Archive for the ‘Finance’ Category

Start Up Money Tricks #3: Debt First

March 27, 2008

You can build wealth faster and feel more in control of your business if you don’t give away equity too soon. Too many entrepreneurs fail to use up all their non-equity sources of financing. They move to equity financing too quickly. This inevitably leads to dilution fever [!] with all its side effects (momentum hiccups, eye off the ball blindness, and I’m not in charge anymore headaches).

 

Todays topic is about conventional debt like bank debt, private borrowing, and other loans.

 

Here goes. BEFORE you go for conventional debt you should make sure that you have used up all your non-equity sources of capital first. Any lender will want to know that you have enough skin in the game before they will even consider lending you money.

 

To look good to a lender you must already have:

 

  1. Cashed in some RSPs for equity injections.
  2. Taken out home equity by way of mortgage for equity injections.
  3. Taken money out of savings for equity injections.
  4. Use the proceeds from a trimmed lifestyle (e.g. downsizing fancy vehicles, recreation property, expensive vacations, your salary, etc.) for equity injections.
  5. Completed all the possible grant applications that you can find. Search carefully. There are many good programs out there such as those that sponsor entrepreneurial women, just to cite one example.
  6. Placed all your previous lottery winnings into the company [!].

 

Once you have done the aforementioned penance, you can confidently move to the next step using up non-equity room for business financing:

 

1. Personal Lines of Credit. Most entrepreneurs and their business partners/spouses/close relatives/supporters/supportive friends with average Alberta incomes can obtain a personal bank line of credit in the $10,000 to $25,000 range. Be sure you have the capacity to pay the monthly charge. You can see how readily one can collect $100,000 or even double that.

2. Personal Loans. Friends and family will often lend money to their favorite entrepreneur [!]. Though I must give you the usual warnings about getting too involved with families and loans (it can often be a disaster), if you get a bit creative you can make it work. For example, why not make the loans convertible to equity upon some future event, or why not make the loan convertible to product or services (if the product or service is something tangible and valuable to the lender)?

3. Forgiveable Loans. There are numerous programs out there such as the well know community futures programs that may possibly provide loans/grants to specific kinds of businesses (check carefully — there is some flexibility out there).

4. Bank Loans. Banks will be quite rigorous and formulaic with you. They will want to see evidence of sales growth and they will carefull analyze all the conventional bank financial ratios (see your Accounting 101 text book for the basics) and your repayment ability. But shop carefully. Character and personal integrity can still tip you over the line and into the much desired YES message. Go to the smaller banks first. Go to credit unions. Go to insurance company/mortgage banks. Save the big banks for your last round of bank loans. They will be very tough on you and you don’t want to have shopped them first as word sort of gets around (confidentiality rules notwithstanding) that you are out shopping for a loan. Capital loans are often accompied by business lines of credit too, in some combination.

5. Equipment Leases. There are good lenders out there including leasing companies and banks who will be interested in signing a lease with you. This is much easier on cash flow than buying capital equipment outright. Most leasing companies will also lease back equipment you are building or fabricating, provided they area convinced you know what you are doing.

6. Private Lenders. There are numerous companies that will provide loans and convertible debt. Though their conditions and due diligence may seem onerous, it is still possible to find good lenders who will provide you with some kind of a loan or business line of credit. These are usually sourced from your networking skills.

7. Factoring Receivables. There are conventional sources of factoring or receivables loans such as the major banks. But there are also many U.S. base large banks and financial institutions that will factor Canadian receivables using quite modest criteria. Shop carefully and perhaps be pleasantly surprised.

 

In my opinion you CAN find many good options for financing your business BEFORE you start giving away equity. Personally, I love the idea of staying in control and using carefully structured, responsibly planned, DEBT!

 

Henry Kutarna

Alberta Deal Generator

 

Startup Money Tricks #2: Work the Grant Structure

March 26, 2008

Every year there are billions of dollars provided as an incentive for companies in the startup phase and on an ongoing basis.  The rules are complex and confusing which means that many companies (roughly 80%) do not claim grants, funding and refundable investment tax credits that they are entitled to.  Here are some programs that you should consider . . . (some perseverance and tenacity is required!) 

