Why does the investor want a lead investor?

I was sitting in the conference room looking out on the river. The investor was telling us he was interested in investing. It was a wonderful moment for me. The investor outlined the services they offered, people in their network who can help, and how they were there for the long-term. He accepted all the terms in the term sheet. Then, right at the end, he said they couldn’t be the first investor in any venture and that as soon as we had another institutional investor, they would co-invest.

I assume they are doing this to reduce their risk or is it some obtuse negotiating tactic?

Can we raise funds and sign a term sheet without a shareholders agreement?

My co-founder refuses to complete our shareholders agreement. He has always tried to avoid conflict. Every time we come to a contentious issue in the agreement, he doesn’t want to discuss it. We can’t resolve key issues. The lawyer hasn’t been able to persuade him that this needs to be done.

We now have firm offers for $750K seed investment and we need to sign the term sheet. Can we raise funds and sign a term sheet without a shareholders agreement?

Starting a business requires hard work, resilience, and attention to detail

Before I started this business I owned a stonemason business that specialized in dry stone walls- walls that didn’t use any mortar. I loved the work but wanted to do something that paid more and I could do when my body could no longer lift rock.

I started the new business, which rates and recommends people for jobs around the house in Latin America. It’s like Angie’s List. It grew really quickly with a lot of expats wealthy people using it. As I reflected on the new business I could see the similarities between growing a business and building walls.

Both require enormous patience.

Both need a firm foundation to grow and become robust.

Both need you to go one step at a time; there are few, if any shortcuts.

Both need vision.

Both need perseverance.

Both require you pick yourself when things go wrong.

Both can give you enormous pride and satisfaction.

My team took a consultant's report very personally and couldn't focus on improvement

In my corporate life we used consultants. I always felt they told me what I already knew but they provided authority and helped with politics. They were also expensive

When I started my business, I vowed not to use consultants but we didn’t have a lot of bandwidth and needed to do some process mapping of our logistics as we grew.

I decided not to use a firm and found a local person with an MBA who was a logistic specialist. I briefed her and she started her assignment.

She presented her report to our senior team. What she showed was that we weren’t communicating with one another and that the systems had big holes in them. We had too many manual interventions and the data entry was inaccurate.

My reaction was this was great as these were easy problems to fix. Dealing with these issues would improve productivity and customer service.

The reaction from our team was quite different. Team members started to blame one another and everyone was critical of the IT people. Tempers flared. I tried to calm everyone down and show them that this was good news as we could easily fix everything. It didn’t matter of who was at fault; it was an issue of growing pains that needed to be dealt with.

The fact that all of this became interpersonal was unsettling for me. I had a lot of work to do to bring this team together.

I didn't realize product mix, delivery costs, and variable rebates would affect our profitability so much

We have over 100 customers and sell the same set of products to each of them, yet some are profitable and others aren’t. I really don’t understand. They all get the same products for the same price. We have volume discounts and rebates but we show them a separate line item and can track them.

My husband’s friend works for an analytics company and took a look at our sales figures and accounts. The first thing he saw was there were significant differences in the mix of sizes between sales outlets. As the smaller sizes have higher margins it is the mix of sizes and not just the volume that affects profitability. The next thing he found was that different outlets had different thresholds where the rebates kick in. On some accounts the threshold was $45K in revenue, on others it was $65K, and one had $80K. So while we can track the total rebate we pay, we start paying earlier and this affects profitability. Finally, he said that delivery costs were assumed to standard costs, but the distance from the warehouse to the outlet varied from 1 to 150 miles. Moreover, we collected returns from some but not all outlets.

This made me realize that all revenue is not the same. I was shocked that our profitability was so affected by product/size mix, how we set rebate thresholds, and by underpricing delivery.

We had to figure out a way to allocate employees' personal cell phone usage

The internet is always going out and we rely on smartphones. We have decided that it would help the sales forces if they all had one. I talked to a friend and she said that when she gave her employees smartphones, she had trouble controlling their use. The data charges were high because people were watching videos and shopping. In the end she decided to pay a percentage of the bill. It meant reviewing the bills each month which was time-consuming.

We talked it over and did not want to spend time going through cell phone bills. But, we needed to control cost. What we decided was to review all the bills for the first quarter and then see how much was for private usage and then deduct that percentage from all future bills. It isn’t 100% accurate but it should be adequate to control our costs.

Starting a business is HARD!!

We hadn’t seen each other since graduation. I was creating health apps in India and she started an agriculture business in Latin America. We caught up over dinner and both agreed the decision to start our own businesses were the right ones. It was thrilling and fulfilling, but it wasn’t all roses.

There were the emotional elements, loneliness, at times raw fear, and work-life balance. But the most surprising was the amount of time and effort it took to build the systems, logistics, and infrastructure. When we knew each other before, we both used to sit in front of a screen working on spreadsheets, doing case studies, and problem sets. We had no idea then what really made a business run. They never taught us all that stuff. It is attention to detail, boring, tedious, and time-consuming. But if it goes wrong, the business won’t function, the accounts won’t balance, and the business will literally get out of control.

We told our horror stories and thought the next new thing should be a business in a box. But we knew of colleagues who tried standard system and all complained about their lack of functionality and the difficulty in making any modifications.

Investors want us to change our strategy, what should we do?

We built a platform that will allow chocolate and nut producers to bypass the middleman and wholesaler. This will give them higher margins and more liquidity. We have a partnership with FairTrade, five manufacturers, and three retailers.

Given the nature and geographic location of the producers, we created a global platform. We have invested over $100K in it and have completed beta testing.

We sent our business plan to five investors. Two said they had no interest given the size of the addressable market .The other three said that they needed proof of concept in a local market, meaning one country. Our platform and partners can’t accommodate this.

The investors told us the risk of global launch was too great. What do we do? Modify the platform and focus on one market or seek other investors?

No one was using the supply chain management system!!

One morning, an employee mentioned there were rumors that the port would be closed due to a dockworkers strike. I asked if anyone knew how much material we had coming in. No one did. I asked if anyone knew how much was actually at the dock. No one did. I asked how much stock have we paid for that hasn’t been delivered yet. No one knew.

I was shocked – no one knew what was going in our supply chain. It was all there in the system but no one bothered to look. Clearly they didn’t look at the data everyday. I asked why they weren’t using it.

They said it was all wrong and has been since the day the system was set up, so no one uses it. I asked how they managed the supply chain and they said they’d call friends at the dock and ask what they have, then call the customs agent and ask what is coming in. I asked if this meant our physical stock records on the computer were wrong and they said yes.

Our accountant sent out a report without verifying it

We got the monthly accounts from Quickbooks and it showed a much larger profit than we had expected.  We estimates profit and cash weekly, so this was a real surprise - a pleasant one I had to admit. I didn’t really give the matter much more thought because the variance was positive. If it has been negative, I would have been all over it.

Then, driving home I began to wonder how we could have made so much profit. The next morning I went in early and started looking at the reports. Sales looked right, but the margins were way too high. We normally have around 40% gross margin but these accounts showed it a 56%. I kept looking. Most of the expenses seemed to be normal with the exception of the sales discounts, which looked really low. They were below the normal 15% level. Suddenly it dawned on me: somehow the discount had been added the to gross margin.

I called in the accountant and asked what was going on. He looked at the accounts and said they were wrong. I was right there was a misposting. I asked why he hadn’t checked the accounts and he said he didn’t feel well and had gone home. When I asked who he sent them to, he answered the bank, board, and all our investors. I told him we needed to recall them ASAP and make sure this never happens again. I told him next time he goes home without signing off on the accounts at the end of the month, he needs to tell me.