What will the coming storm in global financial markets mean for all those would-be Web 2.0 entrepreneurs?
One thing which both webs and bubbles have in common is that they both tend to be carried away by the wind. These days, it seems as if you can’t move for techies, would-be entrepreneurs and plain old chancers spouting forth about their latest, greatest Web 2.0 idea. “Web 2.0” is, of course, the blanket term being applied to the latest generation of web-based technologies which are turning the World-Wide Web from a pretty, but essentially flat series of pages into a truly interactive reality. This offers users a much richer, context-sensitive experience and businesses an opportunity to serve stakeholders better with more useful content within a cost-effective model. Technology is a phenomenal enabler and web 2.0 is fertilizing the previously unimaginable, the previously uneconomic and, inevitably, the permanently stupid.
At the same time as the Sergey Brin wannabes are incanting “web-two-point-oh, web-two-point-oh, web-two-point-oh” over their double-shot dry cappuccinos, the global finance sector appears to be approaching some kind of nigh-apocalyptic melt-down. Suddenly, it’s no longer smart to lend eight times earnings to individuals, not a good idea to allow folks to bequeath eternal mortgages to the unborn children of their own unborn offspring. As it turns out, “sub-Prime” means just that and “high risk segments” are high risk for a reason. Fancy that.
Now, if I didn’t drink my double shot of espresso with a robust dome of bubbles on top, I might be sensing more than a slight stirring on the surface.
What does this mean for would-be web entrepreneurs or any small business looking to raise finance? In a lot of ways it means, simply, “back to basics”. Investors do not invest in ideas, even those rare, good ideas. They do not even invest in future cash-flows, no, not even very clever WACC-NPV calculations. Investors invest in people; people who can deliver the cash-flow by executing on the great ideas. Investors are not going to disappear but they are, necessarily, going to be more cautious. There will be less investment cash looking for a home and investors will inevitably, be more demanding of potential investees.
Let’s take a look at those Basics. I like to think in terms of the “3P Model” which consists of three big P’s: the People, the Plan and the Potential and an assortment of little P’s. Let’s look at these in reverse order.
POTENTIAL
You have a great idea. It is unique. It will surely change the world. And surely you will reap your just rewards as a consequence. Now is the time to pause and get some Perspective. Do your research; is the idea truly unique? If so, why? There is, allegedly, nothing new under the sun. Perhaps many people have already thought of your idea but discarded it as imPractical. What will stop other, better funded competitors from Pinching your idea? What are the barriers to entry for your idea? What barriers can you create by way of Protecting your Intellectual Property? Now is also the time to think about how to monetise your big idea. The blogosphere is full of debate about whether you should worry first about footfalls (drive traffic and the money will follow) or about how to monetise (no use flogging a dead horse) but ultimately, you need to consider both. The coming investment climate will be much harder on both of these. At the end of the day, Potential equates to the Pitter-Patter of virtual feet and the consequent Pennies they bring.
PLAN
The natural consequence of considering the Potential is to get that down on Paper in a robust form. Often the very act of committing the Plan to Paper engenders a more structured, businesslike approach. A plan which approximates, “Launch, Get Noticed, Get bought out by Google/Microsoft etc, Retire to Caribbean Island with Sacks of Loot” is a little insufficient. Start with the Potential and describe, in detail, how to realise this. Remember the dot.com bubble? The vapid talk of new economics, of cash-burn rates? Now, remember the dot.com burst. The new climate will look very like that and once again, the numbers, or lack of them, will matter. Projections: Profit and Loss, Balance Sheet and Cash-Flow. How much money do you need? Where will it go? And over what period of time? What are the risks and the business’s sensitivity to risk? From time to time, it is fashionable to poo-poo (not one of our P’s) the fundamentals of Finance but there is no escaping them. Even if your business does not forecast a profit any time soon, it needs to be able to demonstrate an ultimate return. Never forget that top of mind for investors is their exit: the Parting and the Payback. You need to demonstrate this and, if the Parting you anticipate is a Trade Sale to another player, it had better be more substantially described than the Get Noticed scenario outlined above.
PEOPLE
The final Big P is People and this is another place for a good objective Perspective. You may have the Potential, you may have the perfect Plan but can you Play the game? Can you present the Promised result. Investors back people; people they can trust – with their money – to deliver the final results. It is worth looking at your situation from a buyer’s perspective. Firstly, would you invest in You? Do you have the Proficiency, the Past record and the Perseverance to deliver? Does the management team have the requisite skills? As a leader or manager, do you have the Pull to attract the necessary talent? Investors can often plug a perceived gap and may bring skills to the party (particularly in the Business Angels or Private Equity space) but they want to know that you have recognised the weaknesses, that you have done all you can to build a winning team in the first place. That comes back to the underlying hunger, the desire to succeed.
Diagram: The 3P Model for Investment Planning
In reality, the investment market is never easy, for every well-publicised “overnight success” there exist innumerable failures. The changing climate will only highlight what was ever the situation: great ideas alone do not succeed. Strong Planning and Preparation are all. Good ideas will come through Providing you pay attention to the three P’s of Potential, Plan and People.