A comprehensive guide to financing a start-up or rapidly growing small business in the '90s.
A comprehensive guide to financing a start-up or rapidly growing small business in the '90s.
Today small-business-capital sources don't look the way they used to. From starting up to cashing out, here's a guide to the new players and changed rules in the money-raising game* * *
Some companies are able to sustain themselves and grow with little, if any, need for outside financing. By creatively holding the line on expenses or by tapping into the resources of suppliers and customers, they're able to get by with less money. But many business owners are finding that bootstrapping solutions can take them only so far. They're concluding that, whether it's to get their new company off the ground, expand to a new stage of growth, or cash out, there's no alternative to raising capital.
Back in the 1980s money was relatively easy to come by. A growing company with a good track record was wooed by bankers all over town. And if the business looked appealing enough, there were always the venture-capital firms, which were rolling in money. But as anyone who has been out seeking financing recently can attest, today's environment bears little resemblance to what was. Most banks are still licking the wounds from their days of aggressive lending and have shunned new loans in favor of cleaning up problems with their old customers. Those that are lending money are structuring deals with a lot less leverage (to give themselves a bigger margin of safety if forecasts go awry). And the venture capitalists? Well, a number of them are out of business, unable to attract new money based on their investment results.
With many of the old deal makers out of the picture -- or at least looking at financing with a different set of eyes -- we decided it was a good time to take a look at the new cast of characters. The sooner you understand who they are and what they're looking for, the better off you'll be.* * *
In a discussion of the galaxy of financial resources available to young companies, one myth dies especially hard: that commercial bankers have a fundamental interest in making loans to start-up businesses. True, a lot of bankers refrain from closing the door on owners of early-stage companies too abruptly. Many, in fact, will dutifully flip through your business plan and talk with you about what you need. But when the chips are down, you won't find many of them prepared to make business loans to companies younger than three or four years old. That's especially true today, with industry regulators monitoring banks so tightly. The loans banks do make (ostensibly to companies) are almost always heavily collateralized by homes and other personal assets.
Contrary to what many start-ups wish were true, that practice isn't about to change even if banks begin to loosen up and increase their lending over the months and years ahead. Bankers can't afford to act like venture capitalists, because of the way they're capitalized and regulated. While both bankers and venture capitalists deal in money, Alex Sheshunoff, president of Alex Sheshunoff Management Services, a consultant to banks in Austin, Tex., notes, "When a bank wins, it makes only 4% over its cost of money. And when it loses, it can lose everything, plus attorney's fees." So a banker is judged, first and foremost, on his or her ability to get the money back. Recession or no recession, credit crunch or not, the key questions for a banker are (1) what's the borrower's track record, and (2) if we lend the money, how will we be repaid? The typical young company owner's answers go a long way toward explaining why bankers are seldom keen about lending to early-stage businesses.
Since loans are so hard to get, start-up founders inevitably turn their attention to equity. And the first source that rushes to mind for most is venture capital. By reputation, venture capitalists are out pumping millions of dollars into hundreds of new businesses every year. But the reality is much tamer: The amount of new money in the hands of professional venture capitalists has fallen dramatically since 1987; and what money there is has gone mostly into older, more developed companies, where opportunities for strong returns appear brighter. During 1991, for example, venture-capital firms invested just $60 million (or less than 5% of their funds) in a mere 47 seed-stage companies, according to Venture Economics, publisher of Venture Capital Journal, in Newark, N.J. And their investment in more advanced start-ups -- companies looking for, say, marketing money to support new products -- wasn't a whole lot greater. Though venture capitalists may become bigger players in this market at some point, it's clear that their sights are on young companies with extraordinary growth prospects (that is, companies that have a good shot at being $40-million businesses in four or five years) and managers capable of fulfilling them. "Unless you're highly unusual, I wouldn't waste my time with venture capitalists," says Stanley E. Pratt, a general partner with Abbott Capital Management, in Needham, Mass., and formerly the publisher of Pratt's Guide to Venture Capital Sources. "I'd look for individuals."
