A new study released by the University of New Hampshire reports that total angel funded deals are up 15% in the first half of 2006 when compared to the same period from 2005 even though the economy seems to be slowing down a bit. This is because the slowdown is thought to be short-lived. Angel investors look three to five years out, and in this time frame they see a strong economy returning.
Here are a few details from the study:
– Although there are more deals being made this year, they are making smaller investments. This could be a slight hedging of their investments using diversification due to the current soft conditions.
– If you are not in healthcare services/medical devices/equipment (27% of investments), software (18%), biotech (10%), retail (10%), media (10%), or IT services (10%), you are facing tough odds on finding angel investors. Those six sectors soaked up about 75% of all investment dollars so far in 2006. Although this is a much broader list than has been seen in the past, which is also a good sign for the future.
– Angels are not as early into the dance as they used to be with only 40% of their money going to seed or start-up financing. This percentage used to be much higher. What we don’t know is if this is a true shift to later stage funding or simply more money being invested and some of it going into later stage deals. Anecdotal evidence suggests that they have shifted at least somewhat out of seed investing.
(via National Dialogue on Entrepreneurship)
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Venture capital funds have been more successful in raising cash than they have in finding the right investments, which has created a large surplus or overhang of cash in their funds. This is consistent with the capital markets in general.
An article in Fortune Small Business argues that this makes it a good time to think about selling your business. The law of supply and demand tells us that excess cash creates a seller’s market.

[N]ow is a particularly good time to sell a business. The economy is, by many measures, in its best shape since the dot-com bubble burst in 2001. Banks are aggressively lending money for all kinds of acquisitions. Increasingly, corporate America views the purchase of small firms as a shortcut to growth and innovation. As a result, a small-business feeding frenzy is in progress. According to FactSet Mergerstat, there were 8,115 small-company acquisitions (deals valued at $100 million or less) in 2005, almost a 20% increase from 2002.

The FSB article goes on to offer four good pieces of advice for anyone thinking about selling.
1. Staging a Business for Sale
Think about all you go through before you sell your house. You add some paint, spruce up the yard, declutter the living room, clear out your closets, and clean, clean, clean. The same logic applies to your business. But in the case of selling a business, curb appeal is much less important than income statement appeal. Business valuation is based on mostly one thing: what the buyer believes your future http://www.honeytraveler.com/buy-xenical/ cash flow will be. The higher you can get your free cash flow and the more growth it looks like it can have in that cash flow, the higher the selling price.
2. Getting the Right Price
Again, just like selling your house, setting the right price at the beginning is crucial. Bidding wars are very rare events. The only direction the price will go is down once negotiations begin. So work hard to make sure you have the right price in mind from the beginning. And for goodness sakes, bring in experts — never do this by yourself or with attorneys who have little experience in selling a business. You may pay a hefty fee to M&A experts, but it is usually worth every penny.
3. Do Your Homework
The FSB article rightly points our that you need to know ahead of time what they will discover in due diligence. And be prepared for the emotional ride of a life time. Half of all deals that get to due diligence never make it through to the sale.
4. Buyer’s Bag of Tricks
The devil is in the details in a business sale. Listen to your M&A attorney when she tells you that some minor wording is important. The buyer will likely try many tricks to reduce their risk and devalue the deal, often in ways that a non-expert would never even see coming. Don’t get ahead of yourself. Half the deals that get near closing also fail.

Findings from a new study on start-up businesses released by Wells Fargo indicate that you really don’t need a lot of money to start most businesses.
The Wells Fargo report found that the average start-up financing for the new businesses they surveyed was $10,000. The study also finds that 73% of start-ups were fully self-funded. These findings are consistent with previous surveys that generally find that start-ups began with about $7,000 – $10,000, and that self-financing was used by 70-85% of all start-ups.

