Obviously, I’m not a venture capitalist (we lawyers, don’t pretend to know what exactly a venture capitalist is looking for and what they will require before making an investment).  However, you start to get a fairly decent sense of what a VC won’t fund.  I’ll save that list for another post and another time…

So my general answer to that question about whether or not an entrepreneur could raise VC funds is: it depends. It depends on the team you’ve assembled, the technology itself, the market for your technology, the right timing, and a little bit of luck. And while that may be the case, if you believe Sam Altman, the founder of Loopt, “If you’ve got a good idea, market, and team, raising money won’t be your problem.”

So, what are the odds then?

The truth is, the “it depends” answer isn’t very satisfying to most people. Entrepreneurs want to know their chances.  In a prior post, I wrote about the VC “Fit” Test.  That is one way to gauge if you may be a good fit or not (although, again, lots of subjectivity there).  The other way to gauge interest is to sit down with a few partners at funds and see the reaction (but that means you can get those meetings or are far enough along for them to be truly interested).

So, what about some more data into the chances of an unnamed startup?  Well, anecdotal evidence suggests that between two and three percent of businesses seeking venture capital financing will ever receive institutional funding. The majority of these cases are because venture funding is not the right type of funding for the business (not passing the VC “Fit” Test….). Sean Wise looked further and interviewed a number of venture capitalists to find out where their deal flow came from and the sources of deal flow that had the highest probability of closing. While these are not scientific numbers, these figures should offer some insights into the way VCs see the sources of their deals.

What are the odds of getting a meeting with a VC firm based on:

• an unsolicited business plan submission? Approximately 1 out of 100.
• a solicitation from an unknown agent? Approximately 1 out of 50.
• direct contact from venture fairs, financing forums, and other industry events? Approximately 1 out of 15.
• referral from professionals with fund relationships (accountants, lawyers, and market dealers)? Approximately 1 out of 3.
• referral from current and future investors? Approximately 1 out of 2.
• referral from executives of a portfolio company in the VC’s fund or other stakeholder in the VC’s funds? Nearly 1 out of 1.

Even getting an initial face-to-face meeting with a venture capitalist only represents the first in a long series of events. An initial meeting will likely be followed by a second meeting, perhaps with other members of the venture firm. Due diligence, company visits, and meetings with other company management team members will be the next phase, with a formal presentation to the firm partners following what could be several months of discussions, meetings, and presentations. And, unfortunately for the companies, at each of these points in the transaction, the venture capital firm may find a reason not to continue the investment process with the company. The information from Sean Wise also suggests that getting a meeting with the venture capital firm is only the first step toward closing the deal.

What are the odds of a deal getting done based on a solicitation from:

• an unsolicited business plan submission? Approximately 1 out of 1000.
• a solicitation from an unknown agent? Approximately 1 out of 100.
• direct contact from venture fairs, financing forums, and other industry events? Approximately 1 out of 20 (much higher if the company wins the competition).
• referral from professionals with fund relationships (accountants, lawyers, and market dealers)? Approximately 1 out of 5.
• referral from current and future investors? Approximately 1 out of 3.
• referral from executive of a portfolio company in the VC’s fund or other stakeholder in the VC’s funds? Approximately 1 out of 3.

Keep in mind — these aren’t hard and fast statistics, many of these figures are based on research and discussions only.  So just because you get that referral from the CEO of a portfolio company, don’t start counting down the days until the wires will clear from your venture round.  Much more goes into the decision of whether or not to invest, and every case is different.

* Portions of this article are from my book What Every Engineer Should Know About Starting a High-Tech Business Venture, available now.

I recently had a terrific conversation with a soon-to-be entrepreneur.  He had pretty much everything set — a unique idea, the right set of skills, co-founders who would bring a nice mix of talent, enthusiasm, connections, etc.  If you asked me, this seemed like a pretty good start to a startup.

Then I asked the question — “So what are you guys doing for startup capital?”

A blank stare came back at me.  “Startup capital?  We don’t need any yet.  Well, I mean we’ll probably do an angel round or something… but we don’t need that for a while.”

Well… you may not think you need startup capital, but odds are nearly every business requires something to startup (more than just sweat equity of the founders).  The question isn’t whether you’ll need it (you will), but is how much (typical range is $15-75K) and where to find it (check the mirror).

