We like to think that when we deposit a dollar at the bank, it goes into a big vault and we can pull out that same dollar at any time. But that¿s not how the U.S. banking system works. Banks take that money and invest it to make money themselves, so cash gets spread around. This, naturally, leads to a big risk: What happens if those investments go sour? Well, you¿d be out of luck. You can¿t get your dollar back.

The Federal Reserve doesn¿t like that scenario, so it prohibits banks from putting all the cash it has on deposit on the line. In fact, the Fed forces banks to keep a portion of their assets at the Federal Reserve itself, to make sure that some of your assets won¿t get squandered if the bank¿s bets go south. These are called ¿reserves,¿ (hence, Federal Reserve. Got it? Good), and usually amount to 10% of the total cash kept in checking accounts.

These reserves are never exactly 10%, and banks like to keep a little extra in reserve ¿ not, as you might think, to make you more comfortable that they¿re in good financial shape, but rather so they can take that excess and lend it to other banks and make money off it. (They¿re banks, they can¿t help themselves.) The rate at which they make these loans is called the Federal Funds rate, which is set by the Federal Reserve¿s Federal Open Market Committee.

When you hear people chattering about how the Fed cut or hiked interest rates, this is what they¿re talking about: the interest rate banks can charge for lending money from their reserves. This begs the question: If these are essentially loans between banks, why is the Fed Funds rate so important for the rest of the economy?

Well, simply put, because loans make the financial world go round. Bank A lends Bank B $10,000 at a Fed Funds rate of 5%. Bank B then lends out $10,000 to a small business at 7%. The small business then takes that money and expands the business and hires new workers. Now someone is employed, Bank B has made interest off the loan, and Bank A is the richer for making it all happen. It¿s perhaps overly simplistic, but you get the idea. When you want the economy to thrive, you make lending cheaper.

Of course, sometimes you don¿t want the economy to thrive. In fact, you might want it to cool down, mostly to avoid money flooding the system and causing inflation. In that case, the Fed raises interest rates, making it difficult to lend or borrow.

Home / Personal Finance / On Topic / Small Business

Friday, August 15, 2008

Analysis

Elevator Pitch: Entrepreneurs Keep it Short and Sweet

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Dunstan Prial

FOXBusiness

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Peter Christensen’s life changed in the few minutes it took an entrepreneur to pitch an idea for teaching golf using sophisticated video technology.

“I liked his pitch so much I invested $600,000 in the company,” said Christensen.

Small business is On Topic at FOXBusiness.com in August. Check back every day to read stories about how to start, build and enhance your small business.

It was September 2006 at a meeting of the Venture Association of New Jersey, and the entrepreneur, Joe Luciano, was giving what’s known in the world of small business start ups as an elevator pitch.

Luciano, president and founder of a Fairfield, N.J.- based company called Motion Golf, had just a couple minutes to convince a roomful of investors that his idea could make them money.

Luciano hit all the right notes, according to Christensen, and ultimately fulfilled the goal of every entrepreneur who has ever made an elevator pitch: He made someone in the audience want to hear more.

Christensen has since invested more than $2 million in the company, which uses proprietary software and imaging technology to help golfers analyze their swings, and he and Luciano are now partners.

The elevator pitch is humorously named for an archetypal business opportunity: an entrepreneur is in an elevator when he looks to his left and sees a potential investor. The entrepreneur now has about two minutes to make his pitch before the elevator reaches the investor’s floor.

(See Larwood make his elevator pitch for Valley Fever Solutions by clicking the attached video.)

“The perfect elevator pitch is the one where the [potential investor] holds the elevator door open before getting off and says, ‘Give me a business card. I want to know more,’” said Palo Alto, Calif., -based consultant Bill Joos, who works with early-stage entrepreneurs.

Joos described the elevator pitch as essentially “a distillation of an entrepreneur's business plan and business model.”

Distilled because investors -- no one, for that matter -- wants to be bored. So the pitch has to be kept short, preferably two minutes or less.

“It’s easy to be longwinded and boring. It’s extremely hard to be short and intriguing,” said Joos.

In reality, elevator pitches rarely happen in elevators. In fact, they usually happen at meetings of venture capitalists and so-called angel investors held in large hotel banquet rooms.

Which means the entrepreneur has time to prepare.

Use that time wisely, Joos advised.

Preparation allows entrepreneurs to sound passionate rather than scripted. “It should sound like you’re talking about your firstborn child,” he said.

The elevator pitch should accomplish several key things, preferably in less than two minutes. First, the pitch should describe how the entrepreneur’s idea will fix a problem. Second, why that problem needs to be fixed. And third, the entrepreneur needs to explain how the idea will make money.

While the brevity of an elevator pitch may at first seem daunting, it actually works in the entrepreneur’s favor in that it forces him to focus on and crystallize every aspect of his business plan.

“The better your business plan is, the easier it is to put your elevator pitch together,” said Joos. “If you’re having trouble putting an elevator pitch together, you probably don’t know your business well enough.”

David Larwood, chief executive and founder of Valley Fever Solutions, said he immersed himself in his company’s business plan for a month before presenting a 90-second elevator pitch earlier this month at a roundtable in Palo Alto sponsored by the VC Taskforce.

Larwood, who has coached other entrepreneurs on their pitch techniques, said he strongly recommends frontloading the pitch so that potential investors are hooked in the first five seconds. That way they’ll want to hear the next 30 seconds, he said.

Larwood said entrepreneurs should explain to investors “quickly and effectively” who they are; who their management team is; who their competition is; and how they’re going to get their product to market.

Larwood also suggested tossing out what he described as “an unfair advantage,” something that the entrepreneur’s competitors can’t hope to match, such as a marketing partnership with Tiger Woods, for example.

“You need to get them interested, show them you’re credible and that your story has legs. That’s the foundation,” he said.

Finally, Larwood said entrepreneurs should never forget that it’s a pitch. “You have to sell yourself. Look confident and sound confident.”