Category Archives: Obtaining Equity Investment

Obtaining Credit – Even When Lenders Are Leery

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Les Mathews, Mesa Capital Partners

Les Mathews, Mesa Capital Partners

The worldwide credit crunch has tightened credit availability for even the largest companies, and that has also made it more difficult for smaller companies to obtain credit for expansion and working capital. Banks, the traditional sources of loans for smaller businesses, have been forced to raise credit standards and make more cautious loans to smaller businesses, which causes a significant reduction in credit availability, higher borrowing costs and more restrictive credit terms.

As a result, smaller companies, the mainstay of New Mexico’s economy, are seeking more innovative ways to finance their operations and growth. This is particularly true for the state’s early-stage businesses: Most have no history of generating positive cash flows, and most have few unencumbered assets and minimal or negative net worth — all of which make them seem too risky in the eyes of loan officers at traditional banks.

Many owners of early-stage businesses have tried to overcome this problem by offering their personal residences as collateral for business loans. But with the mortgage market meltdown and stagnancy in the residential real-estate market, banks are getting more cautious about hedging bets even on this traditionally most stable and secure form of collateral.

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Financing Decisions in the Real World

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Tom Stephenson, Managing General Partner, Verge Fund

Tom Stephenson, Managing General Partner, Verge Fund

Raising equity capital for your business never happens in a vacuum. External forces inevitably affect when and how and where you hunt for investors, just as they affect your decision about how much money you’ll need to support your company for a few years until you start showing a profit.

External forces include the financing market — the universe of people and institutions that constitute funding sources for your company — as well as the larger business market in which you operate. Understanding these forces will help you develop a strategy for fundraising.

Beware the bubble

Pure financial investors are in the game to make the most money they can from their investment in your company. But even they can make mistakes and act impulsively.

Investors have no more insight than you do into how a market or an individual company will evolve. They, too, can misread the economic signs and underestimate or overestimate the market appeal of a particular product or service. Their fallibility is one reason why certain market segments get “hot” and others get “cold.”
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Equity Funding: Milestones That Matter in the Life of Your Businesses

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Tom Stephenson, Managing General Partner, Verge Fund

Tom Stephenson, Managing General Partner, Verge Fund

Creating a road map with meaningful milestones for the development of your business will help you determine how much equity capital to raise and when to raise it in such a way that you maximize ownership of your company over time.

Many entrepreneurs who decide to share ownership in their companies in exchange for capital investment identify goals that substantially increase the value of their business when reached, and they schedule financing rounds to follow these achievements.

If your product requires pre-approval from a federal agency such as the Food and Drug Administration or United States Department of Agriculture, for example, clearing this hurdle represents a success that makes your business more valuable and attractive to investors. If you raise just enough money to accomplish this goal and carry you through another three months — until you can complete your next round of fundraising and deal with unexpected costs — you can increase the amount of equity that you and your earliest investors maintain in the company.

Reaching these milestones also means you’ve reduced the risk for investors and greatly improves your chances of finding new partners and greater amounts of capital.
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Equity Capital: Show Me the Money – But How Much?

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Tom Stephenson, Managing General Partner, The Verge Fund

Tom Stephenson, Managing General Partner, The Verge Fund

Once you’ve decided to finance your new business with equity capital and reconciled yourself to sharing ownership with a partner or partners for several years, it’s time to decide how much money you should raise and when to do it.

It’s not as simple as predicting how much cash you’ll need in the early years and setting off to raise that amount all at once. What you decide at the beginning has a great bearing on how much of your business you’ll own a few years down the road when it becomes self-sustaining.

If you decide instead to raise the money in multiple rounds, you give up less equity in the long run. You might even become established enough to forgo further equity financing and instead borrow money through a traditional loan.

Transaction costs and investor needs often frame this funding decision.

Understand transaction costs

Raising money costs money — and time. The biggest time-consumer involves managing the equity-investment transaction: reviewing documents, preparing due-diligence materials and negotiating specifics of the deal.
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Speeding Up Startups in Northern New Mexico

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Tatjana Rosev, Los Alamos National Laboratory Communications Office

Tatjana Rosev, Los Alamos National Laboratory Communications Office

The gap between the early stage funding needs of a startup company and the expectations of a typical venture-capital firm can prevent many innovations from growing beyond a concept into a commercial commodity. Because venture capitalists and angel investors tend to support products and services in intermediate, less-risky stages of development, numerous government and academic institutions have created “pre-seed” or gap funds to accelerate the creation of new companies and sustain developing companies through the research phase so their owners can focus on preparing their businesses for later-stage equity investments.

