Banks have never been particularly fond of lending to small and startup businesses.  Probably the primary reason is that many early-stage businesses have not built up the strength and cash flow to make them less risky borrowers, and a lot of startups fail in the first year.  The perceived wisdom has generally been that about half of startups do fail in the first year.  But according to numbers from the SBA Office of Advocacy’s 2018 Frequently Asked Questions, roughly 80% of small businesses survive the first year, and a new report form the Kauffman Foundation – “2017 National Report on Early-Stage Entrepreneurship” comes to the same general conclusion – that approximately 80% of small businesses do survive their first year.  And getting back to banks, one of the other reasons that they shy away from high-risk small business lending is that they are heavily regulated.  During and as a result of the 2008 recession regulators came down hard on many banks for making risky loans, and that fear by banks of being beaten up by regulators has not yet completely gone away.

So even though online lenders were around at the time of the recession they were not a significant force in the lending marketplace.  But now with the dramatic rise in computing power over the last five years, massive amounts of data on consumers have become available and allowed online lenders to create algorithms that can analyze data in seconds to create a risk profile of a potential borrower.  And a great amount of that data comes from mining consumer behavior online.  We have been witnessing the birth of BIG DATA.  There is enough information about you out there everywhere to create a pretty accurate profile that an algorithm can analyze for many purposes, not just lending.

Since most small business owners don’t think about or plan to borrow money in the near future, depending on how urgent the need is, an application to a bank is likely to take somewhere in the neighborhood of 30 days give or take to make a decision, although this is beginning to change as some bankers wake up to the fact that the same data that the online lenders use can be used by a bank.  Fancy that.  So if a small business owner suddenly needs a working capital loan or a loan to buy a piece of equipment that could substantially improve their profitability, the online lenders are there, and they make decisions fast, and if the result is approval you can often have your money in a few days or less.  As is always the case, there is a cost to be paid.  Online lenders are more expensive than banks – often much more.  But if you need money fast or something bad could happen, you pay it because the consequences of not getting the money could be serious.

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I Can Do That Better
February 19th, 2019

The most important aspect of the lean startup model is finding a customer pain that you can alleviate with your product or service.  If you can – i.e. do it better or faster or cheaper, you may have something significant on your hands.

Let’s start with one of America’s biggest problems – getting old.  The percentage of the American population over the age of 65 is continuing to grow – on a nonstop pace.  Medicare is using technology – telemedicine, in a pilot program to give seniors more options than going to a hospital emergency room.  An example of using telemedicine is that ambulance crews might be able to use certain treatments at home working under the supervision of a doctor in a remote location.  This could potentially free them up to focus on more serious emergencies.  If the pilot program proves successful Medicare projects that it could ultimately save as much as $500 million dollars a year.

On the local level a startup is providing through a technology platform a way for seniors to sign up for assistance from neighbors or others with many of the simple things in life that most of us take for granted – picking up or returning books to the library; shopping trips; help with pets; even just companionship.  To create a wide network of people interested in helping seniors would be extremely difficult under normal circumstances.  But with the benefit of technology to create an app to do it, a major pain for seniors can be eliminated.

Using technology another startup created a peer-to-peer mobile payment service to help merchants without the necessity of having things like point-of-sale systems or physical presence.  It could open up sales opportunities for many businesses that are in places or at events where they could sell but don’t have the infrastructure.

And one more – for young people finding affordable car insurance can be a little time-consuming and more than a little pain.  Suppose you could just scan your driver’s license with your phone and bypass the time it takes to answer the many questions on insurance applications and have quotes from three insurance companies within a very short time, all with just your phone using the company’s proprietary software.

I can do it better….


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The Business Model Canvas
February 12th, 2019

The business model canvas shows the logic of how you are going to make money.  It takes the four main areas of the business: customers, offer, infrastructure, financial viability, and shows how they all relate in achieving the desired goal.  The current gold standard of developing a business model was created by Alexander Osterwalder, and set out in his book, Business Model Generation – a wide-ranging introduction and discussion of the canvasHe shows the nine building blocks that it takes to deliver your product to market and make a profit – all on one page. 

A business plan involves a mission statement, problems, solutions, data and forecasting all used to show how a startup would execute success in the future.  It defines why you are in business and what your company does.  What it does not describe is how company does itIt is generally a one-time static document that winds up filed away and never looked at again.  Its most practical use is when pursuing financing. 

The business model canvas is a perfect example of visual thinking.  Business models are complex concepts composed of various building blocks and their interrelationships.  In a business model one element influences another.  It only makes sense as a whole, and capturing that big picture without visualizing it is difficult.  Looking at the nine blocks of the business model canvas allows you to do that. 

One of the most effective ways to use the canvas is with Post-it notes.  When I have taught the canvas I took it and blew it up to 11 x 17 and gave everyone 1 ½” x 2” Post-its, and as we discussed each block they could use the notes to put in information pertaining to that block.  Just one example – the Customer segment.  One Post-it might have been “I’m solving this customer pain.”  By the time we were finished some peoples’ canvases were almost completely covered with Post-its.  It is a great tool with which to study how your company makes money, and it is especially useful for startups.  Even the best-planned startups sometimes don’t realize all the interactions that different parts of the business have on each other.  The business model canvas enables them to see all the relationships as they interact with each other to make a profit.

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Crowdfunding just sounds so easy.  You read stories about all of these neat products that got crowdfunded to start.  You just put up a campaign on Kickstarter or Indiegogo (the two giants in the field), people start to donate, and you can avoid having to knock on doors looking for investors and testing your tolerance for rejection.  Sounds great, but unfortunately it ain’t that easy.  There is a lot that you need to do first and by far the absolute most critical thing you need to do is research.  There is so much good information out there on crowdfunding that you could almost get overwhelmed by it.  But the benefit is that there is a great deal to learn from other people’s successes and failures.  And to get started, Kickstarter and Indiegogo have a wealth of how-to information on their sites. You may not need to go much beyond their sites.

Another extremely important decision is what is your reward going to be for contributions?  Rewards can be tricky.  One thing you need to make absolutely sure of is if you are looking for funding for some type of product and the product is the reward, you better make sure that you can produce enough.  I have seen instances where a campaign was so successful and oversubscribed that the sponsor’s manufacturer couldn’t keep up with the demand and stopped making them.  People were so mad that it ultimately sank the company because of bad reviews.  Once you’ve determined what you’re going to do and how, you need to pick the right platform.  It might not be one of the big two, but we will stick with them for now.  Whichever platform you choose, look closely at their policies, fees etc., but most of all their policy on the money you take in.  Kickstarter and Indiegogo are very different.  With Kickstarter it’s all or nothing.  If you don’t make your goal the money goes back to the investors.  With Indiegogo you have an option to keep what you raise. 

Once you have determined what platform to use and how much to try to raise, you have to create the campaign.  When you’re doing your research, look at as many campaigns as you can.  Some can be pretty elaborate.  Some not so much, but whatever you put out there it needs to look professional.  Cheesy will probably not attract much interest.  You are probably going to need some kind of marketing materials including video.  That takes time and money depending on how professional you want your campaign to be.

This has been barely a scratch on the surface of crowdfunding.  There are many different types – for example, debt crowdfunding sites – Lending Club and Prosper being the giants.  But because there is so much of it everywhere, you have to be at the very top of your game so that your campaign will be successful.  Remember, research, research, research.

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