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G . PAT R I C K G R U H N

POWER PL AY

How to plan, fund, grow and sell your 121st century business


P O W E R P L AY By G. Patrick Gruhn


This pre-release edition published 2008 by G. Patrick Gruhn Copyright Š G. Patrick Gruhn 2008 All rights reserved. No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of the publisher. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. Design and typeset by Paul Cok Edited by Simon Douglas This book is sold subject to the condition that it shall not, by way of trade or otherwise, be lent, resold, hired out, or otherwise circulated without the publisher’s prior consent in any form of binding or cover other than that in which it is published and without a similar condition including this condition being imposed on the subsequent purchaser. 4


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To my wife and child to be...

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C O N T E N T S

PROLOGUE

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ONCE UPON A DIME

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CHAPTER I: INTRODUCTION

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CHAPTER II: BUSINESS MIND

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CHAPTER III: GETTING STARTED

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CHAPTER IV: FUNDING YOUR BUSINESS

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CHAPTER V: BUSINESS PROCESS

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CHAPTER VI: RUNNING YOUR BUSINESS

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CHAPTER VII: SALES AND MARKETING

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CHAPTER VIII: THE EVIL

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CHAPTER IX: THE EXIT

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CHAPTER X: CONCLUSION

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APPENDIX A: BUSINESS PLAN GUIDE

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P R O L O G U E

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P R O L O G U E

PowerPlay is a unique blend of experience, facts, solid guidance and personal business advice. I’m starting with some key thoughts about the kind of person an entrepreneur has to be in order to make it in today’s business world. This is designed to help you find out whether you have what it takes to go the distance. Once you’ve taken a good look at yourself and defined what you want to achieve, you will read about the importance of planning and how best to write, build and structure your business plan. PowerPlay is a step-by-step, straight to the point approach that will take you from the conception of your business, all the way to the point when you want to sell your established company. Since I’ve been active in the private equity sector and personally involved in direct investments in start-up companies, I will be sharing information which I believe is crucial to this process. I’ve included a chapter on how I perceive business and economics. There has been much change over the past decade and I firmly believe there are many economic elements to consider when you venture out into business on your own! Once we’ve gone through all the significant macro elements of business and economics, we shall move on to look at things from a micro perspective. This means the actual business process, human resources, marketing and sales to support you with some valuable experience and to prepare you for some important decisions. Finally, I will highlight your choices on how to exit your business, how to cash out, the different options you have and what downside there is to any kind of exit scenario. How you choose to make your millions, is up to YOU…

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O N C E U P O N D I M E . . .

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I’ve just returned from a long walk with my dog in the crisp, cold of a winter’s evening and thought, as you probably have no idea who I am, I’d introduce myself to you! Hello! I am Patick Gruhn. I’m writing this book to share my entrepreneurial experiences with you and will try to give you a tool to develop your very own, best fighting chance to succeed with your venture. I’m assuming you are reading this book because you are either an entrepreneur or are well on your way to becoming one. Welcome to the club! I started my first business in the 1990’s before I was of an age to sign legally binding agreements. Since then, I’ve earned my BBA and MBA on a partial scholarship and by tutoring my classmates. In the past ten years I’ve worked as a broker, asset manager, financial advisor, VIP advisor, business consultant, relations manager, art dealer, financial director, managing director, marketing consultant, columnist, writer and as an editor. Now, aged 30, I’ve co-founded several ventures in Switzerland: the first fine art rental company; the country’s biggest VIP service network; a private equity boutique firm; I’ve advised on the creation of dozens of business concepts and helped build brands from the ground up. Today I own a private equity brokerage firm, a private equity magazine called ‘The €levator’ and a private investors’ club. I own more assets and earn more money than the majority of people I know, especially under the age of 30. I’ve done all this without security or help from anyone. The only help I ever got was 300 Dollars from my wife to start a company. In the past years I’ve written dozens of business plans, financial plans and marketing plans; in the last two years I’ve reviewed hundreds of business plans from people seeking my assistance for their venture. The title of this book reflects two states of mind – Power and Play. The feeling of power when you’ve worked a 16-hour day; you’ve been successful and achieved the things you set out to do and the adrenaline makes you feel powerful – hence, the power. The other aspect is the pleasure you get from doing what you do best. If you really like what you are doing it will always feel 1 1


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as though you are playing. Hence – the play. A very accomplished financier once said he felt like he had never worked a day in his life, because he loved every minute of it… I am a workaholic, working an average 12-hour day, seven days a week, spending most of my time thinking up new ideas to make money and to bring things to the world that can actually be useful to individuals. I’ve received and written in excess of 10,000 emails in the last twelve months and I want to share with you my very own, hands-on approach to turn your professional efforts and aspirations into the economic result you deserve. It is all about physics – action causes reaction. My writings are not about any illusive billion-dollar ideas which require more luck than anything; instead I write about real business and entrepreneurship. I want to write, without creating illusion, about the achievements you can attain through your own hard work. My writings will give you my perspective on how to create, fund and operate your business from the very first word in your business plan. I hope you get the best out of my thoughts!

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C H A P T E R

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introduction

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t the core of every business is an idea. Many people have ideas but most of them choose not to pursue these ideas because of a multitude of factors which may make their lives less comfortable. Realizing an idea means taking risks. If you want to make a dream come true, you must be willing to take certain risks, and/or make sacrifices. Success is a matter of performance and performance is a matter of choice. Also, let me tell you from the start that you don’t learn much by doing the right things, but instead you learn the most when you make mistakes. As long as you are ready to accept your mistakes and learn from them, you will always be able to grow and improve your skills in business. I went to university, got my degree in business and then never worked for anyone. I felt I had to pursue the realization of my dreams rather than slaving away at a random desk, making money for other people and see their dreams be fulfilled instead of mine. I made my first deals, very small at that time, when I was just under 18 years old. Even whilst at school I was developing small ventures to make extra cash that would get me the things I wanted. It didn’t work as often as I had hoped, but allowed me to learn things about the business world right from the start! One of the biggest problems you can encounter is the lack of credibility and since in every transaction you must first sell yourself, you have to work on your credibility before anything else… This is more true if you are selling products that the potential buyer doesn’t need. For example, you don’t need much credibility to sell a loaf of bread, but to sell a life insurance, you sure do… In the early days I fell on some hardship right from the start whilst I was working to achieve my goals, but I am convinced that without this hardship, no real success would have been possible, because if you don’t know how hard it is to succeed, you may never cherish the fruit of your work. When I say hardship I mean failure, the need for personal refinement and all the things that come with it. If you fail while venturing out on your own, with each failure the pressure mounts, making it harder to succeed because your focus tends to naturally go to the problems in your life, rather than the solutions. Also, society tells us that 1 7


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a steady job and the false security of employment is the best choice in life. For most people that may work – but for those of you who have ideas and can’t be satisfied without the fulfilment of achieving something of your own, this path is simply not sufficient! A few years ago I wrote my first book, entitled “Master of the Storm” which deals with the key elements necessary to be able to perform. When you venture into the world of business without the big umbrella of an established company, it is extremely difficult to get to where you are going. Chances are, someone has been on that road before and wants to keep you from getting where you are going, as you will be in his / her way once you are there. It’s a dog eat dog world and you need to learn how to bark and how to bite if you go on the road least travelled. My first book, which was more of a trial to understand what it would mean to write a book, was an honest attempt to motivate mostly myself into getting the things I want from life. I wanted to know what it was like to write a book and so I simply wrote it. I wish to elaborate on a few aspects of business. Actually, it will be those aspects that I have come to understand very well over the past years. Hence, I will write about things that I know and of which I am sure. I will share small anecdotes and scenarios that will shed some spectral light on the business process. I wish to show the way to building a business and to making it work: from writing your business plan; going from theory to practice, funding your project; making it work economically; structuring it for the optimal fiscal situation and finally sales and marketing – the engine of all businesses. I have never seen or heard of a business surviving without marketing or sales, so that is really like the heart and lungs of your enterprise. Your success will rise and fall with them. The title PowerPlay is derived from the literal and transcendent meaning of the two words. If you create a prosperous business you will gain power and influence on various levels; if you drive it to sustainable success you will be able to play as you please. At the same time, the world of business today, more than ever before, is a constant power play. Push and pull! Push prices, pull clients, go 1 8


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to the limit. So it seemed evident what to call the book. I wish you great pleasure in the discovery of my writings and if you learn something along the way or simply have a good time reading about business – then I have served my purpose.

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C H A P T E R

II

B U S I N E S S M I N D 2 5


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I

mind

n business, there is nothing more significant than the right mindset. You can make anything possible if you set your mind to it. Those who claim to do their best and don’t succeed didn’t really set their mind to getting it done. I ask myself if one can train for such a mindset? I’m sceptical towards this idea but anything is really possible in life. Success is an attitude and performance is a matter of choice. Above all, the business mind has to be competitive and eager for recognition. I once read a survey which stated that most people who wish to work in the financial sector (stock market) have been neglected by at least one of their parents and are looking for recognition through quick success. The mind is a very complex thing. I’m not qualified to provide a professional opinion, but I think that achievement is exponentially related to our childhood and upbringing. In life, we have to become who we are… I know a lot of entrepreneurs, some who succeeded and some who have failed and it is interesting to see that most of those who amount to something have actually experienced some emotional hardship in their youth. They developed a drive beyond the normal, average person, to set themselves apart from their environment and to obtain more of everything the world has to offer. Maybe it is some kind of compensation for the void(s) from their past. It may also be found, that those who didn’t endure any hardship seemed not to succeed very well or have become mediocre. At the same time they didn’t appear to be pursuing it with the same whole-hearted approach which goes towards explaining that the output is very much related to the input. The bottom line being, you really have to want it or it won’t happen! I’ve also frequently seen entrepreneurs succeed and then lose everything because they didn’t maintain the mindset. They became arrogant and careless and consequently lost what they had earned faster than you’d imagine. The world of business is made up of people, hence it is made up of minds. In order to get what you want, you need to enhance your compatibility with the public; you need to feel the beat of the street in order to filter the information you need, spot opportunities and ultimately succeed with your venture. 2 7


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The entrepreneur has to be able to withstand greater levels of stress than the average employee, simply because the stakes are higher and the responsibilities are more substantial. It all comes down to the decisions made by the entrepreneur as our world is, in a way, like one big casino – fortunes are made and lost every single day. Hence, if you venture out on your own and you want to make it (big), you really need to have a deep understanding of your limits. You, the business mind, need to be honest with yourself and know what you can and cannot do. Knowing what you cannot do is most significant, much like embarking on a journey. You need the full co-ordinates of your destination and a global awareness of the hazards on the road you will travel, so you may anticipate and prepare accordingly. You need to know what you are doing; otherwise you will feel like a snowball on the beach or a skier in a swimsuit. At the same time you always need to be ready to expand and push your limits in order to grow as a business mind. You should be like a sponge, absorbing all the experiences you can get. I suggest you take twice the time to analyse your mistakes because not everyone learns from winning. This is simply because the emotional experience of losing can make your shortfalls and faults far more apparent than believing you’ve done everything correctly. Imagine it like a car race; if you drive start to finish and win you will be happy but you didn’t learn much; if you drive and you finish last or crash you will work harder and you will question yourself to improve. There is always room for improvement! The business mind needs a clear framework; a comprehensive set of guidelines by which to operate; much like a charted course. It is essential you have those directives, set by yourself, as your own strategy for success. Yet, always be ready and willing to question your framework as the world is constantly changing and so must we all. Successful is he or she who can adapt the quickest and the best to new situations. Hence, be always aware and ready to change if necessary. Change management decides whether you win or lose, because if you can accept it and implement it faster than the competition, you will have the extra edge you need to succeed. We all have small “change management” decisions to make in our everyday lives but those changes are so simple that we don’t even 2 8


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mind

PERFORMANCE

EDUTITTA

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SUCCESS

IS A MATTER OF

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think about them. Example: Putting winter tyres on your car when the first snow falls. You do this because otherwise, you know you would be slipping and sliding. In order to succeed in life, you must be prepared to change at any time and constantly adapt to the ever-changing conditions you may encounter. The business mind needs to be able to anticipate situations before they happen. Anticipation is one of the keys to success. Visually, think of business opportunities like a train you need to be on; it will be much easier for you to anticipate the arrival of the train, be on time and get to choose your seat, rather than be late and either have to run to catch your train and settle for the last seat available (which is usually not the seat you want to be in) or even having to run to the platform just to see the train pull out of the station. A big part of business is speculation; if you can speculate and then anticipate what will happen to any given market, you can position yourself accordingly and be in an optimal position to exploit the opportunities unfolding before your eyes. The reward of anticipation is exponential on a timeline. The earlier you anticipate, the higher your reward should be. NOTE: You cannot anticipate things that randomly occur. The business mind needs to make decisions whilst weighing the options in the most productive way possible. All philanthropy left aside, there is no heart in business and if you think with your heart instead of your brain, emotions will lose you the game rather sooner than later. Building businesses in all their forms and shapes is a matter of clear vision and decisive action.

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Key Thoughts: 1.