Over the past few years more and more people have come to see private investors as the best source of equity for start-ups. Because that market is made up of everyone from parents and ex-roommates to distant business acquaintances who may have struck it rich (in Redmond, Wash., for example, an estimated 1,000 Microsoft employees are at least paper millionaires), nobody knows how big this pool of capital actually is. But a number of analysts see it as both wide and deep. William E. Wetzel, a business professor at the University of New Hampshire who has spent years researching the so-called angel market, figures it is anywhere from 5 to 10 times the size of the institutional venture-capital pool, putting it into the tens of billions of dollars. While some investors have been battered by the recession and soft real estate values, the potential for higher returns in today's low-interest-rate environment suggests there are plenty of opportunities for entrepreneurs in search of $50,000 to $500,000.
Even as this market gains public awareness, however, it remains highly fragmented and disorganized. In New England, Texas, and several other parts of the country, business groups and universities have in recent years attempted to create special database networks through which individuals with money can learn about nearby companies looking for cash. (See "Finding the Right Investor," page 7.) Recently, moreover, there's been talk of tying some of those networks together, enabling, say, a company in San Antonio to find an investor in Louisville. But as helpful as those resources have been (and continue to be) for a few dozen companies a year, most deals are done by private investors operating on their own, responding to what they like and what they hear about through their own personal and industry contacts. For money seekers, then, the challenge is to present well-defined opportunities to the right individuals.
When Terrye Clear and Bill Donahue went out looking for $100,000 for their new construction-equipment business in Pueblo, Colo., they made lists of everyone they knew who might be interested. They talked extensively to local businesspeople and former clients of the company for which they'd previously worked, and they walked them through projections of how they intended to build a profitable business. When they ran out of prospects, they started all over again. Only after working through more than 30 prospects did they manage to find six investors to put up the money.
While angels aim for better returns than they could get on a portfolio of blue-chip stocks, studies show that their return-on-investment targets tend to be somewhat lower than those of professional venture capitalists. Whereas professionals might shoot for as high as 60% to 70% annually on an early-stage start-up, most angels, notes Wetzel, would look for about 50% (and less where the risk is lower).
It also makes sense for a start-up company to target prospects who have an interest beyond economic gain. "In addition to the financial returns, angels often seek psychic income, too," explains David Gerhardt, director of the Texas Capital Network, in Austin. Based on their experience or background, many angels are looking to contribute more than capital. Gerhardt and others recommend seeking people who know something about your market or who are likely to get excited about what you're trying to achieve. A picket-fence business, for example, might have better luck with individuals who are active in the local historical association than with directors of the symphony. Besides being better able to connect with your company, such investors may also be able to contribute more as advisers and board members. For his part, Wetzel has noticed that many private investors own airplanes -- or at least have pilots' licenses -- suggesting, he says, that pilots (no matter what their formal occupation) identify strongly with entrepreneurs.
"In my experience," says Jean Wojtowicz, president of Cambridge Capital Management Corp., which operates several investment funds in Indianapolis, "there are two big hurdles facing all people looking for private investors: satisfying investors about the industry and about the management." To the extent that you focus on people who already know something about your business or who have confidence in you, she says, you'll make it easier to get the money you need.* * *
More Start-up Money
Small Business Administration lending programs. If your bank isn't willing to make a loan, ask your banker if it can do so using an SBA guarantee. While SBA loans can be burdensome for borrowers, a growing number of lenders are learning the ins and outs of SBA lending programs to offload their risk on loans to young companies.
Third-party guarantees. If you're confident you can afford the cost of debt, consider asking an investor to guarantee your loan from a bank. It will add to your cost of debt, but it may be worth it.
Strategic partnerships. By cutting an early deal with a customer or a supplier, you may not be able to raise much capital. But many companies are finding that such deals can help reduce out-of-pocket expenses for things like research and development and marketing.
State programs. Many state and local governments have seed funds to invest in local companies that have good prospects of generating jobs. Most target technology businesses, although some will invest more broadly.* * *
Money to Grow On
Given the fears and biases lenders and investors have about start-ups, you'd think it would be a lot easier for companies to raise money once they had a few years' experience under their belts and were growing and profitable. But since 1988 the options available to most businesses that fit that profile have narrowed considerably. Whether you're looking for equity or debt, plan on looking harder. And while there are some glimmers that things may improve, it's not clear how fast that will happen.
