I love Coursera.

I can't believe they offer such high-quality and diverse course offering by world-leading experts for free. I feel like a kid in a candy store when I look over their course offerings. Recently I enrolled in a short course offering called Grow to Greatness: Smart Growth for Private Business, Part 1 by Edward D. Hess.

The course is, in part, based upon a recent book on the same topic by Edward Hess:

I tried to order the book through the usual online book retailers but there has been a run on the book as a result of the course offering so I ordered from Stanford's bookstore. The cost with shipping was competitive with all other online bookstores as I followed a discount link from the course to the book. One reason why professors would want to teach an online course via Coursera would be because of the significant jump in book sales that it produces.

Regarding the course, I would recommend it to entrepreneurs for two reasons. First, it discusses issues related to growth and in the first set of lectures it offered some excellent discussion on the perils of growth and what it takes to grow. Mr. Hess has spent a long time studying growth so it is useful to hear him speak on this issue. Second, Mr. Hess is a very dynamic lecturer so does a good job of holding your attention and interest. This cannot be said for many lecturers even though they may be a world-leading expert on a topic. I've spent time trying to fight off sleep listening to some lecturers. This is not the case with Mr. Hess. He makes a real and obvious effort to keep the viewer engaged. So thumbs up for this course so far, and thumbs up for Coursera.

By the way, it is not to late to enroll in this course as you can enroll after the start date.

At the end of march next year, my wife and I will have paid off our house mortgage.

My wife was looking over some financial statements and it looks like the total amount we will have paid for the house will consist of the original mortgage cost plus approximately 44% of that amount in interest costs.

We wondered whether purchasing real estate is a good investment or not.

My wife pointed out that this can't be answered in the abstract because it very much depends on what your interest rates are as you pay down your mortgage. We had higher interest rates at the beginning of our mortgage 12 years ago (approx 6%) but the last few years they have been in the 2.5% to 3% range. It would have been especially nice to have had the lower interest rates at the beginning of our mortage as we would have taken down the principal faster and paid less interest. Our interest rates have been fairly reasonable compared to borrowing in the 80's and 90's and compared to those with a poorer credit rating.

In general, the degree to which a real estate investment is good or bad very much depends on how that investment is financed, in particular, the timing and size of interest rates on borrowed money. Current low interest rates make real estate investing fairly attractive right now. We are happy that we purchased a second farmstead property in our home town 3 years ago as the interest rate regime has been favorable (2.5% to 3% range). If the farmstead wasn't such a money pit, I'd be even happier :-)

Those wanting to list real-estate investments on Planet Dealflow are welcome to do so. Our premium service packages (Express Plus, Global Express Plus) offer you the ability to upload documents, images, and video to produce a professional real-estate opportunity for Canadian and international investors.

I just finished reading Joel Salatin's latest book Folks, this ain't normal.

The book examines food, farming, and life from the perspective of what has been considered historically normal in order to highlight how abnormal our current food, farming, and living arrangements are. Joel values many of the practices that were considered historically normal because they were sustainable, they taught valuable life skills, and they put us in touch with how food arrived on our plate (or should arrive on our plate). He rails against the conditions in Concentrated Animal Feedlot Operations (CAFO's) where most of our meat comes from, the pesticides and NPK fertilizers used to grow our vegetables; the food police and regulations that thwart farm entrepreneurship, local food systems, and rural economies; how out of touch we are with where our food comes from or how to grow or prepare our own food; and many other bugaboos of modern living. After reading this book, you will probably agree that our industrial food and farming systems are not normal, and if you are sufficiently disturbed by this fact, you might consider joining the fight to bring some normalcy back to our food, farming, and living arrangements. The book offers some ideas on how to do so.

I read Joel's books for several reasons:

• He is a successful farm entrepreneur who engages in innovative and sustainable farming practices. There is much for aspiring farmers to learn about business and farming from his books. While he devotes alot of ink to railing against industrial food and farming systems, his writing is also sprinkled with practical nuggets of information about farming. These nuggets come from his own experiences running Polyface farms or the extensive reading he does on farming and food.
• I am entertained by his books. He has distinctive writing voice that is part farmer, part philospher, part business person, and part showman.
• I am moved by his books. They make me rethink how I acquire the food that I eat and motivate me to want to grow more of my own.

