CHAPTER 2

GATE 2- Preparation: Money, Model and Mentors

Idea – the prerequisite for a business venture. Without good, doable idea

1. Funding or Money cannot be justified

2. Model or business model cannot be designed
3. Mentors that can add value can’t be matched

Exhibit 2-1: Preparation Needed to Bring an Idea to Life

1. Money
2. Model
3. Mentors

Exhibit 2-3: Why the 4 Basic Questions are important to investors

1. Who is your target market?

- Gives and indicator of how big the market is
2. What is being offered?
- Answers what’s in it for the target market, addressing the pain points of the consumers.
PAIN POINTS – can be conscious( actual demand ) or unconscious ( latent demand) that can
be pointed out by the seller
3. Why is the offer relevant and unique?
- This answers why the offer is compelling to the target market
4. How will this make money for the firm?
- This answers how the firm can win in the market place and what’s in it for the investors

Exhibit 2-4: 3 Levels of Strategy

1. Corporate Level – What industry do we enter / exit and why? What is potential value capture?
2. Business Level – What is (or could be) our competitive advantage?
3. Functional Level – What is the compelling reason for consumers and customers to buy our
products and/or services and prefer us over competition?
More in-depth questions, it is equally indispensable to understand and be realistic about 2
things:
1. The value chain cycle until the company can be operational and products capable of being
sold to a paying customer
2. Consumer’s path to purchase. The longer the sales cycle, the bigger cash flow required.

Cash Flows – is one of the biggest reasons why companies can stop operating

- An access to which new companies or underfunded neophyte entrepreneur may not readily
have
PERSONAL BRANDING – a term used to describe the image of one’s self in the public’s mind from
previous choices made that will affect the future level of personal influence

- Makes others feel good and feel right working and dealing with entrepreneur

Shin doing – credit worthy

Different bad practices of business partners

1. Integrity issue
a. Collection deposited to own account instead of company account
b. Transferring funds from company to personal bank account
c. Charging personal expenses to the company
d. Padding expenses
e. Getting personal commission from company’s deals
f. Intellectual property of the company registered in own name instead of company name
while using company funds
g. Borrowing or using a lot of money without board approval
h. Creating bogus board solutions
2. Planning issue
A. No alignment on where to take the business to the next level
B. No alignment on how to take corrective action
C. No financial plan for massive expansion
D. Propensity to take unnecessary “Short cuts”
3. Priority issue
a. Lack of accountability, acting like they work for themselves and not considering other
partners
b. Not spending enough time in a partnership business while using company resources to build
own image publicly
c. Mismanaging internal operation – confusing publicity with good management skills
d. Valuing loyalty over competency in promoting people to key positions
4. Political issue
a. Blaming others as non-supportive to save face wile no remorse
b. Delusional self-image
c. Having a sense of entitlement by hanging on to power and position
d. Changing agenda to avoid discussing real issues

Raising Funds

EXHIBIT 2-5: 4 simplest ways to raise capital

Funding from immediate network

1. Savings – Discretionary funds from unspent money earned previously by the entrepreneur
2. Partnership – Includes investment from relatives, friends and acquaintances.
3. Loans – Money advances, which may be source from individuals informal channel or financial
intermediaries like me
 4. Customer’s Advances – terms of scales advantageous to the seller , such as cash with order
(CWO), asking for down payment (DP), cash on delivery (COD), or collecting franchise fee
upfront

Exhibit 2-6: 5 sources of funding from outsiders

1. Angel Investors – Money invested by an outside individual to a firm

2. Super angel – big amount of money invested by an outside individual to a firm
3. Venture capital – amount of money invested by outside investors, typically over 10 individuals
with none owning over 10% of the investment pool, forming themselves as a venture investing
company
4. Private equities – amount of money invested by outside investors, typically over 10 individuals,
forming themselves as a private equity investing company, focusing on firms that already have
revenues and profit.
5. Going Public – amount of money invested via initial public offering (IPO) from the stock market.