What is “startup capital?“

Some people call this seed money; others call it startup capital or initial capital; and still others use terms like founder capital. The short of it is, that this cash represents what you needed that can’t be paid for with your sweat and your time.  Real cash expenses.

Unfortunately, what this promising entrepreneur I’d been speaking with failed to recognize is that it takes money to start a business — really nearly any business, even the most lean, bootstrapped business takes some cash to get it going.  And that isn’t the type money you raise from angels or the like.  This is real startup capital to buy things like office supplies, business cards, software, laptops, test equipment, licenses, paying for a developer or designer, etc.

How much startup capital does a business need?

Obviously, that depends — and it depends on what period of time we are talking about.  If you plan to bootstrap the entire way through, you may be talking one amount or if you are just trying to get setup and have a seed investor or angel investor lined up, then it could just be a month’s worth of startup costs.

In his book Entrepreneurs in High Technology, Edward Roberts interviewed entrepreneurs to help identify issues that face a startup in its first days.  One of those important items is startup capital.

Roberts’ research examined the amount of funds needed for the initial capital of the business and where startups had obtained those funds. Here is what his research found:

• Nearly 80% of those companies surveyed said they had needed less than $50,000 in initial capitalization,
• Nearly 48% needing less than $10,000

(Note: these figures are as of 1991; using the Consumer Price Index to adjust these figures to 2007, the numbers would be approximately $76,000 and $15,000, respectively)

How much should a founder plan on for startup capital?

According to the 2004 financing report from the Global Entrepreneurship Monitor, the average amount needed to start a business was $53,673. For businesses that were necessity-pushed (driven by a currently unmet need in the industry), the average startup only required $24,467. Depending on the industry and the specific growth plans, each business may require more or less to startup their business.

Where do founders get this startup capital?

According to the GEM report, more than 65% of the startup phase funding comes from personal savings, credit, and through informal investors such as family and friends. According to Roberts, 74% comes from founder savings.  In either case — the bulk of it needs to be accessible by founders through their savings, credit cards or other readily available sources.  Don’t expect an angel to magically fall from the sky and provide you this $15,000 to $75,000… think ahead to ensure your founder team has that available.

The perception may be that startups open their doors after receiving a big investment from an angel or a venture capitalist. However, this is far from the truth. In fact, it is very uncommon for a startup business to open its doors with venture capital funding in hand (fewer than 1 of 10,000 startups have VC money in the bank when they open for operations).

Understand what it will take to get the business going — including the money that will be needed before you ever see a dime from outside investors.  Do you have that money available?  Can you get it?  Will your husband or wife be okay with you depleting the savings account to get there?

Better to ask the questions before you start rather than realize that need after you have opened your doors…

]]> http://www.myhightechstartup.com/2009/05/29/startup-capital-do-you-have-enough-to-startup/feed/ 0 http://www.myhightechstartup.com/2009/01/16/obama-inauguration-what-does-it-mean-for-seattle-startups-part-i/ http://www.myhightechstartup.com/2009/01/16/obama-inauguration-what-does-it-mean-for-seattle-startups-part-i/#comments Fri, 16 Jan 2009 21:44:10 +0000 admin http://www.myhightechstartup.com/?p=154 On January 20, 2009, America will have a historic day — historic for many different reasons for people around the globe.  Like many of you, I’ve signed up for the CNN-Facebook viewing party (work productivity may hit lows only matched by the first round games of the NCAA men’s basketball tourney on Thursday and Friday).  As much as we can be excited about the inauguration — what comes next may be of real interest.

$1 Trillion Dollars…

Incoming President Barack Obama

And while this date will have substantial cultural significances, the Obama administration has promised a full-frontal attack on kick-starting the economy.  Estimates for the dollar value of the kick-start are huge — between $700 billion and $1 trillion.  (The Democratic House proposal floated a number of $825 billion). Numbers that size are hard to get your brain around… and so for most of us it is simply a number that is supposed to make capital start flowing again, stop the bloodletting of employees and get people excited about our economy again.

But, the reality is the Obama administration is planning substantial programs and tax relief that could reach startups and other technology companies here in Seattle (at least we all certainly hope so.)  Once the speeches end and DC begins to take down the grandstands, you’ll be hearing plenty about the American Recovery and Reinvestment Bill of 2009. The Obama White House believes this bill will create an additional 3 to 4 million jobs, get the credit markets moving, stabilize the housing market, and make transformational changes to our economy — with $275 billion in economic recovery tax cuts and $550 billion in targeted priority investments.

