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Go in with Your Eyes Open!
A. "Love Capital"
B. Bank Loans and Loan Guarantees
C. Strategic Alliances and Partnering
D. Venture Capital
E. Angel Investors
Some developers have the financial resources to support their research, development, and later commercialization efforts, while others are fortunate enough to have attracted early interest from investors. Most developers, however, encounter a point at which they need outside help from private sources.
There are always stories about how hard it is for technology developers to obtain
private capital. To some extent, these stories are true—it usually is not easy for individuals and small technology companies to obtain the private capital they believe is needed to move forward.
The problem is not a shortage of capital, however. There will always be capital
available to support the development of worthwhile technologies. Instead, the
problem is usually in either the technology and/or the developer and how both
are presented.
Private Capital Invests in Market Opportunity, Not Technology
The first key is to remember that private-sector funding sources—much more so than public-sector sources—have one primary objective ... to make money. They're not in business to help technology developers or to create new jobs or to increase the tax base. They are in business for one main reason—to make a profit—and usually the intent is to maximize that profit.
The profit motive is not a bad thing. Indeed, while there are some exceptions, most technology developers hope to someday realize large financial gains from their efforts. But remembering that private-sector capital sources are driven by the profit motive will help you understand how and why they make the decisions they do.
Be Prepared ... and Remember, Initial Appearances are Crucial
Just like with public-sector funding, the process of tapping private capital
stand by finding a source that is a good fit for your particular situation. Just
because banks make loans doesn't mean a bank is going to loan you money to support
the development of your technology. Similarly, just because venture-capital firms
sometimes invest in new technologies doesn't mean every venture-capital firm
is a candidate to invest in your technology.
Finding a source that a good match means you first must thoroughly understand
your situation and needs. This understanding comes only through thinking ahead
and planning—for both your business and the commercialization of your
technology. (And NO!, business planning and commercialization are not the same!)
As an individual or small technology company owner, you are prepared to approach private capital sources only if you have a reasonable plan for how the lender or equity investor can recoup his investment. Such a plan might be quite informal if you're approaching your family, friends, or neighbors. But for other prospective investors—including banks, venture capitalists, and angel investors—your chances of success will be much greater if you are able to present a formal written plan.
Without a doubt, most individuals working independently to develop new technology use their own money or seek help from their network of family and friends. And it makes sense ... after all, if the developer isn't willing to invest his own money in his technology, then why should anyone else be expected to do so?
The sources and arrangements for "love capital" can vary over a broad spectrum. Initial capital may come from the developer's savings or from the sale of some asset. Later, it may come from family or friends, either as loans or investments.
When funds become scarce, developers may turn to credit cards or high-rate lenders. More than a few businesses have been started and/or financed with these borrowed funds, but it is not recommended. In hindsight, most debtors who used these resources would likely agree it was a last resort.
For individuals and small technologies, bank loans are usually difficult, but there are reasons for this. Banks are care-takers of their depositors' money, and as such, are highly regulated and strongly discouraged from making risky investments. Technology development and commercialization is inherently a risky venture, so it is not a good match for banks, credit unions, and other similar lenders.
There can be exceptions. Banks may be convinced to loan money to a technology developer, but usually only if:
- the borrower can fully collateralize, or secure, the loan with some asset that the bank can sell to recoup its funds in the case of a default; and
- the borrower can demonstrate some way to repay the loan (plus interest) that is not tied to the success of the technology's commercialization; and/or
- a qualified third party—e.g., another individual; the SBA; a community development organization—is willing to guarantee repayment of all or most of the loan in the case of a default.
In these situations, the bank is not making a loan decision based on the technology's commercial potential. Instead, the decision is based strictly at how the loan will be repaid, regardless of the technology's commercial success.
Knowing this, you should never try to "sell" a loan officer on the promise of your technology. This approach will almost certainly bring an immediate rejection. In the conservative world of banking, it may also raise hurdles that are hard to overcome later. Again, banks go to great lengths to avoid risk!
Instead, you should understand the bank's perspective from the beginning. Then you can decide either to try to meet the bank's requirements or not to seek a bank loan.
If you want to learn more about what a bank will require before approving a loan, you can visit the bank. But a better idea is to meet with one of the many service organizations that exist to help small borrowers obtain loans. These resources allow you to ask questions that may be uncomfortable to ask of a banker. They will also often help you prepare an actual application, working with you to make sure it will meet the bank's expectations.
