Lesson #360: How to Survive a Difficult VC Funding Environment

 

CB Insights, a leading research organization that tracks venture capital financings, recently released its report on the state of the venture capital market in 2023. The long story short is: it was a terrible year for raising capital. The global market was down 30% year-over-year, to its lowest levels in six years. The U.S. market fell to its lowest levels in 10 years, down 21% in the last quarter alone. Gone are the days of “unicorn” creation (companies worth more than $1 billion), mega-sized financings, and excessive valuations. And, investors simply can’t exit the investments they have already made, with an anemic IPO market. A pretty bleak picture if you are a startup raising capital today. So, what are you supposed to do to navigate these choppy waters? Buckle up and read on, for some useful tips based on my past experience surviving markets like these.

Step 1: Batten Down the Hatches—Cut Expenses

Don’t fool yourself into thinking your story is better than all the others, and that you will have no problem raising capital. Once VC’s put their heads in the sand, it is pretty much across the board, with a few exceptions if you happen to be in a hot market like artificial intelligence, fin tech, retail tech and sustainability. So, that means you need to get your expenses down to the absolute bare minimum. And, yes, that most likely means making the tough decisions of downsizing your staff, to survive the storm.

You need to hunker down to focusing on your core business (no side projects) and most profitable product lines, remembering that your marketing efficiency during a down market will also be negatively impacted. So take out your hatchet, and start chopping away at all non-core and discretionary expenses. And when you are done, if you do not have enough cash on hand to survive the next 18-24 months without requiring any additional financing, you have not cut enough. Keep cutting until you get to that point, even if it means you are cutting into your “flesh” at that point. Because if you don’t, you will never live long enough to survive and fight another day, which is the primary goal of this exercise.

Step 2: Revise Your Business Plan for a Downside Case

If your original business plan was to grow 50% per year, spend unlimited marketing dollars, add many new product lines, and expand into new markets, forget it. You will need to table that plan and dust it off in a couple years. For now, you are in survival mode. Focus, focus and more focus is what is needed right now. And whatever assumptions you made in your original plan, cut them all in half. Your cost of customer acquisition will double in a down economy, which means your revenues could cut in half of where they are today. So, focus more on getting additional revenues out of your existing customer base, where you can. And, if you do not have any revenues from a specific initiative you are working on today, those should get zero attention in this market. Only focus on your highest revenue producing product lines, and double down on those.

Step 3: Talk With VC’s to Learn Their Revised Goals and Keep Networking

Just because investors are not writing as many checks, does not mean you stop speaking with them, as they are still sitting on a lot of “dry powder” of un-invested capital. But when you approach them, instead of raising capital and asking for cash, you are asking them what they are looking for in the limited investments they are making today. And, getting their reaction to your revised business plan to see if you are heading in the right direction or not. If they give you any constructive feedback or suggest pivots, listen to them, and consider taking those actions, if it will help you raise capital a couple years from now. And once you and they are on the same page, and you have set some reasonable goals for yourself, keep in touch with them and hit those goals. VC’s are still prefer to invest in the best teams over the best ideas, and if you can prove that you accomplished the goals you set out for yourself, a year after the fact, you will earn a ton of credibility with them for when you re-approach them for a capital raise once the markets improve, and you have over a year of relationship-building with them under your belt.

Step 4: Seek Alternative Investors Outside of Venture Capital

If you have cut all you can cut out of your expense base, and there is still a capital need, you will need to seek alternative investors outside of the traditional venture capital industry. This could be friends and family, angel investors, crowdfunding, venture debt, credit cards, asset backed loans (e.g., securing inventory, equipment, real estate), revenue share loans, home equity loans, etc. Time to pull up your bootstraps and get creative in your potential funding paths. But focus on equity investments, if you can. If you go down the debt path in a down market, it could end up being the noose around your neck, tightening with each month that passes.

Step 5: Think Out of the Box

If the venture capital market is closed based on a flight to higher quality investments, maybe the private equity market is still open for larger businesses raising capital. Maybe consider rolling up a bunch of companies into one bigger business that is more of the size that private equity investors like. For example, the VC’s may not have liked your $1MM profit business, but if you merge with four of your same-sized competitors, the PE investors may like your $5MM profit rolled-up business. There are creative ways to enable those “mergers” in a cash-free way, based on pro rata revenues or profits, and then help those additional shareholders get an exit down the road, when raising PE capital. Roll-ups are a pretty complicated topic, so get some help if you decide to pursue this path. This article I wrote about roll-ups may help you.

Closing Thoughts

When the venture capital markets close, it is critical to take actions like the above to ensure that your business does not close, permanently! Make the tough decisions now, to live and fight another day. Your current shareholders and future version of your business, built for the years that follow, will thank you.

For future posts, please follow me on Twitter at: @georgedeeb.

The 5 Steps to Survive a Difficult Funding Environment

CB Insights, a leading research organization that tracks venture capital financings, recently released its report on the state of the venture capital market in 2023 and, most recently, the fourth quarter of 2023.  Long story short, it was a terrible year for raising capital. The global market was down 30% year-over-year to its lowest levels in six years. The U.S. market fell to its lowest levels in 10 years, down 21% in the last quarter alone. Gone are the days of "unicorn" creation (companies worth more than $1 billion), mega-sized financings, and excessive valuations.  And, investors simply can’t exit the investments they have already made, with an anemic IPO market.  A pretty bleak picture if you are a startup raising capital today.  So, what are you supposed to do to navigate these choppy waters?  Buckle up and read on, for some useful tips based on my past experience surviving markets like these.

Read the rest of this post in Entrepreneur, which I guest authored this week.

For future posts, please follow me on Twitter at: @georgedeeb.

[VIDEO] What Matters Most? Product or Proof-of-Concept?

I was recently interviewed by ASBN, an online "television network" serving the small business community, about what is more important to investors, the product or the proof-of-concept you are getting around that product.  As you will learn, most investors are flexible on products, and it is more important that the "proof is in the pudding".  I thought this video turned out great, and I wanted to share it with all of you, to see if it can be helpful to you in crafting your investor pitches.  I hope you like it!!

The embedded video player didn't give me the option to change the size of this video.  But, if you want to see a bigger version, simply click the expand size button in the player above.

Thanks again to Jim Fitzpatrick and the ASBN team for having me on the show.  I look forward to our next interview together.

For future posts, please follow me on Twitter at: @georgedeeb.

[VIDEO] What Makes a CEO Fundable to Investors?

 

I was recently interviewed by the Atlanta Small Business Network (ASBN), an online "television network" serving the small business community, about what venture capital investors are looking for in the CEOs of the companies they invest in.  I thought this video turned out great, and I wanted to share it with all of you, to see if it can be helpful to you in sharpening your own skills to impress prospective investors.  I hope you like it!!

The embedded video player didn't give me the option to change the size of this video.  But, if you want to see a bigger version, simply click the expand size button in the player above, or feel free to watch it on the ASBN website.

Thanks again to Jim Fitzpatrick and the ASBN team for having me on the show.  I look forward to our next interview together.

For future posts, please follow me on Twitter at: @georgedeeb.

[VIDEO] Are Investors More Likely to Bet on You or Your Idea?

I was recently interviewed by the Atlanta Small Business Network (ASBN), an online "television network" serving the small business community, about whether investors are more likely to invest in you (the "Jockey) or your idea (the "Horse").  I thought this video turned out great, and I wanted to share it with all of you, to see if it can be helpful to you in learning how investors think, to help hone your pitches.  I hope you like!!

