Entrepreneur Addiction #16 — 'Start, Grow, Plan, Exit' with David Lavinsky
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Today’s episode features an interview with David Lavinsky, founder of GrowThink. Dave has developed over 100 business plans, and has written hundreds of articles on entrepreneurship, business planning and capital-raising. He’s consulted thousands of business owners on how to start, grow and exit their companies. We pick Dave’s brain on each of those topics, and also dive into crowdfunding, a quickly growing type of business financing.
So grab your headphones, turn up the volume, and enjoy the conversation.
In this episode of the Entrepreneur Addiction Podcast, we discuss:
- Finding niche markets
- How to start an online business
- Likes, interests and expertise — and opportunity
- How the ‘Entrepreneur Access to Capital Bill’ gives freedom to entrepreneurs
- Rewards-based crowdfunding vs equity-based crowdfunding
- Think creatively about how to raise capital
- Why VC and Angels are bad fits for most businesses
- How business plans get you funding
- Biggest mistakes with business plans
- Everyone should have an exit strategy
- Trends for 2012
- Bad version of a Harley Davidson rider
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Fueling your business success, this is the entrepreneur addiction podcast, breaking the small business loan news you need if you obsess about your company. Heard exclusively on Lendio.com. And now here are our your hosts: Brock Blake, Dan Bischoff and Patrick Wiscombe.
Patrick: This podcast is sponsored by Lendio.com, the online source you need to find the right business financing to grow your company. So check them out: Lendio.com, to get your business growing right now. It’s the entrepreneur addiction podcast episode number sixteen. My name is Patrick Wiscombe. Thank you as always for tuning us in and taking us along wherever and however you’re accessing the podcast, whether it be on Lendio.com/blog or on PatrickWiscombe.com or on ABC4.com. We appreciate you tuning us in and taking us along. Dan Bischoff director of corporate communications for Lendio joins me for the podcast. How are you?
Dan: I’m doing great, today.
Patrick: You know what, you really, truly startled me today. As I was pulling into the parking lot, I looked over and said, “Well, that’s Dan’s car. That doesn’t look like Dan, though.” (laughter) Dave Lavinsky also joins us for the podcast.
Dave: Hey guys.
Patrick: He (Dan) shaved his head. He’s completely bald. He has chops. He’s got a mustache. But if you turn him around, he’s got a mustache on the back of his head because Lendio’s holding a mustache growing contest.
Dan: Mustache growing contest. That’s right. Today’s the end of the contest. It’s called the Movember, mustache-no-shave Movember.
Dave: I’m sorry I can’t be there to join you guys to see it.
Patrick: Dave Lavinsky who is the owner of GrowThink.com joins us for the podcast.
Dan: Is owner the right word?
Dave: I’m co-founder and one of the owners. So I’ll take that.
Patrick: Okay, so let’s get right into this. Let’s talk about GrowThink. I was looking at your website, GrowThink.com. Give us some background about GrowThink, and give us a little bit of background on yourself.
Dave: Sure. So, GrowThink, we started the company back in 1999 to help entrepreneurs develop their business plans so they can grow capital and develop their companies. So, since 1999 we’ve worked with literally thousands of entrepreneurs. We have consulting services, where we write business plans, with over two thousand clients doing that. We also create products with a business plan template, and other products that we’ve sold to over twenty-five thousand entrepreneurs. And over a half of million entrepreneurs have downloaded our materials. So basically we’re in the business of helping entrepreneurs succeed, and particularly with developing their business plans and raising capital. And part of GrowThink, I’m a serial entrepreneur, and part of GrowThink, I’ve just been running companies for the past twenty years, starting companies whenever I see an opportunity. Just going after it and growing it. So I’ve done products ranging from, products ranging from consulting businesses to a nutritional product businesses to several online business that I’ve run, and some that I still run on the side as well. I just love starting and running businesses and helping entrepreneurs do the same.
Patrick: Why do you still enjoy doing it?
Dave: I guess it’s that part of being an entrepreneur in my DNA is just the excitement. I just love hearing a great new idea and helping somebody go after it or doing it myself. I know some people who have corporate jobs. They just loose that passion, that fire. For me, seeing an opportunity and seeing it from the idea states to execution is just fun. It’s just enjoyable for me. That’s why I just love coming to work everyday and doing it. It’s what I love to do. It’s just the excitement.
