Situation: A CEO has been the principal source of financing for her company. She is looking for Round #1 financing of $800K to $1 million to take the company through the next two years, followed by an additional two rounds of financing to take the company to profitability. What are the best options to obtain financing?
Advice from the CEOs:
Given the company’s size, it’s too risky to put all eggs in one basket. Also, it is difficult to simultaneously pursue all options. List and rank all financing options, and limit efforts to the top 3-5 options, forgetting the rest for now. The company is more likely to be successful with a limited number of targets.
The big question is which avenues to pursue? Current preferences are:
Sell what the company can sell now – focus on collaborators and bootstrap the company as much as possible.
Angel funding, if the company can find the right angel.
Avoid venture capital unless there are no other options.
Given these, where does the company have live contacts? What conversations can be pursued to a successful conclusion in the next 1-2 months?
For the Angel option, the company’s model is easy to explain and has appeal. Which potential Angels could be approached in the next 1-2 months?
An option is to bring an Angel in slowly – creative input, perhaps a Board seat.
Once the Angel is on-board, put together a list of your funding priorities and a list of 4-5 top prospects in a Board discussion. Ask this individual’s advice and assistance contacting some of the prospects. He may ask at that meeting or later why he hasn’t been asked.
For the first $1million – consider an SBA loan.
Under new guidelines, the application fee has been reduced.
Approval cycle – 30 days or less.
The trade-off between bootstrap and Angel funding and SBA is personal risk. Look at this as a fallback option.
VC funding is very time consuming. Also, VCs prefer that their clients are somewhat desperate, so that they will receive a larger piece of the company for their money.
Situation: The CEO of a successful company is considering two options: sell the company or grow to the next level. She believes that the company could be sold for an amount that would satisfy her financial needs. Also, the prospect of a long vacation and more time for family is appealing. Do you sell the company or grow bigger?
Advice from the CEOs:
First Option: Pursue funding to take the company to the next level – through either private equity or venture capital. Present an optimistic, but credible, upside return for the investment; back this up with a realistic lower estimate to cover exposure.
Both funding sources only buy the home-run model. Two reasons:
They need potential and credible home runs to sell to their investors; nobody invests in solid base hits because the return is insufficient for the risk.
They assume that the funds recipient is overestimating what they can do.
Given the existence of new technology to expand the company’s presence, it has a legitimate home-run model.
Hire a pro to help obtain funding.
Second Option: Take a shot at buying the company’s principal competitor – this provides the opportunity for rapid growth at low risk in the existing market and will make the company more appealing at a higher price.
Third Option: Based on personal goals, if the company can be sold now at a good price – do it. This will enable you to fulfill your life goals.
Give the first two options 12 months. If there is no or limited progress in 12 months start taking two successive months off on vacation – allowing minimal time to monitor the company. If vacations are satisfying, sell the company.
Ask yourself a serious question – do you really want to be on extended vacation now or is this an objective for 3-5 years out? If the company already has strong momentum, why not see what can be built and then sell. There may be more adventure in this.
Fourth Option: Take some money off the table – enough to build your dream – but continue to own controlling interest in the company. This offers both choices.
Situation: Early stage companies often find it difficult to raise funds from traditional sources. An experienced CEO wants to help certain new companies of which she is aware in two ways – assisting them in receiving funding, and then helping to assure that they reach key milestones. What is the best way to profitably address this ambition? How do you fund a start-up?
Advice from the CEOs:
Build relationships with a few select sets of local investors – venture capitalists, angels, and private investors – with whom you have strong credibility. For a retainer or fee, agree to bring them a number of new pre-vetted companies in the next year, and post-finding, help the companies to succeed and hit milestones. From the companies that you bring to funders, ask for equity in return for securing funding and providing guidance.
Put yourself in the shoes of the person who will pay you – what do they want and how do you deliver this for them? Develop statistics from your past successes that highlight your capabilities. Don’t be shy about your accomplishments.
What are you passionate about? If the answer is development – linking technology entrepreneurs to strategic partners and then being an accountability partner to assure that milestones are met – this will be your focus and your pitch to both funders and tech companies.
Your value is linking the entrepreneur to the funding source and being an accountability partner.
Situation: A company has been growing within budget. In the near-term they anticipate an opportunity for significant growth. The challenge of this ramp-up is that it will sap existing financial resources as expenses associated with the ramp outpace revenues. In growth terms this challenge is known as financing the inflection point of the hockey stick. How do you finance a ramp-up?