You can watch Salatin's Google talk below if you want to find out more about the book. You can skip the first few minutes - I find he warms up and gets more eloquent and entertaining as the video progresses.

One of the most successful venture capital funds is Union Square Ventures.

They have backed many successful next-generation companies such as Twitter, Zynga, and Tumblr. It is worth checking out their current portfolio of investments.

Part of their success in backing winners is due to their focus on making specific types of investments. They target companies with "large networks of engaged users". Union Square Ventures promotes thesis-driven investment versus just looking for good deals to come across their desk. According to partner Fred Wilson:

You've gotta have a thesis that is well articulated and well understood among the partnership ... and it is why we are doing so well right now.

Investors might ask themselves whether they have a particular investment-thesis. Entrepreneurs might ask themselves whether their investment proposal fits the investment-thesis of a successful venture capital organization in your industry. If you are building web applications, for example, it might help your chances of finding funding if you can demonstrate that you have "large networks of engaged users".

The idea of introverts marketing themselves strikes one as ironic. If you are an introvert, then why would you, or how would you, engage in self-promotion.

According to some statistics, over 1/3 of the population are introverts. In the era of facebook, linked in, cell phones, etc,. how do introverts survive or thrive?

For me, this is not an academic question because I work from home and during the week I don't engage with many people. I don't feel lonely or missing out as a result. When I meet people, I am not hesitant or unwilling to talk. I have social skills and know how to use them, but I don't generally make an effort to network (I have 7 brothers and 1 sister and feel that keeps me grounded).

One of the hardest aspects of my business is self-promotion. I like to blog and to some extent that is a form of self promotion, but that would not be sufficient motivation for me wanting to blog. For me, the main motivation to blog is to express my own researched opinion on how the world works. I don't currently accept comments on my plog, in part, because I will have to waste time dealing with automated comments, trolls. and spam so am not really that motivated to solicit feedback. This is probably the introvert speaking in me as well.

Entrepreneurs can compensate investors in the form of dividends or royalties. There are significant tax advantages for entrepreneurs if they compensate investors in the form of royalties rather than dividends. To see why, lets first define these terms.

Wikipedia defines a Royalty as:

Royalties (sometimes, running royalties, or private sector taxes) are usage-based payments made by one party (the "licensee") to another (the "licensor") for the right to ongoing use of an asset, sometimes an intellectual property (IP). Royalties are typically agreed upon as a percentage of gross or net revenues derived from the use of an asset or a fixed price per unit sold of an item of such, but there are also other modes and metrics of compensation.

Wikipedia defines a Dividend as:

Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be distributed to shareholders. There are two ways to distribute cash to shareholders: share repurchases or dividends. Many corporations retain a portion of their earnings and pay the remainder as a dividend.

An eHow article entitled Income Statement Classification of Royalty Expense has this to say about classifying royalty expensies:

Since royalties fall under the overall heading of "Compensation" they can be written off as an expense for each tax period. Royalty payment rates are outlined in a contract between the company and the individual being paid, and are therefore determined based on sales figures for the applicable product. Necessary expenses, including any form of compensation, decrease a company's net income. Royalty payments are classified as current expenses on the income statement.

In contrast, Wikipedia says this about paying dividends:

For the joint stock company, paying dividends is not an expense; rather, it is the division of after tax profits among shareholders.

So entrepreneurs wanting to claim investor compensation as an expense might want to consider entering into a royalty arrangement rather than a dividend relationship with investors. Consult the above Wikipedia links for a wealth of information about royalties and dividends as methods of payment.

If you had money invested in the stock market over the last few years, you have probably seen the value of many of your stocks go down. There has been a bit of a rebound in the last year so the hope is that the value of our portfolios will recover back to the levels we were at before the dip in the markets.

The math of recovering from a percentage loss in portfolio value is trickier that you might intuitively think it is. This is because when you lose 50 percent of the value of a stock, and then you gain back 50 percent, you don't get back to where you were before the 50 percent loss. You only get 75 percent of the way back; you are still at a 25 percent loss.

