The Rapid Response Institute

2010 Business Funding Challenges:

Texas Resource Availability & Go
Forward Strategies

By:

Scott M. Shemwell, D.B.A.

The Rapid Response Institute

February 2010
 2010 Business Funding Challenges: Texas Resource Availability & Go Forward Strategies

Copyright
© Copyright 2010 Rapid Response Institute LLC and Scott M. Shemwell, D.B.A. All
rights reserved.
Disclaimer
The Rapid Response Institute LLC, its principals, and the author make no representation
or warranty as to the accuracy or completeness of the information contained herein or
any other information (whether communicated in written or oral form) transmitted or
made available. The Rapid Response Institute LLC, its principals, and the author
expressly disclaim any and all liability related to or resulting from the use of the
information herein or such other information by the recipient or third party or any of their
affiliates or representatives.
The information contained in this document was gathered from various sources. The
Rapid Response Institute LLC, its principals, and the author do not guarantee its
accuracy or completeness. Where other parties have provided information, The Rapid
Response Institute LLC, its principals, and the author have relied on that information to
the extent we believed prudent, when drawing conclusions, making evaluations or
recommendations or expressing opinions upon it.
This document is provided on the understanding that The Rapid Response Institute LLC,
its principals, and the author, are not responsible for the results of any action taken or
refrained from on the basis of any conclusions drawn, evaluations or recommendations
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any company or any interest therein, nor shall it form the basis of any contract entered
into for the sale of shares in any company.

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 2010 Business Funding Challenges: Texas Resource Availability & Go Forward Strategies

Table of Contents

Introduction .....................................................................................................................4
The Current Environment ................................................................................................4
Overcoming the Credit Crunch.................................................................................................4
What is Right for Me Today? ...................................................................................................5
Defining Your Value Proposition......................................................................................5
Support Organizations.....................................................................................................8
Financial Resource..........................................................................................................9
Bullet Proof Your Organization ......................................................................................10
Conclusions ..................................................................................................................10
About The Rapid Response Institute .............................................................................11
Contact Information.......................................................................................................11
Endnotes.......................................................................................................................12

List of Figures

TRADITIONAL METHODS OF EXPLAINING VALUE ........................................................................ 6

EXPECTED VALUE OF MARGINAL INFORMATION......................................................................... 7

List of Tables

COMPONENTS OF VALUE MATRIX ................................................................................................... 7

TEXAS RESOURCES ............................................................................................................................. 9
FUNDING RESOURCES....................................................................................................................... 10

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 2010 Business Funding Challenges: Texas Resource Availability & Go Forward Strategies

Introduction

T
he Rapid Response Institute (RRI) and the author have recently been asked to
provided a set of guidelines targeting small to midsize businesses and
organizations seeking funding and/or various business guidance primarily in the
state of Texas, USA.
This document attempts to address some of the questions raised in this regard. Per the
disclaimer above, no document of this nature can be deemed to be a definitive work as
this sector is in a state of constant change. Moreover, no recommendation is made
regarding any of the organizations herein. As always, proper due diligence is required
before undertaking any business venture or acquiring partners, etc.
The author has been involved with small businesses and start up companies for much of
his career. Moreover, his experience with large-scale mergers, acquisitions, and
divestitures provides him with a unique perspective on the technology life cycle.
The challenges faced today, while daunting, are not as historically unique as if often
portrayed by the media, governments, and other pundits. Challenges of this nature have
been overcome before and most likely will be prevailed upon by those yet to come.
For example, in the midst of the Great Depression, Howard Hughesi, Amelia Earhart and
others built and expanded an aerospace industry. Flash forward to the 1970s when in
the middle of Stagflationii, a small software company was born. By all accounts
Microsoft is a successful company. The list can go on, but that is not the point of this
document.
The Austrian economist, Joseph Schumpeter, described the Creative Destruction
process wherein the old order is constantly changing and giving way to the new.iii
During tough times, this author believes that this normal process is accelerated as
economic tectonic stresses result in plunging fractures in some segments and upward
pressures in others. The case can also be made that even in normal times, the creative
destruction process cycle time will decrease as well—see the section Bullet Proof Your
Organization for a more in-depth discussion on this point.

