equity financing.

BUSINESS PLAN

-One of the most important steps in preparing to launch a new business -Describes what a business does, where it is going, how it is going to get there, and the resources it is going to require -It will only be as good as the depth and the quality of your research -Generally a prerequisite for formal debt and equity investors

3 PURPOSES

-Extraction: Extracts, translates and expands upon an idea for a company from the entrepreneur’s head turning it into a written outline and roadmap for how to run a business -Most effective exercise you will go through -Communication: Communicates business to prospective advisors, management team members, investors, strategic partners and employees -Sales document -Management: Effective management tool -Serves as a benchmark -Dynamic, living document

BUSINESS PLAN OUTLINE

-Executive Summary -Company Description -Market Analysis -Product/Technology/ Service -Competitive Analysis -Marketing and Sales Plan -Management and Operations -Long Term Development and Risk Analysis -Financial Plan -Avoid computer based outlines-makes plan difficult to read

-Business Plan Article-www.njbiz.com/guide

EXECUTIVE SUMMARY

-Most important component of plan, provides snapshot overview Should convey the essence of your business IN LAYMAN’S LANGUAGE and summarize the most important information contained in each section of the plan -Starts with the mission statement -Value Proposition What’s compelling?

-Identifies how much money you are looking to raise, your planned use of the funds, earnings projections and an exit strategy -Typically read first by investors and bankers -Screening tool -Must arouse curiosity and be compelling -Should be completed last and run no more than 2 to 3 pages in length

COMPETITIVE ANALYSIS CREDIBILITY BUILDER OR KILLER

-Identify and discuss your competitors -EVERY PRODUCT HAS COMPETITION -At a minimum, your competition is NO SOLUTION -What is the basis for competition? (technology, price, features, quality, service, advertising) -Competitors strengths and weaknesses -What are your strengths and weaknesses compared to your competitors?

-What is your competitive advantage and how sustainable is it?

-How may your competitors respond to your entry to the market?

-Are there any developing technologies which could disrupt the competitive field?

COMPETITIVE MATRIX

-Matrixes allow the presentation of lots of information in a useable format -X Axis-Critical evaluation criteria -Y Axis-Key competitors or groups

COMPETITIVE MATRIX

Criteria 1 Price

Competitor 1 $ 28,000 Competitor 2 $ 37,000

Criteria 2 Speed

8 units/hr 10 units/hr

Criteria 3 Useful life

7 years 10 years Competitor 3 $ 31,000 You Inc.$ 33,000 10 units/hr 12 units/hr 10 years 8 years

MARKET VALIDATION

-Sales -Beta testing -Business Partnerships -Testimonies from prospective customers and industry leaders

MILESTONES

-Significant achievements to date -You want to be able to demonstrate that a momentum is building -The number and significance of them determines their placement in the plan

MARKETING AND SALES PLAN

HOW YOU WILL SPREAD THE WORD ABOUT YOUR PRODUCT, GET IT INTO THE HANDS OF YOUR CUSTOMERS AND CLOSE THE SALE -How you will penetrate the market -Marketing communications strategy -Pricing strategy -How you will distribute your product -Will you have your own sales force?

-How you will maintain and increase market share

FINANCIAL ANALYSIS

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What is the company’s current financial status?

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Capital requirements- both short and long term

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Use of funds

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Sources of funding (R&D grants, bank loans, equity, other)

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Projected net income and cash flow for the first 3 years

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Explanation of assumptions underlying projections

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Break-even point

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Discuss financial ratios- are they in line with industry standards?

FINANCIAL ANALYSIS

Introduce and discuss company’s revenue model including all revenue streams included in the financial projections and their scheduled start Discuss company’s current financial status?

-Capital requirements- both short and long term -Use of funds -Sources of funding (R&D grants, bank loans, equity, other) -Source of repayment -Projected net income and cash flow for the first 3 years Not worth the paper they’re written on -Explanation of assumptions underlying projections -Bottom up versus top down financial projections -Break-even point -Discuss financial ratios- are they in line with industry norms?

FINANCIAL ANALYSIS

Introduce and discuss company’s revenue model including all revenue streams included in the financial projections and their scheduled start Discuss company’s current financial status?

-Capital requirements- both short and long term -Use of funds -Sources of funding (R&D grants, bank loans, equity, other) -Source of repayment -Projected net income and cash flow for the first 3 years Not worth the paper they’re written on -Explanation of assumptions underlying projections -Bottom up versus top down financial projections -Break-even point -Discuss financial ratios- are they in line with industry norms?

READY, SET,… STOP!

-Avoid approaching investors directly, get referred -Avoid approaching investors too early -Milestones -Market validation -Okay to approach early if you are reasonably certain about your path to and timeline for market entry

NJ SMALL BUSINESS DEVELOPMENT CENTERS (NJSBDC) OF RUTGERS BUSINESS SCHOOL       

Part of a national public, private and academic partnership Free business counseling, consulting, and affordable business training Funded in part by the U.S. Small Business Administration and the NJ Commerce and Economic Growth Commission 11 regional centers and 26 satellite offices across NJ More than 200,000 small business owners, prospective entrepreneurs and business professionals served since 1979 Serve businesses from pre-startup stage to those with 500 employees Specialty programs in international trade, government procurement, manufacturing, E-business, & technology commercialization

NJ SMALL BUSINESS DEVELOPMENT CENTERS (NJSBDC)

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Services include help with:

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Business plans

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Marketing plans Financial statements Loan packages Record keeping Taxes E-commerce

NJSBDC Web Site:

www.NJSBDC.com

SBA Web site:

www.sba.gov

RUTGERS RESOURCES -NJSBDC DIRECTOR OF E-BUSINESS

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Reviews and evaluations of small business web sites

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Nat Bender 973-353-1924

NEW JERSEY INCUBATORS

-10 public incubators, www.state.nj.us/scitech -Lease office and light manufacturing space, sometimes wet labs -Targeted to start ups and graduates of an entrepreneur’s home -Rents typically at or slightly below commercial rates -Shared administrative support services -Free on site management assistance services -Access to a network of volunteer business professionals -Referrals to business resources and education and networking events -Supportive environment -Visibility and credibility -Objective is to build the business to the point where it is increasing sales, generating new jobs, and ready to graduate to larger commercial space within three years

LESSONS LEARNED

-Market entry takes more time and costs more than planned -The better and more comprehensive your planning, the better your chances for success, minimize your surprises -Reader should know after the first sentence what the company does.

-A great technology may not be good enough, Thou shalt know thy markets and customers and their needs Readability/ Layman’s terms, Don’t make reader work hard to understand the technology and the business opportunity -Differentiate yourself from your competitors in a way that provides the perception of value to your prospective customers, and that you can sustain over time

LESSONS LEARNED

-First business hire or advisor should usually be a marketing and sales professional who knows your markets -Validate market demand and be able to demonstrate momentum before approaching venture capitalists -Venture capitalists will expect you to understand your markets and customers at least as well as anyone -Management, management, management -Develop a bootstrapping strategy which you can fall back on -Develop your venture as far as you can before quitting day job -Network -If the reader is not EXCITED by the end of the executive summary, you have lost them