Balancing Business and Law Blog

Angel Investment Today

October 29, 2009

Our guest blog post to wrap up this topic is from Loren Lyon, CEO of Magic Wheels, Inc. and presenter at the Zino Society Zillionaire Forum in September. Loren shares insights as to what investors are looking for now.
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Having been on both sides of the fundraising fence, as a potential investor and as a CEO attempting to raise money, I can say that fundraising in 2009 is challenging and requires more thought as to approach and fit with the potential investor.


In the late 90’s fortunes were won and lost in the Dot Com lottery and brick and mortar companies with reasonable business plans found “tough sledding” in the Venture world.

Following the Dot Com bust, what some called “real companies with real products” gained more favor with investors. Timing of a company fundraising effort was pretty critical if you were on either end of this window.

Venture Funding has been constrained dramatically over the last several years related to the general economic and stock market conditions and that has created a ripple effect, pushing deals that once would have been logical Venture Capitalist plays squarely in the lap of Angel investors.

Angel investment groups are making investments but individuals often hedge their bets with smaller investments in more opportunities. Fewer eggs in more baskets.

Today, there are venues of Angel investors that are attracted to certain types of opportunities.

Identifying those investors who find your product or service interesting/valuable is very important to successful fundraising. i.e. if one group has a fairly strong propensity to invest in real estate related deals, and another has a strong software/internet bent, taking an OEM hardware company to either of these is likely to yield fairly low response.

Given the tough investment market conditions, most companies in search of funding “cover all the bases” by presenting to as many investment groups as possible. This is a reasonable strategy as long as it is coupled with appropriate expectations of results.

Experience tells us that Venture funds are much more concerned about the hard facts and Angels tend to be swayed with personalities and presentation styles.

Consequently the success or failure of raising money with Angel groups is often strongly linked to the connection between the investor and the presenter/company representative.

So calibrating your audience is an important element in fundraising. Most organizations offer assistance in tuning each presentation to their audience. This is valuable assistance and should be utilized for the best effect with each audience.

There is a lot of money “on the sidelines” right now that really needs an investment home.

Several years ago, one could argue that the relative risk/reward ration of investing in a start up company was high vrs a general stock market portfolio.

Today, I think that many Angels are seeing that ratio narrow.

The overall risk and upside in the stock market is not so far apart from a carefully selected private equity investment in a start up company and the ROI is generally much greater.

So there is money that needs investment homes and there are good private equity plays that offer superior “Risk vrs Reward” ratios for careful Angel investors.


Key elements for investor consideration:

• Management track record of success
• Market size
• Long term market trend (aging population, green, energy, health care, internet)
• Idea Scalability/Reasonable growth plans
• Liquidity Strategy
• Offering, (Simply stated, is this a good deal?

Identifying the Risk vs the ROI has always been the key to raising funds to bring an idea into the market and it still is. Presenting it to the right category of investor has become more important than ever before and more complex.

October 26, 2009

Our guest blogger this week is K. Suzanne Goff Guitierrez, business banker extraordinaire.

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Credit for your Business

Several of the key ingredients to obtaining financing for your business are the basics: Credit Score, History of more than two years with Net Positive Income, Positive Net Cash Flow, where Total Assets are more than Total Debt, and a Positive Net Equity.

When approaching a bank to request financing, being prepared will make it a productive meeting for both parties. As the business owner it is crucial to understand and identify some basic financial information.

Know your numbers: You should be prepared to discuss the last three years of profitability, so make sure you study your company’s financials, understand them and know where the numbers came from. What are the last three years of Gross Revenue? What are the last three years of Net Income? What are your total assets for the last three years? What are your total liabilities for the last three years? What is your beginning Equity? Your ending Equity? What are your Retained Earnings for the last three years? How do you (the owner) compensate yourself? Be prepared to answer any questions the bank may have about your numbers.

Have a business plan: Having a well laid out plan indicating where you are, where you want to go and how you are going to implement it goes a long way in helping a lender understand your objective. The plan should also include what the purpose of the loan is and how you intend to pay it back. Including a “Plan B”, just in case your plan or revenues do not hit the projected amount will help to answer questions a lender might have about the ability to repay the debt.

