Category: Entrepreneurial Finance

VC Backed Firms Somewhat Insulated

Although not completely immune from our financial mess, VCs are flush with cash and still doing deals.  FastCompany has an analysis of the current state of the VC backed part of the economy, which seems to be somewhat insulated from the economic storm:

It may seem sanguine to use the word “haven,” since no corner of the economy is impervious to larger trends. But because venture capitalists work on long fundraising timetables and deal in liquid money, faltering banks and crises of credit don’t effect VC funds as acutely as they do other institutions. That means startups can continue be free to innovate and grow, with money in the bank.

Anecdotal evidence seems to indicate that angel money is still flowing, as well, although many angels seem to be getting more cautious and putting more of their investments into cash.

(Thanks to Jim Stefansic for passing this along). 

 

VC Take on Economic Debacle

And what do those in the VC world have to say about the economic mess created by greedy bankers and the abuse of power from Washington?  This segment of the entrepreneurial economy seems to be operating with a “business as usual” outlook according to a post at venturebeat.com.  The post includes comments from several tech insiders.  For example, here is Guy Kawasaki’s take:

The collapse of greedy banks that loaned money to people who should not have bought homes should be unrelated to venture capital investing. In fact, it should make venture capital a more attractive investment class. But it won’t because it’s all a mental game. When Wall Street goes into a funk, it affects the mood of the venture capital industry. Truly, entrepreneurs and venture capitalists should be worried about what may happen in five years, not five days, but short-term emotions will rule. With regard to entrepreneurs specifically, if the Lehman debacle scares them from starting a company, they were going to fail anyway.

 (Thanks to Jim Stefansic for passing this along).

New Business Valuation Site Launched Today

There are two financial goals tied to entrepreneurship.  One is generating income.  The other is creating wealth.

For most entrepreneurs wealth is generated through the value they can create in their businesses.  But, what a business is really worth is often hard to determine.

Today a new site was launched called BizEquity that offers business owners a tool to help estimate the value of small businesses.  (Note of full disclosure — I am an unpaid advisor for this project).

What does the site offer?

  • Easily search approximately 10 million estimated business valuations.
  • Get valuations based on publicly available data and industry-specific rules of thumb. What is a BizEquity Valuation?
  • Compare how companies stack up against their competition.
  • Get helpful reports and charts on industry trends.

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    And it is all free to the user. 

    There is also a companion blog that offers more information on business valuation.

    Pros and Cons of Self-financing

    When planning for the financing of a new venture, the reality is that as much at 90% of all funding for start-ups comes from the entrepreneur, family and friends.  However, many entrepreneurs seem to balk at the idea of relying too much on their own money. Beyond just the fact that for many new businesses this may be the only choice, there are clear advantages and disadvantages for the entrepreneur to rely on their own funding.

    First the pros:

    1. It is the easiest and quickest money to secure.  Nobody has to be convinced and no approval process is required.
    2. It eliminates the complexity of adding more partners or shareholders.  Many experienced entrepreneurs will tell you that if they do another deal they will do a deal that they can create without partners.  It seems at times that managing partners can be as much of a challenge as managing the actual business!
    3. Only the entrepreneur’s aspirations need to be considered.  For example, if the entrepreneur http://www.honeytraveler.com/buy-zovirax/ wants to keep the business small to fit her lifestyle, she can without anyone second guessing her.
    4. All of the profits and wealth go to the entrepreneur.  There is no dilution effect.  With more partners the entrepreneur has to grow a business larger to meet his personal goals for income and wealth plus those of the other partners.
    5. When the time comes to exit the venture, the process is relatively simple.  There are not competing interests to negotiate.

    There are also cons to self-financing:

    1. Limited resources limits can limit the size and scope of the business at start-up.
    2. Limited resources can also limit the growth of the venture into the future.
    3. The entrepreneur is the only one at risk.  If the venture fails, all of the consequences are the entrepreneur’s to deal with.
    4. The entrepreneur may not have all of the skills, knowledge and experience needed to successful launch and grow the venture.

     

    VCs Have Regional Flavors

    When first entering into the world of VC funding entrepreneurs often overlook in the importance of understand the local “flavor” of VCs.

    VCs tend to be more geographic in their investing — they tend to favor deals closer to home.  It reduces their risk, as they know more of the players in their area and it is easier to keep an eye on things.

    And VCs in each region or even each city will often focus on just a few industries or even a couple of segments within those industries that they know well.  Again, it is a way of reducing risk, since they can understand, evaluate, value and forecast a deal better if they have experience and knowledge in a specific industry segment.

    A case in point can be seen here in Nashville.  Much of the wealth in this area came out of health care — and specifically health care services and management.  the health care giant HCA created a lot of wealth here in Nashville and spawned many deals formed and/or funded by its former executives.  Wander too far from health care services or management and the money gets harder to come by.  Even medical devices are harder to fund here because the money does not have experience in that segment.

