Capital Crunch

[rogercbryan]

I have a lot of consulting clients who are looking for VC, business loans, and/or personal loans. I'm having a heck of a time helping them to find the needed funds.

It's easy to say that if they had better credit, more of their own money, and/or better business plans then they would have no problem finding funding. This may be the case but that does not help them.

Who out there has been able to secure funding in 2008. I'm looking for people in their first round of financing for a start-up. I borrowed money in 2006 to start my company. I then borrowed money in 2007 to advertise my company. In 2008 I secured a line of credit to grow my company (early in the year).

I'm wondering if I would have even been able to get started had I waited until this year? Is anyone lending money to small business start-ups these days?

[jasaunders]

In the last two months, our scrapbooking company has been able to secure two new lines of credit from two new banks which we had no previous relationship with. Both are small LOC's, but nonetheless, it took a simple application and within 48 hours were approved for both lines.

Recent reports from the VC world indicate VC investing is still strong, as is angel investing. Investing was down about 8% in Q1 from Q4 of 2007, which saw $7.8 billion invested in 1045 deals. In the first half of 2008, 72 VC funds took in $11.5 billion, up 15% from the $10 billion in the first half of 2007. This is incredible considering IPO's dried up so quickly.

[rogercbryan]

This is good info... I need to look more closely at what my clients are doing. I do not offer fund raising services so I have to base my information on what their experiences are. Do you see a variance between micro-vc ($5000 to $100,000) compared to larger deals (over $1,000,000)?

Most of the people I'm working with are $5000 to $25,000. I'm trying to get more of them to go to Prosper. If the numbers look like they can support a 25% interest rate and there are no other options for funding then I think Prosper is a great (all be it the only) option for them. What do you think....

[StealYourDreams]

This is good info... I need to look more closely at what my clients are doing. I do not offer fund raising services so I have to base my information on what their experiences are. Do you see a variance between micro-vc ($5000 to $100,000) compared to larger deals (over $1,000,000)?

Most of the people I'm working with are $5000 to $25,000. I'm trying to get more of them to go to Prosper. If the numbers look like they can support a 25% interest rate and there are no other options for funding then I think Prosper is a great (all be it the only) option for them. What do you think....

I assume you use the term VC loosely/erroneously, but realize neither of the two figures you threw out fit within the standard VC parameters.

[pboychuk]

I gave up. I am only 21, but my credit is "perfect" but banks want to see income, Even to get a personal loan, I would have to have a co-signer. So basically I am just having to build my own capital, its working fine, although its slower than I would like. However, I am realizing that even if I had an extra $10k I would probably blow through it soo fast and keep re-investing my earnings that I would be hurt by the interest rates.

[rogercbryan]

I assume you use the term VC loosely/erroneously, but realize neither of the two figures you threw out fit within the standard VC parameters.

Venture Capital by definition does not have a monetary limitation. It is a term used to describe a type of fund raising but not an amount.

Venture capital - Wikipedia, the free encyclopedia
Venture capital (also known as VC or Venture) is a type of private equity capital typically provided to immature, high-potential, growth companies in the interest of generating a return through an eventual realization event such as an IPO or trade sale of the company. Venture capital investments are generally made as cash in exchange for shares in the invested company.

Venture capital typically comes from institutional investors and high net worth individuals and is pooled together by dedicated investment firms.

A venture capitalist (also known as a VC) is a person or investment firm that makes venture investments, and these venture capitalists are expected to bring managerial and technical expertise as well as capital to their investments. A venture capital fund refers to a pooled investment vehicle (often an LP or LLC) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans.

Venture capital is most attractive for new companies with limited operating history that are too small to raise capital in the public markets and are too immature to secure a bank loan or complete a debt offering. In exchange for the high risk that venture capitalists assume by investing in smaller and less mature companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the company's ownership (and consequently value).

[ScottRobertson]

I gave up. I am only 21, but my credit is "perfect" but banks want to see income, Even to get a personal loan, I would have to have a co-signer. So basically I am just having to build my own capital, its working fine, although its slower than I would like. However, I am realizing that even if I had an extra $10k I would probably blow through it soo fast and keep re-investing my earnings that I would be hurt by the interest rates.

If I remember correctly, you are a student. If so, then why don't you just get a student loan for your business. I don't know how it is in the states, but in Canada the student loan rates are actually quite favourable AND you can get interest free terms while enrolled in full-time studies.

