Entrepreneurs

Charity Financials on the Back of an Envelope

Any business or charity needs money to operate. I recently wrote about how to do a back-of-the-envelope calculation to determine the financial feasibility of your business. In this article we look at your non-profit project or organization. We will focus on the question:

How much money do I need to create my non-profit and sustain it over time?

We will start by considering the sources of money coming into your charity. Then we consider the expenses to be incurred. Finally, we will compare the two so you can estimate the answer to the question above.

Sources of Income

EnvelopeThe sources of income for your charity will vary tremendously depending on the nature of your operations. Here are some to consider:

  1. Program/Participation fees – Income from people receiving services, such as entry fees, class registration fees, membership, or materials fees.
  2. Charitable Grants – Money received from other charities or foundations to support your work.
  3. Government Grants – Money received from local, regional, state, or Federal agencies.
  4. Event Income – Fundraising event revenue. Don’t forget the cost of putting on the event.
  5. Individual Donors – Small or large gifts raised from individuals, either through direct solicitation, mail campaigns, or online. Consider legacy gifts for the long term.
  6. Other Operation Revenue – Includes other sources of income, such as renting out your facilities or sales of product (ex. Gift store).
  7. Income produced by endowments or other long term funding.

Each revenue stream requires it own distinct effort, and the payoff will vary. Consider the amount of money raised versus the effort involved. Some sources may be recurring once established and some may be one-time raises.

It is best to strategically decide what sources to pursue rather than taking a shotgun approach. Putting a token effort into lots of different things hoping one will succeed does not replace a thoughtful approach and plan to fund raising. It is good to keep an open mind and try different approaches from time to time, in order to find the best fit for your organization.

Expenses

moneyThere are many possible expenses for your organization. Try to come up with a ballpark estimate for each one. Here are some ideas to get you started:

  1. Services – What services do you offer? How often? What is the cost per event, service, or time period? Is there also an Outreach cost?
  2. Staffing – How many people, how much does each work (full-time/part-time), what are typical pay scales? Don’t forget benefits, taxes, etc.
  3. Location – Rent, Buy, Build, be Virtual? How many square feet for staff and services? How much per square foot? How much does it cost to maintain it as well?
  4. Hardware/Equpment – Items needed to run your programs or support your organization.
  5. Materials/Supplies – What do you need to run your charity or program?
  6. Fundraising – Consider staffing, mailings, web site, social media, grant writing, etc.
  7. Other Items – Food, Travel, Insurance.

Are you an organization that can start small and grow, or do you have significant startup costs before you can launch?

Create a basic timeline for the roll out and first years of your organization. Choose a unit of size appropriate for your organization (# events, staff size, # clients, etc). How big can you reasonably expect to be the first month, the first quarter, the first year, and after three years?

Estimate how each expense scales with size. Then combine your size estimate and expense scaling to map out your start up expenses and your annual expenses for the first few years.

Putting It All Together

If your start up expenses are large (building something, setting up an infrastructure, etc), you will need to have a capital campaign. This is really hard for a new organization without a track record. See if you can start small and grow into this once you have base operations established. Otherwise, get some experience on your team and build a compelling story.

The natural operating cycle duration for most charities is the annual basis. Let’s focus on your initial operations budget framework.

Your program fees and some operations revenue typically scale with your expenses and size of operations. Calculate those right away and look at the gap. Your annual fundraising need can be determined using your size estimates and your expense scaling.

Evaluate your income sources and pick two or three that seem the most promising to close the gap. Does it seem reasonable to raise that much money from those sources? Based on your own fundraising experience, similar organizations, or research you have performed you should be able to evaluate the feasibility of your project. Try some market research – talk to potential donors, grant organizations, etc to see if they have the level of interest needed to support your goals.

If it doesn’t seem promising, can you alter the model or rollout to be more achievable? Once the numbers work you are ready to put together a full budget and go for it.

Good luck!

Your Business – Will it fly?

How to Estimate Your Startup’s Finances

Will Your Business Fly?You have a great start-up idea. The market is interested. The technical barriers have been passed. You are serious about making it a business. Before you pull the trigger, the questions is “will it fly?”

If you haven’t done it already, now is the time to check the feasibility of the financials. I’m not talking about 5-year monthly projections. I’m not talking about hiring an accountant. I’m talking about an estimation exercise – a basic back-of-the-envelope calculation to answer questions such as

  • Will this business be profitable long term?
  • How many widgets do I have to sell to hit my financial goals for the business?
  • Am I charging enough for my services to cover my costs and make a profit?
  • Does the model I’m considering make sense for a business, rather than a hobby?

