Need Money?

The private financial markets are dynamic and at times difficult to navigate. A report on the latest trends.

1 | 2 NEXT

Raising money may be one of the least appealing aspects of building a business. For most entrepreneurs, it involves a combination of begging, borrowing, and making countless PowerPoint presentations. And, of course, every investment comes with a price. Novel sources of funds have cropped up recently, sometimes bringing with them unusual conditions for making an investment. Deals are also being put together in new ways, and different industries are in fashion. Here are the trends that every entrepreneur should know.

For companies funded through the founder's assets: Plastic is more dangerous than ever

The means by which most entrepreneurs finance their companies have changed markedly in recent years. In 2000, fully half of all small businesses were relying on credit cards for working capital, according to a survey by the National Small Business Association. This year, only 11 percent of businesses were financed that way, according to a similar survey. What happened? The housing boom. Higher home values combined with low interest rates gave homeowning entrepreneurs easy access to inexpensive lines of credit.

As home prices plateau (and in some areas drop), however, it's likely that business owners will rediscover the power of plastic. But if you have financed a business this way in the past, beware: Credit cards come with new pitfalls. Interest rates obviously are higher. Card issuers have also been quietly adopting new billing tactics such as two-cycle billing, which tacks on interest between the purchase date and the billing statement. And President Bush last year signed a bankruptcy reform law that was lobbied for by credit card issuers. The law makes it more difficult to retire credit card debt in the event of a bankruptcy.

For start-ups seeking outside funding: Your time is now

Some good news. Venture capitalists are showing renewed interest in start-ups. Yes, mature companies received 80 percent of all venture capital investments in 2005, according to the National Venture Capital Association. But VC firms also invested $786 million in seed-stage companies, which often have only a founder with a concept. That's up from $295 million in 2002. Mark Heesen, president of the NVCA, which published the research, attributes the gain to the fact that many VCs have been raising new funds. Firms traditionally earmark a portion of new funds for seed-stage deals, he explains.

For companies raising between $2 million and $5 million: Find your angel (or consider a move to Albuquerque)

For years angel investors have invested alongside VCs and private equity firms in syndication deals. Lately, however, angel groups and larger investors have begun to use the same term sheet, says James Geshwiler, managing director of CommonAngels, a group in Boston. This closer working relationship between angels and institutional investors has driven more angel money into deals worth between $2 million and $5 million. Deals of this size accounted for 45 percent of all reported angel investments in 2005, up from 35 percent in 2004, according to the Center for Venture Research.

Some venture capitalists are concerned about hedge funds tromping on their turf.

Joining the angels and conventional VCs are state-sponsored venture capital funds. Forty-three states reported budget surpluses in the 2006 fiscal year, and many of them are taking the opportunity to plump up state-run funds. So far, 42 states have set aside at least $5.8 billion for their VC funds. States such as Maryland and New Mexico will sometimes invest directly in companies, but most states prefer to invest through regular VC funds, says Sue Strommer, head of the National Association of Seed and Venture Funds.

Eclipse Aviation, an Albuquerque company that makes small jets and counts Bill Gates among its investors, was one of the first companies to receive venture capital from the state of New Mexico. Vern Raburn, the founder of Eclipse, says the experience was not significantly different from dealing with a traditional VC. New Mexico never acts as a lead investor in a financing round, which means that another firm must commit more money to the deal, complete the due diligence, and set the valuation. But the fact that New Mexico was investing in his company "gave the other investors a lot of comfort," Raburn says. (For more on how states are helping entrepreneurs, see our report "Rating the Governors")

1 | 2 NEXT

Try a RISK-FREE Issue of Inc. Today!

Renew | Contact Us | Current Issue

Select Services