Bio/Resume: Have a current and up-to-date Bio and Resume of the owners as well as a history of the company will get the lender insight to the people who run the business and how you have done so far. This “story” helps to fill in the gaps and answer questions that the numbers don’t always tell. Make sure to add any explanation for downward trend in revenues or increase in expenses. This is also the opportunity your company has to shine and list your awards and achievements.

Financial Package: It is very common for the bank to want a complete financial package. This should include 2 to 3 years of your company’s most recent tax returns. Make sure to include all pages and schedules which will help the lender understand where the accountant arrived at the numbers. To complement the business tax returns, you should include the last two years of company financial statements as well as year to date. The Balance Sheet and Profit & Loss reflect the actual numbers of the company that a Tax Return doesn’t always show. Be prepared to include an Accounts Receivable and Accounts Payable Agings with the dates to match the Balance Sheets. You should always include 2 to 3 months of bank statements. This will show the account balances and cash position of the company. All owners of the company having 20% or more should be able to provide a current Personal Financial Statement as well as 2 to 3 years of Personal Tax Returns. This gives the lender a secondary source of repayment for your loan.

Make sure to interview the banker/loan officer. You want a banker/lender who understands the underwriting process and can explain the banks position. Unfotunately in this environment you often get a “nice person” who acts more like an order taker, but does not have the knowledge to answer your questions. Steer clear of this situation because your information is often entered into a computer system and not looked at by a person.

Securing SBA Stimulus Funding Now

October 20, 2009

Our guest post comes from Gary Skrla, owner of ACE Hardware of Silver Lake and client of Equinox. ACE Silver Lake utilized SBA stimulus funds and opened its doors this summer.
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My journey in starting a new business began in January of this year. I initially searched for existing businesses for sale and started calling banks to ask about financing. The majority of banks were not interested in my business due in large part to the economic conditions in the marketplace. Many were moving away from small business and downsizing or eliminating their small business loan teams. In the process I learned of a group called SCORE. SCORE "Counselors to America's Small Business" is a nonprofit association dedicated to educating entrepreneurs and the formation, growth and success of small business nationwide. SCORE is a resource partner with the U.S. Small Business Administration (SBA). Their Seattle office is staffed with very helpful and qualified counselors. It was through their workshops that I learned of various financing options in funding one’s own business, including information about SBA guaranteed loans. (Coincidently the SBA office adjoins the SCORE office.)

With SCORE’s help I decided to look into owning my own hardware store. That led me to Ace Hardware and their northwest field support team who had local experience in helping entrepreneurs find funding. With Ace’s help I was referred to Fortune Bank of Washington, a commercial lender in downtown Seattle where I met Lisa Forrest, a small business loan executive with years of experience working with small businesses and the SBA. Lisa took me by the arm and guided me through the entire loan process, from pre-qualification, to reviewing loan types and options, assembling and completing all the required forms, gaining loan approval, and finally loan closure with a loan through Fortune Bank, guaranteed by the SBA. The process was daunting but moved quickly and efficiently with Lisa and her teams’ help. In all the process took just two months to complete.

Some things that helped secure the financing: 1. A good personal financial history and favorable credit rating. Banks, landlords, vendors, and others will go over your financial history in detail. You must know your history well and be prepared to speak to it. 2. Confidence. My years of retail experience and the Ace model were a perfect match. I was confident that opening an Ace Hardware store would be successful. This confidence was apparent to all I worked with on the project. 3. Business Plan. I did my homework and developed a business plan (using Score’s template) that I believed in and was convincing, so convincing that the bank couldn’t say no. 4. Organization. Be well organized. Banks and the SBA continually ask for a lot of detailed information and can get frustrated when customers are slow or can’t provide it. Have it ready and be prompt and thorough when responding to requests. 5. Follow-up. The loan process can drag on, if you let it. Be persistent and follow-up with lenders to keep the process moving. 6. Follow-through. Once financing is secured and you have signed on the bottom line get to work on the project and keep all parties informed as you move forward. You now have numerous partners that are part of your team and they are anxious to see you succeed. Keep them informed and involved.

Footnote: The Federal Stimulus Act is a boon to small businesses, particularly new startups. The SBA was guaranteeing up to 80% of a loan’s value. That went to 90% under the Stimulus Act, making it more secure and attractive to lenders to loan to entrepreneurs like me. I am convinced this helped me secure my loan and it is still out there for lenders and entrepreneurs to take advantage of. I hope you can take advantage of it as I did.