1.      NRC Industrial Research Assistance Program (NRC-IRAP)

2.      Scientific Research and Experimental Development Program (SR&ED)

3.      Natural Sciences and Engineering Research of Canada (NSERC)

4.      National Research Council (NRC)

5.      Alberta Advanced Education and Technology

The NRC Industrial Research Assistance Program (NRC-IRAP) 

This program provides a range of both technical and business oriented advisory services along with potential financial support to growth-oriented Canadian small – and medium-sized enterprises (fewer than 500 employees). Working directly with these clients, NRC-IRAP supports innovative research and development and commercialization of new products and services including: 

  • Technology Expertise and Advisory Services
  • Financial Assistance for R&D activities
  • Networking
  • Partnerships

For Information on IRAP, call 1-877-994-4727

Scientific Research and Experimental Development Program (SR&ED)

The Scientific Research and Experimental Development (SR&ED) program is a federal tax incentive program to encourage Canadian businesses of all sizes and in all sectors to conduct research and development (R&D) in Canada that will lead to new, improved, or technologically advanced products or processes. The SR&ED program is the largest single source of federal government support for industrial research and development.

Claimants can apply for SR&ED investment tax credits for expenditures such as wages, materials, machinery, equipment, some overhead, and SR&ED contracts.

Under the Federal program, Canadian Controlled Private Corporations (CCPC’s) receive a refundable Investment Tax Credit (ITC) of 35% on $2 million of expenditures and 20% on expenditures over the $2 million benchmark. Canadian Public Corporations earn a 20% non-refundable ITC on qualified expenditures which can be used to reduce taxes payable.  Proprietorship, partnership or certain trusts earn a 20% partially refundable ITC to reduce taxes payable.

The Alberta government is set to introduce a provincial SR&ED program with a refundable 10% investment credit on all eligible expenditures.  Details will be provided in the provincial budget to be passed down in April 2008 (or thereabouts).

For more information visit www.g9Consulting.com 

Natural Sciences and Engineering Research Council of Canada (NSERC) 

Under the Collaborative Research and Development (CRD) Grants program direct project costs are shared by the industrial partner(s) and NSERC in an amount equal to, or greater than, the amount requested from NSERC.

Projects may range from one year to five years in duration, but most awards are for two or three years. CRD projects are monitored closely. Annual progress reports are normally required from the grantee. The industrial partner will be asked to provide comments on the project’s progress.

For more information call 613-995-1111 or email rpp@nserc.ca

 The National Research Council (NRC)

The NRC functions under the auspices of the National Academy of Sciences (NAS), the National Academy of Engineering (NAE), and the Institute of Medicine (IOM). The four organizations are collectively referred to as the National Academies.

The core services involve collecting, analyzing, and sharing information and knowledge. The independence of the institution, combined with its unique ability to convene experts, allows it to be responsive to a host of requests.

Free Scientific Information is available from this organization that publishes more than 200 reports and related publications each year, the institution is one of the largest providers of free scientific and technical information in the world.  Most of it is now on the Web at www.nap.edu.   

NRC also conducts collaborative and fee-for-service research in facilities and offices across Canada.

Western Economic Diversification Canada (WD)

 WD offers numerous funding and assistance programs through the Western Diversification Program.  Through the Loan and Investment Program, WD contributes to a loan loss reserve, which offsets a portion of the risk financial institutions experience when lending to small businesses. http://www.wd.gc.ca/259_ENG_ASP.asp 

Alberta Advanced Education and Technology (AAET)

Alberta Advanced Education and Technology provides leadership and strategic investments in research and science and technology initiatives that are undertaken in the following priority areas: energy, ICT, nanotechnology, and the life sciences.Research equipment in these areas can be applied for via the Alberta Science and Research Investments Program (ASRIP) or the Small Equipment Grants Program (SEGP).

Alberta Advanced Education and Technology manages a number of programs that provide various forms of research funding.

The Ingenuity Industry Associates program addresses the increasing research personnel needs of Alberta industry. Through this program, Alberta companies are able to recruit recent Master’s and PhD graduates to conduct research that benefits the organization.

Check out these programs, and share your experience if you have had success with others not mentioned here!

Startup Money Tricks #1: Cash on the Table

March 10, 2008
We’re going to be doing a finance series over the next few weeks titled “Startup Money Tricks“.

This is based on an observation from my tenure as EIR at Calgary technologies: at least 80% of startups have ignored significant untapped sources of cash when they start to look for equity financing.