Patrick: What’s the last thing that you did, other than GrowThink, that you were listening to somebody and you went, “This is going to be huge!”?
Dave: The last big thing I did that did take place while GrowThink was around was when I started really understanding SEO, search engine optimization, and what was going on back in the early 2000, and understanding what the opportunities were. What I did at the time, I did a lot of research into different keywords and opportunities and found a whole bunch of words that were not being fully served. I remember things like bunk beds. I recognized the word bunk bed was a very valuable keyword, and the companies that were ranking on ‘bunk beds’ weren’t very sophisticated. So I went out there and created a team of a people and created three thousand websites all focused on very specific areas. Like a bunk bed website. One for futon beds. One for baseball gloves. We actually created three thousand websites and ended up growing our business. It was an advertising model generating millions of dollars in advertising revenue, and ended up selling a lot of those websites. So that was just seeing the opportunity, learning about search engine optimization, realizing that the big guys were doing it, but nobody was doing it in these little niche markets. And just going out there and starting with one website, getting some initial success. Then we created over thirty websites. They started getting some success. So I said, “Okay, let’s scale this thing.” And grew it until at one point we had over a hundred people writing content for our websites.
Patrick: So what I hear… one website is a big enough pain, so when I hear three thousand, how in the world did you pull off three thousand websites?
Dave: It was just a system. We created a system whereby certain templates on how to do it. We had a, everything was systematized, so we had a process really from beginning to end. There was a process of, “How do we find the keyword, like baseball bats or bunk bed. How do we find and identify the best key words. How do we research what the best url is.” Once we had that, we had to do more research into what are the subkey words, what are the pages of the website. For example, wooden bunk beds and metal bunk beds and bunk bed frames. We identified all of the keywords. Then we found a whole bunch of firms and individual writers throughout the world that we aggregated. Then we created a system whereby we created something like sixty thousand article titles, and people started writing those articles. Then they came back, and another person was responsible for taking in those articles, editing those articles, and then forwarding them to the web developer person. Then the web developer person basically had a system for taking article in Word and converting them, using other systems, into html and getting them off to the websites. Another person monitoring, getting all the websites live on GoDaddy and other servers and just managing flow. We just kind of used the Henry Ford, you know, model, the machine model and just broke everything down to lots of pieces.
Patrick: That’s impressive. I’ve got to be honest. Dan?
Dan: You know, I love the SEO world too. I come from that a little bit, and I’d love to talk to you all day about SEO. But a lot of what you do is help people start, finance, and build a company. And from looking at your website and things, if I’m right, a lot of that is emphasized from starting an online business. Is that right?
Dave: Not fully.
Dave: I would say about ten percent of our clients are looking to start an online business. The other ninety percent are looking to start anything from a retail business to a tech or a software company, from healthcare to real estate, to every other type of entrepreneurial venture you could think of.
Dan: Let’s talk about the niche of starting an online business. It’s something that doesn’t take as much capital, as much resources, as much overhead, and let’s talk about the steps here of how to go about creating an online business and making that successful.
Dave: The first thing that I’d want to make sure is that you’re going after the right niche. There’s two ways to go about it. One way is kind of opportunistically doing what I did in my story, saying, “Okay, there’s an opportunity in the bunk bed market. There’s a gap where the incumbents aren’t fulfilling this need.” And the other way is to look at what your personal likes and interests and expertise are. You know for me, I’m big into, I was a college wrestler. So I know a lot about wrestling. My son’s big into lacrosse, so I know a bit about lacrosse. And I do a lot of exercise. So those are kind of passions of mine, things that I know about. So I might want to go into that field. The ideal thing is, if you marry the two, you know, what you’re excited and passion about and what you have expertise in and what the opportunity is.
Patrick: So, do what you love?
Dave: Exactly, do what you love. You’re not going to be successful not doing what you love. You look at, when I was in the bunk bed business, yes it was exciting because I was going after a niche that had an opportunity but I wasn’t full time on the bunk bed business. I wasn’t growing a bunk bed company. It was one out of three thousand. I believe, personally, I would’ve gotten bored running a bunk bed business even if it was a great opportunity and I was making money, I would’ve gotten bored because that’s not my passion. Again, the key is that you’ve got to be passionate about it, and the other thing is to figure out within your passion, you know, what is the core opportunity. So I would just look at what is out there because success in entrepreneurship is simply fulfilling a need. That’s really what it is at the end of the day. So you’ve got make sure that there are some real unmet needs out there.
