3. Raising Equity Capital (Part I)
Hi there, reader! How are you doing? I’m here, back with you, to tell you all about raising “LLETES” (dough)! As my friend “El Chaparro” says; AKA capital. This topic is of the utmost interest for entrepreneurs, since several factors affect the results, and there’s no set formula that works every time. Therefore, I’ll tell you about our experience, and I’ll invite a couple of people, in future columns, who have raised dough or make a living by investing in Start-Ups, so that they can share their point of view.
But, for this, I must go back in the history of “Resuelve.”
After the four-month period, of Darrel Duffie’s class, was over; Zorro and I organized a trip to Turkey with a group of Standford students. The project consisted of coordinating 30 students, for 10 days, in a country unknown to us, with the goal of meeting with entrepreneurs, to understand how business is done in that country; and, of course, sightseeing.
This was a great opportunity for us because we tested our dynamics of working together in something a little more stressing than a master’s assignment. However, the best, and the main reason to do it was that it was free for us: the students traveling with us were covering our expenses.
The trip was a success. No one got lost, we made it to all of the meetings, and everyone had a blast. Back in Stanford, Zorro and I agreed we’d use our last four months in school to work on a business plan. This was a meaningful commitment; generally, the final months of a master’s are used for leisure and relaxing. While most of our friends played golf or were getting wasted, we were in the damn library. I remind you that, at the time, the concepts of Lean Start Up, and Business Model Canvas, weren’t even born yet. This means that we made a 100-page business plan in Word and a financial model that, crashed my “toaster” laptop every 10 minutes.
Nowadays, business plans are considered kind of old-fashioned, but sometimes new entrepreneurs like to take this to the extreme. I mean, they come to us with an idea, but they haven’t given much thought on how to execute it. We believe that, besides your product or service, you must have thoroughly contemplated the following points:
1. What will your Income Model be to generate “dough”?
1.1. Recurring fee (our favorite)
1.2. Brokerage
1.3. Licensing
1.4. Franchise
1.5 Productions, and product sales
2. How will you attract customers?
2.1. Own sales force
2.2. Third-party sales force
2.3. 100% digital channel
2.4. Online/offline mix
3. What will your Customer Acquisition Cost be?
3.1. Marketing Cost
3.2. Sales Cost
4. Cost Model
4.1. Fixed Costs
4.2. Variable Costs
4.3. Mixed Costs
5. The famous “Unit Economics” (fundamental, from our point of view).
6. Burn Rate to reach your Break-Even Point. For this, you need to build a sound financial model counting all your estimates, that will help you understand how much “dough” you need to raise.
Most likely, there are tons of successful entrepreneurs who never developed a plan with these concepts in mind. What’s more, when we launched, we were not so sure about them. Nevertheless, thinking these concepts through, helps you to execute your ideas more efficiently.
However, we’ll talk more about these concepts in future columns. But, going back to our conversation, Zorro and I were in the middle of Spring in California, locked in the library, working on our 100-page business plan, on top of that: in English.
I’d like to pause to point out that, if you ever speak with Zorro or me in English, you’d never believe we have an MBA from Stanford. For example, during our trip in Turkey, we needed to vote to elect the group’s president (AKA the most popular), and Zorro took the mic and said: “OK, everyone, let’s do a votation.” I believe that saying “votation” worked for him, he won the election. Some other time, Zorro spoke in a panel for aspiring Stanford students, and when he talked about our digital bookkeeping business. “Enconta,” he said: “we do accountability.” (I think Harvard did great in recruitment that year). I’m not even invited to speak in such panels. My Ensligh accent sounds like a mix between Pakistani, and pretentiously posh Mexican Spanish (in my defense, my high school English teacher said things like “Close the ‘ventain,’” and “I love ‘palomits.’”). Only a trained ear can easily understand me.
But, in spite of all this, we diligently worked on the famous business plan and wrapped up just in time for our convocation ceremony. I remember sharing it with some of my American friends from Standford, and more than a few remarked “How funny, I didn’t know you could do business out of this.”
Right before going back to Mexico, we had our first formal equity capital raiser in California, with the founders of Freedom Debt Relief (the company on which we based our business idea). In preparation for the meeting, Zorro and I printed several copies of our business plan in Kinkos (a type of Lumen in the U.S.A.).
We made it to Kinkos, and asked for 6 sets, in full color, in the most elegant paper they had (a trace of my White Collar/ Banker wannabe mindset). Zorro really disliked this decision; he’s cautious about his money (his childhood friends say he’s stingy, but I say he’s careful). Now imagine his reaction when we got the stratospheric bill, in USD, and I told him to pay with his credit card because mine was declined. It was the end of our master’s, and we didn’t have a cent.
We made it to the meeting with the guys at Freedom, and the first thing we did was to give each one of them a set of copies of our fine Business Plan. Immediately, Jeff, one of the founders, turns around and says: “let’s watch it in the projector, and then you can email it to us.” Zorro almost fainted out of anger! We did OK in our presentation, but by the final part, they started asking if this was something we would pursue for sure, or if we had other plans. So, we told them that Zorro still had an offer in Barclays, in Mexico, to be a trader; and I was still being interviewed by some private equity funds. Immediately they said: “Well, it’s been great meeting you, and if you ever launch this, keep us in the loop.” This was the only meeting in which our English business plan was useful. When we got back to Mexico, the first thing we did was to translate everything into Spanish!
To this day, we still have a good relationship with the guys at Freedom, and, sometime later, we asked them why they had decided not to invest with us on that occasion. They answered that, when we presented the project, it didn’t seem to them that we were dying to become entrepreneurs; instead, that we would do this while we found something cooler. Also, they said that we weren’t specific in what we wanted from them. We didn’t walk into the meeting with clear objectives.
1. How much “dough” we wanted?
2. When did we want it?
3. How much would they get?
Considering all of this, I’d rate our first capital raising meeting with a solid 3. Obviously, 2 out of those 3 points come from the print quality of our business plan!
I’m running out of space, so we’ll leave the rest of the story, and other theoretical topics on raising capital, for the next columns.
We’ll read each other next month. If you have any comments, questions, complains, or suggestions, nag me on Twitter. Find me as @Javivelop.