How does a startup get access to $550 billion?

Good question. $550 billion is a big number and, given the slowdowns in the economy, expect a government gold rush.  Many experts have predicted that there will be uptick in activity to solicit government agencies directly, to submit proposals to RFP requests, and to get access to various government loan programs. Whenever the government launches a program or a series of programs of this scope, there is always concern that unless you “know people” your business may never know these potential projects exist.   And, while that may be the case for some projects, in other cases there is a great deal of information available.

The first action for a small business or startup is to familiarize yourself with the government contracting system.  I previously posted some information on various government programs for startups and small businesses — and that should be a helpful place to start out hunting for resources.  The net is full of resources out there — some of which come with a fee and help guiding you through the process.  Others are purely informative.  But the important thing to note is that the process isn’t simple (think about how frustrating you’ve heard it is to submit an iPhone app to the AppStore, and then double or triple it — that could be what you are dealing with here).  So understanding the ins and outs is crucial.  And, if you aren’t a prime candidate for a direct contract with the government, remember that subcontracts can be just as valuable (and perhaps slightly less onerous… but only slightly).

What we don’t know is when these proposed projects from the Obama team will be posted or be available (obviously, until legislation is passed, these new programs won’t be available).  The incoming administration has been clear that the American public can expect heightened accountability for these new dollars — hard to know exactly what that means, but look for more direct oversight, reporting and more “strings” to be attached to the government dollars.

While we wait to see what will get funded and what will get cut in the Congressional process (which could take as little as a couple weeks or much longer depending on how nice everyone plays together), be prepared to hear lots of buzz words about the bill and its components.  In the meantime, if you think your business could be a good fit, figure out the sandbox you’ll need to play in to submit a proposal.

Here are couple sites to look to in order to understand the process:

• Federal Business Opportunities
• Small Business Administration – Office of Government Contracting
• Business Partner Network (source for vendor data for the Federal Government)

There are many more places for you to find education about these projects that should be coming soon.  Remember, the time to submit such proposals can be substantial.

Where will we see these dollars spent and what might ‘trickle down’?

To the extent your business can meet an RFP put out for a government entity, small businesses can and will be given priority for certain deals.  And, to the extent small businesses can’t meet the RFPs on their own, there are opportunities for subcontracting — with Seattle in a prime position to help with key IT, biotech and other resources.

Direct Funds. Let’s begin with the obvious — a substantial amount of that $550 billion is probably not going to ever make its way down to small- or medium-sized technology companies.  But, don’t be fooled — the Federal Government has actually put its money where its mouth is on the issue of promoting small businesses.  In 2006, small firms won $77 billion, or 22.8 percent, of a total of $340 billion in federal government contracts eligible for small business competition.

In addition, some of these funds may be directed to state or other types of organizations who will be responsible for handling the distribution and management of the projects.  Obama and his team are thinking creatively about getting this money into the economy in a hurry — so don’t be surprised to see state governments in action or other sources handling management of the projects.

Subcontracting. Many of the programs and projects will require subcontracts — and oftentimes these subcontracts are terrific opportunities for small businesses.  The SBA has a wealth of information on how priority can be given to small businesses.

Tax Relief and Loan Programs. The Obama administration has spoken about a number of programs designed to lower taxes on certain Americans and direct new low-interest loans.  This is probably one of the areas to expect the most wrangling over the coming weeks and days… but be aware that Obama and his team continue to state that this next amount of money isn’t going to the folks on Wall Street — it is going to Main Street.  Now if we only knew where Main Street was?

Next Post: Specific Spending Proposals in the ARR Bill of 2009

The next post on this subject will look more specifically at the areas the Obama team is targeting in its draft of the American Recovery and Reinvestment Bill of 2009.  In early drafts, the Obama team has laid out the following priorities:

• Clean, Efficient, American Energy
• Transforming our Economy with Science and Technology
• Modernizing Roads, Bridges, Transit and Waterways
• Education for the 21st Century
• Tax Cuts to Make Work Pay and Create Jobs
• Lowering Healthcare Costs
• Helping Workers Hurt by the Economy
• Saving Public Sector Jobs and Protect Vital Services

These all seem like interesting areas and may well have some applicability to Seattle-based businesses.  Even more interesting is that the Obama team has price tags on some specific projects which may help identify opportunities that could shortly be arriving.

