The Entrepreneurial Mind

According to the latest report from the National Venture Capital Association, venture capital investments were down 8.5% during the first quarter of 2008 when compared to the last quarter of 2007. The report also found that deal flow was also down.

The decrease in new deals landing on the desk of VCs and the fewer deals being funded are both consistent with the slowdown in the economy.

"Despite the current economic downturn in the United States, venture capitalists are still putting money to work across multiple industries and stages of development," said Mark Heesen, president of the NVCA. "The continued interest in the life sciences and clean technology industries, as well as the traditional IT sectors, reflects the long term investment horizon that the venture industry has always embraced. We do not expect to see significant declines in investment levels in the coming year. However, the dollars going to later stage investments could increase if the IPO window remains closed for an extended period of time and venture capitalists have to sustain companies longer than expected."

This part of the report actually concerns me more than the slowing flow of deals. VCs had already become more cautious in 2007, pursuing more later stage deals. With angels also pursing their investments into later stage deals, there is an alarming shortage of money for seed and early stage ventures.

The drag on these shifts might be felt on the economy for years to come.

Posted by Jeff Cornwall at 05:29 AM | Permalink | Comments (0) | TrackBacks (0)

The federal reserve announced that bank credit has tightened. Not startling news, but the implications might catch small business owners by surprise.

The first impact is on new loans. Tighter credit standards means that banks will be even more conservative on business lending. Higher standards for cash flow, personal credit history, collateral requirements, and performance standards. Business loans that might have been approved a year ago, might no longer meet this new standards.

The second impact is on existing loans. This is where the surprise might hit hard on many small businesses. Many entrepreneurs assume that business loans work like personal loans -- you make your payments on time and the bank leaves you alone. Not true. Making payments on time is only one of several criteria that bankers will be watching. They will look hard at all of those loan covenants and performance expectations that many of us gloss over the the excitement of getting a loan for a new project.

During tight credit times, these restrictions become much more important for a bank to watch -- they are judged on how well they meet performance standards by the federal regulators. For example, a common condition is to maintain a certain debt coverage ratio, which measures how comfortably your cash flow covers your loan obligations. If you dip below the agreed upon ratio, the bank may step in and require you to improve your performance. If you don't, the bank can call your loan even if you never missed or were late with a payment.

The bank's portfolio of loans comes under tighter scrutiny during tough times like this, and they will pass that scrutiny along to their business loans.

Once a bank asks you to move your loan, you have to find another bank that will take on your loan. During good economic times, this is somewhat easier. But during times like these, all banks are under the gun to improve, so this becomes a much more difficult task.

Yet another reason to get back to basics during tough economic times. It becomes even more critical to improve cash flow and bring down debt.

Posted by Jeff Cornwall at 07:13 AM | Permalink | Comments (1) | TrackBacks (0)

This morning's installment for ideablob.com Week at the Entrepreneurial Mind looks at an idea to develop sportswear for women:

Vintage Blue is a vintage inspired sportswear line for women. We hold the exclusive license to the All American Girls Professional Baseball League featured in the film A League of their Own. We create t-shirts with graphics from the 1940's and 50's. Our line is environmentally friendly using non-toxic dyes and 100% organic cotton tees. We also give back to the community with our internship program encouraging young women to be positive, motivated individuals while learning the ins and outs of the fashion industry. We will also donate 5% of our profit to the Achieving Independence Center Female Mentoring which helps young women achieve self-sufficiency through mentoring relationships.

They stated that their main concern is funding, so here is my advice:

Funding for this venture is probably limited to family and friends.

Your market is probably too limited and does not offer enough growth potential for traditional equity investment (angels and VCs). Not enough growth potential, especially using a movie that is several years old as your theme. Don't feel bad about this, as they actually only fund a fraction of a percent of deals in the US.

Banks will only loan you money on your personal credit for a start-up like this. If you have homes that you can borrow against you should be able to get some help from a bank.

So that leaves friends and family. Treat their money as a true outside investment. Set up terms and conditions. Be realistic with them about potential returns and all of the risks. Thanksgiving dinner comes every year, so let's avoid creating family problems that center around unrealized expectations of any investment. Families can be complicated enough as it is!

