VENTURE CAPITAL AND ANGEL INVESTORS
If the change in your pocket isn’t enough to fund your latest business venture, sometimes you have to reach out to investors to get your project off the ground. That’s what Michael Witt did. Following his time at Accenture, he decided to acquire and revamp a software company to create ClearBasin Software. ClearBasin is a tax and finance administration software company made for county governments and municipalities that has been up and running since January 4 of this year thanks to 12 investors.
When Witt began considering who in his network would be a good fit, he sought out those who were interested in an investment opportunity and not necessarily a teaching experience. “I approached it much differently than many startups do where they’re clamoring for both help and money,” he says. “What I was interested in doing was running an operation that I think is a great investment opportunity, and I offered it to folks I thought would be interested in a return.” Of the 16 people Witt approached, 12 accepted his pitch and invested in the company.
The secret to such a high success rate came down to having a good plan. Witt first started with a one-page pitch, which he then presented to several close friends and colleagues for input and revisions. That page alone isn’t enough to gain investment, so Witt then began expanding on the company’s strategy outlined in the pitch to build his book—which is a business plan in a polished, comprehensive presentation form. He spent a lot of time assembling realistic projections and compiling an attractive, complete package to offer to investors. “People forget that this is sales,” Witt says. “Many aspiring entrepreneurs don’t think about it as sales. They think about it as almost a religious experience where, if I can get you excited enough, I can get you to part with your money. That’s the wrong approach in my opinion.” Instead, Witt says he had a polished, complete product at a set price that he offered to investors. The attraction for those investors was a return on the money they contributed to help the company grow.
If your own network of connections won’t bite at an investment opportunity, you can reach out to angel investors or Venture Capital (VC) firms. An angel investor is willing to overlook a lack of experience and assume more risk to invest in what is typically a startup opportunity. A VC firm is run like a business in which a group of individuals from financial, business and strategic backgrounds represents investors and their funds. Because more people are involved and the relationships are more formal, VC firms typically ask for more equity and seek higher returns, making them more suited for investments in larger companies.
Build Your Best Book
When approaching investors and Venture Capital firms about investing in your business, Witt recommends putting a lot of time and effort into perfecting your plans and always keeping in mind the importance behind getting it right. “Some folks who are new to the whole creating a business plan thing kind of look at the business plan as the thing you’re making, but you’re really making the strategy,” he says. In fact, nearly five months into running the business, Witt says he and his team still regularly refer to their book to ensure the company is right on track.
A solid book starts with a pitch. Witt used an online software called LivePlan to clearly define the company’s vision. Witt’s pitch itself was not meant to lure investors. Instead, he used it to start conversations with friends and advisers to see if the idea was worth pursuing. Because the technology industry is relatively competitive, those to whom Witt pitched the idea had to be highly trusted and somewhat removed from the industry. He instead looked for those he respected and those who had a good understanding of business principles to give constructive feedback. After a few revisions and tweaks, Witt’s pitch was ready to be formalized and worked into the book.
If you’re building your own book, you don’t have to go it alone. Witt used the SCORE template as his guideline. He says many people overlook the template because they feel it’s too detailed, but he says you don’t have to use all of it. Plus, the thorough sections ensure you don’t leave out any important details. About three quarters of Witt’s book focused on the company’s strategy, which covered the state of the market, who the competitors would be and the company’s growth strategy. Only four pages of his 30-page book were on financials, which he says is much less than most people include. He says too often, entrepreneurs get caught up in the company’s potential return seven years out instead of focusing on realistic and modest multiples to project profits in a shorter-term time period. “I think people seeking investment would do a lot better to spend more time on their valuation and really get that math right,” Witt says. “It needs to be very defensible. I’ve seen several people who have taken an approach of what seems to be sort of a guess, and I think that’s a big mistake.”
Witt then took that valuation and assembled a firm, clear package for investors. He stresses that entrepreneurs need to know that what they are selling is a product. Although it may seem to be an opportunity more than a item you’re purchasing, it has to be polished, have a set price and a clear return in the form of some sort of exit strategy for it to be attractive to investors. “There’s a strategy component, a finance component and an execution component,” he says. “You’ve got to have all three, and you’ve got to make your investors understand how you’re going to use the money to achieve the goals you’ve set forth. That means it’s sales. It has to be believable, and it has to be real.”
Once you’ve cleaned up your plan, Witt says you’re ready to get feedback and go through a revision process. Keep in mind that this assembly stage takes weeks, but the time you put in getting it right will pay off in the end.
The most common way to gain startup capital for a new business is through a bank loan. Loans can be used to finance anything from purchasing equipment to hiring employees, and they connect entrepreneurs with bank representatives whose goal is to expand the business community.
There are many types of business loans, and we break down four popular lending options.
SBA Loan: An SBA loan—from banks backed through the United States Small Business Administration—is available to any new or existing business that may not otherwise qualify for traditional financing.
Conventional term loan: Unlike an SBA loan, the bank isn’t guaranteed to get any of its money back with a conventional loan, so these are awarded less readily. But the approval process tends to be quicker, as no other entities are involved.
Home equity loan: Money from a home equity loan can be infused into a business as capital. The application process is more streamlined, and using your home as collateral also means interest rates are lower. But you also run the risk of losing your home if you default on repayment.
Credit card: While not a traditional loan, many entrepreneurs turn to credit cards to finance their startups. But many banks, including The Bank of Missouri, advise against this option. Cards have high interest rates, have to be paid back much quicker and can cause your credit rating to plummet if you can’t make payments.