Here are 10 reasons to look at as much alternative financing as you can before you go for venture money:

  1. Tactical Advantage: The more your company is worth when you start to talk to angels and venture capitalists, the better you do in negotiations. Every cent of cash you can bring in before negotiations improves your bargaining position.
  2. Better Investors: Sad but true: the unusual investor who will give you large amounts of cash early isn’t always the best partner for you. Of course, good investors will be a superb asset to you, and will bring much more than money to the table. But, with some conspicuous exceptions, the more you can validate the fundamental hypothesis at the core of your business, the better investors you’ll be able to attract. Many companies who attract very early investors live to regret it: the investors often wind up with board seats they’ve bought for a pittance, and they throw their weight around in ill-considered ways that create all kinds of problems. Often, early investors are poor investors because they don’t have the same skills that other, more-conservative investors exercise. The term “cram” was coined almost exclusively to describe how later investors have to deal with these rapid shareholders. Of course, your scheme might be SO interesting that you can interest a visionary, experienced investor in your idea at an early stage. But, by virtue of their very experience, they’ll “hose you”: see number 1.
  3. Sign of Competence: If you’ve been careful and ingenious in the ways you’ve financed the early stages of your venture, you signal to potential investors that you are, as my great-granny would put it, “Canny lads and lasses”. But if your potential partners see you have left promising sources of cash untapped, they’ll look at you with those squinty VC-eyes, and you’ll know you’re toast. Gives me shivers just thinking about it.
  4. Conservation of Management Time: The hunt for equity financing is often a huge time suck. If you want Angel or VC financing, you’re going to turn your management team into a road show: you’ll be going from city to city with your laptop and projector in hand to find money. And, once you do find it, you’ll be put through the time-consuming and expensive dual wringers of negotiation and due diligence. It’s not at all uncommon to see newly-funded companies who have lost their market advantage because they didn’t have the necessary execution power during the months they needed to get equity financing.
  5. Clarity of Concept Non-equity financing is often much easier to get, but it don’t, as they say, come easy. Just as you’ll need a business plan, some financial projections, and a presentation to talk to Angels and VCs, you’ll probably need them to secure most other forms of financing … you’ll even need them for some grants and government loans. There’s no faster way to turn a VC off than to put green, half-formed concepts and childish, badly-written documents on the desk. Look at the prep work for early, non-equity forms of financing as proving grounds in which you will refine your concept and message in front of less-particular but still-sophisticated audiences.
  6. Stealth: Not everybody has to worry about this one: VC money and Angel money can be noisy money. The VCs and the Angels aren’t noisy themselves: but the very act of trotting about with PPTs and business plans puts a buzz on the street. Buzz doesn’t always work to your advantage. While you can raise equity cash quietly, word eventually gets out about which companies want to raise money for which ideas. Other forms of financing can be much, much more private and more discrete.
  7. Focus and Control: As you move more deeply into equity partnerships with financiers, more people will influence how your company makes decisions. Anyone who has had a startup will tell you that the pre-investor stage is sweet, because you get to focus solely on the customer problem you’re trying to solve. When you can put the entire company in a Mini Cooper and go for Ethiopian at lunch, the firm can behave in a focused, obsessed manner that you’ll grow to miss. (Of course, you may not be able to afford the Ethiopian food when you get there…). Once the authority and control mechanisms of your company are spread throughout a larger group, you’ll spend more time dealing with that group and less with your problem domain … no matter HOW good the large group is.
  8. Network Growth: If you have a good idea, your network grows as you work on it. Inevitably, during this growth you’ll meet well-connected people who understand your problem set. If you’re lucky, this will lead to quiet introductions to VCs or angels who can see and appreciate what you’re doing … which means you don’t have to put on a road show, distract your management team, and make a whole bunch of indiscrete noise to attract investors. Usually a pretty good idea.
  9. *The “Bootstrap Gambit”: Absolutely the best time to negotiate for funding is when you don’t need it. You’ll get better partners, give away less, and raise more money if you can somehow get your company to the point where customers are giving you money and your basic hypothesis is proven. The best investor pitches contain the sentence “We have a conservative business plan that would allow us to do very well, but we think we can dominate the market almost overnight with your money and connections.”
  10. You’re An Idiot If You Don’t: If non-equity money is relatively easy to get, doesn’t vastly increase your risk, extends your operational capabilities, puts you in a better position in front of VCs, and lets you afford the odd Ethiopian lunch, why wouldn’t you do it?

