5 Reasons To Forget About Venture Capital Funding

5 Reasons To Forget About Venture Capital Funding
Is Etsy Still About Handmade Goods – Or Mass Produced Stuff?
Fire Yourself From the IT Department
McDonald’s Testing Mobile Payments in Two Cities
The Latest News on Employee Health Insurance at Small Businesses

Posted: 23 Sep 2013 04:00 PM PDT

venture capital funding

In the startup world, venture capital funding from a big firm has become the Holy Grail. But, of course, there are other ways to launch a successful business. Bootstrapping, borrowing money from friends and family, using funds from an existing business or leveraging personal assets are all certainly options.

Below are five reasons you may want to seek another way to start your business without big VC money.

Very Few Companies Receive Venture Capital Funding

Believe it or not, for all the talk, venture capital funding is actually a rare thing. In fact, Forbes.com reports that currently VCs fund only about one to two startups out of every 100 business plans they see. And only about 300 of the 600,000 businesses started in the U.S. every year receive venture capital. Simply put, 99.5% of entrepreneurs will not get VC funding, at least not at the startup level.

So, if venture capital funding is so rare, isn’t it practical to seek an alternative for your business? Here are five reasons venture capital funding may not be right for your business.

Your Idea May Not Be Big Enough

You’ve heard how successful small businesses or startups should look to small niche markets. However, VC investors are generally looking for an idea that can pay off in the billions. Venture capitalists are in the business of making money, of course. But just how much money may surprise you.

Even medium-sized VCs will look only at businesses targeting a market in the $1 billion range, says Mark Peter Davis, founder of Interplay Ventures and a venture partner at High Peaks Venture Partners. Larger VCs will want businesses with a potential $5 to $10 billion market. Unless you’re launching a startup with this kind of potential, venture capital funding probably isn’t for you.

You Won’t Get the Deal You Want

In a post based on a talk he once gave to perspective entrepreneurs, Paul Graham, co-founder of the Y-Combinator, explained the venture capital ecosystem this way:

VCs and corporate development guys are professional negotiators. They’re trained to take advantage of weakness. So while they’re often nice guys, they just can’t help it. And as pros they do this more than you. So don’t even try to bluff them. The only way a startup can have any leverage in a deal is genuinely not to need it. And if you don’t believe in a deal, you’ll be less likely to depend on it.

So one of the best reasons not too seek venture capital from the beginning in your startup is that needing the funds puts you in a vulnerable negotiating position. Instead, try to figure out how to get your business running on your own and when you prove your product or service, funding may pursue you on more favorable terms.

You’ll No Longer be Focused on the Customer

In the beginning, an entrepreneur’s focus is on problem solving, creating value for customers, and delivering an incredible product or service. While, in theory, the same goal remains after beginning to pursue funding, the realities can be quite different. Entrepreneurs can instead become preoccupied with raising money and focusing on the demands or needs of VC firms and other big potential investors before the needs of their clients or customers. Assuming they receive the investment they seek, they will potentially end up loosing control of their companies as well. Satisfying those investors can begin to take priority over satisfying the customer bases their business models were built upon in the first place.

Your Success May Not Be a Priority

After all the time spent chasing that elusive venture capital funding, it still doesn’t guarantee your success. Part of the reason is that to VC firms you are only one investment among many. It may be hard to believe anyone would put so much money in your startup without a firm commitment to its success. But as entrepreneur and author Erika Hal explains:

To be blunt: Many VCs don't care whether any one particular investment enjoys long-term success. They only care that a percentage of companies in their portfolio nets them a high return.

Compare this to the dedication you have to your startup. It’s a dedication to your customers, to your employees and to your own and your family’s financial future. Still think you need venture capital to launch your next business?

Forget About It Photo via Shutterstock

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Is Etsy Still About Handmade Goods – Or Mass Produced Stuff?

Posted: 23 Sep 2013 01:30 PM PDT

new etsy rules

When it was founded back in 2005, Etsy was created for a special kind of small business owner. The platform promoted itself as a place for the artisan or craftsman specializing in homemade goods.

The rules still call for handmade products, but critics say some have managed to skirt them essentially becoming resellers of mass produced items on the site.

New Etsy Rules Open Door for Mass Produced Items

Etsy’s basic selling information divides products merchants can offer on the site into three basic categories:

handmade goods
vintage items 20 years or older
craft supplies

But critics say changes to Etsy’s “Dos and Don’ts” section in 2011 in an effort to help sellers grow their businesses have created gray areas.

For example, one passage of the Etsy’s official rules now states:

A third-party vendor may be used for intermediary tasks in some crafts. Acceptable examples include, but are not limited to: Printing the seller’s original artwork, metal casting from the seller’s original mold, or kiln firing the seller’s handcrafted ceramic work.

However, the rules also state these third party vendors should not be performing the majority of the work on items sold as handmade.

Meanwhile, another passage of the Etsy rules explains:

One artist screen prints fabric, then another artist sews clothing from the fabric. The finished product is listed in a collective Etsy shop.