Know yourself (your strengths AND your limits)

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Be ready to question yourself and change if necessary

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Be the best you can while you become better

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Be persistent and stick to your directives

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Be open to ideas and change

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Analyze and act quickly

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Anticipate situations and make decisions

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Learn from your mistakes

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Be fair

10. Visualize your reward for motivation

Success, like most things, works from the inside out. It has to start in your mind and will then grow physically as you make the right decisions. The amount of your success will be the sum of the right decisions you make during your life. Also, the speed of your success will be a reflection of the mistakes you learned from. Einstein said madness is best described as doing the same thing over and over again but expecting different outcomes. The savvy business mind never makes the same mistake twice‌

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C H A P T E R

III getting started 3 9


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t the beginning there is an idea. Everything starts with one great idea and even if it sounds dim, we are all just one good idea away of being millionaires – and who doesn’t want to become a millionaire? Chances are, if you are reading this book, you want to become successful, more than the next person. What most people don’t know is that you have to create a solid framework before you get started. This is astonishing to me but true, most people will just get started without going through the necessary planning phase… As you can image, that hardly ever leads to something productive, because how do you know how to get there if you don’t know where you are going? You need to shed light on all the aspects of what you are planning and willing to do, in order to make educated decisions about your future business. You cannot just have an idea and then start running. A visual example would probably be athletics. Because you want to take the best care of your body, you will always warm up before you start running. If you exercise a cold muscle it will easily cramp and you will hurt yourself. In the same way, the lack of solid study and planning will do you more harm than good when it comes to turning your idea from theory to reality… You need to structure, analyse, chart, develop, write and then look at the bigger picture. It is only when you have planned everything thoroughly that you will be able to take two steps back, look at what you have created in theory, and then make a decision for yourself as to whether or not you want to undertake the venture. You must also be ready to walk away from an idea at any time if your research and intuition tells you that the market does not want the product you had planned on selling! The best visual example would probably be sports. If you are doing sports and you are considerate of your body, then you will always warm up before you start running because if you exercise a cold muscle it will easily cramp and you will hurt yourself. In that same way, the lack of solid study and planning will do you more harm that good when it comes to turning your idea from theory to reality… I believe it was Donald Trump who said 80% of all successful business is pure planning. Look where that approach took him; think about it and then 4 1


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act accordingly. Don’t run off like a headless chicken because you will waste your time and energy as well as the time and energy of those whom you choose to involve in your project. I know a man who has never failed in business and evidently, he has planned his every venture down to the smallest detail. Knowing what works is crucial, so make sure you have all the facts before you get involved with anything. If you travel, unless you really want to go on a spontaneous trip without a real destination, you will map out your way so you know where you are going and find the quickest way to get there. Surely, if you are currently looking to realize an idea, it means you have spent some time thinking about it. Also, let’s assume you have analyzed the market for your idea and have come to the conclusion there is a demand for what you wish to bring to a potential client or consumer. Should you not have done both of the above, I strongly suggest you go and do them before you do anything else. The advantage of doing so is obvious. You will find out if there is competition in the market in which you are interested; you will find out what you need to do better in order to compete and to get the market share you wish to obtain; or you will simply find that you are the pioneer of your idea and you are dealing with a virgin market. Having competition as well as being a pioneer holds ample advantages for you, as well as many risks, so it is important you define your current position before proceeding. Being the pioneer in a market evokes a most crucial question: Why hasn’t anybody thought of it before you? It is most important you find the answer to that question because in the today’s world, with ever-greater efficiency, there are not many great ideas left to exploit and quite frequently it could be the case that somebody has tried to develop your idea before you, but the market didn’t want it. The upside of such knowledge is that you can avoid making the same mistake. It is also possible that a market wasn’t ready for the idea when it was first launched, but could be receptive for it now. So make sure you are educated about every aspect of your idea and its market. Also, take a very good look at yourself and find out, or decide, whether you 4 2


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believe you are cut out to do what it is you are about to begin. Starting your own business is no walk in the park Many people think that creating your own business holds less stress than being employed. But the truth of the matter is, that having your own business is a constant stress because it is yours and you are responsible for it one hundred percent. On the other hand, working for someone is much like watching someone’s kids. You will take care of them as long as they are in your care but at the end of the day you will be rid of the responsibility. Not having that responsibility frees you from stress. So first and foremost you should find out if you are cut out to be an entrepreneur. I believe that if you are an entrepreneur, you will wake up in the morning wanting to achieve things for yourself, wanting to create and build beyond the possibilities that employment can ever hold! I often hear people say things like “in a few years I’ll start my own business, then the good life is going to begin”… Think again! First of all I don’t believe that even 10% of the people who say such things will ever end up having their own business, simply because the comfort and false security of employment cradles them so much that any entrepreneurial spirit gets lost over time. Incentives and a steady salary turn most free spirits into followers in the long run! Secondly, when you start your own business, you may find things will get worse before they start getting better. It is not like you can sit down at a set table and start feasting because now you don’t only have to set the table but you also have to cook the food… You can trust me on that. Once you have figured out whether you are cut out to be your own boss and hopefully the boss of others at some point, you need to sit down and start planning for what you want to achieve. Plan every detail of your enterprise; plan it so well that you are aware of every possible scenario so you are ready for whatever comes your way. There is a book in which the author analyzed the common point of a number of big fortunes and the one thing they had in common was that all action was thought through and planned out. Put simply, and at the risk of repeating 4 3


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myself, if you go on a trip you chart your route – unless you are going on a random journey – you need to map your way to know how to get to where you are going. Usually we want to be efficient so we plan our activities in order to complete them as swiftly and as efficiently as possible. Planning your business will show you the how, the why, the where and when. Without it, don’t even bother to start. NOTE: Doing it in your head does not count! I have actively worked on a number of business plans over the past years, and in my experience as both an entrepreneur and consultant, I can assure you that the projects which didn’t have a solid plan never came to fruition. Sure, you can have an idea; ask your family for some start up money and then get it going – but soon you will be stuck in a number of ways and in situations you didn’t foresee. You don’t want that… I had an acquaintance who had a glamorous idea, decided to implement it, but it went down in flames after only a few months. Sadly, many of his close friends and family lost their money and went down with him, as did the people who worked for him as they took an economic beating. It was a simple lack of planning that drove his business into ruin. He had had an idea that sounded great and was very appealing in theory, but at the end of the day, nobody wanted his product and he didn’t see that coming. Had he done his homework he would have been able to foresee there was little demand but the market was growing and had he considered that, and applied a relevant business model to the real market conditions, by now, he could have been very successful. As a matter of fact, I know of a company that came into the market shortly after his financial ruin; they played it smart and were flexible because of a very low cost structure and they are rather successful today as the sector is growing. They are the leaders in their market and are doing very well for themselves. This small anecdote illustrates the fact that all success begins with a solid plan… In contrast to the previous example I wish to say that I have assisted or advised on several projects where we made the planning phase our primary objective and in part, as a direct result, these businesses are up and running 4 4


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DOING IT IN YOUR

HEAD DOES

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today. This is not fiction; it is simply an application of what is known to work best. So take my word for it and plan away! Economic timing is crucial. You need to start by looking at the macro economic situation before venturing into anything. By doing so, you will be able to determine the best entry point. If the economy in which you wish to operate is spiralling slowly into recession (and your business doesn’t feed off other people’s misery), you may want to use the time to plan even more, while waiting for the end of your particular recession before starting your business. It’s like going out for a walk, you wouldn’t rush out the door when it is raining; but would wait until the weather conditions have improved. So remember, watching somebody else’s children is nothing like having children of your own AND don’t go for a walk when it is raining outside; wait for the sun to shine or at least for the rain to stop. How pleasant is it to leave your house just when the rain stops and you can see the sun break through the clouds… That is also where you want to be with your business idea – on the sunny side of economics. The planning phase of your business includes several steps which I will describe on the following pages. You should start with a short description of your idea. Write down exactly what it is you wish to do. Write down who your target market is and why you think your project is viable. This is called an executive summary. It should point out all the vital elements of your project - a brief document that will tell the skilled reader exactly what you are willing to do and what your venture is about. It should be a brief outline, or summary, of what the reader will find in greater detail within your plan. For this part of your plan my advice would be to write it as clearly and concisely as you can when you get started, then set it aside and come back to it once you have written your entire business plan. That way you will be able to fill in the comprehensive blanks that you may have missed before researching all the elements of your business idea. Ideally, this document should be no longer than five pages and should be a refined product of your complete business plan. 4 6


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Once you have written your executive summary, the next step is to write a strategic summary. Once again, this is a brief document that specifically identifies the product, its purpose and the demand for it. This document is also something you may want to come back to once you have written your entire business plan. The strategic summary should be more tuned towards how you will go about your business and briefly describe the reasoning for your future strategy; this excerpt of your planning should be concise and should be able to stand alone without additional parts of your plan. Having completed your two summaries on a preliminary basis, you can move on to start analysing the different elements that will play a role in your success. The first thorough analysis you must do is an industry and sector analysis to find out exactly what opportunities are available for you to exploit. You must also analyse the risks that the industry holds, so you may protect yourself (and your potential investors) from them. Also, you need to research the dominant factors and forces of the sector and the industry into which you are going, so that you are able to position yourself in the best possible way. Is your business idea seasonal? Is your business cyclical or non-cyclical? Answering these questions is crucial so you are prepared for changes and shifts which can be foreseen by your analysis. Note: As we live in an ever changing and rapidly evolving world, no analysis can ever be complete and this part of your assessment should not take more than ten percent of the entire plan. It is mostly to be considered an assessment of the business environment, so that the person reading the plan may also be aware of the driving forces of which you may already be aware‌ The next step is to write a demographic analysis of your target clientele and to determine your target market. Are you appealing to old people, children or young people, middle aged people or even to people of all ages? Are you targeting women or men? What kind of income or sophistication do you believe they need to have to make good use of your product or service? What is the ultimate motivation for your target clients to buy your product? Are you 4 7


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providing a necessity or a luxury product? All these questions need to be answered in great detail in order for you to know how to go about your business. This part of your plan is elementary because you need to understand exactly who you are trying to reach, in order to get to them through the channels that your target audience is most receptive to. Also, understanding your target audience allows you to refine your product and make the most of it. For all analysis you are going to do, be it for the industry of the target audience or the end consumer, make sure to include a well selected number of visual outlines, such as graphs and charts, in order to display and even underline your message by an image. An image can tell a thousand words and that is very true for a business plan, because reading through a dull collection of thoughts and numbers of 50 to 100 pages can be rather de-motivating. Always look at your document from a reader’s point of view, making it as easy to read and as interesting as possible, yet sticking to the facts of your project. Let me recapitulate at this point. •

Up until now you have determined what you are going to do (executive summary)

You know where you want to do it and who you want to do it for (strategic summary)

You are mostly aware of the risks and opportunities in the sector of your venture, so you already have a theoretical competitive edge

Already this a big step in the planning phase of your business and you should have a much better perception of the possibilities that lay ahead of you at this point Now you can move on to the next steps.

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The professional business plan holds 12 steps (you will find a one-page outline at the end of this book). So far you have completed four, so you are one third of the way through the process. In terms of text you should have done approximately 10 - 20 pages, depending on the complexity of your product, its industry and its market. The last of the macro economic elements, (probably the most important one you have to research and analyse), is the market and competition into which you are entering. You may think the industry and sector analysis should have already covered this part, but no. The previous analysis should be done from a production and supply angle, where the market analysis should consider the elements of post-production. What are the barriers to entry? Is it an open market? How is it regulated? What are the advantages and disadvantages of that specific market? Is it a local market or an international or even global market at which you are looking? Is there an existing market, hence competition? Who are the major players (if any) in your market and how to do you need to position yourself amongst them in order to succeed? Once again, these are crucial questions that need to be answered in detail in order for you to see clearly. Always remember you are writing this plan for yourself, but also bear in mind that if you are going into a very specific field, your plan should be understandable to any third party you are submitting it to. One of the worst things which can happen is that someone doesn’t read through your plan and puts it aside, simply because it is too technical or too specific. Unfortunately it may not be your idea or your product which is not interesting, but it is the document and the way you choose to present it that doesn’t appeal. Always make it interesting to read. Note: Be careful not to wander off too far from reality because after all is said and done, you should be able to realize the things for which you plan. It is a thin line between failure and success so you should balance your writing wisely. Step Six is the writing of your marketing plan. In many cases, this plan should be designed like a stand-alone document, which you can extract and use to present to marketeers with whom you may wish to work. You don’t always 4 9


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have to use your entire business plan when discussing your idea. In fact this is much like the financial plan, as that part of your projection should also be able to stand-alone and speak for itself; but more on that topic later. When you write your marketing plan you are obviously looking for ways to market your product, so the first thing to do is to establish a detailed description of your product or service. The point of this is that you get a clear vision of what it is you are bringing to the market. With that clear vision you will be able to define exactly how to best promote your idea. Basically, you are building on the analysis you have done before with your demographic study, as it is vital to the marketing plan to know your target. In this sense, you may choose to include elements from the previous steps, make connections between your target market and your product, and describe how it is useful to the client or consumer. Marketing is basically sales, so what you want to do is to point out the best ways to sell your product by highlighting its advantages to the consumer. Good marketing is what leads to sales and the better your marketing, the more successful you will inevitably become with your product or service! Once you have described your product in full, you can move on to point out the advantages and disadvantages of your product. You may also choose to make a S.W.O.T. (Strengths, Weaknesses, Opportunities and Threats) analysis. You are free to decide whether you want to make this section of the marketing plan brief or extensive. From my experience in business planning I have found it is usually a good approach to simply point out the above aspects in bullet point form. You can extract these points from your product description. For example, if you were to bring a new mobile phone to the market, your advantages could include elements like: user friendly, extensive content, compact design etc. but you could also write a small paragraph on each advantage if you feel the need to elaborate for the sake of clarity. Whichever way you choose, always think of the person who will be reading your plan. On the one hand, assume they know nothing about your project, and on the other, that they may not want to spend hours ploughing through details of no real consequence. 5 0


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Once you’ve completed the two elements above, the final and crucial element of your marketing plan needs to be elaborated. In this part you should discuss the many channels of promotion and distribution. The promotion channels include mailings; direct marketing; swap promotions (with an existing product or a service that may be complementary to your idea); TV advertisements; radio spots; newspaper advertisements, as well as event sponsorships. You may also consider giving away your product or service for a limited time at little or no cost, making a controlled loss in the beginning to spike the interest of your target market. Example: Recently I was involved in a deal where a company was bringing a new medical device to the market. They were considering giving away the actual devices to doctors and hospitals at no cost and then simply billing them for the various related disposable items of the device they were selling, making the business profitable after only several months of use. That way, the users could bill the disposables to their patients, have no initial investment but benefit from the latest technological advance. The patient wouldn’t need to worry because the billed costs would be covered by their medical insurance and so in the end, everybody would benefit from the new product. To me, that was a clever idea! An aspect to strongly consider in your planning is the cost side of things, meaning you need to find a way to get the most efficient exposure to your target market whilst keeping your expenses at bay. This is not an easy task and I’ll get to that later in more detail. Now you have (hopefully) developed your marketing strategy, you can move on to the next step, which is going into more detail of your business. You are about to start your product strategy. The product strategy is required because it allows you to point out two things. Firstly, it is important to establish where you are in terms of the product development. Is it still an idea or has it been developed? In the case of a product, do you have a prototype ready, are you ready for production and if so, what kind of output are you planning to achieve in the near term? It is important that the 5 1