I’ll lay out some of the key discussion points for each of these priorities and where money may be available for Seattle startups.  We have some details to help give us some insights.  Obviously, it is all speculative at this point, but it gives us a helpful idea of where to expect this nearly half a trillion dollars to be heading.  And hopefuly, that will make its way to the small businesses and startups… as long as they know where to find it.

]]> http://www.myhightechstartup.com/2009/01/16/obama-inauguration-what-does-it-mean-for-seattle-startups-part-i/feed/ 2 http://www.myhightechstartup.com/2009/01/07/where-angels-fly-finding-angel-investors-and-seed-financing-for-your-startup/ http://www.myhightechstartup.com/2009/01/07/where-angels-fly-finding-angel-investors-and-seed-financing-for-your-startup/#comments Thu, 08 Jan 2009 01:46:04 +0000 admin http://www.myhightechstartup.com/?p=120

Raising money is tough these days. But try asking for money from someone that just saw their portfolio value decline by twenty to forty percent in 2008. Now that is a tough assignment… and what is occurring more often these days as promising startups pitch to individual Angels or Angel associations.

If you plan to reach out to private individuals and contacts, or formal Angel groups, this post has some helpful information – including where to look and how to target your efforts.

We all know 2008 was a tough year for individuals that might be looking to invest in startups. So be aware that adding a risky startup to their portfolio may be hard to stomach for some individual investors. But smart investors know that now offers the opportunity to ‘buy low’ into many very promising startups that are in dire need of important money. Finding the right investor can be a win-win situation for you.

A bit about Angels…

Angel investors represent a crucial piece of the startup infrastructure. According to the Center for Venture Research at the University of New Hampshire and the MIT Entrepreneurship Center, more money is invested annually by angels (approximately $23 billion annually) than venture capital firms (approximately $21.9 billion annually). And so it goes without saying that looking to Angels for startup capital will continue to be crucial, even as money remains tight from other funding sources.

As you are probably aware, Angel Investors are simply individuals who back emerging entrepreneurial investors. (They supposedly get the name “Angels” from the people that used to anonymously give money to Broadway theater productions – known as angels for saving the production.) Generally, angels are willing to invest at an earlier stage of the business compared to VCs or other institutional monies, and will contribute money to help move the company to a stage where it can attract venture capital investment. Funding levels vary greatly, but usually range from $50,000 to $2 million. Oftentimes certain industries or regions will have groups of angels that meet together to listen to presentations of startup businesses to give angels opportunities to decide whether to invest in any of the businesses. Here in the Pacific Northwest, we have several of such associations that are discussed below.

Finding where Angels Gather

The Pacific Northwest is fortunate to have a number of excellent Angel Associations including Alliance of Angels – Seattle, WA, Bellingham Angel Group – Bellingham, WA, Boise Angel Alliance – Boise, ID, Keiretsu Forum – Seattle, WA Oregon Angel Fund – Portland, OR, Puget Sound Venture Club – Bellevue, WA, Seraph Capital Forum – Seattle, WA, Tacoma Angel Network – Tacoma, WA, and ZINO Society – Seattle, WA.  You can find a great deal of information on their websites and oftentimes these groups host sessions to prepare entrepreneurs and aid in preparation of materials required by the associations.  The odds to present your company can be steep — so don’t be surprised if you don’t make the cut.  But be prepared to ask how to improve your materials and resubmit when you may have improved your odds.

After you’ve checked out the familiar parties, you may consider using AngelSoft 3.0 to help find the right Angel Networks or find others in geographies outside of the Pacific Northwest (that could involve travel and may be a challenge, but if you have a connection or a reason to make it worthwhile, consider it). AngelSoft is a website with software that will help point you in the right direction, and for a $250 fee, you can use it to contact multiple angel associations. If you don’t want to pay the fee, then you’ll have access to up to three angel groups. The benefit is that, oftentimes, you can submit the same information rather than having to do multiple submissions to each Association. It is a helpful tool and can help you find targeted Angels too (for example, there are some Angels who specify they are interested in investing in energy-related startups).

