Category Archives: Business Funding

Update on Angel Investors

Angel investors are often one of the first things an entrepreneur thinks about when beginning their search for money to start their business.

Unfortunately, this can be a daunting task.

Today, Angel investors can be divided into two general groups:

  1. The first group of Angels makes larger investments, primarily in high-tech enterprises nationwide. These are often referred to as “Super Angels.”
  2. The second group of Angels makes smaller (and earlier) investments in local startups. They are likely to be successful business people living in your hometown.

For the first group of Angel investors, the Angel Resource Institute recently released its annual “Halo Report,” which is a survey of Angel investments over the past year—2012.

The “Halo Report” presents the results of a survey of 738 deals totaling $1.1 Billion during 2012. Following are the highlights of this survey data:

  • Internet, Healthcare, Mobile & Telecom, and Electronics made up 70% of the deals.
  • Most common investment size in 2012 was $600,000 ($690,000 ave. for 4th quarter).
  • 63% of recipients were already producing revenue.
  • Co-investment (multiple Angels investing in same deal) deals were most prevalent in this first group of Angels with 70% of all deals being made by multiple investors.
  • Median investment with multiple investors was $1.5 Million.
  • Over the past two years, the value of companies receiving investments from this first group of Angel investors has averaged $2.5 Million.

Obviously, this first group of Angels is only interested in the high-tech, high potential profit companies that are already established and either already producing revenue, or are about to.

Most of the vast majority of the 6+ million new business startups this year do not fall into this high-return-on-investment requirement and must look elsewhere for their startup money.

There are a variety of alternative sources of startup financing available, but if you are interested primarily in Angel Investors, you will need to look much closer to home … for Angels in the second group of investors.

I would suggest that you do this search for your investors through your Advisor Group, banker, attorney, accountant, or business network.

There are many qualified Angel Investors in every city and town around the country—all you have to do is find out who they are … and then make your very best presentation to anyone you contact.

Just keep in mind that if all the investments by Angel Investors and Venture Capitalists were added together each year … the total would barely make a dent in the total startup money required by the 6+ million new full-time businesses that start up each year.

There are many ways to finance a new small business besides Angel Investors and VCs … it just takes a little digging to find them. You can get some help here.

How many of you have used either Angel Investors, or some alternative form of investment (equity) capital to start your business?

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What Venture Capitalists are Looking For

A recent study put out by the combined efforts of the University of St. Gallen in Switzerland, and the University of Utah concludes that Venture Capitalists around the world rely on social connections to introduce them to business deals, but they base their decisions on more important factors.

I have no idea how much money the above study cost (in time and/or money), but when throwing around terms like Bayesian Methodology, Hierarchical Bayes Procedure, Monte Carlo Markov Chain (MCMC) methods, and Metropolis-Hasting algorithm, you have to assume that a great deal of time was spent arriving at the same conclusions that entrepreneurs have known for quite some time.

Anyway, here are the two main conclusions that can be taken from the study:

First—You need to have an intermediary (can be an “event”) to either refer you and your Business Plan to a Venture Capitalist, or to introduce you directly to an influential member of a VC firm. A-list Venture Capitalists don’t pay much attention to unsolicited Business Plans that come in “over the transom”—there’s just way too many of them to ever get serious attention.

Second—Your Business Plan needs to specifically address the three main interests of Venture Capitalists:

  1. Potential Return. This is the number one interest of all A-list Venture Capitalists. If your Business Plan doesn’t provide a realistic 10 to 20 times the VC’s investment within 5 to 7 years, you likely don’t have a shot at venture capital.
  2. Founder’s Experience. If the founders of the business don’t have a track record, or an accomplished “platform” to dazzle the VCs, you also are far behind in the running for VC money.
  3. Market Readiness. You should have a “proven” product or service ready to hit the marketplace full force as soon as you receive VC money. Venture Capitalists don’t invest in “ideas” alone.

If either one of the above two major findings of the study are weak—the other one needs to be extremely strong. There are very few venture capital deals made each year (around 4,000/yr. in the U.S.), and they are only made to the businesses with the most convincing proposals.

Of course the above study only confirms what entrepreneurs have always known, but it is always good when academia catches up to the real world once in a while.

The take-away on all this is two-fold:

  1. Don’t bother shot-gunning your Business Plan to lists of Venture Capitalists—they won’t bother reading it. Get a personal introduction, or at least a referral. Otherwise you’re just wasting your time and the cost of postage.
  2. Make sure your Business Plan (it is really an “investment proposal,” but the SEC won’t allow you to call it that) measures up to the big three of VC interests: (1) Potential Return, (2) Founder’s Experience, and (3) Market Readiness.

If you can’t meet the above requirements—you’re not yet ready for venture capital, and you may need to seek alternative methods for financing your startup.

Are any of you looking for startup financing? If so, keep checking back as I’ll have more information on various ways to finance your small startup business.

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Equity Crowdfunding Coming! (?)

Crowdfunding—where anyone can list their special project or business on one of the crowdfunding websites and ask for “donations” in exchange for simple “rewards”— has exploded in recent years (524% per year).