Next entry: working the government grant structure in Canada.

The Eagle Has Landed

March 5, 2008
I crossed the classic entrepreneur’s divide earlier today. I had been steadily cleaning out my office over the past couple of weeks, knowing the day was drawing near when I would walk out the door, maybe for good. Then, it was announced our work group had been re-organized, a new boss had been hired (about 10 years my junior), our reporting structure had changed, and I knew it was my time to go.

I scraped up all the vacation I had owing to me — six calendar weeks — and with the blessing of my current boss, will spend the time pursuing my life-long dream of a start up. As I said to him “I just can’t shake this feeling that I want to change the world.“ I was somewhat flattered when he seemed a little disappointed, and not really all that surprised when he didn’t try and stop me, either. I think we both knew it had been in the works for a long, long time.

It gives me six weeks to get some traction on prototype development, and maybe even get started on the fund-raising process that I formally started at the Financing Your Vision seminar a little while back. To this point, I have been attempting to keep both my full-time job and the start up plates in the air at the same time. However, it felt as if each day that went by when the start up ideas weren’t moving ahead quickly, was a day when opportunities were slipping away.

I was surprised to find myself feeling a little melancholy — which is not what I expected, at all. I felt I contributed a lot over the course of my eight years with my current employer. As the last couple of hours ticked away, my ego allowed me to believe someone would rush through the door and say they couldn’t live without me. But that visit never came. I sent out a note to my co-workers, put a ‘gone fishin’ sign under my office number, filled out the vacation request, and just walked out the door. If this current chapter of my career really is over, it was a really weird, last day.

At the end of the six weeks, I’ll be at another fork in the road; given one final opportunity to decide which way to go. Return to the Dilbert world of beige cubicles, performance evaluations and office politics, or follow the yellow brick road. However, like a corny commercial that is running on TV at the moment; “Sometimes to move ahead, you have to leave something behind.“ That’s exactly how it felt today. But tomorrow, it’s on to the business of creating value, building brand and becoming the new, new thing.

March 4, 2008 | Unregistered CommenterButzi

Venture Summit West

February 28, 2008
The Venture Summit West is coming up in December.This isn’t something most of us would have the chance to attend, but it’s always worth watching. You can learn:
* What businesses are hot
*Who makes the best presentations and what they look like
*Where the trends are
*What investors are looking for what things

If you’re hunting for money, stretching your legs as a startup, or looking to polish your investor-facing image, I suggest you use Google news to follow the happenings in and around this conference.

It’s quite the big deal to attend, but extremely informative to watch, too. As their Web site says:

Venture Summit West is a two-day gathering that highlights the significant economic, political and technology trends impacting the global growth investor. Venture Summit West features the most innovative and influential institutional investors, venture capitalists, investment bankers, research analysts, financial and technology media and corporate buyers in keynote presentations and panel debates.The Venture Summit will also host 14 Best of Breed CEO Showcases hand-picked from the AlwaysOn annual top 100 private company list, and 36 other qualified six-minute CEO pitches from companies seeking later-stage capital or potential acquirers. The Venture Summit¹s goal is to match growth company buyers and sellers and identify the most promising innovation-driven, growth investment opportunities. At the Venture Summit, our editors will also honor the AO Top Dealmakers and the annual AO Industry Analyst All-Star team.

http://alwayson.goingon.com/permalink/post/17491

October 31, 2007 | Registered CommenterThe Startup Guy

VC Math

February 28, 2008
Why aren’t VC’s interested in my 4X business?In the world of early stage tech, entrepreneurs’ regularly beef about why venture capitalists and angels will only invest in companies that offer the potential for a 10X return. They don’t get what’s so pathetic about the odd 3 – 4X company among a portfolio of 10 baggers.

Alright entrepreneurs, imagine yourself in the well-polished shoes of your favorite VC for a minute.

SO, you are a VC and you have a $100M fund; your job is to deploy that capital and provide $150M of value to your shareholders (a 50% return). To do so, you must invest in companies within a pretty skinny profile: the potential to generate 35 – 50M in revenue in about 5 years. (There are one or two other key factors, but let’s keep it simple for now).

And here’s why.

Given a portfolio of 10 companies, the win/loss ratio for most VC’s follows some variation of the 2:6:2 Rule. Meaning 2 companies never return any capital (the Dogs), 6 companies break-even (the Living Dead) and 2 win big (the Stars).

