
Show Me the Money!
1
The Key Metric
"Cash is King, a positive cash flow the Holy Grail and the cash burn rate the Sword of Damocles."
Contents
I. BIG MONEY
1. From the Origins of Venture Capital to How It Works Today
2. The Funding Universe
3. Business Incubators
4. Your Shortlist
5. Your Action Plan
II. Medium Money
1. Business Angels
2. Business Plan Competitions
3. Loan Intermediaries
III. Little Money (Micro-lending)
1. The Concept - Microloans as a Trojan Horse
2. The Micro-lending Universe
I. BIG MONEY
1) From the Origins of Venture Capital to How It Works Today
For the academically inclined to begin by learning how the venture capital industry came into being is of interest. The driving force was a Frenchman, Georges Doriot (1899 - 1987). He was a college drop-out in France who immigrated to the U.S. in 1921. In the U.S. he became a professor at Harvard Business School, a General, and the founder of the VC industry. Along the way in 1957 he founded INSEAD, the elite business school in Fontainebleu, France. Spence E. Ante has written a fine biography, Georges Doriot and the Birth of Venture Capital, 2008.
Then proceed to Raising Venture Capital for the Serious Entrepreneur, by Dermat Berkery, 2007. This well written textbook for a business school course about venture capital (VC) is excellent background reading before seeking funding. It explains how VCs work, what kind of exit strategies they are looking for, and pitfalls to avoid. It covers business plans, presentations, milestones, stock options and more.
Last but certainly not least is the timeless classic Business Plans That Win $$$: Lessons from the MIT Enterprise Forum, by Stanley R. Rich, 1985. It is aimed at entrepreneurs who are looking for major equity investments and who will be dealing with the professionals at venture capital and private equity firms. The first chapter really drives home the message that one is dealing with a specific investment culture. Its members tend to be, obviously, rich, and also extremely secretive, highly selective and, not surprisingly, conservative. Few and far between are those with the mentality of Las Vegas high roll gamblers: "no risk too large, no profit too small."
In the past, entrepreneurs used to take a shotgun approach to seeking funding. They would photocopy their business plans and send them off to the entire list of Pratt's Guide. As that list has expanded to over 20,000, that is no longer practical. Furthermore the Internet allows one to rifle in on firms and their key decisions makers so that one can better determine "goodness of fit" before making contact. First, one examines the universe of capital providers, including business incubators. Second, one starts to narrow down the candidates to a manageable shortlist. Third, one makes a specific, detailed action plan for the funding search.
Realize that VC firms prefer local investments. Partners at VC firms in Silicon Valley want to be able to drive to the company. That means they tend to invest within a 100, maximimum 150, kilometer radius of their offices. Of course there are exceptions. Two VC firms with similarly long reaches are Accel and Matrix. Both firms have offices in Silicon Valley, New York, Beijing, Shanghai and in India. Accel also has an office in London, and Matrix one in Boston. However neither one of them has a particularly high rating with TheFunded (cf. 2.2 Secondary Research below).
2) The Funding Universe
2.1 - The Public Library: See what directories are available, and what relevant databases are subscribed to.
2.2 - Vfinance has a free database of 1541 VC firms (July 2011). It also provides information about business angels.
2.3 - Pratt's Guide of Thomson Reuters lists 20,000 VC, buyout and mezzanine firms.
2.4 - VC Gate provides access to a database of 5,100 angel investors and VC firms for $97 (July 2011).
2.5 - Bloomberg, the reknowned financial services firm, provides a list of about 190 VC firms structured with common stock. (If the link does not work, Google "List of Venture Capital Companies, Worldwide - Bloomberg.") Find out if this structure makes for a plus point for your start-up. The VCs range from Adcapital AG in Germany to Xenia VC in Israel, with ones in between from countries as disparate as Bulgaria, Finland, India, Poland, Sri Lanka, Turkey and the United Arab Emirates. The major countries, as one would expect, are the U.S., with 30 such VCs, and Germany (because of its legal structure) with about 60.
2.6 - Prequin Alternative Assets is an interesting newcomer with offices in London, New York and Singapore. Mark O'Hare and Nick Arnott founded the firm, which is owned by its staff, in 2002. It offers profies on 3,600 VCs, 5,300 private equity firms and 60 sovereign wealth groups. It also has databases about hedge, infrastructure, and cleantech funds, as well as on secondary markets. Its services are pricy, so do some due diligence before purchasing.