But with funding limited to only donations and minor gifts, or “rewards,” it is nearly impossible to raise money for starting a business, conducting a very large project, or completing a serious expansion.

A major impediment to real funding for small businesses and projects is the Securities Act of 1933, which currently does not allow a business to offer for sale any equity of their business without registration with the U.S. Securities Exchange Commission (SEC), which is extremely expensive—or, by going through Venture Capitalists, or “accredited” Angel Investors.

An “accredited” investor is anyone making over $200,000 in each of the prior two years, or has a net worth over $1 million (excluding their home). This is only about 1% of the general population. (Interestingly, this is also the same group that President Obama wants to raise taxes on.)

However, all of that is supposed to change as a result of the Jumpstart Our Business Startups (JOBS) Act that became law on April 5, 2012.

This new law allows anyone to buy equity in a small business without having “accredited” status as an investor—with limitations. Under this new law, anyone with an income under $100,000 is allowed to take a maximum of a 5% interest per year—or a 10% interest for those who make over $100,000 per year.

The business is also limited to raising $1 million per year in this manner.

Sadly, the U.S. is far behind the rest of the world in the way we fund small businesses. For example: in the U.K. they not only openly allow equity crowdfunding, but they have the Enterprise Investment Scheme where anyone can invest in a non-registered business, or startup.

The U.K. even goes one step further by allowing income tax relief up to 30% of the amount invested when investing between £500 and £1 million. Quite a difference from the U.S. stand on investing in small business.

As you would expect here in the U.S., there are also opponents of the new law who are concerned that these new investments are too risky for the average American.

Of course, these same people totally ignore the unregulated lotteries that raise about $45 Billion ($150 per American household) annually—with odds of winning at about one in 175 million.

Apparently, it is o.k. for a person to spend all their income buying lottery tickets, but they are not allowed to invest in a small business.

Unfortunately, this new crowdfunding resource for equity capital won’t be available until after the SEC issues new regulations—and therein lays the problem.

The SEC moves at glacial speed (for example: the Dodd-Frank Act became law in July 2010 and the SEC had a deadline to complete the regulations by April 2011—and they are not done yet).

A greater fear is that when the regulations are completed, they will be so onerous that many small businesses will still not have ready access to equity capital. The SEC might just kill the attractiveness of the entire program.

It appears to me that heads should roll at the SEC, but in the meantime, if your business is looking (now, or possibly in the future) for equity capital, I suggest you contact your Congressman and Senator asking them to build a fire under the SEC—that you need equity capital to start providing some of the jobs that everyone is saying small business can provide.

Would equity capital, through Crowdfunding, help your business? Let us know if this is an important issue with you.

Funding For Startups

When talking about funding for startups, I continually find it interesting (and disheartening) that the business community so closely (exclusively?) associates “startups” with Venture Capital. In fact, a young entrepreneur recently told me that a business should not be called a “startup” until they begin searching for venture capital.

The Reality

That was a very naïve comment, and here’s why: According to the Kauffman Foundation, there were over 6.5 new businesses started in the U.S. during 2010. Also, according to PriceWaterhouseCoopers reports, there were 3,277 venture capital deals made during 2010.  Not very good odds.

So, where did the funding for startups come from to start the remainder of the 6.5 million new businesses?

Angel Investors

Certainly some financing came from Angel Investors, but their requirements are not that much different from the VCs. Angels usually precede VCs and get a company started before the VC becomes involved.

The data is elusive, but It appears that (certified) Angel investors may not have made substantially more deals than the VCs did. Even if they made 10 times as many deals as the VCs, that would only account for about one-half of one percent of the total startups for 2010.

Angel investors are actively coming together as “groups” that act on new venture deals as investing partners, just like the Venture Capitalists. The lone wolf angel investor is a dying breed.

Banks

Of course, no bank is going to provide funding for startups (other than, perhaps, a personal loan to the entrepreneur…if they have substantial collateral). There is also no indication that banks will begin more aggressive lending to businesses, especially small businesses, anytime in the foreseeable future.

Banks certainly are not the answer now, or any time soon.

SBA Loans

We need to remember that SBA loans are made by banks, not the government. SBA loans are only partially guaranteed by the government, and I have been told by many bankers that their SBA loans must meet the same borrower requirements as a non-SBA loan. Therefore, in reality, the SBA is not the answer either.

Grants

There is no such thing as a U.S. government grant available for the purpose of starting a for-profit company. There can be local “incentives” like tax postponement, subsidized property or facilities, etc., but finding grant money to start a for-profit business in the U.S. is like finding the Holy Grail.

While many of the economically emerging countries are offering strong incentives to entice American entrepreneurs to start businesses in their country, the U.S. seems paralyzed about doing anything to keep those businesses here, let alone expand our own business community.

Who’s Left?

Well, that still leaves something over 6 million new startup businesses without any realistic form of  outside funding. That means the primary sources of funding for startups available in the U.S. are: (1) the entrepreneur’s personal borrowing capacity, (2) family, and (3) friends.

Unfortunately, for nearly all of the over 6.5 million new U.S. businesses that will start up during 2011, the only investor decision that can be made is which family member or friend to approach first. Very sad.

How did you fund your startup business?

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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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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!