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.
Microfinance
Small business startups in the U.S. are typically funded through owner savings, credit cards, family or friends. Bank loans are out of the question, and most Angel Investors are not interested in funding “concepts.” Of course, rarely does a small startup qualify for venture capital funding.
Small startups that cannot self-fund their business are out of luck—unless they can qualify for a “microloan.” The concept of microfinance has been around for some time…Kiva, Grameen, ACCION® International, “community” funding, and the Small Business Administration…are only a few of the organizations providing microfinancing for small businesses.
Microfinancing has grown in recent years, not just because it is a great help to poorer entrepreneurs, but because it is good business. For instance, in the last decade, ACCION partners have disbursed more than 28.5 million loans, totaling $23.4 Billion, to men and women entrepreneurs in 23 countries. The repayment rate of these loans stands at 97 percent—a far cry from the recent performance of Wall Street.
Now, more main-stream sources of funding are joining the microfinacing arena. I have previously posted about Super Angels, Community Development Venture Capitalists (CDVC’s), Open Source Funding, and the shift by Venture Capitalists to earlier stage funding. All of these sources are looking at startups, and many of them are offering microfinancing.
Of even greater significance is the interest being shown in microfinance by mainstream investors. Here is just one indication: ACCION® International—the private non-profit pioneer in microfinance—is sponsoring a conference in Washington D.C., September 21-23; to “…analyze next-generation microfinance investments for pension funds, family funds, and private wealth managers.” “…the conference will also assess the latest venture capital, or ‘frontier,’ investment initiatives in industries supporting microfinance.” Perhaps institutional investors are beginning to look beyond Wall Street for their investments
Could microfinance be for you?
If you are an entrepreneur wanting to start a small business—and you have no money, microfinace may be something to consider. The SBA Microloan program is a good place to start. Look at several other avenues for microfinance by searching the Internet for Microloans—there are many sources available.
Good luck!
Super Angels
With IPO’s nearly shut down, and large Venture Capital firms wringing their hands over “Venture Capital’s Coming Collapse” (a January Forbes cover story), it is encouraging to see a new breed of “Super Angel” courting today’s startups. The June 1 issue of BusinessWeek carried an article (online version here) featuring this new funding phenomenon. Any entrepreneur looking for startup capital should read this article to see if there might be a fit.
Venture capital peaked in 2000 and total VC investment today is below 1998 levels. It has been 11 years since the industry has paid out more cash to investors than it has invested. Many VCs annual rate of return to their investors over this period was lower than the S&P 500 Index.
On the other hand, the Super Angel is smaller, quicker, and more interested in more things than their bigger, older VC brethren. They manage smaller funds and cater to the startup, with smaller investments. They have returned to the grass roots of the VC industry, with informal gatherings at the local pubs and eateries where new entrepreneurs gather to make short pitches to a Super Angel.
However, don’t forget: An entrepreneur needs to do their homework—and well! A short pitch (sans Power Point) requires a person to really know what they are talking about. They must be able to present an entirely new business idea succinctly and completely—in a matter of a few minutes.
Most of the Super Angels are also supplying more than money. One of these is Paul Graham and his new-concept VC firm, “Y Combinator.” Graham launched his firm in 2005 and has funded 145 startups to date.
Y Combinator is a hybrid venture capital firm and business training camp. Although Graham makes small investments (usually less than $25,000), he also provides advice, mentoring, technical help, and introductions to later-stage investors. He also periodically feeds his band of fledgling startup entrepreneurs.
So, the time for you to start a new business could be now…if you are properly prepared. Check out Super Angels on Google—then get yourself ready to pitch your new business. Today might be the day you have been waiting for.
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