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reader of your plan understands at exactly what stage of the business you are, because it is a significant element in the assessment of financial risk. If you are not ready with your product - perhaps it is merely a design - then you must point out where you want to go from here, and also mention what kind of resources and time must be allocated to progress in the right direction. Don’t pay much attention to the financial aspects at this point, because you will be covering that soon enough in your financial plan (which is Step 11). If you are planning to build a business about some type of (new) service, you obviously don’t have to go into so much detail but you should develop some description nonetheless. Usually it makes sense to provide more detail about the business process of your service so your readers understand exactly where your service will be adding value to the potential clients. Another major aspect of the current step is to elaborate on the identity you wish to give your product or service. Will it be hip, trendy or stylish – or will it be durable, conservative, complex or even simple? What stands out about your product or service that you want to market as its identity? Is it the luxury of it or is it the savings that people may achieve by using it? Is it environmental or is it decadent? Be fully aware about the identity of your product or service and you will be able to position yourself in the market. The idea of product identity goes hand in hand with marketing, so it is even more important to have this aspect figured out completely. Usually, you would integrate your product identity in the marketing plan as a related section; I choose not to do that, because in today’s world the identity of a product is so significant as we live in a world of images. Example: look at the value of brands that have been built over recent years. The companies who own those brands may not have any other assets of real value, yet they are valued at astonishing amounts and that is precisely why an identity is so important to create the intrinsic value around a product or service. When discussing the identity, make sure you include visual aspects of the identity such as logos, draft advertisements and other elements that can make your product appear more ready to market. The more theoretical your 5 2


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project appears, the less it will be of interest, because there is a high chance the typical investor looking at your business plan will not have the time nor the imagination to visualize those aspects. Last but not least, if you are planning something with a technical side to it, make sure you include some technical elements, such as designs or plans for the reader to get a clearer idea of what you are doing. This will make your project more tangible and that is very important, especially to those who may invest in a currently intangible, future asset. Next on the list is Step Eight; the evolution and timeline of your project. This part allows you and your readers to know exactly where you are with your project in terms of planning and development. It gives you a clear idea of how much time you need in order to achieve the next step and the steps after that. This is particularly interesting for the later financial analysis, because you can state, with a certain precision, when you will reach what stage and what target. The timeline and planning is an excellent tool to use throughout the start-up phase of your business, because you will be able to go back to your initial plan and compare it with your actual progress. That way, you will learn about the difference between theory and practice. Usually this part is abbreviated with an outline of bullet points, a timeline with dates by which you estimate to achieve certain milestones, like incorporation, staffing, physical setup, market introduction, first sale and so on. The list should contain all the elements you believe are significant to your business. When writing your evolution and timeline, also consider mentioning some of the risks that are involved at each step of the way, so that you and the reader are perfectly aware of what needs to be done and what obstacles must be overcome in order to be successful with this particular project. You can normally sum up this step in approximately three, to a maximum of five pages. It should be concise and comprehensive and give the reader a clear outline of the time that will be spent. For an investor it is important to have such a timeline, because he or she will be able to follow up with you and get a clear idea how the business is evolving from the day you get things off the ground. At the risk 5 3


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of repeating myself, always keep in mind those for whom you are writing your plan. This is primarily an action plan for yourself but should you need funding (which is usually the case), then also remember to write for the investor. Make your document as accommodating as possible! Don’t go into too much detail, especially with the obstacles because that will show you are focused on what can go wrong, and if one believes Murphy’s Law – what can go wrong, will go wrong… Always do your best to maintain a positive tone when describing anything you are planning to do. I’m not saying you shouldn’t point out or be aware of the risks and obstacles involved; I’m simply saying you should think and write in the direction you want your project to go. You will then have a higher chance of success (it’s simple psychology and I’ve seen it happen in either direction). Step Nine is of great significance for everyone involved because it should describe how you will go from planning, to actually doing what it is you have set out to do. I’m talking about creating your operational plan. In your operational plan you must describe all your products and services. Once again you don’t have to waste anybody’s time with too much detail. You need to precisely point out what it is you are going to do in your company, who is going to do what and how your company will operate. Who makes what decisions? Where do you produce? What logistical plans (if any) are in place and are you doing everything in the best possible way? If you are planning to offer services and no products, you must describe how you will go about the rendering of the service you are making available to your clients. Once again, who does what? Who decides over what subjects? How do you make your organization run as efficiently as possible with the resources that you have at your disposal? This plan is very straightforward and needs no further explanation, simply elaborate on the elements stated above. Followed closely by the operational plan is Step Ten; the outline of your staff / management team. It is of the utmost importance to show your reader - the potential future investor in your business - that you and those who will work 5 4


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for or with you, know exactly what you are doing. Not only that; you must also show you have been able to do in the past, what you intend to do in the future. This part of the plan is where you can build the confidence and gain the support of the decision makers who have your business plan in hand. The rule of thumb is, that if you are an unknown company with an unknown product, you must at least be able to convince your new clientele with the competence of your management team. It is crucial for you to build at least hypothetical credibility in order to establish that you as able as you are willing to lead this project of yours to financial success. Get somebody to be your front man / woman; someone who has a great deal of experience in the field into which you will enter. That way you can quickly get credibility and confidence at every stage of the game! You must also show who you will work with as external partners. Who are your suppliers or advisors? The more knowledge and credibility you can build at this stage, the better it will be for you every step of the way. Imagine two plumbers deciding to open a bakery. Would you want to get involved with your money? No. However, if the two plumbers were only the owners of the company and came up with a clever idea for a new bread or sandwich and were hiring bakers to do the actual work, surely you would be more interested… that is the whole point of outlining the competencies of the individuals involved in the project. The final step of actual planning is your financial plan. There is a good reason why this step of your plan is at the end – simply because it is the numbers that determine everything and you can only do the numbers when you have mapped out everything else. You need to be aware of what you are planning to offer to the market and what it will cost you to provide it to said market. You must be aware that probably 50% of your credibility is attached to the numbers you are presenting. If you are talking to an investor, this percentage is probably higher, because if it were up to these individuals, you wouldn’t be presenting any text, only numbers. Obviously this is greatly exaggerated but you do understand what I am saying. The numbers may well be the key to your 5 5


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business. Nevertheless, the numbers must go hand in hand with your project and all your previous deliberations, because if the numbers are too high or too low, then the educated individual will certainly realize your mistake and swiftly become aware that you do not know what you are talking about, and that is fatal to whatever you wish to achieve. The polite listener may hear you out and then simply revoke his or her interest after a short period of time but the real investors, the venture capitalists and angel investors, will not even hear you out. Instead, they will end your presentation and move on with their business because rest assured, they probably haven’t been waiting for you in the first place. It is of the utmost importance that you make your plan appear solid and realistic to your very best knowledge. An investor will have an understanding of economic fundamentals and market possibilities so you will not be able to sell something that you cannot achieve. Nor will an investor be interested to invest in a project where the person in charge aims and plans to achieve only the minimum (worst case scenario writers, be aware!). A complete financial plan must be comprised of at least two to three cash flow and profit and loss (P&L) scenarios and it is not unusual that a financial plan makes up 30% of your business plan in terms of pages. All your planning efforts should also be in harmony with the scale of your future business. If you are looking to start a small shoe store, and therefore looking for micro capital, you don’t need to present any investor with 20 pages of financial data. However, if you are planning to introduce a new cell phone or even a car, then you must be prepared to make at least 20 - 30 pages of financial assumptions to be able to measure your financial success probabilities. Rule of Thumb: the more capital intensive your project, the more financial planning you have to do to provide confidence and credibility to those who may be your future investors. What goes in the financial plan is straightforward. You need to include your cash flow projects to see exactly when and for what you will need extra capital. This is especially important if you believe you will have a negative cash flow for some time. This exercise will show you exactly what kind of funds you need to keep your business running whilst you are starting to operate. Depending 5 6


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on the importance of your cash flow you may decide to include two to three variations or scenarios to show you and the investor what you are looking at in terms of best and worst case situations. This can be particularly useful for businesses with low overhead or low production costs and/or high profit margins, in order to show that even with low sales you can stay afloat. Even if it is not the point of your venture, you can benefit from displaying such a quality because the economy moves in cycles. An investor may consider that, even during a recession, you are positioned well enough to survive when customers are scarce. A business that can “survive” during the lean times is the one most probable to succeed substantially during times of strong economic growth. If you can turn little or nothing into something, then you will probably be able to turn something solid into something substantial. It is also a good idea to do your cash flow statement projections for at least two to three years ahead, starting from the first month you go into business (including your start-up phase). If you do so, the strict minimum of projections is four pages (two years x two scenarios). I personally recommend making cash flow projections for at least three years, because once again that displays you are planning ahead and not leaving much to chance – or simply allowing as little room for chance as possible, because that is not something you want to rely on in your business! The next part of your financial plan is the projected income statement for your company. It is complementary to the cash flow statement in a way that highlights non-cash expenditures as well as taxation and potential dividends. Also, whilst the cash flow statement should be done on a 12-month basis (starting with the first month of your business setup), the income statement is done on an annual basis. Given the compact nature of a projected income statement, you can easily fit five or more years of projections on one simple spreadsheet. This means that even if you don’t make a detailed cash flow projection for five years (but maybe two or three years), you can still show you are planning far ahead and can measure your estimated relative growth over time. In line 5 7


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with your different variations of the cash flow scenarios, you may want to do the same thing with your income statement. Create at least two scenarios (best and worse case) to show how variable your finances really are. I want to point out here that it is very important to base all your figures on research or your best knowledge, because your projections reflect you and your work in the present and in the future. If your worst case is a grim pursuit of one loss after the other and your best case is a glittering financial extravaganza, triple digit growth and no excessive margins, the investor may or will quickly make you understand that he is not interested in your business. Always remember, an investor, in most cases, has the money to invest because he or she has previously made several consecutive good decisions and too many clever business people have travelled the road of overdrawn projections and failed miserably (taking the investors with them). Also, note that it is the investors’ profession to make money with money so they are (in most cases) more accustomed to financial planning than you are… Once you are done with the projections it is usually advisable to blend some graphs and charts into the financial plan because this illustrates and helps to visualize certain relations. Some useful charts are: inflows vs. outflows; cost allocation; cost vs. net profit; geographical allocation of income and allocation of income by sectors (if you are planning to offer more than one product or service). This mix of numbers, graphs and charts will make your financial plan easier to absorb visually and is also a superior factor in your favour, as you want to do all you can to keep your reader interested throughout your plan. Once you have completed your numbers you can write a conclusive statement. What is important in this statement is that you highlight all the aspects which stand out. Highlights are things such as financial risk on the downside or good profit margins on the upside. Summing up your financial plan, you should come to a very precise conclusion about the economic feasibility of your project. Where are the potential “bumps in the road”? What is the worst that can happen? What is the best that can happen? Is the risk worth the potential reward? You 5 8


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should point all of these things out, along with some key facts and figures that may allow the reader to better understand your projections. Always assume you are the person who knows the most about your project and think about the questions the readers may have whilst they are reading your plan. Rule of Thumb is: The fewer questions you leave unanswered, the more chances you will have to succeed at all the different stages of your project – starting with funding… Always be precise, give the reader all they need to understand and to evaluate the potential of your plan; but at the same time try not to wander off too much from what it is you are trying to bring across. Try to avoid simply filling pages, because if the content is not of interest, no one will read them. Compact and complete is the best way to go… The very final step of your business plan is the global conclusion. At this point you have highlighted all the aspects of your future business, from the product, to the market, to who is behind it and what numbers you are expecting to generate. What you need to do now is to sum everything up concisely and make a statement. Given that you have come this far with your planning, you should write this summary with an underlying positive tone. Not enthusiastic or euphoric, simply positive to the extent that the reader recognizes, without any doubt, that you and those involved in the project are convinced that what you are doing makes sense in every way – ethically, morally, financially and economically. You may decide to include a short paragraph of subjective content, stating that you are certain of your success, but be careful not to sound too intrepid. It should merely be a small pointer towards your motivation to make the reader understand your attitude… It is similar to a closing argument in a court of law when the lawyer summarises the most significant elements of the case with the aim of convincing the judge and jury to pass verdict in favour of what he is arguing. You will see how successful your efforts are once you get your verdict – and if you have done your planning according to my suggestions, I hope the decision will be in your favour! 5 9


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Key Thoughts •

We are all just one good idea away from being millionaires

Make sure you have all the facts to consider before getting involved with anything

Salaries and incentives enslave most free entrepreneurial spirits over time

Plan every detail of your enterprise

Make your business plan as accommodating to the reader as possible

We live in a world of images, make sure you get an appealing identity for your business

Find the best value for your marketing efforts and keep costs at bay

The better your marketing, the more successful your business will be

Always look at your business plan from a reader’s perspective

No analysis can ever be complete because tomorrow it may be obsolete

Economic timing is crucial to your venture

The numbers will determine everything

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The more capital intensive the project, the more financial planning is required

Your projects reflect you as a business person

The fewer questions you leave unanswered, the more likely you are to succeed

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ow you have gone through the planning phase, reviewed all the different elements of your plan and finally come to the conclusion that you want to go forward and put your plan into motion, you will need to make your first sale. By first sale I mean you will have to go out and convince someone, present your idea and win them over to fund your project. Of course, this excludes the privileged few who already have funding lined up for them. It doesn’t matter if you have to present and sell your project to an investor or a member of your family, even if the degree of financial understanding and initial motivation towards you and your project may vary. A sale is a sale and you will have to make it in order to proceed with the realization of your idea. Compared to the sales process, the planning is easy. When you plan for a venture you don’t need to defend your idea, you simply need to put it on paper and put all its aspects on display. The sale is difficult because this is the first crucial part of taking your idea into the world. Certainly, this can create much stress which you have to tackle along the way. The first presentation is always the worst; maybe you will make your pitch and get your funding the first time around or it may take several attempts. Note: It gets easier as you build confidence and even a routine around your plan. You will know what kind of questions the investor(s) tend to ask and you can refine your presentation, including the experiences of previous ones. If you keep learning, it gets easier every time until you get it right. The complete and well-developed business plan you created for this purpose will be (besides you who is presenting the project) the most important aspect of your pitch. For you to be ready, ideally you must be aware of all the questions and all the answers that may be asked about your project. In most cases you will lose the interest of any investor if they catch you unaware, not knowing what you are talking about. At this point I can say, that from my experience, a man will part with his car or even his wife more easily than with his money. Bearing this in mind, be prepared for all topics that may be brought up, no matter how far fetched they may seem. 6 9


