Capital Gains

Making the Connections

When Steve Grushcow, CEO, and David Ries, COO, started their web maintenance service, Edit.com, they deliberately avoided borrowing from friends and family, hoping instead to convey a more serious attitude that would attract professional investors. The two entrepreneurs built on Grushcow's enrollment in Columbia Business School's executive MBA program and links to investor support through the school's Eugene M. Lang Entrepreneurial Initiative Fund for Columbia students. From there, they proceeded with a relentless networking campaign to reach VCs. The proc-ess took about a year of meetings and presentations that mostly paid off in tips and advice--and eventually an introduction to an interested angel investor who decided to support them.

The investment put Grushcow and Ries in an elite group among entrepreneurs. According to the Center for Venture Research, of the 24.7 million small businesses in the U.S., just 48,000 received angel funding in 2004, earning a total of $22.5 billion.

Despite these odds, most angels give businesses a fair chance to at least know if they qualify. The Angel Capital Association lists angel investor groups with links to websites where entrepreneurs can review funding requirements and submit business plans. Generally, angels look for companies with high growth potential, experienced management and unique market advantage, such as proprietary technology or a patent. Some angels may focus on a particular industry or region; others are open to any good idea. Investments run between $100,000 and $1 million. Some angels only look at companies referred to them, so keep working on your business network.

Joyce A. Woodlen, 46, realized the value of relationships when she needed money to start Re-Joyce Medical Billing in Wilmington, Delaware, in 2004. She wanted to use her commercial property as collateral for a loan from PNC Bank, but the bank questioned just how commercial the building was after learning it also had residential tenants. Because of Woodlen's longtime relationship with her bank, Jacinta Panella, PNC's community development business banker, took charge and arranged a site visit that resolved the bank's concerns. "If it wasn't for Jacinta," Woodlen says, "I don't think I would have gotten approved."

If ATM withdrawals define the extent of your banking relationship, start working on establishing more human contacts at your bank. Months before you start your business, visit your local branch manager or business banker, and introduce yourself and your business plan. The description should be brief, but be sure to mention your interest in developing a small-business-friendly banking relationship.

Expanding your network might also turn up some unexpected answers to financing needs while helping you fine-tune your business strategy. Jan Norman, a small-business expert and author of What No One Ever Tells You About Financing Your Own Business, suggests contacting business owners in similar fields to gauge the market for your idea, preferably companies big enough not to feel a competitive threat. If local competitors balk, try reaching out to other geographic areas. While this might not lead to an investment, entrepreneurs often gain useful tips, says Norman, such as the names of equipment leasing agents or suppliers who will give favorable terms to young companies.

Other sources for reaching out to business owners are trade association meetings, local chambers of commerce, rotary clubs, new entrepreneur forums, business breakfasts and business-school lectures open to the public. "Every community has its network," says Thomas C. Kinnear, executive director of the Zell Lurie Institute for Entrepreneurial Studies at the University of Michigan, Ann Arbor's Ross School of Business. "You have to get to know the people who know the people in it."

A less conventional means to funding a business can be business-plan competitions, often sponsored by municipal economic development agencies and universities. Companies with unique ideas and ironclad business plans make the best candidates. Jay and Vicki Perdue, both 51, owners of Amarillo, Texas-based Pedal-Paddle Inc., the eponymous name for the company's land and water bicycle, won $75,000 in the 2004 Amarillo Enterprise Challenge. They credit the competition with helping them revamp their business plan after their first submission failed in 2003. "We had a better idea of the cost, how to make better projections and where our market was," says Vicki.

Each funding source will have its own criteria for judging a business, but David Terry, associate director of West Texas A&M University's Enterprize Network in Amarillo, which administers the Amarillo Enterprise Challenge for the city's economic development corporation, lists some rules for developing a winning business plan, regardless of the potential funder. Your plan should clearly describe:

  • How your business solves a problem
  • How competitors solve the problem
  • Who your potential customers are
  • How your company makes money
  • Your three- to five-year forecast of revenue and expenses

The last bullet gets the most attention from lenders and investors, so the more detail you can provide, the better. This is often the toughest challenge for entrepreneurs. "It's time-consuming," says Jerry Ezell, 33, owner of SFS Fabrication, a metal fabrication and wholesale office-supply company in Tulsa, Oklahoma. "If you're not a Ph.D. in finance, get a counselor to do it the right way."

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This article was originally published in the March 2006 print edition of Entrepreneur's StartUps with the headline: Capital Gains.

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