The only real problem is that if things go belly up, you cannot declare bankruptcy on student loans. But to counter that, you can only get something like 5,000 per semester so before you get too deep in loans, you should know whether or not your getting into trouble or not.

[pboychuk]

If I remember correctly, you are a student. If so, then why don't you just get a student loan for your business. I don't know how it is in the states, but in Canada the student loan rates are actually quite favourable AND you can get interest free terms while enrolled in full-time studies.

The only real problem is that if things go belly up, you cannot declare bankruptcy on student loans. But to counter that, you can only get something like 5,000 per semester so before you get too deep in loans, you should know whether or not your getting into trouble or not.

I have looked into it. its illegal to use a student loan for things other than school expenses. So, i thought, why not get a private loan, they will never know, and I called citi, and they told me I actually have to keep track of how the money is spent. Of course I could use the loan for my school expenses, but those are probably around $500 a month, and id rather just pay that out of pocket than pay interest. I dont believe you can actually have zero interest when enrolled, atleast not with a private loan, you can defer payments and interest, but it is still incurred.

[ScottRobertson]

I was inquiring about business loans at TD bank the other day and the rep suggested that I go the student loan route. He also mentioned that a friend of his got full student loan amounts each semester (interest free - this is government student loans fyi) and put it into a mutual fund. Withdrew the money once he was finished school, payed the loan back w/o interest and gathered his interest.

[StealYourDreams]

Venture Capital by definition does not have a monetary limitation. It is a term used to describe a type of fund raising but not an amount.

Well then go right ahead and continue looking for $25,000 in venture capital. Part of the challange of raising or securing capital is knowing your audience and the criteria they use to evaluate an opportunity.

Have you tried a straight equity investment from the bank lately? Same thing, it's not what they do.

[akula]

Venture capital - Wikipedia, the free encyclopedia
Venture capital (also known as VC or Venture) is a type of private equity capital typically provided to immature, high-potential, growth companies in the interest of generating a return through an eventual realization event such as an IPO or trade sale of the company. Venture capital investments are generally made as cash in exchange for shares in the invested company.

the definition is incorrect. there's at least 2 things wrong with it...strange given that it's wikipedia. in q2 2008 (which was pretty typical), out of $3.7B allocated to 990 deals, immature/seed stage firms attracted only 4.7% of this total amount in institutional venture funding (94 deals in total, at an average of $3.7m per deal). in other words, the venture industry doesn't "typically fund immature companies". more than 90% of deals are post startup. VC funding for pre revenue shops is an exception rather than the rule, and when it does happen, the firms need to raise well over $1m for the deal to make any economic sense for the investor.

Likewise, in terms of vc consideration, fund managers rarely "invest money in exchange for shares". in 9 out of 10 deals, the securities offered are convertible notes and preference shares, both of which which are quasi debt more than equity. statistically speaking, buying ordinary stock in seed stage firms is pretty much a guaranteed way to go broke, which is why any vc with an ounce of sense will typically promise her LP's to never participate in that sort of nonsense.

stats: https://www.pwcmoneytree.com/MTPubli...jsp?page=stage

...come to think of it, there's a lot more wrong with the definition. who ever wrote that "venture capitalists are expected to bring managerial and technical expertise as well as capital to their investments" has obviously never invested in a company. why on earth would someone invest in a team if you have to show the team how to manage the shop lol? the value add that vc's do is certainly not "managerial and technical". that's what the entrepreneurs are for! the vc's role is to line up the exit, and they're the best person to help facilitate the transaction because they've typically also had a hand in funding the acquirer company...and therefore, can effectively influence it's board. that's the sole and only value add that venture managers are paid to offer.

[rogercbryan]

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...come to think of it, there's a lot more wrong with the definition. who ever wrote that "venture capitalists are expected to bring managerial and technical expertise as well as capital to their investments" has obviously never invested in a company. why on earth would someone invest in a team if you have to show the team how to manage the shop lol? the value add that vc's do is certainly not "managerial and technical". that's what the entrepreneurs are for! the vc's role is to line up the exit, and they're the best person to help facilitate the transaction because they've typically also had a hand in funding the acquirer company...and therefore, can effectively influence it's board. that's the sole and only value add that venture managers are paid to offer.

My short lived business career has been based on what you say is wrong with the Wikipedia definition of Venture Capital. It has been my experience in a handful of ventures that I have taken part in either from an ownership or consulting standpoint that the investor (VC) has always taken an active role in the business. Either through an executive position or at least a top seat on the board of directors.

