Big ideas need funding
Big ideas need funding
by Christine Van Dusen
Maybe you have big ideas, too. Big dreams. Big plans for your own business. But maybe you
also have a small bank account.
Most early-stage entrepreneurs need between $250,000 to $2 million to get their product to
market, establish sales channels and show momentum in advance of going to venture capitalists for
later-stage financing, says Stacey Anderson, general partner with Atlanta-based Monolith Capital
Partners, a new earlystage funding firm.
Anderson, like Noro-Moseley’s Kathy Harris, is one of the few in the venture capital
business. “It is an extremely tough environment for entrepreneurs seeking early-stage funding in
the Southeast,” she says. “We meet with entrepreneurs on a daily basis who have great ideas and
need funding to take their products and services to market. However, many of these entrepreneurs do
not have a sound strategy. .. because they are not business leaders. They are typically
technologists or operations people who have a great vision but a poor go-to-market strategy. And
without that, they have little chance of getting funded.”
Monolith typically deals with early-stage companies that need to bridge the gap between
friends and family capital and venture capital money.
“They’re tapped out of their own funds and don’t meet the venture capital’s stated
parameters,” she says. “We like a company with a unique, defensible idea that has an experienced
and knowledgeable entrepreneur/ management team that understands the industry in which he or she
competes. The solution the company offers has to solve a clear market need and have large revenue
and profit potential. Also, the market has to be ready to purchase what the company is selling.”
But carry on. Never fear, there are places to go for
the financing you need.
Here’s a look at the options:
Banks
When determining who to lend to, banks are looking for:
1. Character
How have you managed other loans? Do you have experience running the kind of business you
want to start? How good is your credit?
2. Cash flow/credit history
Do you have a business plan? Showing how you expect to generate revenue — and
eventually pay off your debt — is a key factor for banks. The lender also will conduct a full
credit analysis to assess whether you’ll be able to repay the loan.
3. Collateral
The lender wants to eliminate as much risk as is possible, so you will need to show
that you have more than enough collateral to cover the loan.
4. Capital
Do you have assets outside the business — stocks, real estate, etc. — that can be
turned into cash? It can be very difficult for a start-up to meet the capital requirements set
forth by a bank. That’s where the Small Business Administration can help.
5. Conditions
What are the market and economic conditions for your industry right now? Bankers
will take that into account, too.
The U.S. Small Business Administration
The U.S. Small Business Administration, a federal agency, typically doesn’t make
loans. But the SBA will guarantee loans, giving entrepreneurs a leg up when they go to the bank,
credit union or other financial institution. The SBA offers a wide variety of loan programs:
Basic 7(a) Loan Guaranty
This is the agency’s primary and most flexible business loan program, designed to help
qualified start-ups and existing small businesses obtain financing when they might not be eligible
for business loans through normal lending channels, according to sba.gov. Loan proceeds may be used
for many business purposes: working capital, machinery and equipment, furniture and fixtures, land
and building, and some debt refinancing. These loans are delivered through commercial lenders.
Certified Development Company,a 504 Loan Program
This provides long-term, fixed-rate financing for small businesses that want to acquire real
estate or equipment for expansion or modernization. These loans are delivered through Certified
Development Companies, which are private, nonprofit corporations that contribute to economic
development in their regions.
Microloan, a 7(m) Loan Program
This provides short-term loans of up to $35,000 to small businesses and not-for-profit,
child-care centers for working capital or the purchase of inventory, supplies, furniture, fixtures,
machinery and equipment. Proceeds cannot be used to pay existing debts or to purchase real estate,
according to sba.gov. The SBA makes or guarantees a loan to an intermediary, who in turn, makes the
microloan to the applicant. These organizations also provide management and technical assistance.
The loans are not guaranteed by the SBA. The microloan program is available in selected locations
in most states.
Loan Prequalification
This program allows business applicants to have their loan applications for $250,000 or less
analyzed and potentially sanctioned by the SBA before they are taken to lenders for consideration.