A simple formula that you can use to figure this out is:

(1-x)(1+x) = 1-x²

So if your portfolio shrinks by a factor of 1-x (where x = 0.50 in this example), and then grows by a factor of 1+x in the following year, the net change in overall value of your portfolio is a factor of:

(1-x)(1+x)

Which is equal to:

1-x²

If x is 0 you don't gain or lose value in your portfolio (1-0 is equal to a factor of 1); however, if x is any value greater than 0 then you don't recoup your losses (1 - 0.5² is equal to a factor of 0.75).

The moral is that it is not as easy for your portfolio to recover from a bad year as you might intuitively think it is.

When investors evaluate a proposal, one of the most critical aspects of the proposal they must judge is whether the customer pipeline supports the growth projections.

The best data that an investor can use to evaluate the customer pipeline is historical sales data. The investor can see if the trend in the sales data supports the growth projections. Not all companies, however, are in the revenue generation stage, or don't have much of a history built up, so for these companies, investors might rely on:

• Whether the management team has experience, relationships, or assets that support growth projections.
• Whether the company has any sort of first-mover advantage that might lead to fast growth.
• Whether the company is in a growth market and are well positioned to take advantage of it.
• Whether the company actually has the capabilities to execute on their growth projections if they are successful in acquiring more customers at the required rate.
• Whether the company is in a market where buy decisions can be made quickly or not. If they are in the health care industry, for example, it might be difficult to quickly sell software units because of the bureaucracy involved, union resistance to changes, regulatory burden, etc....

For entrepreneurs seeking investment in their proposal, it is important that you be able to discuss your customer pipeline and how it supports your growth projections. Investors will generally be skeptical of growth projections in the first place, but they will want to gauge your customer pipeline and whether it is likely to generate enough new customers to support increasing revenues over time.

One caveat is that revenue growth can occur by gaining more of a share of customer spending, rather than generating new customers per se, so just looking at the number of new customers over time can be misleading if the company intends to grow revenues by increasing their share of existing customer spend. The customer pipeline not only bifurcates to reach new customers but also widens to handle more of a given customer's spend.

The Canadian Pension Plan Investment Board (CPPIB) is the asset manager for the Canadian Pension Plan. Currently, the Canadian Pension Plan has approx 160 billion dollars under management. The mandate of the CPPIB is to grow this asset pool so that Canadians have a secure and growing source of pension funds.

Since 2005, CPPIB has become more involved in private equity investing as a way to help the pool achieve higher rates of return than public market investments.

The CPPIB seeks to be a passive investment partner with top tier Venture Capital organizations. Top tier Venture Capital organizations tend to maintain their performance advantage relative to other VC organizations which is why they are considered less risky to invest with. For CPPIB to become a limited partner in these VC organizations, the VC organization has to be big enough to handle the large amount of capital the pension fund will minimally invest. The VC fund has to be over $500 million in size and be willing to accept a minimum of $75 million from CPPIB; otherwise such investments won't make much difference to CPPIB's bottom line and it will take too much time and resources to stay involved.

John Breen is one of the top managers of private equity investing with CPPIB. He summarizes their philosophy as "Go Big with the Best":

Historically, the average private equity investment has not exceeded our performance benchmark which is a premium over the public market alternative to reflect the implied risk of leverage. Only private equity funds in the top quartile have, on a consistent basis, exceeded the public markets' performance, net of fees. If we can identify these top quartile performers which we actively endeavor to do on an ongoing basis, and commit sizeable amounts of money to those firms, we believe we'll outperform both the public market and our benchmark. We have identified approximately 60 fund managers around the world that we anticipate will exceed our performance benchmark.

The CPPIB invests the majority of pension plan funds in large public companies and funds, bonds, and other conservative assets; however, it also needs to grow at an estimated 4.5 percent a year to keep up with the demands on the pension fund and has gotten more into private equity investment for this reason. You can visit http://www.cppib.ca to judge for yourself whether the strategy of "Going Big with the Best" is working and, more generally, how they are investing our pension funds. The graph below suggest that they are doing a good job and are a success story that more Canadians should be aware of.

You don't have to be listed on the stock market to think about your company as consisting of so many shares valued at x dollars a share. If you think your company is worth $100,000 dollars, then you can also think about that value in terms of 10,000 shares at $100 per share or 1000 shares at $1000 per share. This is just simple math and you are free to choose whatever breakdown you like.

