What physician entrepreneurs should know about Venture Capitalists

Guy Kawasaki is famous for calling rubbish like it is -- it's "bull shiitake"!

And for those of you who don't know of him, he's an entrepreneur, who made his name originally at Apple, a venture capitalist, a columnist for Entrepreneur magazine and the author of 8 books.

In this series of videos from his How to Change the World blog (remember - it isn't necessary to be modest to be a successful entrepreneur!), he forewarns ambitious entrepreneurs about the challenge of trying to get VCs to open their coffers, and then spells out how to get the attention of a VC if you believe you have a fundable business.

Watch the videos not only their entertainment value but for the gold nuggets he gives away about what is at the heart of a good business - whether you opt to get it funded by VCs or not!

Update on Wednesday, September 10, 2008 at 08:50AM by Philippa Kennealy

Here's a Plan B from Guy Kawasaki for those of you (us!) who are not in the market for VC money.

For physicians in business - Bootstrapping your entrepreneurial venture

I was curious about where the term "bootstrapping" actually came from - it turns out that a bootstrap is the "loop of leather or other material sewn at the side or top rear of a boot to help in pulling the boot on".

And of course, the bootstrapping I am referring to here is "to start a business without external help".

From Rich McIver of BusinessFund.com comes a handy little article called How to Bootstrap it (27 tips) that serves as both reminder and inspiration for those of us who are trying to build our "mini empires" without the investments of others!

There is the usual advice - personal savings, home equity lines, and credit cards, but there are other ideas that you might not have considered, such as:

5. Licensing: Instead of sinking a bunch of money into producing and marketing your product, sell licenses to companies that have the need and the resources to make it work. The company gets the product they need, your product is in the market and you can sit back and collect the royalty check. (Philippa's comment: the gist here is - you put the idea together, protect your intellectual property and then license the right to use your idea to people who have the means to produce and market your service or product)

6. Trade Credit: Basically, this entails receiving goods from a supplier without having to pay cash up front. You may be able to get 30, 60 or 90 days to pay for the goods. This is a good, short-term method of freeing up working capital that can get you on your feet. Of course, you will have to sell the goods before payment comes due or you will be paying with your working capital anyway. If you use trade credit, expect to pay interest on the goods. (Philippa's comment: this is most typically done if you have to use raw materials in manufacturing, or items such as software or hardware)

7. Customer Financing: Ask your customers to pay up front and use that money to buy the materials that you need to do the job. The most common place you might have seen customer financing is when a builder or contractor asks you to pay up front to put up a fence or hang gutters. The contractor then uses that money to buy the materials before he returns to complete the actual work. (Philippa's comment: Imagine you want to put together a "whiz bang weight loss program" that is based on a methodology you have used successfully in your office. You could approach a large corporation who might be interested in buying 50 copies of your program. You'd ask them to pay for the 50 copies in advance, providing you with the capital to print your books and create your CD-ROM and web-based interactive components.....or something like that!)

You've heard this from me before, but it doesn't hurt to get a nudge from someone else!:

11. Know Your Limits: Before you drain your savings and max out your credit cards to turn your revolutionary business idea into reality, step back and take a look at your situation. The plan is, of course, to pay off all of the ensuing debt and rebuild your savings from the piles of money that are going to be laying around after your business takes off. But how realistic is this plan? Can you achieve this goal? And, most importantly, can you afford to take the hit if the business fails?

12. Map Out Your Finances: Start from day one. Figure out how much money you are going to need for development, production, advertising, payroll, distribution and any kind of overhead that will be associated with running your business. Don’t overlook the small things like rent and utilities. Take into account that it might be days, weeks or even months before you see any money generated from your goods or services so don’t plan to use accounts receivable early on. You need to have a plan to cover all of your expenses three to six months in advance.

18. Keep Your Day Job: To minimize the risk of losing everything, continue working and build your business on evenings and weekends. This way, if your business doesn’t work out, you will have something to fall back on. If it does take off, you can quit your day job as soon as you are able to sustain yourself through the business alone.

And finally, some sound marketing advice:

25. Do Something Different: Any lawn care service will come to your house, mow the lawn, trim the weeds and edge the driveway. Include watering in your service. If you’ve become a full-blown landscaping service, some plants require more care than others do. Include detailed instructions on how to care for everything, tell them to call with any questions and maybe even schedule a return visit to ensure that everything is going well. Go the extra mile.

26. Get the Word Out: Buy some paper and business card stock and make your own fliers and business cards on the computer. Take your cards and fliers door to door. Introduce yourself to everyone and tell them what you do. Add a second phone line under the name of your business and get listed in the phone book. Get out there and build a customer base. (Philippa's comment - this is where it pays to learn how to become an ace networker.)

27. Create a Joint Venture: Find a similar business in its infancy with identical needs as your business and join forces. You can share office space, supplies, equipment, cost, employees and profits. Once you are both ready you can split and go your separate ways.

Any other success tips from physician entrepreneur bootstrappers?

Angel investors continue to shower healthcare with money

If you are in the market for funding for your new physician business, and yours is a healthcare service or a medical device company, you are in luck!

In an article today in the San Francisco Chronicle highlights the leap in investments made in healthcare ventures by angels in 2006 - up 10.8% in the year, to $25 billion dollars!

