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Opinion: Saving investment capital 1 step at a time

A Wider Lens

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A movie a day for only $10 a month? It’s a deal that seems too good to be true. And so far for investors, that appears to be the case.

MoviePass is the product, and Helios & Matheson Analytics Inc. (Nasdaq: HMNY) is the owner. The company’s stock steadily declined from $32.90 per share on Oct. 11, 2017, to a dismal 65 cents per share by May 11.

I can’t help but think back to an sbjLive interview with Jack Stack, founder of SRC Holdings Corp. In the February 2017-released series, “A Conversation With Jack Stack,” he made the point that of the 600,000 startups each year, fewer than 15 percent of them can survive five years in business.

“The scariest thing in the world,” he says, “is that wasted capital, that angel capital, that family capital, those credit cards.”

Stack laments that budding entrepreneurs are told it’s going to take five years to be successful, so they believe they can lose money for five years.

The MoviePass model is the perfect example. Subscribers pay $10 per month, while the company pays full price, about $9 a ticket, to theaters for every ticket ordered by its members, up to one daily. I understand the golden ring of their business plan: to leverage a magic number of 3 million subscribers for advertising dollars, user data and a cut of theater revenues. But can they make it that long?

According to a May 16, Wall Street Journal article, MoviePass lost $98.3 million on $48.6 million of first-quarter revenue, and the company recently announced it only had $15.5 million in cash and $27.9 million of accounts receivable. I am not in finance, but even I know that isn’t good news.

Right now, MoviePass seems more like an expensive gambling trip to Las Vegas without the benefit of cheap casino buffets. Most of us can’t gamble with millions of dollars of other people’s money. The sbjLive sponsored-content series, “Why Businesses Fail,” identifies five shortcomings that most often contribute to an unsuccessful venture with tips to avoid the pitfalls:

1. Lack of business plan. Chrystal Irons with the Small Business and Technology Development Center identifies five things to include in your business plan. In my opinion, the first step of a business plan, the feasibility study, is the most critical. It is the step that all other decisions hinge upon. It is also often the least fun for most people, requiring data collection and market research. Not to mention we often look for the data that supports our dream idea. This is a stage to find a trusted, objective third-party with no emotional attachment.

2. Partnership pitfalls. Establish transparent conversations and documentation when forming a partnership. Attorney Dwayne Fulk cautions about potential business partners who fear killing a deal by talking too much. “If the venture’s so tenuous, though, that just a few questions might upset the apple cart, then I think it should probably be upset,” he says. Since many partnerships develop out of friendships, it seems this is a process that can be easily derailed by polite intentions. The difficult conversations in the beginning can set the foundation for a number of eventualities, such as work roles, share dividends and survivorship rules. Planning for those decisions helps prevent emotionally charged conflicts later that may save a business and friendship.

3. No exit plan. According to Tracy Barnas of Arvest Wealth Management, 65-85 percent of people have not completed a succession plan for their business. She advises that “it is not just about creating the plan that is executable, it’s about planning how to develop the plan.” She recommends choosing advisers who “mirror their values and mirror their business makeup.” Those advisers include wealth managers, lawyers and accountants.

4. Fraud.  To mitigate fraud, Kala Forehand of Arvest Bank recommends dual control approval for all invoice payments, spending restrictions on employee credit cards and an automated clearinghouse fraud filter that allows business owners to review and accept or reject transactions. Did you know that unlike individuals who have 60 days to file a transaction dispute at their bank, business owners only have a 24-hour window for electronic transactions? I do, now.

5. Uncontrolled growth.  Inaccurate assessment of growth opportunities can leave a company in worse financial condition than before a growth opportunity was actualized. More revenue does not always equate to more profits. Summer Massey of Arvest Bank recommends first determining industry benchmarks from a banker or accountant. If projections are outside of industry standards, growth might place the company in jeopardy. Controlled growth is also about balancing cash flow, such as offering customers early payment incentives to shorten accounts receivable to 10 days rather than 30 days and negotiating better early payment terms with vendors. This allows paying with a purchasing card to slow down accounts payable by up to 30 days or better yet utilizing a low-interest line of credit.

I’m banking on the advice of these experts. But I’ve placed my penny bet on MoviePass like it’s a Megabucks slot machine.

SbjLive CEO Mar’Ellen Felin can be reached at mfelin@sbj.net. SbjLive is a video media outlet and spin-off of Springfield Business Journal.

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