Short-term Project Financing: Case Study

This question (paraphrased) was submitted by one of my readers:

"Hi Scott - I have been reading some of your financial blogs. I have a question for you, yes is a needle in a haystack... I am looking for capital - short term - to announce a local sporting event with internationally-recognized sports figures. My original funding source was delayed out of by 30 days and I need some immediate cash for expenses related to the event. Do any of your contacts have access to immediate funds with ticket sales as collateral?"

Funding of this sort doesn't fall into the normal "venture capital" funding out there, but I see a couple of potential options for you:

1. Talk with your event partners, such as the arena hosting the event about providing a short-term loan in exhange for a return on ticket sales. In the arena is booked, they might find it difficult to re-book their location with another event, and thus both of you would be losing money if the event does not happen. Take a partnership approach.

2. Approach your local vendors that stand to lose planned revenues if the event is postponed - same principle applies as with the arena hosting the event. Agin, take a partnership approach and leverage the fact that you're bringing this event to your city - they'll be buying into you and your ability to make the event happen.

3. Talk with a leading local bank about some derivative of Accounts Receivable Financing (sometimes called "factoring"). This type of financing is normally reserved for firms that have revenues booked as Accounts Receivables, but have not yet collected. Because the terms extended to customers may include net-30, net-45, net-60, net-90, etc., some lenders provide financing based on these future revenues, with some risk premium charged to you in exchange. While this doesn't match your situation exactly, a local lender or credit union may be willing to provide a loan in exchange for the aforementioned risk premium and some hefty sponsorship recognition from your organization at the event.

A search in Google for "accounts receivable financing" yields thousands of results where you can learn more.

Because of the short-term nature of your capital requirements, you'll need to approach private banking institutions and lenders, and avoid SBA (Small Business Association) loans. SBA loans take months to get cleared and its likely that your situation doesn't fit their lending criteria.

I'm suggesting a local bank because they may have more autonomy to make a quick decision locally, instead of the probable "up-the-ladder" decision process with a large regional or national ban. Plus, the local banker will have more implicit interest in receiving sponsorship status in exchange for providing an event loan.

4. Meet with the local Chamber of Commerce to discuss business contacts of private business leaders that can help you out of your situation. From what I know about your city, there are bound to be a couple local business leaders that might be willing to take a risk in working with your event. They may have some lenders in mind for your as well.

5. Contact your previous sponsors and VIP ticketholders and offer a significant pre-pay discount for sponsorships and tickets if you've had this event in the past. This would provide you with some quick cash flow for promoting the event.

In short, I'd consider any and all options if you're in that much of a bind. Take the win-win approach that everyone that gets involved with the event and leverage your existing work with previous events and your foundation. Hope this helps.

Venture Capital Investment Trends since 1995 (Deals by Stage)

Doing some research about Venture Capital trends, I came across some interesting data provided by PWCMoneyTree.showing convergence in the number of venture capital deals between Early Stage, Expansion, and Later Stage deals, while the Start-up/Seed Stage dropped considerably over the past 12-13 years:

Reading nothing more than the data presented in these graphs, I'm hypothesizing that this decline was a function of a number of factors:

1. Venture Capital followed itself.

If there were a plethora of start-ups in the mid-1990s at the start of the internet/tech bubble, then it would make sense that targets that received venture capital in the "Start-up/Seed Stage" would then receive subsequent rounds of funding while in their "Early Stage" and "Expansion Stages", then eventually as "Late Stage" investments. Seems there may be some evidence of this effect as you examine the decrease of Start-up/Seed Stage funding with increases (and then decreases) in Early Stage and Expansion targets. These Early Stage and Expansion investment targets then became targets for Late Stage funding.

2. Venture Capital has become more risk averse.

Following the fallout of the last tech bubble in the late 1990's, venture capitalists turned their attention to firms that were past the start-up stage and had a better chance of survival. This would certainly explain the dramatic rise in the percentage of deals in Later Stage companies from approximately 10% to 30% of investments.

3. Venture Capital has become more selective

Certainly there was not a drastic decrease in the number of firms seeking Start-up/Seed Stage funding during the past 12-13 years - just the number of venture capitalists willing and able to fund these start-ups.

4. The ongoing emergence of Angel Capital

As angel capital groups continue their emergence, they may be filling the void - funding Start-up/Seed Stage companies instead of traditional Venture Capital.

I am actively researching these thoughts to support with further evidence, but this certainly provides some interesting fodder for discussion. I'm interested in your feedback on this thought process.

Mike's Case Against Venture Capital

Mike Simonsen, our fearless leader at Altos Research, wrote an article for FoundRead this weekend entitled "My Case Against Venture Capital."Interesting how he and I wrote our articles independently this weekend, but advocated similar positions - heeding caution with respect to venture capital's role in funding your start-up endeavor.

Maybe its the "Altos Research Cultural Bias" in play. Since the founding of Altos Research, the company has bootstrapped - paying for growth as cash comes in the door (no pressure on the sales guy here though....). I've been on the other side working with start-ups with considerable cash (Aplia, Inc. with $10+ mln) and my own firm that I operated for 2+ years on angel funding. Now that I'm on the side of the "pay as you go" model, I don't think I'd go back unless there was a viable reason. There's a certain feeling of autonomy at Altos Research that I didn't feel in my previous tenures, including my own company...

His article is chock full of great examples and outbound links that are guaranteed to get the gears grinding if you're considering venture capital for your business.

Venture Capital is not the end goal

It’s interesting when talking to start-up CEOs and entrepreneurs how often they are enamored with landing venture capital, as if receiving the funding itself is their main business objective. Venture capital is the beginning of any start-up's journey- a vehicle to speed product development, expand market reach, and grow the firm more rapidly than what would be possible through self-funding from revenues. Venture capital is never the destination.

Just remember the VC's rough equation:

10 investments = 7 failures + 2 breakevens + 1 successful exit

You're one of ten - there's a better chance that you're one of the future failures in this model than the successful exit.

Just as bankers provide small business loans to firms that meet their expected rate of return hurdles, venture capitalists invest in start-ups that offer the opportunity for them to meet their own capital growth goals. This is not philanthropy. One rarely hears an entrepreneur express delight for their pending small business loan from their banker, yet closing a round of venture capital is met with valedictory celebration.

In many ways, it would seem logical that the bank loan should be the capital event to spark celebration at a small business, since the bank only wishes to be compensated with interest payments, instead of preferred shares. Of course, most start-ups don't fit the lending criteria of most banks - this is illustration is meant to offer some perspective.

Certainly venture funding is vitally important to fill the investment gap between angel investors, private equity, and traditional lenders. The start-up entreneur should just remember that there are two sides to any transaction. If a VC is willing to invest $5, $10, $15+ million in your biotech, software, or patented technology, that money will come at a cost. Be sure to weigh the cost/benefit of the transaction before considering venture capital funding to be the end game.

(There's some solid reading and perspective on venture capital and angel investing at The Smart Startup).

Some Basics on Angel Capital

While doing some reading tonight, I came across a couple of very informative articles regarding angel capital and seed stage start-up financing.

• Jim Roberts provides his Top 10 Tips for Entrepreneurs Seeking Venture Capital - a nice list of practical examples that focuses on developing relationships and taking the long view when considering angel funding.
  

• An article from The Huntsville Times written by an angel investor offering the "blocking and tackling" basic advice that is always good to remember when approaching angel investors.

• Some cautionary advice from BusinessPundit.com.

The key factor that I read time and time again, is that angel investing is an option and an opportunity for entrepreneurs. But remember, angel capital doesn't mean "manna from heaven."