Money CalculationFundamentally, to answer these questions you need two types of information:

  • What are my costs/expenses?
  • What are my sources of income/revenue?

The answers to these questions depend completely on the specifics of your business, so rather than try to tell you an answer I’m going to share a method of finding the answers.

Part I – Expenses

white-penStart with a blank piece of paper or empty document. First, I want you to brainstorm all the different types of things you will need to spend money on. Some will be obvious so add those right away to your paper.

To make sure you haven’t missed something, do a few thought exercises:

Mentally walk through your client or customer’s experience to determine your costs associated with each step —

  • How do they find out about you (marketing, advertising, sales, Internet presence)?
  • How do they start to make a purchase (walk into store, call on phone, see product at dealer, meet company at conference)?
  • How does the purchase happen (Online sale, physical sale, create contract)?
  • How is the product delivered (electronically, physically, order fulfillment, shipping, professional services, travel)?
  • What happens after the sale (follow-up, returns, customer support, collections)?

Mentally walk through the mechanics of running your organization–

  • Physical location and facilities (store, office, warehouse, manufacturing, computers and equipment).
  • Human Resources (how many people and what roles to fulfill all the above functions).
  • Overhead (taxes, accounting, human resources/hiring, legal)

Some of these items will float to the top as key expenses while others are small in comparison. Spend more time and more granularity estimating the larger expenses and use broad assumptions for the smaller ones or simply neglect them for this calculation.

For each expense, note if that expense is one-time or ongoing. Also note if that expense is mostly fixed or scales as your sales grow. Later, this will help you determine how high sales need to be to reach break-even or profitability levels desired.

Part II – Revenue

moneyThis is typically the easier part to do, since, as an entrepreneur, you have probably spent countless hours already imagining selling your product or service and reaping the rewards.

There are still aspects of your sales that you may not have considered. Are you primarily relying on a single homogeneous revenue stream or are there multiple distinct revenue streams in your business? You may need to consider each stream independently as you evaluate how you focus your energy. Which is your primary profit center?

First, determine the metric that defines your revenue stream (units sold, hours worked, contracts signed, clients acquired, etc). This is a Unit. Make all estimates on the sales and expense side relative to this unit. Your unit may be a single transactional sale or recurring relationship (billed per period). For the later see the notes below in parenthesis.

You then need to determine

  1. Revenue per unit (or per unit per period).
  2. Number of units sold over time (or total active units over time).

Let’s tackle these one at a time.

Revenue per Unit

Is there a price point or range for your product or service already established in the market? If so, how to you want to set your price relative to this price point?

If the market has not yet dictated a price, how do you want to position yourself? What are the alternatives that your clients would be spending money on and how do you compare in value?

Number of Units

What are reasonable expected unit sales in your market based on what others are doing, the size of the market, the capability of your sales engine, and the capacity of your delivery systems?

Part III – The Calculation

0th Order Estimate
Start with an order-of-magnitude, down-and-dirty, rough approximation.

Write your expenses as

equation1

Write your revenue as

equation2

If your (CostPerUnit) is larger than your (RevenuePerUnit), stop and rethink your business model. Otherwise, your initial break-even point, in Units, is

equation3

How long do you think it will take you to sell and deliver that many Units? Is that a reasonable business or do you need to rethink your model?

Based on your initial break-even duration, you should adjust your FixedOperatingCost to account for keeping your doors open that long and run the formula again to improve the estimate.

1st Order Estimate

To take this a level deeper, bring in time as a variable, because you have fixed expenses each month whether or not you sell or deliver any units. Using Period to represent the unit of time used (typically a month) we get

equation4a

Expenses are your fixed Startup Costs, plus the sum over each period of the Operating Cost for that period and the cost of good sold in that period. You will need to estimate have many Units you expect to sell each period, keeping your 0th order estimate in mind.

Your revenue is then

equation5

Revenue is simply the sales price times the number of units sold each period.

You can then graph total revenue and expenses over time by estimating the number of units you expect to sell per period.

