In an ideal world, the shortest timeframe for securing financing
would be three to six months before you need it. Have a shorter
window? Read on, dear debtor, and be amazed at the wealth of early
financing options that are yours for the taking.
you have to want at least a million dollars in order to be
interesting to venture capital groups. "One-third of the funds being
raised now are for $50K or less," says John Taylor, research
director at the National Venture Capital Association (NVCA) based in
Arlington, VA. NVCA represents over 360 venture capital and private
equity firms, amounting to approximately 85% of all venture capital
invested in the United States.
"There are VCs that are very willing to talk to [those seeking
small amounts]. Others say even if you're a year away, we'll give a
It makes sense. Venture capital funds increased 150% in 1999,
topping out at $48 billion from $19.2 billion in 1998. It follows
that as deals get bigger (Zhone Technology's $500 million infusion
last year in Oakland is the record) they will also trickle down to
every garage cum research lab in the nation. Look up NVCA members
especially Edison Venture Partners and Arch Venture Partners.
venture capital, many individual investors are flush with gains from
equity markets. They're eager to plow earnings back in and are
willing to wait a little longer than VCs for the typical 25-50%
return, hence their "angelic" status. They got their divine name
from early Broadway days when an investor would rescue a flailing
production, often with no profit when a show closed.
Some figures estimate that there are as many as 250,000 angels
investing up to $25-30 billion a year in the U.S. According to the
NCVA, there are no statistics on this type of investment, but they
say it could be double the venture capital market.
"The difference between angels and venture capital is huge --
it's like the difference between going to your Uncle Harry for $100
thousand or to your bank for $10 million," says John Burke of ABS
Ventures from Baltimore, MD, a venture group that typically invests
$3 to 15 million in IT or healthcare startups. Though he admits that
you can't group all angels together, "99% of the time, the typical
route of funding a startup is friends and family, angels, and then
institutions [such as VC]." Only when things go awry, does the order
go backwards. How to get started with an angel? Keep reading.
Don't think that
your company has to be ultra-sexy or frenetically ambitious to get
into a business incubator. Only 8% of incubators are for-profit.
These homes for potential golden eggs exist in almost every state
and have a multitude of sponsorship arrangements, often with
educational institutions, or with local governments whose main goal
is to create new jobs in their communities.
Twenty years ago, there were only 10 or 15 incubators nationwide.
Last year, there were 585, and there are more on the way, offering
startups a variety of help, such as discounted rent in exchange for
shares in the hatchling company, access to government funding and
resources, as well as private sector expertise and financing
Three years ago, Ed Palmer, CEO of SolarAttic, moved from his
garage into the Elk River Business Center, an incubator sponsored by
Genesis, which houses a myriad of other baby businesses in
Minneapolis, MN. He plans on moving out in a year due to lack of
room and docks required for his inventory at the center.
"Otherwise, I would stay as long as I could," he says. "They took
stock [in exchange] for 80% of rent, which dramatically helped my
cash flow." The synergy of working with another business at the
incubator improved his own technology for converting the heat in
attics to energy. Most of all, moving into the incubator helped his
credibility to attract financing.
"It takes you out of the garage. Many people have come to see our
facilities, and it's a lot different driving up to this building
than to a house," Palmer adds.
professional services people, such as lawyers, accountants, and
consultants, about financing is a great way to get the right
introductions to private investors and VC as well. If your idea is
viable enough, they might even invest themselves.
"When we like a client, we make sure that cash is not an issue;
we try to take compensation off the table," says John Hilgenberg of
The Eager Street Group, a consulting company in Baltimore, MD. Most
of the companies they mentor are in the pre-venture stage.
They aren't "money-finders" he says, but they know the people who
are. "Don't be afraid of your investors," Hilgenberg points out.
"It's surprising how many companies are afraid of losing control.
They approach the process in a semi-adversarial way and investors
can sense that." That's the point at which many investors walk out.
"The company which is not willing to say everything, the positive
and the negative, is not going to be perceived as
Mine the Web
incomplete when filling out extensive forms at Web sites geared to
link up money with opportunity. You've got to give an impression of
confidence and thoroughness in all written communication since
that's the beginning of this kind of relationship. When a site also
requires you to post your business plan, be proud of it. Make sure
Check out the three-year-old ACE-Net (see Resources),
the U.S. Small Business Administration's Internet-based listing
service for securities offerings of small, growing companies.
Accredited investors view listings anonymously, and the government
makes sure that entrepreneurs are meeting all the legal requirements
of federal and state securities regulators: a win-win situation all
Of course, the private sector has its many counterparts. One of
the first of its kind was DataMerge, Inc. (see Resources),
which has offered a national database of alternative lenders and
equity investors since 1989. It's an easy way for someone in
Cincinnati to find money in Atlanta. Detailed profiles of investment
criteria accompany hundreds of listings, and active financiers reach
into the thousands.
Don't skip the promising MoneyZone.com (see Resources),
launched just this year. They offer a variety of debt and equity
financing options to apply for online. You can also post your
business plan for browsing investors. It could be interesting: in
their first month of operation, they claim to have processed a
billion dollars' worth of financing.
Garage.com (see Resources)
is a also a great site for companies looking for seed-level
financing. Investors are listed in the section of the site called
Heaven, where they peruse pre-screened entrepreneurs -- investment
opportunities -- that match their interests. If no angel comes
knocking on your door, at least you can get some excellent advice
More of these services are showing up online every day -- so
unless you are dealing with a quantity that is well known to you, be
sure to check them out, and call references before you send them
anything or post any information about your company.
