General > General Technical Chat
Need help/idea/advice from Veterans
Electro Fan:
Further thoughts (for the OP and anyone starting a business):
1. You probably don't need an investment, you need sales. How are you going to get sales if you don't have an investment? That is a good and difficult question, but the reality is that most investors don't like investing in businesses that don't have sales. So if you don't have sales, then you need to find users, happy users, very happy users, users who will say your product is so much better than any others they have used. And then they will have to explain why if your product is so good they only use it for free as opposed to paying for it. Bottom line - unless you create enough value that someone wants to use and purchase your product you won't have much of a business for very long.
2. So, let's say you can get some users to try and like your products. At some point after proving that you have happy users you need to get paying customers. How many customers do you need? That will depend on things like your projected selling price for each product. That price times some volume will equal your revenue for that product. And likewise for each other product. When you add up all the revenue from all the products for a year that will be some number. You need to get a grip on what that number is. If that number is X your own personal income (salary) will be something less than X. In addition to your salary and other expenses (Sales, General, and Administrative), you will of course have the Cost of Goods Sold (for parts and labor). All of that will need to be subtracted from the total revenue. If there is any money left over that is your profit, of course.
Revenue - SG&A - COGS = Profit
How much profit can there be in the first year, second year, third year? Whatever profit there is, over time or at some time, some % of it will eventually have to go the investor to pay for their investment.* How much $ do you want the investor to invest? How much will they get back as a return on their investment? When (and how)? Is the ROI big enough for the investor to take the risk and spend their time studying your business plan and trying to manage/keep an eye on you. Without some idea of these numbers you have no frame of reference for whether any of your products are big enough to be meaningful to the overall revenue and profit targets. You have to at least chop with an axe to get some idea of these numbers and then iterate.
If you go to an investor and say I want you to invest $10,000 or $50,000 or $1 million (or any amount) they will ask “how much are your revenues now?” And you will say zero. They will then ask “if I give you the investment you are seeking how much will your revenues be in a year, and two years, and in three years?” If you can't answer these questions the discussion will end without an investment. If you can answer these questions the investor will ask “how much profit you will make on each of these annual revenue numbers?” If you can't answer that with compelling information the investor won't be able to determine how much of your company's equity they need in order to get a ROI. If you can answer these questions the investor might then say "OK, your revenue projections seem plausible, and your profit projections seem plausible, so I will need "N" percent of your company's equity in order to get my ROI.” That would be the start of a good negotiation but before the investor wires you any funds the investor will ask "how do I know you can sell that much of your product?" To which you will say because it's better than all the other products and because you have some users who are happily using the product but you don't yet have any revenue producing sales. To which the investor will say "Sounds like you have some good ideas and a good start so come back and visit me when you have some sales where the customer actually pays for the product." And when you go back with a report on your first revenue producing sales the investor will say "Congratulations, that's exciting, come back to me when you have some more sales - and by the way, how much revenue do you think you will have this coming month, the next month, and the month after?" To which you will say, "it says right here in my spreadsheet, I will have A, B, and C revenue for the next three months". To which the investor will say "ok, if you get on that pace and trajectory, come back and see me and we'll talk about an investment." Investors like to see a plan so they can determine if the founder can operate to the plan (because they will be entrusting their investment $ to the founder’s performance, so they have to be very confident in the founder’s ability to consistently execute).
(And by the way, when you show the spreadsheet to the investor, you better be very sure those first 3-6 months are sales numbers that you will meet or exceed - because closing the investment might take roughly that long and if you miss any months during the closing process the investor will either renegotiate to account for your misses or worse yet the investor will bail out because they will figure if you can't make the early and usually lower projections on the front end, what are the chances you are going to make the later and usually much more challenging projections later in the plan?)
