Dr. Earl R. Smith II

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23 Responses to “What viable alternatives have you found to equity investment by VCs?”
1.
July 8th, 2007 at 6:56 pm e
Greg Odum: None
2.
July 8th, 2007 at 6:57 pm e
Barrie Harrop: master license our offer into selected countries,then bind these selected partners into performance related agreements,take royalities for our IP/systems.
VC’s take too much of management time,for very little value add,they are also moved on from their goals in taking risks with their clients capital,and now becoming almost leaders of last resort.
3.
July 8th, 2007 at 6:57 pm e
Marc Douglas: If you struggle to attract non VC investors then maybe its not the fault of the investors but that your not an investable proposition to them.
VC’s are prepared to take a punt so go figure………….
4.
July 8th, 2007 at 6:58 pm e
John Kwag: There are several new initiatives in mini-investments but still require equity investments albeit smaller than the nominal. From new initiatives like QuickStart from Charles River Ventures to Y Combinator to incubators run by quasi-governmental entities.
However I am not aware of any non-equity routes.
Links:
http://www.zyn.com/sbir/
http://www.acq.osd.mil/osbp/sbir/
http://www.nsf.gov/eng/iip/sbir/
In essence, it is still approaching some sort of VC or VC-like entity so…at the moment right off my head I cannot think of any alternative financing scheme that is not unethical.
Unethical and/or potentially hazardous options yes.
A Ponzi scheme would be one. CB’s. Loans…etc.
Equity funding however at the moment can’t be beat.
There is a government program called SBIR (Small Business Innovation Research Program) that does provide funding which is not equity based.
It is however difficult to navigate through ( from what I have heard)
This may be an avenue to go through.
Clarification added 3 months ago:
Let me clarify this…Multiple US government agencies have SBIR programs which grant untethered financial assistance to get product development going.
I have included multiple web resources to this ( the first one is a SBIR portal)
5.
July 8th, 2007 at 6:59 pm e
Richard Stump: prosper.com for small amonts of capital. The real change today is that bootstrapping is a real option for many businesses since most are not capital intensve
6.
July 8th, 2007 at 6:59 pm e
Steven Cairnduff: Heavy marketing and name recognition.
First off you make sure to get any and all government grants you can get your hands on. Also arrange with local counsels any cost cuts in rates/costs etc some are very welcoming of the idea as you may be likely to bring in more people to the area and raise the areas standing if you do well.
While gathering these funds and cost cuts make sure to get a mention in publications even if it’s just the local paper and business sections of a more prominent paper. Possibly try to get on the news as the next big thing for the local population. Remember it’s a start of your name branding.
Now it’s time to market online and in the areas of interest to your company. Trade shows are good, hand out flyers, business cards, arrange possible investment meetings but don’t make it seem like you need them and don’t push the idea, make it seem like you like them and you are doing them a favour. Call up the magazines of interest get a story done.
Once your company name or brand is out there you will find more people asking “Who are they?” It’s at this point the possible investors come to you to find out more. All you have to do is convince them your company is a good investment.
You definitely need someone that can talk to people and is charismatic to pull all this off. It’s a big marketing campaign and presentation is the key.
If this isn’t your thing try:
- Looking at possible joint ventures with other companies,
- Partnering,
- And of course Loans.
7.
July 8th, 2007 at 6:59 pm e
Matthew Levin: From small to big:
Micro-lending
Small Business Loans
Angel investors
Venture debt (i.e. Silicon Valley Bank)
8.
July 8th, 2007 at 7:00 pm e
Eric Standlee: Disclaimer: I work for a commercial factoring company
Commercial Factoring is a very viable alternative that’s been around since biblical times. It provides financing to growing companies.
1. Do you know any company in need of working capital?
2. Do you know companies which need money to meet payroll or to make tax deposits?
3. If they had more cash today could they grow their business?
4. Does their business ever have growth spikes that their bank is not willing to finance?
5. Has their bank refused to increase their line of credit?
6. Do you know anyone looking to acquire a competitor? They can fund the purchase partially with the assets of the company being acquired at the closing table.
7. Do you know any companies looking to not give up equity nor use long-term debt for short term solutions? Commercial factoring is short-term and can be used on a case by case basis.
Commercial factoring can accelerate their cash flow by funding on their accounts receivable and giving them immediate cash to meet their needs.
Keep in touch,
Eric Standlee
Prospered not to increase my standard of living
but to increase my standard of giving
http://www.AmericanPrudential.com/eric-standlee
http://www.linkedin.com/in/ericstandlee
Commit to the LORD whatever you do, and your plans will succeed.
Proverbs 16:2-4
Disclaimer: the company I work for provides this form of finance option.
9.
July 8th, 2007 at 7:00 pm e
Paul Viskovich: A couple of things.
Our state govt has invested in a tech/bio start-up 1:1 matching fund which co-invests with VC’s or angels.