If at some point you decide you are looking for a business investor, then this game of representing your company as consisting of so many shares valued at x dollars a share is no longer a game. This is one way to write up the purchase agreement with investors where they get so many shares in your company valued at y dollars in exchange for a comparable amount of financing. How much financing they provide can determine the number of shares in your company they might acquire.

If you go this route, then an important distinction that you need to keep in mind is the distinction between common shares and preferred shares.

An angel investor generally purchases common stock in a company where their voting rights, dividend payments, share of the revenues is comparable to the owners of the company; they get voting rights, share of dividend payments, share of revenues, etc... in proportion to the number of shares they have purchased in the company.

A venture capital organization may come in at a later around of funding and supply more capital on that round then was supplied during the seed round by an angel investor. One of the differences you might expect in this round, is that the Venture Capital or Private Equity firm will be asking for preferred shares in your company. What that means can vary from deal to deal, but one aspect of what it might mean to have preferred shares is that the investor has priority in terms of being paid whenever there are dividends, profits, or assets to be distributed. If there is a "liquidity event" the investor with preferred shares in your company will be first in line to recoup their investment.

The cost of shares in your company vary over time just as the needs of your company do. The cost of preferential shares are generally higher than the cost of common stock in a company which is why you would agree to offer preferential shares in the first place. This is not always the case, and you will sometimes hear of "flat rounds" and "down rounds" of investment that can occur in a struggling ecomony when a company is strapped for cash.

The rule of thumb is that if an angel investor is investing smaller amounts in your company you can offer them common shares; if a large venture capital firm is offering you larger amounts of money, then they will likely be looking for preferred shares in your company. Not all shares are created equal and the distinction between common and preferred shares is one mechanism used by larger investors to better protect their investments.

If you are prepared to give up a percentage of your company in exchange for financing then you might want to consider how this will be done. It is one thing to offer a percentage of your company, it is another to spell out exactly how that percentage will be operationally defined.

Some investors who are less legalistic on these matters, might be comfortable with defining a royalty that they would expect to receive based on any sales the company makes. The royalty could be the percentage of revenues before or after expenses are taken out. The terms of any deal can either be investor favorable, company favorable, or middle of the road. A royalty before expenses would be investor favorable, after expenses would be company favorable, and some selective expense accounting would be a middle-of-the-road compromise.

If you are asking for a larger sum of money, then there is a good chance that the investor will want you to alter your letters of incorporation to include them as a director and to spell out their rights as a director and partner in the business. If you have not already incorporated, then you may have to incorporate the business to legally satisfy the investor. The investor may be more versed in matters of incorporation and be willing to put in the time and some/all of the money required to set up a proper legal framework for the joint venture company; if not, then it would be a point of negotiation as to who should pay any incorporation and legal fees. It should be noted that you can file all the relevant incorporation paperwork online if you are willing to spend some time learning how to use the government supplied tools for registering and updating an incorporated company profile. If you go this route, the expenses are not that much of a burden relative to the amount of financing you are requesting. I incorporated Dealflow Solutions Ltd. myself using online tools. The name search, federal incorporation, and provincial incorporation cost me around $500. I need to pay an annual fee of around $250 to maintain my provincial registration; different provinces charge different amounts.

These are a couple of ways you can operationally define what it means to give up equity in your company. The nice thing about seed capital is that angel investors tend be more flexible in defining how such equity is to be interpreted; when you start looking for the next round of funding, Series A funding, the venture capital investors tend to be more legalistic in how such equity is defined and how much control they want to exert as a director/partner in the joint-owned venture. They may want to limit their participation in that venture to a horizon of, say 5 years, after which they expect to be able to exit the joint venture with their capital and a defined return on investment. Investment capital might be contingent upon reaching milestones defined for the joint venture; milestones that bring the company to an exit point for the investor in a defined period of time.

Talk of incorporating your company or changing your letters of incorporation may seem a bit scary to someone not familiar with such matters. The flip side of this coin, however, is that if you plan to be a successful growing company then it is inevitable that you will need to incorporate and tweak your letters of incorporation. There are financing, liability, and tax-related benefits to doing so that you will want to take advantage of as you grow.

The more I read about Henry Ford the more impressed I am with him. He may rank as one of the all-time greatest business innovators and thinkers.

