start me up!

Brief review of who's got the money

Venture capitalists -- organized as firms, these guys invest in new companies. They tend to focus on certain stages of development, and on certain businesses. They define market segments in which they have expertise and knowledge, and decide who to deal with on those bases. With these guys, there's a formal pitch after due diligence, and investment isn't a done deal until after a formal vote.

Angel investors -- these are wealthy individuals who invest in start-ups. They tend to be loosely organized, if they are organized at all. They may find out about certain investment opportunities through affinity groups/clubs. With these guys, if you get to due diligence, it's likely that they at least PLAN to invest.

Stages -- Early, growth, final (within about a year of IPO) stages, each having fairly hard definitions, from the point of view of those holding the money.

• Early stage/seed capital = initial outside funding.
• Early stage = beyond seed but before full-up sales.
• Growth stage = beginning to develop markets, and you have your first sales (up to $1M or so) in hand. This stage is perhaps the most critical, timing-wise, because windows for expanding markets will only stay open for a limited time.
• Final stage = as indicated above, you're headed for an IPO.

Due diligence -- this is the process by which venture groups or investor organizations will determine for themselves whether what a start-up says about itself is true. The rigor of this process is pretty much a function of the experience of the investors. Groups will pay different levels of attention to such issues as intellectual property, technical development, etc. Due diligence requires the start-up's participation, because so much must be provided to the investors. There'll be weekly, and almost daily, contact as the process nears completion.

What goes into a due diligence package? Critical elements include a marketing plan (including what we perceive as marketing opportunities), financial projections, references from folks you've dealt with, the legal standing of the company, its
investment structure, the nature of the company's intellectual property, and its management. We must confirm what we write in our business plan. Some investors and organizations call what they're looking for a "SWOT analysis," where SWOT == "strengths, weaknesses, opportunities, and threats."

Here are notes on "alternative" funding sources for start-ups, as published in US #1, a regional business newspaper.

State loan pools -- organizations exist that provide portions (25% is not unusual) of loans, guaranteeing those portions, for loans ranging from $50K to $1M. The interest rate on such loans varies from 5% to (prime-1)%.

Loan guarantees tied into certain types of businesses -- for outfits that will create lots of jobs, or locate in an economically distressed area, or represent an important economic sector. We have seen in this area guarantees for up to $1M of working capital, limited to 30-50% of the loan amount.

Direct loans -- up to $500K for fixed assets, $250K for working capital, for up to ten years, at interest rates varying from 5% to (prime-1)%.

The weaknesses in these programs (as I see it) are (a) that only a relatively small portion is guaranteed, (b) that the money must be used in certain ways, and (c) that to qualify you may have to be in certain industries or locations. Some entrepreneurs like to be able to make these choices for themselves. And, well, I guess that means they have to find money themselves. :-) :-) :-)

Labels: consulting

posted by Ron @ 9:06 PM