August 26th, 2011 by Macy Stoneback
The Capital Saving and Raising at the Brink event held Monday, August 22, 2011 as part of the Forward Technology Festival was a success! Entrepreneurs, investors, government representatives, and others interacted and shared ideas in a collaborative forum. We put together a resource page for the event: http://alphatechcounsel.com/capital-saving-raising-2011.html
In the Capital Saving segment led by Troy Vosseller, attendees were divided into six teams, and each team collaborated to identify the ways in which they have saved capital in their businesses. Teams simultaneously entered their ideas in different tabs of a GoogleDocs workbook. Team captains pitched their team’s top two ideas, and attendees voted electronically on the top two ideas. The winning ideas were:
(1) Run contests for everything (from logo designs to product ideas)
(2) Get your customers, strategic partners, and others to pick up company expenses
Members of winning teams selected prizes from local startups, murfie.com, FlattCola, and Sconnie Nation. Many of the teams’ ideas are listed in the Team tabs in this GoogleDocs file: http://tinyurl.com/3h853a7.
The second segment of the event focused on Capital Raising. The session leader Matt Storms gave the attendees a choice of these topics to discuss, in addition to angel financings: founders financings, friends and family rounds, government and nonprofit funding and resources, and other topics such as incubators and venture debt. Matt raised questions on these topics and attendees shared information and their experiences and perspectives as well as their questions. Here is some of the advice raised by attendees:
- Develop Relationships. Raising capital and entering into strategic deals starts with developing relationships. Investors value the quality of the management usually more than the technology or business model itself. You may not know who is an accredited investor, but the well-established angel networks are a good place to start. It’s never too early to approach VCs, angels, or strategic partners, not to pitch them, but just to ask for advice and build relationships to lay the groundwork for potential deals, referrals, or leads later. A personal introduction to them through someone you know helps provide credibility. It can be surprising, the types of companies that large consumer companies are looking to acquire (e.g., software, social media, security). Generally, these types of companies prefer to be in contact with startups early, so they can help shape the direction of the business.
- Expand Search Regionally. In addition to looking for investors locally, expand your search to Chicago, the Twin Cities, and other areas in the region. Network at area events and meetings. Be prepared to answer what position local investors have taken with regard to your company, because the question will likely come up when searching for angel or venture capital money outside of your local area.
- Educate Yourself. Educate yourself on how to read your financial statements and understand the investors’ economics. Also, understand legal terms related to investments. Model out different scenarios with spreadsheets (e.g., liquidation preferences). You’ll be better equipped to discuss deal terms. As a couple people said, entrepreneurs should know as much about legal deal terms as their lawyers. How you fare at the end of the day has as much or more to do with the legal terms than your pre-money valuation. As one person mentioned in connection with the sale of the company, you don’t want to end up wearing a barrel.
- Investment Range and Terms. The amount of an angel investment can vary by type of business. It can be as low as $20,000 or as high as $2 million, if syndicated. Sometimes angel deals end up above $5 million, but that’s rare in our area. Attendees suggested that $200k – $250k for an early stage IT deal is typical, whereas the range is higher for other types of companies due to greater development costs. Go into a potential deal with angels knowing the terms you want — terms that are standard in the region and for your type of company and growth stage. There is typically less negotiating with angels if the proposed deals terms are within the range of what is normal. Contrast that with VCs, who will give you a term sheet. Drum up interest between multiple investors to increase your negotiating leverage.
- Act 255 Tax Credits. Apply early for Qualified New Business Venture status so future Wisconsin investors in your business can get the Act 255 25% income tax credits (assuming you meet the criteria). Currently, it can take 6 – 8 weeks to get certificated and must be in place before an investor is eligible to receive the credit. After your business plan is prepared, contact the Wisconsin Economic Development Corporation to see if your business meets the criteria and to discuss the application requirements. Attendees stressed that not getting approved for the Act 255 program is not an invalidation of your business model; it just means your business didn’t meet the program criteria. But, not meeting the criteria can affect your ability to raise capital locally.
- Government Programs. The Small Business Development Center and Wisconsin Entrepreneurs Network can help entrepreneurs tap into the federal well of money, and your regional development manager at the Wisconsin Economic Development Corporation can help you get in touch with state money. The application process, particularly for SBIR/STTR grants and loans, can be long and drawn out; it helps to stay in touch with the grant program manager. Madison Development Corporation offers venture debt to qualified Dane County businesses that have reached revenue stage, even if they have a negative cash flow. One attendee suggested that government funding should be supplemental to other sources of funding, and you have to be careful to maintain the focus of your business.
- Customer Funding. Customers can be a source of funding, as they may want to invest in order to secure a right to be first-to-market with your product (that may be an add-on to theirs). There were several in the audience that had done this, either receiving funding for their business or providing funding to others to enable them to expand. They also may enter into a long-term contract which provides a solid stream of revenue. Getting customer buy-in can provide validation to outside investors, as it demonstrates commercial interest.
The final segment of the program was an open mic session emcee’d by Jonathan Fritz. Eleven attendees each gave a 2-minute pitch on an idea, and the attendees asked questions and provided feedback. Ideas ran the gamut from tongue-in-cheek silly to potentially groundbreaking.
The Capital Saving and Raising at the Brink event was a success overall as attendees met new contacts, learned from each other, and had fun! Several people urged doing it again next year.
August 26th, 2011 by Macy Stoneback |