Angel Investors and “Super” Angels
Angel investors have long been the backbone of early financing for startup businesses. They have stepped in when money from family and friends runs out. Angel investors have traditionally filled the gap between owner-raised investment money, and venture capital investments.
Now, however, Angels are banding together and forming more “groups” of investors—Super Angels—to raise the limits of their investments, while spreading the risk. This creates a new “grey area” where the Super Angels and Venture Capitalists overlap.
According to a recent study by the National Association of Seed and Venture Funds, the number of Super Angels has grown 40 percent just in the last year. More importantly, 51 percent of association members have indicated that they intend to invest more money in startup companies this year than they did last year.
This is good news for entrepreneurs—as long as you are properly prepared to fast-track the growth of your business. Super Angles want to see a strong management team that can make the most of their investment money. Neither Angels, nor Super Angels will invest in just an “idea”—they want the entrepreneur(s) to be operating and have some skin in the game already.
In addition, your business needs to have the potential for explosive growth to tens of millions of dollars in revenue in just a few years. Also, you will need to convince a Super Angel that you can return three to five times their investment within five years—usually through acquisition.
This is good news for high-potential startups, but you will need to prepare well before you meet with investors. Even though there is investment money available, there is tremendous competition seeking it…so you better bring your “A” game.
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New Business Financing
A reader recently called my attention to a small business loan program offered through Sam’s Club. Sam’s Club is not a lender, but they are working through Superior Financial Group, the largest Small Business Administration (SBA) lender in the U.S. (number of loans).
Superior Financial Group makes small business loans that are guaranteed through the SBA. They loan amounts from $5,000 to $25,000, with interest rates as low as 4.25% over the Wall Street Journal published prime rate. The current interest rate starts at 7.50% and increases slightly with smaller loan amounts.
To qualify for this lending program, you need to meet the following criteria:
- Your business can be either a startup or already operating, but it must have a business checking account and a good credit standing. A nice feature of these programs is that no collateral is required.
- You also must have a good personal credit standing.
- You must be a member of Sam’s Club (to receive the low interest rate and loan fee discount).
- You must need a minimum of $5,000, and a maximum of $25,000 for operating capital for your business.
- You must be a “for profit” business.
To investigate this loan program further, go to the Sam’s Club web site and click on “Services”, then on SBA Small Business Loans. Follow the instructions and apply online, or by phone. The lender will process your request quickly and you will hear back within a day or two. Good luck!
The SBA guarantees these small loans through the Patriot Express and Community Express (”Community Reinvestment Act”) programs. You can learn more about these, and other, SBA loan programs through this special report.
In the event an SBA loan does not work out for you, there are other small business financing options—check out this report on Creative Business Financing. There are many ways to finance a business…it just takes creativity and perseverance.
In fact, if you have enough passion and perseverance, you could even Bootstrap your business. Be aware however, that this method only works for the highly determined person who can discipline themselves through the process. Here is a report on a typical scenario for Bootstrapping.
I would be interested in hearing from anyone who has obtained a business loan other than through a bank.
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Private Equity vs. An IPO
The mood on Wall Street is still not favorable for IPOs. So, what are successful young tech companies—and their investors—to do? How will they cash in on that big payday? Many employees went to work at some of these companies for very low wages plus stock in the company, which they expected to cash in on IPO day. Now, instead of months from startup to IPO, it is taking years.
In the meantime, many employees are holding stock they deem worthless, because there is no market for it…and that doesn’t make happy employees. Someone at the National Venture Capital Association said, “You want entrepreneurs hungry, not starving.”
Also, many Venture Capitalists are not happy with the long wait for payday. They have fund investors they have to keep happy, and they normally do that through the IPO…but not lately.
Well, things are looking up. Large Private Equity firms are stepping in and laying out cash for employee stock, as well as helping some of these tech firms continue their growth. Here are some recent examples of private equity deals that have—at least partially—replaced the IPO for now.
Facebook — Russia’s Digital Sky Technologies kicked in $200 million and promised another $100 million to buy employee shares and give the company some cash to grow on.
Twitter — T. Rowe Price put up $100 million so Twitter could invest in much-needed servers and equipment to keep up with burgeoning traffic.
Yelp — Elevation Partners put $100 million into Yelp, 75% of which will be used to buy employee’s stock.
Zynga — Game developer Zynga took $180 million form DST. A portion of this money was used to buy out employee’s stock.
These are only examples of some of the larger deals that fast growing tech companies are putting together with private equity firms. So, if your company is a potential candidate for an IPO and you—and your investors—are just waiting for the timing to get better (it may be a long wait), you may want to take a look at some partial stock sales to a private equity firm.
