Business Incubator Series: Ross Sanders, Bizdom U – Detroit, Michigan and Cleveland, Ohio (Part 9)

By guest authors Irina Patterson and Praveen Karoshi

Ross: We set goals. We set a monthly goals for the number of phone calls that the entrepreneurs have to make, which then translates into a number of meetings they are able to set, and a number of proposals, and a number of contracts that they need to sign. We monitor that.

We know, on a daily basis, how many calls are made, how we are doing toward our goal, what our progress has been. It is a detailed process. It is a good process, and it is a process that a lot of entrepreneurs overlook.

I think entrepreneurs build things, build products and services that they like, and they tend to overlook the sales process, so we really work on that and we set goals around it.

Irina: What about Bizdom U itself – how do you plan to become self-sustaining?

Ross: Well, the bottom line is that we will not be self self-sustaining for a while. It will take a good amount of money to become self-sustaining.

We have to produce startups that are going to be making good revenues and that can make distributions that fit our operations. We don’t plan on being self-sustaining any time in the near future. I think, somewhere around 2018 is when we do want to become self-sustaining. That is the kind of plan we have put in place.

We will get some revenues from the investment we make in our startups. We also need to continue to take donations until we get to the point where we are self-sustaining.

Irina: What is the process of your investing?

Ross: What happens is that when our entrepreneurs get to the end of the training, they put together a pitch, and it is a presentation to a committee that makes decisions as to whether they are going to invest in the business.

The committee also put a financial package together, that explains all the financials. So, entrepreneurs go to the event, they pitch, and they review the financials.

Typically, what happens is, there will be some dialogue about the business, then the entrepreneurs will go and do more research, they’ll come back, they’ll address that research and, if everything goes well, we’ll make the investment into their business.

Each business is set up as an LLC, where the entrepreneur is CEO of that LLC, and they are also on the board of managers in that LLC. And so, there is an agreement that outlines the investment, governs the investment funds, and there is an employment agreement between the LLC and the entrepreneur to run the business, and that is typically how that works.

Irina: And what is the range of your investments?

Ross: We invest up to $100,000, but that is given different milestones. We just don’t give that $100,000 right from the start.

For example, they launch the business and they end up at a certain level of start up expenses that they need. We might invest, let’s say, $30,000. Then, if they hit a certain milestone, we will invest another, say, $20,000, and then at another milestone, we invest another $20,000. All those investments are connected to their milestones.

Irina: I understand. What is your equity share?

Ross: At the beginning, we take 67% and an entrepreneur gets 33% of the equity. And what happens is that the board of managers I talked about, it is a three-person board: there is the entrepreneur,  there is our firm’s representative, and then the fund takes the third seat on the board. So, there are two fund representatives and one entrepreneur.

Let’s say, we invested $50,000 in the business. Bizdom U has a 67% ownership and the entrepreneur has a 33% ownership. Now, when that investment is paid back, it is not a loan, it is an equity investment, and, when it is paid back, the ownerships flips. Now the entrepreneur is the 67% owner of the business and we are are the 33% owner.

When this flip occurs, now the entrepreneur picks the other person on the board. So, at that point, Bizdom U has only one representative on the board and the entrepreneur has two representatives on the board.

It is a nice mechanism because, in a sense, the entrepreneur can take as little money as they can, in order to pay that back quicker, so that they can become the majority owner quicker.

I can take $10,000 and pay back those funds much quicker and be the majority owner much sooner. If I need to take more than that, it will take me a bit longer to pay back the funds and longer to become the majority owner. That is how it works. It is a self-regulating mechanism.

This segment is part 9 in the series : Business Incubator Series: Ross Sanders, Bizdom U - Detroit, Michigan and Cleveland, Ohio
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