When venture capitalists say “NO”—creative financing strategies & resources, by Ron Peterson

A variation on mutual funds is the closed end fund specifically developed for smaller, private and financially troubled company—the Business Development Company or BDC. Traded on national stock exchanges since their creation by Congress in 1980, these companies may raise additional capital by selling stock (see www.NelsonMullins.com, Janis F. Kerns) and be a source of capital for you. Some of these funds include: Patriot Capital Funding, Kohlberg Capital, Highland Distressed Opportunities, Hercules Technology Growth, Ares Capital, American Capital Strategies, BlackRock Kelso and MCG Capital.

BioSante Pharmaceuticals did largely the same in 2009 when the firm needed cash to make it through the FDA trials for its sexual dysfunction product for women. The firm offered $38 million in an all-stock acquisition for Cell Genesys, a firm sitting on $36 million in cash but not much in the way of products or prospects. It’s not necessarily so clean and simple, since there’s a Cell Genesys note due four years later, but this way the struggling firm gained cash and time.

Many large companies are struggling with their present business model, mired in highly competitive industries with steadily declining margins. If you see a way they can extend their business in new directions with better margins, show them just what you can do. Start with their problem and then show your solution. Companies as large as IBM have considerably altered their business emphasis in response to opportunities. Spend time in honing business models, don’t limit funding avenues, and offer help.

While you may be unsuccessful getting a check written by angel groups or venture capital firms, it wouldn’t hurt to ask if any of their members could provide mentoring for you. The few hours that a person could spare monthly might prove especially valuable for you while the mentor has a chance to become a lot more familiar with your company than they ever could from just an investment briefing. Professor William Miller and Randy Williams were selected as “Most Mentoring Angels” one year by the International Angels Group in Silicon Valley (www.Angelinvestors.org). The Silicon Valley Association of Startup Enterprises puts on a dinner program to instruct young companies in how to best use the mentoring process, with details at www.svase.org. Additionally, the people associated with these groups are a rich source of board members that can provide not only guidance but also access to funds. A number of banks have funded themselves by requiring that all board members invest a substantial amount of capital in the bank before taking a board seat, but don’t expect that for other types of businesses.

Shorebank Enterprise Pacific of Astoria, Oregon is one of 600 Community Development Financial Institutions (CDFIs) in the U.S that provide funding and extensive technical assistance to new businesses. Shorebank worked with Oregon State University researchers to develop innovative technologies, increase access to capital, and open new domestic and international markets for seafood products that are landed at Astoria. Nisbet Oyster is one of dozens of companies to make use of the technical assistance skills and loan or equity funding by Shorebank. Nisbet uses a new high-pressure technology for shucking oysters that reduces bacteria, extends shelf like and lowers labor costs, permitting the company to expand its market domestically and overseas. Cash from Shorebank allowed their technology to be used for opening new markets.

Shorebank and other CDFIs (www.cdfifund.gov) are financed through the Riegle Community Development and Regulatory Improvement Act of 1994, aimed at providing incentives to traditional banks and thrifts. Total awards made over two decades amounted to more than half a billion dollars. CDFIs use flexible tools including loans and equity investments along with grants and deposits. www.newamericancommunities.org, the website for New American Communities, documents many areas that sponsor community-based entrepreneurial development as well as examples of companies that have prospered by using them. Kansas Venture Capital, Inc., a CDFI, invested in 30 companies and repaid the original $5 million invested in them by the State of Kansas. The Colorado Seed Fund saw its investments dwindle, however, causing it to refocus. Community Development Funds are detailed at www.cdvca.org. Greater Rochester Enterprise (GRE) in New York is hoping to raise a local venture capital pool to facilitate economic growth in that region. GRE is itself a $14 million effort to promote job growth and business investment. Community economic development has the attention of American business interests as well, with companies such as Citigroup providing over $67 million in grants around the world, through their foundation, to facilitate financial education, building communities and entrepreneurial development.

The Rural Entrepreneurship Initiative was begun in 1999 as a -partnership between national organizations and several states to promote new businesses in rural America. A number of guides are provided through their publications including Equity Capital for Non-Metropolitan Businesses: An Introduction to Alternative Sources and Directory to Related Web Sites at www.rupri.org/pubs, the work of the Rural Policy Research Institute and Five Myths About Entrepreneurs: Understanding How Businesses Start and Grow, authored by the National Commission on Entrepreneurship, was found at www.ncoe.org. Development events and publications are found at www.accra.org.

The microfinance movement had its start in 1976 when an economics professor in Bangladesh, Muhammad Yunus, loaned $27 to several impoverished women stool makers in a tiny village to buy raw materials for their output and launched Grameen Bank. That act plus the tireless efforts he made thereafter won Yunus a well-deserved Nobel Peace Prize in 2006. Yunus is famously quoted as saying “All poor people are entrepreneurs.” In person he is entirely self-effacing and mild yet a riveting speaker and he generates passion wherever he appears.

Micro-loan programs are available in the U.S. and can spell the difference for people with vision and energy. A $5,000 loan from a public fund in Southwestern Virginia allowed a husband and wife team to start a cleaning business that now employs fifteen others and is growing steadily. The loan has long since been repaid with interest and the record of default on this type of finance around the world is miniscule, roughly 98%. www.accion.org lists hundreds of micro-loan organizations in the U.S. and Latin America and has sponsored a new $18 million fund for Latin America, with contributions from major financial institutions. U.S. sites are exclusively detailed at www.accionusa.org. The Association for Enterprise Opportunity (AEO) is an association of 500 U.S. microlending organizations at www.microenterpriseworks.org. The AEO lists fourteen sources of federal microenterprise funding including the little known Office of Refugee Resettlement as well as Community Development.

Grameen America, a microfinance nonprofit, opened in New York City in 2008 and Kiva.org, a person-to-person microfinancing Web site, began making loans to U.S. borrowers in 2009. Keep in mind that most microlenders are likely to apply what's often called a “double-bottom line” lending standard, which takes into account not just the company's profits but its social impact. “You want to show that you're helping the community grow," says Wharton professor Keith Weigelt. For example, microlenders may want to see that you: hire within your neighborhood; upgrade your storefront; and buy goods and services from other area businesses. “They'll want to see that the money is flowing within the community and helping the local community.”

Royalty Capital Management in Lexington, MA felt that the technique didn’t require a home run like most venture capital-backed investments to be able to cash in and is actively promoting the form of investment. While new for many, royalty-based financing dates back to early mining days, when companies needed money for oil, natural gas and minerals, and has also been used for government-funded economic development programs.

Nearly a half-century ago, this was the strategy David Packard used with a group of engineers who had come to them with an idea for a new display technology. Packard sent them away with his blessing and an agreement to buy their company at a future date of they pulled off the design. The team did just that and helped to create the modern diode industry. (Characteristically, Packard bought their company for several times the agreed-upon price.)