Take venture capital. During the early 1980s pension funds, insurance companies, and others flooded the venture-capital industry with billions of dollars. Much of that money went into later-stage expansions of technology companies, although the retail and health-care industries got their share as well. Yet, in part because of the sheer level of investment (more than $4 billion in 1987 alone), the overall returns fell far short of what investors expected. "There was that old problem of too much money chasing too few deals," says Bob Mast, vice-president of Venture Economics. Not surprisingly, the market cooled: by 1991 new funds going into venture-capital partnerships were off more than 70%, compared with their 1987 peak.
Fund-raising picked up somewhat in 1992, responding in part to a much-awaited flurry of initial public offerings. "But there hasn't been any landslide of new money coming in," says T. Bondurant French, a partner with Brinson Partners Inc. in Chicago, which helps large institutions select fund managers. For now at least, venture capitalists still favor later-stage investing in the hopes of becoming liquid sooner rather than later (through acquisition, perhaps, or by going public within three or four years at the most).
For most growing companies, it's worth noting that venture capital has always been a bit of a long shot, since fund managers aim for a 30% to 50% return on their equity on later-stage investments, which is more than most businesses can realistically imagine achieving. Today, however, the odds of getting venture money are even longer. Not only is there less money; nearly 60% of it is concentrated in a select group of funds with $100 million or more each. In these so-called megafunds, the cost structure strongly favors bigger investments. "Once you have that kind of money, it's very hard to parcel it out in $250,000 lumps," explains Jim Parsons, a general partner with RFE Investment Partners, a venture-capital firm in New Canaan, Conn. To be efficient, big funds like to invest at least $2 million to $3 million at once.
One thing to bear in mind: even though the market is heavily dominated by big funds, smaller funds with new money still go out looking for companies. Last year, for instance, Corning Partners, in Boston, which invests throughout New England, closed a new $8.5-million fund. While small funds have the same general growth targets as the large ones, they can afford to get into smaller deals. Corning, for example, aims to invest about $500,000 in each of its portfolio companies, although general partner Jack Stewart says it has gone as low as $100,000 for investments it likes. Even if such funds are few and far between, they're worth looking for. You can find out about them from accountants, bankers, or local investors.
Perhaps the best news to come along in the equity market for small companies is the recent legislation changing the structure of Small Business Investment Companies (SBICs). Historically, SBICs (venture-capital firms licensed by the Small Business Administration) have been able to augment their private capital by using government guarantees to borrow funds. Part of the problem, though, was that they had to make interest payments semiannually on the borrowed money, which made it difficult for them to make equity investments. But last summer Congress revamped the way SBICs can obtain financing through the government. In essence, instead of having to make regular interest payments on their debt, they'll be able to delay repayment until they begin liquidating their investments in companies. The upshot, says Patricia M. Cloherty, a general partner with Patricof & Co., a New York City venture-capital firm, is that "SBICs will be able to pursue long-term-investment strategies instead of lending strategies."
Pete McNeish, president of the National Association of Small Business Investment Companies, in Alexandria, Va., says a number of fund managers are already preparing to take advantage of those changes. How much new money will we see? There's no way of knowing, but McNeish and others think the changes will help SBICs raise hundreds of millions of new dollars from pension funds and other investors in the next few years. "It's really the biggest thing to happen to this industry in more than 30 years," he says.
As bleak as the current equity markets may be, for many small companies the debt picture is even grimmer. Since 1989 banks have been under pressure from regulators to reduce their exposure to potentially weak loans. The banking industry's response (most extreme in the Northeast and Southwest) has set off a three-year debate over whether we're in the midst of a regulator-inspired credit crunch or simply a recession in which banks are exercising proper restraint to protect themselves from losses. Notwithstanding all the finger pointing at regulators and bankers, most everyone now agrees that the basic criteria for would-be bank borrowers are a lot tighter than they were in the late 1980s. But there's less consensus about what companies can do about it and how quickly the pendulum will swing the other way.
Four years ago, if you ran an expanding and profitable company, you were the apple of your banker's eye. In most markets, banks would lend 80% of the value of accounts receivable and 50% on inventory. And if another bank showed some interest, you did even better, perhaps winding up with 90% on receivables and 60% on inventory. Those generous terms in essence waived the requirement for equity. But no bank offered them for very long. By 1990 most bankers were hitting the brakes in response to either rising loan problems among their own customers or fear of criticism from banking regulators, or both. Indeed, the same companies that had received those generous loan packages in 1988 were now seeing their advances cut to around 75% on receivables, and cut even further on inventory. For growing businesses, it meant shrinking -- or finding new equity. (Finding a new bank with better terms was rarely a possibility.) And those were the good customers, the ones who were meeting their forecasts, making money, and meeting their debt payments.