The Current Environment

It is always a challenge to raise money. Investors of all types require not just a Return
on Investment (ROI), but have expectations that they will receive a Return OF
Investment. Generally, frustrating to entrepreneurs with the world’s next best
mousetrap, the due diligence required is always onerous, or so it seems at the time.
However, the process of due diligence by potential investors requires companies
undertake a level of assessment, even soul searching that will serve them well in the
long-run. Recognizing and defending market strategies, potential partners, licensing
schemas, etc. will help the entrepreneur truly construct a company that is BUILT-TO-LAST.
There are organizations such as the Houston Technology Center and the Rice Alliance
that can provide entrepreneurs with assistance in understanding and preparing for the
funding process. These organizations can provide business plan templates, mentoring,
and access to potential investors and customers as well. Others are listed later in this
document as well.
Overcoming the Credit Crunch
Much has been made in the media about the lack of credit for small to midsize
businesses and there is a certain amount of truth this crunch from traditional sources.

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Other debt channels remain active, including the traditional credit card or “friends and
family” loan. Moreover, the American Recovery and Reinvestment Act of 2009
(Recovery Act), signed into law by President Obama on February 17, 2009 provides
additional access to SBA loans—see the SBA website for current status and additional
details.iv
However, non-traditional debt such as raised from Life Settlement based instruments
are finding favor.v This type of debt is expensive and may only be suited to specific
projects or uses. Other models are available as well.
It may be useful for the entrepreneur to retain the services of a financial advisor to help
identify which debt instrument(s) is appropriate.
What is Right for Me Today?
The WEIGHTED AVERAGE COST OF CAPITAL (WACC),vi a financial metric most often
attributed to the capital structure of large corporations, is also relevant for small to
midsize firms. In the good ole days, a venture capital firm/syndicate would invest one or
more rounds of (risk) equity ending in an Initial Public Offering (IPO). Another possible
exit strategy was the sale to a larger firm, typically using the larger firm’s common stock
as currency.
In today’s environment, it is not uncommon to find the CAPITAL STRUCTURE viiof even very
small firms to be complex. On the surface, this seems counter intuitive and at odds with
the keep-it-simple mantra. On the other hand, the ability of the firm to issue common
stock, a variety of debt series, and even preferred/convertible stock (given the right legal
entity structure) enables management to attract a variety of investors, each seeking
different risk/return scenarios.
Of course, this approach may not be right for all organizations, the purpose of this
discussion is to posit an expanded view of the organization’s capital structure. Individual
requirements will vary and management should seek guidance from qualified
professionals before undertaking complex financial arrangements.
Issuers of debt instruments will perform due diligence with an understanding that the
organization has the ability to repay. Certain collateral may be required as well.

Defining Your Value Proposition

The concept of the firm’s VALUE PROPOSITION is one of the most misunderstood aspects
of modern business. It is also one of the most difficult constructs to articulate, especially
in the so-called 30 second elevator pitch.
A Google search generated approximately 2,340,000 hits for the term in quotations,
“Value Proposition”. That is a lot of opinions; it is no wonder that entrepreneurs struggle
to get this right.
In this section we will briefly explore some of the salient aspects of a strong, easy to
articulate and understand Value Proposition. The author believes that management
must develop a value prop that his or her customers will accept. It is all about revenue
generation. If the market understands and accepts your value proposition, the
investment community will as well.
First and foremost, a value proposition must be relevant to the customer and it must be
believable.
v As a general rule, the Feature—Benefit approach is dated. It is focused on the
product and not necessarily the needs of the customers. Moreover, it does not
truly differentiate. For example, if one looks at the feature—benefits of one

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television set to another; what is the difference from one model of similar size to
another?
These similarities might lead one to purchase on price or how the screen looks in
the “perfect” lighting of the store. Moreover, does this generate brand loyalty and
higher margins?
This may not be relative to a customer.
v “Decreased human errors by 100%” is a recent actual statement by a midsize
software company in a specific niche market. If their solution eliminates all
human involvement then it might be believable, but if it does not, then is an
overstatement. Either way, the statement is suspect and may raise a flag
requiring the potential customer to invest emotional and temporal capital to
assess its relevance to her problem.

