How do you value a business that has nothing to value? That is the challenge for pre-revenue ventures. They have no sales, and therefore certainly no cash flow, so how do you agree on a value that can be used to give equity in the business to investors that is fair to all parties? How do you assess a value to “potential”?
A common approach has been to basically postpone any valuation and issue convertible notes that allow early investors to convert from debt to equity when later stage investors come in once revenues start to flow. But even this method has flaws and pitfalls.
The latest collection of articles, tools and profiles from Kauffman’s eVenturing examines the issue of pre-revenue valuation. What is particularly valuable is that it looks at valuation from both the entrepreneur and investor side of the negotiation. Very good material for any high potential start up to review before entering into discussions with a VC or an angel.

Entrepreneur magazine has an interesting profile of three entrepreneurs who successfully navigated the path to VC funding. Finding the right VC fit — if your business is really VC fundable — can build a working relationship that can benefit all involved in the deal. VCs are never simply sources of money — they almost always become an active player in the strategic growth of the business.

My column this week at the Tennessean examines taking business loans and investments from family:

Family members provide funding for many different reasons. Some are motivated by altruism — they just want to help the entrepreneur get started and be successful. Others can be driven by greed — they see the investment as a way to ride on the entrepreneur’s coattails to fortune and fame.
But no matter what the reason they provide financial assistance, defined boundaries and clear expectations should be clearly established.

A couple of useful pieces of information on entrepreneurial financing:
– A new study released last week by the SBA Office of Advocacy finds that bank size in local markets affects the likelihood of a small firm receiving credit more than it affects the amount of debt provided. The research provides evidence of the impact of the two lending methods, relationship and standardized, on credit availability to small businesses and finds that one method is not apparently better than the other. The study concludes that entry of giant national and regional banks and bank holding companies into local markets may have increased market competition for small business loans, with the primary banks exploiting the niche in relationship lending, while large, more complex banking organizations use standardized methods to supplement supply.
– BusinessFund.com published a great financing summary titled “Top 25 Alternatives to Venture Capital.”

I keep telling you that venture funds have raised too much money…..From MediaWeek.com:

John Byrne, BusinessWeek’s executive editor and the acting editor-in-chief for Businessweek.com, said that company is looking to create a “business YouTube” essentially an online video hub for wannabe moguls to post short pitch videos for a new ventures or companies.
The site is also buy topamax for weight loss exploring the launch of an online-video-based contest that would invite anyone with a idea for a new business to submit a plan on the site with the chance to land $500,000 in venture capital funding.

(Thanks to Natalie Wozniak up in Minne-so-cold for passing this along).

Many argue, and many whom I’ve heard argue this are women, that in the world of entrepreneurship we should not segment men and women. Entrepreneurs are entrepreneurs. A new study on venture funding suggests that this may not always be the case in high growth, high potential ventures.
Jeffrey Sohl addressed the recent NC Council for Entrepreneurial Development on angel investing trends about the results of a study he co-authored with and John Becker-Blease to be published in the July 2007 issue of the Journal of Business Venturing titled, “Do women-owned businesses have equal access to angel capital?”
From TechJournal South:

The results suggest that women seek angel financing at rates substantially lower than that of men, but have an equal probability of receiving investment. The authors also found that women are more likely to seek, and to a lesser extent receive, financing from women angels.

Why does this difference exist? The authors speculate, but there is no compelling evidence as to why these differences were observed. It may be inherent bias in the private equity markets, it may be social behaviors, or it may just be the nature of the choices women entrepreneurs make in terms of deals to pursue. Most likely, evidence for all of these explanations can be observed, depending on the specific situation. I have noticed that any angel investment or venture capital gathering I have been to tends to be made up mostly of male entrepreneurs and male investors. While this study confirms my observation it begs the more interesting question: Why?
(Thanks to Jim Stefansic for passing this along).

More and more attention is being paid to the state of VC funds and Angel money these days. A story in the Nashville local paper the Tennessean just this morning talks about the flow of cash into local VC funds has slowed way down.

Some Nashville-area venture capital funds trying to raise money are facing a tougher time as investors chase promises of quicker and larger returns from a hot private equity market.
A year after setting out to raise its latest fund, Massey Burch Capital Corp. decided this week to do away with those plans after getting commitments for only a quarter of the $125 million it had sought. And Salix Ventures of Nashville is yet to announce a closing a year and a half after it said it planned to raise a $150 million fund.

Even thought the media makes this sound horrible, it is really OK. Not to worry! As long as the politicians and bureaucrats stay out of this arena, and that is sounding like a big if right now, things will be alright.
Capital markets — if left alone — are very efficient. There has been way too much money going into the VC markets, so what is happening is an adjustment of supply to meet demand. The money that was going into VC funds is now flowing to funds seeking to take public companies private. That is where the supply of deals is right now.

Angel networks have been growing in their level of sophistication. They also have been moving up the food chain, looking for more later stage deals. From the Boston Business Journal via MSNBC:

As the market grows, angels — especially angel investor groups — are moving upstream, looking to dole out more money and take fewer risks. Meanwhile venture capital firms anchored by huge funds are increasingly looking to invest larger rounds of cash. Entrepreneurs say that combination has made tapping into angel capital, once fertile ground for early-stage funding, trickier in recent years.

That is what I am seeing with the entrepreneurs we work with. There is plenty of cash, but it is getting farther out of reach from the early stage entrepreneur. An additional trend is the mass of private equity money going to fund buyout deals like Chrysler. This will put additional pressures on finding seed monies.
(Thanks to Dr. Jim Stefansic, an entrepreneur in search of early stage money himself, for passing this along).