Secondly we’ve rounded up the local angels, got them together with a few breakfasts and lunches (paid by the professional community), got them to buddy up and put them in touch with our local incubator for deal flow. The idea is to help syndicate deals.
10.
July 8th, 2007 at 7:01 pm e
Furqan Nazeeri: The best solution available is customer financing, i.e. sales. You’d be surprised how far you can get by asking customer to pre-pay contracts.
11.
July 8th, 2007 at 7:01 pm e
Lionel Spearman: Wow – great question. Answer in part depends on primary goal of owner of business. Of course all businesses strive and are purposed with making money (that is how we live) but is the purpose personal freedom and control or is it wealth generation regardless of control – this question determines the answer to type of funding. Of course there is family – though rare, bootstrapping (know it well), client revenue generation, strategic channel partners (depending on nature of types and deal), business lines of credit, friends, grants (depending on type of business), and there are other mechanisms – various zones, microloans, and almost as many options as there are creative people.
12.
July 8th, 2007 at 7:02 pm e
Timo Ruohomäki: The funding options naturally depend on what the cash is needed for. If you need equipment, use leasing options. If you need to buy 3rd party services, you should seriously have a look at your development plan and especially roadmap. A common mistake in software development is to aim too high and therefore it will take too long before the cash is coming in. Start marketing and sales with the concept and look for pilot customers, that are willing to get something new at 50% discount. Only focus on their requirements. This approach has two benefits: you can show revenue to banks (or VCs) and you will have something to sell.
The good thing in software and software related services is that now it is possible to do similar things than 5 years ago with only 10% of the budget. There are rapid application development methods, application servers and so on. Use them. The last thing you want to do is invent the wheel when having short of cash.
One important thing to notice is that in the very early stages the operations don’t necessarily require full day effort. Working half-time is a good option. You don’t need an office space before you will constantly have meetings with customers – in the early stages you can easily manage a year or two in home office or garage.
In the early stages it is essential to have a good strategy on when to let investors in. If you do this at the idea-stage, you will lose a lot of the shares. If it is anyhow possible to reach the beta stage with your own money and bank loan, do that. If the only thing you have ready when you negotiate with VC or business angel is business plan, then you are about to lose a significant part of shares. If however at that point you have the first pilot customers and somewhat working product, you are in much better position to negoatiate a better deal.
13.
July 8th, 2007 at 7:02 pm e
Kunal Ghosh: Many early stage companies should not be funded by ‘high risk capital” (VC’s included). The entrepreneur(s) should be in a position to put in seed capital, put together a proof of concept, demonstrate a pilot and then go for funding. This will act as a first level filter (what looks good in a business report, may not always attract the end customer), a demonstration of a proof of concept will allow the entrepreneurs to attract a wide band of investors who will then be willing to take the risk at a lower cost of capital. The easy access to high risk finance spurred on by the high-risk-high-return economics of PE, VC and Hedge funds have resulted in several entrepreneurs being pushed or going to the markets much earlier than required .. causing all around loss of capital and confidence .. Look through any VC, PE or any other high risk equity financiers portfolio. the number of hits to the number of misses are mind boggling …
14.
July 8th, 2007 at 7:03 pm e
Anand Babu Periasamy: take on what ever businesses that comes on your way, cut down expenses as much as possible, turn profitable
and survive till your product gets ready
15.
July 8th, 2007 at 7:03 pm e
Jeff Mesnik: First of all, you are an early stage company that can pay salaries, YOU HAVE SUCCEEDED! Congrats you should feel really good.
Now how do you grow?
Well their are many avenues for this without ever considering the investment, or the debt route.
First off, look towards your clients, and understand what their Quarter and Fiscal Cycles are. The politics of larger organizations tend to be spend the money or loose it. Some are so specific, that a division seemingly has a bank account and the first person to actually get the check cut wins. So work with any current customers understand what their cycles are and potential cash available for a quarter. Structure a deal that allows you to get more cash now, for perhaps a lower over all price tag.
Second part is dependent on your risk profile, and how much you truly know your business and where to get it. Growing a businesses can be like flying one of those stunt planes. Ya know during the show they start off at a certain high dive bomb down, picking up enough speed so that they are able to get their tires to hit the ground and then they go shooting back up into the sky.
Your bank balance is the ground. So spend targeting ad dollars hard and fast, and then hope that the return give you the lift before you hit the 0 balance number.
Lastly, if you do go out and try to get debt financing, put the home, and all assetts into your wifes name, get a homestead act, and keep your personal assetts as protected as possible.
My first comment is how we started our business, and funded phase two, which was the marketing spend.
I hope this is not too cryptic and is somewhat helpful.
16.
July 8th, 2007 at 7:04 pm e
Jim Soleymanlou: In many cases entrepreneurs seek an institutional VC round too early.
One should keep in mind that the earlier a VC comes in, the lower the valuation and the higher the equity stake they take away from you.
My advice is to use whatever you can to stretch the finances, using friends and family money until the model is proven and revenue is around the corner. Then seek an angel round. Angels are usually happy with convertible bonds to be converted at the first institutional round.
