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Options Abound For Raising Capital

For startups, financing can be challenging, and often the biggest barrier. Each month we’re focusing on a different financing option in Minnesota for startups and featuring experts in the field. 

(This article originally appeared on BetterSMB)

by April Chen

John Funge, chief product officer of DataTribe, left, and Steven Witt, co-founder and partner of the technology venture capital firm, sat down with BetterSMB to discuss ways of raising capital for new businesses. (April Chen)

Raising capital to start a new company can be challenging, but with the right knowledge, the endeavor can be successful. Knowing the nuances of each way to raise money as an entrepreneur can help a business owner decide which is best.

For people seeking to fund a company, the best source of information is an entrepreneur who has a successful business in the same or similar industry, but in a different market, said Steven Witt, co-founder and partner of DataTribe, a technology venture capital firm in Fulton, Maryland.

“The greatest thing about being an entrepreneur is that anyone that’s been one will be of the mindset that they want to give back and help the next generation of entrepreneurs,” Witt said.

When a business uses a venture capital approach to funding, some ownership of the company is given in return for the services and capital provided by the firm. This huge injection of funding enables tremendous gains that would otherwise be impossible.

For entrepreneurs not seeking venture capital funding, there are other approaches.

One of the most risky ways to startup a company is by borrowing against personal assets. Witt did this when starting his first company, so he could pay himself a “salary,” but he came within days of having to sell his family’s second car because he couldn’t afford the car payment. Some entrepreneurs even take the extreme measure of liquidating their retirement savings, which Witt doesn’t recommend.

Another approach to raising revenue is through crowdfunding, using websites such as Kickstarter.com. Since its inception in 2009, more than 15 million people have backed almost 150,000 projects there. An advantage to using websites like Kickstarter is that the investor doesn’t get equity in the company or future profits. Instead, they get the product, or a discount, once it is released. While there may be less financial risk in funding a business using this route, if the promised product is not delivered, the entrepreneur keeps the capital but it’s almost certain this entrepreneur will never be able to sell anything again. It has the potential to ruin someone’s reputation.

“One of the top reasons these types of endeavors fail is that a supplier that the businessperson negotiated a deal with either goes out of business or changes the terms, making it impossible for the creator to deliver the product to the crowd funders,” Witt said.

The Small Business Administration can help small firms get financing by guaranteeing loans. It also licenses small business investment companies, which are private investors who can make loans, invest in a share of the company, or do both, with federal backing.

John Funge, DataTribe’s chief product officer, said the businesses that would best utilize this method are those opening a franchise where there is already a predictable model, marketing and other resources that have previously proven themselves to be successful.

“Entrepreneurs need to be really thoughtful about their life stage and their future financial obligations since startups can put extreme stress on a family and personal life. Someone in their 20s likely has more to lose than someone in their 40s who is more established financially,” Funge added.

Business owners can also seek angel investors, who are sometimes found among especially wealthy friends or family. Angels often invest on more favorable terms in comparison to traditional lenders. They often look for something in return for their investment, such as a seat on the board of directors or participation in day-to-day operations, according to the Small Business Administration.

Regardless of how an entrepreneur obtains funding, Funge said business owners should line up two professionals to help their business get the right start.

“Founders of all stripes should find an accountant and a lawyer that they can work with who specialize and can serve as trail guides for starting the company,” Funge said.

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Angel Investors and Their Criteria for an Investment

For startups, financing can be challenging, and often the biggest barrier. Each month we’re focusing on a different financing option in Minnesota for startups and featuring experts in the field. 

It is important to first understand that angel investors and VCs all share one thing in common: the need for a return on their investment. This is not philanthropy. Even Impact Investors who may accept lower rates of return, still need that ROI.

After a founder understands this, one must realize that there are angel investors who specialize in an industry while others are “agnostic” meaning they are open to all industries.  Do your homework in advance of contacting investors.

What all investors rate highest in evaluating a deal is the strength of the team.

  • Does the management team have the relevant skills to be successful?
  • The team should bring diverse skill sets to the business.
  • After funding, who would be the first hires to help round out the team?
  • If not the management team, are there mentors or an advisory board to help guide the management team.
  • The gold star is a founder or early team member that has been through the business stages from concept to an exit.
  • Many investors like to see some “skin in the game”. Have the founders invested in their own startup?
  • Passion for their concept
  • Are the founders coachable? Will they listen to others and sift through their advice for better ways to build the company?

A great team can carry a good concept to success. A dysfunctional team can kill the best business models.

Back to the ROI…

Is there an exit in the plan? The business can be very successful but without an exit there is generally no ROI. Ideally, investors would like to see an exit (acquisition or an IPO for example) in 5 to 7 years. There are other ways to structure an exit. This could be a form of revenue sharing or a guaranteed founder buy out of the investors.

 

David Russick is an established entrepreneur and angel investor. Russick is co-founder, Managing Director, and Board Member of Gopher Angels.  Russick was also founder and CEO of TUBS, Inc., a family owned waste and recycling business operating in the Twin Cities, Denver and Cleveland.   In addition, Russick serves on the Board of Advisors for the Dakota Venture Group.  Russick has been featured in the “Star Tribune,” “Twin Cities Business,” and the “Minneapolis St. Paul Business Journal.” “Twin Cities Business” named him a “2014 People to Know – Finance.”  

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