If you invest $100M into 10 companies and expect a 50% IRR on your fund, the numbers wash out as follows:

($20M) from the Dogs
$60M from the Living Dead

Since you’ve only generated $40M on the Dogs and the Living Dead, you now need to generate $110M on your Stars in order to meet your shareholder’s return expectations.

Each Star = $55M

And you probably only own max 50% of each company so each Star needs a $110M exit in order for you to hit your return expectations and pay back the losses from the Dogs. This means you need to ensure that every company in the portfolio has the chance to sell for well over $100M to make up for the fact that odds are, only 2 actually will. And if we assume the company sells for 2-3x revenues (a big generalization), you can see how the profile must include a company able to hit a $35 – 50M run rate in the lifetime of the fund (~ 7 years).

Simple right? This explains why VC’s have such a narrow investment profile and why they avoid small markets, niche technology and inexperienced management teams that don’t shoot for the moon.

November 29, 2007 | Unregistered CommenterKerri Knull

VC Math – Part II

February 28, 2008
Part II… ValuationWe are fortunate to operate in Alberta where there is allegedly lots of cheap capital available at high valuations. But, entrepreneurs need to be cautious about raising money at high valuations because it seriously impacts the exit and return profile.Consider this example.

Let’s say your start-up raises $8M at $12M pre-money and your post-money valuation is $20M (Pre-Money + Investment = Post-Money). Your investors now need to sell your company for $200M to see a 10X return. No small achievement.

Now consider that if you raise $2M at $4M pre-money (=$6M post), your investors get that same rate of return if you sell for $60M. And a $60M exit is 10X more likely than $200M.

Most first-round entrepreneurs try to negotiate the highest price possible for their financing, however with IPOs few and far between and acquisitions over $100M tough to come by, accepting an inflated valuation can price you out of the market very quickly.

November 29, 2007 | Unregistered CommenterKerri Knull

Financing Your Vision Seminar at CTI

February 28, 2008
This past Thursday, I had the opportunity to attend the Financing Your Vision seminar at Calgary Technologies. This is the one-day seminar that covers all of the financing options available to entrepreneurs – covered by speakers with direct and relevant experience in their respective fields. It seems to be aimed primarily at high tech entrepreneurs, but the discussion is certainly not limited to this type of company — anybody who is seeking financial partners for their new start up venture would be a candidate to attend.The session is put together and facilitated by Kerri Knull, Manager of the Calgary Innovation Centre, which is based at Calgary Technologies. It’s a very well-organized event. Comfortable, but not overly lavish. Most importantly, Kerri exercises polite, but firm control over the agenda so the schedule is respected and each speaker is marched through on time. The speakers seem to appreciate it, and the attendees as well. Kerri also makes a direct contribution to the agenda in her own segment, putting the day in overall framework.

The guest speakers in our session included Revett Eldred, Al Saurette, Corey Keith, Greg McLean, Mike Scarth and Wayne Powell, all drawn from the local entrepreneurial community. I have read a ton of material on this subject, but there is nothing like hearing from, and being able to talk with people who have really been there and done the kinds of things you are contemplating taking on yourself. They cover the full range of options from bootstrapping, angel investment, venture capital, bank financing and even a short section on one government sponsored program (SR&ED) aimed at start up companies.

For me, the session put my own efforts in context. It also enabled the sequencing of the steps to get where I’m going from here. I may not know all of the things that I have got to do to fully realize my objectives, but I have a clear sense of what’s next. I also now know that there are certain stages of the process for which I’m not ready. That’s useful information, in itself.

If you’re in the bootstrap phase, which best describes where I’m at currently, you’re giving every penny one last squeeze as it heads the door — it’s your money after all. The $250/300 fee for the seminar is well worth it, and I would highly recommend the investment of your money, and likely more precious, your time.

If you have any specific questions about this seminar, I would recommend you get in touch with Kerri, whose email address can be found on the CIC site. By all means, if you have any questions for a previous attendee, please leave a comment, below, and I’ll do my best to answer as promptly as I can.

One additional comment; for all would-be entrepreneurs who are currently labouring away at the soul-crushing work of the mothership, you owe it yourself to spend a day amongst your own kind. If your experience is anything like mine, you’ll feel like an entirely different person, and walk away with a renewed feeling that you really can do this.

February 24, 2008 | Unregistered CommenterButzi