I’d be happy to answer specific questions if any.
17.
July 8th, 2007 at 7:04 pm e
Bruce Niven: 3Fs (friends, family & fools).
Angel investors
Listing on London AIM
Government grants (SBIR, STTR etc)
There are also a small number of finance companies such as Vencore which offer debt financing to early-stage companies. Often they will look for securitizable assets, but not always.
Factoring is also good for working capital when you’re in growth phase.
Strategic investors / corporate VCs. Often can be better than VCs in that they may be less concerned about valuation, but then there can be strings attached. Beware of having a major customer as an investor. However, often the corporate VC groups function more-or-less independently of the corporate parent in reality.
18.
July 8th, 2007 at 7:05 pm e
Bineet Ramrakha: You may want to look at what Konstantin just did at his start up jaxtr for an innovative method
VCs Aim to Out-Angel the Angels
http://www.businessweek.com/technology/content/apr2007/tc20070402_747117.htm?ca
Usually alternative funds may be found from
1) whats referred to as Family Friends & Fools (FFF)
2) Angels
3) Running a very tight ship may be another option but without some form of a marketing budget how do business get clients ?
Links:
http://www.primaworldwide.com
Bineet Ramrakha also suggests this expert on this topic:
Alex Gayl
19.
July 8th, 2007 at 7:05 pm e
Ajitesh Das: My experience says that you should use Angel, Venture leasing or CVC/partnership as long as possible to support your startup growth. This way you can maximize the value of your equity,
20.
July 8th, 2007 at 7:06 pm e
Robert Carsia: I’ve read these posts. Debt financing (yours), factoring (come on, might as well give the % to someone else). I’ve been CEO of five start-ups. What you need is a strategic plan (with financials). OK. That’s easy. Now, in this day, you need REVENUE and CUSTOMERS. Not many, but you need investors to know that your business model actually does work.
You do that, and if you still are not stupid, the angels and the equity will come…if you know where to go to pursue it. It’s not your Uncle Morty!
21.
July 8th, 2007 at 7:06 pm e
Jesse Domingo: Loans from lending organizations have been mentioned… but I see loans from family and friends should be more emphasized. We just have to have a time-table for launching/payback, the organization’s cycle… and an insight on the competitor’s (or so) moves. This calls for being more “proactive”.
Hope you do well.
This is TheGreatLight.
22.
July 8th, 2007 at 7:06 pm e
Alicia Castillo Holley: First identify ideal type of funding:
Debt/liability creates an obligation to pay principal and interest
Equity creates a reward emotionally (feel good about it) or financially (make more than low risk or zero risk)
Use debt if:
Look to the future: can you make constant payments to cover your debt?
Look at the present: do you have any collateral that can be used to leverage the amount you are requesting at a discount? (that’s the principal)
Look at the past: do you have a history of fulfilling your financial commitments?
Use equity if:
Look at the future: can you reward who believed in the business? are the equity holders satisfied with the reward system? (could be your parents or your investors)
Look at the past: do you have what it takes in drive and experience or can you create a team around it?
Look at the present: can they take the risk (look at what they have and what can they afford to risk).. and see beyond the money.. sometimes you don’t want to loose your image.
If you can’t raise capital in today’s economy, you can change your business model. Businesses don’t make decisions, people do. If you are smart about the uses of resources, curious about the development of your business, driven to put in a lot of energy, and humble to accept that you too make mistakes and need to change, you are on a better track.
23.
July 8th, 2007 at 7:07 pm e
Puja Jain: As others have mentioned there are many options(listed in order of difficulty in getting it and the route most people take) like
Family and Friends
Angel Investors
Government Grants if you qualify
Customer Financing
Supplier Financing
A/C recievable Factoring
Leasing
Venture Lending
Bank loans
However if you are look for large amount of money and some contacts/management help or consultations, you cannot help but end up at some VC’s doorstep. VC’s are specialised in the type and stage of start up they invest in. Thus it is very necessary to find the right type of VC, someone who operates in the field of your product and is ready fund a startup at early stage. The funding is normally based on four criterions
1)Product : consumer must need it and not want it.
2)Market : A thorough analysis of the market , competitors(don’t forget the substitutes), paying capability of the consumers and any sustainable advantages your model/product might have.
3) Team : Make sure that your team is well diversified in terms of capabilities .for example – A team that is comprised entirely out of tech people tend to ignore issues related to financing, sales and marketing and general administration.
4)A good business plan : You should have a short and good business plan supported by market research, that seems to have been well thought out , even the aspects that are not so favourable(you might not want to mention them at first meeting though) or may be problematic in future.Be very frank with your expectations(if you need any other help or advice other than the money).
Inspite of all this, if you are still having problems…try getting a feedback from the VC and thier suggestions. They are often happy to point out what would have made your proposition more attractive or if there is someone they know, who would be more suited to funding you.