Example

Our example is XYZ Widget company. It will cost $5000 to make the widget tooling in order to produce our soon to be famous widgets. Widgets cost $10 to build and we will sell them for $25, making a nice profit margin. Our overhead cost to keep our doors open, website, and advertising is $500/month.

model-params

This is our expected production. We of course expect sales to grow steadily as word gets out about how great our widgets are. The Units Sold are the new sales that month. We will grow over time and then stabilize at 500 Units per month. The expenses, revenue, and profit below are cumulative through the life of the business. We have passed break-even and are profitable in month 4!

model-params-units

Here is the pretty graph we show our potential investors:

model-chart

Have fun and good luck with your business. Save the envelope you take your notes on. One day it may be a collector’s item!

Creating a Quick Pitch

ForumspeakerA Quick Pitch is similar to an Elevator Pitch, in that you are trying to deliver an actionable message to your listener in a short amount of time. However, a Quick Pitch takes place within more defined context, such as a competition, and is specifically done in front of an audience.

Consider the case of a 1-minute business idea quick pitch competition. Your goal with the audience is to get their time, money, or vote for your team or project. You may be trying to generate a buzz that could energize early adopters, win a competition, or just determine if your idea has legs. You will be one of many pitches that the audience will hear, so you need to stand out and be memorable.

The Basics

Your pitch needs to include several basic elements. Having these elements does not guarantee a good pitch, but omitting them will certainly prevent your pitch from succeeding.

  1. Name your company, product, or project. If you don’t have a good name for it, nobody will even be able to refer to it. The name should be easy to remember (and spell). It does not need to be your final trademarked brand. It just needs to get you through this pitch competition.
  2. Explain your value. Justify your existence by the value you are delivering to your clients. A product that delivers no value or solves no problem has no chance to succeed and no reason to be memorable. Make sure you communicate your value proposition.
  3. Make your ask. If this pitch competition is more than a feel-good exercise or class drill then you want something from your audience. You may want them to join your team, buy your product, fund your company, or vote for you to win. You cannot get a “yes” if you do not ask the question. Explicitly make the “ask”.
  4. Show your model. How is this project going to sustain itself financially? Will it charge its clients, get income from third parties (such as advertisers or vendors), take commissions, receive government grant funding, get donations from individuals, etc.? Your model shows how your company or project will sustain itself over time and/or create value for its owners.

The Story

Once you have all of the basic elements in mind, you can design the meat of your pitch to incorporate these elements in a memorable and compelling story. There are a variety of strategies you can use to accomplish this, so choose one or more of the elements below and craft your pitch around that.

Compelling Value Proposition

Highlight your compelling value proposition through a client story that incorporates these 3 elements:

  1. What is life currently like for your clients, without your solution? What are the problems they have and what attempts have they made to solve these problems (ideally with great effort and little results)?
  2. What is your solution that addresses these problems? What additional benefits flow from your solution that add value beyond just reducing the problem?
  3. What is life going to like for your clients, with your solution?

Personal Story

microphoneWe all love to hear personal stories. It may be your personal story, the personal story of a client, or even the imagined story of a future client. You can use the story to highlight how important the problem is, how innovative your solution is, or how much better life is for the subject with your solution. The best story is one in which each audience member can personally feel as if they or somebody they know are the main character of the story.  If they come away from the story imagining themselves using your product, then they will remember your product and might even be your next customers. Engage your audience on an emotional level, rather than just on an intellectual level.

Pitch Timing

clock-clipartSo how do you make best use of that precious one minute? There are no firm rules for timing, but the outline below is a good framework with which to start:

  • [10 sec] Introduce and sell yourself
  • [20 sec] Describe the problem you want to solve. What is your client’s life currently like?
  • [15 sec] Describe your solution. What will your client’s life be like?
  • [10 sec] What is your source of income/revenue?
  • [5 sec] What help do you need?

Many people think through what they want to pitch and then just stand up and do it. The result? They ramble on about the problem for the first 50 seconds, realize they are running out of time, and try to cram everything else into the last ten seconds as they are being escorted off the stage. Don’t be one of those people!

The solution? Practice your pitch with a stopwatch. Write down your pitch and then time yourself giving it. Then practice again and again. If you want to see how it sounds, ask a friend or family member to listen to your pitch and give you feedback. Or, video yourself with your phone and watch yourself. You will be amazed at what you see. Then fix it and practice again until you are doing the pitch you want to be doing.

Good luck!