Top 10 Tips for Talking to Investors for Your Business

October 12, 2009

Our guest blog post comes from Nate Silverman. Nate is the founder of Silverman Consulting, LLC and an experienced advisor to early stage investors and entrepreneurs with more than nine years experience in business development working with entrepreneurs, start-ups, and rapidly growing companies. Nate will be co-presenting our Equinox Focus event "How to Fund Your Business Now" on October 28.

Top 10 Tips for Talking to Investors

1. Be prepared – Learn as much about your audience as possible. Understand what they are looking for and what you are willing to sacrifice.

2. Do as much as you can before talking to investors and begin fund-raising early. You don’t want to say, “I only need $10,000 within the next three weeks to file patent.” Why not? First, while it may seem like a lot of money to many of us, ten thousand dollars is really not that much money to an ambitious entrepreneur. You should be able to raise that yourself or through friends and family. And, the more you accomplish yourself, the more milestones you achieve, the more valuable and attractive your company is. Second, if you have a looming deadline, you will be desperate very soon and have no negotiating strength. What if someone asks you for 50percent of the company the day before you have to file? If you say no, then you have 100 percent of nothing. But half your company is too high a price to pay for such a little amount.

3. Know your story – you shouldn’t even need notes or PowerPoint. Do you need notes to talk about your family? You probably spend more time with your company than your family. Know your market, your partners and your competitors like you know your spouse, children and siblings (not necessarily respectively). PowerPoint is a tool to help the audience grasp key concepts and provide a second method (visual) of learning in addition to your audio narration.

4. Remember your objective – To raise money, not sell your product. In many settings, such as presentations to angel groups or at investment forums, your goal isn’t really to close the deal. Instead, it is to pique investors’ interest for a future meeting.

5. Be clear – would your mother understand? Don’t use too much jargon or make too many assumptions. Sacrifice precision for clarity. For example, take the question about a car’s fuel economy. Clear: “The EPA estimates this car gets 27 MPG on the highway; 22 MPG in the city.” Ask an engineer, and they’d give you a more precise answer: it depends on a number of driving conditions, such as how fast you drive, traffic, if there are hills, altitude, temperature, wind conditions, and others. You also have to consider the condition of the car, including tire pressure, air and oil filters, and how much weight is inside the car. In absolute perfect conditions, it is calculated that the car could achieve 29.8 MPG.” Sure the engineer is more accurate, but how valuable is all this extra information? All cars use the standard EPA estimate, so if you are trying to compare two models’ fuel economy, that’s the easiest figure. All cars have the same performance gains or losses based on the numerous conditions the engineer listed.

6. Be honest – Don’t overstate anything such as status of customers or your technology. Investors will learn the facts. In the example above, it would be misleading to simply say the car could get 29.8 MPG. Also, don’t understate anything. Modesty is an honorable quality, but you need to put your best face forward. Do talk about your team’s successes and impressive backgrounds. Do talk about major customers you’ve won – and include quotes from them about why they chose you over your competitors.

7. Be proactive about “skeletons in your closet.” A smart investor will find them in due diligence, so take the opportunity to put your spin on challenges, obstacles, law suits, or other issues that keep you up at night. Fear the question not asked.
8. Give just the right amount of information to be interesting, without giving away your secrets. Focus on benefits, not necessarily features. What will users get from using your product or service that they won’t get from others?

9. “Make the Asks:” a. Money – Tell them how much money you need to raise and under what generic terms (convertible debt at 10% interest with 20% warrant coverage or equity at a pre-money valuation between $2M and $3M). Then actually ask them to invest! b. Referrals – Whether they invest or not, also ask them if they know anyone else you should talk to that may either invest or help you with advice, customers, partners, manufacturing, etc. c. Feedback – Ask them if your presentation and business made sense. Do you have any questions? What is exciting about this opportunity to you? What are you concerns? What do you think I could do better when I talk to the next investor?

10. Learn from each meeting, presentation and investor. a. If you keep hearing the same feedback (other than “yes!”), consider the fact that you may need to change something. b. If you get similar questions each time, either find a better way to explain it the first time, or include the answer in your initial presentation.