The embedded video player didn't give me the option to change the size of this video.  But, if you want to see a bigger version, simply click the expand size button in the player above, or feel free to watch it on the ASBN website.

Thanks again to Jim Fitzpatrick and the ASBN team for having me on the show.  I look forward to our next interview together.

For future posts, please follow me on Twitter at: @georgedeeb.

[VIDEO] George Deeb Discusses the 4 M's of Evaluating Startups

I was recently interviewed by the Atlanta Small Business Network (ASBN), an online "television network" serving the small business community, about the 4 M's that investors use to evaluate startups:  market, management, model and momentum.  I thought this video turned out great, and I wanted to share it with all of you, to see if it can be helpful to you to in learning what key points to emphasize when pitching investors.  I hope you like!!

The embedded video player didn't give me the option to change the size of this video.  But, if you want to see a bigger version, simply click the expand size button in the player above, or feel free to watch it on the ASBN website.

Thanks again to Jim Fitzpatrick and the ASBN team for having me on the show.  I look forward to our next interview together.

For future posts, please follow me on Twitter at: @georgedeeb.

[VIDEO] George Deeb Discusses Pitching Venture Capitalists (on ASBN)

 

I was recently interviewed by the Atlanta Small Business Network (ASBN), an online "television network" serving the small business community, about how best to pitch a venture capitalist.  I thought this "Tip of the Day" short video turned out great, and I wanted to share it with all of you, to see if it can be helpful with your own fund raising efforts.  I hope you like!!

The embedded video player didn't give me the option to change the size of this video.  But, if you want to see a bigger version, simply click the expand size button in the player above, or feel free to watch it on the ASBN website.

Thanks again to Jim Fitzpatrick and the ASBN team for having me on the show.  I look forward to our next interview together.

For future posts, please follow me on Twitter at: @georgedeeb.

Lesson #337: The 14 Characteristics of a Fundable Startup CEO

I recently stumbled on this great article below from my good colleague, David Gardner (pictured), the founder and General Partner at Co-Founders Capital, one of the most active early-stage venture capital firms in the Southeast, based in the Raleigh-Durham area.  David was kind enough to let me share this article with all of you startup CEO readers.

What I liked about this article was it was a clear way to score your performance, which isn't easy to do as a CEO, typically with no boss to help critique you.  Whether you are doing it with the lens of what an investor is looking for, as detailed below, or whether you are doing it for yourself, just to see if you are doing a good job, everyone needs to be accountable for their actions, including the CEO!!

If you scored perfectly on the below categories, you would earn a total score of 70.  If you were average in each of these categories, you would earn a score of 42.  And, since nobody is perfect and you want to be materially better than average, I would say shooting for a score of 56 or better is where you want to end up.

So, after reading the article, score yourself, in an honest and self-reflective way, and see how you are doing.  If you are doing well, congrats, keep up the good work and you should have no problem fund raising.  But, if you are not, it's time to sharpen your skills, especially if you plan on raising venture capital.  

Thanks again, David, for sharing your wisdom with our readers.

___________________________

Being a CEO is a tough job especially the first time someone has to wear that hat.  Constructive and actionable feedback can be hard to come by.  It can also be difficult to know how well you are doing and what areas you might need to improve upon when you don’t have a boss observing you firsthand. You can only improve what you measure and CEO performance is no exception to that rule. 

To help our portfolio CEOs, we have developed the following evaluation criteria.  It covers some of the things we look for in a solid operator and leader.  This annual evaluation is meant to be completed by the CEO, their direct reports and the board members in an anonymous 360 aggregated review.  It’s purpose is honest feedback to facilitate awareness and constructive discussion. We ask each reviewer to rate the CEO being reviewed in each of the following 14 categories, on scale from 1 to 5 scale, as defined below:

1. Very deficient and detrimental to the organization
2. Needs a lot of improvement
3. Base level of competency
4. Meeting or exceeding expectations
5. An exceptional strength

1. Transparency: Our CEO is genuine and forthcoming with all information significant to the success of the business.  Bad news is delivered as is and not sugar coated.  Good news is not exaggerated.  Facts are presented dispassionately for what they are.  Our CEO shares more key metrics and data trend lines than anecdotal stories.  Board members are provided with the timely and accurate information they need to asset the business and help the CEO make informed and balanced decisions.

2. Leadership:  Our CEO is trusted by the team and other stakeholders to make the informed and necessary decisions required to keep the company moving forward.  Staff members know what is required of them at all times and how their efforts and performance metrics contribute to overall company goals and objectives.  Our CEO is demanding but fair.  Team members, investors and advisors feel listened to and that their opinions and ideas are heard and help to shape our CEO’s final decisions and policies. Team members trust their CEO to do what he or she says.  Our CEO respects the chain of command and does not circumvent his or her managers.  Our CEO is building a positive company culture that people want to be a part of.   Our CEO is always bringing organization to chaos as our venture grows.

3. Communication:  Our CEO can articulate the company’s mission, differentiations, and value props to all stakeholders and potential shareholders including employees, customers, prospects and investors.  Our CEO’s communication is clear, concise and convincing.  Our CEO can see things from an audience’s perspective and handles objections in a non-offensive manner.  Our CEO can speak in terms of value propositions that are relevant to his or her audience.  Our CEO can walk a person logically from where they are (point A) to point B when explaining complex matters.

4. Management:  Our CEO is a good manager.  Team members know what is expected of them, how they are doing and how they are evaluated.  Direct reports are never surprised when promoted or fired.  Objectives are clearly defined as are job descriptions, best practices and procedures.  Direct reports feel confident that their CEO is striving for their individual success as well as company success.  Our CEO meets regularly with the management team as a group and each direct report individually to review progress, lend assistance and address concerns.  Our CEO does not have excessive employee turnover.  Our CEO is a good trainer who takes the time required with new team members to make sure they can do all aspects of their jobs.  Our CEO holds direct reports accountable and will decisively terminate consistently poor performers.

5. Judgement:  Our CEO demonstrates good judgement.  Our CEO is calculating and practical gathering all of the information and opinions available before making important decisions. Our CEO does not make rash uninformed decisions or chase every shiny object.  Our CEO will take calculated risk using appropriate risk/reward analysis.  Our CEO always has a contingency plan in mind.  Our CEO sets reasonable timelines and goals.  Our CEO is data driven and not afraid to pivot when necessary.  Our CEO is thoughtful and dispassionate in decision making testing hypotheses and tactics before committing major resources or time to projects.

6. Time Management:   Our CEO manages his or her time wisely and efficiently.   Daily tasks and projects get appropriate amounts of time based on their importance.  Our CEO projects a consistent and contagious sense of urgency.  Our CEO does not waste time but treats it as his or her most precious resource.  Our CEO alots his or her time in a manner always mindful of the opportunity costs that may be involved.  Our CEO is not a perfectionist and knows when 80% is good enough.  Our CEO does not avoid or short-change tasks that he or she doesn’t like to do.  Our CEO keeps a written personal task list and is constantly reprioritizing it.  Our CEO knows when to go slow and when to go fast.

7. Fundraising:  Our CEO ensures that our company does not run out of money and stays well ahead of any cash shortfalls in full realization of the time it can take to raise capital.  Our CEO is the chief fundraiser for the company and always mindful of our runway, burn and cash-out date.  Our CEO keeps investors and prospective investors informed.  Our CEO understands which types of investors and fund managers are a good fit for our company based on their check size, investment thesis, expertise and geographic preferences.  Our CEO maintains and can defend a reasonable forecast and key assumptions.  Our CEO can deliver a convincing investor pitch deck and plan.  Our CEO inspires confidence.