Los Alamos National Security, the public-private partnership that runs Los Alamos National Laboratory, sponsors the Northern New Mexico Connect Venture Acceleration Fund to support businesses with lab affiliations. While such funding is rarely enough to carry a company all the way to profitability, it bestows credibility, public exposure and access to venture firms and allows an entrepreneur to reach critical commercial milestones that demonstrate to a potential backer how the company plans to deliver an attractive return on an investment.
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Credit Crunch Isn’t Squeezing Equity Lenders

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Jarratt Applewhite, Founder, NM Community Capital

Jarratt Applewhite, Founder, NM Community Capital

Sandy Weill, the billionaire tycoon who built Citigroup into the largest financial institution on the planet, was asked by TV interviewer Charlie Rose how much his net worth had declined during the ongoing credit crunch. Weill said he was probably “25 percent to 30 percent” poorer than he had been six months earlier.

Before you weep for Weill, consider how much “poorer” he would be if he lived in New Mexico and had to do the kind of driving most of us do every day.

But even billionaires aren’t immune when the economy is ailing. Policy wonks and economists can argue endlessly about whether today’s economy meets the definition of a recession, but outside the Beltway it’s clear to most people that these are the roughest financial seas in decades. When our homes, the biggest assets most of us own, are losing value, it’s hard not to worry.

Eyes on the distant prize

Living in a “flat” world of interdependent nations and economies accentuates the turbulence of global markets. Rising oil prices, falling employment and a weak dollar make most investors nervous enough to seek new ways to protect their capital. Instability creates anxiety, which leads to tightened credit and more restrictive access to debt capital.

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Sources of Equity Capital in New Mexico

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Shyla Sheppard, Associate, NM Community Capital

Shyla Sheppard, Associate, NM Community Capital

Looking for additional funding to launch or grow your business?  If you have the experience, skills and passion, there are a number of potential sources of private equity capital available in New Mexico. Equity capital sources can be broadly placed into two categories: Angel investors and institutional equity investors. Determining which source to pursue is largely a function of three key factors: 1) industry focus, 2) business stage, and 3) amount of money you are raising.

Angel Investors

An angel is an accredited investor who invests his or her own, personal capital in early-stage business ventures. Angels are often the bridge from the self-funded stage of the business to the point where a venture capitalist would be interested in investing. An increasing number of angel investors are organizing themselves into angel networks or angel groups.

The New Mexico Angels prefer seed and early stage investments. They consider themselves generalists and will consider investing in a wide range of industries. Initially, they were focused on technology but they now consider non-technology ventures. Initial investment amount ranges from $100,000 to $500,000.

Institutional Equity Investors

The Altira Group focuses on energy technology in early or expansion stages, although they will evaluate previously funded and later stage opportunities on a selective basis. Initial investment amount ranges from $1 million to $10 million.

Flywheel Ventures focuses on information technology, physical sciences and clean technology in seed and early stage ventures. They target innovations arising out of the region’s research universities, R&D organizations, and national laboratories. Flywheel also manages the New Mexico Gap Fund. Initial investment amount ranges from $100,000 to $1 million.

International Venture Fund/Invencor focuses on technology, preferring co-investment opportunities. They favor seed and early stage ventures and are typically one of the first venture investors in a company. Initial investment amount varies.

ITU Ventures focuses on technology ventures in early stage or seed stage. They target businesses emerging from the leading universities, research institutions and corporations. Initial investment amount varies.

Mesa Capital Partners focuses on manufacturing and service companies in underserved industries and locations. They prefer early stage ventures.  Initial investment amount ranges from $500,000 to $2 million.

New Mexico Community Capital invests in under-served areas and industries in New Mexico to achieve both financial and social returns. They do not focus on a specific industry and they prefer later stage ventures or those in expansion. Initial investment amount ranges from $500,000 to $1 million.

Psilos Group focuses on healthcare companies that improve quality while reducing healthcare costs and advancing the alignment of payer, patient and provider incentives. They prefer early stage ventures or those in expansion. Initial investment amount ranges from $2 million to $6 million.

Sun Mountain Capital manages a $60 million state investment fund. They look for co-investment opportunities and do not have an industry focus. They prefer early stage or start up ventures or those in expansion. Initial investment amount ranges from $300,000 to $10 million.

Tullis-Dickerson and Company focuses on healthcare and has a national and international presence. They prefer early stage or start-up ventures or those in expansion. Initial investment amount ranges from $500,000 to $10 million.