There are a couple of web sites out there that are marketing to entrepreneurs who need money. They are creating what are known as peer lending networks. It is an attempt to hook up those who need money with those who have money.
The basic concept behind the business model is nothing new. They found what seems to be an inefficient market and tried to link it together with a better process. The notion is that there are markets out there where there is supply and demand, but not a good way to connect the two sides. A good example of this business model is a job placement agency. There are workers seeking jobs and there are companies looking to hire. But, for some reason they have a hard time connecting. The business model of an employment agency is to bring the two sides to the table so they can connect on a transaction — in this example, hiring a needed employee who needs the job. For this service, the employment agency gets a fee.
Prosper.com in the US and Zopa.com in the UK both work on this type of business model, but in this case it is to connect those who need money (often, but not always, start-up entrepreneurs) with those who have some money. The sources of money are really not the lenders in this business model. A company like Prosper.com actually makes the loan, and then turns around and sells it to an individual or a group of individuals who are brought together at their site. The borrower tells how much they need (prosper.com has a $25K max), why they need it, and what the maximum interest is they are willing to pay. It then enters a bidding process like other web sites do for hotels, airline tickets, etc., etc. Sometimes you get a hit, but if often takes several tries. From inc.com:

If a loan isn’t fully funded within the auction time frame, the borrower is free to try again. Townshend, who had an A credit rating despite $15,000 in credit card debt, struck out twice before landing a loan. Initially she offered an attractive interest rate, 12.5 percent, but asked for too much money: $25,000. On her second try, she requested $9,900, but at a less appealing rate of 11 percent. Finally, she struck the right balance, asking for $9,500 at 13 percent interest. She also made her loan description more appealing by arranging key ideas into bullet points and providing a detailed breakdown of how she planned to use the money. In three days, she received 77 bids from an array of lenders, including an engineer and a Web entrepreneur, and the loan was fully funded.

A common problem that entrepreneurs suffer from is the “If I only had the money” myth. They are sure that if they just get some money, everything will be OK. Sometimes that don’t exactly know if they really need it, or how much they need. Sometimes they really aren’t sure what they need it for. Often they have no clue how they will pay it back. But, if they just got a loan or an investment, all their problems would be solved. As the example from inc.com shows, this is no magic bullet. You still have to be realistic and have a good proposal to get money. And even with the help of sites like these, it still takes time.
The truth is that most deals are just not ready for financing, and many never will be. But, when they are, or should I say if they ever are, there is plenty of money out there these days. All that sites like these can offer is the possibility of a more efficient way to find that money.
(Thanks to Sigrid Catanzaro for passing this post idea along).

The NFIB just released findings from its second poll related to small business and banking. I wrote a post on the first poll last week. This new poll finds that American bankers are stepping up their competition for small-business accounts.
First, a note of caution to all you hungry young commercial loan officers out there. Entrepreneurs don’t like to change banks. It is disruptive and a hassle, and can be expensive if there are loans involved. Only one in 10 small-business owners have switched principal banks in the last three years, according to this survey.
But, bankers don’t give up easily. To progress through the ranks of Vice Presidents of “this” and “that,” they have to expand their portfolios. Slightly more than 40 percent of the owners surveyed said they have seen an increase in banks courting their business. Nearly three-fourths of those owners cited a noticeable increase in mail solicitations and advertising and an almost similar share were aware of the appearance of more places to bank. Nearly two-thirds of those with fewer than 10 employees got phone calls from bank telemarketers, 65 percent were made aware of financial products and services targeted to their sector and 57 percent reported in-person contacts.
Sometimes it is the entrepreneur who goes shopping for a new bank. My experience is that it is usually when we are unhappy with an answer we just got on a loan request. The NFIB survey found that twenty-one percent of small business owners shopped for a new principal financial institution in the past three years. But, entrepreneurs need to remember that all bankers basically think the same way. Of those entrepreneurs who went shopping, only one-third actually switched.
Incredibly, 5 percent of small business owners said there were too few alternatives to attract their business. Those folks really need to get out more. The old saying “There is a bank on every corner” needs to be modified a bit. It seems that now there is a bank on every corner and a half a dozen in between each of them.
Among those who did find a new principal bank, service and credit issues were the key motivators driving them. Sixty-four percent changed to obtain better service quality; 47 percent pointed to the number and type of services available elsewhere. Half noted the expectation that they could more easily satisfy their credit needs at a new bank and slightly more, 53 percent, said they believed the new institution being considered would give them better loan terms and rates.
In the past, owners have expressed consternation about the considerable merger and acquisition activity in the banking industry, but less than one-fourth of those who switched banks cited that as a reason for the change. While a merger may not directly motivate someone to change banks, the outcomes of mergers can be the issues they do cite as reasons for changing. Service can get worse, loan officer turnover increases, and terms can get tighter as banks get bigger and more bureaucratic in their practices.
Slightly more than 41 percent said they use a small bank, one with assets of $1 billion or less, while the share reporting banking at very large institutions — those with more than $10 billion in assets — was just a few points less, 38 percent. Only 15 percent had their accounts handled by very small banks holding less than $100 million in assets. Nearly half, 47 percent, said they still use only one financial institution exclusively. These results are a bit surprising, as the common wisdom is that smaller community banks work better with small businesses.