8. Recruiting:  Our CEO is good at sourcing and recruiting the talent needed to grow our company.  Our CEO makes recruiting a regular priority each week and does not wait until the company is desperate for help before starting the recruiting process.  Our CEO conducts detailed interviews and reference checking.  Our CEO can communicate a vibrant company vision and culture where new hires want to work.  Our CEO is not afraid to hire those more talented than himself or herself in any given area.

9. Strategist:  Our CEO possesses a deep understanding of our chosen industry and market sector.  Our CEO has a full appreciation of the subtleties of our space, competitors and how to position our solution to fit into each customer type and business partner’s perspective.  Our CEO knows when to partner, when to buy and when to compete head on.  Our CEO is always looking for business development opportunities and partnerships leveraging the technology, customer  base or salesforce of others.

10. Negotiating:  Our CEO understands and utilizes basic negotiating techniques.  Our CEO is not afraid to push back on or walk away from a one-sided deal.  Our CEO takes the time to understand another’s position, constraints and goals so that he or she can propose creative solutions.   Our CEO rarely pays full price.  Our CEO is always willing to lose a battle if it means winning a war.

11. Maturity:  Our CEO is always the adult in the room.  Our CEO is not intimidated by those with skills and ideas that are not his or her own.  Our CEO is assertive but not overbearing.   Our CEO is comfortable admitting when he or she has made a mistake.  Our CEO takes into account the human element and emotions in every situation.  Our CEO is always professional.  Once a decision has been made our CEO expects full compliance and will not tolerate insubordination in any form.  Our CEO is not given to emotional outbursts or knee-jerk reactions.   Our CEO cares about more than just the success of the business.   Our CEO encourages the team to take risks and try things. Our CEO does not penalize team members who try creative things that don’t end up working out.

12. Resourcefulness:  Our CEO seeks out and utilizes available resources.  From advisors, key customers, grants, publications and reports to competitive sales collateral and market analysis, our CEO stays abreast of that which might be useful in accomplishing the mission at hand.  Our CEO is coachable.  Before starting a new initiative or implementing a key strategy, our CEO taps available contributors and data.  Our CEO avoids an echo chamber and solicits outside opinions.  Our CEO does not shoot from the hip, make decisions in a vacuum or simply buy his or her way out of a problem or into a quick solution.

13. Financial Management:  Our CEO has a complete understanding of the business model and which assumptions and key metric as most important to the business.   Our CEO can spot trend lines and how they impact the business.  Our CEO is constantly discussing key assumptions with those involved and tweaking them to produce the most accurate forecast possible.  Our CEO understands the impact of debt and increasing the burn rate and never waits too long to right-size the business.  Our CEO knows when to grow faster and when to slow down and proceed more cautiously.  Our forecast is continuously becoming more accurate.

14. Administrative:  Our CEO consistently ensures that required administrative tasks such as submitting monthly financial statements and updated forecasts are submitted to board members.  Our CEO fulfills written and legal obligations to maintain D&O and key-man insurance.  Our CEO schedules and conducts all board meetings and annual shareholder’s meetings on the required cadence.   Our CEO schedules required meetings well in advance and sends board decks, option grant proposals, legal and other documents for board member review well in advance of board meetings.

For future posts, please follow George on Twitter at @georgedeeb and follow David at @StartUpHats. 

Lesson #324: A Guide to Small Business Loans

[Image source: https://cdn.pixabay.com/photo/2017/09/07/08/54/money-2724241_960_720.jpg]


As you know, in the wake of the Coronavirus, the federal government passed the CARES Act in March 2020, an economic stimulus recovery package, where employers who retain their employees through June 30, 2020, will be rewarded by having their payroll and certain other costs paid for with the loan, entirely forgiven.  As I write this post, the application period is just opening today, and there is a mad rush for the potential of "free money" from the government.  So if you think you qualify, you really should be applying today.  As you can imagine, the demand is far going to exceed the supply of capital, even if government is shelling out hundreds of billions of dollars from this program.

So, when that capital runs dry, what are the rest of you going to need to do, to find your much needed capital infusion.  You are going to have to seek it out from traditional lending sources.  That will be a lot harder to do, and the loan won't be forgiven, but it may just be the lifeline your business needs to survive the current economic downturn.  This post summarizes the types of small business loans that are out there, the typical requirements and the typical process you should expect.

In helping me write this post, I wanted to give a special shout out to Luke Hayward, my colleague at Funding Circle, an online lending platform for small businesses, who is an expert in this space who shared his wisdom on the lending market with me.

An Introduction

Many small businesses may not be able to meet all of their financial needs with the money they have on hand. It’s not that they don’t make enough money, but circumstances often require businesses to borrow. Maybe it is just a slow time of year, or the business might need to buy a new piece of equipment, or in the current times--a national pandemic. Whatever the case may be, it is not uncommon for a small business to need a loan.

While the need to borrow might be common, it isn’t always easy for small businesses to get the funding they need. This isn’t just about getting approved for a loan, which is difficult enough task in itself.  But, many small business owners simply don’t understand all of their borrowing options, and this can lead to them taking a loan that is not a good fit for their business.

With this introduction to small business loans, owners can gain a better understanding of their borrowing options, for both in good times, and the current bad economic climate we are currently living in. This knowledge will make it easier to find a loan when you need one, and it will also help you find the lending option that is right for your business.

Types of Loans

Term Loans

A term loan is one of the more straightforward options for small business financing. The business owner gets a lump sum of cash and they have to pay it back with interest over an agreed-upon period. Term loans are a flexible option that can be used to cover a wide range of expenses, and the funding can often be released in as little as two days.

Business Line of Credit

This is a type of revolving credit. A financial institution gives the business a line of credit with a limit. As long as the line is open, the business owner can borrow up to the limit and they only have to pay interest on what they borrow.

SBA Loans

In addition to the Paycheck Protection Program, which is getting all the attention this month, the Small Business Administration (SBA) has a range of other loan programs that are designed to help small businesses. Basically, these loans are backed by the SBA. The intention is to help small business owners get loans that they might otherwise not be approved for and to help them get loans at lower interest rates.

Equipment Loans

These are loans that are designed specifically for helping small businesses finance the purchase of a piece of equipment or any other asset that is vital to day-to-day operations, where the asset is often collateral for the loan.

Merchant Cash Advance 

With this option, the business gets a lump sum of cash that is guaranteed by future credit and debit card sales. This can be a way for a small business to access money quickly, but a merchant cash advance usually comes with high interest rates.

Invoice Factoring

This is a way for a business to get money for outstanding invoices. The lender gives you a percentage of the outstanding invoices and then they collect on the accounts. Invoice financing can be a good option for businesses that need income faster than the invoices are paid by their clients.

Peer-to-Peer Lending

P2P lending is a newer option. The business owner uses an online platform to connect with lenders. In most cases, the business would borrow from a group of investors who would all have a right to a percentage of the interest that is paid on the loan.

Venture Debt

And, I have previously written about venture debt as a a funding source.  Venture debt is a hybrid between debt and equity, and often comes at expected returns on invested capital somewhere in between stand-alone debt or equity financings.  I won't repeat the details here, but please re-read the above linked article.

It is important to note that the terms of the loan will vary significantly for different lending products. You could find short-term loans that are for just a few months, and there are also loans that can be repaid over many years. Along with that, you also have to consider the interest rates with different lending products and fees that may be associated with borrowing. Many loans also have penalties for things like late payments or for paying the loan off too early.

