Our last LAUNCH|Talk, held at Plexis Healthcare Systems in Ashland, featured an expert panel to look in detail at the subject of fundraising for a start-up or established business. There were so many great insights, so we thought we’d let our Venture Catalyst, Alex Palmer, give you a summary. Whether you attended or not, these are useful lessons for everyone!
1. Know which type of financing you need.
Our panel featured a pretty even split between those on the debt finance and equity finance side. We looked at the differences between each type of financing in detail. As Melissa from HerdDogg’s experience showed, the type of finance that is the right fit, depends largely on the growth stage of your company.
In HerdDogg’s case, they are an early stage start-up that is still pre-revenue, but they have some really groundbreaking technology in the AgTech space that is protected by patents. In this situation, equity financing in the form of capital from friends and family was critical to helping the company gain traction. Melissa has been successful in raising over $2M in equity financing, including a significant amount from a Venture Capital firm (more on that below) and this form of financing is ideally suited to a tech enabled company that has big potential, a defined market with lots of potential, but little or no revenue just yet.
For many early stage companies (including HerdDogg) debt financing is not as accessible without any revenue or regular cashflows, but this is where it’s ideal for more established businesses that can show this. So, if you have an existing business, or are considering acquiring an existing business, and you have regular cash flow, then debt financing from a bank such as First Interstate or a community lender such as Craft 3, is ideal. It means you don’t have to give away any equity or ownership.
In many cases it’s a trade off between giving away some ownership to get the capital to grow rapidly, or retaining ownership and not having quite as much capital to fuel growth.
2. Use your network and industry expertise.
Raising equity finance is hard, requires persistence, tenacity and, of course, connections. Being able to work your own network to get that first round of finance is critical. This is often referred to as the “Friends, Family and Fools” route. But in addition to this, using connections and knowledge within your own industry is vital. Melissa explained that this was critical to her successful round of Venture Capital (VC) funding from Serra Ventures, who specialize in AgTech investments, amongst others. The panel talked about some useful tools for this, such as CrunchBase and AngelList. These are great resources for seeing activity in your industry, such as which VC firms are investing in which companies. Another resource I use regularly, is FinSMES which provides daily updates on deals in the VC & Private Equity space.
This sort of knowledge is also really useful when it comes to establishing valuations for fundraising rounds or exits, which can be used as benchmarks for your own business plan. Showing solid M&A activity such as acquisitions or other liquidity events in your sector is important when convincing a potential investor to put money in.
3. Know/Research your potential investors.
Jeff gave us some great insight into what he looks for in potential investors at Rifton Capital, a small Private Equity firm based in Ashland. His criteria are pretty specific; he looks at companies with over $1M in revenue, typically in product-based industries, since he gained much of his expertise as a co-founder of MASSIF. Perhaps the most striking thing that came from Jeff was his laser focus on the gross margin in potential deals. In his view, having a high margin (in the region of 70%) is critical to the company’s ability to be profitable and grow.
Jeff’s views are very specific to just one investor. It goes without saying that every investor or firm will have their own requirements. As investing becomes more competitive, investors also need to work hard to differentiate themselves and appeal to specific niches (sector, revenue, gender, ethnicity, technology etc). The bottom line is to do your homework and find this stuff out! It will save you time and effort in the long run and ultimately make sure that your investment search is laser-focused on those investors that have the closest match to your business.
4. Get your personal finances in order.
This one applies whether you are looking at debt or equity financing, although its may be more relevant when applying for debt financing. Bill & Stephanie both explained the application process for bank-style financing, whether an SBA loan or one from Craft 3. While both of these type of loans (and indeed our own SOREDI loan program) can be a little more risk tolerant than a typical bank loan, they will all require a very similar application process, which will include a consideration in regard to collateral for securing the loan.
This is also where you can’t escape the value of having a good credit score (650-670+). Along with solid personal finances, a strong business plan demonstrates your ability to repay the loan. This is maybe one of the hardest parts about starting a business, which inevitably places a lot of strain on personal finances. Many entrepreneurs max out credit cards and other lines of credit to get their business off the ground.
Being upfront, honest and transparent with your lender is really important. It’s far better to build a great relationship with your lender in this way, rather than burying your head in the sand! Get to know your banker before making an application, in the same way you would a mortgage lender for a house purchase. That way they can explain to you what sort of things you need to work on in order to give your application the best chance of success.
5. Be persistent. Hustle!
Raising funds is an incredibly competitive exercise and those who are successful show large amounts of determination, ability to keep going despite setbacks and persistence/belief in their vision to see it through until the end. It’s true that doing your homework, being prepared, having a solid plan & pitch and knowing your investor can all get you a long way, but for many investors it still comes down to personality and your ability to deliver a convincing pitch time after time. Many successful entrepreneurs pitch hundreds of times before securing the funds they need to go on to achieve great things.
6. Ask for advice.
There’s a ton of resources out there to help entrepreneurs and business owners with all aspects of starting and running a business including: SBDC – for help putting together your business plan & financials. First Interstate Bank – for SBA loans or other forms of commercial lending. Craft 3 – for community based lending programs. SOREDI – Business Development Loan Fund. Your local Venture Catalyst – for advice & mentoring on getting equity investment from local or state-wide resources.
Thanks again to our panelists:
Melissa Brandao – CEO & Founder Herddogg.
Jeff Roberts – Founder MASSIF and now head of Rifton Capital, an Ashland private equity firm.
William McCurry – First Interstate Bank, SBA Loan Expert.
Stephanie Hirche – Business Lender, Non-Traditional Lender – Craft 3.
And to our sponsors:
First Interstate Bank
City of Ashland
City of Grants Pass
Oregon Entrepreneurs Network
And don’t miss our next LAUNCH|Talk on April 3rd at Urban Cork in Medford. This one’s all about eCommerce, whether its running an existing eCommerce business, building a successful side hustle on Amazon, or pivoting a traditional business to an eCommerce model