Two excellent sources of this assistance include Small Business Development Centers,
a list of which is available through the Association
of Small Business Development Centers and the Service
Corps of Retired Executives (SCORE). Both programs are funded by the U.S.
Small Business Administration and often have numerous offices throughout
each state. Services are usually available at no cost. Your state may have
other helpful resources as well.
There are many other resources available on the web. Listed below are just a few of them:
Business Owners Idea Cafe
Introduction to bank loans, who they're good for, and when you should seek one. This article also discusses strategies leading to loan approvals.
Resources from Entrepreneur.com
An excellent collection of resources and articles from Entrepreneur.com, addressing many issues in bank financing.
GoCommerce.Net
A good introduction to securing a bank loan. Prepared by a private accounting services firm, but provides useful information for those new to bank loans.
Small Business Resource
This Web page provides information and Web resources for small business people. Their section describing the pros and cons of bank loans will be of interest to inventors considering whether or not to seek one.
PowerHomeBiz.com
While geared somewhat for home-business entrepreneurs, this page provides good perspective on bank loans—including why banks need to make loans.
Yahoo BuyerZone
Advice on securing a bank loan to grow your business, from Yahoo.com.
E-Commerce Digest
A useful overview of funding strategies, with an emphasis on success in securing
business loans.
The Texas Society of Certified Public Accountants
More tips from CPAs on how to secure a bank loan.
Wells Fargo Bank Business Loan Advice
Points to consider when pursuing a business loan, from the perspective of a large commercial bank.
Partnering can be a great option if you are willing to trade some level of ownership
in your technology in exchange for funding or other needed support. Indeed,
sometimes it may be the only option.
Increasingly, companies already established in an industry are looking to grow through strategic partnering opportunities. Many times, these opportunities are based on new technology that promises to deliver increased efficiencies, superior products, or both.
There are certainly no limits or restrictions on who you can approach as a strategic partner, but you should do your homework to make sure your targets are good candidates. At a minimum, you should learn whether each target is open to or has a history of partnering with other entities. There are a number of resources for this company-specific information:
- Numerous hardcopy and electronic search tools at public and state libraries
- Company and industry reports from brokerage houses
- Business Index ASAP and other electronic databases at colleges and university libraries for searching articles and reports from newspapers, industry periodicals, investment houses—Excellent and free!!
- Through EDGAR at the U.S. Securities and Exchange Web site
- Through DIALOG, a fee-based service, but one that opens the doors to superior data sources such as Frost & Sullivan, Investext, Freedonia Group, Euromonitor, and Datamonitor. DIALOG is most valuable when used by a trained researcher who can minimize the search cost.
Finding a strategic partner(s) is similar to the process of thinking about who will actually buy your new technology once it is developed. The key is to understand:
- what specific resources you will need from a strategic partner—i.e., what do you get out of the deal, and
- what benefits your technology can deliver to that partner—i.e., what does the partner get out of the deal.
Answering the first question is not usually too difficult. Generally, you'll
be seeking individuals or companies that can help with funding, with some portion
of the R&D, with production, with marketing and distribution, or with all of
these activities.
Answering the second question is more difficult, especially if you are honest
and objective about it. Indeed, you will not be well prepared to approach any
strategic partnering candidates until you can discuss—specifically and with conviction—what benefits the partner will derive from the arrangement.
There are numerous resources available to help technology entrepreneurs learn about and explore strategic partnering opportunities:
NREL's Industry Growth Forums (IGF)
A forum bringing together start-up clean energy companies, venture capitalists, and senior business executives. The site hopes to encourage learning about business growth strategies and create strategic business partnerships. There is a chat feature where a group of venture capitalists (VCs) and other business executives can evaluate your business plan.
NREL Growth Link: A Directory of Clean Energy Companies for Linking Companies and Opportunities
A clean energy directory that provides business information to potential investors and partners. This site is intended to help a business be more successful, from start-up to accelerated growth.
The National Business Incubator Association's Business Matchmaker Database
A great place to look for partners and strategic alliances. This database profiles
more than 1,000 early stage (recent graduates of business incubation programs),
mid-sized, and large corporations interested in forming strategic alliances.
