The New Reality

As the new economic realities set in, small businesses and fledgling entrepreneurs are grasping for legitimate information and resources for guidance when trying to start and build their businesses. There have been a plethora of funding programs both public and private that purport to have the answers to small business development and growth.

Many of these programs are excellent if the candidate meets stringent requirements. However, other programs can be misleading and don’t prepare the entrepreneurs for the reality of their business model… it will likely NOT be fundable for a variety of reasons. This has mostly been true especially since the lessons of the dotcom era. There is a bit of movement from the SBA this year with new program dollars, but the borrower must have good credit, collateralize the loan with everything of value, and be certain of their market(s). There will be no other loans available to the borrower until the initial amount is fully repaid to the SBA lending institution.

Raising Capital in the Down Economy

For companies looking for 3rd round funding, since they’ve exhausted friends, families, and fools, they now need serious capital for infrastructure, manufacturing, marketing etc. This money has been very hard to come by, especially in the economic downturn, and especially in Nevada.

The entire Angel and Venture Capital (VC)  industry has shifted in recent years, from early stage funding to funding after revenues, or more hysterically, only funding after profits are realized. This used to be the position or institutional investors, so the early funding for high-growth companies is much tougher to get, and impossible for lifestyle companies. Of the hundreds of thousands of new businesses started yearly in America (I’ve gleaned varying #’s in my research), only 2500 are funded by VC (less than 1%), and these are companies that expect huge growth in billion dollar markets. There are only a handful of those each year, like the new coupon sites LivingSocial & Groupon,  the rest must fend for themselves.

There are plenty of great ideas out there and given a sustainable model,  they are worthy of market share, as well as funding, but because they will never produce earth-shattering returns, the professional investors wont touch them, and complain that there are no “deals” out there. Since VC’s are looking for a $100M company in a billion $ market, the deals are few. In Nevada, even fewer…

New Rules for Recovery

But what about a $10M company in a $100M market; or a $1M company in a $10M marketplace? Are these worth funding? Are these going to provide “enough” of a return to the investors? Are they going to drive the economic recovery?  You bet. These are the engines of this economy, not the Dow Jones average, nor the VC funded startups. It’s the little 1-15 person companies, sprouting up that need support and funding. It’s not up to the VC’s to support these ventures. Its up to the communities and successful entrepreneurs in each city across the US to step up and help another entrepreneur gain traction through dollars and support.  70% of job growth will come from these small innovators. If everyone does a little then it limits risk and maximizes potential, and if managed correctly, creates a nice return for investors, and their communities, so everyone wins.

There is currently a movement to develop some sort of VC fund in Nevada, and the versions vary from a state fund to a private fund to a hybrid of the 2. As these strategies are being worked out, the money aggregated and the parameters of the fund developed, there is a movement to put together an intermediate solution that would come together in a matter of weeks, not months. This solution is a smaller fund to help small businesses who don’t qualify for VC funding, nor do they qualify for conventional bank lending. This fund will provide interim loans out of a fund developed through local public/private entities, and managed by a separate organization to limit conflict of interest and maximize each entity’s core competencies. This is achieved by utilizing more than just  loan oversight, its achieved by having entities focused on supporting the startup w/mentoring and guidance both before and after the loan is made. These loans are typically from $5000- $35,000 loans, and will still need to be collateralized, but with less-stringent stipulations than SBA or conventional loans .

This mechanism is believed to be the first of its kind in America, and should produce results on par w/the very best small business programs in America.  Nevada will go from being a laggard in recovery to leading the way through entrepreneurial endeavors in the next 18 months….    By this time these companies will be ready for the VC fund if it develops, and the bigger fund ought to be ready to lend by then.