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Secondly, an investor always wants to be informed in a comprehensive manner. By this I mean the following: chances are that if you submit your 100-page business plan to somebody, they will simply not bother to read it. You therefore need to have a comprehensive document, ideally an executive summary which doesn’t exceed three pages. Since the executive summary should be a part of the documents you created whilst developing your business plan, this should be no problem. Also, you should have a document that presents financial facts and figures at a glance (on one or two pages). All in all you should be able to bring your projects across to investors on a maximum of five pages and the document must speak for itself. It must be compact, interesting, brief, but complete. Finding someone who will actually look at your project with the intent to give you money for your idea is rather difficult. There are however, several different places to which you can go! Firstly, there are your friends and family. If you are fortunate enough to have financially independent people close to you, it is probably best to introduce your idea to these people before you approach anyone else. Friends and family are usually receptive to put up at least some of the funds you need to get things going. If, for some reason you are not in the position to get funding this way, maybe because you need too much money or there is simply no one there to support your idea with their savings, you have the three common choices, also depending on your deal size (meaning the amount of money you are looking for to launch your project). You can seek out an angel investor, you can go to a venture capital firm or you can go to a bank. The latter is probably the most difficult way to go, because in almost all cases you will be asked to provide collateral for the money you will be lent. I’ve come to define banks as institutions who will give you money only if you can prove that you don’t need it. I don’t recommend borrowing from personal credit institutions because the conditions are not at all favourable and will put you under more pressure than you want to have. Usually, you will have enough pressure from the start-up phase of your business; you don’t need 7 0


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additional pressure from a financial institution simply because you took out a loan designed to be paid back swiftly. You need to find a lender or investor who will give you enough time to be flexible so you can focus on your project, rather than focusing on finding the money to service your debt‌ The most common sources for project funding are angel investors and venture capital firms. You may also be able to attract the interest of a single private investor, but that is usually difficult as these people are very hard to come by or to get close enough to, in order to pitch your idea. Angel investors and venture capitalists are similar in nature and will, in most cases, be interested in an equity share of your project. This is natural in the sense that if they believe in the feasibility of your idea they will want to be part of it in order to benefit from it in the long run, beyond the start-up phase where they may receive interest on a loan, just like a bank. It is very common, at least in my experience, that entrepreneurs will be so eager to get the support / funding for their business that they weaken their negotiating position by showing this needy emotion. The financier, who funds deals for a living or even simply for the love of the game, will be able to identify your state of mind and feed off it the best way he can. An investor does everything he can in order to maximize his own profit. This is more than normal; everyone in this world looks to make the best deal for him or herself – and so should you. When you talk to an investor and see there is an interest in your project, you should understand that most angel investors or venture capitalist firms think alike, so there may be more than one party who would be willing to provide funding for you - you need to bear this in mind for your negotiations. Note: An important difference - the angel investor usually invests his own money whereas the venture capitalist may invest other people’s money. They are very similar in their approach but there is a difference in personal involvement. Generally you should know that if you can get the interest of one investor, chances are that there are others who will be interested in what you have to offer and you need to bear that in mind for your negotiations. 7 1


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When you have the confirmed interest of a financing party, and you’ve established this particular point, you can take that confidence with you into additional meetings. At the end of that road you will find there is probably a (much) better deal available to you than you may have thought. Business is a game. It may be a very serious game but it is still is a game. There are rules, there are players and whoever is the best will win. In order to play the game and to master it you have to build experience at all levels of the game. Making an educated decision on how to fund your business is not an easy task. Firstly, you have to find out which options you need funding for, and then you have to make a choice on the one which will be the best for you in terms of entrepreneurial freedom, attractiveness of the conditions and finally, the control over your own business. Most venture capitalists (VCs) and angel investors, as previously stated, will ask you for an equity share in exchange for their investment. Many will even try to get the majority share if you let them. What is most important - once you have established serious interest from funding parties - is to determine how much of your business (equity) you are actually willing to give away. As described previously, the typical investors will try to get as much equity from you as possible, so it is my personal suggestion that you seek out an external financial advisor who can then calculate how much your idea is worth (potentially). An example for such a calculation would be discounting your projected cash flows. Also, this specialist can assist you in talks with the investors. It adds to the professional image of your actions and is helpful for you to determine certain elements on the spot. You may think of it as having a lawyer present if the authorities ever question you… I would suggest you involve such an individual whilst you are in the planning phase, that way you will already have the professional input during this crucial process and you don’t have to go back and change your documents based on the new information or feedback you may well get from your advisor. If you lack the resources to hire (and by that I mean 7 2


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remunerate) an advisor, you can offer him or her a small share of the equity of your new venture. If the advisor likes your idea and believes in it, which is the best groundwork for excellent advisory services, he or she will be receptive to a non-cash remuneration proposal. It is actually a common approach! Many years ago, I was involved in the start up of a project - actually I was able to sit in on meetings when doing my internship in project management while I was still in college. There was a company with a brilliant idea, but the board of directors who were looking for funding had no experience in starting their business. Of course, as I was to learn during the course of the negotiations, this would have catastrophic results during the start-up and funding phase. I saw that the possibility of getting the project going with the help of the investors created such an enthusiastic mindset in the party which was seeking funds, that it was practically an early Christmas for the investors. Here was this project, certainly worth a multiple of millions and the company was merely looking for about half a million to get going. Market studies had been done and the market potential was confirmed, so there should have been a strong confidence on the side of the entrepreneurs but somehow emotions overtook them. In the end, the creator of the product ended up giving away almost 50% of the equity, merely for the promise of funding and business development. For the sake of the example, let us pretend the idea was worth somewhere in the neighbourhood of 10 million (be it Dollars or Euro). The managing individuals were so keen on the funding that they gave up five million and in turn barely received 500,000 in investment. Sure, the risk is much more elevated when you talk about a start-up. It is pure venture capital in the true sense but still, the above example is just one of many where too much capital or equity was given away. Given that the average return on private equity investments has been somewhere in the region of 10% p.a. (in 2005 and 2006) the directors of this particular company overshot the target by far. My personal assumption would be that they gave away at least twice the equity that would have been needed to sway the investor(s) - this may depend 7 4


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on the final structure of the deal. Now, what would have been the appropriate share of equity to be allocated for this kind of transaction? This is the million dollar question. If you have a solid plan and (independent) studies that value your project at ten million and you are looking for half a million, I would suggest you start to offer roughly 10% in equity and somewhere between 7 - 10% in interest for the funding. Factoring in the various risks of such a transaction, the reward may be appropriate. Assuming you agree on a five-year reimbursement plan, giving the investor a 10% interest and giving away 10% of your equity, we can do the (linear) maths: Year 1 - 50,000 Year 2 - 40,000 Year 3 - 30,000 Year 4 - 20,000 Year 5 - 10,000 With an annually diminishing financial risk, the investor makes 150,000 in interest payments over five years, plus, he owns 1,000,000 worth in your equity; making his operation worth 650,000. Including his initial 500,000 he will then have 1,650,000 or 230% return on his investment in five years. That boils down to 46% p.a. which is a good deal, given of course that your company actually makes it and becomes successful, re-pays the debt as planned and grows over time. Also, bear in mind that the risk of the investor is reduced every year and that theoretically there will be an endless flow of dividends for decades to come and once your project has turned into a successful venture, that 10% you gave away may be worth tens of millions on the stock market. This is just an example to display the assessment of return on investment. It is crucial that you value your business correctly in order to have an optimal position in your negotiations for funding! Obviously, deals vary in size and 7 5


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growth projections, which means that valuations vary as well. The company I previously described actually had to sell their project for scraps to another business that had entered the market years later as mismanagement had started in the funding phase. They had to sell their idea because they couldn’t manage the market introduction (but the product did become a considerable success at a later date). The investors lost their money and that was the end of it all, which brings me to my next point. An investor may always argue around the potential failure of your business in order to get you to sweeten your offer; so if you can credibly establish the feasibility of your project then be confident and get the best deal for yourself. Consider what you are giving away, consider what you are being offered and then retreat to do the maths on how good a deal it really is that you are getting! Always be aware of the choices you have and consider the timing when you make your decisions. If, for example, time is of the essence for your project, then you have much less room for negotiations, because as time goes by your chances of success will narrow. Another element that you must consider is the structure of your funding. You can seek a loan and make it interesting, simply by offering an attractive interest to the investor. A word of caution at this point: always make your offers within reason, because an investor will not be easily convinced about the transaction, simply because you offer a higher interest. What he or she will certainly also take into account is the likelihood of you paying the interest as well as the principal. The structure of the investment is something to which you must pay particular attention. If the investor doesn’t want to give you a pure loan but also wants equity or only equity, you may choose to offer a convertible structure. By this I mean that an investor will receive a set number of shares, representing a fixed percentage of the business, but only for a certain period of time. Over the course of your agreement, let’s say five years, you will pay interest and the principal back and then, at a set date in the future, the convertible will turn into a number of shares, usually much lower than the initial amount. 7 6


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Example: You get one million as a loan, which you will back by 45% of your company’s equity. After five years you will pay back the principal (initial loan) and the convertible will turn into shares at a set ratio such as three to one. The investor then has received interest over the agreed time period, was paid back his initial investment and now has 15% of your company’s shares. This is a more complex transaction. There are other structures such as mezzanine financing (a loan structured to give your company more financial freedom without weighing much in your balance sheet) which allows you to finance your project, but this is not our major concern. The most frequently practiced alternative for an investor, is a simple acquisition of your equity. You will get funding in exchange for a certain percentage of your stock; this is also the best way to start a business because the investor is involved to some extent, rather than focusing on interest and the repayment of his principal. It is also a fair approach because you bring the vital idea and the financier brings the vital funds, hence everybody has a role to play and should therefore be part of the success if it materializes… There is one element in the funding process to which I would suggest you pay particular attention. I’m talking about external advice. Generally I’m in favour of additional input from a neutral, constructive source. However, be careful what advice you buy because the choice of to whom you turn for it, can be decisive to the success of your business. Recently I’ve come across several cases where the advisory services significantly slowed the evolution of the project. In those cases the advisors were not at all competent or fit for the tasks, and also strained the initiator of the business for cash. The small amount of resources which were available to the entrepreneur were actually eaten up by the fees of the so called advisors and for many months nothing ever came of their so-called efforts. The financial industry, more than any other industry, is filled with incompetent individuals who make themselves out to be so much more than they really are. I cannot underline this enough. 7 7


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It is very easy to fall into the wrong hands, so when you actually decide to acquire the services of a firm or an independent consultant in order to obtain the required funding, you should insist upon a track record, eventual testimonials/ reference companies that he or his company has already raised money for, or he has advised in the process of funding. You don’t need more than one good (independent) reference and you should ask for at least this one in order to be reassured. Just the fact of getting the reference will give you some reassurance because a bad advisor will probably not have any good references to his name‌ The sweet sales talk may make you believe a lot of things and you should always remember that you are looking for the quickest route to economic and financial results. For your sake and the sake of your business, always be on high alert. There are certain institutions which exist beyond the doubt of incompetence, but even those are few. Look at past events where multi-national advisory firms were prosecuted for fraud and other offences. No one is really safe from incompetence, but we can pay particular attention to the warning signs and act accordingly and getting a good reference is a good proof of past result. Also, please note that not all different financial advisory services may be suitable to assist you in your quest for funding or for the review of your projections. For example, talking to your banker or your asset manager may not be of very much help because it is not really their field of expertise. Not everyone in the financial industry is automatically trained or skilled in the field of new ventures. In order to get a solid and valuable feedback you should talk to someone who works in private equity, venture capital or project management. You could also talk to your accountant but he would probably only advise you on the techniques of forecasting; what he / she would probably lack is the competence to draw a connection between your projections and the economic feasibility. Don’t talk to your insurance broker or your lawyer about your numbers; they will not have any valuable advice to give. Remember, there are specialists in every subject and you must make the effort to get their advice 7 8


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in order to cover every angle of your tasks. Surely, if you cover all the angles and make the right pitch, you will get funding for your idea‌ Just make sure you’re doing it right!

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Key Thoughts: •

To put your plan in motion you will need to make your first sale

Presentations will get easier as you become experienced and refine your pitch

A man will part with his car or even his wife more easily than with his money

An investor always wants to be informed in a comprehensive manner

Your pitch must be interesting, brief and complete

There are four main sources of funding: angel investors, venture capital firms, funds and banks

An investor will always do everything to maximize his own profit

If you can get the interest of one investor, you can be sure there are others like him who will consider what you have to offer

Business is a game

Most angel investors and VC firms will ask you for a substantial equity stake and they will take the majority if you let them

Seek out an external / independent financial advisor to calculate what your project is worth

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An investor will always argue around the potential failure of your start-up business, so you must establish the feasibility with the least amount of doubt

Be careful whose advice you buy

A bad advisor has no good references

Do not talk to your insurance broker or your lawyer about your numbers

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inding the right approach on how to operate your business in the most efficient way is never really easy. But do you know the saying “the easy things are not worth doing”? Well, it is the same idea for your business process. The key aspect is efficiency. You must define who does what, where and when in order to be efficient. You must develop your task flow in such a way that you waste the least amount of time and resources. The resource of money will be discussed later. What is important in the business process, or simply your day-to-day operations, are the human resources. Some people will try to do everything on their own just to keep things “low budget”, others will hire a lot of staff from the start – you need to find the right compromise between the two. You need to work efficiently with what you have and grow with your business organically before you move on to the level of growth through investment. Be careful not to overload the people you have working with you, because they will not be efficient if they have too much to do. Also, in order to avoid conflict, you must distribute the workload as equally as possible because the human psyche can be very tricky and counter productive when it comes to just treatment. You need to show your employees that you are willing to work just as hard as or even harder than them to make your business successful and thereby profitable.