Those who experienced even the smallest hiccups -- dips in earnings or brief sales declines -- were often pushed to find new lenders, which was often easier said than done. A $15-million oil distributor in northern California, for instance, began looking for a new bank more than 20 months ago, after its regular bank became concerned when the company lost money. Although the business has since been able to cut its debt in half and show healthy profits, it's still been unable to find a bank. "Because of their recent losses, nobody wants them," says Bob Judson, president of Sierra Financial Group, in San Mateo, Calif., who's been advising the company.
Variations on that theme have echoed from coast to coast, and the data suggest that loan reductions have been substantial. From October 1991 to September 1992, commercial and industrial bank loans to U.S. businesses fell 4.2%, the biggest drop in a decade, according to the Federal Reserve.
Over the past year a lot of banks have gone out and raised new capital. But instead of expanding their portfolios of business loans, most have chosen to pour the money into risk-free government securities (where, by the way, the spread between their cost of funds and what they can earn has been at least a healthy 3%). That has enabled most banks to improve their profits and bolster their capital bases. So it's only natural to wonder, How long before banks will go out looking for growing companies again?
In selected areas, like eastern Pennsylvania, some say they've started already. The well-capitalized banks are beginning to call on the top-tier borrowers, and smaller community banks are becoming more active as well. For example, Traffax Traffic Network, of New Cumberland, Pa., which provides traffic reports to around 40 radio stations, applied last October for a $75,000 loan to expand its service into a broader market. To the surprise of the owner, Brian Freeman, Pennsylvania State Bank, in Camp Hill, Pa., approved the loan the next day.
But given the trauma many banks have gone through, most industry experts expect it will take months, maybe years, for most banks to feel confident about lending to growing businesses, no matter what the Clinton administration tries to do to stimulate lending. "It's not just getting the regulators to back off," explains Bert Ely, a banking-industry consultant in Alexandria, Va. "It's getting bankers to believe they've backed off. And that takes time."
So what does a company in need of money do in the meantime? Well, a lot of businesses are going to the finance companies. "If I were looking for money, that's where I'd start," says George M. Dawson, a San Antonio financial adviser with a background in banking. Unlike banks, which need to feel comfortable with a customer's balance sheet, finance companies (which are far less regulated and thus don't have to answer to the examiners) base their credit decisions on the quality of the assets (hence the term asset-based lender). For a growing business, a finance company would lend against the value of the receivables and, often, the finished inventory as well. (A factor, which is a particular type of asset-based lender, would actually buy the receivables.) Since 1986, as banks have tightened their lending policies, finance-company loans to businesses have soared from $85.1 billion to $156.1 billion, increasing their share of business loans from 14% to 19%.
Because of the demand, many of the big finance companies have seized the opportunity to boost the size of their minimum loans. In most communities, though, your accountant should be able to lead you to asset-based lenders willing to consider loans of less than $1 million. Be forewarned that you'll pay more than you'd pay at a bank. (As an example, at Fremont Financial Corp., in Santa Monica, Calif., which has nine offices around the country, rates begin at about 3% over prime and can be as high as 5% over prime.) But if you can afford the price, says Daniel Glick, a partner with Glick Morganstern, a corporate-finance-advisory firm in Woodland Hills, Calif., "finance companies can provide a lot of stability. They get to know you, and they do the things old-time bankers used to do."
More Money to Grow On
Angels. While angels are best known for being interested in straight equity, there's no standard investment formula. For instance, you might be able to get an individual to lend you money or to provide a letter of credit enabling you to borrow from a bank.
Private placements. Some regional investment firms have a proven ability to find private investors you may not find on your own. It's worth asking your accountant or lawyer for an introduction.
Customers and suppliers. While many people turn to customers and suppliers as a last resort, some companies seek out those sources early. If you can come up with an incentive to get your customers to pay sooner or get your suppliers to cut you more slack, you can get by with less outside financing.
Leasing. Leasing can be an attractive means of acquiring equipment without borrowing. Although the market has tightened, equipment makers with financing capabilities are still offering good terms to stimulate sales.