Posted by Jeff Cornwall at 05:37 AM | Permalink | Comments (0) | TrackBacks (0)

Angel investors were busy, but a bit more cautious in 2007, according to the latest study from the Center for Venture Research of the University of New Hampshire. There was little growth over the previous year in their investment activity.

They stuck to familiar ground in terms of industry sectors that they favored.

• Software 27% of total angel investments
• - Healthcare Services/Medical Devices and Equipment 19%
• Biotech 12%.
• Industrial/Energy 8% (green technologies moved this up a bit)
• Retail 6%
• Media 5%

Their conservative stance also showed up on the stage of deals that they favored. While seed and start-up capital, long the domain of angels, was 39% of angel deals, they showed more interest in later stage deals with more proven track records. The survey found that 35% went to post start-up ventures and 21% was directed toward even later stage expansion investments.

Exit activity showed that in the post Sarbanes-Oxley world mergers and acquisitions still dominate exit events -- 65%. IPOs were an anemic 4% of exits. Bankruptcies accounted for 27% of the exits.

Rates of return continue to hover in the 20-40% range.

Posted by Jeff Cornwall at 05:34 AM | Permalink | Comments (0) | TrackBacks (0)

Milt Capps, a seasoned journalist, has launched a new blog called Venture Nashville. Capps says that "The purpose of The Venture Nashville Blog (VN) is to help increase the flow of accurate information about research, innovation, technological developments and investment activity in one of America's finest cities, Nashville, Tennessee."

Although the focus is on Nashville, he is building a blog that will be of interest to anyone dealing with technology entrepreneurship.

Posted by Jeff Cornwall at 09:38 AM | Permalink | Comments (0) | TrackBacks (0)

Stressed about getting that "A" Round of funding closed? Have you heard "no" from one too many angel investors? Then maybe you want to let off a little steam and show up to a pitch wearing one of the shirts offered by Startup Wear.

Here is my personal favorite:

Posted by Jeff Cornwall at 09:29 AM | Permalink | Comments (0) | TrackBacks (0)

I've been preaching the need for entrepreneurs to practice fiscal prudence during these uncertain economic times. Keeping debt load to a minimum is one of the more important steps a business can take, due to the inevitability of rising interest rates if inflation continues to heat up. Also, banks will be coming under more pressure to clean up their loan portfolios -- this means that even if you have made all of your payments on time the bank may call your loan simply because your credit risk is too high to fit with tighter regulatory standards.

Helen Anderson at her blog called Bankaholic also worries about entrepreneurs who take on too much debt:

As an emerging entrepreneur, it is very easy to quickly accumulate debts that are substantial enough to kill your burgeoning business before it even gets off the ground. But it does not have to be that way. Take the time to examine your business workflow and you will likely discover a number of extraneous costs that can be eliminated to improve the health of your bottom line. Here are eight common practices that lead to common results; learn to avoid them and you will be uncommonly successful.

You can read her eight avoidable causes of unnecessary business debt here.

Posted by Jeff Cornwall at 08:18 AM | Permalink | Comments (0) | TrackBacks (0)

Some good news on the high growth venture financing front -- VC money is spreading out across the country.

From the New York Times (thanks to Ben Cunningham for passing this along):

Venture capital is on the move -- to New Mexico, Pittsburgh and points beyond.

A new survey shows that venture capital investment -- the stuff that fuels technology innovation -- is growing in parts of the country where it has been largely unapparent. The survey from the National Venture Capital Association, based on data provided by Thomson Financial, found that while Silicon Valley remains the hotbed of seed capital, other regions are seeing it grow more quickly.

Cities and states are pushing hard to get venture capital and angel money flowing into their economies. I am part of a planning group that is seeking to attract more high growth money to Nashville.

However, attracting venture capital is not the holy grail of entrepreneurial economic development that many people seem to assume. A few points to remember:

- Venture capital money funds only a tiny fraction of new business ventures. Most of the fuel of the entrepreneurial economy comes from small businesses that will never need nor attract venture capital. While high growth businesses are important, they are marginal players in economic growth.

