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Paul Schaye, Investment Expert Financing Your Business

Q&A with Paul Schaye

AmexVoices: We are delighted to have with us tonight Paul L. Schaye, a founding partner in Chestnut Hill Partners, a boutique investment banking firm in New York City. Having spent 22 years in investment banking and management consulting, he can offer considerable insight on how small businesses can position themselves to take advantage of the tremendous financing opportunities that exist today, even after the April stock market correction. For many entrepreneurs, finding startup and growth capital is an incredible challenge because they don’t have much experience in that area. If you’re looking for advice on how to make your business more appealing to investors, you’ve come to the right place. . Send your questions to Paul Schaye. You can also read Paul’s advice to other entrepreneurs in the Answer Men column, which appears Monday and Wednesday on www.FSB.com. You can find Paul at www.chestnuthillpartners.com Welcome, Paul!

Paul Schaye: Welcome everybody to the chat on Small Business. This is Paul Schaye in New York City, I welcome you to ask questions with respect to financing your business, exit strategies and opportunities for growth.

Paul: I am interested in starting a business. I would like to know what steps should I take to get the process going.

Paul Schaye: Well, I think the first thing you need to do is decide the business plan, and there are some very key steps to think about in terms of what factors are going to affect your sales. How do these factors interact in terms of competitors? How are you going to pay for the business – how are you going to capitalize the business – is very important. Before you start a business it’s always good to test it. See who else is doing it. It’s a lot easier to copy someone than to reinvent the wheel. When one is starting a business one should be patient.

Jet: I just heard of a book called “Rich Dept, Poor Dept”. Are you familiar with it, and if so what do you think of it?

Paul Schaye: No I’m not familiar with it. There are books I highly recommend for people in business. One is “Built to Last”. Another book I think is important is “Word of Mouth Marketing.”

Beffie: How can entrepreneurs interest investors in their business ideas?

Paul Schaye: That’s an excellent question. The most important thing is to think of yourself as positioning your business to be sold. You want to come with a very strong strategic plan of how you package your business. So if you think of selling your business, package it well. That is, you should clean up your financial statements. Make sure you have 3 to 5 years of audited financial statements available. If you’ve down-played your profits for tax purposes, you’d want to address that. Also, you want to clean up your financial statement so that personal expenses aren’t running through the business. You want to physically improve the looks of the facilities. Pay down debts if you can. Very important when selling your business is to document your business process. What I mean by that is many entrepreneurs have a tendency to put all their time and attention to growing their business, as opposed to documenting procedures. But many buyers will expect you to produce a business manual that details how your business runs. So it’s very important to take the time to document all the steps involved in your business cycle, your design processes, ordering processes, manufacturing, shipping, mails, billing, customer service, etc.

Locklear: I want to sell some of my multimedia collage work as well as my woven work. What would be a good way to start out doing this?

Paul Schaye: I don’t know your business or collage work, but what is the channel of distribution used by other people in the same business? If it’s a cottage industry such as crafts, maybe a flea market might be the appropriate channel. A trade show of some type might be a possibility to gain exposure.

EZGuest: what sort of sources are there online for information on getting funding?

Paul Schaye: The markets are not efficient to allow for funding through the internet for businesses, as opposed to getting a personal loan for auto loans or mortgages. The amount of monies that are generally available for business loans are greater than someone would want to trust on a CRT.

AriesRising: How is it best to start a consulting business?

Paul Schaye: Again, it’s the same way you start any business. You have an excellent business plan. Identify your target market, your network. You create promotional materials that differentiate you from someone else. And think of yourself as a consumer product. Positioning yourself, promoting yourself, pricing yourself as a product.

Mauricio: Hello Paul. I just attended the Latin Venture Conference in Miami. One of the hottest questions that were made to VCs was if they are looking to invest only in companies that are already up and running – it seems this is the positions of all VCs after the crash. What is your position?

Paul Schaye: I think generally that people want to invest in something that has an ongoing enterprise. A company that is already executing in the market place. There are a lot of ideas in the market place but very few people execute them well. And because of the volatility of the marketplace, both public and private, investors are leery of green start ups. With one proviso if a person has done it before, and is an offshoot of something that’s already been done successfully, then monies are available.