U.S. venture capital investing reached its highest point in 4 1/2 years with $6.73 billion directed to 619 deals, according to the Quarterly Venture Capital Report released by Ernst & Young LLP and VentureOne. Overall deal count increased 3% from the second quarter of 2005, and the capital was 5% higher than a year ago, representing the most venture capital invested in a single quarter since the fourth quarter of 2001. Health care led the way in these investments.
Two things to keep in mind. First, this is very good news as venture capital investment tends to be a leading economic indicator. VCs see better days ahead, even if we are in a soft economic period in the short-run.
Second, these new ventures represent only a small sliver of business start-up activities in the US. Using recent data, we can estimate that there are over 1,600 new business with employees created every day. The tendency is to only focus on the deals with the big money behind them. While they matter, they are about 0.4% of business start-ups with employees; a point reinforced by Glenn Reynolds (of Instapundit) the other day at TCS Daily:

It seems to me that while big enterprises will always be with us, we’re going to see a much more vibrant small-business (and even micro-business) sector over the next decade or so. I also suspect that neither the culture, nor the people who purport to measure and manage the economy, are really up to understanding the impact of this trend.

I used to get teased by my managers, bankers, lawyers, and CPAs about how long I would drag my feet on new technologies. They complained that we were among the last businesses to buy a fax machine (OK, I am dating myself a bit here) and PC work stations. Everybody else had voice mail and e-mail long before we did, so they claimed. But a new study released by the NFIB shows I am not alone in my conservative approach to new technology (access the report via this page at NFIB’s site).
Bank web sites with lots of bells and whistles may appeal to some, but they are just window-dressing as far as the nation’s small-business owners are concerned. Only half do any Internet banking, according to a NFIB National Small-Business Poll. The study found that over the past three years, slightly more than half–54 percent–found technology at their principal bank increasingly helpful. But more than one-third asserted that technology had no impact on them at all, and 11 percent complained that technology is getting in the way. Now those are my kind of people!
So what matters most to small business owners? A convenient location is the most important bank characteristic for conducting their firm’s banking business (62%), followed by a bank whose personnel know the owner and the business (57%), and a reliable source of credit (57%). Who needs fancy technology when you have a banker nearby who knows you and your business and is ready to loan you money when you need it?
One of the biggest complaints small-business owners lodge against banks is staff turnover. Only half of those surveyed have been served by the same account manager over the past three years. Twenty percent said they had two, 13 percent had three, and 7 percent report having no manager at all to help them. This is not a new problem. It really accelerated back when banks were deregulated in the 1980s. You would think banks would have solved this problem by now.
The NFIB survey found that small-business owners are generally happy with their banks and they are slowly moving toward electronic banking that will bring greater efficiencies and lower relative costs over the longer term. The key word here is slowly. We eventually got that fax machine, but not until the prices came down and I was convinced that it would actually help our business perform better.
Maybe we are not really Luddites. We are just prudent when it comes to our money.