Something Ventured, Funding Gained
Written by Gregg Henglein
Got a big idea but banks don’t want to lend? Don’t lose that entrepreneurial spirit. You can Capitalise elsewhere! The end of the recession has entrepreneurs ready to launch new businesses and ideas. But with banks still reluctant to lend, how does the start-up get itself off the ground?
Of all the things the global recession has cost us, the loss of the introduction of new ideas through an entrepreneurial spirit is among the most damaging. But what’s transpiring now bears watching.
With the recession being declared over – despite a still shaky global economic foundation – small business is eager to make up for lost time, while the individual whose great idea has been locked inside his or her imagination for the last few years is feeling reinvigorated by the hope of a rising tide coming to lift their creative vessel.
The waters remain choppy, however, thanks to the banks. In the USA last year, venture capital firms raised just US$15.2 billion from 120 funds, a 47% decline by dollars committed and the slowest year for fundraising since 2003, according to Thomson Reuters and the National Venture Capital Association.
“Traditional forms of business financing remain stubbornly difficult to nail down,” Inc. magazine recently noted. According to Pepperdine University in California, banks are reporting increased volume and quality of loan applications. Nonetheless, the overwhelming majority of these are being rejected. Banks are simply wary of exposing themselves before the recovery is complete. But there are other avenues.
Focused Banks
Too often, those seeking capital approach the banking giants in the belief that they have the most money to give. They also, however, have opened themselves up to the greatest risk potential, which is a fundamental reason for the economic meltdown in the first place.
Increasingly prominent are institutions such as the non-profit Qatar Development Bank, which at the start of November announced its new indirect lending programme, Al Dhameen. By serving as the guarantor of the small-to-medium enterprise’s loan, QDB – traditionally a direct lender to Qatar’s private sector – will enable Qatar National Bank to offer loan assurance in a more focused, localised fashion.
“Al Dhameen truly is a premier lending product for the SME sector in Qatar, and effectively for the region,” said Mr. Ali Shareef Al-Emadi, QNB Group Chief Executive Officer. The initiative will let entrepreneurs benefit from the bank’s “extensive local experience, thorough knowledge of the market and a proven track record of supporting projects and initiatives that foster economic growth and development”.
“We are working with our local entrepreneurs and business owners to help them establish solid credit histories so that they’re able to secure future funding without guarantors,” stated chief executive of QDB, Mr. Mansour Bin Ibrahim Al Mahmoud. “We’re also focused on encouraging closer working relationships between SME owners and banks,” he added.
Community Development
The venture capitalist can profit from more than sheer profit, of course. The mechanism is com-munity development venture capital (CDVC). The CD Venture Capitalist looks to invest not only in a business with financial potential but more importantly a business with forward-looking benefits in terms of job creation or environmental impact.
In many ways, Europe is ripe for CDVC, as it’s ahead of the USA in terms of the ‘green movement’. It may take some digging, but a small or start-up business should look for smaller banks or other companies that will provide financial capital – in return for a stake in the business – if they believe they can offer a social or environmental benefit, even if tangential to the core business.
Direct Public Offerings
For decades, direct public offerings, or DPOs, have served as a way for small businesses to raise funds not from banks but from wealthy individuals or what are termed by some as ‘affinity groups’.
These may include customers, suppliers, distributors, friends, family, employees, and other members of the community. In a direct public offering, the company places its shares with those familiar with its product and management, and most likely to hold the shares longer because they feel comfortable with the company’s prospects for the future.
Regulations for DPOs were stringent for a long time. However, in the past decade those rules have been greatly simplified. As bank lending became more difficult, DPOs – including some called small corporate offering registrations, or SCORs – became a new capital-raising approach.
Looking Ahead
What’s interesting is that, in looking to recovery, Europe is ahead of the United States, as European venture capital firms – in Britain, in particular – are getting back into the game.
Figures released in May showed that venture capital investments by British firms jumped 55% in the first three months of 2010, The Telegraph reported. While the number of deals dropped in the same period, the increase in investments was contrasted with an overall drop in venture capital funding across Europe, which was down 10% compared with the same period in 2009.
As for the USA, perception is that the decline isn’t quite done yet, though there is a light at the end of the tunnel.
“The venture industry will likely see several more quarters of declining performance overall until distributions to limited partners begin to flow more readily in the coming year. Based on the current exit market, the ten-year return number – which we view as the most reflective of industry performance – won’t begin to reverse its negative trend until mid-2011,” said Mark Heesen, president of the NVCA.
Business Finance Options
Family Offices
A family office is a private company that manages the investments and trusts for a single wealthy family. Affected greatly by market losses in 2008 and 2009, family offices have shifted from those supposedly safer asset classes towards investing themselves, rapidly becoming a critical source of new venture capital.
This is not a new idea. Many well-to-do families, such as the Rockefellers in the USA, were among the first venture capitalists. As such, the family office concept really returns venture capital to its roots.
Venture Online
It should be no surprise in this day and age that, like everything else, venture capital can be raised online. Look at RaiseCapital.com, which boasts more than 5,000 investors ready to sup-port your small business. Though largely from North America, the investor list is global and investors are not limited to extending capital to companies in their own country.
Entrepreneurs who register (for US$99) can provide photos and videos of their venture idea to the site in addition to the standard text description, and also may maintain a blog through the site to keep potential investors updated on the business.
Govt Offices
Governments are in an interesting Catch-22 situation. Although they don’t want to be too liberal in their distribution of grants and loans, they also can’t afford to shut the door on the small business owner for fear of being perceived as callous to the plight of such individuals.
Economic development associations have micro loans available. Economic development centres located in many cities are usually a reasonable source of information for possible funding sources.