In the end, the purpose of the business plan is to i) set your investor's expectation in a way that you can meet and exceed their expectations but also to ii) help you figure out how to run your business in a reliable manner. Without a plan it's like building a building without a blueprint. You don't want to disappoint the investor and you don't want to disappoint yourself. You want to be able to reasonably forecast and then reasonably perform to the forecast. If you do this, the investor and other investors will probably give you more chances with more investments on ever more favorable terms. If you whiff there might not be any more help from any investors. This is your track record, build it well.
At this point, you might be thinking "wow, this is a bunch of work beyond designing and manufacturing products." To which you should be happy the light bulb came on sooner than later. Designing and manufacturing can be very complex and challenging, but so can selling and marketing (determining what to sell as well as how to promote it). The first part is "production", the second part is "distribution" (either with direct sales, or indirect sales). Unless you have a grip on both production and distribution you might only have half a chance for success. Either you need to step up to managing production and distribution, or you need someone to help you, or you need to go join another team where you can play the role you enjoy playing. This last part is really important. If you enjoy something it won't feel like work; if you don't enjoy it could become overwhelming to the point of being a significant impediment to the success of the business.
You need to find something you can not only design and build but that people will buy often enough and for a price that will give you a chance at success and happiness. No sense in kidding yourself about any of this.
In summary, you either need a) revenue producing customers before investors, or b) some very happy users before investors, and then in addition to a or b, you also need c) some very clear answers on what your revenue will be for the next 36 months or so. Without clear and fairly specific answers to questions about customers and revenue, nothing else will get you there unless you find some investor who doesn’t care about their ROI (in which case they might be a philanthropist). With a few exceptions, most investors probably didn't accumulate their $ without having some ideas about how to manage their $. So you need to have some good answers that can only be derived from good planning and analysis - almost certainly in a spreadsheet. Further, the fewer good answers you have the about these matters the more risk the investor will assume and the more expensive (to you and your company) will be the investment. More risk requires more reward; your job is to minimize the risk (for you, your company, the investor, and your customers) by building a business plan that can be reliably executed.
Net, net: you must be able to project your revenue, costs, and profit in order to give an investor any chance at determining if there is any particular likelihood of ever getting their investment back along with some return.
PS, when you call for "Veterans" to help you, you should probably acknowledge that you saw and received the help. Investors will want timely and succinct feedback on any Q&A as will anyone who might help you.
*PSS, these are the simple basics. It's a little bit like ideal vs lumped elements. Until you get a grip on the ideal it's hard to figure out the lumped. So, there are more layers to the process of building a business plan and a business, and securing investments, but this is about as basic as it gets. Having great products is great, but now your top priority needs to be figuring out how you can reasonably forecast and actually secure revenue, or at the very least get some very happy reference users - because eventually, without the topline (revenue) there is no chance at a good bottom line (profit), and without the prospect of a good bottom line there isn't much chance of providing an investor with a ROI. However with a clear and concise view of the future topline and bottom line - and how they will be attained - there is a chance for an investment.
Revenue
- SG&A
- COGS
Profit
It all starts with revenue and flows from there to profit, to a potential ROI for the investor, to a chance for you to get an investment.
PSSS, if this was easy, everyone would be doing it
fourfathom:
--- Quote from: Electro Fan on September 21, 2020, 08:00:13 pm ---Further thoughts (for the OP and anyone starting a business):
[... some excellent advice and observations ...]
--- End quote ---
This is good stuff. It doesn't always apply, but in "normal" times it generally does.
Some places and times, profit is less important than growth and market share. In the late 1990's this was the case with my start-up (I say "my startup" because I was a founder, but I was one part of a larger team). When we began, we had the traditional business plan where we had our "burn rate", a plan to reach profitability within two years, and had a plan for growth beyond that. But along the way it became evident that investors were valuing growth more than profitability -- the strategy being to capture a larger share of a supposedly expanding market. If we structured ourselves for quick profitability we would have been losing future market share and limiting our ultimate return on investment. So we poured money into speeding our planned product expansion, and winning customers. This cost money, but the investors were more than willing to fund this growth at fairly reasonable terms. We gained lots of customers (this was a piece of networking equipment, not vaporware), and developed quite a presence in our space. We were about to go public, at what was probably near the peak of the networking craze, but were acquired before the public offering, without ever turning a profit.