- About 80-85% of start-up capital for new businesses comes from the entrepreneur and her friends and family. Most of the rest usually comes from loans.

- A typical venture capital firm receives hundreds of plans each year, considers only a handful, and usually funds only 3-5 deals a year.

- Most venture capital goes to businesses that promise very high growth, with the promise of high returns (70-100% annual return on their investment). They are looking for home-run deals.

- They tend to favor funding deals that are run by people they know from previous deals.

- Venture capital firms most often are looking for deals that need at least a $5 million investment, and most now look for $20 million deals or even larger.

Posted by Jeff Cornwall at 04:44 PM | Permalink | Comments (0) | TrackBacks (0)

As an entrepreneur, I always hated the month of February. Why? Because it had 10% fewer days than many of the other months, which meant that it generated 10% less cash flow for my business.

So in honor of the extra day we get every four years, I want to wish a Happy Leap Day to all of you entrepreneurs out there!

Posted by Jeff Cornwall at 05:04 AM | Permalink | Comments (3) | TrackBacks (0)

The Angel Capital Association reports on their latest survey of angel investor attitudes. It seems that angels are not quite as gloomy as their VC cousins (see my post on their mood from last week).

Angel group leaders expressed optimism about the climate for investments in early-stage businesses in 2008 in a recent survey by the Angel Capital Association (ACA). This optimism comes despite recent news about the slowdown of the US economy and follows a year in which investment activity stayed level with 2006.

You can read a summary of their report here and find the summary statistics from this survey here.

Posted by Jeff Cornwall at 08:33 AM | Permalink | Comments (0) | TrackBacks (0)

To those of you who deal regularly with venture capitalists you probably think this is the start of a bad joke. How do you tell when a VC is feeling pessimistic? Well, the University of San Francisco has created an index to measure the mood of VCs -- and as dour as they usually seem, their confidence plummeted during the last quarter of 2007. (I am a horrible joke teller, so if you have a punch line to offer for my hypothetical joke, please pass it along!)

"The Q4 Silicon Valley survey indicated a significant decrease in Bay Area VC confidence in the high growth entrepreneurial environment to its lowest reading in 4 years," says Mark Cannice of USF.

And the mood overseas is not much better.

"The China Q4 survey indicated a modest decrease in China VC confidence in the high growth entrepreneurial environment. This decrease was primarily attributed to a changing regulatory environment and inflated valuations."

Here is a graph that displays this sudden drop in the confidence of VCs.

So what does this mean?

- VCs will likely now look at each possible deal with even more scrutiny. They will become even more diligent in reviewing each deal and will likely be quicker to throw deals that give them any heartburn out the door.

- They will also in all probability offer less favorable terms to protect their returns. The assumptions they use to model growth will become much more cautious, leading to much lower valuations.

- And they will be quicker to pull the trigger on replacing management if the entrepreneur starts to falter.

Posted by Jeff Cornwall at 06:40 AM | Permalink | Comments (1) | TrackBacks (0)

The SBIR (Small Business Innovation Research Program) funding program is in jeopardy of not being renewed. From GenomeWeb Daily News:

The Federal funding program that supports small businesses that pursue innovations in biomedical and other high tech fields is in need of an overhaul, according to some industry representatives, and is set to dry up later this year if the US Congress does not agree to extend it. In an effort to press lawmakers to do something about the Small Business Innovation Research program, industry representatives held a sort of a cheering session this week on Capitol Hill that touted the value of the program to biomedical research.

One of the "cheerleaders" is Belmont alum Dr. Jim Stefansic, CTO of Pathfinder Therapeutics, Inc. (PTI). Here is part of his testimony before Congress:

Although PTI has overcome much of the technology and regulatory risk associated with bringing a new medical device to market, many other challenges remain to ensure that our technology can improve the lives of those suffering from abdominal cancer. It is important to note that these risks would not have been conquered without both the SBIR grants and the modest seed round investment in PTI. Both of these funding sources are described in more detail below.