Verge focuses on technology in New Mexico, preferring seed stage ventures. Initial investment amount ranges from $100,000 to $750,000.

Village Ventures focuses on opportunities in emerging domestic geographies in consumer media and retail, healthcare, and financial services. They prefer seed and early stage ventures. Initial investment amount ranges from $500,000 to $1.5 million.

vSpring Capital focuses on technology – biotechnology, life sciences and information management – in seed, start-up or early stage, although they will invest in later stage companies under special circumstances. Initial investment amount ranges from $2 million to $3 million, although investments can be as small as $250,000 or as much as $5 million.

Epic Ventures, formerly Wasatch Venture Fund focuses on all sectors of technology in early stage development. Their new name reflects the organization’s evolution from a local Utah firm to a growing regional and national fund. Initial investment amount varies.

For definitions of the various stages of business development, see the glossary on the Finance New Mexico website.

Download 25_Sources of Equity Capital in New Mexico PDF

Be Prepared Before Talking to a Potential Equity Partner

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Tom Keleher, Managing Director, New Mexico Community Capital

Tom Keleher, Managing Director, New Mexico Community Capital

When many entrepreneurs think about funding the growth of their business, they think about taking on more debt. That works pretty well when times are good and asset prices are going up.

But what do you do when a loan is not available and your favorite banker says you need to finance growth with cash flow. What happens if there is not enough cash to pursue your growth dream? This is usually when entrepreneurs start thinking seriously about finding an equity investor. You may not call it that in the beginning, but as your investigation proceeds, you will realize that folks who are willing to provide growth capital that is at risk of being entirely lost are called equity investors. Because of this risk, investors will want to own a piece of the rock and will probably also want to exert significant influence on the business.

The tipping point comes when the bank says “no mas” and you must decide whether you want to put the brakes on growth and give up potentially rewarding value creation opportunities, or give up a slice of the pie to obtain the cash to fund continued, rapid growth of the business. Equity investors will invest if they see the opportunity to help you grow the value of the business quickly enough to generate attractive risk-adjusted returns for them. If your planning indicates that selling a portion of the pie will help you create the growth rate and the company value you desire, then it makes sense to pursue equity financing.
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More Than Capital: What a Partner Really Brings

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Trevor Loy, Managing Partner, Flywheel Ventures

Trevor Loy, Managing Partner, Flywheel Ventures

Influential writer Jim Collins, author of Built to Last and Good to Great, has written that the critical questions in life are who-decisions, not what-decisions. “The primary question is not what mountains to climb but who should be your climbing partner,” he writes. As I mentioned in a previous article, when considering an investment, the entrepreneurial team is of more importance to most venture capital investors than market strategy, technology or financial projections. When evaluating the pros and cons of bringing on an investor as a partner in your business, your considerations should be similarly weighted toward who-decisions.

But how do you objectively evaluate a potential investment partner? Professional investors should provide assistance and value in many areas beyond financial resources. Here are some key areas that can be assessed.

Experienced oversight and strategic guidance are perhaps the most important roles of the professional investor when partnering with entrepreneurs. Typically, venture capitalists are ourselves former entrepreneurs or industry executives with experience and skills to contribute. More importantly, because of our unique perspective, we can often identify key trends, challenges, and lessons learned from other investments that can help our newer companies.   While a venture capital investor will never share the same depth of knowledge about a particular market sector that the entrepreneur holds, our breadth of experience can help add objectivity. Exceptional venture investment professionals regularly provide that data and breadth, acting as a “sounding board,” while respecting that the ultimate judgment about specific decisions and operational matters is best trusted to the entrepreneurs themselves.
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Equity Capital: The Costs and the Benefits

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Tom Stephenson, Mangaging General Partner, Verge Fund

Tom Stephenson, Mangaging General Partner, Verge Fund

Over the course of this series, various columnists have provided insights into equity – how to determine if it’s appropriate for your business, how to prepare your company, how to navigate the evaluation process, and how to identify the right capital partner. Before you embark on the long and sometimes frustrating process of raising equity capital, however, you should heed an old adage: be careful what you wish for. Make sure that you actually want equity investment in your business.

Raising equity capital brings substantial benefits. If you have selected your equity source carefully, you gain far more than just cash – you gain a partner. Good equity partners bring experience, networks of contacts and energy to your enterprise. They should be able to help you think through strategic decisions and introduce you to important business contacts like vendors, customers or even, eventually, acquirers.  They may participate in recruiting candidates and reviewing financial statements. And, lest we forget, they invest cash into the business to help cover operating losses during growth phases, as well as build working capital and make infrastructure investments in the business.
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