What a Business Needs to Get a Loan

A small business is not going to get approved for a loan just because they ask for one. Each lender has requirements that must be met for the borrower to get approval. These requirements vary from one lender to the next. Even with the same lender, the requirements may vary depending on the type of loan.

The following are a few of the things you will need to prepare in order to get approved for a loan:

Cash Flow/Income

Most lenders are going to want to see your cash flow and income before approving a loan. The better your situation is in the regard, the more likely you are to be approved. Higher income can also increase the amount that a lender is willing to approve.  Your operating income typically needs to be at least 2x the expected interest expense on the loan, and your business plan must show a reasonable path to repay the loan within 18 months or so.

Debt

It isn’t just about income – lenders are also going to want to consider your debt to income ratio. If it looks like the business is already overburdened with debt, it will be difficult to get approved for a new loan.  This works best for companies with under 50% debt to invested capital ratios, including any new loans that are being applied for.

Credit History

Your personal credit history is going to be a factor when applying for a small business loan. Check your credit report and try to improve your score before applying for a small business loan.

Business Age

The reality is that new businesses are more likely to fail. For that reason, lenders tend to favor businesses that have been in operation for at least a few years. If you have been in business for less than a year, it will be difficult to find financing.

Collateral 

It is possible to get an unsecured loan, but lenders view collateralized loans as less of a risk. If you have collateral (e.g., assets, receivables, invoices, real estate), it will be easier to obtain financing and it may even help to reduce the cost of the loan.

Turnaround Time to Get a Loan

The amount of time it takes to get approved and receive funds can be an important factor for many small businesses. This is especially true if you need the money in a hurry, as most of you likely are in today's market conditions.

Unfortunately, there is no straightforward answer concerning how long it takes to get a loan. The approval process will vary from one institution to the next. You will also find that different types of loans might have different approval times.

You will find some financing options that offer cash in as little as 24 hours, but there are also situations where it might take weeks for a loan to get approved. In general, the options that offer fast cash tend to have higher interest rates and more fees, but they can be a good option if your business needs money right away.

How much can a business borrow?

You may also wonder what your borrowing limit is for different types of loans. Different lenders have different limits. Furthermore, the lender is going to consider things like your income and debt to determine how much they are willing to lend.

On the high end, you could potentially get a loan that is for a million dollars or more. Looking at the lower end of the lending market, you also have options like microloans that can offer a sum of just a few hundred dollars.

What is the process of getting a loan?

If you want to get the financing you need and find the right loan, you are going to need to be prepared. The following are some of the steps you should take when looking for a small business loan:

Create a Business Plan

You need to be able to show lenders you have a viable business plan. Not only that, but you want to be able to tell them why you need the money and show them your plan for paying it back.

Get Your Credit Report

Check your credit score and get your credit report from the three major reporting agencies. You should also review the reports for any issues. If you find any problems, try to get the reports fixed before applying for a loan.

Compare Options

Your business plan should provide you with the information you need to know which type of loan is right for your business. Look at the available options and find lenders that offer products that are suited to the financial needs of your business.

Apply for a Loan

Once you find a lender that offers the best loan for your business, start the application process. You should try to have a few options available since you might not get approved for the first loan you apply for.

Popular Online Lending Platforms

The internet age has made it easier for businesses to find and compare loans. You have a range of online lending platforms that can help to ease the process and many of these platforms cater to specific types of loans.

There are many online lending platforms that invest their own capital or are a marketplace where lenders compete; these include Kabbage,  BlueVine, SmartBiz, OnDeck, QuarterSpot, FundBox and Street Shares.  Sites like Funding Circle and LendingClub are two of the top names for P2P lending. Kiva and LoanMe are good sites for microloans. And, that doesn't even talk about industry specific sites, like Fundrise, which is an online platform focused on the real estate market.  Or, sites that have a specific purpose, like Currency, for equipment loans.  There is also this great comparison of various funding platforms completed by QuickSprout, which may be helpful during your research.  And, don't forget about your crowdfunding options.  So, do your online research and figure out the best funding site for you.

Depending on the needs of your business, you should be able to find an online platform that offers loans that can meet your needs – you just need to take the time to find the right option for your business.

Concluding Thoughts

As you can see, there are plenty of small business loan options to consider; you simply need to know where to look!  Thanks again to Luke Hayward for his help here on helping me write this post.  If you think Funding Circle could be a good option for your business, feel free to email Luke at luke.hayward@ fundingcircle.com, and he will help point you in the right direction.  I know the current market conditions in the wake of the Coronavirus may feel bleak, but I promise you, there is a path forward with a light at the end of the tunnel.


For future posts, please follow me on Twitter at: @georgedeeb.

Lesson #322: Need Venture Capital? Take Your Company Public in Canada!

I was recently introduced to George Khalife, a Chicago-based Vice President at the Toronto Stock Exchange.  In Canada, there are two exchanges; the TSX which is the senior exchange suited for later stage, more established businesses and the TSX Venture Exchange (TSXV) which allows earlier-stage companies to raise public capital--for companies that otherwise would be too early stage to go public in the United States and are typically more dependent on traditional private market financings funded by venture capitalists.  It was an eye-opening conversation, that I didn't even think was possible, and I wanted to share those learnings with all of you.

TARGET COMPANIES

The Venture Exchange is targeting companies with $5MM-$50MM in revenues, with valuations of $5MM-$50MM, that are trying to raise $5MM-$25MM in capital.  Companies can be in any industry (although many are in the technology industry) and the business can be headquartered anywhere.  If that sounds like your business, keep reading.

HOW IT TYPICALLY WORKS (on the TSX Venture Exchange)

The most common way to go public on the TSX Venture Exchange is through a Capital Pool Company (or CPC). This is a unique listing vehicle which introduces investors with financial market experience to entrepreneurs whose companies require strategic capital. Unlike a traditional IPO, the CPC enables seasoned directors to set up a public shell company with no assets other than cash.  The CPC then uses the funds to seek out an investment opportunity - and once the operating company has been acquired and meets the listing requirements, its shares begin trading regularly on the Venture Exchange.  Here is an example typical structure of the ownership of the company after going public.

THE PROCESS YOU WOULD FOLLOW

If you are a company in the Midwest U.S. doing at least $5M in revenue and are interested to learn more about raising public capital, get in touch with George Khalife at the TSX who can help walk you through the process in more detail (email provided below).  He will likely set up an intro call to learn more about your business and figure out from there the best course of action - this might involve you sending an investor pitch deck which George would review and assess which introductions to the investment community make the most sense based on your company’s profile.

If approved, your pitch will get circulated to potential investors (the founders of the CPCs described above).  If any of them like your business, those CPC founders will act like your investment banker to do all the work in helping to get your funds raised through their public shell company.  It would typically require a day or two of investor meetings in Toronto, and the process from start to finish is around 3-4 months in length.  The total cost to the issuer (your business) would be $100K-$500K depending on the deal size, which would be deducted from the funds raised in the round.  All monies raised can be in US Dollars.

THE ADVANTAGES

The advantages here are that this is a creative way for early-stage businesses in the U.S. to raise capital, especially if they are having trouble getting the attention of the U.S. venture capital firms.  And, once you are public, raising your 2nd and 3rd rounds, graduating from TSXV to TSX, are materially easier than trying to "pound the pavement" for new venture capital investors.

