Tag Archives: alternative financing

A Video Primer on Crowdfunding

With all the new Crowdfunding websites being launched, as well as new regulations being released, this form of funding is becoming fairly complex and more difficult to understand.

Things will only become more complex when the equity investment by non-accredited investors is allowed sometime next year.

That’s why I was delighted when The Kauffman Foundation sent me a link to their video that discusses some of the “ins and outs” of Crowdfunding.

One of the best features of the video is the presentation of actual successful Crowdfunding projects. Of course, there are also a number of “takeaways” in the video for everyone.

Here is the video—provided by the Kauffman Foundation (best watched in full screen):

(email subscribers can view the video here)

Here are some of the issues covered in the video for anyone considering participating in today’s offerings:

  • How much should I ask for?
  • What are my chances of reaching my goal?
  • How many rewards should I offer?
  • What kind of rewards should I offer?
  • Why should I offer more choices?
  • How involved should my backers get?
  • How much work does it take to apply, and then follow-up after the project is funded?
  • Is Crowdfunding something I should even pursue?

So, if you are looking for startup, or expansion, money for your business, I highly recommend you watch the above video—and then put together your video “pitch.”

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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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