Critics say the rule could be used to justify outsourcing of work on items that are then sold as handmade.

The Rise of the Resellers

Disgruntled Etsy members claim merchants like Laonato, a popular jewelry store on Etsy, have already become resellers of mass-produced items, reports The Daily Dot.

Back in May of 2012, thousands of Etsy sellers staged a silent protest putting their shops in vacation mode for a 24-hour period to draw attention to the issue.

Etsy claims to conduct investigations of stores flagged for violation of its rules, but some members say the the site hasn’t done enough about the reseller issue.

Some Merchants May Themselves Be Victims

Some Etsy merchants say that even though they may appear to be reselling mass-produced goods, they in fact are the victims of counterfeiters. Offshore production houses steal their designs, they say, and soon are pumping out copies of their creative works and selling them online.

That’s what Laonato claims is the case about its jewelry designs. It says others are copying and selling its designs. Laonato has made over 38,000 sales on its Etsy store, according to numbers published on its shop. That sounds like a lot of sales for a craftsperson, yet Laonato hardly holds the record for large sales numbers. A site called CraftCount tracks top Etsy sellers. It shows that Laonato doesn’t even make the top 10 in the “handmade” category in terms of number of sales (although it is the number one selling shop for jewelry). Shops showing 44,000 to 82,000 sales are currently in the top 10 overall for “handmade” goods sales.

Trish Hadden, who sells on Etsy under the store name of Creations by Tiana, is quoted in the Daily Dot article as saying her creations have been counterfeited and sold on Alibaba.com. Her Etsy shop has made just 425 sales. Earlier this year Alibaba announced that its incoming CEO would join a task force to combat counterfeiting.

A site as big as Etsy could be a goldmine of design ideas for counterfeiters. Most if not all of the sellers on the site are individual craftspeople and solo entrepreneurs, who don’t have the deep pockets of large entities to police their brands and fight counterfeiters on their own.

Etsy is huge. It has over 30 million members, nearly 1 million shops, and 60 million unique visitors per month, according to its website. And while a marketplace that huge will be hard to ignore, Etsy is not the only game in town. Check out some other alternatives for selling handmade goods. See also: 20 More Places to Sell Handmade Crafts.

Handmade Items Photo via Shutterstock

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Fire Yourself From the IT Department

Posted: 23 Sep 2013 11:00 AM PDT

it department

I have an important question for other entrepreneurs. How much time are you losing by handling your technology needs yourself?

Are you troubleshooting when your website goes down? Scratching your head while the hours slip away as you try to figure out why your email isn’t working? Trying to ensure your files are backed up reliably?

Many of us start out in our businesses by being do-it-yourselfers. I did. Cash is usually tight in the beginning. The last thing you want to do is spend money. That’s probably the right move when getting started. In the beginning we have more time than money — so it’s better to conserve our cash.

But it’s a mistake to stay in the do-it-yourself mode too long. As the business begins to grow, you need to grow too. Your daily duties need to shift. Spending your energies on anything less than the best and highest use of your time is not a good use of a scarce resource: you.

And what is the best use of your time? Well, for a business owner it’s not tinkering around with backing up files. Yes, having backed-up files may save your business from certain disaster. But it doesn’t do much to proactively grow it. You could do more to grow your business by working on a new pricing strategy or by making community connections that may lead to new customers.

I’m sure you’ve heard the advice about “working on, not in, your business.” It’s more than just a catch phrase. You really must think about what that means. An old friend of mine said it well — and he was extremely successful in his business. He wrote:

Okay, so what would change if the owner started working on the business? First, he or she would not be the first one in and the last one out. He wouldn’t necessarily come to the store every day. She would be circulating in the community making contacts with other owners of small businesses getting ideas. He would seek out organizations made up of like-minded business people in his community. She would be joining associations like the Chamber of Commerce, the Rotary Club, and the Lion's Club. Once a member the owner would be attending regular meetings to become an integral part of the community.

The owner would be expanding his or her circle of associates and yes, even friends, outside the industry. He or she would be spending ‘think time,’ that quiet time spent thinking about the future and how to use all that knowledge bottled up inside but not exercised because of day-to-day pressures.

Did you know that small business owners lose 6 hours of productivity per week by doing IT-related tasks? Think about those 6 hours. Multiply those by 50 weeks out of the year (assuming you take two weeks of vacation time). That’s 300 hours per year — 300 hours that could have been spent working on your business instead of in it — had you spent it on high-value work.

That’s seven and a half weeks! What I wouldn’t give for an extra seven and a half weeks of think time, strategy time and relationship building time in my business….

And that’s really how you have to look at it. Don’t look at how many pennies you can pinch by doing it yourself. That’s a small-minded approach to running a business.

Look instead at how many opportunities your business may be missing by filling your time up with what is — for you — low-value-added work.

I am not saying IT activities aren’t important. They are very important. Technology matters a lot today.

IT is just the wrong use of a CEO’s time.

