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INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | | JANUARY 17, 2003 VENTURE CAPITAL By Gabor Garai Finding Financing in a Slump Investors with the vision and the cash to back a solid startup aren't easy to find, but they're still around. Here's where to look
This ointment has just one fly in it: Where do you find the financing? Three years ago, you had various places to turn: Any of the numerous venture-capital firms that specialized in backing startups and wealthy dot-com entrepreneurs, known as "angels," who had often reaped millions selling their companies or going public. Today, the financing landscape is a different, more discouraging story for early-stage entrepreneurs seeking investors. Venture-capitalist outfits that haven't folded their tents from the heavy losses of the last few years have moved "upstream," focusing on lower-risk, later-stage deals. And many of the dot-com entrepreneurs have retreated from the small-business investment game, licking their wounds after huge stock market losses. SETTLE FOR LESS. The startup entrepreneur who needs "only" half-a-million to $2 million faces a huge challenge -- often a much greater one than the founder of the more established company who needs $5 million or $10 million of new or follow-on financing. The venture funds that are still investing tend to be quite large, with $500 million and more of funds, and they increasingly take the view that it requires as much upfront work to invest $1 million as it does to invest $10 million. What are entrepreneurs in search of funding to do? The key to success is adaptability. For example, if you're unable to obtain the $1 million you're seeking from venture capitalists but can raise $300,000 by going to individual investors, consider adjusting your business plan to make the smaller amount work. Here are suggestions for raising early-stage money in the current down economy: Investment advisers. These individuals have access to wealthy investors. Because such investors are less visible than they were a few years ago, an adviser can be especially useful in identifying and getting through to them. The challenge in finding an adviser is that significant numbers of individuals pass themselves off as having connections when they really don't. A key way to separate effective advisers from the wannabes is by looking at the way they charge for their services. The effective ones are paid according to a predetermined formula based on how much they raise. Many charge only their investor clients and not the businesses looking for money. By contrast, the ineffective ones demand advance retainer payments from the companies searching for investors. Niche players. These are investors who limit their activities to narrowly definable fields in which they enjoy particular expertise. For example, a group might specialize in doing deals in medical-imaging technologies or voice-over-Internet-protocol telephony. You can often search out such investors by networking heavily within your industry -- attending shows, carefully reading trade publications, and inquiring with suppliers and customers. Kith, kin, cash. Since they know you best, these are the people most likely to invest. Granted, they may be skittish in light of the market's downturn and stalled economy. But if you have some well-heeled relatives or friends whom you've impressed with previous business ventures, you might be in a position to approach them. How do you convince investors to back your startup? By demonstrating two things: First, you must position your venture as a truly unique business opportunity. This means it shouldn't be just another Internet brainstorm, but, ideally, something that penetrates a major market at low cost. Also, you should have a head start over the rest of the market. That way, when the big guys become interested, they'll want to buy you rather than stamp you out. Second, demonstrate that you have the capability to implement your vision. You've got the business up and running with your own money -- the longer you can bootstrap the venture, the further along you'll be. Ideally, you will have demonstrated actual sales, which will increase the value of the business and reduce the amount you will have to give up in any fund-raising arrangement. This may not be the easiest time to raise financing, but it's a most opportune time.  Gabor Garai is a partner in the Boston office of the national law firm Epstein Becker & Green, specializing in the financing and growth requirements of small and mid-size companies. Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | JANUARY |
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