Membership in NBIA (which starts at $500 for businesses with 5 or fewer employees)
is required to access the database.
The National Alliance of Clean Energy Business Incubators
This site offers financing referrals and introductions to potential partners, among other services.
U.S. Small Business Administration's Tech-Net
Tech-Net is the SBA's electronic gateway of technology information and resources
for and about small high-tech businesses. It is a search engine for researchers,
scientists, state, federal, and local government officials; a marketing tool
for small firms; and a potential "link" to investment opportunities for investors
and other sources of capital. It is a free service for those seeking small business
partners, small business contractors and subcontractors, leading-edge technology
research, research partners (small businesses, universities, federal labs and
non-profit organizations), manufacturing centers, and investment opportunities.
Venture capitalists are just as their name implies—investors in high-risk ventures. They invest for one reason, and one reason only—to earn the highest possible rate of return on their investment. They invest in higher-risk ventures, because this is where the greater rewards are likely to be found.
What they look for
While there will always be some exceptions, most venture capital firms today shy away from new, small, unproven technology companies. Instead, they are increasingly putting their funds behind companies that have demonstrated a track record of performance and now need additional capital to expand and move forward.
Developers often make the mistake of trying to sell venture capitalists on the technical aspects of an innovative, new technology. Frankly, "VCs" don't care about the technology, and in the beginning, the last thing they want is to sit through a detailed lecture on how the technology does what it does.
Instead, they're much more interested in seeing that a new product or process:
- has a large proven market
- has at least one major competitive advantage
- is being (or can be) managed by individuals experienced in successfully taking new technology to market.
Thus, the best way to capture early interest from a VC is by focusing your opening presentation on these topics. And remember, VCs aren't generally interested in the developer's assessment of these issues. You can make reasonable claims regarding each of them, but be prepared to back them up with objective, outside data.
VCs focus first and foremost on markets and management, because they are looking
down the road toward the time when they can recoup their original investment,
together with the highest possible rate of return on those funds. VCs typically "cash
out" following
an initial public offering (IPO) or if management or other investors buy their
shares. If VCs don't foresee a reasonable opportunity to recoup their investment
and a return, you can count on them not spending much time with you. This is
why it's so important to be well prepared for the few opportunities you may
get to meet with VCs.
For technologies with strong market potential and competitive advantages, but less experienced management, VCs can actually play a valuable role by bringing industry knowledge, contacts, and management experience to the table. Indeed, in return for investing in your company, you can expect the VC not to request, but to require a role in managing the commercialization of the technology.
Making the approach
Venture capital firms typically focus their investments in just one or a few specific industries—e.g., medical; electronics; pharmaceuticals; energy. Part of your preparation before approaching a particular VC is to learn what types of investments it targets. This can be done with a phone call, by reviewing the firm's Web site, or through literature available from the company. Another highly regarded source of information on venture capital firms is Pratt's Guide to Venture Capital Resources, which is available at many public and university libraries.
Understand that established venture capital firms receive hundreds, if not thousands, of mostly unsolicited business plans each year. From these, they will actually read and consider perhaps one or two in every 10, and initial reaction often has a lot to do with deciding which ones receive further attention.
Nothing gets the attention of a venture capital firm quicker than a professional, well-prepared business plan. Be careful not to interpret the term "professional" as being flashy and full of hype. On the contrary, the best business plans are relatively brief (less than 20 pages), highly factual, and completely void of "trust me" statements. They should be reviewed and enhanced by an experienced editor to read smoothly and concisely.
The Internet is full of information and resources to help you prepare a top-notch business plan. Here are some good ones:
National Association of Seed and Venture Funds
The NASVF is a network of private, public, and non-profit organizations investing and facilitating investment in entrepreneurs. The group offers training and free access to an electronic newsletter that stays current with developments among especially state-level funding sources.
Center for Business Planning: Venture Capital
A portal site providing links to a variety of pages relating to venture capital.
"1,000 Ventures" Introduction to Venture Capital
Includes six questions venture capitalists ask.
Do's and
Don'ts of Attracting Venture Capital
Article discussing the challenges of raising venture capital in the "post-bubble" period, with suggestions for overcoming the currently challenging climate.
Tips to Improve Chances of Securing Venture Capital
A resource furnished by the Canadian government, this page provides general advice on how to prepare before approaching a VC firm.
