Is VC (Venture Capital) for computer geeks only?
March 5, 2010 10:22 AM Subscribe
Is VC (Venture Capital) exclusively for high tech software startup companies? IOW, are there any brick & mortar retail or service companies getting VC for creatively integrating technology into their existing business to scale up or reinvent themselves? Examples: Zappos, Amazon. (I don't have any service type examples.)
Trying to figure out a way to get from a hyperlocal-sized 2 person design-build service to a regional, possibly national (US) size in 3-5 years. We're surviving, but running ourselves ragged.
We have ideas on prototype products, services & equipment we want to develop, but it's very difficult when we're slammed with the bread & butter services we currently offer. We've tried bootstrapping w/ personal funds, but are now in debt even though people are increasingly beating a path to our door. This time last year we had no projects. This year we've already completed 4 so far.
I've talked to a few "strategy" consultants, but they are stuck in the formality of what used to be conventional business practice. I'm looking for an open minded, equally creative, positive connection to help make it happen, not make us feel like we're hopeless idiots.
Our shingle has been officially out since January of 2008 with very little advertising & we are now known in a 30 mile radius as the best & only of what we do. We want to give more people our products & service faster.
I apologize in advance for the lack of granular specifics, but I wanted to ask without giving too much away. I have the beginnings of a business plan I'm putting together with the help of SCORE in an effort to be taken seriously.
I know what I *can't* do. Tell me what I *can* do.
Throwaway email addy: equalopportunityvc [at] gmail.com
Trying to figure out a way to get from a hyperlocal-sized 2 person design-build service to a regional, possibly national (US) size in 3-5 years. We're surviving, but running ourselves ragged.
We have ideas on prototype products, services & equipment we want to develop, but it's very difficult when we're slammed with the bread & butter services we currently offer. We've tried bootstrapping w/ personal funds, but are now in debt even though people are increasingly beating a path to our door. This time last year we had no projects. This year we've already completed 4 so far.
I've talked to a few "strategy" consultants, but they are stuck in the formality of what used to be conventional business practice. I'm looking for an open minded, equally creative, positive connection to help make it happen, not make us feel like we're hopeless idiots.
Our shingle has been officially out since January of 2008 with very little advertising & we are now known in a 30 mile radius as the best & only of what we do. We want to give more people our products & service faster.
I apologize in advance for the lack of granular specifics, but I wanted to ask without giving too much away. I have the beginnings of a business plan I'm putting together with the help of SCORE in an effort to be taken seriously.
I know what I *can't* do. Tell me what I *can* do.
Throwaway email addy: equalopportunityvc [at] gmail.com
There's are VCs for just about any type of business, as long as there is an opportunity for order-of-magnitude returns on their investment. I don't know exactly what you're doing, so I can't really offer guidance other than that.
You also haven't said how much you need. VCs don't tend to invest small amounts (less than US$500,000 or so), though sometimes they do.
Having gone that way in my past, I would not go to a VC unless it's the only way to get the money. There's lots of good things that VCs *can* bring to the table, but bottom line VCs mean losing part (perhaps most) of your ownership in your company, less control and more oversight, and partners you might decide you can't get along with but can't get rid of. You also need a lot of savvy and a lot of solid legal help when dealing with them.
You've started out the right way. You *really* need to have a solid business plan to talk to anyone about money. Even if, as you imply, you're have a non-traditional business practice. SCORE is good for help. Local university biz schools and small biz networking groups have been useful to me in the past as well. Get everyone you can to review and critique it.
If you are a going concern with revenue and a pipeline, I would approach a local bank about a small business loan to strap up. You'll want to go in with detailed financials, your business plan, a detailed plan of what you are going to do with the money & realistic expectations of what that's going to do for your business. Letters of reference from clients are good as well. Make an appointment with the bank president and sell him on you as a company and your ability to pay back that loan, with interest. Bank money is going to be the cheapest money out there; you don't have to give up part of your company to get it.
Good luck.
posted by kjs3 at 11:04 AM on March 5, 2010
You also haven't said how much you need. VCs don't tend to invest small amounts (less than US$500,000 or so), though sometimes they do.
Having gone that way in my past, I would not go to a VC unless it's the only way to get the money. There's lots of good things that VCs *can* bring to the table, but bottom line VCs mean losing part (perhaps most) of your ownership in your company, less control and more oversight, and partners you might decide you can't get along with but can't get rid of. You also need a lot of savvy and a lot of solid legal help when dealing with them.
You've started out the right way. You *really* need to have a solid business plan to talk to anyone about money. Even if, as you imply, you're have a non-traditional business practice. SCORE is good for help. Local university biz schools and small biz networking groups have been useful to me in the past as well. Get everyone you can to review and critique it.
If you are a going concern with revenue and a pipeline, I would approach a local bank about a small business loan to strap up. You'll want to go in with detailed financials, your business plan, a detailed plan of what you are going to do with the money & realistic expectations of what that's going to do for your business. Letters of reference from clients are good as well. Make an appointment with the bank president and sell him on you as a company and your ability to pay back that loan, with interest. Bank money is going to be the cheapest money out there; you don't have to give up part of your company to get it.