11. Have fun and show your personality and passion for your company. Raising money has been compared to getting married. These people will be your partners and best allies. If you don’t get along, you won’t be as successful. Probably more than numbers or technology, your passion will generate interest in your company and the opportunity to work with you will entice investors to invest in you.

12. Under-promise and over-deliver. I promised 10 tips, but gave you 12. Don’t say “these numbers are conservative”. Instead, say things like “The industry average is about 10% margin, but we used 6% margins in our projections because …” or “We are projecting a total of 100 customers by year five, but already have 20 under contract and 60 more in our pipeline.”

Fund Your Business Strategically

October 05, 2009

Over the past year, businesses experienced first-hand the truth of the mantra “Cash is King.” Not only have sales decreased in many sectors but receivables increased, creating a true cash crunch. Outside financing was virtually non-existent with both public and private funding sources holding back on any investment.

Now, with some light at the end of the tunnel, businesses expecting big growth can reach funders; but many don’t know how to do so or which funding options to consider -- self funding, bank financing, equity or debt financing. Below, I discuss the various funding sources and what to expect in tapping into them.

1. Self-Funding. Self-funding means that the active business owners themselves are personally funding the venture. The funding may be a “capital” investment to launch the company or personal loans made to the business by the owners. The self-funding option is straight-forward from an accounting and legal standpoint but, of course, is limited by the cash of the founders.

2. Bank Financing. Banks are a core source of capital for businesses but they work best where the company’s founders and/or executives maintain a strong relationship with the banker. Companies that leverage their banking relationships early are able to obtain loans and lines of credit based not only on the company’s financial standing, but also on their credibility with the banker. Bank funding keeps the equity in the hands of the owners/founders but creates a financial obligation that can be a burden on the company. Furthermore, in many cases, the company’s founders must personally guarantee any bank debt of the company. If the company fails, the owners become personally responsible for the repayment of the debt.

3. Equity (or Private Equity) Financing. Equity financing is the granting of an ownership interest in a company to an individual or company in exchange for their financial investment in the company. The term “equity financing” often connotes investment by angel investors or venture capital, but the term includes any investment by a passive third party who receives ownership interest in exchange for a capital invested in the company. In an equity financing transaction, the company sells its stock or membership interest (a “security”) to a third party and becomes subject to both federal and state securities laws. Under the securities laws, the security must be registered with the Securities and Exchange Commission (SEC) or be exempt from such registration. A “private placement” is a sale of securities that meets one of the statutory exemptions and allows for the securities of a private company to be sold without registration with the SEC. A private placement requires investors to be accredited (having substantial knowledge about private equity transactions or high net worth) and significant disclosures to investors of the risk of investing. For these reasons, equity transactions can be very risky and very expensive. That being said, when a business is raising significant amounts of capital (i.e. $500K plus), private equity provides access to that capital. Connecting with angel investors and venture capital firms can be challenging as the marketplace for these funds is highly competitive and these investors demand a lot in exchange for risking their capital including percentage ownership in the company, voting rights and a preferred return. Note that in an equity transaction, the investors are not guaranteed their money back (as a debt transaction below). Instead, their investment is a risky investment where the entire investment could be lost.

4. Debt Financing. Businesses can also finance through loans offered by individuals or companies. The debt would be similar to bank financing and executed as a promissory note that may or may not be personally guaranteed by the owner or secured by the assets of the company. The parties agree as to the interest and terms of the note. The lender is entitled to repayment of the loan (unlike equity financing). Debt financing may also be “convertible,” meaning that it can convert into equity upon the occurrence of a particular financing or exit transaction. Debt financings are typically classified as securities, especially where there is an equity component, and must comply with the same private placement requirements as described above.

As you can see, the options for financing a business are varied and the right choice for the business depends substantially on 1) how much capital the company must raise and 2) what the founders are willing to give up in exchange for funding. Furthermore, the investors can self-select the opportunities they believe have the largest potential return for their investment.

Funding must be thought of in a strategic, long-term view for the business as its implications play out throughout the company’s life cycle. The right choice can launch the company toward success while the wrong choice may burden the company in ways that limit its growth potential.

An XSIVE 1 STUDIOS™ creation.