You see, when you become a business owner and CEO, the business takes higher priority in your work day, than what you personally have fallen into a habit of doing. You owe a responsibility to employees, investors, yourself and your family. It’s no longer about what you find easy to spend your time on.

You have to have the discipline to tackle the longer-term stuff — strategy and relationship building. If you don’t, who will?

So the next time you are tempted to handle some IT task on your own and not wisely use technology, pretend you have a board of directors. What would your board say about the company CEO spending time on daily details versus working on strategy and bringing in more revenue?

Image: AMI Partners study for Microsoft – click to see full image

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McDonald’s Testing Mobile Payments in Two Cities

Posted: 23 Sep 2013 08:00 AM PDT

mcdonald's testing mobile payments

If you operate a small business, you probably already know the growing importance of accepting mobile payments.

Research suggests mobile payments could reach $90 billion annually by 2017, and that’s not just in businesses like retail.

McDonald’s Leads a Mobile Payment Trend

News that fast food giant McDonald’s is exploring mobile payment options is a good indication of this. The company is testing a mobile order and payment system in restaurants in Salt Lake City and Austin, Bloomberg reports. A TV commercial promoting the new service appears below.

The fast food company, which also includes many franchises, is not alone in offering mobile services. Chain restaurant Chipotle Mexican Grill Inc. offers a mobile app.

And, of course, now some can even order their morning cup of coffee via a mobile device. In fact, Starbucks recently saw a 10 percent jump in its U.S. mobile sales contributing to the best quarter in the chain’s 42 year history.

Consider Offering Mobile Payments

Sources say McDonald’s is exploring mobile as a way to boost sales after seeing disappointing numbers in August. Offering mobile payments can be one way to boost sales by giving customers even more payment choices.

Read more about your options for accepting mobile payments at Small Business Trends.

McDonald’s Photo via Shutterstock

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The Latest News on Employee Health Insurance at Small Businesses

Posted: 23 Sep 2013 05:00 AM PDT

news on employee health insurance

The cost of employee health insurance at small businesses rose faster than inflation last year, with the annual premium for family coverage at the average 3-to-199 employee company increasing by $328 to $15,581, the 2013 Kaiser Family Foundation Health Benefits Survey reveals. Despite (or because of) our policy makers' efforts, employee health insurance remains a burden for small business owners.

Measured in inflation-adjusted terms, the cost of employee health insurance has nearly doubled since 1999, when Kaiser Family Foundation data show that the average annual premium for covered workers with family coverage at small businesses was only $7,968 (in 2013 dollars).

Rising Costs and Dropping Coverage

As costs have risen, the fraction of businesses willing to provide insurance has dropped, with percentage slipping from 66 percent in 1999 to 57 percent in 2013 – the lowest level since the Foundation began reporting the data in 1999.

Small businesses account for all of the decline in the share of companies providing insurance. While the same percentage of businesses with 200 or more employees provided coverage in 2013 as in 1999 (99 percent), the fraction of businesses with between 3 and 199 employees that offered employee health insurance declined from 65 percent to 57 percent over the same time period, the Foundation’s report reveals.

The drop in coverage has been steepest at the smallest firms. From 1999 to 2013 the fraction of businesses with 3 to 9 employees offering employee health insurance declined by 18 percent. For businesses with 10 to 24 employees, the drop was 8 percent, for businesses with 25 to 49 employees, it was 3 percent, and for businesses with 50 to 199 employees it was 6 percent, Kaiser Family Foundation data show.

The link between rising health insurance costs and declining provision of coverage is not surprising. The primary reason why small firms do not offer employee health insurance is cost, a point made by 50 percent of the survey respondents whose businesses do not offer employee health insurance. By contrast only 16 percent gave the next most common reason – because "the firm is too small" – the foundation’s report reveals.

Health Insurance and Your Piece of the Pie

Health insurance costs are taking a growing slice of employee compensation. Bureau of Labor Statistics data reveal that health insurance now accounts for 8.6 percent of employee compensation, up from 5.8 percent in 1999. The cost of health insurance is now higher than all legally required benefits (social security, Medicare, federal and state unemployment insurance, and workers compensation) combined. And health insurance costs account for nearly twice the fraction of employee compensation as retirement benefits.

Small company owners have sought to mitigate the adverse effects of rising costs by moving to insurance coverage with higher deductibles. The Kaiser Family Foundation's data show that employees paid only a slightly higher fraction of the total cost of family coverage in 2013 than they did in 1999 (34 percent versus 32 percent). However, 58 percent of workers in businesses with between 3 and 199 workers now have an annual deductible of $1000 or more for single coverage, up from 16 percent in 1999. The fraction with annual deductibles of $2000 or more rose from 6 percent in 2006 to 31 percent in 2013.

The cost of small business health insurance continues to increase, leading owners to look for ways to cope. Only time will tell whether our policy makers' efforts to help have alleviated or exacerbated the problems.

Health Insurance Photo via Shutterstock

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