Is manufacturing completely dead?

Over the past two years, we at Beacon Angels have seen about 150 new businesses. Most were start-ups, usually pre-revenue, but about 15% post-revenue, pre-profit. Out of curiosity, we recently analysed what kind of businesses were in this group. The results weren't completely surprising but did display pointed differences from standard statistical analyses of the US economy.

We believe these differences result from multiple causes:

• Entreprenuers go where they feel growth is; older or stagnant industries never show up
• We see businesses that require some capital but not too much. Consulting and other services that generate cash immediately won't come to us. Neither will large infrastructure projects, like wind turbines, whose needs outstrip what angels can provide.
• Geography plays a role; we see no gaming companies, vacation real estate, mining or resource extraction, and certainly no agribusiness.
• About one third of our hopeful entreprenuers are fairly young, defined as under 30. They usually propose what they know and think exciting, which is overwhelmingly internet and cell phone based, with a heavy dose of music thrown in. (Although we, fortunately, don't see proposals for inde movies!)

Enterprise software was our largest category with 25% of our deals. We define the category to mean a corporate sale, whether on servers or PCs. Some deals were highly technical, such as those that dealt with security of distributed databases. Others were just kind of vague, such as the one that "simplified processes & procedures within large enterprises..." Some were quite specific, such as:

• Mortgage calculators for small banks
• Managing clinical trial data
• Adminstering medical codes in hospitals
• Managing risk in large processing plants or refineries
• Filtering and archiving of outbound email

The abundance of ideas testifies that the American enterprise has not yet exhausted all of the diverse possibilities for automation and productivity improvements.

2007: A HECTIC YEAR

Beacon Angels completed its first year this spring after making 6 investments totaling over $760,000. Utilizing its experienced cadre of investors, the Group focuses on early and mid-stage companies in the software, high-tech, consumer, and financial services industries. We are the only angel group that meets in downtown Boston and as such have a unique insight into the business developments in this dynamic marketplace.

Beacon Angels is unlike other angel groups in the thoroughness of our approach. We meet at a roundtable where lengthy, detailed discussions are the norm, not the exception. Everyone expresses an opinion; no holds are barred. Truth is the sine qua none of our philosophy, the ultimate objective of all we do. Typically, entrepreneurs tell us that presentations to us are longer and far more illuminating than they expect. We are not shy with our feedback. If the company needs some additional work, we are frequently approached again by the same firm after they have achieved their milestones.

This year, 27 locally-based active investors joined Beacon Angels. It’s a diverse group, ranging from software entrepreneurs and MIT engineers to owners of active manufacturing businesses and retired financiers.

PORTFOLIO SPOTLIGHT - SEPSENSOR

SepSensor is an early stage company with a low cost, patented, wireless sensor for remote monitoring of the thickness of various different stratified liquids and solids in tanks.

Key markets:

· Restaurant grease interceptors: ~1/2Million US/world
· Septic systems: 26/50 million US/World
· Industrial process monitoring (groups of 100s) - 1000s

SepSensor's initial target market is restaurant and food service grease interceptors. Today, restaurants pump out grease traps frequently at fixed intervals whether needed or not. Overflows can cause bad publicity, fines and even shut downs. Also, pumpers frequently leave the trap partially filled with grease.

Their sensor communicates via radio to their remote monitoring service that automatically schedules the pumping as needed. Monitoring subscriptions create recurring monthly revenue. Facilities managers see ROIs in excess of 100%/year by reducing pump out costs in addition to improving their "green" image.

Customer Traction

SepSensor has an installed base and backlog of 60 units, increasing at a rate of about 4-6 per month.

The sales targets are the chain segment of the restaurant market. SepSensor has over 65 potential customers in their sales pipeline representing over 50,000 sites. The initial customers are Ruby Tuesday (900 stores in the USA) and Friendly's (500 stores in the USA).

At Ruby Tuesday, data is being collected on the initial order of 21 sites. Initial projections are that all sites are being pumped prematurely and ROI will exceed 100%/year

Friendly's initially ordered four systems. After 3 months of monitoring we are projecting ROIs in excess of 300%/year.

Financing Status

The company has raised $1Million from angels to date with Beacon Angels being the lead group and having the largest portion invested in four tranches. SepSensor is currently raising an additional $1M in Series A Preferred Stock at a pre-money valuation of $3.1M. Several other angel groups are at various points in their due diligence. The funds will be used to expand sales and marketing and further cost reduce the sensors.

MAKING the FINANCIALS MAKE SENSE

We see hundreds of business plans every year. Financial projections are an integral part of every entrepreneur’s submission yet they are also often an area where quick improvements are possible. Too often we see financials that are obviously inadequate, simply don’t make sense, or simply don’t agree with other parts of the business plan. We recognize that with start-up companies it may difficult to think about costs and revenues several years in advance. Yet, it must be done.

Four basic objectives are served by good financial projections:

1. Relate revenue estimate to the market:

Entrepreneurs need to show how the revenue increase over a five year period matches the start-up taking a reasonable share of the market, if successful. Plans submitted in 2008 should start in 2009 (for new companies) and continue through 2013. No market can be totally dominated, so future revenues should somehow match no more than 20-40% of a carefully circumscribed market definition that is actually reflective of products/services the company will actually sell. Excessive and unjustified revenue estimates do nothing except hurt the entrepreneur’s reputation.

2. Relate revenue to operations:

Show how the underlying operational metrics create revenue. That is, how many actual widgets, licenses, or services will be provided and sold? All too frequently, plans make no mention of shipments. How do units delivered or services delivered compare to the market and the potential number of customers? Are sales repeat or one-time? How many actual unduplicated customers does the company think it will have? (Needless to say, this requires a statement of pricing policy, another area too many plans fail to elaborate.)

3. Realistic future cost estimates:

One thing funding sources don’t believe is excessive future profitability estimates. When we see 5-years out the company expects 80% margins and that accelerating revenue growth will happen without staff increases, we know we have a naïve entrepreneur, if not a complete idiot. Half the business plans we’ve seen project better margins than Microsoft or Google, so how realistic is that? What is important is thinking through the needs if the company is actually successful. Success breeds its own costs: they can be substantial.

4. Thinking about the next round:

Funding needs only cease when break-even arrives, which is obviously after revenue begins but usually before success can occur. In reality, most start-ups face a growth/loss trade-off. Grow fast and absorb money; grow slowly and hit break-even earlier. Which is best depends on the market, the technology, and the strength or weakness of competitors – and, of course, the ability to get more funding. So, a more relevant issue is not time to profitability (or level thereof) but time to break-even and the causes that allow it to occur at that moment. Again, few plans make this clear.

In summary, venture professionals may say the last thing they look at is the future financials. There’s an element of truth in this aphorism. Why? Aside from the items above, we all know that the future is hard to predict. And that too many business plans’ financials all look alike. But, therein lays the opportunity for the entrepreneur. Make those financial projections shine and look better than that plan lying next to yours!