Platt Perspective on Business and Technology

Planning for and building the right business model 101 – 30: goals and benchmarks and effective development and communication of them 10

Posted in startups, strategy and planning by Timothy Platt on July 21, 2017

This is my 30th posting to a series that addresses the issues of planning for and developing the right business model, and both for initial small business needs and for scalability and capacity to evolve from there (see Business Strategy and Operations – 3 and its Page 4 continuation, postings 499 and loosely following for Parts 1-29.) I also include this series in my Startups and Early Stage Businesses directory and its Page 2 continuation.

I began a discussion of outside-sourced business funding, and the consequences of having outside business equity holders in Part 28, with consideration of venture capital and angel investors. I then turned to consider crowd sourced outside investors in Part 29, as a rapidly emerging business development funding option. My goal for this posting is to continue and complete, at least for purposes of this series, my discussion of crowd sourced funding, and to at least begin a more thorough discussion of the more in-house oriented issues of exit strategies as a business plan consideration.

I wrote about the finances of crowd sourcing and of how many people, each making an individually small and even tiny investment, can collectively lend a business a very large amount of money. And I wrote of the largely “no strings attached” nature of these investments where individual investors cannot make significant equity holder claims on a business they crowd source invest in: meaning their not individually having much if any of a say in the running of those businesses.

The one and only real exception to that second point, at least that I can think of off-hand, would arise if a significant group of crowd sourced investors in some particular business, all came to see its behavior and its use of their loaned funds as being so egregious as to prompt them to enter into a class action law suit against that business. This circumstance would probably arise, if it did, as a consequence of negative social media driven viral marketing against the business, with an initial smaller number of irate investors pulling in more and more other potential plaintiffs to such a legal action until they reached what amounted to a critical mass of collective discontent. And at some point in this process, this group would have to hire the services of a hungry law firm to represent them. But the most they could reasonably ask for in claims against this business would be a full refund of monies actually loaned out, and a sizable percentage of that would go to their class action suit lawyer and towards paying off a variety of filing and other legal fees related to their case. Crowd sourced financing loans start out small on a per-lender basis. These irate investors would get back even less than that starting amount potentially due to them, and perhaps a third or more less than they has initially paid out and even if the business paid out every penny received this way to end the suit. So no one would actually get much of anything back and winning here would be more of a moral victory than a financial one; this is probably one of the reasons why I have never heard of such a legal action actually taking place. And this single exception scenario simply reinforces a point that I just made above, of crowd sourced investors “not having much if any of a say on the running of those businesses” that they invest in through the crowd.

The one other aspect of crowd sourced investment that I at least made note of in Part 29 was the marketing value that this can create for a funded venture. Think of the above paragraphs as addressing an at least potential negative viral and crowd sourced marketing and its consequence. Here, I focus more on the positive side to this. And I am going to more fully explore what that means here, and by way of comparison with the at least potential positive marketing value of being able to claim to have received venture capital funding support, as a new and still largely unknown business venture.

Venture capitalists, essentially by definition make significant cash investments in the businesses that they select to work with. And they do this on the basis of in-depth reviews and analyses of the businesses that they consider investing in. So when a venture capitalist or venture capital group invests in a business, they add to that venture’s reputation, the fact that they have been objectively professionally reviewed and found to be a good bet for success. And this is always arguably a significant vote of approval as the investing business offering it, does so by “putting their money where their mouth is” for it. This has marketing and reputation building value for a business that is invested in and particularly when the venture capitalists involved have a good reputation for their own professionalism and for their investment savvy and success.

Most venture capitalists are industry specialists and focus on businesses of types that they have expert familiarity in, when making their investment decisions. They know what to look for and what to look out for there, and both before making their specific investment decisions and as they seek to actively promote the success of their investment choices. And they have the expert familiarity to make meaningful positive contributions to the success of the ventures that they invest in that go beyond the offer of funding support alone, where for example it is common for venture capitalists to join the boards of directors of the businesses they invest in, or offer explicit business development advice to their owners and executives. They reduce their own risks and increase their possible and likely payouts and profits there, in all of this. But the marketing value that their funding and other participation offers to a venture that they invest in, is not going to primarily take the form of supporting their client businesses’ particular marketable offerings: their product or service specialization or what they particularly bring to market. It is going to be in support of those businesses themselves and their strategies and operations, and their capabilities as businesses per se.

The marketing and reputation building value that a venture can accrue from garnering crowd sourced funding support is going to oriented more towards the perceived value of their mission and vision goals and in what they actually produce that would at least attempt to fulfill those generally stated goals.

This distinction is telling, and it also connects in very strongly with where these funds come from:

• Business-oriented professionals and their venture funding businesses, for venture capitalists,
• And end users and consumers and people from the marketplace, in the case of crowd sourced funding.

In both cases these investors and groups of them evaluate and arrive at an understanding of value of a possible investment opportunity. And both categorical types of investors offer marketing support as they do that too, from the perspective of the demographics that they represent. It is just that they tend to use words like “value” there very differently, with venture capitalists focusing on cash flow and monetary return on investment, and crowd source investors focusing more on non-monetary returns, and societal and other “big picture” criteria for success.

And this brings me to the questions and issues of exit strategies as my next to-address topic here. I have been addressing the value and perceived value of a business and its potential, in the last few postings to this series, and in this installment to it too. But I have done so in terms of what could be a fundamentally immutable business development pattern, and with an initial and fundamentally unchangeable goal for the businesses under consideration. Exit strategies represent fundamental change and true transition points where same and linear evolutionary change in a developing business, give way to fundamentally new and different.

The term exit strategy is used in a variety of ways; I use it and certainly in a new and young business context, to represent the goals and strategy transitions that a business and its founders and owners can come to face as their new venture first reaches a point in its development where it is now bringing in at least some profits and at an at least largely consistent period-to-period pace (e.g. month-to-month, quarter-to-quarter, or whatever period the enterprise is strategically planned out for and on a routine basis.) With this brief orienting note in place, I am going to more fully address exit strategies in the context of this series, in my next installment to it. Meanwhile, you can find this and related postings and series at Business Strategy and Operations – 4, and also at Page 1, Page 2 and Page 3 of that directory. And you can find this and related material at my Startups and Early Stage Businesses directory too and at its Page 2 continuation.

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