State programs. More than half the states have revolving loan funds for working capital and fixed-asset requirements at attractive rates and terms. And a number have loan-guarantee programs. Typically, they're coordinated by state or local economic-development officials.
In many ways you'd think this would be an opportune time to be selling your business. In communities across the country, thousands of middle-and upper-level managers from big companies (many with cash from early-retirement packages) are looking to find a place in the entrepreneurial economy. Rather than starting businesses, many hope to buy. But over the past couple of years the environment for purchasing companies has been ravaged by both a weak economy and a dearth of bank financing. However eager a company owner may be to sell, few buyers have been able to put together the amount of money that would satisfy sellers. While today's market isn't as bad as it was, it's still a challenging time to be a seller.
During 1987 and 1988 the owner of a healthy small company ready to cash out was sitting pretty. With a growing economy, almost any credible buyer could put together the financing. In those days a lot of banks were willing to lend seven or eight times equity (and if the banker was your friend, he or she would lend you the equity too). They were perfectly comfortable relying on the growth in the business to service the debt. And it wasn't just individuals buying businesses. Growth-minded companies, both domestic and foreign, were doing it too -- often with cash. With many offers priced at a generous 8 to 10 times earnings before interest and taxes, sellers weren't complaining. According to the Geneva Cos., a large small-company acquisition firm in Irvine, Calif., 1986 to 1988 was a peak period for selling.
But when the banks changed their tune and the economy sputtered, the seller's market fizzled. In 1990 many bidders couldn't get banks to lend even half of what they might have lent a year or two before; a lot of banks (especially those with loan problems) didn't want to look at buyouts. Since other investors weren't able to fill the gap, people who truly wanted to sell typically had to cut prices by a substantial sum or help buyers finance the purchase by taking back a note (which, if unsecured, put the seller at risk for part of the purchase price). "Given the circumstances, a lot of sellers decided to hold on," says Geneva president Robert L. Kuhn. Those who did sell received, on average, about 30% less than they would have gotten two years earlier.
So what about today? Well, the good news is that the market seems to have stabilized: sellers shouldn't expect prices as high as those four years ago (unless, of course, they operate in a hot area like environmental cleanup), but people who know the market say prices are up a bit from where they were. (A frequently mentioned benchmark: 4 to 6 times earnings before interest and taxes.) "Most good companies should be able to attract at least two serious bidders," notes Ken Smith, president of Massachusetts Business Development Corp., a private investment company in Boston. Yet with many banks still out of the market, financing remains tricky.
Those banks that are willing to consider buyout financing today are being much more careful. Not only are they dissecting the balance sheets (of both the business and the buyer), but "they also want to see a lot more money beneath them on the capital structure," says Kuhn. On a $4-million sale, for example, a bank today might want to lend only about $1.5 million. Whatever amount the buyer is able to come up with in equity, the seller would be forced to finance the rest (in the form of notes and other agreements) if he or she wants to go forward. (See "Who's Buying Companies," page 7.) "On deals of less than $5 million, it's rare that the seller doesn't take back a note for a part of the purchase price," Kuhn says.
Most people say the options available to sellers who want to get out quickly are limited by the funding. But if you have more time -- even a year or two -- you'll probably have more options, particularly if bank lending bounces back. One obvious step along the way to selling is to bring in a manager who will eventually buy you out. After a period of time, you might begin selling him or her some equity and create a formula for selling the rest (possibly at a valuation higher than today's). Another strategy is to set up an employee stock ownership plan (ESOP). While it would be difficult to get financing to transfer the entire business to employees in one fell swoop, Corey Rosen, director of the National Center for Employee Ownership, in Oakland, Calif., suggests "you can do it in pieces." Today, he says, many banks would do a loan to purchase maybe 30% of an owner's stock, provided it's a stable company. (The rest could be purchased over the next several years.) If necessary, moreover, the SBA can guarantee an ESOP loan up to $750,000.
And then there are the buyout funds. While many of the big-name buyout groups have focused on deals in the billions of dollars, a growing number of funds are on the lookout for small, often mundane companies with a potential for growth. The reason buyout professionals have shifted their sights downward toward smaller deals, says Elizabeth A. Squeri, executive editor of "Buyouts," a newsletter based in New York City, is that they aren't able to leverage their money the way they used to.