Valerina: What do you think of all the money investment bankers threw at internet companies like the breakfast cereal portal? Do new internet startups have a harder time since the market correction?

Paul Schaye: Absolutely! I think there are multiple components of the internet/e-commerce. One is the business to consumer, also known as B2C, has shown very little legs. The other side of that is business to business, or B2B, has done reasonably well, but that too will see a shake-out as we go forward. The other side of e-commerce which investment bankers have thrown a lot of money at is the infrastructure, also known as the plumbing, of the Internet. That will continue to prosper and grow.

Curious1: What are warning signs that would cause you to stay away from investing in a business?

Paul Schaye: Sales trends. There are 2 issues, top line and bottom line. If the top line is declining, that’s a red flag. If the top line is not declining, but the bottom line is declining, that’s another red flag. Management flight is another red flag. Constricting markets such as a company that is selling buggy whips, the market could be declining. You go back to basic fundamentals of looking at any business – sales down, earnings down, debt up.

Mauricio: Regarding the question on how to start a consulting business, I will add, how to decide on what to consult?

Paul Schaye: What’s your core competency? Establish it. ‘cause you can only teach what you know. Join professional organizations that support that core competency. Networking is an excellent way for consulters to start businesses.

Andrea: How did you become a venture capitalist?

Paul Schaye: What we do is, we are really financiers. It’s not a question of venture capital. We provide capital to later stage companies. We do look at a lot of venture capital opportunities on an ongoing basis.

DrRevenue: Paul, are most VCs only interested in ventures that can go public within a few years?

Paul Schaye: No. Exit strategies have changed now and many times, because the market has been so volatile, the exit strategy could be selling to a strategic buyer, a financial buyer, or the public markets.

EZGuest713: Are venture capitalists continuing to fund companies like Napster, where the model is to undermine the ability of content creators to maintain their copyrights?

Paul Schaye: Well considering today’s ruling, I think it’s questionable. More importantly, investors will fund viable businesses. No one is looking to undermine the integrity of another company.

Kat: Are there any business sectors where it is especially hard to raise capital?

Paul Schaye: It all depends on the business cycle. Currently, because of the abundance of semiconductors, it is hard to raise capital for semiconductor businesses at the same time, it is hard raising capital for classic rustbelt businesses. It is an ever changing landscape, and as of as short as 4 months ago the dotcom craze had everybody’s attention. Today you see Amazon.com being downgraded by analysts.

EZGuest: What sort of companies should I be partnering with to position my business properly?

Paul Schaye: You should partner with those businesses that have some synergy with yours to support your business. If vertically integrated that can support your supply chain of distribution, or horizontal in terms of adding a product line such as complimentary products or a complimentary sales force.

DebbieD: How much of a business should an entrepreneur be willing to give away to investors in exchange for funding?

Paul Schaye: That’s a great question. It’s such a wide range because there’s a give and a get there – what you’re willing to give up depends on what you’re going to get. Sometimes if you give up a lot at the beginning you have a big bite of the apple, but the apple is actually worth more later on. What you decide to take for your business is what you think it’s worth not, but more importantly, what you think it will be worth later. And most importantly, creating a win-win for everybody involved.

Ghector: Given today’s market, have your investment criteria changed for Internet companies?

Paul Schaye: Yes. It has to be proven, as I tried to address before, the B2C dynamic is not as attractive as it used to be. The Internet and the new economy is going to change the dynamic of business. The attention towards the B2C is definitely waning and the reason being that the barrier to entry is very low. It’s important to look – you’re gonna see that in different types of products – how will the Internet affect getting money. You can now buy insurance over the Internet. We’ll see consumers with the ability to get their car loans, their insurance on the Internet. There will be some segments radically affected by the Internet.

FillMore: How can an entrepreneur tell when it is time to take a company public?

Paul Schaye: You have to see if the markets are receptive to that type of business. Recently we have seen companies with sales in excess of $500,000,000 languishing in the market because there is no interest in that industry or segment. So going public is not the panacea it used to be. You can have some companies with no profits and no sales doing very well in the public markets, and you can have billion dollar companies again languishing.

Mauricio: How do you see B2B startups? Would you invest in their businesses (or ideas!)?

Paul Schaye: There is an interest in B2B, it depends on who is behind it – is there an existing business foundation. The Internet is an enabling tool to move things through the market place. B2B is strictly a way to move product more efficiently that is already being exchanged.

