Question for all you finance and business geniuses

[dsmrolla06]

I have a question for all you business and finance geniuses (aka actually went to school for this kind of stuff or whatever). Im in the process of writing my business plan to raise capital for the business I am starting. Its a website geared towards the restaurant and bar industry and will need about $15000 in capital.

What do you offer investors to help finance the business? Is it a certain interest rate, equity, other terms? Any feedback would be great. If you need any more information please let me know.

[Luco]

It's usually equity in the business based around the projected return. The trouble with websites is it's so hard to forecast.

Typically an investor would like to see their investment returned in 3-5 years so gear your % around that.

I think you should focus on the content rather than the equity though as a lot of investors will be willing to help calculate or negotiate the equity as long as they're interested enough.

[dsmrolla06]

Thats been the huge problem Im having is the forecasting of the usage and sales of the sites. I feel like all I can do is guess on a conservative basis.

[Luco]

Is there anything even remotely like it out there? That's a good place to start.

[dsmrolla06]

Its kind of like digg.com meets yelp.com, but does not just list the restaurant or bar, but why you go there. So say a bar has $4 pitchers on wednesday, that would be listed under the restaurant and each item, day and restaurant would have a vote digg style. This is so you can find the best places to go to on any given day or best items or specials a restaurant has or whatever.

Its kind of hard to explain in words, with a visual its much easier. So ya in a sense there is something out there like it such as yelp, im just taking a different approach.

[Luco]

Too big. Get traffic reports on a smaller site and then get some figures from advertisers for pay per hit or pay per click. I think there's a website you can order takeaway from, that might be a bit closer to what you're aiming for.

[Reidak]

Here is what is important to investors, in order of importance

People
Product
Placement
Plan
Pitch
Proposal

What you are writing now is the LEAST important thing that investors will care about. First, they want the best people behind your company. They will like it if you are invested in some significant way in the company.

To answer your question you will be giving investors a % of your company for some capital. They own a peice of your company until they decide to sell it.

Placement refers to the industry you are in. Most startups will fail. Investors want to invest in companies that are in industries that are growing at 25% or higher. So even if you aren't a leader you can still be profitable.

Your pitch will also be more important than your proposal. The key here is: it is for you to explain, not for them to understand. Make it short, concise, irrefutable, and greed inducing. VC's dont have the time to read through your entire proposal, which should be 10-30 pages long. Also, it is easy to change your proposal, and all your numbers are based on your own presumptions.

Your numbers need to be reasonable, not right. Nobody could accurately forecast your numbers, but if they look reasonable then that is good enough. Remember, this part is the least important in the whole investment process.

Also, investors look for 10x. Your product needs to be 10x better, faster, cheaper, whatever than what its replacing. It has to be good enough to make people switch.

With all this being said, your last post you say its hard to explain in words. It shouldn't be. You should be able to talk about your business until you are blue. You may want to draw up a BOND or infographic to supplement your pitch.

[dsmrolla06]

Banner ads arent going to be our main source of income however.

[dsmrolla06]

I should rephrase what I said before. Its not that I have a hard time talking about the business, I could talk about it all day if I wanted. What I was referring to was enveloping the entire concept of the website in just a short paragraph.

[kevster]

Equity. If you're idea is unique (or unique enough) and has the potential to bring in a lot of green, investment shouldn't be a problem.

[FriskyPirate]

For such a small amount, I would personally just try to get a loan. You might even be able to get 2-3 credit cards and cash advance it. You generally get into many legal headaches and feel ripped off in the long run when you:

1. have partners
2. give a percent of gross or net

You may be able to get loans to this amount and some of the micro loan sites online where many people give a small amount to one loan borrower.

http://www.kiva.org/
http://www.lendingclub.com/home.action

Do you have a car? Another way to get a small loan is to put it up for collateral.
http://carcashauto.iarbiz.com/

Often times text based ads like google adsense, do as well as banner ads. You might consider testing both. One other tip on internet businesses...it is all about the traffic. If you build it...they will "not" come. Spend 80% of every waking hour trying to get more and more and more traffic to your site and sales will follow.

[dsmrolla06]

So what kind of equity should I offer? I obviously don't want to lose control of the business, or even 49% would be huge. Credit cards probably aren't the way I want to do it either but a business loan would be an option. I'm writing a business plan and working on getting with the SBDC because they will guarantee a loan up to 95%.

As far as advertisement, I will be supplementing the site with google adwords at the beginning used in fairly discreet mannor as not to detract from the site and will not be relying very much on any significant income from these. In phase 2 of the development is where we are going to introduce other revenue opportunities.

