Advice on Financing Your Business Idea - The Money Chase

Talk to a Professional: Venture Capitalists and SBICs

In the heady, dot-com boom days, it seemed venture capitalists were on every street corner, throwing cash at anyone and anything that called itself a startup. Today, the world of professional investing is significantly more reserved, and venture capital is not so easy to come by.

Venture capital is equity financing for young, rapidly growing companies that have even bigger growth potential (projected annual revenues of $25 million or more). Most venture capital comes not from wealthy individuals, but from venture capital firms that invest in a portfolio of young companies. The number of companies that seek venture capital is very small, and the number that receive it is even smaller: In 2003, there were 2,779 venture capital investments, with an average investment of $6.5 million, according to the National Venture Capital Association (NVCA).

Clearly, venture capital is not for the average startup. The stereotypical venture capital recipient is a high-tech firm in Silicon Valley, but in reality, venture capital firms invest in life science, industrial products, construction, communications and business services companies all over the country. The common characteristic is growth potential.

Typically, the earlier you receive venture capital money, the more equity you have to give up. (Because your company is untested, the investor's risk is higher and the rewards must be greater.) But you shouldn't view the loss of equity as a hardship, says Babson's Greene. Management and business counseling is a key component of any venture capital deal, as it's in the best interest of the investor to help the company grow and succeed.

"If all you get out of a venture capitalist is money, you didn't go to the right venture capitalist," Greene says.

If you decide high-growth and professional investors are for you, your first stop should be the NVCA website at www.nvca.com. The site provides an overview of the venture capital industry, a calendar of upcoming venture capital fairs and a listing of the nation's venture capital firms (available for purchase). The listing, which includes short summaries of each firm, can help you focus your search. Venture capitalists are highly selective and you shouldn't waste your time on a firm that has no interest in your business. Instead, target firms that specialize in your industry, stage of development or region.

If you think you have a high-growth business, but need help connecting with investors, check out New York-based Springboard Enterprises
(www.springboard enterprises.org). This national, not-for-profit organization helps women-owned firms gain access to the professional investor community. Springboard produces programs that educate and showcase entrepreneurs, including the Venture Forum, a six-month long training and coaching program that culminates in a venture capital fair.

You should also visit www.sba.gov/INV to learn about the Small Business Investment Company (SBIC) Program. SBICs are privately owned and managed venture capital funds that are licensed and regulated by the SBA. They use their own capital, plus funds borrowed with an SBA guaranty, to invest in growth companies. Some, like Johns Martin's Capital Across America, invest exclusively in women-owned firms. An SBIC investment is typically smaller (about $1.5 million) than one from a traditional venture capital firm. In fiscal year 2002, SBICs invested almost $800 million in 1,979 companies.

"SBICs sometimes look to the more mundane industries," Johns Martin says. "Venture capitalists tend to invest in the latest, greatest and fastest business concept. At SBICs, we're looking to invest in those 'boring' kinds of businesses that are going to make money."

Capital Across America is unique in that it doesn't require business owners to give up equity. Instead, it offers a type of debt financing called mezzanine financing that loans against the companies projected cash flow. The interest rates are typically higher than a conventional loan, but Johns Martin says it's still less costly than giving up equity.

"We call it 'smart money,' because you're also receiving counseling and advice to help you grow the company," she says. "It's like having a professional business consultant at your fingertips."

While more women-owned firms are working with professional investors, they still lag their male counterparts in their ability to secure venture capital. Back at the height of the venture capital gold rush (the late 1990s and 2000), women entrepreneurs participated in fewer than 5 percent of the deals in which billions of dollars were invested, according to Greene's research. The reason for this disparity is multi-layered, Greene explains. The majority of women-owned firms are in the service and retail industries, sectors that are typically less attractive to venture capital firms. Women entrepreneurs are also less likely to be part of the clubby, old-boys network of big-money investors, and so may fly under the radar of venture capitalists. And, finally, Greene says, many women avoid high-growth businesses for perceived lifestyle reasons.

"Too often women limit the growth and size of their companies because they think running a high-growth business will have a negative impact on their quality of life, family time, etc.," she says. "But in reality, it's just a different kind of process--and one that's not necessarily more time consuming. If you're trying to support yourself as a consultant and you're out there providing the services, selling the services, marketing the services, etc., does that take any less time than managing a high-growth business?"

If your business is the realization of a life's dream, you're short-changing yourself by not considering any and all financing options that might help it succeed, Greene concludes.

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