The important factors to focus on is the “why” of raising public capital - reasons like; (1) access non-dilutive growth capital to execute against strategic growth plans, (2) improve company profile from both a community and customer perspective, (3) ability to make the right acquisitions by using shares as currency, and (4) added credibility that comes from being a publicly-listed entity, etc. 

THE DISADVANTAGES

The disadvantages here are that now you are a publicly traded company.  Your financials will need to be filed quarterly and they will be openly visible to all your competitors.  And, the costs of the financing are materially higher than doing a private round with a venture capital firm.  But, maybe you don't care, because you ultimately were able to raise capital that you otherwise could not have raised.

KEY CONSIDERATIONS

Going public is a major milestone for any company and is a decision that requires careful consideration and advice. To start, ask yourself the following questions when thinking about listing:

● Does your management team have expertise in your industry sector and experience running a publicly-traded company?
● Is your management team committed to the implementation of effective corporate governance measures?
● Does your company have an attractive track record or a product or service that has a readily identifiable market / significant growth potential?
● Have your management team and board of directors invested their own capital in the company?
● Has your company developed the appropriate internal controls that are needed to meet financial reporting requirements?

If you have answered yes to the above questions, you should be a viable candidate. It’s certainly not the best fit for every company, but it is surely a right fit for some - and as founders, it’s important to consider all the financing options on the menu before making a definite decision of which path to take.

CLOSING THOUGHTS

Anyway, I thought this was unique and worth sharing as a potential funding path for you.  Thanks George for introducing the TSX Venture Exchange to me (and our readers).  If anybody desires to reach out to George, feel free to email him at george.khalife @tmx.com.


For future posts, please follow me on Twitter at: @georgedeeb.

Should I Bootstrap or Look for Investors?

I was recently interviewed by the U.S. Chamber of Commerce for my thoughts on the big question:  should I bootstrap finance my business or look for investors?  I figured this was an important enough topic to share my answer with all of you.  You can read the full article at this link at the U.S. Chamber of Commerce website.

For future posts, please follow me at: @georgedeeb.

[VIDEO] George Deeb Presents Advice on Approaching Investors at Startup Summit

Last week, I had the pleasure of being a speaker at the 2018 Startup Summit at NC State.  It was a great event with all-star panelists and speakers offering terrific insights for entrepreneurs.

The emcee, Keith Washo, asked me to do a quick video interview on what investors are looking for in their startup investments and their entrepreneurs.  Here is a link to the video:







So, hopefully, there are some nuggets in there that will help you all with your businesses.  Thanks again Mark Bavisotto and Keith Washo at Startup Summit, for including me in your program.


For future posts, please follow me on Twitter at: @georgedeeb

Lesson #277: Revenue Share Loans

I recently met Benji Taylor Jones and Jim Verdonik, the crowdfunding team at Ward and Smith (a leading law firm in Raleigh), who introduced me to a new type of loan that I had never seen before, called a revenue share loan. Apparently, revenue share loans are being popularized by crowdfunding – especially in offerings to both accredited and non-accredited investors in Regulation CF and state crowdfunding offerings.  Let's learn more, to see if this is a valuable financing vehicle for your business.

WHAT IS A "REV SHARE" LOAN?

A revenue share is a loan that is paid back over time by the borrower "sharing" a percentage of its "revenue" at regular intervals until it has returned to the lender a fixed return.

For example:  let's say a local brewery needs $100,000 to expand (amount you can raise is capped at $1MM per year).  The business borrows $100,000 from investors with a promise to return to them a fixed amount (say, 1.5x the amount loaned) over time.  The business then pays off the loan by paying investors a percentage of its revenue (whatever is a comfortable amount for your business, say 5%-10%) in periodic (i.e., monthly or quarterly) installments until the fixed return (in this case $150,000) has been met.  As an investor, you would receive your pro rata share of such payments based the amount of money you loaned the business.  The business's obligation could be open ended (meaning the loan remains outstanding until the stated return is met), but more often it might pay the return back within a specific time window (say 3 to 5 years, which may also require the business to make a "balloon payment" at the end of that period if there is any shortfall).  The shorter the length of time the company takes to fulfill its obligation -- the quicker the payout, the higher the rate of return (ROI).  So, investors "hit the jackpot" on loans that have a five year maturity date if the company repays the loan in three years, because revenue increased faster than the company projects.

Revenue share arrangements have lots of labels– they can be called a "revenue share loan", a "revenue share note",  "revenue share agreement," "revenue share interest" or replace "revenue share" with "royalty" in all of the above.  But whatever it is called, a "Rev Share" (as Benji and Jim like to coin it) is a "security" and that makes it subject to federal and state securities regulation.

Rev Share is rapidly becoming a popular choice for companies using "investment crowdfunding" exemptions to access capital.  Crowdfund Capital Advisors recently released data focusing on the "small but significant group" of companies utilizing Rev Share to raise capital under Regulation CF.  Picking up on this trend, Startwise.com, the newest FINRA approved Regulation CF platform, is specifically targeting Rev Share, allowing anyone to invest in businesses for as little as $100.  LocalStake has been featuring Rev Share for the small businesses it helps raise capital for several years.  But Rev Share isn’t a new concept.  It has been used in the oil and gas industry, real estate and film and music industries for years.  Franchising, and even share cropping, are other forms of Rev Share that long preceded Ccrowdfunding for other business startups.

WHY ISSUERS SHOULD LOVE "REV SHARE" LOANS?

Crowdfunding is popularizing Rev Share, because many retail investors prefer an immediate monthly or quarterly investment return to waiting five to ten years for an equity investment to hit a home run.  Every dollar an investor gets back in monthly payments reduces investor risk.

It has the potential to be a great win-win for investors and small businesses – particularly those businesses that are close to, or already have a history of, producing revenue.  Take our brewery example, as an investor if you know that you basically get a penny of each beer the brewery sells each month (or sometime like that), then it's not hard to imagine where you will go for happy hour on Friday afternoons; whether you might buy that extra round for your friends while you are there or where you recommend your neighbor buy the keg for the next Labor Day cookout.  This makes it great for businesses with products to sell with relatively high margins and those with repeat customers (think food, booze, software).

Rev Share creates an incentive for investors to buy a company's products and services and to become marketing ambassadors for the business, which in turn builds revenue the company needs to repay its loan.

THE TOP 10 BENEFITS OF "REV SHARE" LOANS FOR CROWDFUNDING:

1. Rev Share is NOT equity.  Investors are not buying any ownership interest in the business.  Investors who purchase Rev Shares have no rights to vote or control management.

2. Rev Share investors are creditors, not shareholders or owners.  Thus there is no "messy cap table" as a result of crowdfunding.  Once the promised return is paid, the obligation is cancelled and any contractual relationship between investor and the business is terminated.

3. Rev Share is NOT dilutive.  Rev Share does not dilute the ownership, control or economic interest small business owners (and their core investors) have in the business.

4. Rev Share avoids setting a "valuation" on the business.  The company does not need to set or negotiate a valuation of its business to sell Rev Share.  

5. Rev Share is offers investors liquidity and immediate ROI, assuming the business is close to or producing revenue.  The quicker the obligation is paid, the higher the ROI.

6. Rev Share does NOT require an exit strategy.  Most small businesses considering investment crowdfunding are run by owners looking to grow the company long-term and stay true to the mission that lays at the core of their business.  They are not looking to have an exit (by selling the company or going public sometime soon).  With Rev Share investors do not need to wait for an exit to earn ROI.