Dan: Let’s back up a little bit too, and talk about helping people get financing or find financing, a little bit. There’s some recent legislation with the entrepreneurial access to capital bill and how it relates to crowdfunding. And I saw on your blog, you wrote a little bit about this too recently. But let’s talk about first what crowdfunding is, so we understand what crowdfunding is, and then how this new bill is helping entrepreneurs.
Dave: Got it. So crowdfunding is simply raising money from the crowd. The crowd being the mass market and/or the internet crowd. The ability to go online and say, “Hey, world. I need funding.” And to have this person in this place give you, lets say twenty-five dollars, and have the person you went to college with give you fifty dollars, and whole bunch of people, literally throughout the country or throughout the globe, kind of chip in to fund your business. Funding from the crowd. Crowdfunding has been around for some time now. There’s some big companies like KickStarter.com, RocketHub.com, IndiaGoGo that are offering crowdfunding online. However, with these crowdfunding sites that are live online, pretty much all of them are, what I call, rewards based crowdfunding. Which is this, if you fund my business as a crowdfunding owner, I will give you some sort of reward. So for example, a cupcake shop raised about ten thousand dollars in crowdfunding. They said, “If you fund us now, when we launch our cupcake shop, if you give us twenty-five dollars now, we’ll give you fifty dollars worth of cupcakes once we launch.” So it’s rewards based. So they’ll give you something like product, which pre-selling their goods. They’ll give you mugs. They’ll say, “Hey, for a ten dollar donation, we’ll list you on our website as one of our donors.” And they can get creative from there. So it’s really rewards based. You get a reward, which is a non-equity reward for your donation. Now the new crowdfuning bill, which is the entrepreneur access to capital act, the goal of that bill is to allow equity based crowdfunding. Now right now there is equity based crowdfunding in the UK and in Europe. In the United States there’s a company called ProFounder, which has two founders, one of which…
Dan: Let’s define what equity based crowdfunding would be.
Dave: So I talk about reward based crowdfunding, where you get some sort of reward for funding. Equity based is simply that in return for your funding, your investment, you get equity. So you get, you write a check for a hundred dollars, you’d get, let’s say, ten shares of stock in my company. So the issue of equity based crowdfunding is is that equity investments in the United States is a highly regulated business, and so there’s certain things that you cannot do today when you’re selling equity or securities…
Dan: So, we’re talking about traditional, VC and angel funding, right?
Dave: We’re really not talking about VC because VC’s are institutions, so a lot of the rules do not apply because they’re institutional funding sources. But it’s really applies to angel investments. So right now if you’re seeking an angel investment in the United States, there are a lot of things you cannot do, which this crowdfunding act is hoping to let you do. So let me give you some examples. The big one is what’s called general solicitation. So like, right now, if I want to raise money for my business, I can’t go sit outside a walmart and say, “Would you like to invest in my venture.” I can’t go on my website and on Facebook and on Twitter and say, “Hey, world. I’m trying to raise money for my venture. Would you like to invest?” That’s known as general solicitation. If you don’t have what’s called a preexisting relationship with somebody, you cannot ask them to fund your business, currently. So one of the big exemptions that the entrepreneurial access to capital act is trying to give entrepreneurs is the exemptions from the general solicitation rule. That’s a big one.
Dan: Yeah, that’s huge.
Dave: Because that opens up the market a lot, and opens up your ability to market yourself to investors. Does that make sense?
Dan: What can people do now, then?
Dave: If this bill goes through, if it gets past the house, it still has to get past the senate and get presidential approval, but it’s going to allow you, once again, the big one is the ability to do general solicitation. The second big one is that currently regulations allow you to raise angel funding or funding from individuals only up to thirty-five non accredited investors. And basically to be an accredited investor you need a net worth of a million dollars or more or an annual income of about two hundred and fifty thousand dollars for the last two years.
Dan: You said that was current? Right? Currently that’s how it is?
Dave: That’s currently. So basically my research shows, about, whatever the… I think it’s on my blog. About, whatever the numbers were… a very small… the number of institutional accredited investors right now is about 1.7 million US households.
Dan: Yeah, that’s what you have on your blog. Yeah.