Floating and factoring
overlook the strength of credit cards, says economist and investment
newsletter author Mark Skousen. "They've become a viable source of
funding for small businesses," he says. The trick, he says, is to
not apply for more cards when you are maxed out on the others.
Instead, apply for several at one time. "Although it's risky," he
admits, "you can use advances from one credit card to pay the
minimum on other cards."
Skousen used the floating concept when he started his own
publishing business 20 years ago. He was able to place ads for his
book and pay for them a month or two later when revenue was coming
in, he says. His latest publication is The New Scrooge
A cousin to floating is factoring: selling your accounts
receivable invoices in advance of payment. There are many companies
that will buy your future earnings now, just when you need the money
most. There are even brokers and referral agents out there to help
you find the right buyer. You can find them on the Web, such as AMJ
Factoring, or in the newspaper. Your best chances for selling
accounts receivable are with invoices to the government, or a
customer who has a track record of paying.
One way to solve the
money crisis is to not pay cash for anything, says Alan Zimmelman,
president of the National Association of Trade Exchanges. Even when
you do have cash, it still makes sense to barter.
Years ago, with little or no experience in baking, he started a
cookie business in Palm Springs, "before there was Mrs. Fields or
Amos." He figured that since the next closest place that people
could buy fresh cookies was at a mall, three miles away, he could be
successful. Trouble was, he didn't have the money to advertise. So,
like a good neighbor, he took cookies in to the radio station, whose
airtime also goes stale if it doesn't sell. And, for the first time
in his business life, he made a barter.
Soon Zimmelman's cookies were all over the airwaves, making him
look like the most successful company in town, he says. "People
stopped in just out of curiosity." You say you've never heard of
Zimmelman's Cookies? Little wonder: Mr Zimmelman became so enamored
of bartering that he sold his successful cookie business, and
eventually bought a bartering company.
Bartering has become quite sophisticated since those first
transactions involving livestock and bushels aeons ago. With
programs that allow you to convert your goods or time into points
that you "spend" in trading networks, you can barter your way to
almost anything and save up to 80% on retail prices. That's a lot
better than cash, especially when you don't have it. You do,
however, have to pay taxes on the value of barters.
If you think you
don't have a network, maybe all you need to do is join one. There's
bound to be a group out there with interests common to yours: look
for professional leagues in your area where you can mingle with your
own kind, trade tips, and find potential funding. Many groups offer
seminars or lectures, so if small talk is your problem, just go and
take notes. See Resources
for some examples.
By showing their wares at a local entrepreneur council event in
North Carolina, Scot Wingo of AuctionRover attracted the interest of
a visiting VC group. At the time, his company was only three months
old. "We were funding it ourselves," he says, "Once they talked to
us, it was pretty exciting." Two weeks and $3 million in seed later,
they got a big office space "and started hiring like crazy."
Another take on this idea is to borrow someone else's network by
signing up for help by the Service Corps of Retired Executives
Association (SCORE). Sponsored by the SBA, it has nearly 400
locations across the country so there should be one close to you.
They've assisted almost four million people since starting in
Sponsorships and partnerships
Don't think you're too little to be of interest to big shots
with deep pockets. Sponsorship is a $22 billion dollar industry and
growing as the next medium of choice in advertising. The best way to
get your foot in the door at a corporation for sponsorship is to
plan an industry meeting or event that they "help" pay for.
Dave Starr, VP of business operations at Vcapital.com, an
ambitious one-year-old referral service for entrepreneurs and
venture capitalists, agrees: "It's good for both sides. For
fledgling companies, alliances and partnerships are the best ways to
get a leg up. There are many benefits other than cash that they can
Arthur Andersen is one of Vcapital.com's sponsors, contributing
content and expertise to its Web resource center. "Though they are
not an equity holder, they provide us with credibility and value."
Starr points out that when making sponsorship deals, "it's very
important to understand what [the potential sponsor's] motivations
are. Make sure you know what their long term goals are."
The best way
to get government money is to go meet it in person. There are faces
behind programs awarding thousands of R&D grants to high-tech
companies, such as the Small Business Innovation Research (SBIR)
Program. Ask the people who make decisions how your proposal can be
the most attractive. See Resources
for a list of SBIR conferences.
Total SBIR funding is expected to exceed $1.2 billion in fiscal
year 2000. The program funds U.S.-owned firms with 500 employees or
less to conduct cutting-edge, innovative R&D that addresses the
government's mission objectives while also promising commercial
payoffs in new products. Ten federal departments from DOT to NASA
take part in SBIR, so you can imagine the range of technology
projects they solicit.
Projects are high-risk and typically at the earliest stages of
development, before companies can attract private capital. Terms are
good and you don't have to worry about selling copyrights or patents
either. Each project may be awarded up to $850,000 over a 2-1/2 year
Promote all you've
got, whether it be a minority or woman president, or the social
cause your spouse insisted be a part of your Web site. Many funding
sources, especially the government, incubators, and angels, focus on
these set-apart qualities, which when added to a great idea and
business plan, may nudge you above others clamoring for attention
And, above all, make sure to get more money than you think you
need. You don't want to be in a cash-strapped position when you set
out on your second round of financing. Not only will it lessen your
value, you won't be able to shop for the best terms possible, which
is what financing is all about.
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