In terms of working with Angel Associations, I’ll defer to the experts on this one. Rebecca Lovell of the Alliance of Angels has an excellent post on how to get on the good side (by staying off the bad side) of Angel investors. I will add the following observation which many entrepreneurs don’t realize – an Angel Association is just that: a group of individual investors. Remember that you’ll usually need to convince a number of individual Angels from any given Angel Association or Angel Associations to invest in your business. This isn’t a process whereby the Association votes and decides to depart with the group’s money to you. Presenting to the group is just the first step, with personal meetings with the interested investors following.  For the most part, these are individuals that meet together to listen to pitches but don’t always invest together (probably more accurately, seldom invest together).

Another important thing to note about Angel Associations is that it is helpful to already bring some investors or potential investors to the table before you meet with an Angel group. It is much more attractive to be able to say, “We’ve got five other individual investors that are investing and we are coming to you looking to fill out the round with another $150,000.”

And finally, remember that by flooding the inboxes of angel groups, you won’t win any points. Fit the angel groups into a broader fundraising strategy to maximize the chance of success.

Where else do those pesky Angels fly?

While many businesses find success in going through angel associations, oftentimes the best place to start your search for angel funds is to go to your (and your team’s) personal networks. Remember, Angels are just individual investors – so where better to start than people you already know and who already know you.

One strategy is to start by searching your current advisors, board members, etc. or to search for advisors or board members and try and turn those folks into investors in the business. Oftentimes those personal connections who are willing to invest can then help you further by working to leverage their networks to help pull in others or help you get some ‘ins’ at the angel associations.

Some people are cautious to get their friends or family or colleagues to invest. However, there are times when it makes a great deal of sense. If that is the case, perhaps you can find some peers who are also interested or involved in the industry, technology or space and tap them to be advisers and to contribute some angel capital. That may be a way to help raise additional startup funds.

Another strategy is to find individuals involved in the entrepreneurial community and target them. Let’s suppose you are only looking to raise $250,000, which is most likely too small of an amount for any venture capital fund. However, oftentimes individual venture capitalist may take an interest personally and be willing to invest on their own. Or you may find a successful entrepreneur looking for a new challenge that may take a personal interest in another startup.  So one approach is to do some research on a site like PWC MoneyTree (which is free) or to use one of the other sites that charge to see what VCs or individuals have invested in similar companies.

I like to encourage folks to start with MoneyTree, which is a great, free way to research recent investments in the space. Check out the MoneyTree “Custom Search” function. This search can be used to find out specific companies that received funding in the most recent quarter and their investors.

An example: Let’s say you are just starting an early stage company here in the Pacific Northwest focusing on the Media and Entertainment Industry. So, you would check out any first-stage investments in the Northwest in that Industry. Assuming you wanted to find out who had invested in a seed/startup financing of Northwest companies focusing on Media and Entertainment in the third quarter of 2008, simply input those parameters (Northwest, Early Stage/Seed, Media and Entertainment) and submit the report. The report would give you the following companies: TrackSimple, Inc. and Treemo, Inc. Reading further, you can find that Ignition and another undisclosed fund invested $2.8M into TrackSimple and JK&B Capital invested $500K into Treemo. Check out those investors and target them. Or connect with those companies to see where they focused their efforts. Or expand your search to find all Media and Entertainment investments in Seattle or all Early Stage/Seed investments in companies throughout the US.

Do some research on those folks and see if you can get any leads from there. Again, just setting up an informal or initial meeting with any of these guys may expand your network and lead you to an angel or other funding source. Remember, getting investors (be it angels or VCs) is a networking game. Continue to build your network of believers and the investment will ultimately come.

Good luck with fundraising efforts. If you are looking for seed/angel money, remember that you need to cast your net wide, involve the personal contacts of your team and advisors, and understand that the process may take time. But once you find someone to lead the round (a lead investor) oftentimes the process will start to come together much quicker.

Is our company a good fit for venture capital?

The harsh reality is, many business plans received by venture capital firms will be immediately rejected because the company is not a good “fit” for that venture fund or for venture capital financing in general. This could mean the company is serving a market that is too small or is a niche market. It could be that the technology has few barriers to entry. Or, it could be a company that will have fairly low gross margins.

But, in many of the cases, it doesn’t mean that the business isn’t a good business.  Rather, it most likely means the business isn’t a good fit for venture capital.

The reasons listed above represent just  a few of the important criteria in the venture capital marketplace.