Dave: Now, yeah. So it’s 1.7 million, sort of, Americans or American households would be considered accredited. Now the crowdfunding bill would allow you to go to as many unaccredited investors as you want, and my research shows that there are 51.7 million US households with incomes greater than fifty thousand dollars that, according to new legislation, would be able allowed to write you a five thousand dollar check or more. So basically it increased the size of the angel market from 1.7 million Americans to 51.7 million Americans that could potentially invest in your company. It would dramatically increase the potential investors in your business.
Patrick: So this is important legislation then?
Dave: It is, and it may not be. It is. It’s very exciting because it allows general solicitation and dramatically opens the number of investors. That’s exciting. The negatives are that clearly there can be a whole bunch of charlatans out there that want to take advantage of this and will try to raise money for companies that don’t really exist to try and pocket that. Right? It could get the one bad egg ruining the bunch. It’s one big concern. The second big concern is that there is no evidence that the general population is more interested in getting equity for their investment versus getting rewards. There’s no evidence. It’s never been tested side by side. So the question is, if I’m opening a cupcake shop, if you as an investor are willing to give me a hundred dollars, what would you prefer. Would you prefer to get ten shares of equity in my company or would you prefer to get a hundred and fifty dollars in immediate gratification or near immediate gratification, you know, in the form or a hundred and fifty dollars worth of cupcakes. So that has yet to be seen, so I can’t say that this going to be successful because I don’t know. I believe in certain businesses like a retail business I would rather have a reward than equity because the exit potential of a retail business is not great versus a technology business, yes, I would rather get the equity.
Dan: Does the business owner want to giveaway equity too? You probably want to start with a rewards based crowdfunding if you have your business that way anyway right?
Dave: It depends on your business. There are certain businesses… if I’m building a semiconductor. If I’m building a semiconductor company and it takes ten million dollars to make any progress, than crowdfunding doesn’t make sense. If I don’t have any immediate rewards that I can give people, it’s harder. So if I’m a nail salon, it’s very easy to say, “Listen, I need a hundred thousand dollars to build up my nail salon, and once I do… You know, give me fifty dollars now, and I’ll you a hundred dollars worth of nail salon services.” It’s very, very simple. For other businesses it’s hard to create those rewards because they may be a little less tangible.
Dan: Right, right. That makes sense actually. So it will open the doors for those who don’t have rewards right now too. I guess that could open the doors for, you know, services businesses or something like that, I guess, too. Or who knows, huh?
Dave: Yeah, I think it does open the door for more technology businesses.
Dan: You don’t have cupcakes, but you have a cool technology. Maybe that technology didn’t have as many opportunities as before as they might if this bill gets passed.
Dan: Cool. Crowdfunding’s growing quite a bit. Crowdfunding and peer to peer and all that stuff. It’s grown quite a bit, so it’s exciting to see all the alternative types of financing to continue to grow, I think. It gives you another option to the traditional bank loan.
Dave: Agreed. Most entrepreneurs never really start their businesses or stagnate or fail because they lack capital. And so I love the concept of giving more entrepreneurs more options to raise funding, but more importantly is that I think that all entrepreneurs need to start thinking more creatively about how they’re going to raise capital. Most entrepreneurs think, “Okay, I’m going to go after venture capitalists.” And as a result, venture capitalists are just way to competitive, and there’s a whole bunch of other ways to raise funding that those entrepreneurs don’t know about, and it’s very frustrating. Because they don’t know about it, they fail.
Dan: Especially for that cupcake shop. There’s not going to be a lot of venture capitalists and angels interested in investing into a cupcake shop. So the crowdfuning thing might be a better option.
Patrick: So how do you get that message out to entrepreneurs, that there other additional ways to finance or grow out a business. Is it just purely educational, getting the message out the best you can?