Henry Ford is best known for his innovations in mass-producing automobiles. The complexity of this undertaking required him to introduce a large array of technical, organizational and financial innovations.

Today I learned that the Model T had 4 buttons on the console. One set of buttons was to control whether the engine would run on gas or alcohol. Another set of related buttons would control spark plug calibration for igniting gas or alcohol. When Henry Ford launched the Model T, it was at a time when it was just as easy to supply a city with alcohol from surrounding farms as it was gasoline from longer distances away. Henry knew the marketplace and designed his vehicles accordingly. What is old could become new again if fuel prices continue to go up and our supply of oil dwindles. It would also require some loosening of laws around alcohol production. Conspiracy-minded people might note that it was during Rockefeller's presidency that prohibition was brought in and alcohol-based engines largely phased out. Rockefeller was an oil man. Anyway, the idea of supplying the motive power for engines from local biomass is an appealing idea in many ways and one that Henry Ford envisioned with the Model T.

Henry Ford also had some interesting ideas about the nature of investment that are worth considering:

I have never been able to understand on what theory the original investment of money can be charged against a business. Those men who call themselves financiers say that money is "worth" 6 percent, or 5 percent, or some other percent, and that if a business has one hundred thousand dollars invested in it, the man who made the investment is entitled to charge an interest payment on that money, because, if instead of putting that money into the business he had put it into a savings bank or into certain securities, he could have a certain fixed return. Therefore, they say that a proper charge against the operating expenses of a business is the interest on this money. This idea is at the root of many business failures and most service failures. Money is not worth a particular amount. As money is not worth anything, for it will do nothing of itself. The only use of money is to buy tools to work with or the product of tools. Therefore money is worth what it will help you to produce or buy and no more. If a man thinks that his money will earn 5 percent, or 6 percent, he ought to place it where he can get that return, but money placed in a business is not a charge on the business - or rather, should not be. It ceases to be money and becomes, or should become, an engine of production, and it is therefore worth what it produces - and not a fixed sum according to some scale that has no bearing upon the particular business in which the money has been placed. Any return should come after it has produced, not before.

The engines of production in our ecomony operate on many scales. Many internet businesses need "fast money" to capitalize upon emerging markets and investors in those businesses often expect quick returns on their investment (to the detriment of those businesses?). There is, however, an equally large array of businesses that require "slow money" because they can't quickly ramp up production. Farms, for example, do better if they get "slow money" to acquire the engines of production (literally) and the terms of re-payment are defined relative to when production happens, and not before. Many farm loan boards should arguably operate as slow-money lending facilities rather than fast-money lenders.

It is not yet time to consign Henry Ford to the dust pile of history. His ideas have a surprising longevity that make him worthy of study today.

The term "angel" in "angel investing" suggests that the angel investor will, in addition to providing money, also provide guidance; that they will take you under their wing and mentor you towards success. I do not want to dispute the fact that angel investors, because of their success in business, can offer entrepreneurs much useful advice; however, I do want to suggest that entrepreneurs shouldn't necessarily be seeking investment in the hopes of being mentored by an investor. Your business idea should be able to stand on it's own merits and your business investor is primarily interested in infusing some capital into your business because they see it as a good investment opportunity.

The idea of being mentored arguably applies more to learning how to do a job well rather than being an entrepreneur. There is no formula on how to be a successful entrepreneur and thus no mentor that can tell you how to succeed. There are people who can give you advice along the way, but for the most part it is up to you to achieve the goals you have set out for yourself. Waiting for someone to tell you how to succeed in your business is a misplaced hope and probably dooms you to failure if you keep doubting your own plans and ability to execute on them.

The major news on the internet over the weekend concerned the suicide of the brilliant social and internet activist, Aaron Swartz (one of the co-founders of Reddit). Aaron started to make waves among the internet intelligentsia when he was 14 and committed suicide when he was 26. Cory Doctorow wrote a heartfelt statement on his death RIP, Aaron Swartz. Cory made the following relevant observation:

Aaron had powerful, deeply felt ideals, but he was also always an impressionable young man, someone who often found himself moved by new passions. He always seemed somehow in search of mentors, and none of those mentors ever seemed to match the impossible standards he held them (and himself) to.