But with this expensive acquisition, the company that bought us filled a large gap in their product line, one that had been costing them significant system sales, and we definitely helped their bottom line. So the "growth over profit" strategy worked at that time. I don't think that this strategy is appropriate now, in general, but it might still work in some cases.
I know this sounds like I'm patting myself on the back, but I will confess that I didn't really understand this until we were deeply into the new strategy. Our CEO and VCs were the ones who were steering the ship. And our company's value wasn't just in the hardware and software we had developed, but it also was in our sales and marketing team, and the customer relationships they had. It took a while for me (as a hardware engineer) to appreciate that.
Electro Fan:
--- Quote from: fourfathom on September 21, 2020, 08:42:46 pm ---
--- Quote from: Electro Fan on September 21, 2020, 08:00:13 pm ---Further thoughts (for the OP and anyone starting a business):
[... some excellent advice and observations ...]
--- End quote ---
This is good stuff. It doesn't always apply, but in "normal" times it generally does.
Some places and times, profit is less important than growth and market share. In the late 1990's this was the case with my start-up (I say "my startup" because I was a founder, but I was one part of a larger team). When we began, we had the traditional business plan where we had our "burn rate", a plan to reach profitability within two years, and had a plan for growth beyond that. But along the way it became evident that investors were valuing growth more than profitability -- the strategy being to capture a larger share of a supposedly expanding market. If we structured ourselves for quick profitability we would have been losing future market share and limiting our ultimate return on investment. So we poured money into speeding our planned product expansion, and winning customers. This cost money, but the investors were more than willing to fund this growth at fairly reasonable terms. We gained lots of customers (this was a piece of networking equipment, not vaporware), and developed quite a presence in our space. We were about to go public, at what was probably near the peak of the networking craze, but were acquired before the public offering, without ever turning a profit.
But with this expensive acquisition, the company that bought us filled a large gap in their product line, one that had been costing them significant system sales, and we definitely helped their bottom line. So the "growth over profit" strategy worked at that time. I don't think that this strategy is appropriate now, in general, but it might still work in some cases.
I know this sounds like I'm patting myself on the back, but I will confess that I didn't really understand this until we were deeply into the new strategy. Our CEO and VCs were the ones who were steering the ship. And our company's value wasn't just in the hardware and software we had developed, but it also was in our sales and marketing team, and the customer relationships they had. It took a while for me (as a hardware engineer) to appreciate that.
--- End quote ---
Thanks
It is of course hard to condense all conceivable scenarios into what is already a long post but yes, in some (many) cases growth is prioritized over profitability. But even then it is generally an emphasis on growth in revenue (or at least users) as costs can only be reduced so far and then growth requires accelerated sales volume as a multiplier for whatever the profit margin might eventually be.
In almost any scenario the valuation will be a function of not just profit margin but the rate at which (eventual) profits will grow as accelerated by sales volume; the greater the sales growth times the margin the more future value. Additionally there can be strategic acquisitions of products, technology/IP, talent, etc as you describe to fill the needs of other larger organizations.
This all gets to what is the end game? Is it to be a self-staining business (in which case the investor will want to know about dividends or other methods of getting their initial investment and return back out), or is it to become acquired, or is it go public? Each of these and more variations are possible but in the same way we had a recent thread saying that it might not be good to pile on too many lumped model concepts vs ideal model concepts for someone just getting started, I think it's important for a new founder to understand that ultimately someone is going to ask about how revenues turn into profits so they can turn into a ROI for the investors - whether those are financial investors or strategic investors. Even if there is no profit to be had by the initial company and it is going to be acquired with a negative cash flow by another larger company, the larger company is going to have some people who are going to ask "if we acquire this money losing but innovative and high growth super selling smaller company, at what point are we going to start making enough profit from our combined sales to pay for the acquisition?" Point being that while there is always the upside potential of the future, someone is eventually going to have to quantify revenue from somewhere to enable some resulting profit to pay for the investment.
