“Where to fish when the VCs aren’t biting” was the topic for the first installment of this year’s Brown Venture Forum series on Oct. 17.
The place was packed.
With funding exceedingly scarce, many entrepreneurs are scrounging for alternative financing sources to keep their businesses afloat while they refine technologies or court customers.
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Panelists suggested a smattering of places for entrepreneurs to seek cash during a dry venture-capital market:
Federal grants
Joseph Kunze, a vice president at Triton Systems of Chelmsford, Mass., a materials company, knows a few things about winning federal grant money. Since its 1992 founding, Triton has grown into a $10 million company subsisting almost exclusively on federal research grants, without any private investment, Kunze said.
Triton has leveraged Small Business Innovation Research (SBIR) grants, a federal program that encourages small businesses to develop new technologies while providing the incentive to profit from their commercialization. The federal government each year requires 10 departments and agencies – including the defense, energy and transportation departments, as well as NASA and the National Science Foundation – to set aside a certain percentage of R&D funding to be awarded to small businesses.
Kunze said Triton Systems also has won Small Business Technology Transfer (STRR) grants, which helps startups take innovations from the lab to the marketplace.
There are, however, drawbacks to these programs, Kuntze said. For starters, it’s a slow process, with a tedious application and slow approval time.
Also, companies that rely on federal grants will need to use a government-approved accounting system and likely will be probed by a government auditor shortly after winning its first program.
The key to winning federal grants? Kuntze said the maxim of “know your customer” applies to the federal government the same way it does in the private sector. He says grant applicants should pinpoint the key decision makers in whatever government agency they’re targeting.
State loans and grants
The Rhode Island Economic Development Corp. offers $250,000 loans to small and startup businesses. The EDC, which meets monthly to review loan applications, now has roughly $5 million to lend to Rhode Island firms, said Paul Harden, assistant director of business services for the EDC.
Harden said the EDC historically has provided loans to help businesses pay for assets such as equipment or furniture. But increasingly, businesses are tapping the EDC’s loan pool in an effort to plug holes in working capital, he said.
Harden cautioned, though, that some startups might not qualify for the loans if they don’t already have customers or contracts lined up.
“We look for companies that have cash flow,” Harden said at the forum. “We need to see the ability to repay the loan.”
Harden added that the state offers grants to help businesses of all sizes train new and current workers. The work-force development grants are available through the Human Resources Investment Council, which awarded a total of $1.3 million to 45 Rhode Island businesses in August.
Angel investment
Angels – those investors who infuse startups with funding to help bridge the gap between seed investment and venture funding – are an increasingly tough source to tap, panelists said.
“It’s a tough market out there for angels too – a lot of them have seen their wealth decline dramatically,” said George Emmanuel, managing director of Massachusetts-based Hub Angels Investment Group LLC, which makes investments of between $250,000 and $1.5 million in New England startups across a variety of sectors.
Emmanuel said angel investors now look more closely than ever at the makeup of a startup’s management team, as well as at whom the company’s initial investors are. But most importantly, Emmanuel said, startups must tell investors a compelling story.
“It’s not just ‘don’t lose us money,’ but you have to stimulate us and entertain us too,” Emmanuel said. “You have to make the business interesting and unique and entertaining, and you have to project your convictions to the (investor) group.”
Cash Management
Startups generally have a finite runway before they take off or crash, said Thorne Sparkman, executive director of the state-funded Slater Center for Interactive Technologies. He told entrepreneurs that one slip up – a customer that gets away or an order that fall through – can shorten that runway in a hurry.
One way to cope: good old-fashioned belt tightening.
“There’s nothing ignoble about conserving cash,” Sparkman said. “Smart entrepreneurs have been doing that forever.”
Startups can “extend their runway” by cutting back their expenditures on rent, furniture and other overhead, Sparkman said. He suggested fledgling firms set up shop in an “incubator,” which offers lower rents and shared costs for amenities such as Internet connections and conference rooms. (The Slater Center for Interactive Technologies opened an incubator at 3 Davol Square earlier this year.)
And Sparkman said nascent firms should leverage second-hand computer equipment and furniture – resources that are in abundant supply as a result of the technology slump that has shuttered many Boston tech companies and caused mass layoffs at others.
Meanwhile, companies can bring in more cash by offering consulting services during the product-development stage, Sparkman suggested.
The Brown Venture Forum meets monthly from October through May. More information is available at www.brownventureforum.com
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