"Six Tips to Getting Time with a Venture Capitalist"
Just getting an appointment with a venture capital firm can be incredibly challenging. This articles discusses ways to increase your chances of getting in the door.
National Renewable Energy Laboratory
The NREL offers some good resources on the private capital investment process
and the entrepreneurial strategies for obtaining financing. For further information
see Working
with Entrepreneurs.
"Evaluating a Venture Capital Firm to Meet Your Company's Needs" (PDF 61 KB)
Download Acrobat Reader
This article discusses how to approach venture capital firms, what they are looking for in evaluating a new company, and how an entrepreneur should evaluate venture capital firms.
Entrepreneur's Guide to Venture Capital Audiotape Series
Venture capital is available in the billions of dollars each year, but only to companies with breakthrough products and services with huge potential for returns. This program explains what it takes to attract interest from this highly specialized funding source and then details the steps that can lead to an investment from the entrepreneur's point of view. It even discusses what the entrepreneur can expect from the relationship with the venture capitalist once the deal is done
"What is Venture Capital?"
The National Venture Capital Association (NVCA) is the trade association that represents the venture capital industry. It is a member-based organization that consists of venture capital firms and organizations who manage pools of risk equity capital designated to be invested in young, emerging companies. Currently, the NVCA represents 400+ member firms, representing the majority of venture capital invested in U.S. based companies.
Venture Capital for High Technology Companies (PDF 123 KB)
Download Acrobat Reader
A comprehensive discussion of venturing and venture capital in free .pdf format. Developed by Fenwick & West LLP, this document introduces entrepreneurs to a variety of legal and strategic issues relating to founding and financing a start-up company, including determining your product and market, assembling the right team, choosing a legal structure, obtaining seed funding, negotiating venture funding, and many more.
VentureWire Alert
Each issue of this daily electronic bulletin has a short market overview and highlights from selected new venture capital deals and other significant events.
State and Regional Venture Capital (VC) Organizations
- Colorado Venture Capital
Association
- Connecticut Venture Group
- Evergreen Venture Capital Association
- Florida Venture Forum
- Greater Philadelphia Venture
Group
- Illinois Venture Capital
Association
- Mid-Atlantic Venture Association
- Minnesota Venture Capital Association
- National Venture Capital Association
- San Diego Venture Group
- Venture Investors Association of New York
- The Western Association
of Venture Capitalists
- Young Venture Capital Association
Venture Capital (VC) Organizations Specializing in Energy and Technology
Following are a number of energy-focused venture capital firms. Venture
Capital Industry Focus on Energy & Environment lists many more
venture capital companies specializing in investments in energy-related
businesses.
Energy
Venture Fair
This event offers a venue for emerging energy companies with fewer than 280
employees to meet with more than a hundred venture and strategic equity investors.
These investors come from the U.S. and around the world. Their list of participating
investors is comprehensive. It offers a good place to further research sources
of venture capital.
ChevronTexaco
Technology Ventures
ChevronTexaco makes direct and venture-fund investments in the power and energy
sectors. The Power and Energy Fund focuses on direct equity investments in
early- to mid-stage technology companies and established venture funds.
NextWave
Energy
Provides assistance to emerging energy enterprises. Through the course of our
work, it has developed relationships with investors interested in new energy
opportunities and can arrange introductions for energy entrepreneurs.
Prospect Street Ventures
Invests in rapidly growing companies, including those in the energy/utility,
information technology, communications, and life sciences industries.
Vfinance.com
A searchable database of venture capital investors. This Web site also provides
useful information on venture capital available both for free and for purchase.
NREL's
Clean Energy Investors Directory
This site provides an information service for clean energy entrepreneurs and
investors. Listings for each investor include the type of investment, the funding
stages it deals with, and technology interests. Through this page, entrepreneurs
can find potential investors for any stage of the business development.
Arkansas
Science and Technology Authority
The Seed Capital Investment Program found at this site can provide working
capital to help support technology-based companies located in Arkansas.
The
Ben Franklin Technology Centers of Pennsylvania
This firm invests time, money, and expertise in innovative technology companies
that have strong market potential. They focus on the state of Pennsylvania.
General
Hydrogen (GH)
Invests in technologies related to the hydrogen age. Invests in technologies
with long-term profit potential and can contribute to clean energy systems.