2.7 - Keiretsu Forums, founded in 2000, has the largest network of business angels with 850 of them in 21 chapters in three continents. European chapters are in London, Madrid, Barcelona and Paris. Companies have been provided with $260 million of capital in investments ranging from $250,000 to $2 million.
2.8 - Business Plan Competitions often have close connections to a network of venture capitalists, private equity firms (some associated with consultancies that support the competition) and business angels. Just one example would be the Münchener Business Plan Wettbewerb. McKinsey & Co. introduced the M.I.T. model to Munich Bayern in 1996, since when the competition has become a major annual event.
3) Business Incubators
Many of them have have direct connections with providers of debt and equity capital. U.S. examples include:
3.1 - Cambridge Innovation Center is located right next to the M.I.T. Founded in 1999, the original focus was on e-businesses in the seed stage with a valuation before financing of less than $5 million. Since 2001 the 250 firms associated with it have raised over $1 billion in capital. Besides Internet oriented firms, the center also houses venture capitalists and firms providing professional services.
3.2 - Ecompanies is located in Santa Monica, California. Sky Daton and Jake Winebaum founded it in 1999 to help web based start-ups. The website (2011) was peculiar. A business card provides more information.
3.3 - HOTVentures is located in Arizona and focuses on early stage technology companies. It has advised prominent media companies.
3.4 - Idealab is one of the earliest Internet Incubators. Bill Gross founded it in 1996 in Pasadena, California. It has since expanded with offices in Boston, New York and Silicon Valley. Although it has part of the creation of 75 portfolio companies, as of this writing (January 2011), it was not accepting new companies. However an affiliated company might, which is "Idealab! Capital Partners."
3.5 - I-Hatch focuses on early stage Internet companies located in the Northeast of the U.S. Chip Austin, Brad Farkas and Derek Resifield founded the company in 1999 to provide seed financing. Their emphasis is on new media content, web-enabling technology and network infrasstructure. A proposal (e.g. an executive summar of the business plan) can be submitted through its website.
3.6 - The National Science Foundation (NSF)
This U.S. goverment organization is funded with $6.8 billion dollars to support research in engineering and science (with the exception of medical research). On July 28th, 2011 NSF announced the Innovation Corps (I-Corps). Its goal is help selected research projects at U.S. universities and move out of the university and into the marketplace. It will fund 100 start-up teams a year to turn research into products. The I-Corps teams will receive $50,000 each. The announcement was accompanied with a solicitation for proposals. A webinar is held about I-Corps the first Tuesday of every month at 14:00 EST (Eastern Standard Time, e.g. New York, which is 20:00 in Munich). The link is to the registration information.
An integral part of the program is six months of training for the chosen teams. That training will be based on course developed at the Stanford Technology Ventures Program, which is the entrepreneurship center of Stanford's School of Engineering. This course, "Lean Launch Pad," teaches engineers and scientists an iterative approach to founding a company. One treats it in a similar way to a research project. One forms a hypotheses, tests it against the marketplace, adjusts the hypothesis accordingly, and again tests it . . . The course is discussed further at the introduction to "The Intra- and Entrepreneur's Education, The Ivory Trench."
3.7 NextSpace, with its main offices in San Franciso, is not strictly speaking an incubator. Jeremy Neumer, Harvard MBA, Ryan Coonerty, London School of Economics and University of Virginia Law School, and Caleb Baskin, University of Pennsylvania and UCLA Law School, founded it in 2007/2008. It also has offices in Santa Cruz, Los Ang
3.8 Plug and Play Tech Center is a start-up accelerator that provides both office space and incubator services, including VC and financing connections. Jojo Flores, University of the Philippines, and Saeed Amidi, Stanford, founded it in 2006. It serves a community of 300 start-ups from all over the world, which have received over $700 million of financing.
4) Your Shortlist
You develop your short list by doing secondary research, then primary.