This was cause for real pain and distress for Aaron, and it was the root of his really unfortunate pattern of making high-profile, public denunciations of his friends and mentors.

As an entrepreneur, you might ask yourself what you are looking for in a mentor and whether those expectations are realistic. It is arguably better to be skeptical about the value of mentorship and put more faith in your own skills and abilities to blaze your own way in business. Your success or failure as an entrepreneur are your own responsability and cannot ultimately be blamed on the bad advice of a mentor.

If you were raising livestock such as cattle, pigs, or poultry, you might think that you hit the motherload if a busy local restaurant, or better yet, a restaurant chain, offered to buy your livestock meat to serve to their customers. Isn't this the dream of the local food movement? Local farmer does good selling his meat to local restaurant.

Farming entrepreneur Joel Salatin raises cattle, pigs, and poultry and tells us why local farmers find it difficult to supply meat at a profit to successful restaurants and fast food outlets. The problem boils down to the fact that these outlets don't want meat from the whole animal, they just want selected cuts of meat. If the farmer can't sell the whole animal then it is very difficult to sell their beef, pork, lamb, or chicken at a profit.

Chipolte Mexican Grill only uses about 18 percent of the carcass, so any supplier needs to find a home for the rest of the critter.The bottom line is that the lack of variety in the fast food simple-menu model creates an inherent inaccessibility to small-scale local producers who need to move the whole animal. The only way a narrow-spectrum fast food place can exist is to be able to cherry-pick from a big enough inventory pool.

In this regard, the specialization, simplification, and routinization of the fast food model discourages access by non-industrial local farms. While we smaller local farms may produce a significant volume of product, we don't normally do enough of any piece of an item to supply such a narrow protocol in such volume. In this respect, the fast food industry has been a driving force in changing the landscape of the food system.

If you are wondering why local livestock producers don't sell to your local fast food outlet or restaurant, their narrow-spectrum use is one of the reasons. Joel has made some inroads into selling his local meat to Chipolte Mexican Grill, but in involves a) working with an owner who is committed to local sourcing, and b) finding markets for a significant portion of the carcass that they don't want on their menus - the "we only serve white meat here" problem.

In conclusion, the fast food model makes it difficult for local consumers to patronize local food producers. The fast food model is also not particularly sustainable so if you want to support local and sustainable food production, you might want to think twice about pulling up to that drive through. To get local meat into your local eating establishments is going to require a) innovation in local food systems, and b) consumers who are willing to have some dark meat with their white meat in order to make it economic for a local poultry producer to sell their chicken in a local eating establishment.

Daniel H. Pink is the author of a new book on the art and science of selling called "To Sell Is Human".

Nora Young, host of the excellent CBC radio program "Spark", recently interviewed Daniel Pink about his new book. That interview offers some new social science research on what sales is and what it takes to be a good salesperson. Listen to the first part of the Selling, Triving, and Developing podcast to learn more about this research. Even if you are not technically in "sales", Daniel argues that white collar workers are spending more and more of their day involved in sales activities. In fact, some companies generate large amounts of revenue without having a dedicated sales force. In such companies "nobody is in sales, because everyone is in sales". Sales, of course, is central to being a successful entrepreneur so I encourage you to listen to this podcast if you have not already done so.

I'm currently working on developing the motivation and courage to start posting videos on YouTube that I think might be helpful to entrepreneurs and investors. Towards that end, I found this video by Marie Forleo to be very inspiring and useful. I thought I would share it with you. And yes, I am as good looking and dress as well as Marie Forleo, but the male version, so you are in for a treat. Not :-)

I agree with Marie that the most important aspect of getting into video is to just start doing it and evolve it from there. I think 2013 is the year when entrepreneurs have to become less camera shy and use sites like YouTube to convey their personal and corporate brand. Our site offers you the option of incorporating YouTube videos into your investment pitches and those who do so have more opportunities to virtually pitch to our investors as investors have a dedicated area where they can watch these YouTube videos. This service is offered as part of the Express Plus and Global Express Plus packages that we offer to entrepreneurs when deciding how they want to list their proposal.

