I'm currently in a similiar situation. I'll explain shortly, I have a question first; MBA = Masters Business?

I'm 20 years old (just turned 20) and am currently working on my Business Plan to seek the proper financing for start-up expenses. There are a few things I know that will hurt me, especially since I'm trying to generate funds exceeding $3m +/-:

-I do not have the "proper" educational background. I'm currently attending a JC but was accepted to Stanford University under their English and Pre-Law program. Although I am seriously contemplating denying their offer to pursue a Business degree, I pondered this - Does any type of education make me more credible when seeking financing? Or MUST it be Business-related? I understand that if I want to open a book store it would be wise to major in literature or english, to rienforce my knowledge of that field - however, the current business endeavor involves services, lurking in the entertainment sector to be more precise.

Despite my seeming lackadaisical situation, I read a tremendous amount and have developed, what I have been told by the SBDC, SBA, and professors at my school, to be an excellent Business Plan for someone who has never taken a business course.

-No credible entrepreneurial track record. Although I've been wheeling & dealing, buying and sellings, and working the streets since I was about 6, I have no documented entrepreneurship experience. This also hurts me, especially with the young age as a "dangerous" decision-making threat. How important is "proper" experience when seeking a significant amount of financing? I've had other roles that involve superior leadership skills, such as being the founder/president of the college's Business Club, "New Era Business," being a student Senator for one year and student President for another. I'm also involved with AGS - Alpha Gamma Sigma (CA's honors society), and the Honors Transfer Program. Do activities, such as these, compensate for my lack of entrepreneurial experience?

Moreover, I know that in order to properly counter my disadvantages, I will have to establish a very strong panel of advisors or "management" team. I'm currently working with a good friend, who is an associate, and have 1 Business lawyer, 1 executive from an administrative buereu of the Los Angeles County RR/CC, and an entrepreneur that owns 3 businesses on my staff team. Would I need more advisors, or perhaps more accomplished advisors, to make the financers most comfortable with investing in me?

Thank you in advance for your replies, fellas!

-Matthew

You have the odds stacked against you...
1. you need experience
2. you need education
3. you need skin (eg, the VC crowd will want to see that you have put in a few hundred thousand dollars of your own money, eg bootstrapping F&F etc)
4. VC's as a rule do not fund startups. A revenue stream, albeit a small one needs to be in place first. The exception would be in biotech, or a few other narrow areas. I have zero experience in the entertainment field, so I can't say for sure.

While one can get funded lacking one or two of the above, all four make it extremely difficult.

The management team to run a $3MM startup which will ramp to 30-100X that in the next 3-4 years will need prior experience. If your team has 2-3 full time members who have done that, the odds are improved, but it still will be difficult with the difficiencies in the other areas.

What can you do bootstrap wise, of SBA loan wise to get started on a shoestring? If you can get the revenue stream rolling, you will be a lot more attractive to investors.

Ron

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Ron,

I was afraid of that type of answer. The only reason why I'm seeking so much start-up capital was because I firmly believe it is better to starta business with purchasing your facility/land instead of renting. Money spent towards rent is money that you will never get back. Money wasted towards purchasing something allows the following to take place:

-Give the company an asset immediately
-Give the company an investment immediately

Generally, the land and facility would be improved to meet a more modern look which would give it value. My understanding of the situation in regards to purchasing land was this:

Investors are skepitcal at first. Start-up capital for someone as inexperienced, but driven and just as capable, as myself began to scare me when I thought of how much I would actually need to make the whole thing fit. Than I began thinking of a different alternative, a very optimistic, but still feasible, perspective that makes investing with me more inviting simply because if they gave me money, and I failed, they could either hire their own management staff to make it work or sell the materials (whatever I purchase) and land/facility (which I'm fairly certain would be at a profit) and not really lose much at all.

I figured that would make it a little easier for me to ge financing, especially with the credibility of my management team behind me.

Your thoughts on this, physicist?

If you are buying property i think you would be in a much better position if you looked for a lot small seed capital say 100-200 thousand. Then get financing from the bank. If the property is good quality, and you are able to get it at a bargin price then you shouldnt have much difficulty getting a loan to cover that cost. There are a couple of reasons i say this

1. A bank is more interested in investing in a property for your business then an individual investor.
2. You will pay a much lower equivelent interest rate on a bank loan then that of private capital. I think many investors who put money into new small businesses are not looking for 8 to 10 % return per year but more like doubling there money in 2 to 3 years if possible.

