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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One More Roadblock for Small Business
Today the U.S. Senate is back at work, and one of their early agenda items is to work on the bill just passed by the House last week dealing with “carried interest.” This is pretty much a Wall Street term for some of their profits, and “carried interest” has always been taxed at the capital gains tax rate. The bill just passed by the House raises that tax rate from 15% today to about 35% on this profit.
Since this increased tax rate would apply to some Wall Street profits—who wouldn’t want to stick it to Wall Street? Unfortunately, this bill also includes Venture Capitalists in the mix. This means that “carried interest” (a portion of the profits taken from an IPO or merger) would be taxed at the higher rate, instead of at the capital gains rate.
If the bill becomes law, every Venture Capitalist will be taking a harder look at every potential investment, and will likely only invest in the most promising “cream-of-the-crop” deals. When factoring in additional expenses from higher taxes, VCs are not going to make any deals other than sure things.
Why should they? There are other places VCs can invest their fund money, e.g., hedge funds. Yes, hedge funds would also be taxed at the higher rate, but they also promise faster returns with less risk than founding businesses. Of course, hedge funds do not create new businesses or jobs.
I don’t know, maybe higher taxes on “carried interest” would be a fair and equitable thing—it has been discussed for many years in Washington. But could it be implemented at a worse possible time than right now?
The very politicians who proclaim that small business is the primary avenue to economic recovery for the U.S., turn right around and pass a bill that makes it harder for new businesses to start up and create new jobs. Venture-backed startups added over 13,000 new jobs in the first quarter of this year—why damage that kind of progress now?
VCs have lobbied to have their industry exempted from the bill, but of course the House members turned a deaf ear…and we’ll have to wait and see what the Senate does.
So, if anyone out there is working on an upcoming new business that will require venture capital funding—you had better get busy and let your Senator know that this new bill could make it much more difficult for you to start your new business. You may also want to let your Congressman know that they have likely jeopardized your chances at venture capital.
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Women in High-Tech
I recently read an article in the New York Times about women in the high-tech industry, particularly Silicon Valley. It was quite discouraging information, but it does give some insight into why the U.S. is falling so far behind the rest of the world in innovation and information sciences.
Here are some highlights from the article:
- Women own 40 percent of private businesses in the U.S., but create only 8 percent of venture-backed tech startups.
- Just 14 percent of Venture Capitalists are women.
- Women outnumber men at elite colleges, law schools, medical schools, and the overall workforce, but are noticeably scarce in the high-tech world.
- Only 18 percent of college students graduating with computer science degrees in 2008 were women—down from 37 percent in 1985.
- Only 1 percent of girls taking the SAT in 2009 said they wanted to major in computer or information sciences.
- Mixed-gender teams have produced technology patents that are cited 26 percent to 42 percent more often than the norm.
- Women have few role models in high-tech.
These are just a few of the key points presented in this illuminating article. I highly recommend the article, because it speaks directly to our country’s decline in innovation and loss of high-tech leadership.
The title of the article is Out of the Loop in Silicon Valley, by Claire Cain Miller. I included a link here.
A New Era for Mobile Phone Apps
With Friday’s launch of the new Apple iPhone 3GS, we now have a hand-held device that really gives app developers a platform to work with.
If any of you developers need investment money to further your app development efforts, check out this post I made back in February. The venture capital firm, Kleiner, Perkins, Caulfield and Byers is looking to invest in iPhone app developers.
On the other hand, CNN had an interesting poll on their news site today, where they asked the question, “Does your cell phone have the features you want?”
- 30% said, “Yes, it’s perfect.”
- 21% said, “No, I wish it had more stuff.”
- 49% said, “I just want it to ring.”
Has anyone tried to buy a mobile phone lately that just makes phone calls? I have, and there is practically nothing to chose from. With about half of all mobile phone users wanting a device that only makes phone calls, this is a very large—unserved—market. The folks who came up with the Jitterbug mobile phone apparently have this niche market all to themselves. It is too bad they do not yet have broad enough distribution.
Innovation does not demand making things more complicated—it takes real innovation to make things more simple.
Then again, maybe the innovators should check with customers first.
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.
Venture Capital–The Reality
Mainstream media, in its search for bad news, seems intent on trying to lead readers into thinking that Venture Capital today is all but non-existent…and that any entrepreneur who is looking for VC money is on a fool’s errand. However, let’s look at the reality of Venture Capital investments.
Obviously, there are fewer IPOs during the present turmoil and condition of the stock market, but this simply means that Later Stage companies will have to wait a while longer before cashing in on their big “payday.”
The good news is for startups. Investment in Seed Stage companies increased substantially in 2008, with a 19 percent jump from the prior year. There was also about the same investment in Early Stage companies during 2008 as there was in 2007.
Money invested in Clean Technology grew more than 50 percent in 2008, and investments in Internet-specific companies remained at about the same level as 2007. VC investments in the categories of Energy, Media and Entertainment, and IT Services grew during 2008, while several other categories remained about the same level as 2007.
It is true that; overall, the total amount of VC money invested was down about 8% in 2008–due largely to a decline in Later Stage and Expansion investments. This is likely due to everyone waiting out the stock market before they crank up the IPO machine again. Total number of deals in 2008 was only down about 4%.
So, with the President arranging for more capital to become available to loan to small businesses, Congress pumping up the economy, and Venture Capitalists continuing to invest at close to their normal rate, there should be no reason for entrepreneurs to put off starting a business, or growing a business. Put aside the fear and get on with it!
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