UP Global Regional Summit Comes to SB – Feb 19-22, 2015

santabarbaraWe are excited to be hosting the first-ever UP Global Regional Summit, right here in Santa Barbara, California. This inaugural event will bring together Community Leaders who have organized and facilitated Startup Weekend, Startup Digest, Startup Next, and Startup Education around the Western United States and beyond.

We expect 60-80 community leaders, UP Global staff and leadership, and special guests to converge February 19-22, 2015 in Santa Barbara.

Through a generous donation by The Eleos Foundation, housing at the Pacifica Graduate Institute, Ladera Campus, is FREE for participants (while space permits). This beautiful campus offers breathtaking views and scenic accommodations.

The program for the long weekend includes a curriculum of information for community leaders, plenty of networking and getting-to-know-you activities, fun excursion options for the physically active or wine-aficionado, explorations of the vibrant Santa Barbara startup community and successes, and of course a blow-out party with a special surprise.

signup

Santa Barbara locals who want to get involved, sponsor, or volunteer should contact me via twitter (@rongans) or LinkedIn.

(Originally posted on UP Global. View latest information.)

Creating Innovation

Light BulbsWhile the media likes to tell the story of the “inspired” lone entrepreneur who had a great idea that magically changed the world or caused a huge new company to sprout from nothing this is the rare exception and you are often not hearing the full story. Real innovation takes work. You need to be open to opportunities, look for them in the right places, and exploit them when they arrive.

Sure, many people thought about the concept of an Internet search engine, or a social network, or a new type of can opener or mouse trap, but did they explore, test, refine, and develop the idea, or did they forget about it as soon as they left the shower?

In this post, I explore some of the many ways in which you can identify those innovative opportunities. In the future I’ll address exploiting them.

Unexpected Success

WinnersA great opportunity, especially for existing companies that have fielded products, is the unexpected success. Often companies focus on what is failing and put all of their energy into those problems, but they neglect what is succeeding better than expected. If a particular product or service is succeeding better than expected then it is important to explore what opportunity that might be revealing.

Just as you can have better human resource success by exploiting and expanding on the strengths of your employees rather than focusing on the weaknesses of each employee, similarly a company should explore product successes and exploit those further. There is more opportunity in turning a successful product into a breakout product than in turning a failing product into an okay product.

Misalignments

alignmentA misalignment is when the expectations and assumptions about the world or a market do not match up to the reality of that world or market. An example of this is the “bubble”. In this case, the assumption is a very high expectation mixed with a low reality resulting in over-valuation. The opportunity is to bet against the bubble.

In addition, any situation where you find that the conventional wisdom does not align with reality provides an opportunity. An example of this is where the major airlines assumed that a hub and spoke system could save money and provide flexibility until low cost airlines came in with direct routes and took away profitable segments of their business.

Cross-Pollination

PollinationCross pollination is moving a technology or a concept from one area into a completely different area, or mixing two disparate fields that have not been combined before. An example of this is Barack Obama’s success in using technology, social media, and big data analysis in politics for his successful 2008 presidential bid. GMO food is another example of two separate disciplines – genetics and food production – being combined.

Demographics and Social Change

DemographicsAn area which is often neglected by entrepreneurs is the area of demographics, which is unfortunate since this area leads to some very predictable opportunities. What opportunities do the Baby Boomers present? How about the Millennials? Predicting what these groups will need at each stage of their lives is not rocket science. And there are plenty of opportunities here to exploit.

Also keep in mind major social or technology adoption changes. Consider the impact of the growth of the Internet, or the adoption of mobile phone technology, or the growing field of the Internet of Things. Each of these social discontinuities provides opportunities and threats to a broad range of markets and industries. In particular, early on in the adoption cycle of these technologies the opportunity is greatest and, of course, the risk is highest.

Conclusion

ComputerOpportunity is all around you. Keep track of the ideas you come up with or those that you find in magazines or newspapers, or talking to clients, vendors, or friends. Once you have a list of innovation opportunities, you can evaluate which one is the best fit for you and your skill set, and that you are able to exploit. More next time on how to make use of your innovation ideas.

The Winning Startup Weekend Presentation

Do you want to win Startup Weekend? The secret to a winning presentation is not what you may think.

winning trophyYou may be in a strong active startup community, like we have in Santa Barbara, where over two dozen “been there done that” mentors are guiding 20+ teams through market validation, customer acquisition, design, and product development. If you are one of the 75+ pitches that the crowd selected to become a team, then you are likely to excel out of the gate in one or more of these areas. So, you have strong competition and the judges will have their work cut out for them deciding who should win the top prizes.

