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

Close behind the community colleges and nearer still, high schools are increasingly offering entrepreneurial training. Former courses in business law are being supplanted or augmented by special offerings on entrepreneurship. A course offered at Montgomery County, MD’s Wootton High School in Entrepreneurship/Small Business Management requires parents to discuss the student’s work and student production of a business plan containing separate sections on marketing, finance and growth along with an executive summary. Both Bill Gates and Michael Dell showed real business ability while still teenagers so perhaps identifying and supporting our future business leaders as early as practicable is a reasonable strategy. Atlanta, GA-based YoungBiz Inc. publishes a magazine and offers business seminars for teen entrepreneurs. Finance Academies in a number of states teach business skills to high-school students under the sponsorship of the National Academy Foundation (www.naf.org), a non-profit run by the cream of American businessmen. The Colorado Enterprise Fund along with Ms. Foundation’s Collaborative Fund helped launch a high school offering of entrepreneurship courses in Denver in 1997 known as BIZWORKS. Junior Achievement is the country’s predominant organization to introduce youth to the business world. The UK launched an effort to promote entrepreneurship among youngsters with an active mentoring program (www.shell-livewire.org./mentor).

Licensing is always a two-way street. Microsoft needed special software to fulfill demands of their big new client, IBM, and the quick way to get that technology was to license an existing product. Isis and Celera use licensing as a revenue stream while they seek to develop their companies into full-scale drug development. ChromaDex needed chemical giant Bayer’s toxicity screening technology to develop tests for the food and vitamin markets. Bayer agreed to the license in return for an equity stake instead of fees, effectively funding the company’s intellectual property. Bayer spends over $2 billion a year on R&D with only 10% of that actually ending up in products they can sell, potentially a rich resource of technology for young companies. Procter & Gamble (P&G) has 100 technologies available for licensing or sale that are listed on an online marketplace, www.yet2.com.

A growing practice involves corporate gifts of unused intellectual property to universities and other non-profits. Companies get tax write-offs and the beneficiaries hope they can license out the technology. While there’s room for abuse of the tax system in this tactic, interesting technology applies to markets that are too small for corporate giants but could fit new entrepreneurial ventures. Some of the examples include: DuPont’s gift of a drug compound manufacturing technique without acidic waste to the University of Florida: Boeing’s optical computing logic and design to Alabama A&M; and P&G’s control of skin pigmentation to the Cincinnati Children’s Hospital Medical Center. Delphion, an intellectual property consulting company in Lisle, IL has tracked many of these programs.
59. Contracts and consulting services.
Essentially, this technique uses the customer to finance the firm either through upfront or progress payments, while it develops the -product needed by the client or related products. Before its saphion batteries were marketed, Valence Technology earned revenues by acting as an R&D lab for Delphi Automotive Systems. Lynx Therapeutics provided cloning services for both BASF and Dupont, and was able to generate revenues of $20 million per year from these two giants. Support services are also quite salable. With expensive R&D pipelines, biofirms and biopharmas are outsourcing more specialty services, from IT support to clinical trials management.
60. Vendor financing.
This approach takes the form of advances to companies to permit them to deliver products. Nokia loaned over $600 million to Hutchinson for product work Nokia needed done. Some times the vendors don’t even know they are doing the financing. In the 19^th century, the Swift meat packing company evolved by essentially kiting checks. Swift had banks and checking accounts on both the east and west coasts. They would pay for cattle with a check drawn on a New York bank that had to clear through the customer’s account in San Francisco. The several weeks that it took permitted them a cash float to slaughter, sell the products, and deposit funds to cover their drafts. While that window has long since closed, variations of this type of financing may occur to you. Neiman-Marcus has taken up to four months to pay some vendors.

Vendor financing doesn’t always take the form of loans and progress payments serve as well. LaVoie Strategic Communications Group in Swampscott, MA, signed their first client, requested an upfront payment of a third of the fee, which they received, and used the money to fund the company. RealTronics Corp ordered products from office equipment suppliers, sold them and received payment before they had to pay the vendors. When RealTronics outgrew the amount that suppliers would advance, they established an escrow account for payments that only the supplier could withdraw, permitting a tripling of revenues.

In the 21st century, bred as we are on scientific advances, it’s easy to fall victim to taking only a high technology and long-term view of what’s involved in creating commercial products. If you can find a simple item that can sell you can use profits from those items to take the risks associated with bringing complex and other long lead-time items into being. The reverse works as well. Boston-based Eleven, Inc. is a company that takes simple items that already sell well and then re-designs them to become more functional. Products include a retractable leash that avoids being wrapped around one’s legs. Eleven, Inc.’s 2001 revenues were $2.5 million. Look what Starbucks did to a cup of coffee!

If you’re going to use a forum, you better be good and be memorable. I once interviewed a company on their capital needs only to find out that I had been in an audience several months before when they had given an eight-minute presentation. Their message was blurred when sandwiched between so many others and it was just another boring Power Point presentation. The problem was not that this was a boring company but rather that it is so difficult to stand out when everyone uses the identical method of making their case. Look at chapter 9 for ways around this problem.