So how do you know if you are a good fit for venture capital?  At the end of this post is the VC “Fit” Test, a tool I’ve developed that can help companies determine if they are a good fit and should spend the time raising funds now, or should wait for a better point to raise funds.  Use the tool to understand whether your company is ready to focus its fundraising efforts on venture capital.

Take the VC “Fit” Test to see if your company would be a good fit for venture capital investment. Keep in mind that this test is simply to gauge a company’s “fit” with a traditional VC model. Many companies may have a different model that fits the particular investment strategy or focus of certain venture firms. Therefore, this information should only be used as a guide to understand the initial perception you may receive from a traditional venture firm. And remember, these tend to be rules of thumb — many companies break the mold every day, so recognize that you should rely on your advisors, contacts, team members, and experience to determine the true “Fit” of your business for venture capital.

Historically not a Good Fit for Venture Capital…

Many very successful businesses or businesses with the potential for success do not fit the venture capital funding model. For example, a business plan to provide technology consulting services may not be a typical business model funded by venture capitalists.

Here are some examples of markets, products and technologies that tend not to be ‘fits’ for venture capital funding:

· A market such as retail, mining or banking, may not be a market the venture firm will invest in or has contacts in and knowledge of.

· A product or service that is highly technical, extremely complicated and difficult to explain to a lay person, or that the venture capitalist is unable to fully grasp may not be a technology that the venture capitalist is willing to try and convince his or her partners to invest in.

· A technology that will only serve a small niche and will involve an extensive process of education, selling and distribution may not have the risk-reward profile for a venture firm.

· A business designed to sell a low-cost product at a low margin, taking market share from the industry leader may not be a model that a venture firm will find fits its strategy.

In each of the cases above, it is not that the business is not a good idea or will not be a successful business. Instead, it is simply a failure to match the business profile of the company with the investment profile of the venture firm. Perhaps, some of these business concepts will eventually be funded by venture firms after they are established and better fit a firm investing in later-stage companies.

Companies may find that they are not a company that is a good fit for venture funding. In some cases, this will mean that the company’s model and goals do not align with the venture capital funding model. In other cases, a company will recognize that they need to attempt to grow the business, further develop the product or increase the experience level of the management team. In both cases, the company should focus their efforts on growing the business through other funding sources until the business more closely matches the business model funded by venture capital firms.

The VC “Fit” Test*

* This article is an excerpt from my book What Every Engineer Should Know About Starting a High-Tech Business Venture, available now.

Select 1 to 5 for each of the categories below. Total your score below.

1. Size of your Market:

2. Revenues in Five Years:

1	Under $10M
2	$10M to $20M
3	$20M to $35M
4	$35M to $50M
5	Over $50M

3. How much Investment do you Require Now?

1	Under $500K or Over $20M
2	$500K to $1M; $10M to $20M
3	$1M to $2M; $7.5M to $10M
4	$2M to $3M; $5M to $7.5M
5	$3M to $5M

4. Product Gross Margins:

1	Under 40%
2	40% to 50%
3	50% to 60%
4	60% to 70%
5	Over 70%

5. Industry:

1	Other
2	Consumer Products and Services; Retailing/Distribution; Healthcare Services
3	IT Services; Networking and Equipment; Computers and Peripherals
4	Industrial/Energy; Telecommunications; Semiconductors; Media and Entertainment
5	Software; Biotechnology; Medical Devices and Equipment

6. Location of Company:

1	Other
2	Within a 2 hour drive of any of below
3	Austin; Chicago; Denver; Philadelphia; San Diego; Seattle; Washington DC
4	Boston; New York City; Southern California
5	Silicon Valley

7. Management Team Business Experience & Success:

1	Very Low
2	Low
3	Medium
4	High
5	Very High

8. Costs to Bring the Product to Market:

(for example, Sales, Marketing, Distribution, Consumer Education, etc.)

9. How extensive are the barriers to entry you have?

(for example, intellectual property, proprietary information, lead to the game)

10. Current commitment to Business

(for example, full-time founders, office space, development products, angel investors)

Bonus Points (1 pt. for each):

• Former CEO
• Received VC Funding at Prior Company
• 1 pt. for every five people you know personally at any venture capital firm

TOTAL:

I’m sure I’m not saying anything surprising when I say that private money is hard to come by right now.  Angels have likely seen their net worth plummet from a declining stock market and decreasing real estate market.  VC money remains tough and not the approach for many startups anyways.  And, of course, you’d be bootstrapping if you could, but you can’t, so that is why you are looking, right?  So where should you look at a time like this?  Well, spend a few minutes digging around to see if you could qualify for any of the various government programs.