Traditional Methods of Explaining

Value
n Feature – Benefit
q Product focused
n “This coffee cup is made of
ceramic and therefore
holds heat better than
plastic”
n Does NOT truly
Differentiate
q Value Proposition
n “My solution will increase
your net income by 75%”
n Often
q Overstated
q Not demonstrable
q Not defendable

Traditional Methods of Explaining Value

It would be nice if a value proposition could be stated so simply. It sure would make the
entrepreneur’s life easier. However, life in this parallel universe would knock down
Barriers to Entry which is often so critical to the organization’s value.
The author has developed a detailed methodology designed to help management
develop an ECONOMIC VALUE PROPOSITION that specifically meets your customers’
needs, and is defendable and easy to articulate and understand. Additional information
is available by contacting the author; however, the following overview develops the
process.
We define Economic Value from the perspective of the dismal science. If one views the
expected value through the economic lens of marginal utilityviii we can apply economic
theory to what otherwise if often assessed from a hip-shoot approach.ix
For example, it has been exceedingly difficult to establish the Value Proposition for an
Information Technology solution. If we apply marginal utilityx as a function of likelihood
which assumes a statistical range of event to an investment in IT, we can surmise that
the Expected Value of Marginal Information (EVMI)xi is:

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Expected value of the best Expected value of the

EVMI = decision with new
information (obtained at no
minus best decision without
new information
cost)

Expected Value of Marginal Information

In other words, if a unit of new information produces a better decision than without that
unit, the EVMI is positive and adds economic value to the firm. Using Economic Value
Analysisxii we can now mathematically (read financial model) determine the impact on
the Economic Profit (EP)xiii of the firm. EP is not the simple accounting profit model; it
takes into consideration opportunity costs inputs as well.

Most firms do not meet the test of economic profit as they do

not return the cost of capital.

A Value Proposition developed using this methodology meets the test of Believable and
Defendable. Moreover, it can create a strong Barrier to Entry.
Seemingly a challenge for the time crunched executive, tools are available that reduce
the pain of developing a robust value proposition. For example, the following Value
Matrix enables management to build their Economic Value Proposition as a function of
four major components; Cost Takeout, Cost Avoidance, Productivity & Efficiency Gains,
One-time Cash Flow Impacts, and Intangibles. Readers will note the matrix also
provides a working definition and examples.

Components of Value Matrix

Category Definition Example
Cost Takeout Completely eliminating a specific n Redeploying a resource from a non
activity or proc ess value-added activity to a value-
a dded activity

Cost Avoidance Identifying and correcting an error that
was not budgeted for correction
but would have caused an expense
had it not been corre cted
Productivity & Efficienc y Increase in produc tivity that improves
Gains existing resource utilizati on.
One-time Cash Flow Decreasing and or eliminating one-time
Impact cash flow impa ct
Intangible Benefits that improve operations of the
business and /or are necessary to
control, protect and enhance
company assets, but are not
quantifiable due to the nature of
the area being improved
n Correcting an engineering design
flaw be fore the flaw goes into
production.
n Removal of a bottleneck that is
c ausing capacity restraint
n Correcting a process to allow more
productive time by shifting from wait
time to production ti me
n Elimination of redundant
information/data stores
n Monetize Capital
n Improvement of communications
between different operational
units/supply chain
n Reduced small equipment shrinkage
Components of Value Matrix

Statements along the lines of “we can save 75%” are not believable unless they are
derived as a function of a series of smaller, cumulative positive impacts. Applying the
techniques herein can lead to statements of major impact.

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Arguments that entrepreneurs do not have time to construct valid and reliable Economic
Value Propositions fall on deaf ears. What else is more important? Nothing else
matters to your customers and by extension, your investors.

“If you do not have time to prepare for a meeting with me, a
key executive decision-maker, and show me how you can add
value to my firm, then I do not have time to meet with you.”

This writer predicts that entrepreneurs who do not take the time and expend the energy
to develop believable and defendable Economic Value Propositions will not be
successful and their investors will not realize a Return OF their Investment.
People respond to PAIN! Today, management has lots of pain. If your Value
Proposition addresses their discomfort, you have their attention. If it does not or
they do not believe it does, then he or she has other more pressing issues.
This is a challenging area, not fully addressed in this space. Readers seeking additional
information or assistance are invited to contact the author directly.

