Innovative Venture Funding Programs

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).

Angel Investors’ Confidence Up

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.

Collecting Receivables

Imagine a world where all you have to do is send out an invoice and customers quickly send you the money they owe you.
Wake up and smell the roses! That world only happens in your dreams. Collections are one of the most important, and at times most challenging, aspects of any business that depends on accounts receivable for cash flow. I am amazed at how passive many small businesses are about this issue. They seem to be afraid to upset customers. My advice is this — if they are not good at paying you probably don’t want them as a customer.
One strategy is to outsource collections of A/R, or even to hire a factor. Factors are expensive, often charging 5-7% of your accounts. That can amount to the same as borrowing against these accounts at an interest rate of 70-100% annual interest rates.
The Wall Street Journal reports on new software programs that allows small businesses to keep collections in-house and under your control at a reasonable cost. There are several options out there, so make sure to find the one that fits your needs and your business situation best.

Lessons Learned

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I have the honor and pleasure of having Joe Keeley here on campus as our Entrepreneur in Residence this week. Joe is founder of College Nannies and Tutors, headquartered in Minnesota. From their website:

We serve the short and long-term childcare needs of today’s working families as well as foster the growth of children’s education and development through our experienced nannies. Our services are designed to provide busy parents with the childcare support they need at each developmental stage of their child’s life. We provide a safe and easy means for families to find a qualified nanny to work in their home.

They currently have over franchise locations operating or under development in 13 states.
Seven years ago Joe was a sophomore at the University of St. Thomas where I used to teach. He wandered into my office with what he thought might be a way to make some extra cash during the summer. He was working as a nanny for a family in Edina, MN. Several families in the neighborhood told him that they would pay him money if he could find a college student to be a nanny for their kids. The next summer Joe continued to nanny, but also placed 12 college students as nannies for a $300 finders fee. Thus was born his concept.
He worked on the business while a student in our program. And when he graduated took the risk of running the business full-time. During the first year he entered every business plan competition he could find. He says that he generated more cash from awards in his first year than he did from revenue from the business. But, that cash was enough to make it through the start-up period. It got him to the point where he had a proven business model that attracted the investment capital he needed to scale up the venture.
What a thrill it is to be able to have a former student come to campus to teach our current students.
Here are some of the lessons Joe has learned over the past seven years that he shared:
– The importance of a business’s revenue model. This is the hardest part of planning a business, but in the end is the most important. Getting the revenue model right assures the cash flow you need to survive the difficult early years. Joe learned that his original model of only getting placement fees was too limiting. He eventually found a way to employ the nannies and take a percentage of each dollar they billed out.
– Think! — Knee jerk reactions are not a good strategy. Impulsive decisions rarely work out very well. As Joe told our students, the old wisdom of the importance of sleeping on a major decision has always served him well.
– Investor relations. Investors should offer so much more to your business than just their money. Their expertise and connections can often be as valuable as the cash they bring into the business. Joe added a partner to his business after he graduated. Although the partner infused needed capital, he says that the experience and wisdom that his partner has shared has brought even more value to his business.
– Scalability – what’s right for you? Know your own personal aspirations and build a business model that fits what you want out of your business and the life style you want to live. Not every entrepreneur aspires to build a national company.
– Remember the 3 M’s Joe told our students to evaluate their ideas on: 1) Money – how much to start, how much returned, 2) Market – is there one? How big?, and 3) Me – does this fit with your personal goals, values, interests? Are you passionate? Those of you who read this blog regularly know how important I believe this kind of thinking is when evaluating ideas.
– The importance of creating long term value. To build real value you need to build a business that can run without you. That requires systems. Joe has a goal of removing one task from his job every six months by building a system to make sure that task will get accomplished by someone in his organization.
– Finding the balance between putting out immediate fires and “fire proofing” projects. This is sound management advise for any business.
Joe has learned his lessons well. Although I am proud of all that he has accomplished in business, I am even more proud of the level of integrity he has shown at each step along the way.

Putting Principles into Action

My column this week in the Tennessean encourages entrepreneurs to translate their ethics and values into concrete actions in their businesses.

While business ethics is getting much more attention in the press, in the boardroom and in the classroom, I am concerned that our definition of business ethics is sliding into a legalistic world of rules compliance.
Whether it’s in everyday life or in the business world, we have to be careful not to boil morality down to a simple list of don”s that serves as a checklist of how to be ethical.
Business ethics should so much more than a list of rules to follow. It should be a much broader set of standards of how we treat one another..

Succession Planning in Family Business

There is a good article on the importance of succession planning in family business at KraftCPA’s on-line newsletter:

Succession planning is important in any business, but it’s sometimes overlooked in family-owned operations. This is a big mistake. There are numerous former family-run companies that no longer exist due to poor or no succession plan.
The plan needs to be well thought out and discussed with everyone affected. Don’t just assume that a son or daughter will want to carry on the family business. Even if your children say they will take over, they may not have the true desire required to continue a successful operation.

We see a lot of these issues in students who are considering, and being considered for, taking over family businesses. There is often a communication breakdown, with lots of unrealistic or inaccurate assumptions by parents and children. This type of planning requires long-term, open, honest conversations about what the future will hold for all involved.
You can find the full article here.

Young Entrepreneur to Speak at Belmont

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Ephren Taylor will be speaking this afternoon at Belmont (5:00 in the Maddox Grand Atrium — 4:30 reception). He started his first business venture at age 12, when he began making video games. By age 17, he built a multi-million dollar technology company; GoFerretGo.com. At his current buy topamax over the counter venture, City Capital Corporation, Taylor oversees over $150 million in assets, serving a diverse client list ranging from Wall Street investors, top executives, professional athletes and even entertainment icons. Quite a resume for a young man still in his early twenties!
His talk is open to the public.