4.1 - Secondary research: You screen the above VCs by location and investment preferences. Then you go to TheFunded.com for further information. This site has a wealth of information about VCs, including their dark side! For instance, it has a section "Banned VCs." There the following statistics appeared (July, 2011):
a) Suspicious reviews - 4 firms
b) Legal action has been taken against a portfolio CEO, or legal threats made against TheFunded.com - 31 firms. Five culprits in Europe are listed including Baytech Venture Capital Beratung in Munich. There is really no excuse for such action. Contracts should entail binding arbitration clauses. (The link is to comments about arbitration in the Appendix of the subpage "Tactics, Culture & Negotiation" at Dienstleistungen.)
c) No new investments - 374 firms.
The next step is to start researching the targeted VC firms, looking for articles about them and their senior managers in the financial press. You also use Linked In and other web sources.
4.2 - Primary research: Armed with this information, you now start interviewing people.
a) Journalists who have written an article useful for you. E-Mail and telephone that person; suggest having lunch.
b) People from companies the VC has funded, ideally its CEO (or CEOs of firms in a targeted business incubator).
c) People who used to work at that VC and have since moved on to another firm or retired. Do not overlook the executive secretary who has switched jobs.
d) Faculty members who are familiar with that VC (or business incubator).
If the above sounds like a lot of work, it is. Consider this point: From whom do you think your odds are better to get a 100.000 €, a million, or ten million:
- from someone who is a complete stranger to you, or
- from someone you know almost as much about as you do your own brother?
5) Your Action Plan
Obtaining funding is a business in of itself. One needs to prepare an action plan for it with budgets (e.g. for travel), milestones, a timeline and deadlines. Tasks need to be assigned and people held accountable for them. This project, critical to taking the company to the next level, has to be performed parallel to developing the technology and the markets. Sometimes to assign this task to one member of the team full time, with regular progress reports to the rest of the team, makes sense.
II. Medium Money
1) Business Angels
Besides friends and family, business angels are an obvious source. The investment preferences of different individuals, what kind of presentations are favored, need to be researched. They frequently have ties to business plan competitons.
2) Business Plan Competitons
The concept was developed at M.I.T. in the 80s and has received major support from corporations worldwide, including McKinsey & Company. The majority of these competitions are held in the U.S. For a list of 80 international ones, see bizplancompetitons.com. The excellent Munich Business Plan Competition is commented upon in German at "Wohltätigkeiten" under Über uns und die USP.
3) Loan Intermediaries
Another possibility are peer to peer loan intermediaries. Two European examples follow. Their business model is somewhat similar to that for microloans. However both of them begin with loans of, respectively, 1,000€ and 1,000 pounds. They appear to be more oriented towards personal loans and perhaps working capital for a small firn, rather than for a start-up. Still, there is no harm in entering several different funding proposals (split testing) to see what surfaces.
2.1 - smava GmbH
This site is an interesting German loan intermediary, headquartered in Berlin. You put up on the website the amount you need and what terms you offer (interest and principal repayment, collateral, if any). Then lenders respond. There is no direct contact between the two parties to the transaction. Consider that a challenge to your creativity! The loans range from 1,000€ to 50,000€, significantly larger then at the traditional microlenders. Lenders can pool their funds, with a minimum investment of 250€ to a maximum of 100,000€.
Consider pursuing this route in coordination with a submission to a German business plan competition such as the Münchener Business Plan Wettbewerb linked above at 1.0.8 of "The Funding Universe."
2.2 - Zopa
This U.K. site is quite similar to the the German smava. It also provides peer to peer lending. The range of loans is 1,000 pounds to 15,000 pounds. The firm is headquartered in London, with a staff of 23 (July, 2010). In this case one could consider participating in a business plan competition in England as a tie-in.
III. little money
2 The Concept - Microloans as a Trojan Horse
The bottom tier of microloans is 5€ (!) to $25, with loans of a few hundred dollars representing the top tier. What on earth could you do with such trivial amounts? Well in the developed world, nothing at all.
However there is another world out there, a pretty large one too, viz. the developing world, a good three to four billion people. Consider developing a franchise related model for your product. The actual form would be a licensing agreement to avoid meeting the often onerous legal requirements for a franchise.
The product needs to do some social good. It can not be a new "tastes like chocolate" cigarette aimed at 1st and 2nd graders. You negotiate with a micro-lender having a large base (and some of them do) to offer your product. It can be purchased with a micro-loan. In fact, research findings have been consistant that over half of micro-loans are not used to start a business. Instead the money is used for badly needed consumer products.
