On my way to work this morning, the AM radio talk show I was listening too was bemoaning the news that another local company was “releasing” 500 workers from its ranks.  At first the news was upsetting because I feel bad for anyone who loses their job, particularly around this time of the year.  It was also a double shot of reality as I found out yesterday that one of the local flower shops in my neighborhood was going out of business after many years of service.  For the first time, I am seeing the very real effects of a down turn economy.  You may have a brain seizure when I tell you that this is going to be a good thing… in the long run.

I was a high school senior the year Yellowstone National Park caught fire in 1988.  I remember returning a few years later to see for myself the absolute destruction that this fire wrecked on that beautiful park.  I truly believed that in my lifetime, Yellowstone would never be the same. As it turns out, I was both right and wrong.

It’s been 20 years since those fire raged in 1988 and even today the scars are painfully visible.  Amazingly, it has rebounded better than I ever thought possible.  It has been well documented that even though the tremendous heat from those fires consumed anything and everything in its path, it also forced the pine cones to loosen their grip on seeds tucked neatly inside and in essence re-fertilized the soil again.  Wildfires are Mother Natures way of cleaning house.

Depressions, recessions and down turn economies are also wildfires in a sense.  They cause a lot of destruction.  Businesses are forced to evaluate, cut back and streamline.  Profitability values are assigned to products, services and painfully, employees.  Despite this, I strongly believe that these painful choices are a good thing in the long run, even a GREAT thing  Follow my logic here.

It has been well documented that more millionaires were created from the smoldering ashes of the Great Depression than almost any other time in American history.  Like the wildfires of Yellowstone, it’s a painful, somewhat expected and amazing phenomenon.  When you take an average American worker, pull the rug out from underneath them and then hold their feet to the fire, something magical happens.  Inevitably many will choose to take fate into their own hands and become entrepreneurs. 

I predict that some of the greatest inventions, products and services that we will see in the next five years will be born out of this current economic down turn.  We are seeing many of them at Funding Universe right now and many of them will tell you that it took this boot to the shorts to find the courage necessary to TRY.  If you happen to be an unfortunate casualty of the current economic crisis, I am truly sorry AND excited for your circumstance.  I challenge you to seriously take a moment to ponder your situation and do some soul searching to see if there is an entrepreneurial spirit in you.   Is this your time?  If it is, feel free to contact Funding Universe to see what we can do to make your dreams a reality!  Friends, this is a GREAT time to be alive!

Joel Nielsen is a Venture Consultant at Funding Universe.  His email is jnielsen@fundinguniverse.com

I know your wondering where this is going, don’t worry that is as crude as it gets.  What I really want to discuss is valuation, who decides and how you decide the post-investment ownership of your company.   Note, that this is a discussion of the reality with my personal opinion regarding the ideal.

In the down market or today Valuation has become of particular interest to both the entrepreneru and the investor.  The facts are these;

1. Down markets give investors stronger leverage in the valuation category because cash is king and credit is hard to come by. so expect investors to negotiate a little harder for lower valuation in order to capture a bigger piece of cheese.

2.  This necessitates a little more negotiating on your part.  Make sure you can clearly show the value of your company, look at everything that could create potential value and make a good argument for it.  Remember although you want to be a good negotiator, don’t let it be a deal killer.

3.  Don’t worry too much about equity portions, worry more about being selective with who you choose to partner with.  If you can get smart and freindly money, then it wont matter if they have 49% equity.  On the ohter hand if you get dumb and controlling money the 10% they take will be a burden you will hate to bare. So focus on partnering with the right people that have similar goals for your company, in the end you both will be happy regardless of what you give up to begin with.  One caveat here.  Smart investors don’t want controlling interest.

4.  Be smart about who you choose as legal council for the transaction.  don’t get firm that wants to control the deal, rather find someone who can give you good council and then move forward with whatever decision you make.  A lot of bad deals are written by lawyers that think there way is the only way.

In summary don’t make too big a deal about who cut the cheese, just make sure the relationship is founded in mutual goals so that when you do smell something displeasing you can work together to air things out.

The Economy & News Angles

My contribution to GM, Ford and Chrysler

Every now and then, something occurs to me that I believe has been swept under the rug. In the past few weeks, we’ve all heard plenty of shouting and screaming about best how to save the Big 3 Auto Makers. However, I’ve not heard anyone talk about saving particular Car Models. For example, who ever picks a movie based on which Studio made it? (Like, hey man, there’s this great MGM flick coming out this weekend.) That’s my point! Why doesn’t GM just make the cars (the models) that people like? Why do we hear all this talk about which Divisions that GM wants to keep? If I was running GM, we’d keep the Corvette, Camaro, Cadillac, Solstice (Pontiac) and some GM Trucks. If it was Ford, it’d be Mustang (of course), Lincoln and for some diehards, the Explorer. And hey Big 3… no more making the same car under four different brands. Most of us figured out that trick about twenty years ago. Duh.

