First-time funding — through a bank, venture capital firms, angel investors or others — can be transformative for small, growing companies.
When twin brothers Shawn and Brian McDonough launched Technical Integration Services-Data Center Services in 2004, they funded it with a personal loan from a business acquaintance that was quickly repaid. Two years later, the company outgrew its leased space in Fairfield, and the brothers worked with New Jersey Small Business Development Centers to secure a bank loan to purchase space in a nearby office complex.
And today, CEO Shawn utilizes a line of credit to fill in any short-term funding gaps.
“One of our largest corporate clients can periodically order hundreds of thousands of dollars of equipment from us, and generally pays us in about 45 days,” said Brian McDonough, who serves as the business’ account manager. “But our equipment supplier wants to be paid within 30 days, so there can be a temporary shortfall.”
Another entrepreneur, Princeton University graduate Craig Limoli, was going for his MBA at the Wharton School of the University of Pennsylvania when he launched Wellsheet in 2016. The Newark-based company uses artificial intelligence and machine learning to help physicians get more information from clinical data.
“We initially got a small grant from the UPenn Health System, then we received one from the U.S. Department of Health and Human Services,” Limoli said. “One of the early funding sources was the Princeton Entrepreneurship Council (a Princeton University initiative), which was important because it also enabled us to network with valuable contacts, and the funding helped to catalyze additional rounds from VCs and others.”
To date, Wellsheet has raised about $2 million. Next year Limoli’s planning on a first round of venture capital fundraising aimed at securing up to about $5 million by “targeting more VCs and higher amounts.”
The Princeton Entrepreneurship Council “engages state’s entrepreneurial ecosystem through education, collaborative spaces, mentoring and funding,” said PEC Executive Director Anne-Marie Maman.
“We have also opened up the Princeton Innovation Center Biolabs — which is for Princeton University related businesses and non-PU-related businesses,” Maman said. “These are for high-tech companies — largely but not only life sciences — which are funded and have high potential of success.”
Among other activities, the organization runs two entrepreneurship conferences a year, and developed an online platform to connect entrepreneurs with Princeton alumni mentors, “which is mainly for our Princeton alumni,” said Maman.
There are no hard-and-fast rules when it comes to the kind of funding that’s best for a company, according to Mario Casabona, managing director and founder of Casabona Ventures. His Kinnelon-based “micro-VC” firm invests in post-seed stage companies located within the mid-Atlantic region.
“We assist our startups by providing strategic business advice, preparation for investor due diligence and access to angel investors,” Casabona said.
An angel investor is usually a wealthy individual who invests his or her own capital, as opposed to an institutional or other investor that may direct a fund. An individual angel may be able to invest up to about $100,000.
“Beyond that, an entrepreneur may approach an angel group, like the Jumpstart NJ Angel Network, or the angel himself or herself may syndicate the deal by seeking out additional investors,” Casabona said.
In the initial, or seed stage, when an enterprise is little more than a concept and a prototype, usually with a valuation of less than $1 million, funding usually comes from the “three Fs — friends, family and founders,” Casabona noted.
“If the company makes it beyond that, and grows into the early stage, typically with valuation of up to $10 million, the founder may seek angel financing,” he said. “Beyond that is the growth stage and then you’re usually talking about venture capital or institutional funding rounds.”
A budding entrepreneur can always try for bank financing, of course.
“But in addition to having to convince the officials there that you can execute on your idea, you’ll probably have to provide collateral for a loan, like a second mortgage on your house, or marketable securities and other assets,” Casabona said. “Angel financing may be faster, and you’ll be reporting directly to investors who have a lot of industry experience that you can tap into.”
Another option is to bootstrap, or fund a business yourself.
“That usually involves cashing out your savings and investments and trying for a grant,” Casabona said. “The advantage of that is you don’t lose any equity and you’re not paying interest to a lender. The disadvantage is that it can be a lot slower.”
Angel investors like Casabona are comfortable pumping big money into new ventures, but that doesn’t mean they’re exactly giving away the green stuff.
“We start by examining the team,” he said. “Have they worked with each other before, and does it look like they have the background and ability to execute the business vison? Then we look at the concept or the product: how large is the potential market? And has the team demonstrated that they’ve got a viable model?”
And don’t forget about competition. “What are the hurdles that other companies have to overcome to enter the market?” he asked. “Are there regulatory or other barriers to entry?”
Even raising money from a limited group of people like friends and family can get complicated, cautioned Marc Press, a member of the law firm Cole Schotz who represents issuers, early stage investors and others.
“If the fund-raising qualifies as a formal offering, you may need to comply with [Security and Exchange Commission] and other private placement regulations,” Press said. “Let’s say it’s less formal. Is it a loan? Who will guarantee it, what is the collateral, and what are the interest and other repayment terms? All of this should be properly documented.”
Taking money from friends or relatives can also bring its own baggage, he warned.
“You may have family members who are now part of the business and want a say in its operations, or they may keep asking when they’ll get their money back,” Press said. “It’s a different dynamic when you deal with third-party investors. You don’t have that personal overlay.”
Credit cards can provide a quick cash infusion, “but they usually carry a very high interest rate,” said Press.
Crowdfunding is another option, but “can mean a lot of compliance for a small business,” he added.