A specific example is the sale of mobile phones in India and Uganda, which was funded by the Gramean Foundation. One received a micro-loan to purchase a mobile phone. The owner now let other people in her village use it for a fee. The fees repaid the loan and provided the borrower some income besides. Communications improved. A variation of this model is to have the "village phone" connected to someone who is on a computer with an Internet connection in order to ask questions (agricultural, medical, etc.)
The mobile phone company is establishing a powerful brand name for itself for future purchases with zero advertising cost. Nevertheless long term thinking about prospects 15 -- or 50 -- years down the road will inevitably be inaccurate. Some backwaters that appear poised for growth will still be backwaters come the next millenium. But others of those long term targets will pleasantly surprise you and turn into revenue centers (for products not even conceived of yet) much sooner then anticipated.
* Chauvinism, excessive patriotism -- up to war-mongering -- entered the English language from the French word that was derived from Nicolas Chauvin. He was a lengendary soldier devoted to Napoleon.
2) The Micro-lending Universe
Contents
A. Point of departure (2006)
B. Interim update (2009)
C. Current status
A. Point of departure (2006)
By way of an introduction to microloans, a quotation from a 2006 entry on Kevin Kelly´s Cool Tools website follows. He introduces his research with:
"Previously I've recommended the micro-finance cool tools of Trickle Up, Opportunity International and my favorite, Heifer International, as three ways to leverage small amounts of money for maximum global good. Micro-finance programs are not a panacea. For a critique, start with Microcredit is booming in India, but. . . " in Forbes.
The more important micro-lenders include:
Accion
Accion provides technical assistant to local micro-lending institutions. Its goal is to enable micro-lending institutions to become self-sustaining. Several of Accion's have, in fact, made the transition from total dependency on charity to being largely self-financing. The minimum contribution to support Accion was $50.
FINCA Village Banking
FINCA lends money to a group of 10 to 50 persons who form a village banking group. The group in turn makes loans to fellow villagers. These range from $50 to $500. With a contribution of $5,000 one could create a village banking group. makes loans directly to the poorest villages. The minimum contribution to the program was $50.
Dan West, an American farmer, helped refugees in the Spanish Civil War (1936-39). After returning to the U.S., in 1944 he founded Heifer International to provide livestock, cattle, geese, also honeybees, to poor communities. ("Heifer" means young cow.) Headquartered in Little Rock, Arkansas, the foundation has provided seeds, livestock and training to people in 125 countries. The focus is on sustainable projects. Do not give a "cup of milk," but a cow. (Its first project in 1944 was shipping 17 heifers from the U.S. to Puerto Rico.) A current example would be a project for pumping fresh water in the Long Phu District of Vietnam. (2010)
Grameen Foundation (GF)
Muhammad Yunus won the Nobel Peace Prize for founding the Grameen Bank in Bangladesh. It is the original micro-lending concept, and the inspiration for On- line micro-lending. GF, owing its origins to the Grameen Bank, is perhaps best known for Village Phone.
Women buy cell phones with a loan. They repay the loan by renting the phone to other users. GF's first attempt to scale the program outside of Bangladesh was in Uganda. Internet access fees in Uganda are remarkable, $100 to $250 a month in one of the poorest countries in the world, with a per capital GNI (Gross National Income) of under $500 p.a.3 In part this reflected a national telephone network that could not handle heavy Internet traffic.
Village Phone has been a resounding success in Uganda. Already by 2005 over 3,500 microloans for "Village Phone operator" had been granted. These operators often provided the first local phones the villagers had ever had, thereby creating a national telecommunications network. This network has had a major impact on these communities, both socially and in terms of improving economic opportunities, medical treatment, and safety.
Namaste Direct (ND)
ND is a person-to-person micro-lending program. One provides funds directly to an individual, about whom one is provided information. One receives progress reports about how the money is being used. ND will even arrange a meeting with the borrower. Unfortunately this direct lending concept requires a great deal of management time and effort. Therefore the program is quite limited. It began in Guatemala and made its first attempt to scale in Mexico in 2005/2006. At that time there was no minimum contribution.