First, make sure you cover all the basics:

Team

  • You need a strong and diverse team that knows design, product development, and marketing.
  • Actively build your team during the networking phase before the pitches start. Come in knowing what skills you need and start recruiting early.

Market

  • You need to do solid market validation. 54 hours is plenty of time for a pivot or two if the market is not what you thought. Pivot early if it looks like the market isn’t what you expected.

Model

  • You need to show you can make money.
  • It is great if you have initial customer names and emails who are signed up for your product or service. It is better if you’ve actually taken pre-payment for delivery or have a signed contract. Yes, teams actually do manage to do these things in 54 hours during the weekend.

Design

  • You need solid design, but only on what you are presenting. This is key. If you are going to present a web site or app, that needs to look good. If you are going to present physical product or a prototype visual, those need to look good. If you are not going to be presenting it, don’t waste time designing it. Instead put your design energies into designing your presentation.

Product

  • No, you do not need a working product. This is not a hack-a-thon. This is startup weekend.
  • If you have development-only team members and building a working product won’t take away from other things, then great, build something that works. You’ll get extra credit for that.
  • Otherwise, build only enough to do a demo. Yes, PowerPoint is fine. Yes, a “product” with “imagined or fake” functionality is fine. Don’t pretend that you built more than you did, but show what the user experience will be. People are awarding the vision, not how much code you can hack in 54 hours.
Once you have the basics covered, even if they are covered well, that won’t necessarily take you to the win. Remember what you are being judged on? It is your final five-minute presentation to the judges.

The Presentation

Start thinking about your presentation Saturday and take your first hack at what it will look like. Plan on redoing your presentation at least five times before Sunday evening. When we won startup weekend two years ago, we had gone through almost a dozen revisions of our presentation before we had our final pitch ready.

Practice, practice, practice. You have mentors. Use them. Run through your presentation to the mentors. Listen for their feedback and revise, revise, revise.

Five-minutes is a lot of time if you use it wisely. It is very short if you waste it. What can you do to maximize your use of the time? Especially if you want to demo a product, you don’t want to waste time clicking around and typing things in during your precious time. Consider pre-recording a video of your demo. This gets you the best possible demo using the shortest possible amount of your five minutes. It also gives you flexibility on how you show users interacting with your product.

But the key thing that will drive you up to the top slot … Connect with your audience and judges on a deep, emotional level. The judges should feel like this is a product that is meaningful to them or is something they personally want to use or see developed. Show the impact of your product on people and how it solves their needs. Give testimonials of future clients who really want to have your product.

Below is the final presentation of the Santa Barbara Startup Weekend first place team. See how this impacts you personally on an emotional level:

On the flip side, should winning Startup Weekend be your goal of joining Startup Weekend. I argue in a different post that there are things more important than winning.

Book Review of “What It Takes To Be An Entrepreneur” by Leon Presser

presserLeon Presser’s book WHAT IT TAKES TO BE AN ENTREPRENEUR: A Navigational Guide to Achieve Success is in a category that I’ll call entrepreneurial biography. In this genre the author imparts life lessons and personal learning through the telling of their own memoirs, rather than using research studies to teach best practices.

Presser is a successful businessman who started and exited several businesses. His bulleted lists of life lessons is backed up by many interesting and engaging examples, making this book a quick read.

This book is a great introduction for want-to-be entrepreneurs. My favorite part is his first chapter “Who is an Entrepreneur,” in which Presser provides his own unique take on the personal attributes required to start and successfully run a company. His 17 attributes are

  1. Necessity to be the master of your destiny
  2. Strong self-confidence
  3. Ability to see what others do not see
  4. Common sense
  5. Sets high goals
  6. Not afraid to make decisions
  7. Will commit
  8. Does not retreat
  9. Pride
  10. Willingness to accept responsibility
  11. Focus
  12. Intense dislike of bureaucracy and bureaucrats
  13. Inspires confidence
  14. Wisdom and selecting team members
  15. Leadership
  16. It is in the blood
  17. Not motivated by money alone

Inspired perhaps by his experience teaching at several universities, Presser completes the book with a final chapter that includes exercises and self training that readers can use to fully experience the lessons of the book for themselves.

Unlike some entrepreneurial biographies that I have read, this book is generally useful and provides a good introduction to many topics that a new entrepreneur should be aware of when embarking upon the entrepreneurial journey.