Startup small-businesses trying to obtain financing to fuel their new operations are often caught in a Catch-22 predicament: they need seed money to grow their endeavor, but most investors want them to be making money first before they can provide financing. Mike Roer, president of the Fairfield-based Entrepreneurship Foundation, noted that some startups also need to fit specific parameters to be considered as small businesses.
“First, you have to define how small ‘small’ is,” he said. “To the Small Business Administration, small is anything under a half-million dollars in sales. But even a half-million in sales takes a long time and a lot of mistakes to get to.”
Roer, who also served as the executive director of the Connecticut Venture Group and owns Academy Books and Records in downtown Bridgeport, added that many venture capital and angel investor firms are “looking for companies with $5 million to $20 million in sales.” The problem, he said, is that many investors are too focused on dollar figures and miss the bigger picture about the small-business’ viability.
“Ten million-dollar companies come from $1 million companies that come from pure startups,” he said. “If you are at that half-million-dollar SBA range, it is not that difficult to show that you have a proven company – most of your mistakes are behind you, you have consistent sales and you are profitable.”
However, Roer acknowledged that startups hoping to attract significant funding are far less attractive today than they were two decades ago in the build-up to the dot-com frenzy, and the chance of history repeating itself with venture capitalists pouring in money for the vague promise of future revenue is slim to nil.
“Startups are very high risk,” he said. “I’m seeing a transition in venture capital. The equity investors have become a lot more conservative. They are not the wildcatters of old – they will not invest in an idea anymore. They’re not just looking for a proven sales track record, but they want to see profitability. It’s great for the venture capitalists, but it is difficult for the entrepreneurs trying to raise money.”
The use of crowdfunding to raise money for startups is an option, Roer said, but he also pointed out that some entrepreneurs taking this route inadvertently expose themselves as not being ready for prime time.
“The caveat is too often an entrepreneur will jump into that without having to really flesh out the idea,” he said. “For example, you can build one product, take a picture of it and post it on Kickstarter without having the foggiest idea of how you are going to mass produce it. That’s a lot different than carving it out of soap. We need to do a better idea on educating people on how to do crowdfunding.”
Roer noted that the Connecticut state government through its CTNext program offers some financial encouragement via the Entrepreneur Innovation Awards, and this competition does not require startups to demonstrate a proven track record for success.
“Judges write four $10,000 checks to the most promising ideas,” he said. “Just ideas – they don’t have to be proven to the standards of a venture capitalists. It is sort of a leap of faith by the public sector. They are grants to help those companies get to the point where they would be investable to the standards of an angel investor.”
For his part, Roer’s Entrepreneurship Foundation coordinates programs including the annual Startup Summer Camp and the Connecticut New Venture Competition to expand the focus of startup entrepreneurs beginning to seek out financing. He is also working to create a new structure that would link entrepreneurs with local universities that can help in determining the feasibility of a startup’s potential.
“I am trying to arrange a process where I can give vouchers to an entrepreneur for things like market research, which he could take to a participating university where students who understand market research under the guidance of a professor could do the market research for that company,” he said. “We can squeeze some of the risk out of the process, not only for investors but also for the entrepreneur. So, you may have two or three ideas, you can find out if people would want to buy those before you invest your time and all of your savings.”