Business Economics

I’ve always been very firm on the idea that a business stands or falls with its internal economics; in other words, the management of costs. To me, this is a very significant aspect and you, as the entrepreneur, must keep a very close eye on this matter. Even if you delegate most of the other tasks in your business to employees, you must always give your attention to your business economics because the truth is, no one will look out for your assets with more interest and care than yourself. Note: I’m not suggesting you actually perform the tasks of financial management, simply make sure you’re always on top of the subject and have last word on crucial matters. 8 9


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A business can have a large overhead if the expenses are justifiable by income and profits. You should calculate your optimal size and work towards it at all times. There is a scenario that will illustrate what I mean. Scenario: Let’s assume you start your business with one million dollars. You rent a large office and hire a secretary and two sales people right away. So far it doesn’t sound like a bad thing. Let’s assume you have always wanted a stylish office with gadgets and a nice company car to go with it. Of course, you should pay yourself the right salary that comes with your newly created company – after all you are the creator; the boss! Before you know it you will have spent 50,000 to set up your office, 100,000 on the car, and within three or four months you will have paid another 100,000 in salaries and running costs. Calculate how long it will take you to spend all the invested money at the rate you are going. Maybe another 12 months if you factor in your marketing expenses? Wow! Will you break even by that time? Can you justify your expenses? Will the people who funded you accept that you have given yourself only 12 months to break even? Do you know that even if you have great margins in your business, you have to generate at least twice the business volume of the amount you are spending? A lot of people underestimate the time frame it will take businesses to go from start-up, to break even, to profitable. That is also why a large percentage of start-ups fail within the first couple of years or even the first year. It is therefore crucial you have a very close look at your expenses and factor in time as a disadvantage – not an advantage. It may work out well and you will actually make your targets and break even or become profitable quickly, BUT by spending your seed capital too fast, you actually narrow your tolerance for failure more and more, leave less and less room for error and you know what they say… you are more likely to make mistakes when you are under pressure. So what can we conclude from this first example? Be smart about the money you have in hand to start your business. Use it to actually start your business, get it going before you start spending, before you reward yourself with the things you think you deserve because if you don’t make it on 9 0


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your first attempt, your business may not be around for a second one. Also, a failure is sour reading for any investor, so you want to bear in mind that what you do, whether positive or negative, will always come back to you in the future. What you do may further you in your life or it may hinder you from getting where you want to go, so spend your money wisely because it runs out faster than you think…

21st Century Economics

With the new millennium came a new set of rules! It is crucial to understand these new, additional rules, in order to position your business accordingly. It is much like trying to run a diesel engine on regular fuel; your car will run a few miles if you are lucky but ultimately it will fail. The role of psychology for instance, which has always been played down in previous theories, is essential in the new world of global economics. There is a strong relationship between the overall human psychological state of mind and the overall global economic situation. This relationship is crucial to the time period, depending upon whether the economy lives within a growth phase or a so-called ‘boom’ period, or in a decline phase or so called ‘recession’ period. Certainly there are the known, traditional factors that affect the duration of the given cycles, but the psychological state of the human mind within the economy is a driving factor. The psychology within the economy is the crucial motivator for the duration of economic cycle. There are four “new” factors which affect the cycles and their duration in the modern world: •

Technology ( e.g. Product Life Cycles, Innovation)

Information Flow ( e.g. Internet)

Communication ( e.g. Mobile Communication)

Public Psychology ( e.g. Consumer Confidence and Awareness)

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Events of 2007 have shown that the economic cycles will be more efficient, meaning that the growth periods will last longer and the recession periods will have smaller importance. I firmly believe that if the beginning of the global economic growth phase hadn’t been disrupted by 9/11 and resulting wars, we would have seen much more proof of the new economic rules. The economy has been and always will be affected by demand, supply, inflation and other key factors. That is also what determines the future, but on top of these factors there are now new indicators that accelerate global economies. The result is a decrease in overall stability and higher volatility due to faster cycles, but on the other hand, we find faster improvement and more efficiency. Efficiency is the key word, and on top of this comes the fact that the general population is more aware of economics, whereas when the most relevant economic theories hadn’t been established, the overall economic awareness and understanding among the general public was much less than in the world in which we live today.

Global Economic Interactive Factors

The graphic on the opposite page shows the interacting fields and the way in which they interact with each other; it is more complex now than it was in the past. The change has caused a new economic environment that we must first comprehend before we can position ourselves appropriately in it and act efficiently. Nevertheless, the direct result of the new factors added to the old factors that are shown above, is certainly greater efficiency. Capitalism, and thereby the market economy, may come closer to “perfection” in the future, even though the so called modern economic school excludes a perfect economic condition. For those of you who are not familiar with the terminology of economics; a “perfect” condition means all actions in an economy function seamlessly without any disruption. Such a condition would basically mean that there would never be recession. It will surely be that in the future, recession and boom cycles will continue to exist as they do today. It is hard to imagine that the global economy will prosper without 9 2


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TECHNOLOGY

COMMUNICATION

INFORMATION FLOW DEMAND

GLOBAL ECONOMY

SUPPLY

PSYCHOLOGY FISCAL AND MONETARY

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interruption. However, we are inevitably moving towards higher efficiency, hence less disruptions, hence shorter recessions. The older economies of this world are shifting from being mainly production industries to being service industries. The well-developed western countries are leaning towards a service industry, whilst many emerging, eastern countries - like China and India - are becoming the exporters of the global economy. Leading the way to this modern economic development are the United States of America. The result of being more service oriented rather than production oriented, is that unemployment will be more volatile, therefore it might become less efficient. Economically the supply of goods is more efficient and therefore the demand is constantly fueled. Why? Because the internet appears as a new, key medium to distribute and promote goods and services without borders and boundaries, creating a subliminal channel to suggest wants and needs to consumers around the world. Another factor that has not been considered is the forced drive to greater efficiency due to the global growth of population. We move faster, we live faster, we produce faster and we think faster. If we don’t keep up with the evergrowing criteria and the increasing competition, we are simply left behind or left aside. On a psychological level, that may create great difficulty in the future because we are all replaceable. In the past, efficiency was not as important as security, but we now face a new economic environment where efficiency is crucial to survival. These mentioned factors and impacts are all side effects of a new economic era and the downside of the drive towards greater efficiency. The old economic process is altered into the new economic process by the aforementioned factors, namely: Psychology, Technology, Information Flow and Communication. The role of the different factors appears as follows:

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Psychology

More awareness of economic patterns and the meaning of economic indicators, leads to greater response to a given economic environment. This adds to the speed of the economy

Less fear of recession, diminished risk of economic depression

Greater enthusiasm towards economic growth, therefore more motivation towards greater efforts leads to greater efficiency

Technology

The technological advances of the 1990’s and additional improvements of recent years have accelerated the global economy and made it more efficient. Amongst those advancements we find the internet as a public resource, we find telecommunication and we find the rapidly moving computer industry

Technology therefore renders the economies more efficient

Technology is the accelerator of demand and supply

Product Life Cycles (PLCs) are reduced

Technology triggers a faster pace of development

The technological advances trigger a snowball effect in economic improvement as businesses may grow

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faster and become more efficient. The pace of all activities is increased •

Communication

All new influencing factors of the economy are inter-related; therefore as technology evolves, communication improves

The new medias that have been developed allow communication at higher speed (a perfect example is the “Blackberry”)

Human interaction is improved, therefore the economy may function more efficiently

Facilitated communication, as we see it today and even more in the future, allows a substantially better response to economic problems and also faster response to all developments

Information Flow

As we communicate, information flows. As communication is improved, the flow of information is more efficient

The current flow of information comes close to the state of “perfect information” as virtually any information required is available anywhere, at any given point in time

The flow of information as we see it today, also corrects the lack of transparency, since more information is available from more sources than ever

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before. Information has always been a market of its own, but never has information been shared so publicly, through so many different medias •

The result of the current state of information flow is that the global economies, once again, become more efficient, but most importantly, more sensitive to events and indicators as we are globally more alert

Economic Scenarios

Certainly there are different scenarios in which the given new factors are applicable and they are to be considered as motivators and influencers with the cycle. Only an extraordinary event in one of the four factors may lead to an independent shift of the economic situation. For example, a technological breakthrough may certainly trigger an economic boom and that has been seen in the past on several occasions. We only have to look at the boom of the internet in the late 1990’s. The boom was so strong that it affected all other factors and had a strong stimulating effect. The main forces that make up an economy – demand and supply – are therefore dependent on these four sub-factors if we want to call them that. But not only are they sub-factors, they are key factors to the global economy and as described before, they are main influencing forces on the duration of economic cycles. These factors have not been considered in “modern” economics until now, and the tendency of each of the four factors works as a multiplier or magnifier within the macro environment. This theory is to be seen as an accelerating model - the laws of economics remain valid for all goods and services. Taking into consideration that the given four factors have never before been thought of, and function as an accelerator to the economic cycle, we may improve existing models as they impact the demand side of the economy as well as the supply side. The models vary depending on the current economic situation where we find ourselves within the given cycles. It is perfectly explained why we anticipate reduced negative 9 7


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cycle times and extended positive cycle times, namely booms and recessions. A simple model can illustrate how the new economy functions:

DEMANd and supply

industrial data

household data

economic data

communication

TECHNOLOGY

info (flow)

industrial governmental institutions

PUBLIC PSYCHOLOGY

national or global economy

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The previous illustration is to be understood as a cycle, an ever-flowing way of action and reaction. In the so called “old economy”, the four factors that have now gained importance in the “new economy” have never been a deciding factor, but the shift is clear and will become more and more obvious within the coming years, eventually decades, depending on the movement of economic cycles. Nevertheless, time periods are reduced, much more speed is applied to the economy and that leads to greater efficiency in both ways - upstream and downstream. The old economic models are less complex with less factors and indicators. Today we have models and means to direct and predict economic shifts before they happen. The efforts to a more efficient economy are well on their way. The stock market as well, is gaining great importance all over the world, as technologies and means of communications are put in place to accelerate the information flow. Once again in this statement alone, we see the interrelation between all those factors. The faster information flows, according to technology and communication, the more efficient is the psychology with the economy. A simple example: the process of collecting industrial and household data is reduced, indicators can be established at a much faster pace, therefore a turnaround is seen much faster as the public awareness is higher, as well as the public’s knowledge of the economy. Certainly the psychology is the key multiplier as all other factors are flat. It may appear possible that the information flow is also negative, meaning that information flows less rapidly due to the lack of economic motivation. Though this should only appear when the economy is already in recession. The flow of information will be jeopardized as the economy has no key motivation to function. However, it must be emphasized that due to the multiplying factors, namely psychology and information flow, the economic cycle times are reduced as well as possibly expanded. In the future, we will see reduced declining cycles as negative data - which leads to recession - being transmitted faster and therefore absorbed faster. Similarly, it will function within recovery periods. 9 9


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New Economy

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The further we go back the more rigid it becomes. The efficiency was quite reduced due to the lack of the factors that this theory is all about. This was mainly because the time span for the information to get through to all relevant individuals was much greater. Today data is available within moments. In the past it took significantly more time for trends to become evident and to be identified as threats to the economy – quite often it took days or even weeks to obtain information. Our world is living at an ever-growing pace which leads to increased efficiency on one side of the equation but to destabilization on the other side. We can call it the One Second Economy. Throughout the history of economics, whenever there was a great technological development, mankind was stunned and euphoric. So the greatest impact out of the four mentioned factors, namely Psychology, Technology, Communication and Information Flow, has always resulted out of the technological and then the psychological aspects of human development. In the 1990’s, the remaining two factors (communication and information flow), in order of appearance, came into play. Technological evolution has always been driven by the need for more efficiency. The lack of efficiency therefore drives mankind towards change. In the recent past (on a historical scale), the world of business has been introduced to the concept of change management. Economics is made up of business. A significant change has occurred in the economical environment that we have known up until this day. We will, without doubt, see more change and as we advance in technology, change will become more frequent. We are constantly re-inventing ourselves and if we don’t we will be left behind. The world, as a result of this development, should continue to be more competitive. If we closely observe recent change, be it globalization strategies, the single European currency, the internet, biotechnology or the mobile telephone, we will see that development has great effects on life, global as well as from an individual point of view. What can easily be lost from view is the simple fact that the economies around the world, (the global economy), is made up of people and is therefore made up of minds. As we saw in the age 1 0 1


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of industrialization, the technological focus was emphasizing on movement, (simply motorization), from the railways, to the car and on to commercial air travel. Thus the best examples of the shown relation are those technological (r) evolutions that change the economic landscape for a lasting period of time – specifically, the railways, the automobile and the internet. The core idea in this theory is, that economic factors are impacted by the four mentioned factors (P; T; C; I), but also the factors have interrelated impacts that increase the effect on the overall economy. Graphically this can be presented as follows:

psychology

technology

communication

information flow

GLOBAL ECONOMY

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Over the past decades we can clearly identify a shift in development focus towards the movement of information, which has now reached a very sophisticated level. As explained previously within the theory, it affects the efficiency of the global economy in a way that mankind has not seen before. It has a multiplying effect on all economic factors. Psychology has been discussed as an economic factor by the great economists of the 20th century such as Keynes and Friedman, but it has never been acquitted the role that it deserves. The fact is that the economy is very much affected by the psychological aspect and that is mainly due to the developments in human interaction over the past years. Now, through all the available media, the individual is directly affected by the economic condition and also responds to it. As education levels rise over time, people in general are able to make more educated decisions and have a greater understanding of the way our world functions. It is not necessarily a profound knowledge, for now we can speak of a general awareness. Information provision and the value of information as well as its availability have greatly supported the current development.

