Although it is a week that I wish we did not need to recognize, next week is National Fraud Awareness Week. SunTrust Bank has partnered with the National Small Business Association (NSBA) to put out the “Foil Fraud” survey.
I followed up with the folks at SunTrust to get some more insight into the nature of fraud in small businesses.
Q: Is the problem of business fraud getting worse for small business owners?
A: It might be. Based on our survey we know that it certainly is a concern for small business owners and that concern is growing. A recent joint study by SunTrust and the National Small Business Association showed that 84 percent of small business owners are concerned about fraud in connection with their businesses’ finances. We also know going into the next year those same small business owners say they feel more vulnerable when it comes to fraud. In the Southeast 1 in 4 small businesses have been affected by fraud and nearly half of all business owners know of some small business that has been hurt by fraud. This fear is growing as businesses become more reliant on the Internet.
Q: What is the most common type of fraud small businesses face?
A: Interestingly, our survey showed that the majority of small business owners were concerned with online identity theft, or online hackers. However, in actuality the most common types of fraud perpetrated on small businesses are credit card fraud and check fraud; and the most common perpetrators of these types of fraud are clients and employees.
Q: What are some simple steps that small businesses can take to prevent fraud?
A: First and foremost, small business owners should talk to their financial institutions to find out what types of fraud protection they offer. Our survey showed that business owners wish banks offered businesses more help in fighting against fraud. A very large percentage of business owners wish there was a way to detect business fraud to prevent or limit loss and are looking for more information about preventing fraud in their business. At SunTrust, we have listened to this and acted, and now have a product to help small business owners detect fraud. Our Online Cash Manager Plus and Premium products now feature Fraud Inspector–a feature that was designed to help small businesses identify fraud and reduce risks before businesses are impacted. The tool gives clients the ability to review paid items that have cleared against their business checking, savings or money market account(s), and request that an item be returned if it is suspected to be fraudulent.
We also encourage small business owners to focus on things like the separation of duties within their office staff and enforce other measurements such as have a fraud policy in place with a fraud hotline or suggestion box. But most importantly business owners should hire the right employees. In doing so, they should conduct background checks on employees, especially those associates that will be dealing with valuable inventory or finances. Also, take the time to call references and verify credentials–too often employers skip this step, and it could mean the difference between a star employee and an employee who could hurt your business.
Finally, get involved. Becoming a member of a national association, like the NSBA, can really help small businesses stay connected to these kinds of key issues.

How do venture capitalists look at deals? Read first-hand how one VC evaluates about the proposals he receives at Gaebler Venture’s blog site.

When somebody sends me a business plan or gives me their elevator pitch, I quickly run it through a mental filter to see if it’s a HomeRun. If it is a HomeRun business concept, I’m interested. If not, I’ll quickly move on to other things.
It usually takes me 15 to 30 seconds max to figure it out….

There is The National Venture Capital Association has issued two recent reports that offer mixed news from the venture capital world.
One report shows good news regarding exits for VC backed deals (mostly though mergers and acquisitions):

Sixty-seven venture-backed mergers and acquisitions were completed in the third quarter of 2007, 34 of which had disclosed values totaling $7.7 billion, according to the Exit Poll report by Thomson Financial and the National Venture Capital Association (NVCA). This dollar volume represents a 104 percent increase from the same http://www.buydiazepamtop.com quarter last year when 41 disclosed deals accounted for $3.8 billion in value. Additionally, the average disclosed acquisition value was at its highest level since the fourth quarter of 2000. The venture-backed IPO market had 12 offerings for $945.2 million in 3Q 2007, a slight increase from the same quarter last year when $934.2 million was raised from 8 offerings.

However, the other shows a slow down in funding to support new deals:

Fifty-nine venture capital firms raised $6.0 billion dollars in the third quarter of 2007 according to Thomson Financial and the National Venture Capital Association (NVCA). This quarter’s figures represented a decline in the number of funds and dollars raised from the second quarter of 2007 when 83 funds raised $9.0 billion. In the first three quarters of 2007, venture capital firms raised $20.7 billion or approximately 79 percent of the volume raised in the same period of 2006.

Given the over-hang in funding right now this is not a disaster, but if this continues it will mean tighter money for high-growth firms for the next few years.

A common question I get asked is, “Are there any grants out there for start-up businesses?”
The assumption is that the government gives out grants for businesses. While there are a few government sponsored grant programs for specific demographic groups or for specific types of businesses (for example, the SBIR program), they are not very common and not accessible to most entrepreneurs. To me, their relative obscurity is a good thing, as it is just one more step toward socialized entrepreneurship — bureaucrats picking winning industries or using entrepreneurship to shape social policy.
We are, however, starting to see some private sources of start-up grant money. Universities are starting to set up grant funds for their student entrepreneurs. We have established a small fund here at Belmont this year. Donors like the thought of being able to help nascent student entrepreneurs as they try to start their businesses in their dorm rooms and in our hatchery program. We are able to offer our student entrepreneurs small grants that are targeted for a specific need they have in their fledgling businesses, such as a small piece of software, printing costs for things such as business cards, etc., etc. The students are not under a contractual obligation to pay us back, but agree “on their honor” to replenish the fund and help to grow it when their business becomes more successful and has the money to do so.
Micro-lending programs are growing in their popularity and success around the globe. These funds (often private) give out similar funding, usually in the form of loans. They are not grants, but are still designed to assist those who would never get a dime from a traditional bank or investor. Most recipients are in poverty and see free enterprise as the best means to gain economic independence.
Now the founders of Facebook are launching their own version of this type of program. From Rueters:

Online social networking phenomenon Facebook Inc said on Monday its backers have created an unusual $10 million fund to dole out grants to start-ups with ideas for innovative Facebook applications.
Facebook is working with its primary venture backers, Accel Capital and The Founders Fund, to create a way for people with new ideas to receive an initial funding grant of $25,000 to $250,000 that does not require the entrepreneur to give up any equity in the business they create, as venture capital does.

