A piece of the action: Angel investors and venture capitalists can help your company grow but it may cost you.
IN AN IDEAL WORLD, BUSINESS OWNERS CAN GET THE capital they need from bank loans or their own savings. And as long as the debts are paid, business owners remain business owners--perhaps sole owners.
Unfortunately, the economy and the financial landscape haven't been ideal for awhile now. Bank loans and credit lines are harder to secure, especially for young companies. But even now, obtaining a cash infusion for your growing business isn't impossible--you just might have to give up some equity in order to get it.
"Most businesses start out with financing from the 'three Fs,'" says Terrence Hicks, vice president of the investment group of Philadelphia-based Ben Franklin Technology Partners of Southeastern Pennsylvania. "Money comes from the founder, friends, and family." Hicks, who is also co-founder of Minority Angel Investor Network, located in Philadelphia, says that if the business then effectively goes through that capital and shows that it has promise, angel investors may be interested. "Once a company has grown and needs more money than angel investors can provide, venture capital might become available," he adds.
Many pennies from heaven. That's the apparent progression at Parallel Computers Technology Inc., a software company in King of Prussia, Pennsylvania. "I first became aware of PCTI when I acted as a judge in a competition for emerging technology companies," says Timothy Reese, now the company's CEO. "At the time, PCTI had an idea, a patent, and the results of tests with customers." The software helps businesses keep track of customer transactions and thus avoid losing revenues. Reese, 44, says he did his due diligence, such as speaking directly to customers before jumping in headfirst. "I found out they were very pleased and I felt there was nothing out there like this company's software."
Reese, representing an angel group, arranged for financing in the "six-figure range" in early 2008 and he was brought in as CEO. "PCTI is a high potential partner with Microsoft," he adds. "Since then, we've added clients on three continents." Reese expects to seek $3 million to $5 million in venture capital within the next 18 months so that PCTI can approach its near-term goal of $30 million in revenues.
Can your small business expect to get divine assistance from angels in these hellish times.? "Angels are still investing," says Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire. "Our latest data cover the first half of 2008. More than 23,000 ventures received angel funding for a total of $12.4 billion, up 4.2% from the first half of 2007. However, angels are being more selective now: about 11% of companies presenting to angel groups received funding in the first half of 2008, down from 23% in 2005."
Double vision. Generally, an angel is an individual willing to provide personal funds to a business with growth potential. Angels or groups of angels often invest in young companies. By contrast, traditional venture capitalists form a pool and make larger investments in several later-stage companies, with a focus on high-technology businesses.
Although seed money usually comes from angels rather than venture capitalists, that's not always the case. Some community development venture capitalists, known as CDVCs, make early stage investments in companies located in low-income and distressed neighborhoods.
"Our members have a double bottom line," says Kerwin Tesdell, president of the Community Development Venture Capital Alliance in New York, an organization of CDVCs. "They want a significant financial return, but they're also willing to back young companies that can help communities by providing good jobs."
Indeed, Mark Wilson, 48, discovered the merits of community-oriented venture capital when he launched Ryla Inc, a provider of call center services in Kennesaw, Georgia. "We approached a community development venture capital fund in North Carolina," he recalls. "Not only did we have a good business plan, we offered to produce professional entry-level positions. This fund awarded us $700,000 so we could get started."
The CDVC's confidence has paid off: Ryla, funded in 2002, increased its full-time employees from 350 to 750 at the end last year. And operations provided enough cash flow so that the company did not have to seek more capital for another five years, when it raised $7 million in early 2007. "We received those funds from a conventional venture capital fund that liked our record of success," says Wilson. And even with the awarded capital, he maintains control of the company (51%). "It's very important for us," Wilson points out, "to maintain our status as a minority business enterprise." Revenues in 2007 were a little more than $17 million, and the company finished 2008 with $25 million."
Despite the current economic challenges, entrepreneurs may find that "venture capital is definitely open for business," according to Emily Mendell, a vice president at the National Venture Capital Association in Arlington, Virginia. "Venture capitalists are looking for ideas that will change how we work or live," she says. "However, venture capital isn't for every business owner. You have to be willing to sell the company or take it public in five to 10 years." And Mendell forewarns budding companies seeking such leverage that if you're looking for a long-term business that you can pass on to your kids, venture capitalists are not likely to be interested.
VENTURES RECEIVING ANGEL FUNDING TOTAL INVESTED APPLICANTS BACKED (FIRST HALF) 2008 23,100 $12.4 BILLION 1.0% 2007 57,120 $26.0 BILLION 14.0% 2006 51,000 $25.6 BILLION 20.1% 2005 49,500 $23.1 BILLION 23.0% 2004 48,000 $22.3 BILLION 18.5% SOURCE: CENTER FOR VENTURE RESEARCH
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|Author:||Korn, Donald Jay|
|Date:||Feb 1, 2009|
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