Funding Availability in Today's Economy – Don't Despair, the Dollars Are Still There
Though the current economic crisis is headline news every day, recessions are certainly not new to the US economy. In fact, today's business slow down is the 22nd recession or depression in the US since 1900.
For the prior 21, the average duration was 14.4 months, trending towards shorter recessionary cycles. Before World War II, the average recession lasted 19.1 months, but subsequent recessions and depressions lasted an average of 10.2 months. Clearly, our economy is quite resilient and there is no reason to believe that we will not come out of this recession stronger than before.
Though not, perhaps, for the faint of heart, opportunities are there for the right entrepreneur with the right vision and plan. Innovation is known to surface during very challenging circumstances. History shows, that even in times of economic turmoil, entrepreneurs start and grow companies, and well–run companies can grow and prosper. There are a number of successful companies in existence today that were started during so-called "hard times."
Entrepreneurs have two primary motivations for starting businesses in an uncertain economy: desire and necessity. Currently, there are motivated entrepreneurs who are starting new and exciting companies and who are not discouraged by the economic events of the past 12 months. Entrepreneurs are driven to succeed in spite of TARP, $800 billion economic relief programs, $50 billion Ponzi schemes, meltdown of the sub-prime mortgage business, credit crunch and virtual disappearance of the IPO market. Even after watching companies like Washington Mutual, Lehman Brothers, Merrill Lynch and AIG suffer financial catastrophe, true entrepreneurs still want to live the dream of starting and growing great businesses.
Having access to the right amount of money, at the right time and at the right terms is key to the success of any size business. Despite the doom and gloom reported in the media, funding is certainly available for individuals and companies that are properly prepared and can demonstrate the uniqueness and scalability of their product and service. In 2008, more than 3,800 companies received $28.3 billion in venture funding. During good times and bad, investors are motivated to invest in management teams that they believe can execute on a strategic vision. Investors are attracted to management teams that have started , grown and successfully exited other companies and who also possess specific industry experience and contacts in that sector.
Scalability is another factor that influences investor appeal. Investors realize that they are putting capital into companies that have relatively small amounts of revenue today, but have the opportunity to be much larger companies in the not too distant future. Companies only have the capability to scale if they are selling into a market with sufficient enough size. Investors certainly prefer companies with a large potential market, since a small percentage of the market, still translates into a robust company.
The past several months have seen large declines in all stock indexes. The Dow Jones Industrial and the NASDAQ Composite are both down almost 40% in the past 12 months. Private companies are seeing similar declines in their values. These declines in value have created buying opportunities for companies that have access to capital and are willing to spend to acquire competitors at distressed prices. Great fortunes have been made in recessionary times by smart companies and investors acquiring assets at a fraction of their potential value. Investors are not only looking for organic growth opportunities for their companies, but also growth opportunities through the acquisition of struggling competitors.
In today's economy especially, investors are being very cautious with their capital. However, a few sectors are seeing heightened enthusiasm and interest from the venture capitalists. The clean technology sector which comprises alternative energy, pollution and recycling, power supplies and conservation, continues to attract investors. Another sector showing interest from the venture capitalists is life sciences, which includes biotechnology and medical devices.
Today's difficult economic climate and investor caution have resulted in many investors spending more time looking at seed stage and early stage opportunities and less time at later stage and expansion stage opportunities. Seed stage and early stage investments typically involve smaller amounts of capital and much lower valuations. In 2008, seed stage and early stage increased, while later stage and expansion stage declined.
Entrepreneurs today should be encouraged by the sources of capital available to them. One bright spot for technology entrepreneurs in particular is the part of the new federal stimulus package that calls for $37 billion in spending in three high-tech areas, producing an estimated 900,000 jobs in the first year.
On a more local level, NJ has one of the region's most active angel networks in Jumpstart NJ, with investments averaging $4oo - $500 thousand. Jumpstart is providing seed stage financing to early stage companies. NJ is also fortunate to be home to AngelVineVC, which brings together angel investors and more than two dozen leading venture funds in order to strengthen the community of angel investors interested in funding early-stage ventures. The State of NJ provides loans and loan guarantees to early stage companies, through the offices of the Economic Development Authority. NJ is home to several early stage venture funds that support entrepreneurs in the region with capital at the seed, start-up and early stages of their businesses. These early stage venture funds typically invest in pre-revenue companies or companies with small revenues. Venture capital funds, private equity funds and hedge funds usually invest in later stage companies with $5 plus million in revenues and positive EBITDA.
Opportunities to present an idea or company to an investor group should be treated with the highest level of professionalism. Investors see companies all day long that project to grow like the proverbial hockey stick, but few if any, ever achieve that growth trajectory. Your business plan and investor presentation should be concise and adequately explain the opportunity at hand. You need to be persuasive to convince the investors that you are the right team to execute the business plan. Your financial projections need to be detailed, accurate and err on the side of conservatism. Remember, "you only have one chance to make a good first impression." Be prepared to show why someone should take on chance on you and your vision!