For example, one of the funds, Metapoint Partners, a $20-million fund in Peabody, Mass., targets businesses with low-tech industrial products. "We're looking for situations where the owner may be getting older," says general partner Keith Shaughnessy. "He doesn't want to bet the ranch -- he wants to pull some money out." (Metapoint's limited partners are current or retired senior executives with Fortune 500 companies and help evaluate the prospects and sit on boards.)
In a similar vein, the Legacy Fund, in Washington, D.C., buys minority stakes and leaves it up to owners to decide how long they wish to remain active in the business. "We'll start with a 25% to 40% share," says president Jon Ledecky, "and the whole idea is to build value and then do an initial public offering or sell to a competitor within five years." Last year, for example, Legacy bought 25% of Washington Inc., a special-events production company, in a transaction valued at $1.5 million. Ledecky and others anticipate that in future years, well-capitalized SBICs will become increasingly interested in these sorts of transactions.
Once you've decided to pursue the sale of your business, it's worthwhile to talk to reputable investment brokers in your area, as well as accountants, bankers, and other professionals. "You don't have to wait for people to come to you," says Cambridge Capital's Wojtowicz. "We all have our lists of potential buyers." Assuming you can work out the details of the sale, you'll have a whole list of possibilities: there's always the beach; there are those worthy start-ups looking for an angel; or you may just want to start all over again yourself.
More Exit Money
Strategic alliances. Teaming up with a company on, say, manufacturing or marketing can be a good way to get to know a potential acquirer. If and when you're ready to sell out, there's a good chance that, in light of the synergy you've developed, your partner will pay more than other bidders.
Selling without property. Instead of selling a company complete with all its assets, one way to put prices within reach of buyers is to hold on to property and equipment and lease them to the buyer with an option to purchase. That would cut the buyer's current capital requirements and give you a stream of income until you sell the assets.
Foreign buyers. The appetite of European and Japanese buyers for U.S. acquisitions has fallen substantially since the late 1980s. But many people think foreign buyers will come back into the market in the next couple of years.
A GLOSSARY OF MONEY TERMS
Angel: A slang term for an individual investor who is willing to provide money and support to a start-up or an expanding company, usually in exchange for an equity interest.
Asset-based loan: Debt that is tied to a business's accounts receivable, inventory, or other assets, according to a formula. If the borrower is unable to pay the loan with cash flow from the business, the lender can seize the assets.
Buyout fund: A pool of money raised from investors to supply the equity or subordinated debt needed to buy companies.
Equity: Capital that entitles an investor to an ownership interest in the company, but without any guaranteed return or protection (in contrast to debt).
Factor: A lender that specializes in buying a company's accounts receivable and then advancing cash to the company; instead of looking at the borrower's credit, factors look at the credit of the borrower's customers (and usually do their own collecting).
Mezzanine lender: A lender often used in buyouts to give banks an additional layer of protection (between equity and bank debt) in the event of a business failure. In exchange for taking more risk, mezzanine lenders earn higher interest and, often, options to buy equity.
Seed money: Usually, the earliest funding a business needs to complete its research-and-development phase before delivery of the product or service.
Seller's note: The portion of financing a company owner provides the buyer, often necessary to complete a sale.
Senior debt: Typically refers to a business's loans from a bank; in the event of a liquidation, the bank's interests generally have seniority over all other financial interests.
Subordinated debt: Refers to nonbank debt, which is by definition less secure than bank (or senior) debt. To attract lenders, borrowers often give subordinated lenders rights to convert their debt to equity.
WHO'S BUYING COMPANIES
With revenues of less than $3 million:
Public companies 28
Investment groups 17
Private companies 11
With revenues of $3 million to $10 million:
Investment groups 29%
Public companies 21
Private companies 14
Foreign companies 10
With revenues of more than $10 million:
Investment groups 46%
Foreign companies 18
Private companies 14
Public companies 17
FINDING THE RIGHT INVESTOR
One way for company owners to link up with like-minded investors is through computer-based networks, which have cropped up in many parts of the country over the past few years. Subscribers, both companies and investors, usually pay a fee for the service; investors check off the sorts of deals they're interested in, and the computer searches for companies that meet the criteria.