Angel investors are typically wealthy private investors seeking a good return on their investments, and unlike venture capitalists, are less likely to need to insert themselves into the operations of the company in which they are investing. They do need to be satisfied, however, that their risk is being minimized by being assured of a sound business plan, a viable set of financials and a solid management team!

I noted this trend in a blog post last year and am happy to see it sustained through the remainder of the year, per the recent report by the Center for Venture Research at the University of New Hampshire.

According to the article: 

Dennis Fernandez, managing partner of Fernandez & Associates, a Menlo Park intellectual property law firm, said he has also seen "a modest unleashing of early stage capital," including funding for health care startups.

He said the aging of the Baby Boom generation and the growing reliance on information technology in health care has prompted entrepreneurs to explore new business opportunities.

He cited the trend of making medical records digital and more easily accessible to patients and their health care providers.

"There is an opportunity here to automate and integrate," he said.

"I think there is a screaming need for streamlining the management of patient information." (bolding all mine!)

It strikes me that now is the time to strike, if you are a budding physician entrepreneur with an idea that will serve the Boomer market or the need for seamless medical and personal health information integration and transfer.

With that in mind, I encourage you to take advantage of the complimentary monthly teleclasses I hold for any physician who is eager to acquire the skills and discipline to start a new venture or grow an existing business or practice.

Tomorrow, Wednesday March 21st, our class topic will address how to prepare yourself financially for a new business venture as well as what your funding source options are.

And next month, I will be interviewing Jim Horan, author of The One Page Business Plan, on how to begin the business planning process and how to write a well-thought out plan, on one page. 

Come join us and prepare yourself to claim your share of the huge "angel pie"!

Angel Investors love healthcare

One of the toughest questions aspiring physician entrepreneurs ask is "where can I get the money to start my business/support me while I develop my idea/open my new practice?"
This is a biggie - right?

An article in yesterday's USAToday.com, entitled "Attracting 'Angels' to your Business" helps shed a small glimmer of light on one possible solution.

Columnist Rhonda Adams writes:

Pop quiz: If you try to raise money from investors, what's your chance of success?

Well, if you're approaching those individuals known as "angel" investors, the answer is a surprisingly high 12%. That's the result of a study just released by the Center for Venture Research at the University of New Hampshire. During the first half of 2006, one out of every eight businesses that pitched to angel investors received funding.

While you may not think 12% is great odds, compare that with trying to raise money from venture capitalists (who receive hundreds, if not thousands, of proposals for every one they fund) or getting money from your brother-in-law.

The term "angel investor" covers a broad range of funders — all the way from a sophisticated financier who invests hundreds of thousands of dollars in a cutting-edge new technology, to your rich Uncle Bob who invests $25,000 to help you get your mobile dog grooming business off the ground.

What all these angels have in common is that they're investing their own money in entrepreneurial businesses — usually start-ups. Venture capitalists, on the other hand, invest other people's money, typically millions of dollars, and, increasingly, invest in later-stage companies.

Adams ends the article by asking another question:

OK, so here's another question: If you want to raise money from angel investors, what's the best industry to be in?

Here's a hint: Think of all those rich doctors.

You got it: health care. Health care services and equipment received more than one out of every four angel dollars (27%). And don't think that's just for new drugs and cutting-edge health technology. Some of those dollars certainly must have ended up in more mundane small health-related companies, such as physical therapy practices

Software was the next-best-funded industry by angels, getting about 18% of the pie, with retail, media, biotech, and information technology each receiving about 10%.

What does this mean for you? If you're trying to launch an entrepreneurial business — one that has significant growth potential — it's going to be easier to find a deep-pocketed investor to pitch your business plan to for financing.

Just remember, angels invested in only 12% of the new ventures they saw. So even if you have a truly great idea, expect to pitch to at least eight investors before you find your own personal angel.

I grimaced at the visual of "all those rich doctors", as it smacked of a prevailing envious and no longer always realistic attitude towards physicians that has made our lives much less enjoyable in recent years.

Nevertheless, I was heartened to know that, as physician entrepreneurs, we are in a position to ask our colleagues to invest in our business and get a reasonable rate of response.

It does behoove us to make sure that what we have to offer in exchange for that investment, is a well thought-out, sound and viable business plan and a road map for responsible execution!

Show me the money!

Just A Quick News Tidbit:

A recent study by WellFargo/Gallup looked at how much money it took to start a business - not as much as I would have thought, and yet quite a stretch for many. They reported that it took an average of $10,000 to get going, and here's what they had to say:

"Many small business owners started businesses with their own money, and with very small amounts. Seventy-three percent of business owners surveyed primarily funded their businesses with their own personal savings, while 37 percent obtained loans and lines of credit. More than half of those surveyed (53 percent) indicated they would have had an easier time had more money been available at the outset.

The study also revealed a need for business knowledge and information. Only thirty-one percent of small business owners surveyed started with business plans. Forty-nine percent say they would have had an easier time had they asked for more advice from experienced business owners, while an additional thirty-nine percent indicated a better understanding of financial management would have been an asset."

Oddly enough, I set aside exactly $10,000 to start my business - nice to know I'm average!

My thanks to Jeff Cornwall of The Entrepreneurial Mind for alerting me to this study!