Good luck.
posted by kjs3 at 11:04 AM on March 5, 2010
Have you looked into the SBIC program? Many of the investment funds that participate in the SBIC program invest in less "techy" businesses.
posted by mullacc at 11:19 AM on March 5, 2010
posted by mullacc at 11:19 AM on March 5, 2010
It's not clear if you meant this from your question, but it's not the case that Amazon didn't have a venture capital investment. It did, by Kleiner Perkins, I believe, and made investors in that fund rather wealthy.
posted by dfriedman at 11:25 AM on March 5, 2010
posted by dfriedman at 11:25 AM on March 5, 2010
GuyZero's comment is correct. VCs are looking for high multiple returns and tech companies make up the vast majority of opportunities that meet their requirements. That said, many funds look at all sorts of deals, see this recent Reuters article.
I also wanted to note that while a bank won't ask for (much - occasional warrant coverage) equity in return for their investment, they often require a personal guarantee in order to give money to a small business. So you may have to determine whether you want to give up a substantial portion of your company to a VC or risk bankruptcy should your company fail.
posted by dbolll at 11:54 AM on March 5, 2010
I also wanted to note that while a bank won't ask for (much - occasional warrant coverage) equity in return for their investment, they often require a personal guarantee in order to give money to a small business. So you may have to determine whether you want to give up a substantial portion of your company to a VC or risk bankruptcy should your company fail.
posted by dbolll at 11:54 AM on March 5, 2010
VC's are looking for "exits" via IPO or acquisition. Service companies (if that's what you're doing - it sounds like it) traditionally can't exit via one of these two routes in a sufficient manner. You're not going public likely and theres not a lot of money in selling a service business. Most in a traditional venture role aren't going to like you much (and I'm grouping angels and VC's here). There is no limit to what VC's will fund. Tesla Motors is a car company started on VC capital.
If you want to go that route you're going to have better luck selling a "product". And if you're just getting started you don't want several products you want one single product. The question you'll get asked is "what pain are you solving" and "what is your solution to this pain". Once you get the money you can course correct but solve one problem first and go from there.
You're other route is via bank loans or credit.
Now the other issue where you're not coming off too attractive is why do you need additional capital to grow?
"We've tried bootstrapping w/ personal funds, but are now in debt even though people are increasingly beating a path to our door. "
This indicates your business is broken. How do you prove you can grow if you can't support two founders without going into debt? If your pitch is "we need money to grow or we die" then warning bells are going to go off all over the place. Your pitch needs to be we have more work and income then we can handle so we want to grow to support the continuing demand. Solve the problem above and you'll be able to both bootstrap and be in a better position to seek outside funds.
posted by bitdamaged at 12:58 PM on March 5, 2010
If you want to go that route you're going to have better luck selling a "product". And if you're just getting started you don't want several products you want one single product. The question you'll get asked is "what pain are you solving" and "what is your solution to this pain". Once you get the money you can course correct but solve one problem first and go from there.
You're other route is via bank loans or credit.
Now the other issue where you're not coming off too attractive is why do you need additional capital to grow?
"We've tried bootstrapping w/ personal funds, but are now in debt even though people are increasingly beating a path to our door. "
This indicates your business is broken. How do you prove you can grow if you can't support two founders without going into debt? If your pitch is "we need money to grow or we die" then warning bells are going to go off all over the place. Your pitch needs to be we have more work and income then we can handle so we want to grow to support the continuing demand. Solve the problem above and you'll be able to both bootstrap and be in a better position to seek outside funds.
posted by bitdamaged at 12:58 PM on March 5, 2010
If your business can afford to pay 8 to 18% for medium to long term capital, you might find that private placement financing meets your needs, particularly in today's commercial banking environment, which is unusually tight. Essentially, you'd get money from one or more high net worth individuals, under terms you negotiate with them. Generally, you'll pay several points above prime rate for the money, give liens against your business receivables, equipment and any other assets, plus personal guarantees over and above the net worth of your business assets (if your borrowing goes that high), and you'll have to submit audited financial reports to the investors as long you have their money, among other common terms.
It's a less rapacious form of financing than VC money, but more expensive and intrusive than commercial bank lending. But I doubt, with your short business history, and lack of profitability, that you'll find commercial bank financing in these tight credit times, so private placements may be your only realistic means of finding capital in the amounts you need.
posted by paulsc at 5:49 PM on March 5, 2010
It's a less rapacious form of financing than VC money, but more expensive and intrusive than commercial bank lending. But I doubt, with your short business history, and lack of profitability, that you'll find commercial bank financing in these tight credit times, so private placements may be your only realistic means of finding capital in the amounts you need.
posted by paulsc at 5:49 PM on March 5, 2010
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posted by GuyZero at 10:57 AM on March 5, 2010