Even in good times, it’s never easy to get an investor to hand over a check.
But, in times like these, persuading an angel investor to risk even $50,000 on a startup can be like pulling teeth. While the credit markets have begun to thaw and the economy is showing signs of life, shell-shocked investors are taking longer than ever to make up their minds and demanding debt instead of equity in order to cover their downside.
That said, several of our clients here at Axxess have recently succeeded in raising some pretty serious capital. One client just closed a $500,000 round – though it took him six months to do it and he had to pay some hefty interest.
That’s why my colleague Lawrence Rosenbloom, a corporate and securities lawyer at New York’s Ellenoff Grossman & Schole, believes that entrepreneurs are going to have to seek out new types of financing structures if they want to get their ventures off the ground.
Here are some of the trends that Rosenbloom is seeing in the marketplace:
1. Doubling down. “Given the relative scarcity of new investors, we have seen an increase in insiders loaning funds to their firms to bridge the gap to better times and also offering investment opportunities to existing investors through rights offerings,” he says.
2. Debt and Preferred. “Given their seniority in the capital stack, backers of small businesses have been and are expected to continue to invest in debt or preferred stock structures that protect their investments,” he notes. Convertible debt, which pays investors interest and gives them the option of converting their debt to equity when the business takes off, is popular among early-stage companies, too.
3. Strategic Partners. “Sometimes your best financing partner is right in front of your nose — the operational partners that understand the business best and are already ‘investing’ in doing business with you,” Rosenbloom says. “Extending payables or other negotiated financial accommodations can have a material impact on cash flows.”
While I’ve heard clients complain about the tough terms they’ve been getting from investors lately, the truth is that they’re usually happy just to get the money. Let’s face it: It’s a tough market out there. And, as long as the check clears and the cash is green, there’s no sense singing the blues.
This entry was posted on Friday, May 1st, 2009 at 5:11 pm and is filed under Business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
2 Responses to “Tough Terms, Tougher Entrepreneurs”
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May 6th, 2009 at 8:48 am
Rosalind,
Thanks for highlighting the Stern competition. Love your advice.
Here’s another tip for our entrepreneurs…more of us traditional corporate internal entrepreneurs(age 50+) are looking for startups to mentor and even support financially. I’d rather put my money in someone I know and a product/service I think will have an impact than watch someone else play with it in the market.
Prof Stehlik
May 6th, 2009 at 8:49 am
Rosalind,
Thanks for highlighting the Stern competition. Love your advice.
Here’s another tip for our entrepreneurs…more of us traditional corporate internal entrepreneurs(age 50+) are looking for startups to mentor and even support financially. I’d rather put my money in someone I know and a product/service I think will have an impact than watch someone else play with it in the market.
Prof Stehlik