Houston small business finance panel lays out funding options for startups
Follow the money
When it comes to raising money for your startup, there's plenty of fish in the sea, however, navigating the rough waters can be difficult.
Houston Community College put on a Small Business Summit on June 13 and gathered a group of financial professionals to represent several types of funding options, from venture capital to microlending.
The crowdfunding game has changed, says Rhian Davies, business development manager for LetsLaunch, an equity-based crowdfunding tool.
While most people think that donation-based crowdfunding — like GoFundMe or Kickstarter that give you the product or thank-you gift when you give — are the only options, that's not the case. And, investing using these platforms doesn't mean anything to you if the company sees success.
"If it makes it big, you're not going to get anything back," says Davies of these types of platforms.
But the JOBS Act in 2012 changed everything. Now, companies fundraising on crowdfunding sites can trade in equity for funds.
"Previously, investments were reserved for wealthy individuals — accredited individuals — who had a certain amount of money could invest in businesses," says Davies. "Equity crowdfunding opened that up."
With crowdfunding, you can also run other types of fundraising efforts at the same time, spreading out your options.
"It allows (the community) to invest in your business and it allows you to pass the hat and have people come on board," Davies says.
The other benefit to using the LetsLaunch platform is the team assists the startups every step of the way, from uploading a digital pitch deck onto the LetsLaunch platform and preparing paperwork to filing with the SEC.
However, one of the major challenges for startups is deciding what their funding goal is. Davies says you do have to hit a certain funding goal to be able to take that cash home, and for LetsLaunch, they look for that figure to be $10,000 minimum. Anything less than that isn't worth it — from both the LetsLaunch and the startup's perspective. The maximum value for equity crowdfunding is capped at just over $1 million — per the SEC.
VC funding is where most people's minds go when it comes to startup funding. And this type of funding is in an evolution phase too, says Remington Tonar, managing director at The Cannon Houston. While traditional VCs want a three-times return in five to seven years, some firms have more on their minds then just the money.
"There's a new phenomenon in venture where a lot of early stage investors and angel investors are looking at social impact investing," Tonar says. "They want to invest in women- or minority-owned businesses or companies that have a sustainability or social impact component to them. For those investors, the return demands are much more flexible."
Not only are they more flexible on returns, but VCs want more hands-on roles at the companies they invest in. Tonar says venture capitalists don't want to give passive capital.
Another way VCs differ from other types of funding is they are looking for something different in the companies they invest in — they want the next big thing.
"What venture capitalists really look for is disruptive business that are creating value in news ways," Tonar says.
And investments can be industry agnostic — VCs aren't reserved to just tech and computing industries.
"Most people would not have thought the hotel industry was a great industry for venture capital until Airbnb came along," says Tonar. "Most people would not have thought that taxis were a great industry for venture capital until Uber came along."
Fundraising through VC firms is a very personal process — they are investing in you, the founder, just as much as they are investing in the company or idea, Tonar says. You can have a horrible credit history or have declared bankrupt in the past, and while they will find that out, it's not a dealbreaker like it would be for a bank or traditional loan process.
"But if the investor feels that the idea has value and can create value and meets their risk profile, they will look at your startup and go through their due diligence process."
A new trend in funding options is microlending — a type of loan process that caps out at $50,000. Lisa Riley is Houston market president for LiftFund, one of the largest microlenders in the United States.
Since the amount is smaller, the risk is smaller too. The type of customer LiftFund looks for is the person or company that's been denied by other banks.
"It's not always because of something negative with the customer," Riley says. "There are certain industries where it's very difficult to get finance right now."
Just like the trend in VCs, these types of lenders want to be hands on too to help secure success and a return.
"The last thing we want to be is another monthly obligation or a debt — the noose around someone's neck suffocating their small business," Riley says. "We want to make sure and walk with you and hold your hand as long as you'll hold mine so that when we give you your loan it's the right amount for your business and the right time."
Traditional loans and factoring
Of course, conventional loans is still an option, as is factoring — the process in which a business sells its accounts receivables to a third-party entity, called a factor.
Peter Ellen, senior vice president at Amegy Bank, explains the process as being pretty traditional. His bank wants to see a secure and profitable business on trach for growth.
"Typically, we look for a business that's been established for two years, that has generated a profit, and can show a clear path of repayment," Ellen says.
Again, like other funding options, Ellen says a relationship with the company is important.
"That's really what we look to do, is to form a relationship at an early stage with a company, really understand what they do, and help assist in the growth and success of their company," he says.
SBA loans are another lending option for startups to consider, Aziz Rahim, senior vice president at Wallis Bank, explains.
Different from a traditional loan process, SBA loans are guaranteed by the Small Business Association up to 85 percent, which lowers the risk for then lending partner.
Other benefits to SBA loans are lower down payments, generous term lengths, and caps on interest rates.
"The good thing about SBA loans compared to conventional loans is SBA loans do not balloon," Rahim says.