Dave: That’s pretty much it. I mean, we are in a nice position that we are known for business planning. We’ve been doing it for so long. What happens as a result is that we get thousands upon thousands of entrepreneurs each month coming to us for business plan help. So we are then able to educate them on saying, “Yes, we can help you with your business plan, but we won’t to tell you that angel and VC aren’t the only ways to go.” It’s just a matter of educating entrepreneurs. The vast majority of entrepreneurs, you know, if you tell them, “Hey. I hear you’re starting your business. How are you going to fund it?” They’re going to say, “Well, we’re going to go to venture capitalists.” And they don’t understand that ninety-plus percent of venture capitalists funding goes to tech companies. And so if you’re not a tech company, you’re pretty much excluded from venture capital. Most entrepreneurs don’t understand that, and unlike what the media often says, most entrepreneurs are not tech entrepreneurs. The vast, vast majority of entrepreneurs are not tech entrepreneurs. They’re, as I’ve talked about before, they’re personal services, business services. They’re, you know, products. They’re retail, etc…
Dan: That’s the message that Brock, our CEO, is always saying too. Ninety percent of main street America is not going to fit. They’re a better fit for a business loan or some type of alternative financing. But what’s some advice you have for people who might be looking for crowdfunding today, and how can they go about getting that? What types of things do they need to do to put it out there to say… How do they prepare to get that funding?
Dave: Sure. So the first thing you need to decide on with crowd funding is whether, once again, you want to go the rewards based route or the equity based route. If you’re going to go the equity based route, you really have to wait until the legislation gets passed. You could go to ProFounder.com right now. They are… I think they started at one point, they stalled and were no longer taking applications because they were waiting on legislation. But that’s really the option right now. A bunch of other sites will spring up if and when the proper legislation is passed. So the other option once again is reward based, and you need to determine, you know, whether you would like offer rewards. He actually have a program at crowdfundingformula.com that actually walks you through the fourteen steps to successfully raise in crowdfunding. What we had done is we had accessed hundreds of companies that successfully raised crowdfunding and hundreds that didn’t and figured out the formula to do it right. One of the keys of the formula is coming up with the proper rewards. You know, how are you going to reward people because when people donate to you, they’re not going to just do it out of the goodness of their heart. They want something back in return. So again, you want to get creative. One of the cupcake companies that I thought were really cool, was they said, “For a five hundred dollar donation, we’re going to name one of the cupcakes that we sell after you.” And I thought that was really, really fun and creative, so get somebody, kind of that ego investment of five hundred dollars, so they sell the Dave Lavinsky cupcake. That’s very, very creative, and they raised a lot of money doing that. I thought that was very, very cool. So you need to make sure that you have creative rewards. The second thing you need, you need a marketing. You need to be able to market yourself. People think, “Oh, I’m just going to put my crowdfunding raise on KickStart or RockeHub and magically people are going to fund me.” That’s just not how it works. You’ve got to market it. You’ve got to tell all your friends about it. If you have a blog, you have to blog about it repeatedly. You’ve got to get on social networks and tell everyone you know about it and get them to tell all their friends, and so on and so on. So you’ve really got to get creative, and you’ve got to market it aggressively.
Patrick: We’re talking about the cupcakes. I’m not sure I’d want my name associated with a cupcake. “Patrick Wiscombe The Cupcake”. (laughter)
Dan: Speak for yourself. I’d take my name for a cupcake.
Patrick: The Patrick Wiscombe Cupcake. The Dan Bischoff.
Dave: You don’t think it would be cool that if in Ohio everyday someone who didn’t know who you are went into the cupcake store and said, “Hey, I want my favorite Patrick Wiscombe Cupcake.”?
Dan: I’d love it. I’d love it.
Dave: A regular. It’s awesome.
Dan: Maybe a steak.
Patrick: It’s fluffy on the outside, creamy on the inside.
Patrick: Hey, let’s talk about business plans. You do business plans almost, I won’t say exclusively because you’ve got a lot of things on your website GrowThink.com. But let’s talk about business planning. What are the critical elements needed in a business plan, Dave?
Dave: There’s really two uses of the business plan. There is funding and strategic. For strategic purposes you just have to make sure that you business plan writes down what your long term, call it your five year or exit, goals are, what your annual goals are, and what your basic strategy is. There’s tons of research proving that entrepreneurs with business plans that have written, formalized goals achieve them dramatically more successfully than those that don’t. So you need to, at a very, you know, basic minimum, you need to have plan. Even if it’s only one page that says, “These are our goals, and here’s are general strategy for getting them.”
Patrick: Do you have clients who still fight you on business plans like, “Oh, come on, Dave. Do I really need to write this down? I know what I want.”