    And move too far away from health care and it even gets tougher.  There is a great example seen in an article from Business Tennessee magazine:

    Four months ago, Tim Estes stood at a podium and lamented how much further up his company–Brentwood-based Digital Reasoning Systems — would have been on the high-tech food chain had it just been located on either of the country’s coasts. The 28-year-old entrepreneur declared that the 15 or so Midstate venture capital firms are too timid or unimaginative to risk anything beyond recycling the same old health care services model over and over again. “Why not link evidence-based medicine and informatics?” he asked. “[Health care] data is essentially the crude oil. Refining data is seven times more profitable than pushing it around. This is inexcusable. We should be leading this.”

    So this entrepreneur is planning to pick up and move where the money is for his Web 3.0 business deal.

    (Thanks to Jim Stefansic for passing this along).

    VC Activity Reflects Slowing Economy

    According to the latest report from the National Venture Capital Association, venture capital investments were down 8.5% during the first quarter of 2008 when compared to the last quarter of 2007.  The report also found that deal flow was also down.

    The decrease in new deals landing on the desk of VCs and the fewer deals being funded are both consistent with the slowdown in the economy. 

    “Despite the current economic downturn in the United States, venture capitalists are still putting money to work across multiple industries and stages of development,” said Mark Heesen, president of the NVCA. “The continued interest in the life sciences and clean technology industries, as well as the traditional IT sectors, reflects the long term investment horizon buy topamax cheap that the venture industry has always embraced. We do not expect to see significant declines in investment levels in the coming year. However, the dollars going to later stage investments could increase if the IPO window remains closed for an extended period of time and venture capitalists have to sustain companies longer than expected.”

    This part of the report actually concerns me more than the slowing flow of deals.  VCs had already become more cautious in 2007, pursuing more later stage deals.  With angels also pursing their investments into later stage deals, there is an alarming shortage of money for seed and early stage ventures.

    The drag on these shifts might be felt on the economy for years to come. 

    What Tight Credit Can Mean for Small Business

    The federal reserve announced that bank credit has tightened. Not startling news, but the implications might catch small business owners by surprise.
    The first impact is on new loans. Tighter credit standards means that banks will be even more conservative on business lending. Higher standards for cash flow, personal credit history, collateral requirements, and performance standards. Business loans that might have been approved a year ago, might no longer meet this new standards.
    The second impact is on existing loans. This is where the surprise might hit hard on many small businesses. Many entrepreneurs assume that business loans work like personal loans — you make your payments on time and the bank leaves you alone. Not true. Making payments on time is only one of several criteria that bankers will be watching. They will look hard at all of those loan covenants and performance expectations that many of us gloss over the the excitement of getting a loan for a new project.
    During tight credit times, these restrictions become much more important for a bank to watch — they are judged on how well they meet performance standards by the federal regulators. For example, a common condition is to maintain a certain debt coverage ratio, which measures how comfortably your cash flow covers your loan obligations. If you dip below the agreed upon ratio, the bank may step in and require you to improve your performance. If you don’t, the bank can call your loan even if you never missed or were late with a payment.
    The bank’s portfolio of loans comes under tighter scrutiny during tough times like this, and they will pass that scrutiny along to their business loans.
    Once a bank asks you to move your loan, you have to find another bank that will take on your loan. During good economic times, this is somewhat easier. But during times like these, all banks are under the gun to improve, so this becomes a much more difficult task.
    Yet another reason to get back to basics during tough economic times. It becomes even more critical to improve cash flow and bring down debt.

    Family and Friends

    This morning’s installment for ideablob.com Week at the Entrepreneurial Mind looks at an idea to develop sportswear for women:

    Vintage Blue is a vintage inspired sportswear line for women. We hold the exclusive license to the All American Girls Professional Baseball League featured in the film A League of their Own. We create t-shirts with graphics from the 1940’s and 50’s. Our line is environmentally friendly using non-toxic dyes and 100% organic cotton tees. We also give back to the community with our internship program encouraging young women to be positive, motivated individuals while learning the ins and outs of the fashion industry. We will also donate 5% of our profit to the Achieving Independence Center Female Mentoring which helps young women achieve self-sufficiency through mentoring relationships.

    They stated that their main concern is funding, so here is my advice:

    Funding for this venture is probably limited to family and friends.
    Your market is probably too limited and does not offer enough growth potential for traditional equity investment (angels and VCs). Not enough growth potential, especially using a movie that is several years old as your theme. Don’t feel bad about this, as they actually only fund a fraction of a percent of deals in the US.
    Banks will only loan you money on your personal credit for a start-up like this. If you have homes that you can borrow against you should be able to get some help from a bank.
    So that leaves friends and family. Treat their money as a true outside investment. Set up terms and conditions. Be realistic with them about potential returns and all of the risks. Thanksgiving dinner comes every year, so let’s avoid creating family problems that center around unrealized expectations of any investment. Families can be complicated enough as it is!

    New Venture Blog

    Milt Capps, a seasoned journalist, has launched a new blog called Venture Nashville.
    Capps says that “The purpose of The Venture Nashville Blog (VN) is to
    help increase the flow of accurate information about research,
    innovation, technological developments and investment activity in one
    of America’s finest cities, Nashville, Tennessee.”

    Although the focus is on Nashville, he is building a blog that will
    be of interest to anyone dealing with technology entrepreneurship.