There are countless programs out there and going through them all would take forever, but I’ve listed a few valuable links to check out at the end of this post.  But think about SBIR, SBA, NSF, or countless other government acronyms that may offer you an opportunity to find money that isn’t available elsewhere.

One caveat — these programs may not be a good fit if the money needed overnight to keep the lights on or pay employees on Friday.  These applications can be lengthy, require lots of time and phone calls, and be worse than preparing your college applications.  But, remember this — the government continues to aid small businesses and if you are already battening down the hatches riding out the economic storm, now might be the time for some applications and waiting anyways.

A bit of background on a few government programs.

Federal and state governments offer grant, loan and technical assistance programs designed to promote emerging businesses. Competition for these forms of public sector funding is fierce, and the application process is oftentimes quite arduous. Additionally, the funds usually come with burdensome restrictions on what you can do with the money. Nevertheless, some startups effectively use government funds to advance their business development, so these funding sources shouldn’t be completely dismissed.

One quick point to make: the SBA does not make grants to small businesses directly — they are the arm of the federal government that aids small businesses.  SBA grants go to others who actually help deploy that money.  The SBA does provide backing for loans to small businesses — but those are sometimes difficult for some technology businesses.

Many federal agencies participate in the government’s Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs. The SBIR and STTR are funding programs designed to stimulate technological innovation and fulfill the research needs of the federal government. Businesses are required to meet several criteria to be eligible for grants under either program, including U.S. ownership, for-profit status, and restrictions on number of employees. The SBIR and STTR programs differ in two major ways. First, under the SBIR program, the principal investigator listed on the SBIR application must be employed by the small business at the time of the grant and for the duration of the project. Under the STTR program, there is no such employment requirement. Second, unlike the SBIR, the STTR program requires the small business to be engaged in a collaborative relationship with a non-profit research institution located in the U.S.

• For SBA loan guarantee programs (the SBA will not actually give you the loan, but will guarantee a loan made through a traditional commercial lender), there is not a maximum loan amount and companies are eligible for loan terms that can be up to 25 years. SBA loan guarantee applications tend to approve applicants where the founders have good credit scores, and strong business plan detailing the use of the proceeds from the loan, and evidence that the founder or founders have made personal financial investments.   In Washington state, check out the SBA Loan Fact Sheet or view the list of participating lenders.

• The SBA 504 loan program (sometimes called a “Development Loan”) is designed to assist small businesses with financing of fixed assets, including the purchase of buildings, land, and certain types of equipment. Private institutions will provide the financing for the assets through Certified Development Companies (also known as a CDC). Loans made under the 504 program are generally made at a fixed-rate, long-term basis. The way the Development Loan works is that the private lender institution will lend the company 50% of the total project, a CDC will lend 40% (guaranteed by the SBA), and the company will be responsible for the remaining 10% of the total project cost. The uses are somewhat limited – inventory, debt service, short-lived equipment and machinery aren’t eligible. However, for various projects including building, construction, and facility renovation or retrofitting, these programs will be an option.

• Companies in the importation and exportation business may be eligible for Import-Export Bank Programs, supported by the SBA. Loans for working capital of up to $1.1 million ($1.25 million if combined with an international trade loan) can be guaranteed by the SBA. This program is typically only available for U.S. companies that have been in business for one full year, operate at a profit, and do not exclusively rely on the loan to support the business operations.

Some federal agencies also run venture funding groups. Rather than awarding grants, these groups make investments in emerging businesses. For example, In-Q-Tel is a venture fund run by the CIA that invests in high-tech startups, typically that look to develop technology related to the intelligence community. These venture funds normally produce good returns, and approaching them may be easier than their private sector counterparts.

The US Government also has a preference program for small businesses, so you may be eligible for certain government contracts that are put out to bid. In 2006, small firms won $77 billion in government contracts, or 22.8 percent, of a total of $340 billion in federal government contracts eligible for small business competition.  Check out the SBA on Government Contracting that includes a guide to winning government contracts.

