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Sunday, 11 October 2015 23:26

ROUNDTABLE: Entrepreneurs have more funding options than ever, but awareness still lags

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Kim Pasquino, portfolio relations manager for Start Garden Kim Pasquino, portfolio relations manager for Start Garden PHOTO: Katy Batdorff

GRAND RAPIDS — While capital and credit remain more readily available these days for most small business owners, advisers need to do more to educate their clients and generate awareness of the funding options.

That’s just one of many observations from a panel of professionals who work with early-stage and startup business owners on financing who participated in a roundtable conversation on capital hosted by MiBiz. Participating in the discussion were:

  • Tom Coke, director of compliance at CrowdFundConnect
  • Jamaal Ewing, microloan program manager at Grand Rapids Opportunities for Women (GROW)
  • Harvey Koning, attorney and partner at the Grand Rapids office of Varnum LLP, which sponsored the roundtable 
  • Kim Pasquino, portfolio relations manager for Start Garden
  • Ray Reitsma, West Michigan president and senior lending officer at Mercantile Bank of Michigan

Here is some of what they had to say about what they are presently seeing in the marketplace.

What do you see emerging for capital and what small businesses need right now?

EWING: The businesses that I’ve met with most recently are looking for alternative financing even before they go to the banks. Our program is designed for businesses that can’t attain traditional financing, so we see them anyways, but a lot of times they’re coming to us first and we have to kind of backtrack in order to go apply to a bank or credit union and meet that requirement.

KONING: In the startup community, I compare things to two years ago or five years ago. There are so many more resources now. Start Garden is going full steam doing its thing. There’s Emerge West Michigan and their accelerate program. There’s just many resources out there (to support entrepreneurs). It just creates a buzz and excitement that wasn’t there two, three, five years ago.

REITSMA: I’d agree with that. I think we’re seeing more awareness and use of some of the programs that are available through the SBA and the MEDC and those types of entities. Although there’s more awareness, it can certainly be built to a greater level as time goes on.

PASQUINO: When (Start Garden) started three years ago, that $5,000 channel was really just to get things flowing, to get the ideas out there and get people working on things. I think collectively Start Garden’s a piece of that, but certainly that’s grown. The latest incarnation and strategy of what we are doing now is that for those who are gaining traction, our role now is to build for that Series A (capital round). How do they get ready for that? What are best practices and so on? We’re working with our founders through that process.

COKE: I’m seeing a really cool coalescence of all the different funding groups. I get to spend time outside of Grand Rapids and watching people in Chicago, Indianapolis and Cincinnati knowing what’s going on in Grand Rapids. We kind of know what’s going on down there, and I’m starting to see the desire to come together a little bit more and maybe treat the Great Lakes as a region and not be city-specific. There’s a lot of that going on right now.

I’ve also seen a lot more investors saying, ‘I want to invest locally. I want to invest in my region. I don’t want to just ship my money off. I’m learning more about the vehicles that are available for them,’ which helps entrepreneurs and has the trickle down effect. Entrepreneurs can look to their local community a little bit more than they did five years ago, let’s say.

Jamaal mentioned that small business owners are looking for alternatives for financing instead of that traditional bank loan. Why? What’s driving them in the direction of alternative forms of financing?

EWING: I’m not sure what’s driving it. A lot of the people we deal with are for smaller dollar (loan) amounts. They are in that $10,000 to maybe $25,000 range. It could be a situation where they’ve had interaction with their bank previously for a loan that size and maybe they were turned away.

REITSMA: I think a lot of it centers around the fact that there are participants here around the table that talk about taking an idea from the incubator stage to something that’s a little more proven. That’s the bank’s sweet spot. We like track records and that type of thing, and so the valuable service that gets provided is to move it from the idea stage to the testing to prove some viability, and that makes a great bank client. But until you get to that stage, it’s a little tougher because we’re dealing with our depositors’ money as opposed to an individual decision that an investor may make.

PASQUINO: Typically, you don’t see startups asking to do a bank loan, so you have to go to that more personal route. With the housing market, I have a lot of founders that are maximizing home equity loans, personal lines of credit or credit cards. You see all of that kind of stuff, and I don’t know if you can get away with it. Not everybody can do that, unless you can find a cofounder that has the ability to help you just to get that early traction.

KONING: There are certain businesses where if you can demonstrate the ability to pay the money back, you can get a bank loan. If yours is the sort of company that has the potential to go from a small startup to something really big, you might be able to get some interest from the startup funding community.