Given that the expertise of the founders in successfully acquiring academic federal grant funding, we were encouraged by our seed round investors in the summer of 2004 to raise additional early-stage funds through the SBIR mechanism. With teamwork and considerable effort from all the founders, in early 2005 PTI was fortunate to land on our first attempt a fasttrack SBIR grant from the National Cancer Institute (NCI) to develop a commercial software and hardware platform for a variety of image-guided therapeutic applications that target cancer. As the principal investigator on this grant, I have been able to focus part of my time and energy on taking the technology from the founders in the academic setting to commercialization without being concerned about salary support and other R&D resources for my engineering staff. The $1.5MM in grant funds have been primarily used to develop the SurgiSight image-guided therapy platform and will enable PTI to grow from one specific therapeutic area (liver surgery) to the broader field of surgical oncology (kidney and colorectal) to the broadest field of general surgery (vascular/soft tissue applications throughout the body). The key to unlocking this potential is the stability and versatility of our software platform and its ability to seamlessly interact with multiple hardware configurations. This versatility will enable Pathfinder to release products that are amenable to applications that employ either an open or minimally invasive surgical approach.

Jim knows that I am not a big fan of programs like SBIR. I do not believe that it is the role of government to steer entrepreneurial activity and fund businesses. That being said, we are very proud of Jim and we are glad that he was able to leverage this funding to start what we know will be a great business.

Posted by Jeff Cornwall at 01:35 PM | Permalink | Comments (1) | TrackBacks (0)

The latest statistics from the National Venture Capital Association seems to suggest that the high growth sector of our entrepreneurial economy has leveled off. Venture capital firms raised just slightly more than they did in 2006 (up 2.6%). This was expected, since capital markets have tightened and many funds still have significant over hang of uninvested funds. Mergers, acquisitions, and initial public offerings were up a bit. These results are good in that we did not see a downturn in the venture backed sector. But, it is a further indication that the entrepreneurial economy is no longer showing the robust expansion we saw over the past few years.

Posted by Jeff Cornwall at 08:49 AM | Permalink | Comments (0) | TrackBacks (0)

If you've ever interacted with a VC you might find it hard to imagine them feeling bullish about anything, but the latest survey released by the NCVA paints VCs as having a fairly optimistic outlook for 2008.

Venture capitalists are forecasting an active year for the industry with high growth in the CleanTech sector, an improving IPO market and fewer venture firms in 2008. These predictions are among the top line findings of the NVCA 2008 Predictions Survey. The results also show concerns about global investments in certain regions including China. Additionally, the industry believes fund sizes will become larger and returns for limited partners of venture capital funds will improve in both the short and long term horizons.

Posted by Jeff Cornwall at 02:20 PM | Permalink | Comments (1) | TrackBacks (0)

When you deal with something almost everyday it can become second nature to you. So it is with financial statements for those of us who pour over them in business plans, financial forecasts, and case studies. But for many entrepreneurs, even some with surprisingly large companies, financial statements are difficult to digest and interpret.

My column in this week's Tennessean offers some tips on how to begin to understand and better utilize the information contained on a monthly income statement.

It is important to look beyond the numbers presented in the income statement and examine the percentages that each of those numbers represents. Look at major expenses every month to see what percentage of sales is being used to pay for each expense. Entrepreneurs who train themselves in how to read their income statements carefully will begin to see trends that will help them make decisions and solve problems within their companies.

Posted by Jeff Cornwall at 10:00 AM | Permalink | Comments (0) | TrackBacks (0)

In this week's column at the Tennessean I provide a summary of what it takes to attract investors to your business.

So what do these professional investors look for in a business when they make an investment decision?

We often hear that such investors will put money in an "A" team with a "C" idea, but not an "A" idea with a "C" team. That is, rather than investing in the next great idea, they invest in entrepreneurs with a proven track record of success in previous deals. However, the truth is that you will need straight A's to get angel or venture capital money.

Posted by Jeff Cornwall at 06:28 AM | Permalink | Comments (0) | TrackBacks (0)

the Kauffman Foundation has released a study indicating that angel investment groups are now seeing returns on their investments that rival VC firms.