Firms it invests in must be able to respond to unanticipated technical, geopolitical,
or environmental changes.
Genesis of Innovation
for South Dakota
A partnership between private enterprise and public universities in South Dakota,
helping entrepreneurs with business development, startup capital, and other
assistance. The Genesis Equity Fund, LLC provides equity financing for emerging
South Dakota companies.
Hydrogen Ventures
This financial services company focuses on high-growth investment opportunities
in hydrogen energy technologies. Acting as an investment facilitator, Hydrogen
Ventures arranges financing for clean new energy technologies such as hydrogen
and fuel cells, as well as renewable energy and energy efficiency projects.
The Indiana 21st
Century Research and Technology Fund
This fund awards funding in two broad categories: Science and Technology Commercialization
and Centers of Excellence. In addition, the
fund provides cost-share on behalf of Federal proposals submitted by Indiana-based
entities.
Kansas
Technology Enterprise Corporation (KTEC)
The KETC offers Applied Research Matching Fund which invests in seed and early-stage
technology companies in Kansas with a focus on new or applied technologies.
It also offers the Seed Capital Funds which provide direct investments to companies
in the KTEC network.
The Mid-Atlantic Venture Funds
This site provides information on four venture capital groups interested in
purchasing the equity in new, young or growing businesses located in the
mid-Atlantic. While they occasionally invest in the early expansion stage,
they are best known for seed and start-up stage investing. They do consider
deals outside the mid-Atlantic region.
NCIC CapitalFund
This early stage investment company invests in emerging, growth-oriented, technology-based
companies in the Great Lakes area.
North Carolina Technological
Development Authority, Inc.
This site details three separate programs. The Innovation
Research Fund is the TDA's pre-seed stage investment vehicle, making investments
of up to $25,000 to selected projects. The First
Flight Venture Fund is the TDA's seed-stage venture capital fund, It provides
equity financing from $50,000 to $500,000 to emerging growth technology companies.
The TDA's Fund-of-Funds portfolio
is designed to increase the amount of organized angel capital and professionally
managed venture capital available in North Carolina. This network offers North
Carolina entrepreneur's seed to later stage funding.
Pennsylvania Early
Stage
A family of venture capital funds that makes investments in seed, start-up,
and early stage information technology and life sciences companies.
Virginia's Center for Innovative
Technology (CIT)
The CIT has discontinued its technology awards funding program for 2004. However,
entrepreneurs can still sign up to receive the Virginia Venture Calendar newsletter,
a monthly compilation of regional early stage financing events, deadlines and
news.
Unlike venture capital firms, which make investments from a pool of funds, angel investors are typically wealthy individuals who use their own funds to invest in promising companies. They generally prefer to remain anonymous and usually work by referral only. They are often ex-CEOs or retired executives.
Like venture capitalists, angels tend to invest in businesses and industries with which they are most familiar. They expect their investments to bring high returns in a short time, but because they're working for themselves rather than for a group of other investors, their terms and expectations are often more flexible.
Angels generally provide smaller amounts of investment funds than venture capital funds, but they are often attracted to invest in a company at an earlier and riskier stage. Thus, an angel investor can be a good match for a smaller company or perhaps one at an earlier stage.
Regional angel capital networks and the nationwide ACE-Net non-profit angel capital
network use the Internet to make angel-funding opportunities available. Through
an angel network, entrepreneurs can seek sources of capital in the $25,000
to $1 million range. This is less than most venture capital funds will consider.
For-profit networks provide more services and exposure. They also sometimes
charge a percentage of the funds when a deal is made.
ACE-Net
A nationwide not-for-profit network, the Access to Capital Electronic Network was started by the U.S. Small Business Administration.
Vfinance.com
A free, searchable database of angel investors, allowing targeted searches by region and industry.
Directory of Angel-Investor Networks
This site lists angel groups in the Pacific Northwest, Southwest, Mid-Atlantic, Northeast, North Central, California, South, and Midwest regions. It also lists those groups that will consider investments anywhere in the country.
Business Angel Investing Groups Growing in North America
This report, funded by the Marion Ewing Kaufman Foundation, highlights best practices of angel investing and provides insights for both entrepreneurs looking for financing and for venture capitalists who typically get involved in follow-on rounds of financing.
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