As an independent, I don't have to worry too much about growing my business or finding capital to do so. There are only so many hours in the day. But anyone who has employees, products, R&D, facilities, etc to deal with, definitely has to worry about this stuff. In many meetings of the Vermont Software Developer Alliance I have learned about the issues that companies face. Their options seem to be limited to going with a venture capitalist who will likely want more involvement in your company than you want to give, or go with a bank which requires collateral - and that often ends up being personal property: your house, your car, your first born.
Yesterday, one of the board members of VTSDA, coordinated an amazing meeting that had three bank presidents and a partner of a venture capitalist firm on the panel and a room packed with owners of area software companies.
I certainly learned a lot more about this area of financing than I had ever known before. The notes from the meeting will be posted on the VTSDA website in the near future.
Some of my own takeaways from it were:
1) A banking 101 concept which is the 5 C's of lending: Cash Flow (and like “cash”, it is king), Credit History, Character, Conditions and Collateral. This link replaces Credit History with “Capacity” but the definition seems to be the same
2) Everyone criticizes banks for being so conservative about loans. All three bank presidents reminded us that they are playing with “our” money (as in: we, the people who have our accounts at their bank) so it is their requirement (and the law).
3) The banks actually loan money to the VC's, since the VC's are good for it. Then the VC's can use that money to make the risky loans.
4) The VC's are looking for an ROI of 3 to 5 times their original invesment in 3 to 5 years. So if they loan you 100,000, they are doing that based on an expectation of you doing so well, that they will get 300,000 - 500,000 over those years. Imagine how well your business needs to do to accomplish that.
5) The VCs get deeply involved so they can do what they can to ensure #4.
6) VC's are interested in “what's hot” regardless of how good or bad it might be in the long run. Hot stuff can earn hot money quickly. Most VCs will be going after the same types of trends.
7) Bankers should have access to people with serious knowledge of the software industry, though that may not necessarily be the person you talk to. They can leverage corporate resources. If that's not available, walk away Renee.
8) Having a long term relationship with a bank before you are ready to ask for money is very helpful. If a banker is able to follow your company's financial history, rather than have to learn it all at once, it's a huge advantage.
9) All is not lost when considering a bank for a loan for software business, but it's the really new businesses with no track record that are going to have the toughest time.
Although the problems surrounding getting funding when all you've got to offer is your intellecutal property is not unique to Vermont (in fact Silicon Valley is probably one of the few places that doesn't suffer from this problem) VTSDA is working diligently to try to figure out how to financially incubate the software industry in Vermont. We are learning a lot and definitely getting noticed.
What makes it really exciting was the example of the two young Champlain College students who were sitting in the corner of the room during the meeting, listening and learning as much as they can. They were there because they are starting up a software business themselves. As Bruce Seifer, who has been our advisor since the beginning (he comes from the Economic Development office in Burlington) pointed out, they are the future of this industry in Vermont and we definitely want to find ways to enable them to realize their potential.
We also talked about the problem many local companies, who are actually growing, are having finding not just money, but enough skilled IT people in the area. Of course, I've written about this a lot here and on my other blog.
All of the above is from my memory and what my own experience allowed me to absorb. Keep an eye on the VTSDA site, for a more detailed and clear report from the meeting.