Dave: No because typically they probably wouldn’t have come to us in the first place if they didn’t know they needed a business plan. But I’m sure if I went out there and spoke to a hundred entrepreneurs on the street that didn’t know me that I would clearly get that push back. But once again, there’s a lot of research showing that just writing down your goals and your strategy for getting there is going to help you get there. Now, as Dan was saying, whenever you’re looking for capital, you need a business plan. Period. Now we’ve all hear the stories of, “Well, no, you don’t need a business plan. I just wrote my idea on the back of envelope and I told this VC, and he or she funded it.” And that is true, and that happens one, one millionth of a time, and the only time that that happens…
Dan: And everyone remembers it too, for some reason.
Dave: The time that it happens, if you are a serial entrepreneur that has already raised venture capital and taken a company public or sold it for hundreds of millions of dollars and made the venture capitalists that backed you hundreds of millions of dollars, you can just say, “Hey, I want to start a new business. Fund me.” Because you’ve already proven, you have a massive track record of taking, you know, a ten million dollar check that the investor gave you and turning it into five hundred million dollars. You were the golden child. You can get away with it. The rest of us, which is ninety-nine point nine nine percent of entrepreneurs, you can’t do that unfortunately. So you need a business plan, and the business plan, the main mistake… before we talk about the key sections, the main mistake that most people make, most entrepreneurs make in their business plans is they don’t realize that your business plan is a marketing document. You use the business plan to market yourself to lenders, investors, etc… You have to market them. Not to say that it’s a full color brochure with fluff, but you’ve got to realize that it shouldn’t be a hundred pages of dense content. You’re trying to sell them on the fact that this is a good opportunity and sell them on the fact that they should meet with you face to face because that’s how deals are done. Deals are not done by, “Hey, send me your business plan online, and then I’m going to send you a check.” It’s done by, “Send me your business plan. Hey, I read your business plan. It looks great. Let’s meet face to face.” Use the business plan to market your company, and within the business plan, the most important thing is the executive summary with the goals obviously to get the investor or lender excited to learn more about your company. And within the executive summary and the plan, the most important thing is what I call is your unique success factor. “What are your unique success factors?” I have a line in all my business plans that says, “We are uniquely qualified to succeed because…” And then are five to eight bullets after that. So what is it about your product or service that makes you unique and qualified to succeed? What is it about you and your other team members, your human resources, that make you uniquely qualified to succeed? What is it about that geographic market you’re in of the competitive landscape or the market trends, etc… You need to figure out why you’re uniquely qualified to succeed, and that’s what’s going to get investors and/or lenders to write you that check.
Patrick: So, differentiation, just like we’ve heard over and over and over. Do what you love, and what makes you so valuable.
Dan: That was great advice, I think.
Patrick: You mentioned a couple of minutes ago that you were, you mentioned developing an exit strategy. Now, what do you mean by that, and how do you even plan for an exit strategy?
Dave: Sure. An exit strategy is how you’re eventually going to exit your business.
Patrick: Is that always then end goal, though? I guess it depends on the person.
Dave: It depends on the person. Everyone should have an exit goal or exit strategy. A Yogi Bear quote, “If you don’t know where you’re going, you’re probably not going to get there.” So you need to know where you’re going. So an exit strategy could be to go public, more likely than that it’s to sell your company. A lot of entrepreneurs just want to run their company forever and reap profits. That’s a possible exit strategy. It’s not a great exit strategy. Or in a lot of cases the entrepreneur wants to sell their company to their employees or sell or give their company to their children. So that is your exit strategy, where you want your business to eventually be because you’re not going to run your business forever. And the real value in entrepreneurship is starting a business and scaling it to a point where it kind of runs itself and is profitable. That’s when you can reap the most value. It’d be a shame to let those businesses die when you could sell them for a lot of money. That’s why it’s very important to have an exit strategy in place, and in terms of building that exit strategy the first thing to do is simply to dream. Dream about what you’d want this business to achieve. Say, “Okay, well, my dream is to take this business concept, execute on it, grow it to a eleven million dollars of revenues by whatever year it is, call it five years in the future, and then sell the business for three times revenue, or thirty-three million dollars in that year, and walk away with a large check. So the first is dreaming. And the second step is making that a reality, which is figuring out your action plan to get there and, very importantly, figuring out how your business is going to be valuable. There’s too many businesses out there, even if they’re generating revenues and profits, they’re not valuable to an acquirer, and acquirers are the number one way that you’re going to exit your company by selling it. You’re not valuable because there are holes in the business. The biggest holes are: One, the business is way to reliant on the founder or owner, and if the founder or owner leaves the business, all the value goes out of the business. That’s the owner that’s running the business seventy hours a week. They’re doing too much of the work. They maintain relationships with all of the key venders and customers, and if the owner goes, the business goes with it. That’s one core thing that entrepreneurs need to make sure they develop systems, processes, and plans to avoid that. The second key risk factor or issue in planning your exit strategy is that you can’t have over-reliance on certain customers. You can’t have too much customer concentration whereby one or two customers leave and you just lost seventy percent of your revenue. That’s too risky a business that happens all the time. And the third thing why would somebody buy your business is if it’s based on residual revenue. So you need to make sure that you have a business that has residual revenue. The best types of businesses are a residual, sort of contract business. So you look at Verizon Wireless, a mobile carrier business. It’s a great business. They lock someone in. They then have to pay them every month for two years. You know, Verizon Wireless could pretty much estimate what their revenues are going to be next month, a year from now, and possibly two years from now pretty well. Investors love that.