The people that struggle are the people that are small businesses that will probably always stay small businesses but aren’t bankable yet. So if you’re looking to open a deli, you won’t be able get startup funding for that and you might not be able to get bank financing for that until you’ve got a little track record under your belt. So it’s that other group of small businesses that are looking for some alternatives.

 COKE: The other side of this equation is that (when) I graduated from Forest Hills Central in 1998, I don’t think I knew anything about entrepreneurism in Grand Rapids. Now I can’t go around the city without hearing about entrepreneurism and things happening. So there’s just a lot more entrepreneurs. I spend time on college campuses, and these kids who graduate with no job prospects are saying, ‘I’m going to go start my own company. I’m going to find a way to alternatively finance this and get a company off of the ground so I have a job.’

We’ve heard for so long in Michigan that we needed to change the culture. Are we in a new era of entrepreneurism?

COKE: I actually think we shouldn’t say it’s a new era. There are a lot of entrepreneurs in Michigan, especially Grand Rapids. We were built on the backs of entrepreneurs. I think it’s the type of entrepreneurship and when people enter that flow that’s changed. 

REITSMA: Over the years, I think, what we saw was a person who became an entrepreneur acquired a skill through some activity they were involved in or otherwise. They parlayed that into a business. The contrast to today is the intent is to start a business and I’ll go find a skill somewhere or an idea and make it happen. It’s a little bit of a different path, but the entrepreneurial bent has been there for a long time. It’s changed its shape a little bit.

KONING: The entrepreneurial history runs pretty deep and that’s a big strength of our area. I think what’s new is the whole concept of high risk, high reward, and large investment on the front end. That we’re going to put a big chunk of money into something right now and it’s either going to happen or not happen in a couple years and it might go bust. That’s sort of a new mentality and a new thinking for our area.

PASQUINO: We were talking earlier about Gen Y: Do they have a distaste for corporate life? Do they think, ‘I can set my own rules?’ Maybe there’s something to that as well.

With the change in thinking out there, how is all of that altering how each of you do business and how is this forcing changes to access capital and credit?

COKE: I’m talking to a lot of people who were big corporate people who were either let go or lost a job or the job just doesn’t exist anymore, and now they are at 55 and they think, ‘My career’s not over. I’m still young, vibrant and healthy. I should be working.’ So they’re starting companies with their friends in industries they know pretty well and trying to change something and make it better. We’re seeing a lot of baby boomer generation folks turning to entrepreneurship because they have great skills. They have to learn a lot, but they’re open to learning, generally. There is all across generations a big change.

KONING: The world has changed in 20 years. There’s so much more technology. There’s so much more information on the Internet. Everybody is connected and it created more opportunity for more people than there used to be because anybody can get in on the game now. Anybody can get access to information. Anybody can get the equipment and computer resources and things they need to try some newer technology-based business.

REITSMA: It makes the relationship side of the business much more important. You’re a resource and you connect clients to each other and do those types of things to build your community because that’s what really makes them go. Technology provides a great platform to make that happen.

That means it’s more than the money you are providing. Do you owe a duty to those entrepreneurs that you’re funding to help sharpen their business acumen and make contacts in the marketplace? Have you taken on more of a consultant role than just serving as the provider of money?

REITSMA: The focus on that has certainly increased. It’s always been part of the relationship to help build skills and build awareness. Entrepreneurs in general have a very strong skill set related to something. Very rarely is that finance. So as a financial provider you have a great opportunity to add value to that situation with good financial advice, help them build a team with a good accountant and a good lawyer and other contacts in the community that can help them with wherever they’re trying to go. Helping them get there is the real capital in the relationship. The capital is the commodity that makes that happen, but all those things that go along with providing that capital is really the heart of the matter.

EWING: Our program is designed so we stick with the business throughout the life of the loan and try to ensure that they succeed. Each quarter, we request their profit and loss statements and kind of go over them with them just to see if there are any glaring issues that need to be addressed. We also try to meet with them every month just to see if there are any other resources that they need and we can help them with our counseling and training.

PASQUINO: That has always been part of Start Garden’s DNA from the very beginning. Here, in the effort to create this ecosystem where you begin to draw talent and grow the talent base, it is leveraging the corporate partners. When we started three years ago, they had an interest in participating, but they didn’t know how that was going to look. Three years later, we’re seeing them step up with dollars to help with that. From commercialization to strategy, they know how to grow things big. So we feel that that’s part of our role, to continue making those connections where it’s appropriate.

