Getting Funded

“I look for an exceptional entrepreneur, a large market with good dynamics, and a smart differentiated, defensible solution.” - Chris Mirabile of Race Point Capital on his investment strategy

Are you familiar with all of the funding options available for your start-up company? Recently The Capital Network hosted a Funding Options Evening Roundtable, sponsored by Bingham McCutchen, to educate entrepreneurs about the sources of funding available to their start-up. Matt Cushing, Senior Partner at Bingham, moderated the event, which featured an impressive panel of experts and over 90 New England entrepreneurs. The program covered many types of funding, including government funding, angel investments, venture capital, strategic corporate investing and debt.

Larry Nannis of Levine, Katz, Nannis & Solomon, PC, provided the audience with an overview of Government Funding options such as SBIR, STTR, MTDC, PCI and MLSC loans, which range from $250,000 - $500,000. Larry cautioned that there are very specific guidelines to follow to be eligible for government funding and the process can lengthy. However if a business qualifies, acceptance rates are very high; in fact, Larry estimated that the current government acceptance rate is better than venture capital acceptance rates. His advice for entrepreneurs: Understand and research your investor and the science behind government funding.

While government grants are typically small and have strict criteria, Angel Investing is generally more flexible and can vary in amount. Chris Mirabile of Race Point Capital described angel investments as the “one stop shop” to fill the capital gap between friends/family and venture capitalists. Angels are willing to take more risks in their investments based on their industry specialties or interests. In addition, since angels are investing personal money rather than institutional money, the character of the entrepreneur will have a greater effect on their investment decisions. How do you keep your angel investor happy? Mirabile reminded the audience that most angels prefer equity in the form of preferred stock because there is less dilution risk than with the simplest notes. They expect to own 20-40% of your business for their round of capital.

Arguably the most sought after form of capital for a start-up company is Venture Capital. Robin Lockwood of Flybridge Capital cautioned that it is tough to get access to a firm if you don’t have past successes, relationships or mutual friends in the firm. Her advice for entrepreneurs: Do your homework and align yourself with a VC firm that would be interested in your industry, network your way into the firm, and leverage your customer response to the firm.

An alternative source to Venture Capital is to identify a strategic corporate investor, known as Corporate Venture Capital. Many people are not aware of the potential benefits of working with a strategic investor, explained Margaret LeFleur of MedImmune Ventures. Margaret defined corporate venture capital as the investment of corporate funds directly into an independent start-up, allowing those investors to obtain a specific competitive advantage. Should you consider corporate venture capital for your start-up? Margaret recommended corporate venture capital for start-ups who have domain expertise, technology and market experience, and proven commercialization know-how. If utilized correctly, corporate venture capital can be a mutually beneficial arrangement for all parties involved.

The final source of funding that was presented on the panel was Venture Debt. Dan Allred, Senior Relationship Manager at Silicon Valley Bank, reviewed the differences between the traditional credit model, which relies on cash flow as the primary basis for the loan, and venture debt, which is early stage term debt for companies that are venture backed and want to prolong their equity. By utilizing debt funding, capital can be put toward more specific uses and capital from the equity arrangement can be prolonged and put toward larger projects. The pros of obtaining venture debt? Your monthly cost is fixed and your firm can establish credit-worthiness. The main drawback is that debt holders receive priority liquidation rights over equity holders, and therefore equity investors may not be open to the idea of obtaining debt.

By the end of the TCN Funding Options Roundtable, attendees had heard about the pros and cons of various types of funding. The common thread throughout each type of funding was that you have to do your homework when searching for funding in order to find the best fit. Knowing your investor inside and out is the best way to navigate the funding process.

The Capital Network will be holding events throughout the rest of the year to give New England entrepreneurs more information about each of these types of financing and other issues facing high-growth start-ups. Learn more at www.thecapitalnetwork.org.

Written by Melissa Diranian, Intern at The Capital Network & Senior at Babson College