Funding Feeding Frenzy

The Funding Feeding Frenzy is the place to be for CEOs and founders of fast growing companies to get connected with a group of investors who just may be waiting to sink their teeth into their winning idea. For business owners raising capital, this is an opportunity that cannot be missed. The Funding Feeding Frenzy is a unique opportunity to network with those ready to recognize the potential their company holds. Attendance at this event could be a tremendous step forward in securing the funding needed to rapidly grow their business.

Each company will present to a panel (including angel investors, private equity investors and venture capitalist) whose investing interests match the company’s profile. The Funding Feeding Frenzy is the ideal opportunity to snag investors who are ready to back growing companies.

use discount code LENBLAND

For more information about the Funding Feeding Frenzy, please visit www.FundingFeedingFrenzy.com

See you on May 4th!

Sign up now and use discount code LENBLAND http://fundingfeedingfrenzy.com/

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Are you taking advantage of available state and federal programs? Several Midwest states are offering angel investment credits.

The Illinois Angel Investment Credit program offers tax credits for businesses and individuals who make an investment in one of Illinois’ innovative, qualified new business ventures. Investments must encourage job growth and expand capital investment in the state. Tax credits to qualifying firms and individuals will be in the amount equal to 25% of their investment (up to $2M) made directly into a qualified new business venture.

Inc Magazine had a good article on How to Get Financing When Banks Won’t Lend.  They highlighted several good methods for raising capital for an early stage business including getting customer financing.  This is the number one preferred method for companies raising capital.  It looks especially good for follow on angel or VC investors.

They also highlighted small corporation offering registrations (SCOR) through a direct public offering (DPO).  47 states allow these types of offerings. The SEC, through Regulation A permits unregistered public-offerings of up to $5 million by a small business in a 12-month period.  Illinois and many other states allow SCOR offerings on the Internet.  Generally, investors must be in the same state.  However, the Midwest Region allows simultaneous listing with a single offering in 10 states.

Therefore, while the SEC restricts the offering of securities on the Internet for their Regulation D private filing exemption, Regulation A may enable your company to post your registration on the Internet.  Check with your state, lawyer, and accountant for details.

Concept Equity Group is not a lawyer and is not qualified to give legal advice.  Check with your lawyer for legal advice.

Basic premise:

1.       Most new jobs are created by small businesses.

2.       Small businesses are necessary for the innovation needed to secure the U.S. competitive future.

3.       VC backed small businesses create 150 times the number of jobs than other small businesses.

Small businesses are currently being squeezed by a lack of capital:

1.       Banks have tighter loan requirements to meet and are taking smaller risks, or have no capital to lend due to making bad loans.

2.       VC fund raising is down significantly as is VC investment.

3.       Angel investing is down.

The U.S. government can help solve these problems in a number of ways:

1.        Fix SBA 7A loan guarantees.  The government recently enhanced the SBA program by temporarily eliminating fees, raising the bank guarantee to 90%, and increasing the limit to $5MM.  This worked for several of my small business clients in traditional manufacturing or distribution businesses.  This change did nothing to help Internet businesses like those providing software as a service (SaaS).

a.       Banks can’t rely on the government guarantee and therefore must stick closely to their three C’s - character, cash flow, and collateral.

i.      Banks are called on to make sure they evaluate the loan so that they meet the reasonable criteria.

ii.      The government only evaluates if banks have properly loaned the money when the government is asked to cover their guarantee on a failed loan.  The government has a record of denying this coverage if small mistakes are made in the paperwork or they can show that the bank wasn’t sticking to normal loan criteria.  This is different than the SBA 504 program where the government actually loans the money along with the bank.

iii.      This saves money in due diligence for the government.

b.      Since banks can’t rely on the guarantee, they deny good loans.  Internet businesses are especially limited in the ability to qualify because they require virtually no assets.  If there is a small flaw in character (credit score, years in business) or cash flow, the loan request is denied.  For example, one of my clients has a SaaS business with $350K in revenue last year and profitable.  They have been in business 5 years and have contracts for $250K with high quality clients for 1-3 years.  They doubled their client base this year.  This proves they have cash flow.  The owner of the business is recently divorced and has no home for collateral and has a mediocre credit rating as a result.  They were denied for an SBA loan.

c.       If the government invested in loan approval at the time of the loan, more loans to small businesses could be approved.