Is today’s generation of entrepreneur, no matter what age, receptive to having you involved in the business? Or do they just want you to give them the money and get out of the way?

REITSMA: Absolutely, they’re receptive to it. It’s part of their DNA to be connected far more than they were 20 years ago. They’re receptive to it and they crave it, and it’s a great thing to be able to provide.

PASQUINO: I do see that that’s true, especially with those kinds of connections that can help them grow the business. Where I often see that they are a little resistant is in the makings of a CEO. It’s rare that the founder that has the idea has all of the makings of a great CEO. They just have a different skill set. So at what point then does it make sense — if you really want to take off in the business — to bring in those kinds of resources to the team? That’s the fine balance we work with as these companies grow.

So where’s the money going today? What are some of the emerging requests that people are asking for capital or credit that you didn’t see years ago?

EWING: Most of our portfolio is lifestyle and service businesses. We have some manufacturing, but it’s a pretty small portion. Commercial real estate is starting to go up with companies that are established or new companies that want to purchase space as opposed to lease.

REITSMA: Construction and all the things that are related to it and manufacturing are the two hottest areas for us right now.

KONING: We see funding going to many different areas, not confined to any one technology but focused on does this company have something that people have a strong demand for. Do they want to buy this product and service and, secondly, is it scalable? Can it get big?

PASQUINO: And there’s plenty of funding for that. The earliest stage investor climate here has changed. There are a handful of these organizations that do that and we work with them consistently.

We’re seeing a lot more physical products, too, which is kind of interesting. When we started, we always said, ‘Hey, we don’t know what’s going to grow here,’ so we didn’t have a certain thesis of what we would fund. We funded all kinds of businesses. I do think that that makes sense because we have such a deep design and knowledge base here (in) manufacturing and software programming. I think we are ripe for this next generation of connected things and connected objects.

COKE: The Internet of things is huge and so is digital manufacturing. The Forbes Reinventing America Summit, it’s been held in Chicago the last two years and it’s basically been a giant commercial for Michigan and the digital manufacturing revolution that’s happening here. The Internet of things is just exploding right now. There is so much going on.

KONING: And that plays to a Michigan strength because we have such a deep heritage in manufacturing, design, engineering, tooling — everything you would need to make things. Why not use that strength?

Are we seeing more people beginning to step up and invest their money in funds or become private investors in small businesses? As the boomers retire and sell their businesses, is it creating a new pool of capital?

PASQUINO: I think it is. It’s unbelievable the number of angel groups that have popped up. (There’s) Muskegon and Traverse City. It used to be just Grand Angels were the only angels here. More and more people are interested, but there’s a learning curve for that. There’s a language that goes with all that. There’s understanding risk. It has definitely changed and everybody is just getting more seasoned around it.

KONING: The capital is there. I think we lag other parts of the country in terms of getting that capital to smaller or early-stage businesses. It isn’t in our culture. (We) keep the wealth under wraps. We haven’t learned about the process of investing in early-stage companies to the same degree people have on the east and west coasts, but we can get there.

COKE: I was in a room one time here in West Michigan — I’m not going to say which event — and I knew most of them were accredited investors, if not all of them. I said, ‘Raise your hand if you are an accredited investor that can invest in startups through a Reg D offering,’ and like two guys raised their hands. I asked, ‘Raise your hand if your net worth is over $1 million.’ Everybody’s hand went up. ‘Raise your hand if you made over $200,000 a year for the last two years.’ All the hands went up. People are now more and more realizing that, ‘Yes, in fact, I qualify by the standard (for an accredited investor) and I can invest in some of these things.’

REITSMA: One of the progressions that’s happened over time is that maybe 20 years ago, you stayed very close to what you know as an investor. Over the last 20 years, there’s been more of a willingness to learn about something that’s further away from your core competency than maybe you were willing to undertake in the past, and the availability of technology and information certainly helps that process.

When a small business owner comes asking for credit or capital, what’s the first question they need to be prepared to answer?

REITSMA: Where are you going to be at if you get this loan? What is this loan going to do for you? Where do you expect the business to be after the influx of cash?

EWING: What other types of funding have you researched? Oftentimes, people may take only one (route). There are a number of people I talk to where Start Garden is the only place they ever went. Did you research anything else? Were you even right for Start Garden? What else have you looked at? Did you look for bank loans? Did you look at microlending?