My Obsessions

Gas-price WATCH

Back to the Future is here again. Today, we saw a Costco here in Tucson selling regular gas at $1.57. Wow, if it goes below a buck, we’re thinking of picking up one of those big Hummers we see abandoned on the side of the road!

My Travels

Entrepreneurs Conference in Sedona, Arizona

Last Thursday, along with four other investors, I was on a panel that reviewed about thirty entrepreneurs pitching their companies to us. There were plenty of good ideas, but most of all, I’ve not seen such a motivated and energetic group of start-ups. There seemed to be no slowdown in these companies. And, right after their presentations, they got in long lines to confront us investors, and some waited half an hour for just a few minutes of face-time with us.

Advice to Entrepreneurs

Accordion to me…This week’s advice to entrepreneurs

At some point, I’ll give you my full list of the Do’s and Don’ts for raising funds for your company. For now, please take these three quick Don’ts to get you through the holidays. Please… 1) Don’t tell investors you expect to get your exit via an IPO. I wouldn’t bet on being one of seven IPO’s that’ll happen in 2009, and who knows whether it’ll be any different in 2010 and 2011? 2) Don’t describe some big deal you have in the works, and then tell investors you can’t tell them who the customer is, and 3) Don’t put a large budget item amount for marketing in your forecast and not take the time to figure out what you’re actually going to do with it, and how you can prove it’ll actually work. Got an idea or something you need help on? Email me at rick@hotventures.com

The Economy & News Angles

$700 billion rounding error?

You’d have to be a desert island not to hear about the current financial bailouts. No matter whether you’re for or against em, the numbers are astounding. Word on the street is that the original $700 billion number was not derived from what was needed, but instead by a calculation on what wouldn’t upset the apple cart. In other words, what could be absorbed, sort of like a rounding error? Ummm…$700 billion, that’s it! Sure, who could blame us for spending 5-7% of our GNP? Well we’re not alone, most other big nations have recently followed suit. China $586 billion (16% of their GNP), Japan $68 billion (1%), S. Korea $80 billion (9%), Russia $209 billion (12%), Britain $450 billion (21%), Germany $151 billion (7%), Spain $111 billion (8%) and Switzerland $66 billion (15%). And this just in… the U.S. is up to $850 billion, plus another $300 billion more for mortgage guarantees (about 6% of our GDP). I just hope it’s going to be enough. [Numbers from Businessweek, December 1, 2008]

When should we start paying President Obama?

Watching CNN or Fox News, you can’t help but see that President-elect Barack Obama is already working ‘round the clock, and he’s not even been sworn in yet. Makes you hope he’s getting some kind of salary for being President-elect. Wouldn’t it be weird if he’s doing all this without pay for the next two months? What kind of welcome would that be? I am sure we are paying for secret service and T&E for all those big meetings, so why not pay the Prez salary upon election, and not simply stand on ceremony?

My Obsessions

Gas-price WATCH

Since gas prices represent the clearest icon of our ‘emotional economy’ we need a reminder how large the swings have been. Since 2007, the price of crude oil per barrel rose from the $50’s and $60’s up to $145 on this July 4, 2008. This month, on November 21, it was $49.93 and on November 29 it was $54.43. Wheeee!

While the lowest I’ve seen recently is $1.83, I decided to check out http://www.gasbuddy.com/ I found there I could buy gas in Tucson for $1.73! Remember, it was $4.00 in July 2008 (regular gas in today’s dollars)? Don’t forget it was up to $3.32 in March 1981, during the Iraq-Iran war. [Prices per zFacts.com]

Advice to Entrepreneurs

Accordion to me…This week’s advice to entrepreneurs

What do angel investors look for? Ideally: A really big market with a big problem, your big solution, your big capabilities, and all it needs is money. Problem is it’s really hard to prove, and contrary to what you may think, even wealthy people don’t want to lose money. Here are two tips on finding your first investors. First, look to people who will give you the benefit-of-the-doubt. These are people who already like you, your friends and family, and already know how great you are, and very much want to help you succeed. Second, while I’m active with several angel groups, including Desert Angels and Northern Arizona Angels, I urge you to spend just as much time looking for specific investors who are likely to find instant ‘relevancy’ with what you’re doing. Like, if you’re working on cure for Alzheimer’s, try talking to local neurologists. No doubt, they’ll be a tough audience, but if you’re on the right track, they’ll know it. Better to find out now. Got an idea or something you need help on? Email me at rick@hotventures.com