Grants
Some businesses may qualify for grant funding. Take a look at www.grants.gov, which
lists all federal government grant programs. If you’re buying a franchise, consider this: Many
municipalities and states have funding programs to underwrite the cost of a franchise if the
business will create jobs, according to
“Start Your Own Business: The Only Start-Up Book You’ll Ever Need” (Entrepreneur Press) by
Rieva Lesonsky and the editors of
Entrepreneur magazine. To find programs in your area, call the nearest Small Business
Development Center or economic development program.
Angels
Angel investors are typically individuals who provide capital for start-up and
expansion. These investors want a higher rate of return than many others, and often prefer to
participate in the management of the company. According to Andy Sack, a software entrepreneur who
writes for
entreworld.com, a
service of the Ewing Marion Kauffman Foundation, “angels are idiosyncratic. Rather than dealing
with institutions … you’re dealing with individuals — and their whims.”
Sack has created a checklist designed to improve your chances with angels.
- Write a presentation and a business plan.
- Identify potential investors. “Stay local,” Sack advises. “You won’t need to go beyond your geographic area to find pockets of people eager to invest.”
- Create a term sheet, which is a one-page outline of the investment opportunity, and specify a valuation. That’s your best guess at the company’s worth.
- Contact prospects and arrange meetings.
- Create excitement around the investment.
- Keep investors informed.
Venture capitalists typically step in after start-up to provide high-growth companies with big financing. In the first quarter of 2007, venture firms invested $579.3 million in companies in the southeastern United States, according to the PricewaterhouseCoopers/National Venture Capital Association’s Money Tree Report. Of a total 54 deals — with an average size of $10.7 million per deal — 10 were in the biotechnology industry and eight were in software. The most active venture capitalists in the Southeast include Advanced Technology Development Center of Atlanta, Cordova Ventures of Alpharetta, Fulcrum Ventures of Atlanta, Healthcare Capital Partners of Atlanta, Imlay Investments of Atlanta, Noro-Moseley Partners of Atlanta, Total Technology Ventures of Atlanta and the UPS Strategic Enterprise Fund, also based in Atlanta. Noro-Moseley, for one, invests in “high-growth companies from early to expansion stages,” according to the company’s Web site. The venture capital firm typically invests $3 million to $5 million in early-stage companies and $15 million for growing companies, as well as $20 million in follow-up financing.
“We invest in early-stage health care, technology and business services companies based in the southeastern United States,” says Kathy Harris, a partner with Noro-Moseley, which has made more than 150 investments since its founding in 1983. “We are looking for companies that are going after sizeable markets, typically a billion-dollar-plus, and growing at a very fast rate. We’re also looking for companies that are building products or services that go after a significant customer need, where the customer is saying, ‘I have to have that product.’ versus ‘Wouldn’t it be nice to have that product.’”
In addition, Noro-Moseley, like most venture capitalists firms, “wants a company that can build a substantial revenue base and be profitable as well,” Harris says. “And be attractive to a strategic acquirer or be an IPO candidate at some point.”
Facts
- The number of women-owned businesses with 100 or more employees grew by 43.9 percent in the last five years.
- Women-owned businesses that had $10 million or more in receipts grew by 36.8 percent. Source: Center for Women’s Business Research
- Nearly 10.4 million firms are owned by women, employing more than 12.8 million people, and
generating $1.9 trillion in sales.
- For the past two decades, majority women-owned firms have continued to grow at around two times the rate of all firms.
- Women of color own 50 % or more of the 2.4 million minority-owned firms, employ 1.6 million people, and generate $230 billion in sales.
- 67 percent of women business owners choose financial products and services based on their relationship and experience with a lender.
- Annual expenditures by women-owned enterprises for just four areas – information technology, telecommunications, human resources services and shipping – were estimated to be $103 billion in 2004.
- Women-owned businesses spend an estimated $546 billion annually on salaries and benefits.
- Despite the fact that 60 percent of Fortune 1000 corporations spend more than $1 billion with outside suppliers annually, women-owned businesses account for only 4 percent of this market share (2003).
- 15 percent of women-owned businesses with $1 million or more in revenue say their primary market is international.
- 79 percent of women business owners who intend to sell their business plan to retire. Only 22 percent plan to own a new business in the future.
