Continued from Part 2

“Seeking Financing” – a compilation of notes and resources from around the web

Finding the moolah
“Roughly speaking, investments break down into two forms: debt and equity. You take on debt when you borrow money from a lender, and pay interest on that investment. You are compelled to repay the money with interest over time. Or, you can take on an equity investment — in which you sell a portion of the company to an investor in return for cash or something else of value. Each source carries advantages and disadvantages. Consider them well before making choices, for finance decisions are hard to undo. It’s not enough to find lenders and investors; you have to pick the right ones. Try to find investors who bring more than cash to the table. Look for supporters who can help you with financial advice, technical assistance, or who can connect you with key customers. Seek patient capital from a sage who can listen to your problems over breakfast and set you straight by the time you reach the offices. ‘Capital raising should be an extending circle,’ says Scott Shaw, founder of the Austin Grill, a successful Tex-Mex restaurant in Washington, DC. He explains that you start small with an immediate group of investors who can help you directly. Then you gradually build on that platform, seeking larger amounts from people you come to meet and with whom you will probably have a more formal relationship. Shaw also counsels that you “listen to the capital markets.” They may be trying to tell you something about your venture. If you’re having trouble raising money, there may be a very good reason why. If you are going out to seek capital — and the associated advice — from people who may have more experience, it’s a good idea to listen to them! They may know something you don’t.”

Bank Loans

“SBA Express was launched in yet another effort to lessen the paperwork hassles attached to applying for a Small Business Administration-backed loan. Bank-qualified business owners can borrow up to $150,000 without going through the standard SBA application process and are guaranteed a loan decision within 36 hours. Since the loans are guaranteed by the government agency only at 50% of their face value, many of the 500 or so eligible “preferred” lenders (which include commercial banks and other financing institutions with good track records on their other SBA loans) have yet to sign on. To track down active lenders in your area, contact your SBA district office, or visit the agency’s Web site. SBA also offers normal loans and microloans through local banks. President Barack Obama signed legislation last week that will pump another $80 million of stimulus money into the Small Business Administration’s lending programs. That sum may not sound like much, but the SBA says this added funding will support nearly $3 billion in loans to America’s small businesses.”

“Community banks, the antithesis of all those huge financial institutions that are merging and acquiring themselves into the deal-making stratosphere, offer the best (and maybe the only) chance for many small or young companies to start building a banking relationship. While the small banks may have fewer products than the giants do, their advantage to entrepreneurs is their flexibility. To locate possible lenders in your region, contact the Independent Bankers Association of America, which can provide leads to more than 5,000 community banks. You can visit the association’s Web site, call the group at 800-422-8439, or reach it by E-mail.”

“National banks — the (self)chosen few is the way we like to think of that select group of national banks that do more than just talk about their interest in backing start-up companies. Their loan officers are out there–even in today’s chilly credit climate–aggressively launching new products and actually approving deals. Silicon Valley Bank perennially crops up on this list; so, increasingly, do Chase and Fleet Bank. (One caveat: companies with less than big-scale growth plans need not apply.) To tell if a big bank belongs to this limited group, look for new products that demonstrate a commitment to today’s credit challenges.”

“Asset-backed borrowing may be the only game in town for many entrepreneurial companies, as long as bankers keep buzzing about the need for “credit-risk premiums,” a “flight to quality,” and other euphemisms for reducing their risk. If that is the way your company must go, so be it. But don’t think in narrow terms. An asset-backed loan can be anything from a home-equity line of credit or an SBA deal backed up by your kids’ college-savings account, to those pricey, but ever-handy, transactions tied to accounts receivable, contracts, or inventory. A very good source of information is GE Capital’s Guide to Asset Based Lending. (Call 800-572-1838 to obtain a free copy.) You may want to skip the 6-page sales pitch about the company’s various business lines, but the 19-page glossary is a must-read.”

“Microloans, which typically are under $35k can make sense for certain situations. We recommend considering this early-stage option if a small infusion of capital could make a difference to your venture’s cash flow or growth-related activities.”

“Third-party loan guarantees typically require that a relative or close friend cosign a credit-line agreement when a company’s credit history (or that of its owner) leaves something to be desired. But with personal indebtedness significantly on the rise, entrepreneurs may have trouble finding among their nearest and dearest someone who is both willing to cosign and is also deemed creditworthy by prospective bankers.”

“A new breed of financing intermediary has stepped forward that will consider cosigning your corporate credit line for the right price (either a fixed fee or a percentage of the face value of the loan). Since these guarantors will be liable for any borrowing you can’t repay, expect a close evaluation of your financial credentials. Still, their standards are probably more flexible than a banker’s. For contacts within this relatively new profession, network through your accounting, legal, or financial advisers.”