Law and accounting firms may have their own internal investment funds along with a practice specialty in emerging growth companies. With a long history and extensive contacts, they can provide terrific introductions and leverage. 250 partners of Akin Gump in Houston, TX put up between $10,000 and $25,000 each to initiate a $5 million fund. Haynes & Boone in Dallas has a separate investment fund that made allocations of up to $2 million per year.

Even before the dot.com boom, many such firms had a history of making investments for their own partners in tax-advantaged programs such as oil drilling, or stock, bonds and real estate for their pension plans. A number set up internal funds that could make investments of $50,000 or less in hot startups that were brought into the firm as clients. In the heydays of the Internet stock market, many law firms in particular found they had to have venture capital-like funds to keep some of their most able professionals from jumping ship. When the legal press carried stories on partner earnings of firms in Silicon Valley that took equity in these firms—sometimes $2 million per year or more—everyone wanted to get into the act. Although that stock market has disappeared, the investment culture remains and the willingness to take a chance on a good idea or group is very much alive. Along with money and introductions, firms today will often provide professional services at reduced rates or with payment plans that make it easy for entrepreneurs to become clients of some of the biggest and well known.

In your area, you’ll find attorneys, accountants and business development specialists who spend a lot of their time seeking capital for clients and solving other corporate problems. In law firms, ask for a corporate attorney. In Washington, DC, as an example of what you’re likely to find in your own area, there are many such experts, but Frank Mellon’s Enterprise Business Law Group in McLean, VA is a firm entirely given to entrepreneurial ventures (www.eblg.com). Bryan Cave, with 1,100 attorneys, has a separate practice area, the Technology, Entrepreneurial and Commercial Practice Client Service Group under the direction of J. Powell Carman, a partner that has helped a number of firms achieve venture and other funding. Wiggin & Dana has an active practice in entrepreneurial and emerging companies with an on-line question and answer forum at www.wiggin.com. John Egan at McDermott, Will and Emery specializes in private equity financings, M&A, and IPOs (www.mwe.com) and David Zanardi at Baise & Miller has developed a special knowledge of biotech (zanardi@dclaw.net).

In business development, Herb Ezrin at Potomac Biz (hezrin@potomacbizgroup.com) has helped many young companies with seed funding and Avner Parnes (avner@attglobal.net) brings foreign technologies and companies from Israel and Europe for funding and technology partnerships in the U.S. Nanopowders Industries of Caesarea, Israel merged with the nanotechnology division of Minnesota-based Aveka Inc to bring metal nanoparticles to the market under the new corporate name Cima NanoTech. Aveka brought both their access to financial markets and manufacturing capability to the table while Nanopowders brought added technology in a deal promoted by venture capitalist Harlan Jacobs.
65. Political and other connections.
When looking for capital, politicians can help open doors or otherwise facilitate your development. Raul Fernandez formed Proxicom with $40,000 of his savings after working for former congressman and vice presidential candidate, Jack Kemp. With his own skills and what he learned on the Hill, as well as encouragement by Kemp, Fernandez met a number of venture capitalists and prominent investors who helped finance his growth. He sold Proxicom after ten years for $450 million. Entrepreneurs have become heroes to a number of politicians who see them as the wave of the economic future. Massachusetts senator and Senate Small Business Committee member, John Kerry states, “Small business, especially today, is entrepreneurial activity that has the capacity to make revolutions.” The voting public seems to agree and in both Massachusetts and Virginia former venture capitalists occupied the governor’s chair until moving on.

While you may have neither Fernandez’ talent nor his connections, you should think of the variety of help that federal, state and local government bodies could provide to you. No one wants to work with government agencies that involve interminable delays and paperwork, but many of them have gotten much better. While daunting, you should still check them out and at least make sure that officials know about your company and what you have to offer. On the purely political side, annual appropriations bills from Congress are loaded with “pork” and framing your needs in something quite valuable to a state or congressional district could turn the trick for you. Professionals coming out of the government have terrific contacts along with insights into the funding process. Frank E. Young, M.D., Ph.D., the former commissioner of the FDA, began a consulting company to help biotech startups find money. By the end of the first full year, Young’s company, The Cosmos Alliance in Washington, D.C., (www.cblsa.com had matched four companies up with $6.5 million.

The Yucaipa America Funds is the name of a pool of union pension fund investments. Yucaipa investment criteria specify companies that “maintain strong corporate governance practices and are sensitive to the interests of their employees.” A number of mutual funds make alternative investments in new companies and, like the Calvert Group begun by Wayne Silby, have a social agenda. Roughly $1.5 trillion worldwide is invested according to social or ethical criteria. Susan Davis founded Capital Missions Co., in Elkhorn, WI to incubate investor networks that seek social and environmental returns as well as profits. Susan has started twenty companies herself and helped found the Committee of 200, comprised of the top women in American business.

Jill Lubin’s PR firm, Promising Promotion in Novato, CA regularly has bartered PR services for legal expenses, website design, telephone installation and anything else they can find to trade. Lubin cautions that you need to put barter agreements in writing and also insure they are in compliance with IRS regulations. A number of barter organizations on the Internet will help you find products or services that you may find useful. Barter Systems, Inc., in Silver Spring, MD maintains a database of over 1,000 companies and individuals with services and products they provide. You form an account to credit and debit the value of services, in exchange for a 6% cash commission. The Reciprocal Trade Association and the National Association of Trade Exchange are both sources of barter information.