Al Whittaker left his job as President of Bristol Meyers International (of the Fortune 500 firm) in 1971 to start a charity in South America in 1971. In 1979 he joined forces with the Australian entrepreneur David Bussau to start Opportunity International, a Christian foundation. It is a major player in 20 countries with a broad range of activities. On the one hand, individual loans can be as small as $60. On the other hand, it has helped create nine banks for microlending. In 2002 it also started the world's first microinsurance intermediary, MicroEnsure. It offers property, crop, health and also funeral insurance.
Seed capital and training for the very poor are provided in five countries. These are Guatemala, Nicarauga, India and two West African countries which neighbor one another: Mali and Burkina Fao.
Unitus
Unitus, like Accion at the head of this list, funds other local micro-finance programs, rather than direct loans to individuals. "Unitus seeks to identify highest-potential emerging MFIs (Micro-Finance Institutions) and help them to achieve exponential growth." Unitus was one of the first programs to accept PayPal, making it easy to contribute to. The minimum donation was $100.
B. Interim update (2009)
An excellent report has been written (2009?) by A. Ashta and D. Assadi, "An Analysis of European Online Micro-lending Websites," cf. www.solvay.edu/EN/Research/Bemheim/documents/wp09059.pdf. The article is published by the Centre Emile Bernheim, Research Institute in Management Sciences, assoiated with the Solvay Brussels School of Economics and Management (e-mail: ceb@admin.ulb.ac.be Tel. : +32 (0)2/650.48.64). The following excerpt is from the third page of this report:
"Kiva,an American company, started an online micro-lending model in 2005 to target mainly the needy entrepreneurs in the developing countries. This too was duplicated, with variations and adaptations by many operators. In Europe, we find MyC4 and Babyloan. However, models are mushrooming all over the world, with a number of them in India alone.
Although traditional microfinance has developed in poor countries, today many developed countries are also using the system with adaptations based on local cultural differences. The online lending movement started in March 2005 with a European firm called Zopa, UK. Since then Zopa has gone to the the U.S., Italy and Japan. Its model, with variations, has also been adapted by many other competitors. Today, there are more than a dozen for-profit commercial operations in the online peer-to-peer lending market. In Europe these include operations such as Zopa, smava, boober, Kokos and Monetto.4
This French organization has provided over 2,000,000 € to some 6,400 micro-entrepreneurs in 137 countries (July, 2011).
Kiva was founded in 2005, is active in 59 countries and makes loans as low as $25. The website states a 98.79% successful repayment schedule on $232 million of loans disbursed. Depending on exactly how one defines the terms "loans disbursed" and "repayment," both figures, and especially the latter, seem a little optimistic. (July, 2011)
Participants from over 100 countries have lent 13,600,000 € to 6,800 small businesses in seven African countries. Loans can be as little as 5 € ! A nice aspect of its website is transparency. Under "loans" it provides believable statistics about payment rates, including frank disclosure of a high default rate. (July, 2011)
SKS is one of the major players in India. Its interest rates are generally 25% to 30% (2010).
III. Current status
Check the websites above for the current status of these programs. Google them, noting that several have articles written about them in Wikipedia. Use them as a benchmark for other (and newer) programs that have been developed since then. Do your due diligence about what percentage of funds provided actually lands in the hands of the intended recipients. Try to estimate that key statistic: loan failure rate.
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1 "Modern Measures of Value," © Florence Mcqinn, dreamstime.com ID 16064379
2 Elephant © Cory Thoman, dreamstime.com ID 6702364
3 The cost of accesing the Internet in Uganda is truly astonishing. In 2011 two offers found on the Internet were a) $380 sign-up fee and $100 monthly afterwards and b) $250 a month, no extra sign-up fee. Estimates for annual per capita GNI (Gross National Income) for Uganda range from a low of $217 to a high of $460. The German/U.S. per capita GNI is, using admittedly a high figure, $3,000 a month versus, say, $30 a month for Uganda, i.e. a 100 to 1 ratio. A person in Uganda pays three to eight times the monthly GNI figure for ONE month's Internet access. That would translate into Internet access costing an American or German $9,000 to $24,000 per month! Internet would be a large company tool, not a small company or private one.
4 This last sentence is not entirely accurate, at least not today (July 2011). Boober, Kokos and Monetto do not appear as micro-lending institutions on a Google search. Smava GmbH is a German peer to peer lending intermdiary headquartered in Berlin, and Zober an English one headquartered in London. Both are briefly discussed above at II. Medium Money.