Nonbank Creditors

“Credit cards have always been the mainstay of the small-business owner. But these days any entrepreneur who relies on his or her credit-card company for just, well, credit cards is walking around blindfolded. Some of the perks, like yet another free on-line news service for business owners, don’t exactly ring our bell. What we do like, though, is the range of unsecured credit-line alternatives offered by both Visa and American Express. If bankers slam the door in your face, contact all the major credit-card suppliers to compare prices and options. As you would with a bank, make sure you’ll have opportunities to increase your borrowing limit  once you’ve proved that your company is a good customer. If you don’t really care about the credit-card part of the equation, consider a conversation with Merrill Lynch, whose portfolio of small-business credit products looks good these days. We particularly like a working-capital revolving line of credit, WCMA Reducing Revolver Loan, that’s competitive with what most banks could–but wouldn’t–offer many fast-growing companies. Also you can consider tapping personal credit cards for your business financing needs as well.”

“On-line credit search engines are practically a dime a dozen. (OK, so we exaggerate. But so do many of them.) The best are the ones that guarantee confidentiality, don’t charge an up-front fee, and can point to successful results in hooking up companies like yours with legitimate lenders. One site that we like (www.getsmart.com) launched a business-financing section. It’s affiliated with 17 banking and nonbanking lenders, including American Express, Heller Financial, and First Union.”

Family & Friends

“Tapping personal ties to raise cash for a company that’s either too new or too small to get financing elsewhere is an age-old formula that still makes sense. But here’s one risk too big to ignore in today’s highly competitive capital marketplace: if you don’t follow professional standards in structuring and documenting “F&F” loans or equity arrangements, your sloppiness will likely come back to haunt you.vThat’s because if and when your company grows to the point at which it can credibly approach banks or professional investors for funds, their lawyers will examine your corporate and capitalization structure with a fine-tooth comb. Even in the best of times, the lenders would delay the closing of any deal until errors or inconsistencies got cleaned up. In today’s market that could mean you’d wind up losing opportunities altogether. Paying a lawyer now is a cheap way of avoiding problems later.”

These are good articles on the subject:

• http://www.entrepreneur.com/money/financing/loansfromfriendsandfamily/article51542.html
• http://www.nolo.com/legal-encyclopedia/article-29499.html

Private Equity

“Performance-oriented, flexible terms can make or break a deal in these risk-averse times, especially for a private-equity investor who is weighing the most attractive opportunities that have been around in years. One thing that can help lure investors is the so-called clawback technique. A financing deal starts off with one set of terms–your equity investor receives a certain percentage of stock in return for a specified capital investment–but those terms can shift, depending on how successful you are in meeting agreed-upon goals according to a fixed set of deadlines. “What I tell business owners all the time is ‘Who cares how much stock you give away going into the deal as long as you maintain control? If you can get a good chunk of it back based upon your performance results, that’s what matters,” says A. Gordon Tunstall, a financing consultant and intermediary in Tampa. ‘Meanwhile, these kinds of terms increase the comfort level of private investors in times like these.’ ”

“The wide world of the Internet still offers a mixed bag for the corporate seeker of capital. Once you start visiting financing Web sites (which seem to proliferate endlessly), you can find yourself in a black hole–unable to turn off the computer but also unable to come up with any cash. Still, cynical though we may be, we recommend that you check out some of the best sites, which offer business owners the chance to research a wide range of funding options. Among the sites we like is www.vfinance.com, which provides information on more than 200 venture-capital firms, as well as frequent news updates about the industry.”  The following websites are other valuable sources of information for finding venture capital and angel investment:

• http://www.gobignetwork.com/funding/
• http://angelsoft.net/
• http://www.inc.com/articles/2001/09/23461.html
• http://www.mycoplan.com/
• http://www.fundingpost.com/alt1/index.asp
• http://investor.fundinguniverse.com/
• http://www.go4funding.com/funding.aspx
• http://www.findthatmoney.com/index.php?file=index
• http://www.gaebler.com/venture-capital-firms.htm
• http://www.ladigitaldirectory.com
• http://www.entrepreneur.com/vc100/stage/early.html

Corporate Support / Partnerships

“Strategic partnerships aren’t just a much-talked-about trend; they’re the best alternative for many companies that find themselves either shut out of traditional financing deals or unwilling to swallow the equity valuations or interest charges required to make those deals happen. Cash infusions connected with strategic partnerships are usually much smaller than they might have been with a traditional financing deal (and sometimes investments aren’t a factor at all). When a partnership’s synergy clicks, however, the resulting growth can often yield far greater capital options later on.”

Networking/Connections

It’s important to tap as many connections as possible within your current network as well as grow your network.  In Greater LA, there are many groups that you can join on Facebook in order to get event invites and be able to network with group members.  I recommend joining the following as well as searching for other Facebook and LinkedIn groups.  I also recommend searching event calendars (e.g. on Mashable) and adding other tech / business related groups in other geographic markets.