Many U.S. states also offer financial assistance and other support to new startups. These funding programs are usually run through specific agencies or departments based on the relevant subject matter. You should be particularly wary of state funding initiatives to encourage startups in areas where few succeed. Though free money is enticing, it certainly shouldn’t be considered free if it hamstrings your business by forcing you into an unsupportive location.

Here in Washington state, check out the Community, Trade and Economic Development organization that provides a guided search for services, grants and loans.  Also check out the Community and Financial Assistance Unit (CFA).  The Washington Small Business Development Center will provide some free services such as market data analysis, competitive analysis or help identify some sources of capital.  While not direct funding sources, oftentimes the SBDC will be able to guide you through the maze our there.

Where to start looking?

– Start at the SBA website and see what you can learn.

– Visit a Washington Small Business Development Center.

– Identify a federal agency grant program (for example, (1) creating software for defense-related applications, check out the DoD Small Business Programs, or (2) building a life sciences or medical devices company, check out the NIH SBIR programs).

– Visit SBIR Gateway which has a list of resources for SBIR awards.  — Building a company based on technology from a University or high-tech science, visit the National Science Foundation programs

Obviously, not every company is a perfect fit for government funding programs. But you won’t know until you try.  Visit the SBA local offices, meet with a SCORE mentor or just call the SBA helpline at 206-553-7310.  If you have licensed technology from a university, talk to the tech transfer office or professors who are often experts at the grant writing process.  You may have to dig to find someone to help guide you through the process (talk with a favorite college professor who may be a resource), but it may be a good program to consider.

Spend some time looking around (now is better than ever) and checking out the resources available online.  You may find you qualify for a U.S. Government-backed microloan or may find that your product or team would be eligible for the Government Contracting programs.  See what resources are available from a quick google search and you may wind up surprising yourself.

]]> http://www.myhightechstartup.com/2008/12/02/fundraising-in-a-down-economy-try-uncle-sam/feed/ 8 http://www.myhightechstartup.com/2008/09/22/to-bridge-or-not-to-bridge-seed-funding-strategies/ http://www.myhightechstartup.com/2008/09/22/to-bridge-or-not-to-bridge-seed-funding-strategies/#comments Mon, 22 Sep 2008 17:06:39 +0000 admin http://www.myhightechstartup.com/?p=60

This is an all too common question we get from management/directors of early-stage start-up companies. How should we structure our angel/seed investment.

Typically, this comes down to a choice between two approaches — a bridge (debt) round or a priced (equity) round. So how do you decide between the two?

Many early-stage investors lament the fact that valuations for early-stage business are often unrealistic (or even downright “crazy” to some investors). Deciding to do a “bridge” round removes the requirement to set a valuation on an early-stage business.

How can you determine if a bridge round is appropriate?

• Are you planning to raise additional funds from Venture Capital or other institutional investors?
• Are you planning to raise these funds in six to twelve months?
• Have you received positive inquiries from potential institutional investors?

If you answered ‘yes’ to each of these questions, a bridge round may be appropriate. Ultimately, a bridge round is an effective tool when it is a “bridge” to a later financing event. If you aren’t planning on such an event or are unlikely to reach it, then consider a priced round.

I advise most companies that intend to raise VC financing in the next 12 months to go with the bridge approach. Again, not always, but as a general rule of thumb. If there is less certainty about the likelihood (or even ability) then I say go with a priced round.

Founders will often ask “What do VCs prefer?”  Truthfully, it probably doesn’t matter either way for your future VC.  They are investing in the company based on the business rather than the cap table.  Make sure that if the bridge notes are convertible that they don’t have some crazy opt out provisions or some mechanism where the bridge investor can elect to receive cash rather than convert.  A VC doesn’t want a situation where they suddenly have to pay out a portion of the cash they just invested into your business back to some angel investor or your brother-in-law.  The key for a VC is a clean cap table without any hidden traps or odd structures.

Typical terms vary, but generally speaking we see something like 10-30% warrant coverage on the notes; or a conversion discount to the price of the Series A round also in that range. In each case, these numbers can be higher depending on the risk and stage of the company; or in other cases we see an escalating warrant/discount percentage as time goes on.

This approach saves you from having to worry about dilution until your Series A — and if you don’t reach the Series A round, then you agree to negotiate the equity conversion at that time.

The terms of a bridge loan are somewhat regional, so as a West Coast company you would likely fall somewhere in that space.