Small Business

Is Venture Debt the Answer?


Lowering early-stage financing costs; entrepreneurs' biggest complaint to computer support; a boost to garage tinkerers; and more

When seeking early-stage financing, is venture debt a lower-cost answer?

A venture capitalist, Ed Sim of Dawntreader Ventures, argues in his blog that because venture funds are increasingly willing to extend loans along with equity capital, early-stage technology companies have an opportunity to lower their financing costs. Of particular interest to venture lenders are Web-based companies, since they "can scale…rapidly" and thus "generate pretty nice returns" from warrants that are part of the loan package, says Sim.

Among the advantages to entrepreneurs:

The money is "relatively cheap compared to an equity financing," since entrepreneurs don't have to give up as much of their companies as they would if all the VC funds were in the form of investment capital.

Entrepreneurs retain more flexibility for future financing options than if they accept all investment capital.

Entrepreneurs gain a longer "runway" to hit their milestones, which improves their chances of increasing the company's valuation and reduces the cost of future investment funds.

Sim cautions that venture debt is best for companies that "are confident in their execution and ability to raise another round" of venture funding. "If you burn through your cash and can't make the monthly principal and interest payments, your lender can take over your company, as their debt is usually secured against your company and intellectual property."

While some negotiation in such a situation is possible, "at the end of the day, if they see their ability to get paid in significant jeopardy, they will do what they have to do to recoup as much value as possible."

Small businesses' biggest computer complaint: slow operations

Poor system performance is the most frequent complaint, accounting for nearly a third of reports to a support call-in center, reports ConnectIT, a marketing communications firm, in an article on its Web site. The usual causes are fragmented hard drives and too many startup programs. The next most significant problem, accounting for 22% of support calls, comes in the form of application issues, such as e-mail and browser problems. Rounding out the top-five list are operating system problems, security issues, and printing difficulties.

Your instincts may be key to identifying the worst sales candidates

A study by two Erskine College professors indicates that initial judgments are more accurate than expected in picking poorly performing salespeople. But women and older employees do best in assessing sales potential and picking the best candidates overall, the professors conclude.

American Inventor glorifies garage tinkerers

I'm not a big fan of reality TV shows, yet this Wednesday-evening effort on ABC to turn inventing into entertainment is admirable for elevating the image of the inventor (see BusinessWeek.com, 1/31/06, "Simon Cowell: From Idol to Inventor").

The show started its second season in early June, featuring inventors from half a dozen cities competing in front of a panel of four judges to win a grand prize of $1 million. The inventors have about 30 seconds to pitch to the judges, so they are forced to deliver a serious "elevator speech." A show I watched featured inventors touting a car bib, a bathroom air freshener, a sponge glove, and an alcohol breathalyzer that shuts down your car if you register too high.

Only the first idea, the car bib, was picked to go on to the next stage. While judge George Foreman votes in favor of seemingly every idea, other judges ask astute questions about whether particular inventions could turn into real businesses. My main objection: the focus on a single grand-prize-winner. There are many worthy inventions out there—why not pick the top 10?

David Gumpert is a journalist who blogs reports regularly about the business of health and has written a number of books about small business and entrepreneurship, including Burn Your Business Plan! He writes his What Entrepreneurs Need to Know columnevery other week.

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