Angel investors participating in organized angel groups are seeing average returns -- 27 percent -- that rival those of in the VC industry. The "Returns of Angel Investors in Groups" study, released by the Kauffman Foundation and the Angel Capital Education Fund, shows that within 3.5 years from investment to exit, this group generated 2.6 times their invested capital. Seven percent even generated returns 10 times their initial investment. However, the risk inherent in angel investing also was illuminated -- just over half of the cases resulted in a negative return with some or all investment capital lost.

Posted by Jeff Cornwall at 08:20 AM | Permalink | Comments (1) | TrackBacks (0)

I came across a site that if you have not visited, you need to. It is called Ideablob. One recent visitor called it a place for idea junkies. Each month people submit their ideas for new businesses. Visitors to the site then get to vote on the best idea for that month. Think of it as Survivor meets the elevator pitch. Each monthly winner gets a $10,000 check to help with their business idea.

The site is funded and sponsored by Avanta. They are being very low key about their connection, however. Marketing of the site has been solely through viral means to this point, such as Facebook, blogs, etc.

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Although it is a week that I wish we did not need to recognize, next week is National Fraud Awareness Week. SunTrust Bank has partnered with the National Small Business Association (NSBA) to put out the "Foil Fraud" survey.

I followed up with the folks at SunTrust to get some more insight into the nature of fraud in small businesses.

Q: Is the problem of business fraud getting worse for small business owners?

A: It might be. Based on our survey we know that it certainly is a concern for small business owners and that concern is growing. A recent joint study by SunTrust and the National Small Business Association showed that 84 percent of small business owners are concerned about fraud in connection with their businesses' finances. We also know going into the next year those same small business owners say they feel more vulnerable when it comes to fraud. In the Southeast 1 in 4 small businesses have been affected by fraud and nearly half of all business owners know of some small business that has been hurt by fraud. This fear is growing as businesses become more reliant on the Internet.

Q: What is the most common type of fraud small businesses face?

A: Interestingly, our survey showed that the majority of small business owners were concerned with online identity theft, or online hackers. However, in actuality the most common types of fraud perpetrated on small businesses are credit card fraud and check fraud; and the most common perpetrators of these types of fraud are clients and employees.

Q: What are some simple steps that small businesses can take to prevent fraud?

A: First and foremost, small business owners should talk to their financial institutions to find out what types of fraud protection they offer. Our survey showed that business owners wish banks offered businesses more help in fighting against fraud. A very large percentage of business owners wish there was a way to detect business fraud to prevent or limit loss and are looking for more information about preventing fraud in their business. At SunTrust, we have listened to this and acted, and now have a product to help small business owners detect fraud. Our Online Cash Manager Plus and Premium products now feature Fraud Inspector--a feature that was designed to help small businesses identify fraud and reduce risks before businesses are impacted. The tool gives clients the ability to review paid items that have cleared against their business checking, savings or money market account(s), and request that an item be returned if it is suspected to be fraudulent.

We also encourage small business owners to focus on things like the separation of duties within their office staff and enforce other measurements such as have a fraud policy in place with a fraud hotline or suggestion box. But most importantly business owners should hire the right employees. In doing so, they should conduct background checks on employees, especially those associates that will be dealing with valuable inventory or finances. Also, take the time to call references and verify credentials--too often employers skip this step, and it could mean the difference between a star employee and an employee who could hurt your business.

Finally, get involved. Becoming a member of a national association, like the NSBA, can really help small businesses stay connected to these kinds of key issues.

Posted by Jeff Cornwall at 03:32 PM | Permalink | Comments (0) | TrackBacks (0)

How do venture capitalists look at deals? Read first-hand how one VC evaluates about the proposals he receives at Gaebler Venture's blog site.

When somebody sends me a business plan or gives me their elevator pitch, I quickly run it through a mental filter to see if it's a HomeRun. If it is a HomeRun business concept, I'm interested. If not, I'll quickly move on to other things.

It usually takes me 15 to 30 seconds max to figure it out....

Posted by Jeff Cornwall at 05:46 AM | Permalink | Comments (2) | TrackBacks (0)

There is The National Venture Capital Association has issued two recent reports that offer mixed news from the venture capital world.

