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Stuart Garfield
Friday, January 30, 2009
Inside Finance
Wanted: Nontraditional routes to money management
By Jim Schakenbach, Special to Mass High Tech
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How is the economic crisis affecting tech companies?
Starting a new company has never been easy, but these days it seems even tougher — investors can be harder to scare up and what cash you find has to last longer than ever. Entrepreneurs and experts offer their suggestions on making precious startup funds last in a tough climate.
Demand for startup money has remained strong, but the supply has diminished, putting some startups in harm’s way, according to John Nugent, director of Boston’s Entrepreneurial Resources Group and a partner in TSG Equity Partners. Nugent recommends checking out state and federal government sources early on. “State and federal government agencies are trying to create financial incentives that most small companies — be they tech-oriented or otherwise — can take advantage of.”
In addition to government money, Nugent recommends looking at angel funding. “Angel funds tend to accept higher risk and state agencies are often chartered to provide money to bridge the gap when a company isn’t yet financeable by a bank.” Nugent noted that early-stage entrepreneurs used to look for investments that would last up to two years, but the current investment environment doesn’t support a 24-month time frame. “If you’re willing and able to look at, say, six months to a year instead, or be willing to accept your cash in tranches instead of one bundle, it makes it easier for investors to put up smaller amounts in increments. The concept here is to put everything on a shorter leash to make the investment more palatable to the investor.”
Mitch Sanders, founder and executive vice president of Worcester’s ECI Biotech Inc., a developer of diagnostic protein sensors, knows all too well the trials and tribulations of finding cash as a startup. “I first started with family, friends and some angel investors,” said Sanders. “But I’m also a big believer in unconventional sources; in fact, most of our sources are unconventional.”
Once he had enough cash to get started, instead of looking for bank funding or VC investments, Sanders began obtaining grant money from organizations such as the National Institutes of Health and the National Science Foundation. In addition, ECI Biotech recently received $250,000 from a fund run by Worcester philanthropist Mark Fuller who typically invests in projects to improve the quality of life in the Worcester area but who saw an investment in ECI Biotech as a way to improve the quality of health care.
Make it last
Once you have some money in hand, Nugent believes it’s absolutely critical to have a well-thought-out business plan. “I’m not talking about not having thought out your technology, I’m talking about not having thought out your business model in terms of a revenue-generating capability.”
Jerome Schaufeld, a professor in Worcester Polytechnic Institute’s Department of Management and an expert on early-stage business. “The primary reason companies fail is that they run out of cash. You can project cash flow with very good accuracy now, so it’s important to understand how long your cash will last.” Schaufeld, a licensed pilot, uses this metaphor: “You wouldn’t start a plane’s engine without knowing how long your fuel will last.”
Michael Holbrook, senior business adviser for the Small Business Development Center at Clark University in Worcester, echoes Schaufeld’s call to do accurate cash flow forecasting. “It’s absolutely critical to develop a realistic cash flow forecast and a budget,” stresses Holbrook. “Do you have enough money to get from Point A to Point B? If not, what cuts can you make in your operation to handle the situation? You need a very disciplined approach.” Holbrook cautions that it typically takes longer to get to market and a positive cash flow than most people think. He recommends building an outside management team and a good advisory board that does not have the same legal obligations and commitments as your board of directors. “You want as neutral and unbiased an opinion as possible,” says Holbrook. “You’ll need all the good advice you can get to stretch your money out.”
Sanders advises entrepreneurs to stay focused on their core technology and continually ask themselves “what is core to my business? What milestones can I achieve every day to bring in more money?” He suggests setting up reasonable investment milestones “to prove that you can achieve X, Y, and Z in a certain amount of time, which can help free up more money and additional investments.”
Nugent confirms the need for milestones and recommends setting them based on time frames starting with the initial investment. “Don’t lock into a particular milestone date,” says Nugent. “If there are delays in funding or any setbacks, investors will have already locked onto the date you set, not the amount of time it takes to get there. Instead of saying ‘March 31’ as a deadline for a particular milestone, say ‘12 months from Point A’.”
As a final point, Sanders stresses that entrepreneurs should “talk to everyone who will listen. You never know where that next investment or business opportunity will come from to make money for your business.”
Jim Schakenbach is a freelance writer in Jefferson.
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