REITSMA: My biggest question is where do you want to end up? What are the steps that are going to be required along the way and what are the financial implications of those steps? Do you understand how the operational plan and the financial plan fit together? That’s really the heart of the discussion that takes place.

PASQUINO: Really understanding the market opportunity and of that market, what’s my piece of it? Most founders underestimate how long it’s going to take and how much money it’s going to take to really build out a plan that reflects that.

COKE: One question that I think is phenomenal to ask is, ‘Do customers want this product?’ That’s lean startup 101. For a while it’s, ‘Can we build this?’ Should we build it is the question.

This seems pretty fundamental. How often do you run into people who cannot answer those questions? Do they get so stuck in the dream of starting their own business that maybe they haven’t completely thought it through?

COKE: It’s a high percentage, and it’s often tough to have that conversation with people because entrepreneurs are very close to what they’re doing and they love it and that’s their baby. Entrepreneurs don’t see the world in the same way non-entrepreneurs do, so sometimes they think, ‘This is a sure thing. Everybody will want this.’ And it’s like, ‘Nobody will ever want that under any circumstances. Please don’t create that.’ And it happens so much.

EWING: A lot of people I talk to are in the idea phase. We have classes where we try to work with them to get them from the idea phase to actually a concept, figure out their value proposition, and to kind of get their head around what the business is actually going to be. (Then we) take it from there and do some market research to consider the viability of the product.

What’s the best thing business owners can do to help their chances of getting a loan or capital investment?

REITSMA: Get your personal credit in order. If their personal balance sheet is in order, it increases the odds that they’ll have an orderly business to operate. The second is to have that full-fledged plan that encompasses the operational, the sales and the financial side and that they hang together — and that there’s some proof for the revenue and what the ingredients are that kind of stands the test.

Do people really want this product? Do you really know how much it’s going to cost? Do you know what overhead you’ll need to support this operation? What kinds of terms will you have to offer and what kinds of terms can you get? If you have all of those types of answers, you have a pretty good plan, and that’s the type of thing that engenders success when you go to any type of lender.

EWING: Just use all of the resources that are available. Not everybody is good at writing a business plan or creating financial projections, but there are plenty of good resources that can help at little or no cost. Make sure that business plan and operations plan is a professional presentation to that loan committee. It increases the chance of getting the loan.

COKE: Do your research when you’re raising capital, and know if you need to raise capital because not everybody needs to raise capital. One of the trends I’m seeing is people saying, ‘Actually, I’m going to hold off. I have some friends-and-family money. Let’s go test our assumptions with this before we go get $300,000 and make some good decisions first.’ Know what you actually need and why you need it.

PASQUINO: When I’m talking to people, I love the slide that’s talking about the risks they may encounter and some strategy about how they’re going to manage that. Going into it, if you ask that question and you say, ‘There are no risks. It’s a huge market and there’s demand for this,’ (then) you’re not thinking objectively enough about what it is you’re starting up.

What’s the biggest mistake you see people make that ruins their chances for the loan or investment?

REITSMA: It’s failing to acknowledge the risks. There are risks in every business venture and if you turn a blind eye to them, that’s a red flag.

COKE: I always encourage people that I meet with to be careful of easy money. If you ask someone for money and the check comes very, very quickly, look into what their demands are and what you’re actually signing away on. I saw a company that gave away way too much of the company, gave away significant rights. It had a great product for their customer base, but it destroyed the company. They never made any money off of it but the investors made a ton of money and took them to the cleaners.

Be careful: Understand that sometimes, good money is money that takes a long time to get. You have to ask a lot of questions and meet with people that are really smart because they want to make sure you’re investable.

KONING: It’s a big mistake to act entitled to a loan or an equity investment. Just because you have an idea or you started a company, you are not entitled to equity funding or a loan from the bank. You have to explain what’s in it for the lender or the investor. For the lender, (it’s) how they will get paid back. For the investor, how will they make a big return on their investment? The smart entrepreneurs listen and adapt their message and their business to meet the needs of the people from whom they want the money.

REITSMA: Whatever skin they have to put in the game needs to be in evidence. The plea that goes along the lines of, ‘my idea and your money, we’re going to go far’ — it has limitations.

PASQUINO: What we’re seeing in really early-stage investing — where we are taking an enormous risk, and more chances than not our money goes to zero — it is understanding that you’re going to give up a little bit more, and if you have somebody that has a term sheet on the table and you think you’re too diluted, if there’s not somebody else offering you money and you want to create your business, it’s not always smart to walk away. If you can really run and validate, you’re going to be able to make that up. There are ways you can make up that dilution piece of it further down the road.

