It has been said that ‘it takes money to make money.’ Entrepreneurs are often pressed to find more funds. There has been a decrease in private venture capital funding inColoradoover the last few years. Where do start-up companies find the cash they need to start and grow their companies?
Funding of Entrepreneurial Ventures Is Important.
Entrepreneurial ventures fuel the economic engine. They produce jobs, experienced entrepreneurs and team members who go on to start other ventures, products / services that provide value to customers, investment return for investors, tax dollars, employees who purchase goods/services from other companies and who pay taxes, and much more.
“For a business, cash is like oxygen. You can’t live without it,” says, Verne Harnish, author of Mastering the Rockefeller Habits. While customer revenue is the best producer of cash, pre-revenue start-up companies need other funding sources.
“For every dollar a venture capitalist or angel invests in a venture, there is an eight to ten times economic benefit,” said Brian Wallace, Managing Director of Access Venture Partners and Co-Chairperson of the Venture Capital in the Rockies (VCIR) 2012 Winter conference. “It is hard to find another investment that produces this result. For example, Access invested around $100M over ten to twelve years along with approximately $1B from other investors in small companies which have created tremendous economic value.”
Situation of Colorado Funding for Entrepreneurial Ventures.
“Ninety percent of funding in 2011 for Colorado-based entrepreneurial ventures came from out of state. Fewer and fewer start-ups have a local investor. It used to be one third of the firms seeking funding had at least one local investor; now that percentage is down,” statedJames Linfield, Managing Partner, Cooley LLP at the VCIR 2012 conference co-hosted by Rocky Mountain Venture Capital Association and KPMG.
The venture capital industry in Colorado has declined with regard to the number of active VC firms. “The venture capital industry—in particular, limited partners—has trended away from regional VC funds, resulting in a contraction of Colorado-based institutional money. Combined with the retirement of the first generation of the region’s VCs, the Front Range has seen a decline in Colorado-based VC funds,” reportsSiliconFlatironsCenterfor Law, Technology, and Entrepreneurship at theUniversityofColoradoin their recent “Mile High Tech Entrepreneurship Conference” program.
Colorado Senator Rollie Heath explained, “We tried to set up an advisory board to learn how to get venture capital back in the state. Other states actively participate in increasing the amount of venture capital. This bill is completely dead now, unless the Governor does this by executive order.”
In addition to private venture capital there is the Colorado Venture Capital Authority (VCA). VCA was allocated by 2004 General Assembly action with $50 million in premium tax credits. The first $25 million is sold out. The remaining funds for seed- and early-stage capital investments in businesses are limited and have restrictions.
Bottom Line: It is harder now for Colorado start-ups to get venture capital funding.
Some Good News in Colorado Funding.
A few new venture funds are becoming inColorado. Point B Capital, headquartered in Seattle, has opened a Colorado office. David Cohen, founder of TechStars, has announced his second seed fund, totaling $28M, which is NOT only for TechStars companies. While a step in the right direction, more is needed.
The JOBS (Jumpstart Our Business Start-ups) Act was signed into law on April 5 by President Obama. This helps startups raise money from new methods such as crowd funding. For example, Story Stock Exchange LLC (SSX), a crowd funding incubator inBoulder, just formed to help entrepreneurs more easily find investors.
Six Funding Tips for Entrepreneurs.
Here are six creative ways to finance start-up businesses.
- Founders’ Capital. Prepare by saving. It will take much more money than planned. Consider inviting a wealthy and trustworthy friend or relative to be a co-founder, and perhaps silent partner. Other people and firms who might consider investing want to see that the founders are truly committed to the venture with their own funds.
- Team. Attract experienced entrepreneurs to join your team who have funded prior ventures. “With the right idea and team, you can find funding,” stated Wallace.
- Business Model. Develop products and business models which can very quickly generate cash and customers. The easiest way to fund the venture is through your own customers.
- Angels. Angel investor networks have formed throughout the country. These high net worth individuals are sophisticated investors interested in early-stage private equity investment in emerging firms with great potential. They may also want a management or board position in your firm as part of the deal. Many online groups are active such as www.Angellist.com and www.gust.com
- Connect. The entrepreneurial business community is taking steps to connect investors to entrepreneurs. Get involved—for example, consider participating in Rockies Venture Club,SiliconFlatironCenter, Meet Up groups, TiE Rockies, and many other groups.
- Venture Capitalists. Realize that a small fraction of start-ups get funded by VCs. Ask if this is the right approach for you and what other options are available. If it is your best option, don’t give up. Persist. Get help. Attract out-of-state VCs toColorado. Consider joining an incubator or accelerator which has connections to the money.
Take Action. What can we together do to improve the venture capital funding situation inColorado? How can businesses, investors, legislature, governor’s office, local government, entrepreneurs, and other members of the entrepreneurial community work quickly towards solutions that increase VC sources? Who will champion this cause? We all will benefit.