1. Tech Coast Venture Network (http://www.tcvn.org/)
2. Digital LA (http://www.facebook.com/group.php?gid=8965717386)
3. Startup LA (http://www.facebook.com/group.php?gid=20956644014)
4. Black Card Circle (http://www.facebook.com/group.php?gid=4783092010)
5. Social Media Club (http://www.facebook.com/group.php?gid=18295985805)
6. Media 2.0 Workgroup (http://www.facebook.com/group.php?gid=2460411391)
7. Social Networking Professionals (http://www.facebook.com/group.php?gid=30068098851)
8. LATechConnect (http://www.facebook.com/group.php?gid=6104555993)
9. BlogWorld (http://www.facebook.com/group.php?gid=5607245325)
10. LA Mixers (http://www.facebook.com/group.php?gid=8731106939)
11. TechZulu (http://www.facebook.com/group.php?gid=12652861964)
12. Social Networking Conference (http://www.facebook.com/group.php?gid=25413307804)
13. Twiistup (http://www.facebook.com/group.php?gid=2438232599)
14. Web 2.0 (Entrepeneurs) (http://www.facebook.com/group.php?gid=2208499259)
15. Social Networking Industry Group (http://www.facebook.com/group.php?gid=25413307804)
16. LA Web Professionals Group (http://www.facebook.com/group.php?gid=108772512008)
17. San Diego Business LinkedIn (http://www.facebook.com/group.php?gid=58673085404&ref=search&sid=55700960.995457968..1&v=info)
18. San Diego Business Network (http://www.facebook.com/group.php?gid=36467713888&ref=search&sid=55700960.995457968..1)
19. Top 1000 Professionals of San Diego (http://www.facebook.com/group.php?gid=295949469082&ref=search&sid=55700960.995457968..1)
20. OC Investors (http://www.facebook.com/group.php?gid=43539340787&ref=search&sid=55700960.3741734922..1)

Events

There are quite a few events in the Southern California region to network and meet investors and people that know investors.  Obviously Silicon Valley and the Bay Area is a strong tech hub as well.  There are also valuable tech and business events in other tech cities like New York, Seattle, Vancouver, Las Vegas, etc… Attend as many as you can, at least one local event per month.  You must be vigilante in the beginning though to get out there and attend and try and meet the right people. There are local and national calendars and resources like the Mashable social networking event guide (http://mashable.com/category/events/).  Read top industry blogs like TechCrunch and Mashable and you can stay abreast of industry happenings.  There are social networking conferences and venture capital summits.  There is SXSW and Blog World Expo.  In LA, do’t forget Twiistup, Social Media Club and Digital LA events. The easiest way to get in the loop with regards to tech, social media, business and investor events is to do lots of Google searches, find well connected people on Facebook and see what events they attend or recommend, and keep tabs on event calendars.

Crowdfunding/Peerlending

“Crowdfunding/peerlending is a newer trend where you can raise money from other people.  Prosper.com and Kickstarter.com are good examples.  In one interesting crowdfunding example, “Like a homespun IPO, CatwalkGenius.com helps hoi polloi bankroll upstart fashion designers. British documentary filmmaker Franny Armstrong raised more than £450,000 ($815,000) to finance–and work full time on–The Age of Stupid, which she hopes will premiere at the Sundance Film Festival in January. People who gave 20 quid ($35) got a credit on the film’s website; those who gave £5,000 ($9,000) and up will get a percentage of the profits, if there are any.”  This logic would be interesting to consider for GD.  Perhaps pre-sell annual and lifetime memberships, newsletter spots, etc…?  Or having “founding members” or “contributing sponsors”?”

Investment Consultants

“There are many companies that act as investment consultants.  They help you package your concept, give you strategic advice and connect you with investors. Capital intermediaries have been around a long time, and we’re the first to admit that they’re a mixed bag. Still, a skillful intermediary with valuable contacts at a wide range of capital sources can be, simply, the best friend a business owner has. But do your homework. Talk to absolutely every businessperson you respect (including your team of advisers) and ask each one to recommend an intermediary who typically handles companies similar to yours in size and industry.vWhen you’ve generated a short list, ask each intermediary for 10 business references, including satisfied customers, bankers, lawyers, and so forth. Make sure the references include names you recognize (and don’t hesitate to check out any that strike you as dubious). We’d like to recommend that you stay away from intermediaries who charge up-front fees, since that’s a typical scam technique, but we won’t because there are some very credible and successful intermediaries who insist on them.”

Alumni

One option to consider is tapping into your Alumni network for investment.  Check with your local chapter, hit up homecoming, and/or ping your former professors and classmates.