Speed is the Essence

The previously described new economic framework underlines the fact there is a new set of rules; it is essential we comprehend this new set of rules and position ourselves accordingly. The most important factor in today’s business world is speed. I’m not talking about sloppy, quick and easy speed. No, I’m talking about being the best at what you do, whilst being the fastest. Economically speaking you can achieve a great deal if your service is swift. Take the example of the numerous service providers around the world, always striving towards a better speed in the delivery (e.g. Fedex; Kinko’s). The second big element for success is efficiency. Don’t make mistakes! If you are fast at what you do but make plenty of mistakes in the process and need to correct them afterwards – how fast are you really?? If you sum up the time spent correcting your mistakes, you’re probably slower than others and also note that errors in your work will always leave a bitter after-taste for your client. 1 0 3


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They might remember you as the person who wanted to do everything too fast but didn’t manage to get things right the first time around. That can actually have a rather negative impact on your business reputation, so you should carefully work towards greater efficiency and move at the speed which you can handle. There is absolutely no point in trying to do things too quickly if you really can’t accomplish them. I’m stressing this fact because it is of the utmost importance when it comes to customer satisfaction. Take any industry and look at the products – the most reliable are the most efficient. Faulty products are not tolerated and if you buy an item and need to get it fixed (regardless of warranty) shortly after your purchase, this will surely diminish your desire to purchase more of that company’s products in the future! It is the same in the service industry, so remember to be swift and efficient but take the time you need to get your work right the first time around, so that the client doesn’t point out your potential mistakes. After all, you are getting paid to deliver…

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Key Thoughts: •

The key to your business process is EFFICIENCY

Grow your business organically as long as you can

Pay attention to the workload of your employees

Show your employees that you work at least as hard as they do

A business stands or falls by its internal economics

Make sure you are always on top of things when it comes to financial management

Calculate the optimal size of your business and work towards it

Don’t underestimate the timeframe it takes to go from start-up -> break-even -> profitable

Consider the time factor as a disadvantage

Whatever you do, positive or negative, will always come back to you in the future

There are four new economic factors to which you need to pay attention:

• Technology

• Information Flow

• Communication

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• Psychology

Technology is the accelerator of demand and supply

Facilitated communication allows better response to economic problems

We live in a “One Second Economy”

Always remember that the economy, regardless of scale, is made up of people

The most important factor in today’s business world is speed

Be swift and efficient but make sure you get things right

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C H A P T E R

VI running your business 1 1 3


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he structure of your business is something which is important in many ways and it is the first thing you need to consider when turning your project from theory into practice. It adds to your credibility and impacts on your profitability. The right fiscal structure of your business can save you thousands (if not millions) in taxes. Books have been written about fiscal safe havens such as The Bahamas, The British Virgin Islands, Panama, Switzerland, the list is long. Should your business be on shore? Should it be off shore? What is perceived as smart or clever and what is perceived as shady? All those questions should be answered in the early days of your business, so you may optimize your structure as early as possible! I will try to outline a few basic ideas on how business structures are perceived and how they make sense for your venture. Firstly, I believe there is no point in building heavy and costly structures if there are “light� versions available to entrepreneurs. If you are starting your business in the United Kingdom, it is a good idea to start out as a Limited Company (Ltd.). This type of entity is widely accepted and has a very efficient structure when it comes to regulations and limitations. In our times you can incorporate an Ltd. in the UK within 24 hours, have a virtual office and be operational to start your business the following day. This is usually not only quick but it is also inexpensive. Opening a Ltd. with a virtual office should cost you no more than $1000 for the first year of business; creating the company itself can be done for less than $500. Since the Ltd. is a common and well accepted structure, you can also use it to do business in your country. Current tax laws provide that a Ltd. that has no business operations in the UK does not have to pay taxes in the UK, making this type of company a very attractive vehicle. In most countries there is a set (at least two or three) of company types you can choose from - it all depends on the requirements and limitations your line of business needs. For example, if you are going to launch a small business in the USA you could start by opening a Limited Liability Corporation, in short LLC. In Germany you can choose between many types, but more commonly, 1 1 5


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the small business sector operates with the “GmbH” or “AG”. In Sweden you will mostly find company names to end on “AB” which is basically the same as Ltd. or AG. In many countries such as Germany (or Switzerland), the company type will be linked to a certain amount of capital invested. To give you an example from my immediate business environment, to create an LLC (a GmbH in Switzerland), you need ten thousand Swiss Francs and at least two people (or one Swiss resident). The process will cost you about one thousand five hundred Swiss Francs and take about ten days to two weeks. Forming a “bigger” company like a Ltd. (which is the AG in Switzerland), will take a minimum of fifty thousand Swiss Francs paid in capital and initially requires three people to create (or one Swiss resident). The AG will cost about three to four thousand Swiss Francs to set up and requires a solid administrative framework. You need to have a board of directors, an independent accountant as well as an independent auditor. All these requirements make the AG rather costly. An LLC (GmbH) will cost you about half in set-up costs, requires a fifth of the paid in capital and is also much easier to administrate in other ways, as it doesn’t require a board of directors. However, the LLC has no shares, only participations and these don’t get issued. Therefore this is not the appropriate entity if you are seeking the facilitated transferability of equity as offered by a Ltd. or AG, where you can simply issue shares and transfer ownership as you please. Also, the LLC is not anonymous like the AG. The AG can have bearer shares, allowing its holder to avoid fiscal or any kind of visibility. Finally, in Switzerland, the AG is perceived as something more prestigious and is therefore more desirable. People will have less hesitation to enter into business with you when they see you are well funded. It is an absolute must if you work in the financial sector, because everything else may be viewed as “small time” and that will certainly not get you to where you are going! If your company is making a lot of money, you may choose to channel some of your revenues through an off shore vehicle such as a Ltd. in Panama, the British Virgin Islands, Delaware, Belize or another favourable location. Nowadays, 1 1 6


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the Middle East also offers excellent ways to optimize the fiscal structure, as there is no, or very limited, taxation on income in many places. Loopholes open and close all the time, affording you a variety of opportunities. You should of course, operate within the legal boundaries of your country of residence, because all the money you can save may not allow you to sleep at night when you are nervous every time the phone rings‌ It’s not worth the trouble! My main point in this small outline is to share with you the fact that there is a perfect fit for any activity. Our global world has made things so much easier and so much more (cost) efficient to be an incorporated member of the worldwide business community. You will get the best advice on your business structure from a certified accountant. Generally, a few hundred Dollars, Euros, Pounds or Francs are well spent on such a professional when it comes to the definition of your business structure. You will save a multiple of the money you spent on this advice, later down the road.

Human Resources

Once you are all set up with your business, its structure, the plan and strategy to go forward, you have to consider the next important issue: people. When you run a small business, or any business for that matter, the most important element of this is the people who run it. Which is why you must allocate much of your attention to the choice and motivation of your staff. If you look at the financial industry for example, you are required to perform even before you get hired, which is almost the ultimate model for success. This allows you to taste the candy before you buy it and if it is not to your liking, choose something different. In that sense the financial industry seems to be an exception, as in most other sectors you simply get hired on a trial period, but that’s not what I want to discuss. Ultimately, it is crucial that you find the most suitable people and provide them with the motivation they need in order to take your business where you want it to go. Depending on what kind of sector you have chosen for your venture, this topic may not be too important as you may start out as a one1 1 8


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man-show and then add staff as the business may require it over time. It is a sensitive balance between wanting to do everything yourself to save money and the allocation of time to the important tasks. I’ve met quite a few entrepreneurs who believe that you have to do it yourself if you want it done right – this is an old saying you will have certainly heard many times over. I think it is essential to work in accordance with expertise, meaning you should try to focus your work efforts on the tasks that really only you can perform, and try to delegate the rest of the work to people you hire (if your budget allows for such an approach). Doing everything yourself can also be frustrating and keep you from progressing and exploiting your full potential. As all my efforts are aligned with the concept of (cost) efficiency, it is my firm belief that you must find the right balance between spending money and wasting time. Also, staff can be viewed as an indicator of your success. A simple example would be answering your own phone… For that particular issue there is a simple solution because you don’t need to hire a secretary to have someone answer your phone. I believe you can get virtual phone services for a few hundred Dollars a month. This is a very proficient way to get what you need without investing in an obsolete infrastructure. Another way to get “cheap labour” is to hire interns. There are always a number of eager, young individuals (usually in or just out of college) who will want to work for basic wages just to obtain experience. This is certainly a way to save a lot of your resources and still have someone do certain tasks for you; especially the ones you don’t want to do yourself… At the end of the day it is important to get value for your business. You can save cash and minimize your expenses, which will ultimately give you a certain corporate advantage because you may be able to perform certain tasks, jobs and contracts cheaper than the competition, but this is only sound when it doesn’t affect your competitive edge. Personally, I like to work with independent contractors because they are operating at a certain entrepreneurial level and know what it means to perform. The independent contractor will usually have a specialisation to set himself or herself apart from the average employee. If 1 1 9


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you are looking to achieve extraordinary things then you need extraordinary people to reach those objectives. I also like to work with young talent because it is (usually) the young professional community that is hungry for change! An example from my personal experience was the branding and design of my private equity magazine The €levator. I built the content and design together with the support of some friends in the design world but didn’t allocate a budget for a complete outsourcing. After about one year in business I had a call from a designer who told me “you have an interesting publication but visually it doesn’t do the trick”. I looked at some of his work and asked for a few visual drafts of his ideas to enhance our product and sure enough it was an instant success. As soon as we launched the re-branded magazine the number of subscribers grew exponentially; we received interest for more advertising and we also got some media coverage because we had built a unique, sexy product. That taught me two things: 1.

You can never do everything alone and expect the best possible result

2.

You can learn a lot when you are working with experts

I have always compared employment to communism because no matter how hard you work, you always get the same pay at the end of the month. In that sense a contractor is an excellent choice because they need to justify the contract at all times and knows that they will secure further work by performance. The idea is to get the very best for your business at the very best price, but be careful because driving the price too low can have a horrid impact on the motivation of your people, so you should always be sensitive to the provision of incentive but alert when people charge you too much. You should always have at least two offers on your table, and in our globally connected world, you can always inquire abroad because from my experience, that pays off heavily in many cases.

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Key Thoughts: •

The right fiscal structure of your business can save you a lot of taxes

Be sure to allocate the right amount of time to the important tasks, don’t try to do everything yourself

It is essential to work in accordance with expertise

Avoid investing your capital in an obsolete infrastructure

Always get value for your business

Work with independent contractors - they work on an entrepreneurial level and know what it means to perform

If you are looking to achieve extraordinary things, you need extraordinary people to reach your objectives

You can never do everything alone

You can learn a lot from working with experts / specialists

Get the best for your business at the best price possible, but be careful not to drive prices too low because it impacts on the people who provide you with a product or a service

Get advice on your business structure from a certified accountant / tax advisor. You will save a multiple of their fees later down the road 1 2 2


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The most important element of a business is the people who run it

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C H A P T E R

VII S A L E S A N D M A R K E T I N G 1 2 9


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ow here is a subject as wide as the ocean! There are endless possibilities to promote your idea, your business or your product. Marketing is basically a reflection of your own creativity (or the creativity of those you hire to promote your business). In today’s business world it has become rather challenging to create a unique identity for any kind of business, because there are countless companies in any given industry and they all strive to be unique and aspire to be the best at what they do (which is normal competitive behaviour). Over the recent decades, marketing, as an industry, has become enormous both in turnover and significance; because of the complexity of markets and the globalization of brands, companies are paying multi-millions to stay on consumers’ minds. Marketing is essential to attain any kind of measurable business success and it will help you build a sustainable product. When most people talk about marketing they talk about advertising and promotion, but marketing also entails the development of an identity and credible branding. The greatest achievements of modern day marketers are probably things like Nike’s “Swoosh” logo or slogans like “Vorsprung Durch Technik” by Audi. There are many examples where the marketing efforts have actually become famous elements of the promoted product. Why am I writing all this? Simply to underline that you need to pay special attention to your marketing, branding, promotion, identity and communication to make sure that your clients / consumers get the right idea about you. When you introduce your product to a market, the customer is like a blank piece of paper on which you can write. This means you can easily deliver a message but you must be careful, because once you have written on the paper with your pen, the paper is no longer blank. Allow me then, at this moment, to mention that the only thing more difficult than branding is re-branding. Think about products advertised on TV (maybe on home-shopping channels) where you roll your eyes and say “I would never buy that crap”. Maybe the product is good and useful to consumers but the market communication is somewhat less than adequate. How and where you 1 3 1


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advertise is extremely decisive!! The person who sees the presentation of your product must come to the conclusion that they want to buy it; otherwise the advertisement is a failure…

Build your marketing efforts around three key elements: Desire, Fear and Greed… Let’s look at the five key marketing channels: Internet, TV and Radio, Print Media, Direct Marketing and of course, Word of Mouth. Now, all these channels have their advantages and disadvantages and you must find out for yourself which one(s) is (are) the most suitable for what you are trying to accomplish. In most cases the choice of marketing channels is simply a matter of the relevant budget – who wouldn’t want to see their business promoted on television to millions of viewers? But of course there may also be a downside to that approach. The downside of marketing is cost! The more people you want to reach the more it will cost you. At the same time, the downside of mass media, such as TV, is that you reach millions of people who are not your target audience. So be mindful of the channels you choose and always consider if the majority of the audience is the right target for your product or service. Anyway, when you think about marketing, the first thing to do is to exclude those channels not in your budget. Once you have done that you can choose from those which are left. You can always think about an expansion of your campaign work later down the line. In the beginning you should focus on what is right for your budget and what you can sustain without jeopardizing your chances of survival during that crucial start-up phase.