I was doing some research on books I might read to get a better understanding of venture capital and private investing. I came across a book called "Venture Capital and Private Equity: A Casebook" (5th ed., 2012) by Josh Lerner, Felda Hardymon & Ann Leamon that looked promising. I read some of the reviews of this book and came across one particularly perceptive review that spoke to the issues that I was interested in but which apparently are not well addressed in this book. Here is the review by Frederic Harwood which outlines some of the hard questions that investors want to know when they make an investment:

As an investor in small start ups, I had to read this book twice. The first read, the book didn't seem relevant at all. The second, somewhat more methodical read, the picture became clearer--The book is written for MBA students who think they might go to work someday for a firm that forms venture capital investment groups. That's nice, if you are thinking of working for a big venture capital company. But for the $300k - $3M investor wanting to understand issues like how much of the company is my investment worth, what percentage of equity should I take, can I treat my investment as a loan and still expect equity, (if yes) how does the loan repayment work so it does not strip the company of working capital and much needed startup cash, what controls do I have over management, how can I be sure they are doing with the money what they are supposed to be doing and not squirreling cash away, what happens to my equity if management needs more funding, how is management paid a salary, how is management rewarded vis-a-vis the investors -- who is in line first, middle and last--and how do I get out early and late, this book provides answers to some of these questions buried in the case studies. You read a case study teasing out the rules of thumbs by what the investors and owners did in a particular case situation. In the process, the reader looks for guidelines, principles, and rules of thumb -- but these are mostly buried deep in the paragraphs or found between the lines of a case study or discussion of a case study. What to do, the rules of thumb for the middling-sophisticated investor are hard to come by, suggesting this is a textbook meant to supplement classroom lectures and discussions. Richard Gladstone's Guide to Venture Capital is a much better primer, but the book that takes Gladstone to the next level and answers the questions I posed above has not been written by Lerner.

If some one is aware of a book that attempts to answer these hard investment questions, please drop me a line so I can share it with others.

After an investor contacts you and have exchanged initial pleasantries, the investor might ask your for a memorandum of offer, also called a private placement memorandum (PPM). They might ask you for such a document as part of the due diligence required to finalize any deal with you. You have the option of getting an attorney to put one together for you. The advantages of doing this are that an experienced corporate lawyer will know what should be in the document and will include all necessary legal provisions to protect the parties involved. The downside it that this might cost more money than you are prepared to fork over, especially, if you are looking for capital in the first place.

Another option is to find a site that offers downloadable PPM templates (often in Microsoft Word format). Usually these PPM templates are not free and include generic legalese that you can chose to incorporate into your document or not. Purveyors of such templates will generally add a disclaimer that you should have an attorney review the final document; supposedly saving you money because the lawyer only has to review the document and not create it from scratch.

A final option is the do-it-yourself approach in which you use your own common sense to figure out what sections should be included in your PPM document and you add a few paragraphs to address each major section of the PPM document. I'm by no means an expert on developing such PPM documents so what follows is some cobbled together information on what should be included in such documents. Some templates want you to include your business plan as part of the document but my feeling is that this should be a separate document or you risk having a document that is too long for an investor to want to read. Also, I think you can forgo alot of the legalese that makes for an unreadable bloated document and use plain english when you complete each section. Include a legalese section at the end if you want rather than bloating the document with it.

So here are some sections that you might want to include in your memorandum of offer document. The document is designed to give the investor a clear sense of the current and future financial state of the company. It provides key information that an investor will need in order to conduct due dilligence on your company prior to making an investment. It is a disclosure document where you reveal your companies financials and operational data so the expectation is that you are being completely honest and are not leaving out any financial or risk data that may later come back to bite you or the investor. As a "memorandum" it should not be an overly long document; 10 pages or less would be best if you want the investor to read it and respond quickly. You can cherry pick parts out of your business plan to include in this document if you want.

So here is one suggested structure for the document contents:

1. Summary: Synopsis of the offer and the type of company making the offer.
2. Risk Factors: Disclose any risk factors relevant to the offer or the company.
3. Use of Proceeds: Describe in specific terms how the money will be used.
4. Capitalization: Where is the company at finanically. Company assets and liabilities.
5. Dilution: Disclose whether other investors have a stake in the company.
6. Selected Financial Data: Provide some financial data regarding the company and the product/service offering.
7. Analysis of Financial Condition and Results of Operations: Provide some insight into the financial state of the company, historical revenues, projected revenues, costs associated with the operation.
8. Business: Provide some market/competitive data regarding the proposed product/service offering.
9. Management: Provide information about the Management team. Include compensation amounts if relevant.
10. Principal Stockholders: List any persons, companies, or major partners with a stake in the company.
11. Description of Securities: Provide a formal characterization of the what is being offered to investors. If you are selling a part of your company as so many shares at a given price, then this is the place to spell that out.
12. Terms of the Offering: Describe any specific conditions or restrictions on the offering.
13. Legal: Add any legal disclaimers or terms of use here.

