CONNECT Newsletter

Funding Sources and What You Should Know

By Camille Sobrian
Managing Director,
Procopio Business Consulting
March 21, 2006

Early stage companies seeking an infusion of capital are faced with a myriad of choices.

Roger Rappoport, corporate attorney with Procopio, Cory, Hargreaves & Savitch LLP advises entrepreneurs to determine, "What it is going to take and how long it is going to take to get your product to market."

Angel investors invest a great deal more money than venture capital firms and they focus on deals between $100,000 to $1 million. Says Bill Carpenter, from the Tech Coast Angels - the largest angel investment group in the country, "Some kind of market validation is typically required before you get to the angel round, and the funds from the angel round are often used to actually develop and make the first commercial introduction of the product." Angels look for high return, moderate risk investments and expect to own a minority of your company from 10 to 30 percent.

Venture capital firms have different specialty areas and invest at different stages from pre-product to completed product.

According to Peter Fisher, Managing Director at Shepherd Ventures, "We're looking for a problem that is huge, broad and world class." This means a billion dollar market growing about 15 to 20 percent a year, three to five competitors in the space, under 20 percent marketshare and sustainable barriers to entry.

Series A round investors expect about 30 to 50 percent of your company and about 25 to 50 percent annual compounded rates of return.

Many companies also take on long term debt, from a commercial bank or venture debt fund, in the form of a loan where the interest and part of the principal are paid back in equal installments over the life of the loan.

According to Chris Wooley, President, Square 1 West, a specialty commercial bank, "pre-revenue, pre-profit is OK by us - we come in very early." The typical range for a commercial bank is from $250,000 to $10 million and the loan period ranges from 12 months to 42 months - depending upon how the company plans on using the funds. You'll have to give warrants on your stock and a covenant - a condition that the borrower must comply in order to adhere to the terms in the loan agreement.

Venture debt funds provide financing of about $2 million and up, for both fixed-asset purchases and working capital and they're not banks so they can be more flexible on terms and don't require covenants. They do require warrants and put in place pre-payment penalties and specific asset filings.

Accounts receivable financing is a means of financing growth and providing working capital without dilution of equity. Says Patricia Burns, CEO of Primary Funding Corporation which focuses on accounts receivable financing and factoring, "We buy your invoices, providing instant cash on credit sales. We provide credit and collection management for companies. This is usually less costly to a company than staffing an in-house credit and collection department. It's a simple way to speed up cash flow without taking on debt or diluting equity."

According to Carpenter, "Almost nobody goes IPO. Almost always the business is sold and yet most of the business plans that we read have this great IPO pot of gold at the end of the rainbow. Less than one percent of companies go through all of these steps and end up in an IPO or sale."

Camille Sobrian is Managing Director of Procopio Business Consulting, a business consulting firm that assists clients in extending the reach and functionality of their marketing and business development efforts across the U.S., including providing and incoming and outgoing bridge with Asia. Camille is a board member of CommNexus and the Wireless-Life Sciences Alliance and co-chairs CONNECT's Springboard Program. PBC is a subsidiary of Procopio, Cory, Hargreaves & Savitch LLP.