One report shows good news regarding exits for VC backed deals (mostly though mergers and acquisitions):

Sixty-seven venture-backed mergers and acquisitions were completed in the third quarter of 2007, 34 of which had disclosed values totaling $7.7 billion, according to the Exit Poll report by Thomson Financial and the National Venture Capital Association (NVCA). This dollar volume represents a 104 percent increase from the same quarter last year when 41 disclosed deals accounted for $3.8 billion in value. Additionally, the average disclosed acquisition value was at its highest level since the fourth quarter of 2000. The venture-backed IPO market had 12 offerings for $945.2 million in 3Q 2007, a slight increase from the same quarter last year when $934.2 million was raised from 8 offerings.

However, the other shows a slow down in funding to support new deals:

Fifty-nine venture capital firms raised $6.0 billion dollars in the third quarter of 2007 according to Thomson Financial and the National Venture Capital Association (NVCA). This quarter's figures represented a decline in the number of funds and dollars raised from the second quarter of 2007 when 83 funds raised $9.0 billion. In the first three quarters of 2007, venture capital firms raised $20.7 billion or approximately 79 percent of the volume raised in the same period of 2006.

Given the over-hang in funding right now this is not a disaster, but if this continues it will mean tighter money for high-growth firms for the next few years.

Posted by Jeff Cornwall at 04:57 PM | Permalink | Comments (0) | TrackBacks (1)

A common question I get asked is, "Are there any grants out there for start-up businesses?"

The assumption is that the government gives out grants for businesses. While there are a few government sponsored grant programs for specific demographic groups or for specific types of businesses (for example, the SBIR program), they are not very common and not accessible to most entrepreneurs. To me, their relative obscurity is a good thing, as it is just one more step toward socialized entrepreneurship -- bureaucrats picking winning industries or using entrepreneurship to shape social policy.

We are, however, starting to see some private sources of start-up grant money. Universities are starting to set up grant funds for their student entrepreneurs. We have established a small fund here at Belmont this year. Donors like the thought of being able to help nascent student entrepreneurs as they try to start their businesses in their dorm rooms and in our hatchery program. We are able to offer our student entrepreneurs small grants that are targeted for a specific need they have in their fledgling businesses, such as a small piece of software, printing costs for things such as business cards, etc., etc. The students are not under a contractual obligation to pay us back, but agree "on their honor" to replenish the fund and help to grow it when their business becomes more successful and has the money to do so.

Micro-lending programs are growing in their popularity and success around the globe. These funds (often private) give out similar funding, usually in the form of loans. They are not grants, but are still designed to assist those who would never get a dime from a traditional bank or investor. Most recipients are in poverty and see free enterprise as the best means to gain economic independence.

Now the founders of Facebook are launching their own version of this type of program. From Rueters:

Online social networking phenomenon Facebook Inc said on Monday its backers have created an unusual $10 million fund to dole out grants to start-ups with ideas for innovative Facebook applications.

Facebook is working with its primary venture backers, Accel Capital and The Founders Fund, to create a way for people with new ideas to receive an initial funding grant of $25,000 to $250,000 that does not require the entrepreneur to give up any equity in the business they create, as venture capital does.

They fund projects that contribute to Facebook. These ventures can be for profit or non-profit.

We are also seeing more limited projects like Bang Ventures and their "You be the VC" popping up. And last year I wrote about venture capital firms holding open forums for all comers to present their ideas (I admit, I was a bit cynical about this one until I interviewed a VC running one of these events).

Although not yet widespread, these types of private efforts hold the best hope for the efficient and effective spread of free enterprise at the grassroots level. Let's keep government out of this important economic function.

(Thanks to Sarita Stewart and Natalie [I Just Got a Promotion] Wozniak for their suggestions toward this post).

Posted by Jeff Cornwall at 06:12 AM | Permalink | Comments (0) | TrackBacks (0)

The National Dialogue on Entrepreneurship summarizes an interesting new report indicating that angel investors are liking the deals they see these days:

In its Confidence Report earlier this year, angel groups belonging to the Angel Capital Association predicted that the quantity and quality of entrepreneurial investment proposals in the coming year would surpass 2006 levels. A mid-year check by the ACA shows that those predictions were not just idle boasts. Fifty percent of survey respondents expressed that their group's deal flow had continued to increase in quality and quantity during the first six months of 2007, and most of the remaining respondents said that deal flow was similar to 2006.

