Financing Options Start With Relationships

Most entrepreneurs face the same dilemma: They want to go into business, but they don’t want to go broke doing it.
Tight credit and regulations take bank funding out of the equation for many because of the risky nature of a start-up business.
Even with President Barack Obama’s recently passed American Recovery and Reinvestment Act, which includes provisions making it easier for small business owners to secure SBA-backed loans, many are choosing to forgo the loan route and pursue other options to finance their ventures.
Debt Free
For those who can, the first option is to go it alone and finance their venture out of pocket.
As Gerald Buckley, founder and CEO and winner of the 2008 Mayor’s Tulsa Entrepreneurial Spirit Award, said, “I’m not inclined to take out any debt (on my business).”
Ned Bruha, vice president of The Skunk Whisperer Inc. and third runner-up in the 2007 Spirit Award, said, “The way I was raised, if you can’t pay for it, you don’t buy it.”
Bruha has self-funded his no-kill, no-capture wildlife management since its inception in 2003.
“I paid for everything cash, out of my pocket,” said Bruha. “Every penny I made, I reinvested it into the business. I bought what I could as I went along.”
He took out only one loan, and that was for his company vehicle.
While not everyone seeking to start a business can afford to pay for it themselves, many look toward creative funding opportunities, such as venture capitalists, angel investors and individual loans, rather than going straight to a bank for their funding.
“You have to kiss a lot of frogs before you secure significant funding. It is important to remain open to creative and non-traditional funding options such as bartering, partnering, stock options and warrants, along with family and friends,” said Spirit Award chair Sean Griffin. “You are going to need to maximize every resource to can dig up to start up.”
Big Money, Fast Returns
Venture capitalists invest private equity into innovative companies that offer a high potential for growth and a return on investment. Recently, VCs have tightened the reigns on their funding.
Ted Cundiff, president of metro markets for SpiritBank and 2009 Spirit Award judge, said banks and venture capitalists are looking for “good, strong” deals to fund.
“On the venture capitalist side, we’re seeing more activity with mergers and acquisitions,” said Cundiff. “We’re seeing more opportunity there, as companies look at synergies with other companies. Due to the downturn in the economy, venture capitalists are looking for good, strong companies to put their money to work.”
Vince LoVoi, managing partner for Mimosa Tree Capital and another Spirit Award judge, said he’s also noticed venture capitalists pulling back on their purse strings.
“Ironically, even in the past few years, there was already a gap in funding for those seeking more than angel or ‘friends and family’ financing but less than about $20 million. At that time, most VCs were looking for larger investments because they had more cash to invest but not more infrastructure in their organizations to review deals.”
One of the reasons Buckley has sought funds from venture capitalists, other than needing a large sum of money to get his “apples to apples” grocery comparison Web site business off the ground is, he said, the advice and networking that also come from VC investors.
“Venture capitalists aren’t just about money; they’re also about helping us accelerate our business,” Buckley said.
Cundiff recommends entrepreneurs seek VCs who’ve expressed interest in their particular field or industry.
“That, more than anything, ties back to the Entrepreneurial Spirit Award,” he said. “That process gives you the chance to create an executive summary and business plan that is well thought-out, with all the elements needed to pitch to a VC, angel, aunt, whoever.”
The coaching and judging process Spirit Award participants go through helps them refine their business plan and pitch, which is important, Cundiff said, because investors typically know in the first five to 10 minutes of meeting with a business owner whether or not they’re interested in seeing his business plan. He said the biggest mistake an entrepreneur can make is not being prepared.
LoVoi offered this advice to entrepreneurs seeking funds from investors: “Make clear to the potential funders that you have a strong personal commitment to success and recognize that sacrifice and ‘skin in the game’ are essential. We will not fund proposals that would use the capital for large salaries or to repay personal debt. In addition, a well thought out business plan with detailed market analysis is essential.”
LoVoi said Mimosa Tree has “shifted its focus more intensely on Tulsa.”
“We feel there’s a lot of talent here we can engage without having to climb on airplanes,” he said.
Money From On High (Or Next Door)
Businesses needing seed capital can also turn to angel investors if VCs find their plans too risky. Angels are individual investors with a few thousand or even a million dollars to invest in a promising entrepreneur.
In addition to hunting down local investors with an interest in their idea or industry, entrepreneurs can also turn to family and friends for money to get their business going.
In fact, that’s the first place entrepreneurs should turn, said Sean Kouplen, CEO of Regent Bank.
Kouplen purchased Regent Bank about a year ago after raising almost $16 million in a matter of a couple of weeks. And he did it by asking friends, family, former clients, people with whom he’s had a rapport, to invest in his idea.
“That is something people don’t think about,” said Kouplen. “They think, it’s got to be the bank, an angel investor or a venture capital firm. But there are individuals out there within the market who have significant wealth and liquidity who are looking for good opportunities for their money. And that’s one advantage right now. Because of the stock market’s performance, people are looking for something to do with their capital and it actually opens up a segment of investors that wasn’t there prior to the downturn.”
Buckley raised his first round of capital through the generosity of friends and family, he said. He’s now working on a campaign to raise $130,000 by pitching his company to angel investors, VCs and other private equity groups.
He recently received a $100,000 matching grant from i2E, a local non-profit corporation dedicated to growing technology-based entrepreneurial endeavors. The grant matched the $30,000 he received from SpiritBank when we won the Spirit Award last year and will match $70,000 in additional outside capital. Having that matching grant, he said, has made more attractive to would-be investors because the funds from i2E will extend the burn of their capital that much further, he said.
“Funding sources exist all around you as an entrepreneur,” Griffin said. “The challenge is being open to unexpected and non-traditional sources of funding when they present themselves. Every person you meet has the potential to introduce you to someone who can fund your endeavor. By focusing on building relationships of mutual reward, you can accelerate the introduction and attraction of funding sources.”

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