Financing Your Company
Content provided by the Women Presidents' Organization
By Marsha Firestone, Ph.D.
President and Founder of Women Presidents' Organization (WPO)
Question: How do multimillion-dollar women business owners finance their companies?
The short answer is with pluck and luck. The long answer could and does fill entire books. So here is a mid-size answer. Women business owners are known to be creative about raising capital (after maxing out their personal credit cards and goodwill loans from family and friends). Where do women turn when they receive a polite but firm "no" from these sources and from independent SBA lenders? Let's assume the business owner in question is not ready for an initial public offering (IPO) or even a direct public offering (DPO). What's left? In search of capital, women business owners have been known to take unusual and creative measures, such as:
- Sell Securities to Investors or Set Up Employee Stock Ownership Plans
- Obtain Private Sector Funding From Angels or VCs
- Sell Receivables For Immediate Cash or Obtain Accounts Receivable Insurance
Sell Securities to Investors or Set Up Employee Stock Ownership Plans
Some women business owners sell securities to a small number of investors without a registered public offering. These types of transactions are called private placements and have varying terms and conditions. Standard types of securities include traditional debt, common stock, and convertible debt or preferred stock. The Small Company Offering Registration (SCOR), basically a hybrid between a public offering and a private placement, is now legal and available in more than 40 states. Unless she guarantees a stock dividend, a woman business owner can sell stock with no drain on the company's cash flow. An Employee Stock Ownership Plan (ESOP) makes pre-tax dollars available to finance her company's growth. An Employee Stock Purchase Plan (ESPP) allows employees to buy stock from the company at a discount. An owner can offer an ESOP or an ESPP as an employment incentive, giving her employees the opportunity to share in the company's growth potential. The plans can be either individual-based or company-wide, and they are inexpensive to implement. Besides raising capital, these plans can provide a company with significant tax advantages and great incentives.
Obtain Private Sector Funding From Angels or VCs
To grow their companies, many women business owners take on a partner or investor. Private sector funding from "Angels" or Venture Capitalists (VCs) can be a savior. An angel is an accredited investor with a high-net-worth (at least $1 million) or even a team of investors who look for an average return on equity of 10 to 15 percent above the S&P 500 or a 40 percent per year return. Angels are willing to invest anywhere from $20,000 to $100,000 on a business venture. In return, they attend shareholder and board meetings, and expect ongoing communication with the business owner about what is going on with the company. Angels will wait a few years but often want their money back during the fifth year of operation.
Besides reading the "Business Opportunities" section in the newspapers, how do you find angels? The Web is a good place to start. Look for companies like Equity International (www.equityinternational.com), which co-invests with world-class local partners in existing and newly-formed companies with meaningful growth potential. Equity International publishes The International Directory of Venture Capital Networks and Business Angel Networks 1999 (U.S. edition, $39.95, available at the Web site). Another idea is to check out vFinance.com if you are searching for capital. Go to a public or university library and look at the Corporate Finance SourcebookTM, a one-of-a-kind information guide featuring over 1500 of today's top investment sources and over 1700 service firms. Another resource is Active Capital (http://www.activecapital.org/), previously ACE-Net, the Angel Capital Electronic Network created by the SBA. Active Capital is a low-cost, Internet-based option for entrepreneurs to register securities for sale. The Kauffman Foundation in Kansas City (www.kauffman.org) works with investor partners to encourage entrepreneurship across America.
Venture capital firms (VCs) seeking to invest $1 million or more focus on high growth, high risk companies. The expectation is that the business will go public within an average of five years and give the VCs a solid return on their investment. VCs typically expect a 20 percent to 50 percent annual return on investment upon their exit. But be wary. Like angels, VCs may take a big bite of equity or insist on majority control of a company's board.
How do you find VCs? Many top U.S. corporations maintain VC divisions to further their own interests. Small Business Investment Companies (SBICs), licensed and regulated by the U.S. Small Business Administration (SBA), are privately owned and managed investment firms that make venture capital investments in small businesses. Here are some Web sites to check out:
- The National Venture Capital Association (http://www.nvca.org/)
- Garage Technology Ventures, which is looking for entrepreneurs who have big ideas and need seed capital to turn their ideas into action (http://www.garage.com)
- The Funding Post, where entrepreneurs get an audience with VCs and the VCs get to hear a honed, to-the-point pitch. (http://www.fundingpost.com/)
- Venture Capital Access Online (www.vcaonline.com), a leading Internet-based marketplace for the venture capital and private equity industry.
- AngelDeals.com, a virtual global network for the business community of entrepreneurs seeking funding and investors seeking deal flow.
- Brass Ring Partners a firm founded with partners from the former McColl Garella is an excellent investment-banking firm that focusing on mergers and acquistions. Sell Receivables For Immediate Cash or Obtain Accounts Receivable Insurance.
When a business owner sells her company's accounts receivables for cash, it is called factoring. Factoring companies will base funding on the credit-worthiness of receivables. Usually these companies take over receivables only for a specified period. Accounts receivable insurance or credit insurance guarantees coverage when a customer can't pay. It's like a credit line that allows the business owner to continue to grow her company without giving up her equity.
Some facts for this article were provided by The Edward Lowe Foundation, a not-for-profit organization which encourages business owners to get involved with entrepreneurial peer-networking organizations and to think about their businesses in new and creative ways.
The Women President's Organization (WPO) is a nonprofit membership organization whose members are a diverse group of entrepreneurial women presidents who have guided their businesses to generate at least $2 million in gross annual sales or $1 million for a service-based business. Each WPO chapter serves as a peer advisory group and empowers members to achieve increased business and financial success, as well as individual growth. Local chapters are coordinated by a professional facilitator who organizes meetings of the peer advisory group to focus on important business issues and cutting-edge business trends. WPO member businesses have an average of $11 million in annual revenues, 112 employees and 18 years in business.
Content copyrighted by the Women Presidents' Organization