The report also suggests that the informal system of financing, with angels usually getting in early stage and then handing off to VCs for later rounds, seems to be working more smoothly from their perspective:

Angel groups also expressed optimism regarding relationships with venture capitalists. A majority of angel group leaders (73.7) thought that the relationships between VCs and angel groups had improved in the last three years. Reasons given for the improved relationship with VCs included: market segmentation, increased understanding about their respective roles in early and later-stage financing, better deal structuring, and good company referrals, among other things. Forty-four percent of the angel groups in the survey had established partnerships with VC firms to expedite co-investments or follow-on investments.

Posted by Jeff Cornwall at 09:53 AM | Permalink | Comments (0) | TrackBacks (0)

One of our alumni, Dr. Jim Stefansic, passed along an interesting article from TechJournal South on the current state of seed capital. It is not very encouraging for start-ups in need of early stage funding. The article cites high risk, too long of a time to a liquidity event, too much need for hands-on assistance, the inefficiencies of small seed capital investments, and investor pressures within the venture capital market as the reasons for VC movement away from seed round funding.

Posted by Jeff Cornwall at 08:25 AM | Permalink | Comments (0) | TrackBacks (0)

The Wall Street Journal has a story about an entrepreneur who took a government grant and tax breaks to help pay for a wind turbine for his ski resort. It was a typical attempt by a governmental agency to try and manage business owners' behavior within the free enterprise system to reach a specific social goal set by politicians. The results?

"If I'd known what I know now, I would have never had done it," says Mr. Fairbank, president and chief executive of Jiminy Peak Mountain Resort Inc. in Hancock, Mass.

Read the entire story here.

Posted by Jeff Cornwall at 05:51 AM | Permalink | Comments (0) | TrackBacks (0)

This story from the San Francisco Chronicle illustrates once again that you can raise too much money.

A year ago, Mark McDade, chief executive officer of PDL BioPharma in Fremont, was planning the move of his biotechnology company to a glamorous new office complex in Redwood City. PDL's operations were growing as it sought to expand its line of acute-care drugs, and it needed bigger quarters.

Now McDade, a Harvard MBA, is fending off critics who blast his real estate deal as just one example of his extravagant spending.

Too much funding in a new business can lead to over spending on overhead, wasteful spending on non-productive expenses, and even taking your eye off of what it takes to build a business. A hungry entrepreneur will out perform a fat and lazy one any day.

Given the choice of a start-up with much more money than they really need and a start-up that is slightly underfunded, I would pick the latter every time.

(Thanks to Dr. Jim Stefansic for passing this along).

Posted by Jeff Cornwall at 05:38 AM | Permalink | Comments (0) | TrackBacks (0)

The Wall Street Journal has a piece on how credit card companies are targeting small businesses.

Credit-card use is soaring among small businesses. Many entrepreneurs find it's faster and simpler to sign up for a card than to apply for a bank loan. Others are turning to plastic because they don't qualify for bank loans. And they're using the cards, ones geared toward small business as well as consumer cards, to pay for just about everything -- including health insurance, energy bills, taxes and photographers.

Card spending by small businesses on tax payments and preparation alone jumped by 80% in the 12 months ended February 2007, according to a report by Visa USA, based on data about spending on Visa cards by 600 small businesses during that period.

To say that I am not a big fan of using plastic to fund small businesses is an understatement. I have seen too many small businesses forge ahead prematurely with a business idea using what seems to be easy credit to secure. It is expensive debt that is almost always personally guaranteed. So even if the business fails, the credit card debt remains for the entrepreneur. They also make spending just too easy. Most of us have experienced this at one time or other in our personal finances.

Again from the WSJ:

Experts say business owners need to remember that there is good debt and bad debt -- and to respect the difference. Good debt generates revenue; bad debt consumes it.

Furthermore, credit cards don't provide an impartial adviser on sound borrowing practices, so it's critical to build a relationship with a banker or other knowledgeable adviser outside a credit-card company.