Support Organizations
The Rapid Response Institute LLC, its principals, and the author do not
endorse, or have a financial relationship with any of the following
organizations
This material is provided for informational purposes only.
By way of disclosure, Dr. Shemwell, serves as a non-paid, volunteer to
the Houston Technology Center (HTC) as an Energy Advisor; however,
he does not, nor does he have the authority to represent HTC in any way.
Interested readers are invited to contact these organizations directly.
However, Dr. Shemwell will introduce interested parties to these
organizations to the extent he can if you desire at no cost or obligation.
The following table presents some of the resources and organizations available to
support and help develop business in the state of Texas—and possibly by extension
those seeking to do business in Texas or with Texas firms. The Rapid Response
Institute LLC, its principals, and the author do not represent that this list is complete or
all inclusive. The Rapid Response Institute LLC, its principals, and the author do not
warrant these organizations in anyway, either explicitly or implicitly.

Organization Website Brief Description

(taken from the individual website)

Houston http://www.houstontech.org/ “HTC is a nonprofit organization enabling

Technology and accelerating the growth of emerging
Center technology companies for the purpose of
creating jobs and promoting economic
development in the greater Houston
region.”
MIT Forum http://alumweb.mit.edu/groups/eftex “Our mission is to foster successful growth
as/ of innovative technology oriented
enterprises in the South Texas area by
providing access to MIT resources and
through services and programs that inform
educate and support these business
endeavors.”

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REPSEA http://www.rpsea.org/ “RPSEA is a multi-purpose entity

established to facilitate a cooperative effort
to identify and develop new methods and
integrated systems for exploring,
producing, and transporting-to-market
energy or other derivative products from
ultra-deepwater and unconventional
natural gas and other petroleum resources,
and to ensure that small producers
continue to have access to the technical
and knowledge resources necessary to
continue their important contribution to
energy production in the U.S.”
Rice Alliance http://alliance.rice.edu/alliance/Defa “The Rice Alliance supports entrepreneurs
ult.asp and early-stage technology ventures in
Houston and Texas through education,
collaboration, and research.”

Texas Business http://www.tbiaonline.org/ “It shall be the mission of the TBIA to

Incubator advance the business incubator industry in
Association Texas.”

Texas http://www.google.com/#hl=en&sou Google search, generating thousands of

Incubators (not rce=hp&q=texas+incubator&aq=0& hits. Readers are invited to do their own
an organization, aqi=g1g- assessment as to the applicability to them
but a web m1&oq=texas+incu&fp=baa94940e of these firms.
search) dcea411
Texas Resources

Readers will note that there are many Texas focused resources available. The intent of
this section is to stimulate thinking, not to provide a definitive list. Readers are invited to
do their own research as to whether or not these organizations are appropriate to their
individual requirements.

Financial Resource
The Rapid Response Institute LLC, its principals, and the author do not
endorse, or have a financial relationship with the following organizations.
This material is provided for informational purposes only.
Interested readers are invited to contact these organizations directly.
There are numerous sources of funding available. Ranging from equity to collateralized
debt, the funding landscape is actually greater today than in recent history. As
discussed earlier, the capital structure of even the smallest firms is now more dynamic.
Type of Organization Description
Angel Finance A wealthy individual or group of individuals
willing to invest relatively small amounts in
early-stage firms. An example is the Houston
Angel Network
http://houstonangelnetwork.angelgroups.net/

Banks Traditionally a source for collateralized lending.

Lately, non-players, but long-term these
institutions will most likely fill their historic roles.

Non-Traditional Hedge fund “like” there are emerging sources

such as the Life Settlement based funding
discussed herein.

Private Equity Firms that invest in private, non-public firms

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although capital infusion as PIPE are done as

well.

Venture Capitalist Professional early stage investors.

Government Sponsored Loans and Grants

The ETF, created by the Texas Legislature at the
Texas Emerging Technology Fund
urging of Governor Rick Perry, provides Texas with
an unparalleled advantage by expediting the
development and commercialization of new
technologies, and by recruiting the best research
talent in the world. Matching and
commercialization funds coupled with additional
federal and outside investments mean new
technology is emerging in Texas
http://members.texasone.us/site/PageServer?pag
ename=tetf_homepage
As discussed above.
Small Business Administration
SBIR and STTR Grant Programs
Other Federal Government
Funding Resources
While not exhaustive by any measure, the number of organizations supporting early
stage and midsize corporations is extensive. It is hoped that entrepreneurs will develop
an appreciation for the resources at their disposal.
It all boils down to the Economic Value Proposition put forth. All of these organizations
assess this as a critical function of the overall business plan.

