As the funding landscape changes, businesses discover risk and opportunity
Every company needs money, and experts say the methods of acquiring it have changed, probably permanently. Banks have money, but they have learned lessons about risk. At the same time, new opportunities have opened up that will likely have long-lasting effects on the way business startups and expansions are funded moving forward.
“The funding environment continues to be challenging, although there are some things taking place that are improving the environment,” said Matt Dunbar, managing director of the Upstate Carolina Angel Network (UCAN). He said early-stage capital has always been tough to come by, and the recession just made it a little tougher. But the evolution of angel investing is creating a structured way for people to get together.
The Laws
Some significant changes in state and federal laws are changing the game this year. South Carolina recently passed the “Angel Investor Bill,” which provides a tax incentive for people who invest in companies within the state.
Regulatory changes from the Securities and Exchange Commission (SEC) will open new doors, although they are getting mixed reviews. Businesses have hailed new rules that allow companies to advertise their public offerings through conventional media. But Dunbar said the rules as currently written could make the process of public offerings more difficult and risky for businesses.
“Basically what they’ve done is that you can solicit, make it known, but there are a whole bunch of hoops you have to get through to do that. One of which is that the only investors you can take in are accredited investors. So the startup now has to verify the investor’s financial info,” Dunbar said.
Even worse, said Dunbar, a company that makes a mistake could be barred from fundraising for a year if deemed to be in violation of the rules. The rules are set to go into effect Sept. 23, and Dunbar says companies should proceed with caution and very good counsel.
The Crowd
Equity Crowdfunding is expected to become legal next year. It will be similar to sites such as Kickstarter and Indiegogo that solicit donations from anyone who wants to pledge money to a cause or project. It’s less popular for business endeavors, though a local company has found success.
By the end of August, Ractiv, whose first product is Haptix, had raised $140,000 on Kickstarter to develop a 3-D multi-touch device that can turn any surface into a computer mouse, among other things. The original goal was $100,000. Ractiv has raised the rest of its funds from angel investors and seed money from the Iron Yard accelerator.
Yet cofounder Darren Lim said the money raised is less important than the support. He sees those crowfunders as the people who can give guidance on the product development from the user side, and also as people to whom Ractiv must be accountable.
“It’s really not more money so much as more pressure,” he said.
Meanwhile, the South Carolina Small Business Chamber of Commerce is seeking businesses to participate in an online portal that will connect accredited investors (people with $1 million or more in liquid assets) with companies seeking funds. Because the federal rules for equity crowdfunding do not kick in until next year, the portal will have a Kickstarter-like donation option as well as equity investment, once it becomes legal.
The Usual
“The banks are still very risk-averse. They have lots of money to lend, that’s not the problem. It’s just some of the government regulations, and they’re just still gun-shy,” said John Farrall, a partner with Newport Board Group. He consults with companies across industries. He said angel investing in South Carolina remains weak, but it’s out there in the form of wealthy people pooling their resources.
Private equity is also available, but often unattractive because such investors usually want a controlling interest in the company, at least 51 percent ownership, Farrall said.
“A lot of companies don’t want to do that. That’s giving up control of the business. That’s usually for when they get big enough that they want to sell the whole company,” he said.
Investment banking, contrary to what the moniker might imply, actually generates profits from fees related to facilitating transactions such as when one company buys another. Farrall said having a relationship with a bank is important. Smaller banks are more relationship-driven than the very large ones, and a few in the Upstate have a reputation for supporting local business.
The Timing
If you think you might need money, better start looking now.
“One of the biggest reasons companies go out of business is because they run out of money, even if they’re doing well,” said Farrall. “That’s not something I realized until I got into this business.”
As businesses grow, they find that resources they might have fallen back on – such as credit cards – are no longer able to meet their needs. Farrall said it is important to anticipate and plan for those needs as far in advance as possible, perhaps establishing a line of credit for expenses such as increased inventory or capital improvements.
“Even good businesses that can’t get money can go out of business – quickly,” Farrall said. “If you wait until you really need it, it’s almost too late.”
The Winners
So who is getting paid? Luckily, experts say investors want to keep their portfolios diverse and aren’t giving preference to any particular industry. But a few characteristics will mean a better chance of success.
Dunbar said that enterprises that can attract capital at the early stages tend to be relatively capital-efficient, such as health technologies, software or advanced materials.
Farrall said when a company starts to make revenue, accessing funds becomes easier.
“And of course how long you’ve been in business. But scale matters, definitely. And a track record of meeting your commitments and doing what you’ll say you’re going to do,” he said.
Companies should plan and build relationships, he said. A well-thought-out plan that lets investors know that businesses have a solid understanding of the realities of their business will make investors of all types more inclined to take a risk. In sum, a healthy dose of hard work, from learning laws to excellent business planning, is the main prerequisite. After that, experts say, the money will follow.