Hank: What method is the easiest to find risk capital?

Paul Schaye: There is no easy method. Go to friends and family first. Those are the angels that you can address. If you have a track record, obviously it’s much easier.

MARV: What elements should every business plan have?

Paul Schaye: A mission, how it’s being executed, financial projections, marketing, competition, who’s going to be running the business. Go to the library and there’s great resources on writing business plans.

Bels: If an entrepreneur lacks contacts in the business world, how can he or she build them in order to obtain capital?

Paul Schaye: If there are industry conferences, if there are trade groups, trade shows, chamber of commerce, small business administration. Simply going to the yellow pages and picking up people who are doing it. People like to talk about their business – pick up the phone and talk about their network.

Locklear: What is the best way to get out of debt?

Paul Schaye: Generate cash flow from your business and pay it down. Look at what type of debt it is, and see if you can convert some of that debt to equity.

GetMyGoat: In your opinion, what causes so many small businesses to fail?

Paul Schaye: Undercapitalization. What that translates to is unrealistic expectations as how long it takes for the business to sustain itself.

Katrina: Are there any common characteristics you’ve observed that are shared by businesses that succeed in the long haul?

Paul Schaye: Yes. That’s a great question. Excellent management, strict execution of the business plan, and sticking to their core competency. Also, being flexible enough to recognize that change is imminent. Focusing not on competition, but focus on beating themselves and always, constantly improving what they are doing.

Miss Q: Okay, no friends or family with free capital like that, so where next to look for a small one person business?

Paul Schaye: If you are a minority, there are minority funding, grants. Some people have financed their business on their own personal credit cards.

LYNN: What entrepreneurial businesses today are run in a way that you admire?

Paul Schaye: Well, you know, let’s look at those business that have been very successful that you think of as big business, but operate as an entrepreneurial environment. 3M runs an entrepreneurial environment – a very visionary company. Corning went from a glass company to now in high technology. Granted these are public companies, but they all started at the roots of an entrepreneur.

Valerina: What are the key factors you look for in selecting businesses for investment?

Paul Schaye: Strength of the management team. Sales history. Market niche. Prospects for growth.

Scoop: What can the government do to help me with my small business, financially?

Paul Schaye: The government can support you with market information, can support you with the Small Business Administration, with subject matter experts, and in some cases, if you’re a minority, start-up capital for funding. And depending on your business, there could be tax credits available to you. And government is just not federal, there are city and state empowerment areas available.

Teri: If I would like to start my own business, how would I get investors/backers to listen to me? I’m sure they hear from LOTS of business hopefuls. How do I stand out

Paul Schaye: Develop a very concise and defensible business plan and differentiate yourself from other people seeking money.

Nickel: Would you be willing to invest in a brand new dotcom company, or has the bubble burst?

Paul Schaye: Depends on what the dotcom is. If it’s a B2B, a lot of people are waiting on the sidelines waiting for the shake out.

Investr: How can a small business owner determine how much money to raise during an initial round of funding? Is there any formula?

Paul Schaye: There’s no formula, but as with any budgeting process there are ongoing operating capital requirements, and then there are growth capital requirements. You need enough capital to support the business through the start-up phase, to the point where it can stand on its own.

StartUp: Some investors are more helpful to entrepreneurs than others. How can small business owners spot the good guys?

Paul Schaye: I think you have to use the same diligence as you would in identify who your doctor, lawyer or banker is. Establish their credibility, their credentials, and most importantly, their references.

Misty: Which way do you think the market will go for dotcoms this Fall?

Paul Schaye: As I mentioned before, dotcom is really bifurcated in 2 segments B2B and B2C. The B2B is projected to do very well on an ongoing basis. The shake-out will happen at the consumer level, also known as the B2C. It is anybody’s guess which ones are going to survive.

Mombo: How should I start investing for the future, since I have just recently started living on my own?

Paul Schaye: Since I’m not an investment advisor I’m not a good person to ask.

ASKAmexVoices: Thank you Paul! This has been very informative and helpful. But sadly we are almost out of time, any last minute advice for us?

Paul Schaye: Businesses succeed when you have a disciplined, focused approach. Stick to your core values. If you do, you’ll do well.