I encourage you to google "private placement memorandums" and based on your own research refine what I am suggesting should be included in a PPM. The important point is to have a document that investors can refer to in order to gain a better understanding of the offer and the financials of the company.

A couple of terms you might come across when searching for startup business capital are "Seed Money" and "Series A financing". Most entrepreneurs using this site to fund their startup will be looking for seed money. Generally after you have exhausted your credit line and tapped out any friends or family that might be willing to help out, you will seek out an angel investor or business investor for additional startup capital. The money these investors supply is called "Seed Money". Seed money is subject to a higher risk because often the business model is not proven or is not generating much revenue yet. The investor will generally be looking for ownership in the company in return for capital.

In the textbook account of startup funding, the next round of funding after the Seed Money round would be called Series A financing round. This round of funding involves larger amounts of money and generally involves venture capital organizations putting up the money. In this round of funding, the legal complexity of the contracts generally goes up and the level of scrutiny and involvement by the venture capital company also goes up. In this round of funding, the percentage of ownership you might have to sacrifice might be about the same as you sacrificed during the Seed Money round, but you will be asking for more money in the Series A financing round owing to the fact that there is less risk involved now and the business model might be starting to generate revenues.

If further rounds of funding are required, then those rounds will be called Series B, C, D, etc.... The letter lets the investor know where they fit in the hierarchy of company investors. If you intend to engage in multiple rounds of financing, then the worry for an investor is that their share of the company profits will be too small to make it worth their while investing in the company. Forward looking entrepreneurs will anticipate this dilution issue and will refrain from giving away too much of the company in the earlier rounds so that there is some left for later rounds of investment.

Image Source: http://en.wikipedia.org/wiki/File:Startup_financing_cycle.svg

We are talking here about rounds of investment that might required to turn a small company with a good idea into a large company with a profitable business model. These are not the only companies small business investors are interested in. Small business investors are also very interested in funding existing businesses that require capital to expand their business.

I've been looking for a good business writing book, and my searches suggested that "Writing That Works" (2000) by Kenneth Roman and Joel Raphaelson was worth looking into. Chapter 2 of that book is called "Don't Mumble - and Other Principles of Effective Writing". It discusses in detail the following 18 writing principles:

1. Make the organization of your writing clear.
2. Use short paragraphs, short sentences - and short words.
3. Make your writing active - and personal.
4. Avoid vague adjectives and adverbs.
5. Use down-to-earth language.
6. Be specific.
7. Choose the right word.
8. Make it perfect.
9. Come to the point.
10. Write simply and naturally - the way (we hope) you talk.
11. Strike out words you don't need.
12. Use current standard english.
13. Don't write like a lawyer or bureaucrat.
14. Keep in mind what your reader doesn't know.
15. Punctuate carefully.
16. Understate rather than overstate.
17. Write so you cannot be misunderstood.
18. Use plain English even on technical subjects.

Effective business writing is required throughout the process of obtaining funding for your project. Effective writing is required to state your idea in the form of an investment proposal and then it will be required in various supporting documents and email communications with potential investors. It is worth investing some time into learning how to write better and to use any tools that might support you in doing so. Kenneth and Joel advocate for improved business writing skills in this way:

The only way some people know you is through your writing. It can be your most frequent point of contact, or your only one, with people important to your career–major customers, senior clients, your own top management. To those women and men, your writing is you. It reveals how your mind works. Is it forceful or fatuous, deft or clumsy, crisp or soggy? Readers who don’t know you judge you from the evidence of your writing.

I've created a blog category called "Writing" and filed this blog under that category. I hope to return often to the issue of business writing with additional writing tips and discussion of the different types of business documents that you might want to prepare in your quest for funding.

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