Bullet Proof Your Organization

Some may yearn for the good ole days, when oil was over $100 or Information
Technology was king. A victim of our own success, we live in a world where the Velocity
of Informationxiv is high and accelerating. The Velocity of Information, defined as the
exchange rate of information enabled by today’s information and communications
technologies, has forever changed that landscape.xv
Recognizing that organizations of all sizes, across all industry sectors, for profit or not,
across the globe need new tools to address today’s volatile markets, the author released
his seminal work, Rapid Response Management: Thriving in the New World Order. This
document provides management with a useable set of guidelines to transform existing
processes and organizational structure to meet challenges without implementing some
of the crushing dictums required by some change regiments.
Interested readers can download this white paper at no cost and without obligation from
http://www.scribd.com/doc/11792098/Rapid-Response-Management-Thriving-in-the-
New-World-Order-20-January-2009
Additional support and implementation templates are available from the author. Please
contract him for additional detail.

Conclusions
This document is the result of a number of conversations and email exchanges between
the author and a numerous of individuals interested in furthering the development of
small and midsize firms with a Texas connection. These firms are defined as all
organizations interested in the Texas economy. In the author’s recent experience this
universe includes organizations across the United States as well as Europe.

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No representation is made that this is a definitive work. Albeit it is a simple guide,

designed to help small and midsize business management to navigate the troubled
waters of the current environment.
The author’s contact information is provide below and questions, comments, and input
are invited. In the writer’s opinion, despite current economic hardships, the bow of the
vessel is pointed forward, a bit into the wind, but making way.
According to Louis Pasteur, “Chance favors the prepared mind.”

So go forth prepared!

About The Rapid Response Institute

The Rapid Response Institute LLC provides its clients with tailored strategic behavioral
economics based programs designed to provide organizational flexibility, rapid
operational response, and cultural adaptability.
The firm’s clients include Fortune 500 global firms and non-profit organizations, as well
as mid-size companies faced with the need to swiftly transform when confronted by
global business dynamics.
Principal & Author
Scott M. Shemwell

http://www.linkedin.com/myprofile?trk=hb_tab_pro
Dr. Shemwell is the Managing Director of the Rapid Response Institute. The firm
provides its clients with Quantitative and Qualitative analysis and insight throughout the
major decision process. It can also arrange funding.
For over 25 years, Dr. Shemwell has led the turnaround and transformation process for
global S&P 500 organizations as well as start-up and professional services firms. His
specific experience includes Executive Management, Information Management, Mergers
and Acquisitions, Change Management, and International Business.
He was business unit head with P&L responsibility and member of the Executive
Leadership Team for an S&P 100 firm. He had led or been a key individual in over $5
billion in mergers, acquisitions, and divestitures. As the Managing Director for a major
consulting firm, he assisted clients in transforming themselves throughout the
globalization process.
He is a leading authority (frequently quoted & referenced) on information management,
business processes and industry change, as well as organizational structure analysis,
with over 250 publications and speeches.

Contact Information
For further information:

Dr. Scott M. Shemwell

smshemwell@gmail.com

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Endnotes
Definitions of terms and references to other works used in this document are provided
below.

i
http://history1900s.about.com/od/people/p/hughes.htm
ii
http://www.investopedia.com/terms/s/stagflation.asp
iii
http://transcriptions.english.ucsb.edu/archive/courses/liu/english25/materials/schumpeter.html
iv
http://www.sba.gov/recovery/
v
http://en.wikipedia.org/wiki/Life_settlement
vi
http://www.investopedia.com/terms/w/wacc.asp
vii
http://www.investopedia.com/terms/c/capitalstructure.asp
viii
Shemwell, Scott M. & Murphy, D. Paul. (2004, November). Knowing the economic value of
information. World Oil. pp. 63-66.
ix
Shemwell, Scott M. (1997, September). The Economic Value of Timely Information and
Knowledge, Key to Business Process Integration Across Boundaries in the Oil & Gas Extended
Value Chain. Proceedings of the Gulf Publishing 3rd International Conference and Exhibition on
Exploration & Production Information Management. Houston.
x
http://wordnetweb.princeton.edu/perl/webwn?s=marginal%20utility
xi
Ibid.
xii
Gouillart, Francis J. and Kelly, James N. (1995). Transforming the Organization. New York:
McGraw-Hill.
xiii
http://financial-dictionary.thefreedictionary.com/Economic+Profit
xiv
Shemwell, Scott M. (2009, January). Rapid Response Management: Thriving in the New
World Order. Author.
xv
Ibid.

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