What I think we have with the OP is a high focus on products and what is needed (if the OP resurfaces) is a reasonably high emphasis on how to win customers and secure revenue (by someone at some time), with some quantifiable projections and analysis of what that might that look like and what it might mean for everyone involved.
And yes, some companies will acquire other companies for their ability to find and win customers in both existing and new markets, not just for their new products and technologies. This just further amplifies the importance of being able to address sales and marketing in addition to product engineering. But even in this scenario someone is going to have to fund the pioneering company and if there aren't enough customers generating enough profitable revenue, then the founder is going to have to explain to the investors why they need to fund bigger, deeper, longer lasting hole digging until an acquiring company is so eager to acquire the hole digging enterprise that the acquiring company will pay the requisite price. This can be a dangerous game for all but the deepest pocketed investors as some not so benevolent acquirers might be willing to wait for the current investors to pull the plug and then buy the assets for pennies on the dollar. So I think the main message should be not to play a game of strategic chicken but to make money the old fashioned way - find an underserved space in the market and create or add enough value that customers happily buy enough products (or services) to pay for the start up and recurring costs of doing business.
I'm sure we can find some companies, whether in largely self-funded organic growth mode, or whether in externally funded land grab M&A mode, that folded due to too high a cost structure, but I'm thinking what ultimately gets most companies in trouble is not enough revenue to cover the costs. Investors know this and that's why they want to hear about revenue projections, and then see some earmarkings of progress toward the projected revenue ramp.
CatalinaWOW:
I will comment that as I read about your products I find it really hard to see why I would want to buy your devices. And that isn't saying that they aren't prime exemplars of their kind. Just not compelling to own. So here is what it looks like to me, as a potential investor.
1. Small to modest market. There will be literally thousands of cell phones, TVs, dishwashers, phone chargers ..... for every one of these that sells. Even if it totally dominates its market.
2. New entries in an existing market. With small variations all of your products already exist. The programmable resistance box can be purchased from major electronics suppliers (admittedly for very high dollars). There are also programmable resistors in silicon format. So this product is carving a small niche out of a small subset of the small market described in 1. (How many hobby applications for a programmable resistor are there? Maybe if you configure it and remarket it as a programmable attenuator you can increase that number, but it is still small). Programmable timers are a commodity, as are timer counter modules. Morse code generators have been available in many flavors since the 1980s and can also be downloaded as free software on a PC. Your terminal tool kit is the most interesting sounding of the devices you mention. But how hard would it be for a Chinese firm to copy the functionality (and possibly the design) and undersell you?
3. As an investor I need to see the possibility of making more money by investing in you than I can make in the stock market or any number of other investments. This is the business plan others have mentioned. And that business plan has to take 1 and 2 into account. I would offer an outline if I had one I believed in. I have a friend who came up with a really, really good sensor device. Smaller size, better resolution, easier interface and lower cost than other devices in the market. He had savings that allowed him to self invest, but even as superior as his device was it was several years before he was doing much more than just paying the bills. I believe he is doing fairly well now, but not so much as would excite an outside investor.
Rah_H:
WOW, so many voices of experience with so many awesome advices, suggestions and guidelines. Didn't realize things are already more complicated than I could even imagine but I am glad I know that now, sooner than later. Thank you, thank you and thank you. I will take all the advices to heart and try my best. On my first job interview, I followed Dave's job interview tips (he has two videos on that) and it really worked. I guess it's only fitting that on my next big step I will again take advice from the EEVblog.
So again, thank you everyone for sharing your experience and valuable advices with a newbie like me. :-+ ;D
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