Editors Note: Jim Verdonik is a principal in the Research Triangle Park law firm of Daniels Daniels & Verdonik, P.A.Spring!
Do your thoughts turn to:
Well, for many people in our local tech community, spring means VENTURE FAIR.
Venture Fair Recipe: Take hundreds of investors, entrepreneurs, accountants, lawyers and other consultants. Lock in a large auditorium for two days with drinks and food. Open Door. Wait for the hot air to escape. Then examine closely before serving.
Yes, CED’s Venture Fair has come and gone.
So, what did Venture Fair teach us this year?
So, why isn’t this turning out to be a wild spring break party?
Simple. A lot of potential dance partners just don’t meet the moneyed crowd’s standards.
If you’re an IT company don’t bother getting dressed for this dance, unless you have product, customers and revenue. If you’re a biotech company, you’re judged by a different standard. If you’re past basic research and into development or testing, you might generate some interest.
The old saying “You can never be too rich or too thin,” definitely applies to start-up companies these days.
Yeah, I know. Life’s not fair.
Get over it!
So, how do you finance the total makeover required for your company to be a worthy dancing partner for VCs?
Burn Rate Gap
That depends on how wide your burn rate gap is. It’s a simple formula: multiply the number of months it will take to achieve VC investment criteria, by your burn rate per month.
Here are ten sure-fire ways to bridge that burn rate gap:
Second Mortgage VCs love companies where the founders will lose their home, if the company fails. It’s called “skin in the game.” Financing your company with a second mortgage may get you a divorce, but it’s a great way to attract the love of investors.
VISA Capital: You can get ten or twenty credit cards, if you apply yourself before you quit your job and start your company. Credit card rates are lower than the prices VCs are charging. Actually, with interest rates so low, credit cards are at least temporarily something of a bargain. You could be caught in a trap, however, if interest rates rise to normal levels before you can repay the debt.
Positive Cash Flow Kids: Yes, your spouse is already in the work force. So you think you’ve exhausted your family’s cash flow generating resources? Think again. What are those lazy kids of yours doing? You’re not a serious entrepreneur these days if your kids aren’t generating positive cash flow. Tell them to cut expenses and “Get a Job.” It’s your decision whether to limit their revenue generation activities to those that don’t draw jail time. Feel guilty? Don’t. This is how Junior earns his inheritance.
Mom and Dad: What? Are they planning to take it to the grave with them? How about forking over a little of the green stuff now? It may seem heartless, but in fact “intergenerational investments” (how’s that for adding some class to your money grab?) have long been a primary source of start-up capital. That’s where the expression “The rich get richer” came from. A little friendly advice, don’t tell your brothers and sisters until after you’ve cashed Mom’s check. It would be unkind of you to cause your siblings needless worries about their inheritance.
Friends and Family: Long before anyone ever heard of the word “angel investor,” there was the “friends and family” round. It’s back in style again by necessity now that angels aren’t writing checks. Ask yourself, why would a total stranger believe you want to make him rich by selling him stock in your company, if you haven’t let your best friends and Uncle Alfred into the deal? No angel investor in his or her right mind should invest, unless you’ve already alienated all your friends and are no longer welcome at family gatherings, because you keep hitting family and friends up for money. Keep hitting on friends and family and perhaps they’ll refer you to bona fide angel investors just to get you off their backs.
Angel Investors: They’re playing hard to get like the VCs. See criteria above.
Uncle Sam: The government has invested in just about everything. Government grants fund research like: Why do children like rubber ducks in the bath tub? Why do ducks fly south in winter? What is the symbolism of ducks in Shakespearean tragedies? Yes, Uncle Sam has funded studies about them all. Why would the government get smart, just because you’re the one asking for money? Seriously, there are billions in government grants and loans available for both R&D and business expansion. You have to jump through some hoops and plan ahead, but if you start now you could be getting some money next year. You also have to know your ABCs. You’ll be looking at a lot of websites with the letters SBIR, SBA, DARPA, SBTDC, etc.
Consulting: If you don’t yet have a product to sell, but you have skills that are in demand, doing some consulting work to raise cash while developing your product is often a viable strategy. Your consulting clients may even pay you to develop pieces of your product. Be careful, however, that your agreements with clients clearly give you exclusive ownership to intellectual property. It’s not a good idea to be sued by your customers for IP infringement when you’re trying to raise money from VCs.
Retired People: In recent years, a lot of people involuntarily “retired” much earlier than they wanted. They’re too young to play golf every day. Some of them have experience you need. They’re willing to work cheaply to get back in the game again. Bringing these people aboard can cut your cash flow. Some of them may even invest in your company and become your partner. Imagine, getting positive cash flow by hiring someone.
Recent Grads: The opposite of retired people is young people. Recent grads have been piling up in the labor market for several years. They’re competing with this year’s graduating class for entry level jobs. In comparison to the class of 2004, they look like week-old leftovers in the back of your refrigerator. They’re desperate to add something to their resumes that is more likely to get them back onto the labor market escalator than waiting tables. What’s more, their parents are dying for them to make enough money to move out of the house. 24 and unemployed isn’t cute. Not only will these kids (excuse me, young adults) work for low wages but their moms and dads may be desperate enough to invest in your company, even though your own parents have turned you down.
It wasn’t very difficult to find ten ways raise money and reduce expenses to bridge your burn rate gap, was it? Notice that we didn’t even have to get into things like Las Vegas, Lotto or white slavery rings.
What, you’re too nice a guy? You couldn’t possibly do some of these things? Get real! Bridging the gap between what your company has achieved to date and what investors want takes a lot of effort and risk taking. If it was easy, everyone would be . . . Rich.
With a whole year to work on your company by implementing these ten steps, you’ll be the belle of next year’s Venture Fair. See you there!
Daniels Daniels & Verdonik, P.A. has been serving the legal needs of entrepreneurial and high technology clients for more than 20 years. Jim Verdonik’s practice focuses on representing technology companies and investors in venture capital, securities and other corporate matters. He founded and operates two websites with business and legal resources www.BoardStrategies.com and www.TecCoach.com. Questions or Comments can be sent to email@example.com.