2.       Help small business raise captial.  Fix the SEC regulations regarding capital finders. This article identifies the problem and the solution recommended by the American Bar Association. https://jmf-law.com/uploads/Private_Equity_Alert_-_Unregistered_Finders_-_The_Last_Chapter_-_VC_Experts.pdf

3. Broaden the definition of Venture Capital as proposed by the SEC for the Dodd Frank legislation. The proposal is very limiting with regard to how limited partners are treated.

4. Continue to treat the increases in company value as capital gains for the VC general partners. Increasing taxes on VC general partners means that fewer business people will be interested in creating VC businesses.

5. Provide a tax benefit for investors that encourages investment in small businesses. For example, eliminate the tax on investment in small businesses that are sold within 5 years.

6.      Allow small business to raise smaller amounts of capital over the Internet. Businesses raising capital under Regulation D exemption for small businesses are not allowed to advertise their raise.  No advertising means that foreign businesses find it easier to raise small amounts of capital outside the U.S. http://www.sec.gov/rules/petitions/2010/petn4-605.pdf

Every entrepreneur should be prepared to answer this favorite question of angels and VCs: What is the cost per customer acquisition (CPA).  During our 9/7/10 BNC VC Group meeting, one of the investors asked this question.  This term is commonly used for companies that obtain customers based on Internet marketing tools like SEO and Adwords.  However, it is useful for every company.

It was interesting that the question came up in the context of an SaaS company that planned to market their product to hospitals (B2B) instead of the typical Internet B2C company.

I believe that this question is suitable for every company, no matter how they market.  It helps us understand what it costs the company to ramp up by attracting new customers.  Since sales and marketing costs are expenses that you subtract after calculating gross margin, it can be a good indicator of when a company will be profitable.

Other good metrics to track are identified in this Read Write Cloud blog:

6 SaaS Metrics You Should Track

What is your cost of acquiring a customer?  How will this change with a capital infusion?

Each month three entrepreneurs seeking capital pitch to the BNC Venture Capital Group. Typically, they want to raise between $500k and $5MM.  Amounts can be smaller or greater.  Our goal is to have the most fundable and promising early-stage companies present to our group.  We favor companies in our selection process that meet the following criteria:

• Excellent investor communications (executive summary, PowerPoint deck). Whether presenting to investors publicly or behind closed doors, it is critical for an entrepreneur to tell his company’s story in a clear, concise, and compelling manner. All companies are required to submit an executive summary and/or PowerPoint deck for our review. The executive summary should be no more than 2 pages. The PowerPoint deck should be about 10 slides, give or take a few. Backup slides can be included for the Q&A session following the public presentation which is based upon the PowerPoint deck. You may include video, in fact we don’t require that the presenter use a PowerPoint deck.
• Coached Presenters. We give preference to presenters who have been coached or mentored because we know they will be more fundable. According to Guy Kawasaki, former Apple evangelist: “As a venture capitalist, I have to listen to hundreds of entrepreneurs pitch their companies. Most of these pitches are crap…These pitches are so lousy that I’m losing my hearing…Pitching isn’t only useful for raising money-it’s an essential tool for reaching agreement on any subject…closing a sale, securing a partnership, recruiting an employee, or securing an investment.”
• Unique product or service:

1. Solves an important problem

2. Disruptive business model.

3. High barriers to entry.

• Complete management team

1. Start-up experience

2. Industry experience

3. Advisory board

• Fully tested product or service that is ready to go to market or, better yet, proven with:

1. Referenceable customers

2. Well known customers

3. Revenue

a. Multiple streams

b. Recurring

4. Large and growing potential market

• High gross profit margins
• Low monthly cash burn
• Strategic business partners with major distribution channels
• Prior funding from outside sources. It’s easier to raise capital if you’ve already done it.