Another option may be to have a small IPO to raise the 3 million by say selling 25% of the shares, yes this values the company high but if you play the cards right you shouldnt have much trouble raising that capital and you have avenues to draw more capital by selling more shares at a later date.

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Whoa... its usually a bad idea to purchase land to start. The ROI on property is terrible from a VC's standpoint. Think about it, if your facilities are worth $1.5MM to start with, how are they going to be worth $30MM+ in only three years. VC's invest in people, eg management staff, ideas, not property as the return is not there.

Real estate is going to be a huge liability to start with, it will take years before it becomes a viable asset. Its also a very poor investment. VC's will generally take an extremely dim view on facility improvements, as its mismanagement 101. EG spending $500K on property improvement might make it worth an extra $2MM if you are fortunate. Spending $500K on the idea may well get you to market faster, and result in magnitudes greater return than any spent on facilities.

Take a look at one of the founders of excite. They started in their garage. Their bathroom was such a mess, one of the VC's "was terrified at the state of it" and wouldn't use it. Still, the ideas and management were great enough, facilities did not matter. They did get funded. BTW, Joe Kraus was about your age when they started. You can check out his blog at http://bnoopy.typepad.com

If you take a look at history, it seems most of the big successes started out in extremely modest surroundings, some were not even heated or air conditioned. Facilities are pretty low on the priority list. Now if we step down the ladder a bunch of rungs, then one can see more real estate involvement early on. If we go down to the bottom, facilities seem to play a much larger role. I think it might be related to risk taking, eg what you alluded to with your contingency plan.

Some outfits that started in very modest environments: Google, HP, Medtronic, Mrs Fields, Dell, Microsoft, Apple, Collins Radio (now owned by Rockwell). An interesting story is the humble beginnings of Ann Winblad's first business. She started out with $500, made under $100 their first year, and they even used food stamps to eat. A few years later, she sold it for $15 million. Here's her bio, http://www.humwin.com/team.html#winblad Today, she's a very highly respected VC.

The saddest case is the small startup that buys new equipment, a new building, and new office furnishings... and then doesn't survive beyond year 2... when they could have worked out of their house or garage, and been profitable by year 2 instead.

Now that half the audience is bent out of shape.... The above real estate discussion only really applies in the world of fast track high risk business ventures. Eg, if your growth rate is low, and the risk is low, then real estate makes some sense. In fact, the ROE can be phenominal, and it makes a lot of sense. It really comes down to whether you are shooting for a $1B+ operation or a $20MM operation in 5-10 years, or just want to generate a comfortable cash flow. The criteria are drastically different. However, no VC will touch you with a ten foot pole if your goal is $20MM in 10 years. The return is way too low.

VC's do not look at salvage issues up front, they shoot for the stars. Remember their success rate is sub 15%, the rest fail miserably, and when the venture goes under, it really goes. Including such a contingency in your plan almost assures you of no funding, as it applies planning to fail, rather than risking it all to win.

That being said, an established business with high growth rates can at that time take advantage of real estate. Rememeber the govt has all sorts of programs for commercial real estate. You might get tax free status, get a real low rate loan, or even have the locality front a good portion of the real estate costs. These factors only come into play with some level of initial success and expansion, and generally only apply to new construction.

VC's would make the determination early on as to the management team. Often times they will replace the founders group within a year, or even right away. It all comes down to performance. You give up a lot in that realm, but for many businesses, its the only way to go.

Also, a good read on the opinions of VC's is at http://www.ventureblog.com

Good luck to you
Ron

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I wont really comment on the big business you are discussing but this is what I do know being that I am currently attending a JR college myself and will attend JR college FOR THE REST OF MY LIFE.

Education is importnat but doesn't make the person. I have obtained no degrees and I am somewhat successful. Your education is important but won't be your ticket to easy street. You will have to work hard after college.

I just choose to do the opposite of most people. Most people in their lower 20's focus on school and get a part time job maybe. I focused on my work, and I work hard. I take a class or two per year maybe. I am successful because I want to be successful. I probably won't make a few million in any given year, but I do know when I die of old age (hopefully) I will be worth a few million.

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