Amen!! This is critical advice for any small business owner. If you can't get other credit for your business there is probably a good reason. Make sure you understand why they have concerns about your business.

Posted by Jeff Cornwall at 08:02 AM | Permalink | Comments (4) | TrackBacks (9)

My column this week at the Tennessean looks at the first rule of bootstrapping: Keep your overhead to a minimum!

Recent studies find that the average business start-up has only $6,500 to $10,000 in initial capital. So, how do entrepreneurs get businesses off the ground with such meager means? They succeed by using a variety of tools and techniques that are known collectively as "bootstrapping."

Entrepreneurs can pull themselves up by their bootstraps by finding creative ways to launch and grow a business within the limited resources available to most new ventures. They find ways to achieve what needs to get accomplished for the business by creatively getting it done for a lower cost.

The first rule of bootstrapping a business is paying attention to overhead.

Posted by Jeff Cornwall at 05:48 AM | Permalink | Comments (0) | TrackBacks (0)

I have pointed out for a long time that there is a growing level of overhang (excess liquidity) in private equity markets. This has led to speculatory behavior in certain "hot" sectors, such as healthcare, as discussed in this post by Bobby Guy at a new blog by Waller Lansden law firm.

Now, it seems money is available everywhere. Many specialty lenders focusing on the healthcare sector have been birthed in the last few years, and hedge funds and private equity funds focusing on the healthcare sector have exploded. Even with interest rates rising, money continues to be available at historical levels. It was recently reported that there is enough money in hedge funds to take the entire NASDAQ market private—twice. Credit derivatives contracts (agreements that divide up risk, either by using pools or through swaps) are worth more than nine times global gross domestic product. A month ago, I talked to a fund with almost $100 million to invest in the next three months, and if it did not meet its three month deadline, all money would have to be returned to investors to chase yield elsewhere.

This is getting to be a worrisome equity market in my opinion. And Mr. Guy agrees:

For the moment then, easy money is "hip" and cool. No one knows how long the current wave will last, but it is fresh wind in the sails of the healthcare market compared to the doldrums of 2001-03. Remember that inevitably, as with all financial cycles (and bubbles), this one too must turn (burst) . . . but maybe not yet.

Posted by Jeff Cornwall at 04:08 PM | Permalink | Comments (1) | TrackBacks (0)

How do you value a business that has nothing to value? That is the challenge for pre-revenue ventures. They have no sales, and therefore certainly no cash flow, so how do you agree on a value that can be used to give equity in the business to investors that is fair to all parties? How do you assess a value to "potential"?

A common approach has been to basically postpone any valuation and issue convertible notes that allow early investors to convert from debt to equity when later stage investors come in once revenues start to flow. But even this method has flaws and pitfalls.

The latest collection of articles, tools and profiles from Kauffman's eVenturing examines the issue of pre-revenue valuation. What is particularly valuable is that it looks at valuation from both the entrepreneur and investor side of the negotiation. Very good material for any high potential start up to review before entering into discussions with a VC or an angel.

Posted by Jeff Cornwall at 07:27 AM | Permalink | Comments (0) | TrackBacks (0)

Entrepreneur magazine has an interesting profile of three entrepreneurs who successfully navigated the path to VC funding. Finding the right VC fit -- if your business is really VC fundable -- can build a working relationship that can benefit all involved in the deal. VCs are never simply sources of money -- they almost always become an active player in the strategic growth of the business.

Posted by Jeff Cornwall at 07:39 AM | Permalink | Comments (2) | TrackBacks (0)

My column this week at the Tennessean examines taking business loans and investments from family:

Family members provide funding for many different reasons. Some are motivated by altruism -- they just want to help the entrepreneur get started and be successful. Others can be driven by greed -- they see the investment as a way to ride on the entrepreneur's coattails to fortune and fame.

But no matter what the reason they provide financial assistance, defined boundaries and clear expectations should be clearly established.

Posted by Jeff Cornwall at 07:02 AM | Permalink | Comments (1) | TrackBacks (1)

A couple of useful pieces of information on entrepreneurial financing:

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