Internet

Promoting your company over the internet can certainly be one of the most effective ways to get business. The visibility, if you can manage to obtain it, is more than excellent. Literally millions of surfers can come by your site in search 1 3 2


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of what you have to offer. The trick is to be seen. As you may imagine there are millions and millions of sites out there in cyberspace and you must set yourself apart from all of them. Your site must contain more relevant content to a search than most others in order for you to appear in the search engines; not on page 1049 but on the first page(s). There are two things in which you should invest part of your promotional budget: sponsor advertisement on search engines as well as website optimization. Sponsor advertisement is the promotion of your product in relation to search queries on sites such as Google, Yahoo and others. The way this works is that you determine the words you want to associate your company or product with and as soon as web-surfers prompt a search on these sites for these words, then you will be visible in a prominent location. Example: You want to sell shampoo; so you would associate your company on the search engine with words like “hair”. There is a whole universe of refining these efforts but I’m sure you get the idea from the above outline. The promotion, through sponsor advertisement, is a continuous and immediate process which you can control on a daily basis which is extremely practical. The second imperative effort in relation to the WWW is website optimization. There are experts that will alter (optimize) the content of your website in order to make it all it can be in the eyes of a search engine. This helps you to be displayed as one of the top search results and that is the key to reaching potential clients. The internet is a very rewarding place to be. It all depends what your business will be selling but you can expose yourself to millions of buyers with the click of a few buttons… Another possibility on the internet is the use of banner advertisement; a small displays of your product and slogan which is linked by one click to your website. All you need to do is to find the websites you want to associate your product with and then buy the space from the company operating the site. It is fairly straight forward. The substantial upside of the WWW is that you can precisely target your audience and position yourself strategically.

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TV and Radio

Auditory and visual media are highly effective methods to reach a substantial number of potential clients or consumers on an (inter)national level. There are however, two things that are important to consider: Firstly these channels are usually rather costly and secondly, there is absolutely no focus. This means your audience may be substantial but the actual clients you wish to reach with your promotion may be few, and then suddenly this approach becomes highly cost inefficient. I believe you should only pursue this route of promotion if you are bringing to market a true consumer product, something that a lot of people can and would buy if they found out about it. I’ve had experience with both TV and radio advertisements and I find the most efficient way to exploit these channels is by means of an appearance as a quality business man. You must understand that the media was created with the intention to inform, which means if your product has a certain innovation to it or it brings great value to the consumers, then you can “simply” write a press release and send it to as many media and agencies as possible. Eventually someone will pick up on your story and you will be interviewed and can explain your product without it being an obvious advertisement. This approach has, in my experience, proven to be prolific. I would suggest that 8 times out of 10, you don’t allocate any part of your marketing budget to expensive radio or TV advertisements during the start-up phase of your business. Use your resources to promote your product directly to the target audience and grow your budget with your success until eventually you reach the outer limits of your regional promotion. Then you can move on to the channels that reach millions of people. When it comes to TV or radio promotion I strongly suggest you obtain as much free coverage as you possibly can. You probably think this should go without saying. Sure it does, so think about the edge that will allow you to get that free coverage… you need an edge, something the media feel they need to communicate as useful information rather than costly advertising… The cooler your business edge, the more free coverage you will get. Go get the edge!! 1 3 4


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Print Media

Newspapers and magazines are an excellent approach to promote your business. Why? Simply because there is a wide range of publications in every segment which allows you to target your promotion and reach thousands of people in a short period of time. Also, most print media will have a number of sections which will allow you to further position yourself within the publication. The classic example for that would be “classifieds�. In magazines you can also chose your positioning to some extent. Print media usually has a rather sound cost/return ratio, meaning that the price of an advertisement or promotional feature will usually be an indicator of the quality of the publication and hence the potential buying power of the audience. Obviously, the price stands in direct correlation with the circulation (number of copies distributed) - the more copies a given media has in circulation, the more expensive the ad-space will be. Magazines and newspapers are a proven means of promotion; they can also be a fairly prestigious way of advertisement, as the product will be identified and associated with the rest of the publication. You can also elaborate a presentation of your product as a feature in the magazine or newspaper to make it appear as if the publication takes genuine interest in your product or service. Such features are usually rather more effective than the presentation of ad-pages. In my opinion, the promotion of products through print media makes perfect sense and should be pursued if the budget of your company allows it. NOTE: Prices of advertisement and advertorials are usually priced in a way that the publisher factors in some price negotiation, which means in most cases you can certainly obtain a good discount on your feature(s). The frequency of your advertisement will also play a substantial role in the pricing of pages. My previous comment about submitting your press release also applies for print media and you’ll lose absolutely nothing by sending your release to as many publications as you see fit.

Direct Marketing

In my opinion, this channel of promotion is highly questionable. Whether 1 3 5


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we talk about direct marketing over the phone or direct mailings to a database you purchase. Think about it! What do you do when you receive a call from a phone marketing person? “Not interested, thank you, CLICK” and what do you do when you receive unwanted flyers and leaflets in the mail? You throw them away without glancing at them twice. I’m not saying that direct marketing is the devil – I’m simply pointing out that this approach is the least favourite of consumers and since consumers are what makes you get to where you want to go, you will need to pay attention to that… It really all depends on what you are selling and where you are selling it. A simple example could be the promotion of products of the “senior community”. Many elderly people live alone and have little or no contact with their community or environment, which is something that makes them very receptive to all forms of communication. So if you are trying to sell a product which appeals to the elderly, you may want to promote it by telemarketing because you can reach your audience in a way they will appreciate. However, a hip and young product for people on the move will be a tough sell over the phone… think about it and position and promote your product accordingly.

Word of Mouth

Usually the Word of Mouth approach is the norm and you must encourage it because it is free and can also be very effective. Think for example about the energy drink “Red Bull”. It used to be sold in few locations in Austria with a direct sales approach, until the word spread and it grew so popular that distributors would come knocking on their door. Word of Mouth can be excellent, especially if you are running a very specialised or small business, where you don’t necessarily want to attract a large number of clients, just those who will make your business run profitably. How does word of mouth work? Well it is basically one person telling another about a good (or bad) experience with a product or a service. What you want for your company is the free promotion and the cognitive association with a good, personal experience. If you think about it, advertising on TV is 1 3 6


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the attempted reproduction of one friend telling another about good products. Instead of friends, the advertising industry will use the skills of media stars because we have the feeling that we know them (through movies, etc). If you dissect it psychologically the approach is actually very interesting. So, word of mouth is one friend telling another about a good product, a cool place or a useful service. Typically these things sound like: “Yeah, I had my pants cleaned within the hour in that small shop on 5th street” “Jenny and I went to the new Vegan restaurant on Rainbow Avenue, it is really fantastic…” “I bought that new phone from Pear – man that thing is really great” What you want is for your company or product to be mentioned in a conversation. The ultimate word of mouth would be if your product is associated with a famous individual and they publicly endorse you - “John Wayne said that Smith & Wesson make great guns”… Word of mouth is not something that will work for every kind of industry but you will find it useful in fashion, art and all kinds of services. For consumer products, the word of mouth can only be a side element because usually it doesn’t spread fast enough to ensure the growth you need to sustain your company.

Sales

In my opinion there are three different approaches to make a sale:

1. Nice and Gentle

This method appears to be the most commonly used approach in sales. With the sweet and soft, nice and gentle way, most times you can sell anything to anyone if you remain persistent. Time is the key word here because you will see that this approach should be used for the long term client relations. You need to accentuate your concern for the well-being of the client and make them see it in every detail of your actions. Some sales people will sweet talk you into a deal over several months if necessary. This nice and gentle method requires a 1 3 7


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lot of resources and attention but you will find it is very rewarding because if or when you make the sale, not only you will be happy (regardless if what you have sold actually makes the life of the client better), you will have made the client feel good by courting him into the business process. To me, this method has a positive edge to it and is much more sustainable than the next one…

2. The Bully

The bully will sell you loud and hard. He will come at you with power talk and strong arguments, putting a lot of pressure on you to get your business. This approach, is in my eyes, the least recommendable because you leave a large percentage of your clients with a bad memory. If you wish to build a business with a growing database of people who will buy from your company again, I personally recommend you stay away from that sales approach and the staff who would eventually practice it. If, however, you have a business where you need to do quick, one-time transactions, you may find the bully method is the most efficient.

3. The Rational

The rational is an approach with little or no emotion. The most important element of this method is the display of professional knowledge and competence in your field of expertise. The client has to believe you excel in your area and with that belief you will gain trust. Facts and figures play a strong role in this approach and a sales pitch is usually made in a calm and calculated manner, free of emotion. Personally I believe a good salesman has to be able to utilise any of these three methods at any time, regardless of his personal situation or the time of day. It appears evident and elementary that a salesman will “read” his client and then choose the most suitable method in his repertoire to work the client in favour of the transaction. A sales transaction requires finesse and much like in a hustle – you have to make others believe… The best sales effort is the one where the client firmly and truly believes that 1 3 8


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they came up with the idea of buying the product and didn’t get any help in the decision-making process When you run a business you need to be very aware of your own role in the sales process. Are you good at sales? The first question you must ask yourself in sales is: What am I selling? You need, not only to find the obvious answer, but you need to assess that question in a 360° manner. There is much in a sale that has nothing to do with the actual product. Are you selling a dream? Are you selling a necessity? The answer to the question will usually tell you how to go about your sales because you will be able to position yourself accordingly. The marketing question to ask at this point is: what kind of promotion makes sense and how much money should you allocate to actually selling your product? You should keep a close eye on the relationship between the sales spending and the actual sales. This will allow you to find the optimal amount of spending; the critical mass if you will… Don’t over-spend because that can easily become your downfall if you don’t keep it under control! Make sure you understand what you are trying to sell and if you don’t have any understanding of sales, I suggest you step aside and hire someone who does. Obviously you can’t go anywhere if you don’t sell and in many cases the entrepreneur or inventor of a product is unable to actually sell the product – I’ve seen it happen many times. You need to do what it takes to close the deal. I would also like to point out that the best sales professionals will be confident to work (mostly) on a commission basis, because they know they can sell a product which ultimately means you don’t have to worry too much about fixed overhead expenses (salaries) and the sales person should be making enough money by selling your product. Personally I love the reward-system for sales remuneration, because it is capitalism in a nutshell, as the output is highly related to your input of professional effort. In other words the more you do, the more you get. If you can find a person who believes in commission-only sales and will come and work for you, you will be cruising… Make sure you have the whole sales angle 1 3 9


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of your business covered at a very early stage of the game, because when it comes down to “product meets consumer” you have to be 100% ready and at ease to make the sale or you will go down in flames…

Remember, the client is KING!!

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Key Thoughts •

Marketing is basically a reflection of your own creativity

Marketing is essential to attain any kind of measurable business success

Build your marketing concept around Desire, Fear and Greed

On the internet, the trick is to get traffic, hence, to be seen

Send out a comprehensive press release about the launch of your company to as many media as you see fit

TV and radio means quantity over quality in terms of audience

Use your resources to promote directly to your target audience

The cost of advertising can be used as an indicator for the quality of print media

Direct marketing is a very questionable approach

You want your company to be referenced in positive conversation. Spread the word!

There are three common approaches to sales: nice; bullish or rational

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The first question to ask yourself is: What am I selling?

Usually the best sales people will work on a commission not a salary

Remember: The client is King

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C H A P T E R

VIII T H E

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don’t want to paint a rosy, obstacle-free picture of success and wealth. Obviously there is a flipside to this coin! One thing is certain (besides death and taxes) - with success comes enemies. No one can live happily and in peace when he or she is successful in business, because believe it or not, there will always be someone who doesn’t think that you deserve what you have and consequently wishes you failure. Evil operates on a wide spectrum from simple insults, blackmail, all the way to kidnapping your children. In my time as an entrepreneur I’ve had trouble with various individuals more than once. It was not because I was doing something wrong, but rather because they wanted to see me and my ventures fall from success to failure… Luckily for me they didn’t succeed. Let me highlight an example. One of my companies was building a rather successful online marketing platform and because our team was very good at what they did, we ended up being the number one on all the search engines in all the appropriate categories of our business. We had contracts with different service providers who we would present on our platforms and thereby promote their products and services. The deal was simple: we would make sure their name would come up in top ranking search results, and we in turn, would get a cut of their profits when our platform generated some traffic, hence revenue for their business. After two years in business we had made sure we were on the top of vital search results on Google, Yahoo and all other significant search engines. One company who had signed a representation agreement with our company realized that instead of coming to their website, which was poor in content, quality and design, the internet users rather preferred using our websites because they were designed to make people curious and to stay. Naturally, a vast percentage of their revenue was thereby channeled through our service and we were entitled to fairly interesting referral fees. But instead of paying the fees they owed us, they decided to cancel their contract, effective immediately, on the grounds of “spelling mistakes” on our websites. They were quite sneaky about it because 1 5 1


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on one day we received an email from them saying that our fees would be paid shortly and the following day we received a letter from their lawyer. This may be an inappropriate example, but I felt a little like Al Capone that day because the only thing they could find to try to bring us down was spelling mistakes. (Back in his day, Al Capone, the notorious Chicago crime lord, was arrested for tax fraud). This incident took on rather silly proportions. To show you how delusional some people are, let me tell you that the company lost over 30% of their business after canceling their contract with us and then tried to sue us for damages when it was their choice not to work with us any more… and if that was not enough, the owners of that business did their best to destroy our impeccable reputation, but they failed miserably and to cut long story short, things were eventually settled in the end… People will always try to bring you down, especially when they realize you are better than they are and they cannot reach you. It somehow makes them feel angry and bad to see what can be done and how they can’t get it done. Personally, I don’t have those feelings. I simply say: If you can’t beat them, join them. Why am I telling you all of this? I mention it simply to make you aware that not all is easy even if you do things right. You have to protect yourself and your business. The best thing is to be the devil’s advocate and to prepare contracts that will protect your interest and authorize you to do the things you want to do. That way you can always justify your actions. One thing that you should bear in mind is we make contracts for when things go wrong. Most people have the tendency to neglect contractual engagements when they start a business relationship because everything seems great, there are promising prospects and we sometimes get swept up in the euphoria of the moment. Don’t! Make sure you sign solid contracts because it is important for your peace of mind. Remember, we make contracts for when there are problems and not for when things are looking great… Make sure you are safe and your interests are well addressed in any agreement you sign. 1 5 2