7. Rev Share reduces default risk.  With a Rev Share the amount a company owes each measurement period varies solely based on the amount of revenue it receives.  This reduces the chance of default when compared to traditional loans where the borrower must find cash to service set interest payments on a regular basis or risk default (and the bad things that accompany missed payments) irrespective of how it business is doing.

8. Rev Share is  based on projected cash flow and is good for companies with seasonal or variable sales.  Since Rev Share is based on projected cash flow, it is a really interesting alternative for companies that experience seasonality in their cash flows.  During months with higher revenues, they can repay more of their debt.  On the flip side, when sales are slower, their repayment would be less.

9. Rev Share has benefits when compared to traditional bank financing.  While it's true that the cost of this kind of loan can be more expensive than traditional bank financing (i.e., the implied interest rate paid to investors is higher than what a bank might charge), many small businesses that are good Rev Share candidates are not ideal candidates for bank financing.  In addition, a business using a Rev Share typically avoids bank requirements for collateral, personal guarantees, security interests on assets and other financial covenants.

10. Rev Share is stackable.  You can combine Rev Share with other types of financings to fund a single project.  For example, a business could raise capital through an accredited investor equity offering, a secured bank loan or equipment financing loan in addition to a Rev Share offering (if the other investors and bank permit).

Crowdfunding is mostly about giving ordinary people the chance to invest in businesses (and products and services) they love.  Rev share builds brand loyalty and incentivizes customer-turned-investors (who are already committed to the business) to buy more products and services and to encourage their friends, friends, neighbors and colleagues to do the same.  This in turn increases the company's revenue and, potentially, allows the company to pay the loan faster and at a higher ROI for its investors.  So, when all the stars align and things work as planned, Rev Share is an optimal solution for companies seeking capital and customers-tuned-investors looking to support the businesses they love while having access to a relatively quick and decent ROI.

WHAT TYPE OF BUSINESS IS A GOOD "REV SHARE" CANDIDATE

The business attributes Benji and Jim look for when they recommend Rev Share deals are:

• Either track record of having revenue or certain near term prospects so that investors will start getting money back within a few months.

• Companies that are or soon will become profitable.  You can't repay debt from revenue that you have to spend to pay your operating expenses.  Revenue growth without profit growth can cause borrowers to default, because their monthly repayments increase at the same time their other expenses are increasing.

• High margins hold the potential for profitability, but that's only true if management controls expenses.  So, the best Rev Share candidates are business where expenses don’t grow as fast as revenue.

• Projections for high revenue growth rates enable companies to repay their loans from the faster growth they generate from the loan proceeds.

• The business can make a good case that every dollar invested in marketing or expanding production has historically resulted in multiple dollars of additional revenue.

Benji and Jim have developed financial modeling tools that they can use to help you set interest rates and projected repayment installments based on different terms you can consider offering investors, to help you determine if this is a good road for your business.  But, in a quick example, let's say your business is planning to grow from $1MM in revenues today to $3MM to $5MM to $7MM in the next three years.  If you raised the $1MM cap, meaning you need to repay $1.5MM (1.5x) within the five year cap, a 10% Rev Share would repay $300K in year one, $500K in year two and $700K in year three, for a total of the full $1.5MM.  Leaving you a two year cushion, in case things don't go to plan, which they never do.  And, don't forget, you can structure this with a lower Rev Share (e.g., 5%, and set up for a balloon payment in the final year), if more desirable to you to "push the can down the road", understanding the risks to cash flow in that last year.

THIS SOUNDS TOO GOOD TO BE TRUE, WHAT'S THE CATCH?

Well, there are few challenges with Rev Share:

1. Repayments can slow a business' ability to reinvest in long-term growth compared to equity. Selling equity promotes faster growth because there is more money to reinvest in growth every year (because you are not repaying debt installments).

2. Paying investors is an ongoing expense and headache.  It also requires sharing periodic revenue numbers with many people.  This info may leak to competitors and customers.

3. In an LLC or other pass through entity, owners will be taxed on phantom profits used to repay the loans.  Not a problem with equity.

4. Future lenders may be unwilling to make new loans to the company while the Rev Share debt is outstanding.

5.  Let's not forget, this is debt, and will default the company if it is not repaid.

CAN YOU RAISE "REV SHARE" FUNDS OUTSIDE OF CROWDFUNDING?

Rev Share is absolutely an available alternative to any kind of investment (not just crowdfunding) – the terms may get impacted by the typical goals of the "class" of investor and the degree to which it can be marketed to them.  For instance, Benji was just talking to a company that was looking at a form of Rev Share to use for an angel round.  Angels typically have higher ROR objectives than the crowd – so the structure may need to target a higher payout (3x to 5x) and the question becomes whether there is sufficient margin to reach that threshold.  So, it becomes a numbers game and whether the deal is marketable to specific types of investors.  But, practically and legally, there is no reason you cannot use a Rev Share in a traditional offering or combined with another offering (e.g., like combine Rev Share with a little less equity than you might offer in the normal angel deal).
This product is so new, that there is a lot of education that  needs to go on with all types of investors in this area. 

INVESTOR CONSIDERATIONS

Investors also should recognize that there are always risks associated with any kind of investment, and particularly investments in small businesses and startups.  There is no guarantee that the business you love will actually continue to operate successfully or derive sufficient revenue to repay your loan.  Many of the things that might be appealing for companies about Rev Share cut the other way for investors.  For instance, unlike equity, Rev Share investors do not have any voting, economic or management interest in the business.  Although they are creditors, they typically do not benefit from personal guarantees, security interests, financial covenants, or other restrictions that protect banks or institutional investors.  Often Rev Share loans can be subordinated to other borrowings by the business.

Although Rev Share could be an attractive diversification strategy and offer the opportunity to support the businesses you care most about -- it is important you consider all of the terms being offered by the company, including whether the company is generating revenue, to minimize your risk of not getting paid back and maximize your expected return.  You should consult your personal tax, accounting and legal advisors before making an investment.

LIVING TOGETHER AFTER THE DEAL CLOSES

Raising capital through investment crowdfunding is complicated.  Businesses need to be prepared for added regulatory and compliance costs, as well as the distractions that accompany taking investments from the "crowd".  Management must provide information and respond to these investors, even if they are not "owners" of the business.  Businesses utilizing Rev Share must manage the payout process carefully.  Rev Share has a more complex tax impact than say, straight debt or equity, due to the variable nature of the installment payments.  Businesses and investors alike will need to understand how tax payments and paperwork will be handled post-closing.  (Many platforms, like Streetwise and LocalStake, offer post-closing payment services to help companies manage these hurdles.)

Like in any marriage, having a long lasting mutually-beneficial relationship with Rev Share depends on whether your projections were realistic and how you manage your business.  So, be careful your love of Rev Share doesn't end in a messy divorce.

Thanks again, Benji and Jim, for helping me to share your wisdom with our readers.  If any of you would like to reach out to them for help, feel free to directly reach out to Benji at (919) 277-9142 or btjones@ wardandsmith .com.


For future posts, please follow me on Twitter at: @georgedeeb.

Raleigh-Durham Private Equity Firms

Following up on our list of Raleigh-Durham Venture Capital Firms & Angel Networks, below is a list of private equity firms in the region, serving later stage companies.  I included a high-level summary of their investment criteria, as communicated on their websites.

Aiglon Capital Mgmt. --  mfg., dist., svs., $20-$250MM revs, $2-$20MM EBITDA.

