Early Stage Funding Market
Ron’s practice focuses around the New England area so his attention and feel for the investor marketplace is focused on this region. This is understandable based on the fact that the Boston area is regarded as the second most conducive area in the world to fostering entrepreneurial ventures, second only to Silicon Valley in California. By concentrating at this area, Ron demonstrates a keen understanding of the investor market and the needs that exist from new business start-ups for funding. What he sees is that entrepreneurs are seeking smaller amounts of money than venture capitalists are used to working with, and thus the venture capitalists are shying away from getting involved with such small investments because they do not match the VC’s investment intentions. “There are very few VC’s that do early stage deals with smaller financing…An entrepreneur that needs $500K to validate his product in the marketplace and approaches an investor with $100 MM is going to have a problem.” This trend can be evinced from what Ron calls the institutionalizing of venture capitalists, “VC’s need overall return on investment. VC funds have become institutionalized with investment guidelines and investor expectations, so they follow the rules. The investor in the VC fund is betting on the team of venture capitalists that manage the money to do a good job.”
Ron feels that the shift towards entrepreneurs needing less money is a sign of the industries that are pushing the economic growth, and thus where entrepreneurs are focusing their efforts on developing new products. A clear example is the software and internet industries. The capital requirements for funding such companies is rather modest when it comes to the availability of powerful computing technology at a reasonable price. If products in these areas are going to show significant opportunity for growth and profitability, there is going to have to be a change in the attitudes of the investor community to be willing to work with smaller investments, or a new investment structure will have to evolve that will capitalize on the new business ventures. “There is a crying need for early stage money…There is a need for those investors that can offer a pool of $250K, and for certain types of technologies that is plenty. The message to the VC community is that you need to adjust your level of participation to play in these new arenas.”
So where does the entrepreneur go that is in need of smaller amounts of early stage funding? “At this level they are not bankable regardless of what they have. The SBA loans may work and those routes should be pursued. It is easier to go through these routes nowadays as long as you go through these procedures and you qualify. Also, there are ways to get relatively cheap money as opposed to equity costs such as prepaid sales, licensing something off, prepaid royalties or strategic alliances to get funding for R&D.” But Ron also sees the opportunity to construct a network of private investors that will be able to be called upon to muster smaller sums of money for viable smaller business venture. “More people are starting to show up but the effort lies in uncovering them, keeping in touch with them on a regular basis, and bringing them together in a systematic way.” It is this private investor network that will be the focus of Ron’s attention in the near future of his practice.
Take-away
An industry expert such as Ron Guerriero can offer an exceptional advantage to an entrepreneur that is seeking to grow their organization with outside investments. Knowing the behaviors and expectations of the people that the entrepreneur must work with to seek outside funding can help shape the entrepreneur’s business plan and strategies to most appropriately meet the investor’s needs. With such understanding and strategies established in the beginning of the process, an entrepreneur can work to add to the legitimacy and influence that a prospective business plan can possess as it sits on the desk of a venture capitalist with fifty other plans trying to stand out and gain further interest. – ###
Provided by Arthur Andersen