Network served listing fee
Georgia Capital Network, Georgia $75/ yearAtlanta; 404-894-5344
Kentucky Investment Capital National NoneNetwork, Frankfort, Ky.; 502-564-4252
Mid-Atlantic Investment Network, Mostly $35/yearCollege Park, Md.; 301-405-2144 mid-Atlantic
Northwest Capital Network, Oregon $100/yearPortland, Oreg.; 503-282-6273
Pacific Venture Capital Network, California $200/ Irvine, Calif.; 714-856-8366 6 months
Private Investor Network, South $100/ Aiken, S.C.; 803-648-6851 Carolina year
Texas Capital Network, National $350/yearAustin; 512-794-9398
Technology Capital Network, Mostly $250/ Cambridge, Mass.; 617-253-7163 Northeast 6 months
Venture Capital Network of Minnesota $100/ Minnesota, St. Paul, Minn.; 6 months612-223-8663
Washington Investment Network, Washington NoneSeattle; 206-464-6282 State
THE FIVE QUESTIONS EVERY MONEY SOURCE ASKS
Because the competition for financing is so fierce, don't even think about approaching lenders or investors unless you've done your homework. Each money source, of course, has his or her own list of favorite areas to probe. But here are some of the basic questions all will want you to answer:
How much money do you need? Instead of being coy, financial people say, it's important to be specific about the amount of money you're seeking. Saying how much you need helps set a framework for the discussion and helps show how well you understand your business. Indeed, some people say if you can't provide a figure, you're not ready to ask for money.
What do you plan to use it for? Lenders and investors will always want to know how you plan to use their money. Do you need it for working capital? For marketing? Or is it to buy out your partner? Different sources have different biases and different tolerances for risk. Your answer will help reveal your priorities and your approach to the business.
How will this money improve the business? Nobody wants to pour money into a bottomless pit. Lenders and investors want to see how their loan or equity lowers your costs, expands your capability, and moves you closer to being self-sustaining. If you're not able to provide credible cash-flow projections showing this, it will be hard to drum up serious interest.
How are you going to pay it back? Obviously, this is of paramount concern to banks these days. The first thing bankers want to understand is how you can pay off the loan from cash flow. (They'll ask you to pledge collateral -- usually business or personal assets -- but only as a secondary source.) While equity investors aren't asking for the same level of predictability, they'll still want to hear your thoughts on how -- and when -- they might become liquid.
If Plan A doesn't work, what's your backup plan? If the business runs into trouble, banks and other lenders will attempt to recover their money by liquidating the collateral. But equity investors won't have that alternative. For them, the big concern is, What if you need more money? The more you can show you have other options for generating revenues and financing, the better off you'll be.
THE MONEY RAISER'S BOOKSHELF
Who are the various sources of financing, and how do they operate? If you want to expand your knowledge of how to get more money for your company, here's a sampling of books worth checking out. Many are available at public libraries and business schools.
Borrowing for Your Business, by George M. Dawson (Upstart Publishing, Dover, N.H., 800-235-8866, 1991, $19.95). A no-nonsense guide to how bankers evaluate small companies, written by a former banker.
Directory of Buyout Financing Sources, edited by Ted Weissberg and Judith Grover Lizardi (SDC Publishing, New York City, 212-952-7060, 1992, $195). A listing of names and addresses of hundreds of firms that have provided debt or equity in buyouts.
The Entrepreneur's Guide to Preparing a Winning Business Plan and Raising Venture Capital, by W. Keith Schilit (Prentice Hall, Englewood Cliffs, N.J., 201-767-5937, 1990, $26.95). An excellent workbook for developing a business plan; also has an appendix containing a state-by-state listing of venture-capital firms.
Handbook for Raising Capital, edited by L. Chimerine, R. Cushman, and H. Ross (Dow Jones-Irwin, Homewood, Ill., 800-634-3961, 1987, $75). While parts of it need updating, a book loaded with good information on dealing with banks, finance companies, private investors, and venture capitalists.
Money Sources for Small Business, by William Alarid (Puma Publishing, Santa Maria, Calif., 800-255-5730, extension 110, 1991, $19.95). A listing of informal venture-capital groups scattered around the country as well as state and local investment programs.
Survey of Seed Capital, edited by Richard T. Meyer (Emory Business School, Atlanta, 404-727-4614, 1991, $22). A listing of more than 70 seed funds and an analysis of their investment criteria and performance.