Advice from the CEOs:
Investigate a number of different financing options and combinations of options. While historically the company has been financed by venture capital, as you finance your ramp think beyond venture capital as the sole source of funds.
Investigate corporate partners who would consider the company a strategic investment. This creates a higher valuation for the company than you will find with VCs alone.
Within the VC community, to raise a modest level of funds focus on 2nd and 3rd tier funds – particularly those who specialize in the company’s technology and market and who will see this opportunity as fitting their portfolio strategy.
Outside of the VC community, look at banking and fund options that offer creative ways of using both investment and debt to fund the company through the inflection until you are again cash positive. Examples are Comerica Bank that has been building its position among Silicon Valley start-ups and venture capital firms, and Paradigm Capital that will provide loans by collateralizing your IP.
Look closely at your IP portfolio to maximize IP value to either VCs or other funding sources. If your IP position is strong it boosts your ability to attract funding.
Interview with Charles Bellavia, CEO, ElectraDrive
Situation: High tech entrepreneurs frequently see venture capital funding as a quick route to enabling their ventures. However VC funding is highly variable by tech sector and company cash needs, and few companies are ever funded. Do you need to rely on VC funding and what are the alternatives?
Advice from Charles Bellavia:
The first question to ask is what you want from VCs. In the past they brought both contacts and funding. Now, generally, they just bring funding. So ask three questions.
Can you fund the company out of your own pocket?
Far more companies are funded by founders, friends and families than by VCs. However self-funding demands conditions.
Cofounders should have alternate income sources so that they can operate without salaries for periods of time.
Watch the life stages of start-up cofounders. Avoid joining a start-up when your kids need your attention, especially during their teen years. Can you forgo regular income if you are paying for college? If an annual 2-week summer vacation is important, don’t join a start-up.
What is the minimum funding needed for the company?
What funding do you need just to prove your technology and generate cash?
Focus is key. People will suggest variations. You have to know your path and whether variations will help or distract.
Stay with your core idea and think in terms of product generations. Build fitting variations into future plans if they will delay initial launch.
How do you keep project workers motivated?
Plan for turnover. Know who is key to the project, and where you need back-ups.
Start-up life is all consuming. When the picture on the wall is crooked, everyone jumps to straighten it out.
Have fun and make it fun. This needn’t be expensive, like parking lot pot-luck barbeques with a CD deck and music.
Be generous with simple, low cost recognition. Acknowledge employees for who they are and where they came from. This is especially important when you have diverse employees and builds camaraderie. One company has pot luck lunches and employees are asked to bring their national dish; the food is wonderful and helps employees to appreciate one another.
Interview with Sandy Lawrence, Past CEO, Therative, Inc.
Situation: The technology sector is growing following a couple of lean years. Whether you want to fund a new company, or a new effort within a smaller company, what are the best avenues to capital? How has the game changed?
Funding and credit markets are opening but still tight. The bar has been raised because too many people are chasing too few available dollars.
The venture capital sector has consolidated. Over 80% of current focus is on technology, software and medical. Under 20% goes to the consumer sector.
It is important to target VCs who specialize in your technology, market and business model.
Research current VC portfolios.
Angels now act more like VCs – particularly structured angel groups.
Initial investments are typically under $1 million.
If you have a technology, investigate the grant world – e.g., NIH or DARPA. These organizations fund research, but not marketing, etc.
Look for specific programs or RFPs that align with your technology.
Target your grant request toward prototype development and studies.
Search LinkedIn for military people who can introduce you to contacts within programs like DARPA.
Investigate SBA Grants, and foundations with an interest in your technology or application.
Foundations sometimes will grant funds ($100k) to support the work of individual scientists and researchers.
Call on friends and family who believe in you and your work.
Whoever you approach, these rules apply:
Do your homework. Choose sources that align with your project and profile.
Presentations must be crisp and easily understood. Investing in professional assistance is wise.
Be able to make your case in 15 minutes or less. The first minutes are most crucial, so have your ‘elevator’ pitch perfected.
Your model and financials must support a high multiple exit, 5-10x their investment in a reasonable period of time (~5 years).
Team, Team, Team – credentials, experience, presentation – be a team with whom the investor can work.