The most important thing to remember is that while banks want to strengthen the economy by granting loans, they must also carefully evaluate each borrower’s request to determine if extending a loan is prudent. This is where having a personal and consistent relationship with your lender pays off. “A relationship with your bank should be more than just signing on the dotted line,” says Mick Nitsch, community bank president at The Bank of Missouri in Springfield. “Your bank should take the time to know you and your industry and work with you to be successful.”
If someone says they’re bootstrapping their business, it means they’re funding the company with their own personal finances or with finances borrowed from friends or family. Sandra Smart-Winegar, a small business consultant at Missouri State University’s Small Business & Technology Development Center and owner of RESARA Design Group, did the former. “When I first started a company with my business partner years ago, we used our own funds,” Smart-Winegar says.
It was 1995, and she and Kirsten Dale were starting the company Design Graphics, Inc. Since they were working with their own personal finances—a sum that was likely smaller than if they had borrowed from a bank or other lending institution—they went in with a very specific plan to try to minimize expenses. Smart-Winegar and Dale established credits with select vendors they would be working with, and they bartered some of their services by trading design work for advertising and other needs. They also leased their equipment instead of purchasing it outright, paid themselves smaller salaries and utilized QuickBooks to do their own payroll. “I think it makes a difference when you’re using your own money versus someone else’s money,” Smart-Winegar says. “Even if it’s a loan you sign for—based on my experience over the years—you spend a bit more freely with borrowed money.”
When you need mentors to learn from and push your business forward, you need to go through an accelerator program. In an accelerator, you get the support you need for all aspects of your business in exchange for equity. Ryan Bell is a Springfield native who took his business, Gremlin Social, through two accelerator programs to become an industry leader in social media services for financial institutions.
Bell has a background in computer science and first had the idea for the company in 2008 when Twitter was gaining popularity. He knew he could create software to help businesses communicate effectively using social media, but didn’t have established connections to the finances. He tried to fund the company himself and went to investor events to give pitches, but no one bit. Eventually, Bell raised $100,000 before getting accepted to Capital Innovators. The company, then known as Gremln, was finally getting investors. “It made me feel like we were a part of something and we weren’t going at this alone,” he says. But he says there was more advice than cash. The team got $50,000 to participate and that allowed Bell to hire more people, but he says it barely got him through the three-month program.
Bell and his team learned how to perfect the pitch, track metrics and approach the market. Because there are other businesses traveling the same path, there’s an immediate community aspect and also an environment that fosters competition. “I didn’t want to fall short and for them to think I’m not as hard of a worker,” Bell says. “It lit a fire under me.”
In the accelerator, he also learned to be willing to shift the purpose of his company to the financial market niche. “Businesses are built through small changes and subtly switching focus,” Bell says. “What I learned more than anything else is to measure everything. Test things before you market them, and if you don’t see it working, change it.”
After going through Capital Innovators, Bell took the company through SixThirty, which exclusively focuses on helping technical business in the financial market. After the two accelerators, Bell had the tools he needed to help Gremlin Social succeed—and investors who were counting on it.
We asked Ryan Bell his advice on how to know if accelerators are asking for a fair amount of your company. Here’s what he shared:
“It really is tough to determine the value in the early days. You’re perceiving it based on an idea, limited traction and limited revenue. It depends on the market you're going in, how big the idea is and your potential revenue. Calculate five years out—your valuation of your company is some multiple of your first year or the total of five years. In the end, what you can charge is what the market is willing to bear. That accelerator is going to have a standard amount of money to give you to participate. Accelerators are likely to count both money and perceived value of services as a investment. There’s no magic formula, but there are ways to pick it apart and apply logic and reason to determine if it’s fair.”
His other tip?
“Always have an attorney with you before you sign. One thing is determining value, another thing is sneaky language and clauses for earning multiples and all kinds of things that make an investment way more expensive than what you think.”
In recent years, the influence of technology and social media on corporate culture has revolutionized how businesses become businesses. Instead of relying on traditional forms of investment, entrepreneurs are now seeking startup capital via online sources. Crowdfunding embraces this virtual networking mentality and gives project creators an opportunity to partner with supporters who pledge money to bring their innovative ideas to market, all without sacrificing equity.
Such is the route Doug Wilson chose. Six years ago, the Missouri State University alumnus from Billings wanted to direct a documentary about the history of typesetting and newspaper production. Using the web-based portal Kickstarter, he and two friends organized a couple of campaigns, pinpointed a target audience, advertised through Facebook and Twitter and ultimately raised $50,000. As a result, Linotype: The Film spawned one of the three most successful Kickstarter efforts to originate in 417-land after Delver’s Drop and Reach 3-D.
The film’s cinematographer, Brandon Goodwin, optimistically launched his own Kickstarter campaign after teaming with Wilson. His goal was to raise $100,000 to begin mass manufacturing of blipcast, a device that streams audio from television to smartphone and allows users to listen through headphones. He only garnered nearly $40,000 and didn’t receive a dime, in accordance with Kickstarter’s all-or-nothing policy.
“The first thing people said was that’s really cool, and that’d be a good product, but the thing I’ve really learned is it’s mostly about execution,” Goodwin says. “Kickstarter is 1 percent the idea and 99 percent making it happen. It was absolutely a failure but very useful because we learned so much about how we need to adjust our marketing to give our product the best chance.”
For those considering crowdfunding, Wilson and Goodwin suggest first, figuring out your project’s total budget and setting a bold fundraising goal. Second, use social media to befriend those who are interested in your project and keep them updated on your progress. Third, invest extra money to make your campaign look legitimate because selling your concept is much of the battle.
For those considering crowdfunding, check out Kickstarter.com or Indegogo.com.