COKE: It’s a two-way street, and so you have to be very careful not to push someone away when they are the right person for you when they want something for their risk because they deserve it.

REITSMA: Understand where you are coming from. An equity provider will not play the role of a debt provider, and a debt provider will not play the role of an equity provider. To understand who you are talking to and what they want and how your business plan fits with their sweet spot is really important.

COKE: There are a number of times I have a conversation where somebody says debt when they mean equity, and equity when they mean debt, and you ask them to define those terms and they have no clue.

KONING: Lenders lend based on the business’ ability to repay as it exists. Equity investors invest with the hopes of something greater in the future. If you have the repayment capacity now, you can talk to a banker. If you do not have any means to repay a loan, then you need to talk to an equity investor.

Where does crowdfunding fit into the equation? It seems to be finding a role in funding for Main Street-type businesses.

EWING: It does fit in for Main Street businesses. We’ve had some people that we lent to that have actually used the crowdfunding route for a portion of their funding needs, and then come to us for the rest. Crowdfunding is a great complement to traditional lending.

KONING: Crowdfunding is intriguing, but it’s uncharted territory. It remains to be seen how it will play out. It’s one thing to throw $50 at a Kickstarter thing. It’s another thing to put thousands of dollars into an investment, and that’s where we’ll need to see how it plays out in the coming years. As people make the investments through crowdfunding and a certain percentage lose their investment, will the model survive? Will regulators let it continue? Will people still be interested? That’s what’s going to be very interesting to see.

REITSMA: In my mind, it lends a lot to the commoditization of money. There are certain instances where you need the commodity and that’s it. But if you need advice, counsel, dialogue and more connectivity with people who can influence what you are doing, maybe a bank is a different place to achieve that type of goal. There’s a continuum of financial needs. (Crowdfunding) fits in a certain slot and it runs more along the commoditization of the process, as opposed to the relationship part of the process.

COKE: What I find fascinating … with Kickstarter and things like that is I can validate my company by it. If I can get $1,000 on Kickstarter or get a thousand people to give me $50, suddenly I have a thousand customers. The non-equity crowdfunding — with its rewards model — as long as you deliver, is a great way to test your assumptions at a relatively low cost in the grand scheme of things. Investment crowdfunding: There just hasn’t been the activity.

We’re doing what we call deal syndication online. We don’t call it crowdfunding because banks won’t even let us in the door when we use the term crowdfunding. But we do a lot of online deal syndication, and I’m seeing more and more accredited investors turn to it and use it, not as a way to do an entire deal, but as a way to complete the back end of a deal.

But we just haven’t seen that at the state level in Michigan. We’ve had campaigns in Wisconsin and Indiana and the other states I have a knowledge of, but there just hasn’t been the activity at the state level. Part of that is investor education.

PASQUINO: We have funded companies because they have done phenomenal Kickstarter campaigns. It’s a great way to get that market feedback. But we have not had any companies that have done the investor (model).

If we get back together in two years, what do you think we’ll talk about?

PASQUINO: From my perspective, I think we will see some exits from some of these companies (that have received capital investments), which is going to change the complexion entirely. When you have men and women that have gone before and want to turn around and mentor and support and then start again, that’s a great attractor to this region.

KONING: More knowledge and visibility for the investing and entrepreneurial world means there will be more investors and entrepreneurs than there are now. The other thing we’re going to see in two years is that Michigan and Grand Rapids will have a much higher national profile as a place for entrepreneurs and startups, and that will be huge.

EWING: The technology sector is probably going to get a lot bigger with social media and technology.

REITSMA: Bank participation in the I.T. and life sciences areas will continue to increase. The notion of building a track record will continue to develop and make it easier for banks to participate as these companies achieve some level of maturity with the type of consistency that banks find attractive.

COKE: I think something really cool is happening right now. There’s a culture clash a little bit between the generations, and one of the things about the baby boomer generation is a lot of them are retiring and they have a lot of free time. We have some phenomenal executives and experienced folks around this city. … This is a city where you can go up to an older (executive) and get candid advice — not always nice advice, but the right advice. So we’re going to have a really large continuum over the next few years of the baby boomer population that retires and are part of this community helping these companies, sitting on boards or coming on as an adviser. Young people should tap into that.

Read 5971 times Last modified on Monday, 12 October 2015 14:36

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