More Bad News for Small Businesses
A few days ago, MarketWatch published an article titled, “Banks cutting back on loans to businesses.” Here is a quote from that article that I find most disturbing:
U.S. banks are reducing their lending at the fastest rate on record, tightening the credit squeeze and threatening to leave many otherwise viable businesses unable to borrow money to expand their businesses, meet their payrolls, or refinance maturing debts.
To counter this, President Obama just presented his plan for helping small businesses obtain loans. The President’s plan calls for money to be made available to small banks from the TARP pool at a low interest rate, and the ceiling for the SBA’s most popular programs to be raised from $2 million to $5 million.
Unfortunately, the changes to the SBA programs require Congressional action, and that could take a long time. Moreover, the money from the TARP pool comes with strings attached, and here is what Cam Fine, President of the Independent Community Bankers of America trade association had to say:
…family-owned banks are not going to want to subject themselves to compensation restrictions imposed by TARP, because it is their own personal money that is the capital of the bank.
Even if banks do get more government money, are they going to loan it to struggling small businesses? According to an article in BusinessWeek, banks are putting much of their available capital into Treasury and other securities. As a result, loans and leases are taking a back seat. Also, banks are complaining that tighter regulation, plus a special assessment to replenish the FDIC, is affecting their ability to make loans.
So, what is a small business owner to do? Well, I’ve been in situations like this before, and, although not pleasant, they can be managed. Some banks are still lending to solid businesses that have a history of profitable operation, so polish up your “public” business plan and spend some time pitching your business to small banks. This is assuming, of course, that you are not already over-extended—remember; banks are not Venture Capitalists.
If your cash situation becomes critical, you will need to look for alternative sources of money, such as taking on a partner, looking for venture capital, or borrowing “hard” money. Alternative sources of money could also include personal resources, such as, home equity loans, family members, credit cards, selling assets (boats, RVs, motorcycles, cars, vacation cabins, etc.) and borrowing from friends.
If you have tried all of these things, and still cannot balance your cash flow, it may be necessary to sell a portion of your business, merge it with another, or cut it down to a manageable size.
Times are very difficult for some small businesses right now, and you may have to do things you likely never thought of when you started your business.
So, stay the course, be persistent, involve your employees and advisors, and don’t give up—you can weather this storm.
Small Business Startups–Beware! Part 2
Last week I wrote about the angel investor scam that Jason Calacanis recently brought to light on his weblog. Jason has now posted Part 2 of his series, which includes testimonials from entrepreneurs who have been victimized, and also comments from a few former employees of some of these questionable operators.
After reading the testimonials in Jason’s Part 2, I am appalled that such a flagrant scam is being perpetrated on entrepreneurs trying to start a business. It appears that this is just another example of the greed and selfishness of unscrupulous business people.
Calacanis also reported that he is now being sued by Keiretsu Forum for mentioning them in his Part 1 post. It appears he is expecting more lawsuits in the future as he digs deeper into this issue. He says he will sell his Tesla, if he has to, to pay his own legal bills.
Jason apparently is trying to get people involved in this issue on his weekly podcast “This Week in Startups.” He is inviting people from both sides to participate, although, after reading his newest post, I doubt that any investors will want to be on his show
If you are looking for startup funding, and considering angel investors, you may want to review Calacanis’s weblog posts first. Part 1 breaks the issue wide open, and Part 2 presents some “smoking guns.” The posts are long, but they could save some people a lot of money.
As I stated in my first post, there are many investors, both angels and Venture Capitalists, who operate ethically and openly—you do not need to pay just to get a meeting with them. You do, however, need to give a compelling reason for them to meet with you, i.e., a great idea, and a well-thought-out business plan.
But remember, unless you are starting a technology company, this is usually not the best source of funding for most small business startups.
Small Business Startups—Beware!
If you have a small business, and are looking for an Angel Investor, beware of a scam that several unscrupulous investors and money brokers are offering unsuspecting new entrepreneurs.
It seems that this scam is simply to charge an entrepreneur for the “privilege” of meeting with a prospective investor, or group of investors. The fees charged for this “meeting” can run as high as $25,000, plus a substantial portion of the amount of money raised.
For an in-depth presentation of this situation, I highly recommend this lengthy blog post by Jason Calacanis. Jason may be controversial, but when he sees what he believes is an injustice to small business entrepreneurs, he tackles the issue with a vengeance.
There are hundreds of fair and ethical investors around—both Angels and Venture Capitalists—so there is no need to pay any investor, or money broker, a fee to make your pitch. JUST DON’T DO IT!
If you are thinking about approaching angel investors, please read Calacanis’s blog post first…then pick your potential investors wisely.
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