We cannot overemphasize the importance of coaching.  The story must be clear and the presenter must be credible.  On multiple occasions, we have seen investors decline to invest or refuse to learn more about a company due to mediocre investment materials and/or a poor public presentation.  An effective ten minute presentation should answer 5 key questions:

1. What is the product or service?

2. Why will prospective customers buy it?

3. How does the company make money?

4. How does the investor make money?

5. Why is the management team qualified to run the business?

We select coached companies first and then fill our roster with companies that look attractive and have the potential to make investors a lot of money.

Concept Equity Group prepares entrepreneurs for investment. This includes preparation of investor communications, strategic review, filling management gaps, introducing strategic partners and customers.

If you are interested in presenting to the BNC Venture Capital Group, send your executive summary to len_bland@conceptequity.com.

My client called today saying that his investor has asked for his Private Placement Memorandum (PPM).  We discussed what should go into his PPM in addition to the business plan.  http://wistechnology.com/articles/3935/  The client is well prepared with a good business plan including an investor risk section.

One of the items we discussed was the term sheet disclosing what the company is offering to investors in exchange for their investment.  Here is an excellent site with term sheet examples and a term sheet generator: http://learnvc.com/2009/04/updated-example-term-sheets-and-term-sheet-generator/

After putting together the PPM including the term sheet, we will take the package to his attorney.  The attorney will review this legal document and make sure everything is handled properly.

The finance bill includes changes to the definition of accredited investor and requires that any private placement be filed for review with the SEC for 120 days.  I encourage you to contact your legislators to make sure that the changes to the finance bill with regard to Angel investing be modified as recommended in this article: http://digg.com/d31PURs?t

Specifically, leave the $1MM accredited investor limit the same expect exclude housing, and eliminate the provision to file with the SEC.  Requiring filing with the SEC for every Reg D filing would only hurt startup businesses and make money for lawyers.

Another aspect that hurts small businesses raising less than $5MM is the current SEC regulation that limits the help entrepreneurs can receive for raising capital to registered broker dealers (and soon investment banks). Other regulations require broker dealers to be responsible for disclosing all the risks of an offering they help with.  This means that they have to spend time and money evaluating an offering, even for a startup raising only $250K.  As a result, nearly all firms don’t allow their members to raise capital for these types of offerings.  This leaves startups that are not experienced in raising capital with no one to turn to.  The American Bar Association has recommended a change to the SEC regulations: “In undertaking this effort, the SEC staff should focus specifically on whether to create an exemption from broker-dealer and/or investment adviser registration requirements for certain finders or instead issue a new regulation enabling these finders to register under a simplified regime aimed at regulating finders engaging in a defined category of activities.” http://www.sec.gov/info/smallbus/gbfor22.pdf

Making these changes would help small business.

You may have heard that investors don’t want to read the entire business plan.  They also don’t want to read an 8 page executive summary.  If you make it interesting and easy to read, they might read your one or two page summary.  Use bullet points, graphics, and simple communications to get an investor interested enough to talk with you.  Here is an outline.

One of the biggest challenges for the investor pitch is showing the investors how they will make money.  Most entrepreneurs fail to show this in an easily understandable fashion when pitching to http://conceptequity.com/BNCVCGroup.htm.

On 1/5/10, I put together a financial summary (https://conceptequity.sharefile.com/d-s0feaaf368864535b) to help entrepreneurs include this in their pitch and take out some of the mystery.  There are certainly special circumstances that will change for each business, so this model should be used as an example, not as the final result.

Implicit in the model is an estimate for valuation.  This will vary by company.  Some experts recommend that the entrepreneur tell investors that the valuation is negotiable because of the uncertainty the value of an early stage company.  If you share this view, do not complete the multiple or show the ownership percentage.