Capitala Group --  diversified. $3-$10MM checks, under $4.5MM EBITDA, $1BN fund

Cherokee Fund --  brownfield real estate, $2BN managed + VC in env./energy

Davie Poplar Capital --  health, educ., med., svs., mfg., dist. Up to $20MM revs, $500K-$3MM EBITDA, recurring revs., capex light.

Eli Global --  fin., health, ins., mktg., other.

Fulcrum Equity Partners --  health svs. & tech, SaaS, tech-enabled services, $3-$20MM checks, $3-$50MM revs, $204MM fund.  Chapel Hill office of Atlanta based firm.

Halifax Group -- biz svs., franchising, health, infrastructure.  $5-$30MM EBITDA, $25-$75MM checks, $50-$250MM valuations.

Hargett Hunter --  hospitality, restaurants.  $10-$30MM checks. $150MM fund, 5-50 stores.

Hawthorne Capital --  health, tech.  $3-$20MM checks.  $2-$100MM+ revenues.

Investors Management Corp. --  diversified, franchisable.  $5-$25MM EBITDA.

Meriturn Partners --  diversified.  $20-$300MM revs, control oriented.

Morgan Creek Capital --  health, energy, nat. resources.

Mosaic Capital Partners --  biz svs., chem., CPG, env., food/bev.., health, dist., mfg., log..  Over $10MM revs, reliable cash flow.

NovaQuest Capital Mgmt. --  life sciences, health.  $1.6BN mgd, $20-$100MM revs, up to $500MM valuations.

Plexus Capital  --  diversified.  $950MM mgd., $12MM average check, middle market.

Triangle Capital Corp. (TCAP) --  mfg., dist., transport, energy, comms., health, restaurants, other.  $5-$50MM checks, $20-$300MM revs, $5-$75MM EBITDA.


OTHER PRIVATE EQUITY FIRMS IN NORTH CAROLINA (INVESTING IN REGION)

Blue Point Capital Partners (Charlotte) -- eng., env., ind., metals, dist.  $20-$300MM revs, over $5MM EBITDA.

Cadrillion Capital (Charlotte) --  info., health, agric., biz svs., fin., other.  Over $1MM EBITDA.

Carlyle Group (Charlotte) --  aero., defense, govt., cons., energy, fin., health, ind., RE, tech, biz svs., telecom, media, transport.  $53BN mgd., $130MM average check.

Carousel Capital (Charlotte) --  biz svs., cons. svs., health svs.  Over $3MM EBITDA,  up to $150MM valuation.

Coleville Capital (Charlotte) --  mfg., dist., biz svs., diversified, ind.  $10-$100MM revs, $2-$6MM EBITDA.

Copeley Capital (Charlotte) --  health, svs., bldg., waste, ind., CPG.  Over $2MM EBITDA.

Falfurrias Capital (Charlotte) --  cons., food/bev, biz svs., fin., mfg., ind., energy, health.  $3-$25MM EBITDA.

Fidus Investment Corp. (Charlotte) --  diversified.  $10-$150MM revs.

Five Points Capital (Winston-Salem) --  biz svs., ind., mfg., dist., health, educ., tech., mfg.  Over $3MM EBITDA, $5-$25MM checks.

Global Endowment Mgmt. (Charlotte)  --  manage money for foundations

Kian Capital (Charlotte) --  biz svs., dist., health, mfg.  $5-$15MM checks, $15-$150MM revs, $2-$15MM EBITDA.

Pamlico Capital (Charlotte) --  biz svs., comm., health, tech.  $15-$200MM revs, $20-$100MM checks.

Ridgemont Equity Partners (Charlotte) --  ind., svs., health, energy, telecom, media, tech.  $25-$100MM checks, $5-$30MM EBITDA.

Salem Investment Partners (Charlotte) --  biz svs., mfg., CPG, dist., recurring revs.  $1MM+ EBITDA, $10MM+ Revs, $2-$10MM checks.

Summit Park (Charlotte) --  biz svs, cons. svs., mfg., dist.  $150MM fund.  $20-$100MM revs, $4-$12MM EBITDA.

Tidewater Equity Partners (Wilmington) --  mfg., svs., tech, fin., energy, retail, health.  $10-$30MM revs, $1-$3MM EBITDA.


Be sure to dig deeper on their websites to make sure they invest in your specific industry, revenue stage, geography and desired minority/majority deal structure before reaching out to these investors. Red Rocket can help make introductions to many of these investors, so please leverage our relationships here.

For future posts, please follow us on Twitter at: @RedRocketVC

Raleigh-Durham Venture Capital Firms & Angel Investor Networks

Below is a list of selected venture capital firms and angel investor networks that are actively investing in the Raleigh-Durham area.  Most are split between a technology or life sciences focus, although many invest in additional industries, as well.  Please research them at their linked websites, to see who may be the best fit for you.  I organized this list in terms of stage of investment focus, from early to late stage investors.  So, please don't reach out to VC's if you do not fit their target criteria.  And, be sure to research their specific technology focus on their websites (e.g., healthcare, education, digital media, SaaS), to make sure your business is a fit for them.  Also, as a reminder, don't blindly cold call these companies.  It is always best to have a warm intro into one of their partners, where Red Rocket or others may be able to help here.

ANGEL INVESTOR NETWORKS IN RALEIGH-DURHAM

Carolina Angel Network --  UNC angels for UNC related entrepreneurs

Carolina Seed Investors --  life sciences focus

Duke Angel Network --  Duke angels for Duke related entrepreneurs

Eagle Angel Network --  UNNC angels for UNNC related enterpreneurs

Investors' Circle --  impact investing

Raleigh Investment Group --  A network of CEOs looking for alternative investments

RTP Angel Fund -- for promising startups based in North Carolina or the Southeast

RTP Capital Associates --  technology centric, or low-tech execution driven

Triangle Angel Partners --  high tech and life sciences

Triangle Venture Alliance --  UNC, Duke, NCSU, NCCU consortium of networks

Wolfpack Investor Network --  NC State angels for NC State related entrepreneurs

xElle Ventures -- women angel network for women entrepreneurs


SEED STAGE (Up to $250K checks from $0 revenues)

Attic Ventures -- pre-seed creation stage

Cape Fear BioCapital -- therapeutics focus

Champion Hill Labs -- technology focus 

Cofounders Capital --  software focus

Contender Capital --  technology focus

Full Tilt Capital --  technology focus

Front Porch Venture Partners -- represent family offices looking for startups

Harbright Ventures -- technology, services, healthcare, industrial focus

Inception Micro Angel Fund (IMAF) -- generalists

Madison River Ventures -- ecommerce, SaaS focus

North Carolina Venture Capital Fund --  technology focus

Pilot Mountain Ventures --  technology and medical devices

Primordial -- pre-seed tech companies based in the Triangle area

Resilient Ventures --  African American founded and owned businesses.

Solidarity Capital Group --  social impact (community dev, economic dev, sustainable agric., energy/environmental, social finance)

Sustainable Food Ventures -- sustainable food products

Triangle Tweener Fund --  regional index fund spreading money across early stage companies.