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IX T H E

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earing the end of the different levels / stages of your business, you will come ever closer to the point which is called the exit. This is the point where you hand over the command of the ship to someone else… the day when you cash out! The term exit is a very nice attribution, because when you sell your business (or pass it on to the next generation) you walk out of the door, usually with the intention not to look back, much like a physical exit. The world of business is much like a big entertainment park; most of it should be fun, some things can be scary… You will ride the roller coaster of business, up and down.. The beauty of the game is that even if some twists and turns vary from one business to the next, the road to success is always the same and once you know and understand the blueprint, you can apply it to all kinds of different ideas! Success is a global concept; some people even believe the business success formula can also be applied to your private life, but personally I don’t believe in that. The exit only has one meaning but various nuances depending on the size of your business. Today there are commonly four ways to exit your business: You take your company public, you sell your business privately, you sell it off in pieces or you simply shut it down. The general public may perceive the best and natural way to sell a business is to take it public. On the following pages you’ll see that this isn’t always the best way to do things…

You take it public

You can pursue the route of an Initial Public Offering (IPO) in order to list your company on any given stock exchange. Depending on what your business does, one stock exchange may be more suitable than another. For example, if you own a technology company you may pursue a listing on Nasdaq or if you own a oil company you may want to list it on AMEX. It all depends on the size of your business and the number of existing investors your company has. Taking a company public is a fairly complicated process and involves the implication of various different specialists such as lawyers and banks. The 1 6 1


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process is also rather costly so it certainly doesn’t make sense to take just any kind of business public. In a well-conditioned market there has to be a founded appetite and a solid business to make for a successful listing on any exchange. If that is the case for your business, then you should at least investigate and consider this opportunity. If you find yourself in an economic environment where there is a hype for any kind of industry, for example in the late 90’s where any company ending on dot com would go public and investors would blindly buy their stocks, then you should surely go for it because the stock market is known to be the place in constant search of “the greater fool”, the one who will pay an even higher price than the previous investor paid. That said, if you find yourself in a euphoric market, historically there will be a lot of fools around to pay high prices for almost anything and as it is a sucker’s game you should not hesitate to exploit such favourable conditions. The stock market is all about timing. If the timing is right, you can be very successful but every medal has two sides - so beware. Another advantage of going public is certainly the number of investors to which your company is exposed. Consequently, with this exposure, you will have direct access to substantial amounts of money. If you can convince investors that your company is worthwhile to invest in, you are in a good position. Commonly the public market also pays higher earnings multiples – the multiplication of a company’s net earnings - than private investors. As a rule of thumb you can assume that for a company with a production or a product, the private market pays a multiple of up to eight, a service company usually get a multiple of around three or four. On the public markets, multiples of ten, fifteen, twenty and higher are the order of the day, which ultimately means you will get two, three even four times over what you could get if you sold your venture to private investor(s). Note: To most businesses, the process of going public is a step along the way of significant growth because you can only go so far on private investments alone. Due to the size of the financial markets and their global reach, you can instantly attain a large crowd of investors with deep pockets who can invest in the future of your business. 1 6 2


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A certain disadvantage of going public is the lock-up period for pre-IPO shareholders. This period is usually set to one year or more. This is a standard regulation in most places and keeps you attached to your shares for those minimum twelve months. It’s a risky thing because you are exposed to a market that has its own opinion and can drag the value of your company along, be it up or down. You will no longer have direct, controlling influence over the price / value of your business. The market will command the price which can easily become a costly scenario should the market turn on you and begin to speculate that your company doesn’t have any solid profit potential. Since the stock market is highly impersonal, investors are happily ignorant and will drop you like a hot potato if they come to the conclusion that your business will not generate the desired return. Simply, the event of a bear market can drag the value of your business down by double-digit percentages without you having any influence. Another big problem with a public company is the perception of your exit and its effect on the stock price. The regulations of most stock markets oblige you to inform the market of any major transaction (e.g. if more than 5% of the shares change hands). So if you have to inform the market authority that you, the owner and possibly the CEO, are about to sell your shares, the market will possibly view that as a bad thing and your share price will inevitably drop. Holding on to the fortune that you worked so hard to build, may turn out to be a very tricky thing! Everything considered, taking a company public may seem like a craps shoot, but the small details make all the difference so if the timing is right, if you are not in a hurry to exit, and your company qualifies for a market listing, then it could be rather lucrative for you.

You sell it privately

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to be publicly traded. As previously mentioned there are enough reasons why one could wish to avoid such exposure. In this case, you as the founder or owner can go out in the market and look for new investors as potential buyers. In many cases the existing management will be the first people that can be addressed with such a proposal, because they know the business and they are the ones who are running it, and they are therefore most likely to be interested in buying it. By selling it to the management you will also be dealing with people who have a clear view of the value of the company and business model, and you will find a common ground more easily. Given these factors, the sale to the existing management (also called a Management Buyout / MBO) is a frequently applied option. If, for some reason, you are not in the position to sell to the management, if your company is too small or if you are the management, then you can turn to the financial industry - more precisely, the private equity industry, to find out whether there are parties who are willing to acquire your company. A private equity fund is a possible buyer for your business as these investment vehicles buy companies that are not publicly traded (hence private equity). There are usually two ways that such a deal will happen. Either you are asked to stay on as the manager or CEO for a defined period of time (anywhere between six months to five years), to make sure the business continues to run and grow while you train someone to take your place, or the buyer has an existing expertise and wants to put his own management in the company to replace you. Private sales, or trade sales as they are sometimes called, are also often done in the process of vertical or horizontal integration. Horizontal integration means you are bought by an actual competitor to be integrated in their business and become part of their entity or business group. Vertical integration means you are acquired by either someone you supply to or someone who supplies to you, a client of yours. These are the two immediate approaches that you can define as interesting, and if you want to pursue such a route you would be well advised to consult with a firm or an individual who specialises in mergers and 1 6 4


the

IT’S

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MAT TER

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RISK AND

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acquisitions. Depending on your own level of financial expertise it can be crucial to retain the services of a professional financial advisor (such as a business analyst), as well as an accountant in order to value your business. This process is usually rather complex as there are many factors to consider that are simply not mentioned in your balance sheet. If the size of your business is, let’s say below one million in turnover per year, you may not need to get any help in valuing your business. Depending on your sector or industry, you can simply take a multiple between three and eight of your net income and that will give you the basis for a healthy negotiation process. Any buyer will look at your business in terms of return on investment (ROI). In the service industry if an investment is amortized in roughly three years, then it is a good deal. Why? Because the service industry usually moves faster than production industries and you will also have a smaller infrastructure, meaning you have less tangible assets that will be sold along with the company. In that sense, the reasonable price for any service provider will normally be agreed in the area of net income times three or four. Again, this is simply a pointer in the right direction rather than a fixed rule, because there are exceptions and if any of these apply to your company, you should make sure you are aware of them and that is where a business analyst will be of great value. In the production industry you would commonly value a business somewhere between five to eight years of net income, depending on the industry and the length or product lifecycles. If you are producing items that depend on a certain trend for example, there is a chance you won’t get a very high multiple. At the other end of the spectrum, if you produce spare parts for the aerospace industry you can offer more assurance that the relevant market will not re-invent itself within a few years, and that consequently your company will generate revenue on a long-term basis. It is all a matter of risk and return. In many cases there is a large element that is hard to value, which is the actual brand of your business. This is frequently a big issue in price negotiations 1 6 6


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because it is simply not tangible, but everybody knows that a brand is worth something; but just how much? In this case it is constructive to solicit someone like a senior industry consultant or senior industry analyst. This kind of professional will be able to help you put a number on paper and can also defend it with the right arguments. I’ve learned that these specialists don’t come cheap, but in the end they are normally well worth their pay check. Most businesses are sold privately and deals are usually not spectacular. That is why we never hear of them as front page news. Personally I favour the approach of selling a business privately, because it is so much easier than going through the ordeal of an IPO and the time and effort that is linked to it. I believe that time is much better spent when you can move on and do new things, but that is my opinion and beyond a certain size of a business, a private sale is hardly viable. However, if your business falls in the size bracket of up to fifty million (Dollars, Euros or Francs) you can surely find a buyer without taking it public.

You disintegrate the company

Sometimes the sum of the parts of a company is not equal to its valuation as a whole. There was a movement in the 1980’s which was called “Raiders”. When I say movement, I mean it in an artistic way much like “renaissance” or “art deco”. It was suddenly discovered that individual parts of companies could be worth more when sold off piece by piece, rather than selling the company as an entirety. Of course, the dismantling of companies was highly questionable in terms of moral and business ethics, because it would put people out of their jobs and so the era of greedy company raiding soon came to an end. In your case I’m suggesting the disintegration of your company, only if it makes sense economically and if you can live with it ethically and morally. Usually there is a substantial discrepancy in real market value and book value of heavy machinery and equipment. This potentially leads to some sort of industrial arbitrage and reasonable grounds for the liquidation of your company. If you have a company with an actual production, humour yourself by evaluating the 1 6 7


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opportunities of selling your assets individually. Most entrepreneurs will not consider this approach, understandably so, because it means the obliteration of their creation and their business legacy, and since most entrepreneurship is founded on some kind of distinct desire to become more than everybody else and to build something that would carry on their name, the destruction of what was built over time doesn’t really qualify as an option. I simply think it’s great to be aware of all the options when making a decision…

The shut-down

Depending what your company is doing, sometimes it is just as reasonable to simply shut it down. For example, if you have a company that explores natural resources; as soon as those resources run out you can shut down your company, take the money and run (as a figure of speech). This is more of a parasitic approach and only applies to business models that are built on something you know to be limited in time or resources, much like a real gold mine. Since a company is in many cases just an administrative body, you can remove it when your purpose is served. This is the “easiest” of ways to part with your business. I simply wish to include it for the completeness of my explanation of exiting your business…

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Key Thoughts •

Success is a global concept

There are commonly four ways to exit your business

In a well-conditioned market there has to be founded appetite and a solid business to make for a successful public listing

The stock market is a place known to be in constant search for the “greater fool”

The stock market is all about timing

To most businesses, going public is a stepping stone towards significant growth, as you can only go so far on private investments alone

An IPO may seem like a craps shoot but the details make all the difference

When selling a business privately, the primary candidate to acquire it is the existing management

It can be crucial to retain the services of a professional financial advisor

Any buyer will look at your business in terms of return on investment (ROI)

The brand is the most complex thing to value

Sometimes the sum of the parts of a company is not equal to its valuation as a whole

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•

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Every aspect of inventing, planning, creating, building, growing and selling your business should be fun

There is no reason why you shouldn’t have more of everything and everything you want.

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NOTES

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NOTES 1 7 3


NOTES

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NOTES 1 7 5


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C H A P T E R

X

conclusion 1 7 7


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conclusion

E

very aspect of inventing, planning, creating, building, growing and selling a business should be fun. Make sure you love every aspect of it and embrace the experience process, because then you can replicate it in the future. If you have failed in the past – Good! Then you know what you should avoid doing when you start again. It is not important how many times you fall down, what is important, is how quickly you get up afterwards… Get up! Go go go! Move!!! Get out there to get what you want, because there is no real reason why you shouldn’t pursue your entrepreneurial dreams, or any dreams for that matter. There is no reason why you shouldn’t have more of everything and everything you want. Be greedy! Be fearless! Be tenacious! I personally love the process of developing ideas and bringing them to life. I’ve done it on several occasions and plan to do so as long as it is possible. I’ve started small and slowly built up with each venture I’ve begun. Some people enjoy travelling, seeing new places, feeling the rush of the adventure and the unknown. I get those same feelings of fulfilment and adrenaline when I start a business or launch a new idea. I don’t know in advance what will happen, I don’t know if my assessment of the market is right and if the product or service will be accepted. All I know is that I will do my very best, give all that I have to give and use all my knowledge and experience to drive the business as far as it can go. I’m proud to say I am an achievement-junky and I believe that if you’ve tasted the sweet feeling of success and all of the rewards that come with it, you will easily get hooked on it too. I wish you nothing less! When everything is said and done and you have achieved your goal(s) make sure you give back to the community, make sure you do something good for the world you live in and support those on whose shoulders you stand… Most of us live in a favoured environment, a privileged world. We should always be aware of that and care enough to give back. Compassion and humanity are essential to lasting success and philanthropy is one of the great rewards in life. There is hardly anything more worthwhile than seeing the smiles of people for whose immediate happiness you are responsible. 1 7 9


conclusion

From here it’s now up to you to create your own power play. Good luck – you’ll probably need it!

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NOTES

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A P E N D I X

A

business plan guide 1 8 7


appendix

-

business

plan

guide

1. Executive Summary a. Introduction b. Indication of all key points of the projects

2. Strategic Summary a. Identification of the product b. Identification of the demand

3. Sector & Industry Analysis a. Opportunities b. Risks c. Dominating Factors

4. Demographic Analysis & Target Market a. Age, revenue, geographic distribution b. Explanation regarding the motivation of purchase

5. Competition Analysis a. Is the market open ? b. What are competitive risks ? c. Who are the major players ?

6. Marketing Plan a. Description of the product b. Advantages & Disadvantages c. Promotion (Channels)

7. Product Strategy a. Current Status b. Identity c. Technical Plan (if needed)

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appendix

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business

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guide

8. Evolution & Timeline a. What are the steps of evolution to follow b. What are obstacles and risks in the development?

9. Operational Plan a. Description of all products and services b. Description of product and service procedure

10. Management Description a. Who are the key staff members to carry out the project ? b. Who are external partners who will help carry out the project ? c. CVs of the management 11. Financial Plan a. Budgets b. Profit scenarios c. Financial conclusion 12. Global Risk Analysis a. Advantages, Deficiencies, Risk, Opportunities & Global conclusion

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“Straight to the point insight on how to do it right…”

In his book PowerPlay, G. Patrick Gruhn offers a down-to-earth, easy to follow guide to making your first million. Revealing many of the pitfalls you may encounter on your journey to riches, he offers practical advice which has come through his own business experience. Covering your attitudes and aspirations, marketing strategies, financial planning, investors, speed and efficiency, communication and experts, this book is designed to be a reference manual in which you can make notes throughout your pursuit of success.

PRE RELEASE COPY

NOT FOR RESALE


PowerPlay  

A hands-on guide to plan, fund, grow and sell your 21st-century business

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