Patrick: With Verizon they’ve got their revenues that are locked in for two years, but even when someone leaves, they can count on some revenue based on whether people cancel early.
Dave: Exactly. Termination fees. That’s the idea type of business. On the other end is selling somebody something once and never being able to sell them again. It’s sort of like the pool salesmen. You know, if you don’t have a pool service contract, you sell someone a pool, you spend all this time, energy, and money selling someone a pool, now if someone busy a pool, they’re not buying another pool for forever, possibly.
Dan: What are some trends that you’re seeing with funding of businesses with industries that might be good opportunities in 2012?
Dave: It’s a great question. I hate to… I’m not really big on answering trending opportunities in terms of business concepts because I think that any business…
Dan: Because you want to keep them close to your vest, is that why? (laughter)
Dave: (laughter) Exactly. I’m not telling you guys. No. No, but seriously, there’s opportunities in any business. You could say that social networking has past it’s prime. There’s too many big players out there. Yet, we’re going to see some great new social networking companies arise today and next month and several months from now. So there’s always an opportunity for a great non-need-to company. In terms of funding, clearing crowdfunding is a large and growing trend. Even once again on the rewards based side, the number of companies raising rewards based capital is huge. When I created my first iteration of my crowdfunding formula product about, lets say, a year and a half ago, the largest funding amount of the crowdfunding was two hundred thousand dollars, and I had estimated that within a year someone would raise a million dollars. I was wrong. But somebody did raise, I think it was nine hundred and sixty two thousand dollars. So the amount of money raised by individual companies is increasing, and the number of companies raising money from crowdfunding is also increasing. So that’s a big trend. The second big trend is that angel investors, there continues to be a growing number of angel investors in the United States. One of the reasons why is the stock market has been up and down and has been essentially flat over the last ten years. So people with money, again there are 1.7 million of them, they have money that really isn’t earning anything in their bank account. It’s not earning anything in the stock market. And they’re more and more willing to invest in entrepreneurs with cool, new ideas. And it’s just a matter of going out there and finding them and meeting them and convincing them to write you a check. So there’s more and more of that going on. It’s a big trend. There’s a lot of wealthy Americans out there that willing, eager, and ready to write you an angel funding check if you know how to get it.
Patrick: We’ll go ahead and wrap it up there. Be sure to pick up the podcast. Again, it’s on Lendio.com/blog, and you can also pick it up on my website on PatrickWiscombe.com. So for Dave Lavinsky, who is the founder and co-owner of GrowThink.com, be sure to check out his website: GrowThink.com. They’ve got a lot of excellent, very excellent services they offer including consulting, business planning, plus you’ve just got some cool stuff on the website, Dave.
Dave: Yeah, I appreciate it.
Patrick: And Dan Bischoff director of communications for Lendio.com for Lendio.com, it’s always good to see you, and I hope you win the chops, the mustache, and bald head contest. You look like the bad version of a Harley rider. So for Dave, Dan, I’m Patrick Wiscombe. Thanks for listening to the Entrepreneur Addiction Podcast. We’ll talk to you next week.
Voice: Making business loans simple, this has been the entrepreneur addiction podcast, helping you secure the capital you need, with your host Brock Blake, Dan Bischoff, and Patrick Wiscombe. Heard exclusively at Lendio.com.