Tom Stephenson, Managing General Partner, Verge Fund

Entrepreneurs just starting out will often view all sources of capital as identical – money is money, right? However, as we have learned previously in this series, there is great variety in the sources of capital available to entrepreneurs. The primary distinction that has been highlighted so far is the difference between debt – borrowing money – and equity – selling a piece of your company. However, the specialization continues even within the equity world, generally denoted by stage of development and area of focus.

This specialization is not unlike what occurs in the medical field. The cardiologist you might see for heart disease has very different skills and training from the oncologist you might consult to treat cancer. Venture capital has similar specialization, and just as a pediatrician would not be appropriate to treat an adult, a “seed” stage investor is very different from an investor that provides expansion capital. As an entrepreneur, you need to pick the financial partner that fits your stage of development and your particular industry.

For example, the Verge Fund focuses on “seed” stage investing. Some believe this means we invest in agribusiness, but it actually has to do with the stage of development of an opportunity when we make our first investment. “Seed” stage refers to the time when the idea is just germinating and has not yet grown into a full company. Often this means companies that are at the earliest stage of development – sometimes before they are even generating revenue.
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Trevor Loy, Partner, Flywheel Ventures

I am often asked to explain the criteria used at Flywheel Ventures to make our investment decisions.

It may surprise some to learn that our most important consideration is the entrepreneurial team. We care about the character of the individuals on the team and the culture they are creating as a team.

Evaluation of potential market opportunity ranks a close second.   Projections – such as the size of the addressable market, its rate of expected growth and the amount of potential competition – are used by entrepreneurs to indicate market opportunity. In the end, however, entrepreneurs must satisfy us on four key criteria.

First, we must believe that prospective customers in the target market are aware of a financial “pain” arising from an unsolved problem in the market.

Second, we must understand the projected dollar amount that a prospective customer will be willing to pay for a solution to this problem.

Third, we need to see a credible plan for the new venture to not only develop the product that solves the customer’s problem, but to also market, sell, and deliver the solution in an economically viable means.
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Trevor Loy, Partner, Flywheel Ventures

Over the past year, my colleagues and I at Flywheel Ventures have received 494 business proposals from entrepreneurs seeking funding. We followed up with initial inquiries to 98 entrepreneurs; 23 were then invited to an initial meeting with the entire Flywheel investment team.   We then pursued additional “due diligence” research on about half of the presenters. Ultimately, we invested an average of $365,000 in initial funding in each of just four new ventures.

From the initial submissions, then, we invested in just 0.8 percent.   These statistics, while specific to our firm, are typical of the venture capital industry.

In any field of investment, achieving higher returns requires the acceptance of higher risk. Venture capital investors search for high-risk investments based on innovations in information technology, life sciences, and clean technologies such as renewable energy.   Investments in these types of firms require an extreme tolerance for risk, uncertainty, and failure. Continue reading →

Paul Goblet, Financial Advisor, NMSBIC

The best source of business capital often comes from friends or family. They know you, they like you, and they trust you enough to provide equity for – and receive part ownership in – your firm. But sometimes a company enjoys greater success than its ability to finance its own growth via family and friends. That’s when you need to go to an outsider for additional equity.

The availability of private equity capital has changed fairly dramatically over the last five years. The common complaint was that you had to go to California or New York to get equity.   But thanks to the New Mexico State Investment Council, several funds have now started and are headquartered in New Mexico, and there are now fifteen to twenty funds with offices in the state. While we may not have a huge track record of companies attracting equity, the number of funds and investments in local businesses has consistently grown since 2001. Most of these funds target technology and most of the investments have been made in technology-related companies.

The process of obtaining equity capital can seem daunting. Without knowing the investors, you may find it difficult to trust them. The dollar value you place on your company may be different than the amount the investors believe it’s worth. You also may be afraid they will take over your company, leaving you with little control.
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