Why partners are needed

The right partners can provide the needed initial funding, opening doors to further fund and
spread financial risk, creating immediate credibility and making the entrepreneur highly accountable

Exhibit 2-7: Inventory of Benefits of having great partners

1. Provide immediate feedback on strengths and weaknesses of plans

2. Help give operational and strategic directions
3. Provide additional funding
4. Spread out financial risk
5. Narrow your knowledge gap
6. Offer immediate credibility to your company
7. Open their network of contacts to you (key suppliers, customers) to lower cost or raise revenues
8. Given an assurance of fairness on dealing with valuation and stock ownership specially after
recovering investment
9. Mentorship on a professional level
10. Mentorship on a personal level

Outside investors and your company’s worth

Outside investors – usually willing to pay a premium to be an investor, but the amount of premium is
dependent on the status of the company

PE – Price earning

EBITDA – Earning Before interest, Tax, depreciation and amortization

- Indicator of financial peformance

EXHIBIT 2-8 : Three Series of Investment

Series Revenue Profit Description Risk Level Investment

Premium
A NO NO Product or service exists HIGH NONE OR
but no business operation LOWEST
B YES NO Business exists with Moderate but can CASE-TO-
revenue generation but be attractive if CASE
lack either revenue sources investment will
or productivity scale to be leapfrog volume
profitable way beyond
breakeven point
C YES YES Company is operating with LOW HIGHEST
both revenue and profit
increasing

EBITDA – an indicator of financial performance where interest, taxes, depreciation and amortization are
added back to the net profit to create a more realistic comparison of profitability

Endowment effect and loss aversion

Endowment effect – a supply-side thinking of overvaluing the things they have more than it actually
worth in the market and also to sell it at lower price than what is being offered to be bought – an
indicator of loss aversion where people typically place more importance on potential losses than they
place on potential gain

Valuation – also a reflection of the preparation, sense making skill, as well as influencing skill of the
entrepreneur

What is the ROI Expected?

Best investment is always the one that gives the highest ROI- return on investment

What investors are looking for

Exhibit 2-9: 16 Questions Investors Need to Ask

Inter-related Goal Key questions they ask themselves

Factors for
investors to
Maximize ROI
Market To determine a. Is the market/ industry big with lots of unserved
if there is a market?
scalable and b. Can it be scaled fast?
 sustainable c. Are there customers waiting?
market d. Are there exclusive agreements?
Product To determine a. Is the value proposition (product and price) compelling
if the value to the customers to keep buying?
proposition is b. Is the product or technology already available?
compelling c. Is there a potential source of competitive advantage,
and ownable i.e. a barrier for competitive entry (patent, copyright,
etc.)?
d. Is the margin good for better cash flow?
People To determine a. Has the entrepreneur done well in the past?
if the b. Has the entrepreneur demonstrated high AQ?
entrepreneur c. Is the entrepreneur committed and is the right person
is trustworthy for the job? (experience, behavior, full time)
and believable d. Does my intuition feel good about working with the
entrepreneur? (EQ, win-win attitude, realistic
projection, etc.)
ROI To determine a. Are uncertainties negated? ( Government rules, legal
if beyond cases, patent, etc.)
market, b. Is the timing right?
product and c. Are tensions controllable? ( Cost, license, manpower
people, it is a needs, inventories, receivable, etc.)
good d. Is it a good deal?
investment

Forming your team – Choosing partners, choosing founding members, and choosing mentors.

Business – dynamic and the choice of partners is critical. A shareholder agreement is highly
recommended to anticipate issues and avoid resentment in the future.

EXHIBIT 2-10: 12 Agenda Items for a shareholder agreement

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Respect and trust are indispensable as partners cannot be paranoid working with each other. Without
these 2, partners will not talk to each other or will just argue, and without real communication, conflicts
will not be resolved.

Mentor- a trusted and experienced adviser who is interested in the success of the mentee

- They are not the same as people who just answer your questions
- They should ideally inspire the mentee with their own credentials and successful experience
in the business.

Mentorship is important because it helps the entrepreneur see what he/she could not see at the
moment
Exhibit 2-11: 4 different types of mentors needed by entrepreneurs

Types of Mentors Needed Role of Mentor for the Examples for a start-up
Entrepreneurs advertising agency
Operational Guides on matters related to Client acquisition, presentation,
present operations, especially execution
key factors for success that the
firm should do exceptionally
well
Functional Guides on matter relate to Accounting, tax, human
support functional areas on resource
which the entrepreneur may
need some advice
Personal Guides on matters related to Work – life harmony
personal growth
Strategic Guides on matters related to Consulting, service
the future vision of the
entrepreneur

Integrity – indispensable in networking as no one wants to network with an entrepreneur without

integrity

Exhibit 2-12: 8 qualities expected from great mentors

1. Interested in the success of the mentee

2. Invest time to listen and understand the different situations of the mentee
3. Provide Advice, both business and personal
4. Help mentees by tapping into the mentors’ network
5. Open doors of opportunities
6. Lesson risk by calling attention to such areas
7. Inspire the mentee
8. Sincerely desire that the entrepreneur succeeds and be better than them