EARLY STAGE (Up to $1MM checks in up to $1MM revenues) 

BioInnovation Capital -- life sciences in partnership with local BioLabs incubator

Bull City Venture Partners --  software, internet focus

IDEA Fund Partners --  technology focus

Morgan Creek Funds -- blockchain focus

Oval Park Capital --  deep technology and enterprise software

Triangle Tweener Fund --  backing early stage companies in Triangle area


SERIES A STAGE ($1MM-$5MM checks in $1MM-$5MM revenues)

Cato BioVentures --  life sciences focus

Cherokee Investment Partners --  real estate, environmental, energy, others

Jurassic Capital --  B2B software

SJF Ventures --  impact investing

Union Grove Venture Partners --  data, agriculture, retail, and food tech


SERIES B  STAGE ($5MM-$20MM checks in over $5MM revenues)

Fulcrum Equity Partners --  healthcare and technology focus (Chapel Hill office of Atlanta firm)

Hatteras Venture Partners --  life sciences focus

Intel Capital --  technology focus (corporate backed by Intel)

One Better Ventures - mission-driven consumer brands

River Cities Capital Funds --  healthcare and technology focus

True Bridge Capital Partners --  into funds early or mid-to-late stage direct, tech focus


ALL STAGES

Echo Health Ventures --  healthcare focus

Pappas Ventures -- life sciences focus


STARTUP STUDIOS

Acorn Innovestments -- advanced materials that solve environmental issues

Bluedoor --  healthcare technology

Bootstrap Advisors --  niche consumer products, online training,  telehealth focus

Disruptive Enterprises --  food & beverage focus

8 Rivers -- sustainable infrastructure innovations in future-critical areas

Excelerate Health Ventures -- healthcare focus

Golden Pine Ventures --  biotechnology and biomedical focus

The Launch Place --  generalist

Rex Health Ventures --  UNC related, healthcare focus

Sherpa Collaborative --  consumer products focus

OTHER NORTH CAROLINA FIRMS WHO INVEST IN RALEIGH-DURHAM

Asheville Angels (seed stage, Asheville)

Blue Ridge Angel Investor Network (seed stage, Asheville)

Charlotte Angel Fund (seed stage, Charlotte)

Double Time Capital (growth stage, Charlotte, sustainable energy)

ECU Investor Network (seed stage, Greenville)

Frontier Capital (growth stage, Charlotte)

Lowe's Ventures (all stages, Mooresville, emerging tech, retail tech, home tech)

North Carolina Innovation Funds (Charlotte, state fund co-invests behind other VCs)

Piedmont Angel Network (seed stage, Winston-Salem)

SunBridge Partners (early stage, Charlotte, technology with global applications)

VentureSouth Piedmont (angel network, Piedmont area)

Wilmington Investor Network (seed stage, Wilmington)


OTHER FIRMS

I would also recommend reaching out to investors outside of North Carolina who are open to investing in the region.  So, research venture investors in the surrounding states in the Southeast.  Or, even further beyond, as I know a lot of Chicago venture capitalists are open to investing in smart companies, wherever they are located, and for the right companies, Red Rocket can make introductions to our relationships there.


For future posts, please follow me on Twitter at: @georgedeeb.

Lesson #264: Financing Mergers & Acquisitions

We have previously talked about How to Set Your Mergers & Acquisitions Goals.  But, once those goals have been set, and targets have been identified, how exactly do you fund those transactions?  As you will read, financing M&A activity is very different than funding stand-alone growth with venture capital, as the investors are largely very different--mostly banks, private equity firms and family offices, instead of venture capital firms.  This post will help you better learn your M&A financing options.

EQUITY ONLY--NO CASH NEEDED

M&A activity doesn't always mean that cash needs to trade hands.  Sometimes you can implement a merger by basically using your equity as a currency, and negotiating a pro rata stake in the combined company.  For example, if you have two equal sized businesses both valued at about the same valuation stand-alone,  you can merge the companies together and your original shareholders would own 50% of Newco and the other company's shareholders would own the other 50% of Newco.  If they are not the same size, use a metric like relative revenues or relative EBITDA and set the relative ownership that way (e.g., if one business generates 75% of the combined profits day one, they could own 75% of the combined equity in Newco).

CASH ON HAND OR COMPANY PROFITS

If cash is needed, maybe your business has cash on its balance sheet or it is generating material profits, and you can fund your M&A activity that way, with no outside capital.  Since companies are typically valued as a multiple of EBITDA,  you may need to save up a few years of profits, in order to afford the other company you are trying to buy, if they are the same size as you.

SELLER NOTES

The easiest way to finance an M&A transaction is to have the seller agree to not take all of their cash up front.  As an example, maybe you pay them 80% at closing, and  you pay them 20% in a seller note a year or two down the road.  Any seller that has confidence in their business, should be willing to agree to at least a small amount of seller note to help you afford the upfront transaction.

SELLER EQUITY

In many scenarios, having the seller involved with the future of Newco can be very helpful.  Maybe you don't know their industry very well?  Or, they bring some specific skillset to the table, and they would enjoy keeping part ownership and future involvement in "their baby".  That helps them to get some upfront liquidity by selling a large portion of their ownership, but at the same time, let's them participate in the long term growth that is created, as a minority shareholder.  So, as an example, if you give the seller a 10% stake in Newco, you only need to fund the 90% of the company's valuation upfront.

BANKS & SBA BACKED LOANS

Banks are often the first call for funding M&A.  But, with banks, there are several hurdles you need to get through.  They need to like the industry, the team, the historical cash flow trends, the underlying assets of the business they can secure, the financial covenants, etc.  And, the more cash flow you have as a combined company, the higher odds a bank with lend to  you.  There are some banks that will lend to companies as small as $500K of cash flow, but the vast majority don't really get excited until you are generating $2-$3MM in cash flow.  So, look for targets that can help you get to that threshold, to simplify your M&A fund raising efforts.  And, keep in mind, bank finance will be the most senior loan in your capitalization table, and banks will need to be repaid within a couple years (and will be senior to any other note holders, including the seller note above).  So, plan accordingly.

In addition, the banks are often conduits to loans backed by the Small Business Association, where they will lend up to 90% of the transaction.  But, the price is steep with the mandatory personal guarantees that will be required, putting you personally on the hook for any defaults by the company.  Personal guarantees can often be avoided in typical bank loans for companies generating enough annual cash flow, so only go down the SBA-backed road if it is your only option.

PRIVATE EQUITY FIRMS

The lion's share of the capital needed for M&A will most likely come from private equity firms or family offices, likes these linked examples in Chicago.  There is a shortage of really good companies for sale, and these investment companies are more than willing to back good teams building good ideas, assuming the combined company is generating a lot of cash flow (which they can take to the banks and finance a portion of the deal with debt, to reduce their equity investment need).  Again, because they are looking to the banks for help, they too will bias companies with over $2-$3MM of combined cash flow (although many will look at deals smaller than this, if only investing equity).  Before you reach out to PE firms, make sure to research if they like to invest in deals within your industry and revenue stage on their websites.

EXAMPLE DEAL

So, let's put this all together in an example deal.  Let's say you found an ecommerce company to buy, that is generating $2MM in cash flow.  Assuming that company is growing 20% a year, it could be worth 5x cash flow, or $10MM.  You think it is important to keep the founder involved, and you are willing to have him take a 10% stake in Newco, so you really only need to finance $9MM to buy the 90% stake.  That could be funded $3MM by a private equity firm, $3MM by a bank and $3MM by a seller note (if amenable to the seller).  And, the private equity firm would most likely want you to have some "skin in the game", so maybe their portion is split $300K from you and $2.7MM from them.  Ninety days and lots of negotiations later, you should be ready to close.  This is an example only, as the multiples, amounts and percentages can vary substantially by deal, company, growth rate and industry.

Hopefully, you are now ready to put on your M&A hats, and get that transaction funded.  But, don't forget about all the potential M&A pitfalls along the way, as we have discussed in the past.  At all times, buyer beware, and exercise conservative caution throughout each step of the process.

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