I have yet to be involved in a deal that had a short term exit strategy. Currently I'm working on a deal that has a five year time horizon that is based on the idea of developing a program for an organization with the intent and option for that organization to buy it back at a predetermined multiple at the end of the five year contract.

I'm in no way saying I have a lot of experience in this industry. I was just introduced to my first M&A project this summer and I've only in the past six months ever secured a credit line of over $1M usd. I'm just wondering if there are variances in each situation that makes what we each know accurate yet different.

What I've seen is that investors take an active role in their investments. They often structure their investment with a repayment strategy. They also take an equity state for future dispersement when the company becomes profitable. I have yet to take part in a sell out so I can't say I know much about that. With the three main investors I've worked with on differing projects in differing industries and in different parts of the country they all seem to have the same approach with out even knowing what the others are doing.

To me this is how venture capital works. I've seen amounts of $6500; $35,000; $800,000; and I'm working on a few dales that require less up front buy more operating cash for leases and/or growth needs.

I'm not saying I'm right... I'm not saying anyone else is wrong... I'm just telling what I've experianced.

[byzantium]

I financed my business on credit cards. Of course, this was in 2007 before the card offers dried up. Then my parents received an offer for a low interest loan from Capital One, so they got the loan and I paid off the high interest cards. My business is almost ready. In the year since I decided to do it, the credit market has collapsed. I couldn't do it today. Anybody starting from square one today is out of luck. The Small Business Administration has a micro-loan program, but it only applies to rural areas, not cities. (Why? I have no idea.) The cited amounts are more in line with micro-loans than with venture capital funding. VC's usually get involved where amounts are at least seven figures if not eight. Most recipients of VC funding are from top universities and have familial and alumni connections.

[akula]

My short lived business career has been based on what you say is wrong with the Wikipedia definition of Venture Capital. It has been my experience in a handful of ventures that I have taken part in either from an ownership or consulting standpoint that the investor (VC) has always taken an active role in the business. Either through an executive position or at least a top seat on the board of directors.

Yeah sure, these are all very valid points. Hehehe. VC "value add" is pretty much the industry inside joke.

Venture managers need to differentiate their money from everybody else's money. The result is that everyone ends up promising founders all kinds of nifty managerial and technical experience to go along with cash. Of course, it's all just spin. One vc i spoke to explains it perfectly: "let me put it this way, i've never seen an entrepreneur accept a lower premoney val because the vc can write html".

company building is a team effort and everyone has a role. founders do the management and tech dev. the vc's fund founders who are good at this kind of stuff. the vc's then take board seats to facilitate exits and fire underperforming ceo's. sometimes, consultants are used to brainstorm new ideas, when the ceo is struggling with a decision. that's pretty much the dynamics of it all.

on the flip side, disasters happen when entrepreneurs mistakenly approach their vc's with some sort of a "hey, I've got no idea what I'm doing, can you help?" (and then watch their investor loose confidence), as well as when an investor offers operational advice to a founder who spends his days in the trenches rather than jetsetting from one industry mixer to another, go golfing on tuesdays and sit on the boards of 6 other companies who operate in unrelated markets.

numerically, of course, it's simple. since your Ms. Typical VC will only spend between 10-30hrs per month being in any way involved with your startup (because of her other time pressures, such as soliciting business plans, reviewing opportunities, raising a new fund and looking after the rest of her portfolio), the level of her active involvement in your business will certainly be less than what was offered in the brochure. indeed, the only time that vc's get actively involved in a startup, is when the company is in trouble and the vc is afraid of a down round/write off. when this happens, the involvement is pretty straight forward and sounds a lot like what donald trump says to unsuccessful tv show participants.

[rogercbryan]

I'm just wondering... based on the information that I've provided about my experiences in this part of the business process... is VC or Venture Capital not the correct way to describe the fundamentals of my funding experience?

Is there another term or category for setting up businesses the way I do? It seems those of you who have been involved in businesses with greater capital needs ($1M+ in start-up funds) have a different view of venture capital the I do.

Every deal I've been involved in has had:
Direct investor involvement (through active management or board representation)
Repayment Schedule or term
Vested ownership granted for future dispersement of profitability

Now I've only completed three deals and I have two more in the works. I'm just looking for everyones opinion on what the correct 'term' is for my way of doing this. I call it 'venture capital' you may call it 'growing the potato'... it doesn't really matter what its called because it has worked so well for me. I just would like to use the correct terminology when I'm talking with other professionals.

Any ideas?