[wufwugy]

reidak knows what he's talking about

[dsmrolla06]

Yes reidak did bring up very good points. Sorry if I'm missing things as I'm at work and I have to use my backberry to get on the site. As for the people behind it, it is currently just me and my investment will be a few thousand dollars as well as of course my time.

Now referring to the placement as to which industry it falls under, would it be considered as online advertising, which is growing industry, or the restaurant industry, which in this economy has been declining although it still remains strong in my local market.

[FriskyPirate]

will need about $15000 in capital...I obviously don't want to lose control of the business, or even 49% would be huge.

SBDC is an excellent way to go. If you can get a loan from them the rate will be fair and you should have a few years to pay it back. Here are a couple more points to consider...

Most investors like venture capitalists prefer to fund larger projects. You might struggle to find investors interested in sub 100k projects. You might check out Mac guru Guy Kawasakis garage.com. Most venture capitalists are looking for 6 and 7 figure projects but perhaps you can find a smaller local one in your area.
http://www.garage.com/

Equity Vs Loan
Let's say you gave away 10% of your business and you do $200,000 per year (net or gross...whatever deal you make with the investors). So now you are playing $20,000 per year for that $15,000 loan they gave you for 10% of your company.

Let's say you do a loan at nose-bleed 20% credit card interest...you are paying $3,000 per year in interest. Generally speaking, if you are successful, paying back a loan is much cheaper then paying back equity, especially when the projects are relatively smaller. Something to think consider.

[dsmrolla06]

Very good points, that's why I didn't want to really give up much equity with such a small amount needed for captial because I do feel it has the potential to become a very profitable site.

I'm meeting with the SBDC on monday and I also discovered that notre dame, which I live right by, has an incubator program called innovation park which I emailed for more information. Not sure if its a for profit or non profit yet or the details involved but they involve notred dame students and the surrounding schools in business development so that would be an avenue worth exploring.

[Reidak]

Here are some problems

1) your idea is very easy to replicate. Someone can see your site, change or improve a thing or two, and steal traffic.

2) you arent going to be demanding a percentage. You will give your pitch, hear a number, and then work from there. Have an idea of what you want. Also; they will offer money for a % based on post money valuation (google it, i just worked a 10 hr shift and its 2am here)

3) if you feel it has a lot of potential then you might want to look into getting a bank loan, line of credit on your home. Yeah its risky but 15K isnt life changing.

remember, the better you pitch this the better offers you will get.

investors love 'skin in the game' right now you have 3K invested, say you supplement another 7K and get a 10K equity investment for a total of 20K for your business. with 3K in; you might get 10K for 30%. With 10K in yourself, you might get the additional 10K for 25%. If you can see what im saying here; putting up some more money now shows investors your hungry to make it work. (That being said, since this project your saying only should take 15, i would advise you find a way other than a vc to get this money)

[kevster]

reidak knows what he's talking about

this.

my investment will be a few thousand dollars as well as of course my time

Also, forget this. Potential investors won't care about how much effort you've put in or even about how much effort you are going to put in. Their only concern will be the bottom line.

From everything I've read you shouldn't settle for less than a 60% stake but that means that you'll be putting 100% of the effort in.

Ultimately, what it comes down to is how badly you need the investment.

[Reidak]

To Kevsters point; I believe that investors will care how much you have put in and how much you are going to put in. It is just you running your business; you will either make it work or you wont. Having more of your own time and money invested will make you a better investment than having spent a week and $200 on the site.

I really think before going to capital investors, look to friends and family for this money. your business is still in the startup phase; with nothing really to show its going to be hard to get a favourable deal. If you believe in your product this much then back it yourself. For this kind of money, beleive me, the investor will think and maybe even ask why you don't just fund yourself. Its a good question.

[dsmrolla06]

Well the reason I'm seeking funding is because I just don't have the $15k needed. I'm putting as much as I possibly can into the business to get it started. I don't have any assets that I could take a line of equity, like a house, either. I do have some friends that are potentially interested in investing but I can't rely on them to do it and it wouldn't be for the full amount needed anyways.

The cost for the initial build is $9600, the remainding $5k is for server costs for the first year and phase 2 development of the site which I anticipate to start in the 5th month and roll out in the 6th. Phase two is when we will begin generating revenue.

I have thought about the fact that it could be replicated by a competitor. For the existing larger competitors (yelp, citysearch, etc) it is different enough from what they're doing that they would have to completely change their focus which is unlikely, although not impossible. Locally there is a couple city guides and such, but all of these cover a broad range of businesses, not just restaurants so I think it would be hard for them to replicate as well.

A new site could be a challenge, but there are always clones of larger existing websites that can't match the success of the orignal even if it is deemed better or improved because of the market presence of the larger site. Gaining enough market exposure and notriety would be key in overcoming these challenges.