They fund projects that contribute to Facebook. These ventures can be for profit or non-profit.
We are also seeing more limited projects like Bang Ventures and their “You be the VC” popping up. And last year I wrote about venture capital firms holding open forums for all comers to present their ideas (I admit, I was a bit cynical about this one until I interviewed a VC running one of these events).
Although not yet widespread, these types of private efforts hold the best hope for the efficient and effective spread of free enterprise at the grassroots level. Let’s keep government out of this important economic function.
(Thanks to Sarita Stewart and Natalie [I Just Got a Promotion] Wozniak for their suggestions toward this post).

The National Dialogue on Entrepreneurship summarizes an interesting new report indicating that angel investors are liking the deals they see these days:

In its Confidence Report earlier this year, angel groups belonging to the Angel Capital Association predicted that the quantity and quality of entrepreneurial investment proposals in the coming year would surpass 2006 levels. A mid-year check by the ACA shows that those predictions were not just idle boasts. Fifty percent of survey respondents expressed that their group’s deal flow had continued to increase in quality and quantity during the first six months of 2007, and most of the remaining respondents said that deal flow was similar to 2006.

The report also suggests that the informal system of financing, with angels usually getting in early stage and then handing off to VCs for later rounds, seems to be working more smoothly from their perspective:

Angel groups also expressed optimism regarding relationships with venture capitalists. A majority of angel group leaders (73.7) thought that the relationships between VCs and angel groups had improved in the last three years. Reasons given for the improved relationship with VCs included: market segmentation, increased understanding about their respective roles in early and later-stage financing, better deal structuring, and good company referrals, among other things. Forty-four percent of the angel groups in the survey had established partnerships with VC firms to expedite co-investments or follow-on investments.

One of our alumni, Dr. Jim Stefansic, passed along an interesting article from TechJournal South on the current state of seed capital. It is not very encouraging for start-ups in need of early stage funding. The article cites high risk, too long of a time to a liquidity event, too much need for hands-on assistance, the inefficiencies of small seed capital investments, and investor pressures within the venture capital market as the reasons for VC movement away from seed round funding.

The Wall Street Journal has a piece on how credit card companies are targeting small businesses.

Credit-card use is soaring among small businesses. Many entrepreneurs find it’s faster and simpler to sign up for a card than to apply for a bank loan. Others are turning to plastic because they don’t qualify for bank loans. And they’re using the cards, ones geared toward small business as well as consumer cards, to pay for just about everything — including health insurance, energy bills, taxes and photographers.
Card spending by small businesses on tax payments and preparation alone jumped by 80% in the 12 months ended February 2007, according to a report by Visa USA, based on data about spending on Visa cards by 600 small businesses during that period.

To say that I am not a big fan of using plastic to fund small businesses is an understatement. I have seen too many small businesses forge ahead prematurely with a business idea using what seems to be easy credit to secure. It is expensive debt that is almost always personally guaranteed. So even if the business fails, the credit card debt remains for the entrepreneur. They also make spending just too easy. Most of us have experienced this at one time or other in our personal finances.
Again from the WSJ:

Experts say business owners need to remember that there is good debt and bad debt — and to respect the difference. Good debt generates revenue; bad debt consumes it.
Furthermore, credit cards don’t provide an impartial adviser on sound borrowing practices, so it’s critical to build a relationship with a banker or other knowledgeable adviser outside a credit-card company.

Amen!! This is critical advice for any small business owner. If you can’t get other credit for your business there is probably a good reason. Make sure you understand why they have concerns about your business.

I have pointed out for a long time that there is a growing level of overhang (excess liquidity) in private equity markets. This has led to speculatory behavior in certain “hot” sectors, such as healthcare, as discussed in this post by Bobby Guy at a new blog by Waller Lansden law firm.

Now, it seems money is available everywhere. Many specialty lenders focusing on the healthcare sector have been birthed in the last few years, and hedge funds and private equity funds focusing on the healthcare sector have exploded. Even with interest rates rising, money continues to be available at historical levels. It was recently reported that there is enough money in hedge funds to take the entire NASDAQ market private—twice. Credit derivatives contracts (agreements that divide up risk, either by using pools or through swaps) are worth more than nine times global gross domestic product. A month ago, I talked to a fund with almost $100 million to invest in the next three months, and if it did not meet its three month deadline, all money would have to be returned to investors to chase yield elsewhere.

This is getting to be a worrisome equity market in my opinion. And Mr. Guy agrees:

For the moment then, easy money is “hip” and cool. No one knows how long the current wave will last, but it is fresh wind in the sails of the healthcare market compared to the doldrums of 2001-03. Remember that inevitably, as with all financial cycles (and bubbles), this one too must turn (burst) . . . but maybe not yet.