Category Archives: Articles

Money Is Tight, but It’s There for the Lending

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F. Leroy Pacheco

F. Leroy Pacheco, CEO, The Loan Fund

The credit crunch is a new nightmare for some borrowers, but entrepreneurs and start-ups of modest means were only too familiar with being turned down for traditional financing even before the economy went sour.

Private alternative lenders such as The Loan Fund have helped such borrowers build self-sufficient businesses for years. Since the Wall Street meltdown, we’ve been getting more referrals from loan officers at local banks who know we have more flexibility than they do and can make a loan or authorize a line of credit of up to $1 million.

Bankers aren’t bad people; our board of directors includes several of them. They want to help business owners, but their hands are often tied by federal regulations and mandates from above — and those restrictions have only increased recently. One banker told me applicants must now have a minimum credit score of 650 and three years of profitable financial reports before the bank even considers making a loan.

Because we’re a private group that balances social benefits and fiscal responsibility, The Loan Fund has more flexibility when it comes to helping our clients get (and keep) going. One such client, Carley Preusch of Silver City, was turned down by four banks that considered her profit margin “too low.” We loaned her $125,000 in July to expand her assisted-living center.
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Finding Venture Capital in a Time of Crisis

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Scott Caruso, Partner, Flywheel Ventures

Scott Caruso, Partner, Flywheel Ventures

In the wake of a financial crisis that spread quickly from Wall Street to the rest of the world, many small businesses are finding traditional funding sources, including debt financing, harder to secure. Many entrepreneurs are consequently turning to venture capitalists to finance the growth of their businesses.

The decision to seek venture capital is a strategic one that requires thought and planning. Venture capitalists generally invest in high-growth companies that have potential to create a sizable return. Venture capital isn’t for everyone, but it’s ideal for companies aiming to acquire a large market share in their industries until they can be acquired by a bigger player or go public.

When looking for venture capital, it’s critical to target a firm whose mission and goals align with your own and to understand the firm’s economics and investment patterns. Doing this important legwork before seeking venture-capital funding will allow you to be more efficient and successful in achieving your funding goals.

Sizing up the venture-capital alternatives: The first step is to qualify the firms you plan to approach, beginning with fund size, the clearest indicator of a firm’s investment strategy. A firm that operates a $50 million fund might make investments between $2 million and $5 million, while a $500 million fund might make investments in the range of $15 million to $20 million. Understanding the amount of capital a firm is willing to invest helps you determine if it can meet your funding needs.
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Public Funds Back New Mexico Businesses

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Paul Goblet

Paul F. Goblet, Financial Advisor, NM SBIC

There’s no doubt that the foresight of current and past legislatures and governors has attracted equity capital to New Mexico businesses, especially in the technology sector.

While more companies could probably benefit from having additional equity capital on their balance sheets, outside equity investments are not for every business. Investors can be difficult to attract, and dealing with them can be time consuming and expensive.

So how does a small company obtain the capital it needs to grow, even at a modest pace?

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Inside New Mexico’s Private Equity Funds

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Paul Goblet

Paul F. Goblet, Financial Advisor, NM SBIC

Mention professional equity capital in New Mexico, and technology start-ups typically come to mind. That’s because most private equity investments target technology-transfer opportunities emerging from universities and national laboratories based in the state.

With the support of the New Mexico Private Equity Investment Program, more than $350 million in capital has been committed to 22 funds that directly benefit New Mexico businesses, typically in the technology sector in the Albuquerque area. But how do non-technology entrepreneurs or entrepreneurs outside of Albuquerque get their businesses going, especially in an unstable and unpredictable economy?

Help begins at home

Realizing that business ideas exist outside of Albuquerque and the technology sector, the New Mexico legislature in 2000 created the New Mexico Small Business Investment Corporation to focus on financing small businesses. Originally funded with $10 million from the Severance Tax Permanent Fund, it has swelled to more than $87 million thanks to subsequent commitments.

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Two Federal Programs Offer Money With Few Strings Attached

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The next-best thing to free money is available through two federal programs for small businesses involved in technology and innovation.

Small Business Innovation Research (SBIR) is the larger of the two programs, and it will provide about $2.5 billion this year in grants and contracts to small and start-up businesses to develop products, technology or services that solve pressing problems in agriculture, defense, education, energy, transportation, the environment, space exploration, health and other areas. Small Business Technology Transfer (STTR) requires the small or start-up business to team with a nonprofit research entity, such as a university or federal laboratory, and generally involves a transfer of technology, know-how or expertise from that institution to the company’s project.

Eleven federal agencies — including the Department of Defense, Department of Energy, National Institutes of Health, NASA and National Science Foundation — offer SBIR grants, and five offer STTR grants. Both programs provide money that doesn’t have to be repaid, and the business doesn’t have to surrender equity. But, as federal programs, the grants are subject to federal procurement regulations.
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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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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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Springboard Gives Entrepreneurs a Boost

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Tatjana Rosev

Tatjana Rosev, Los Alamos Nat’l Lab Communications Office

The most successful entrepreneurs recognize the benefits of networking with external experts — service providers, industry consultants, venture capitalists, business coaches and successful CEOs — when starting or building a company, especially when the economic forecast is uncertain and entrepreneurial confidence is at an ebb.

But there’s more to effective networking than passing out business cards and attending seminars to meet and interact with influential others. It also requires connecting with individuals locally and nationally who have a vested interest in helping entrepreneurs take their companies to the next stage.

Wise Counsel

Business coaching is a powerful, collaborative relationship between an entrepreneur and a coach/consultant who is more versed and better established in a particular industry or discipline than the business owner and has better access to human and financial resources. Being trained by a coach how to identify, evaluate and overcome obstacles to growth can help the entrepreneur achieve his or her goals faster and more effectively. Northern New Mexico Connect’s Springboard program offers free coaching to technology entrepreneurs in Northern New Mexico whose companies are at various stages of development.
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