Prepared for
Rural Policy Research Institute
200 Mumford Hall
University of Missouri
Columbia, Missouri
by
|
RUPRI Equity Finance Task Force
|
|
|
|
|
|
David L. Barkley
|
Clemson University |
| Christopher Ferland |
Clemson University |
| David Freshwater | University of Kentucky |
| Deborah Markley | Policy Research Group |
| Julia Rubin | Harvard University |
| Ron Shaffer | University of Wisconsin |
| Sherri Wright | Clemson University |
November 1999
Funding for preparation of this publication provided through a grant from the USDA Fund for Rural America.
Equity Capital for Nonmetropolitan Businesses:
An Introduction to Alternative Sources and Directory to Related Web Sites
Policy
makers concerned about the viability of rural communities have expressed renewed
interest in identifying strategies to enhance the competitiveness of rural
economies. An important component
of these strategies is to improve access to equity capital to support rural
business creation and expansion.
Equity
capital, defined as higher risk capital involving an ownership role in the
company in which the investment occurs, is available from a variety of sources.
Rural businesses’ ability to access equity capital markets will be
enhanced if business owners are aware of the alternative sources and differences
in objectives and investment strategies among these sources.
The purpose of this web site is to
provide an introduction to the principal sources of equity capital for rural
businesses. The selected sources are:
1.
Small
Business Investment Companies (SBIC)
2.
Community
Development Corporations (CDC)
3.
Community
Development Venture Capital Alliance (CDVCA)
members
4.
Private
Venture Capital Firms
5.
Angels
/ Angel Bands / Angel Networks
6.
Community
Development Financial Institutions (CDFI)
An overview of each equity capital source is provided
along with links to other web sites containing information of potential interest
on that specific source or program. A brief description of the contents of linked
web sites is provided along with the sites’ addresses. Some of the linked web sites provide information
on private organizations or private venture capital firms. The Rural Policy Research Institute does not
endorse any of the sites or products or services offered on the web sites.
I.
Small Business Investment Companies (SBICs)
Although SBICs are private, independently-organized firms that
construct their own management and investment policies, they still must adhere
to a set of rules and regulations created by the SBA regarding firm
organization and investment procedures. SBICs can be organized as corporations
with publicly traded stock, subsidiaries of a corporation, or limited
partnerships. In terms of ownership of
an SBIC, the SBA has dictated few restrictions. Banks (national and state-chartered), bank-holding companies,
foreign-operating companies, and other venture capital organizations can own
and operate SBICs, although verification of significant foreign investment is
required due to money laundering concerns.
In general, most SBICs are owned by small groups of experienced venture
capital investors or commercial banks.
The SBA also requires each SBIC to employ either a SBA-approved
full-time manager or an agreed-upon outside investment manager. In addition, the SBA must approve all
officers, directors, investment advisors, and owners with 10% or more ownership
share in a SBIC.
The SBA designates which companies qualify for financial assistance
from SBICs through specific size and firm type restrictions. SBICs may finance
only firms defined as “small” by the SBA.
Those firms classified as small are companies with a net worth, or
annual receipts, less than or equal to $18 million and an average net income
not exceeding $6 million for the preceding two years. However, the above size criteria are considered too low for
industries with large average firm sizes.
Thus, the SBA provides less restrictive size standards for these
industries in terms of maximum annual receipts or employment levels. Examples of these industries include
Department Stores (SIC 5311), Motor Vehicle Dealers, New and Used (SIC 5511),
and Motion Picture and Video Tape Production (SIC 7812) with maximum annual
receipts of $20.0 million, $21.0
million, and $21.5 million respectively.
In addition, SBICs may not invest in other SBICs, finance and
investment companies, unimproved real estate, passive or casual businesses,
companies with less than half of their assets and operations in the U.S, or
businesses that plan to use the proceeds to purchase farmland. SBICs also are prohibited from investing in
companies whose primary business activity involves financing other individuals
or businesses, purchasing debt obligations, or factoring or leasing equipment.
SBICs may use both private and federal funds to supply financing to
small businesses. Sources of financing
for SBICs include private equity, public offering of stock, issuance of bonds,
promissory notes or other debt securities, loans from commercial banks or other
lenders, and funds or guarantees from a federal government funding system. Although SBICs generally possess anywhere
from $2.5 million to $10 million in private capital from investors, many of
these firms choose to supplement, or leverage, their private funds with federal
loans made available to them through SBA financing. A SBIC may obtain a leverage of up to three times the value of
its private capital, with a special exception allowing a leverage of 400
percent of private capital if at least 50 percent of the SBIC’s total
investment funds are invested in “venture capital”. For example, a SBIC with $10 million in private capital may
issue up to $30 million in debentures which are guaranteed by SBA and sold ( in
pools with other SBA-guaranteed debentures) through a public offering. However, if $5 million or more of the $10
million in the SBIC's private capital are invested in “venture capital,” the
SBIC may issue up to $40 million in SBA guaranteed debentures. Each SBIC is limited to a maximum of $90
million in SBA-guaranteed debentures.
The SBA requires that SBICs have a minimum of $5 million in private
capital to qualify for a debenture leverage and a minimum of $10 million for a
participating security leverage.
Participating security leverages are preferred stock or deferred-payment
debentures with interest payments contingent on income.
A SBIC can provide
financial assistance to qualified small businesses in two ways: debt or equity
financing. Debt financing can be in
the form of long-term loans or debt securities. Debt securities are loans for which small businesses
issue a security which may be convertible into or contain rights to purchase
equity. In general, both forms of
debt financing have a maturity of at least 5 years, although loans may not
have a maturity of more than 20 years. In
addition, debt financing may be secured or unsecured and the terms for subordination
and amortization may vary. Equity
financing involves the SBIC purchasing equity securities from participating
small businesses. However, a SBIC
may not become a general partner of an unincorporated small business concern
or otherwise become liable for the general obligations of an unincorporated
concern. In general, a SBIC cannot
invest more than 20% of its private capital in any one small business.
SBICs fund small businesses in many different industries and stages of
development, though each SBIC has its own distinct investment policy and
financing preferences based on managerial knowledge and experience. In addition, most SBICs prefer to invest in
businesses close to their offices, although many invest on a regional or
national scale. In general, SBICs
prefer to finance businesses with a moderate level of growth potential and
risk, although many seek out high-risk, high-technology industries because of
the potential for high returns.
However, when SBICs use SBA leveraging, they usually avoid seed,
early-stage, and/or start-up companies and their high delinquency rates because
of the required immediate debt service on SBIC government loans.
Sources: SBIC
Overview on Small Business Administration homepage; Small Business Investment Companies Manual
on Eaton & Van Winkle homepage; The
Growth Company Guide to Investors, Deal Structures, and Legal Strategies,
Clinton Richardson, Pfeiffer & Company, 1993.
Relevant Web
Sites:
The Small Business Administration provides a
web site describing the functions and purposes of Small Business Investment
Companies. The site discusses many topics dealing with SBIC financing including
government leverages, tax advantages, loans, debt and equity securities, licensing
and regulatory requirements of SBICs, and alternative methods of SBIC financing.
This site is useful for gaining an understanding of SBICs and finding
links to other SBA supported sites.
www.sba.gov/INV/howtoseek.html
This web site advises entrepreneurs on how to seek SBIC funding for their companies. The site offers information on the Small Business Administration and specific programs available to entrepreneurs.
The National Association of Small Business Investment Companies (NASBIC) created this web site to assist those searching for information on SBICs. This site answers the following questions: what is a SBIC, what have SBICs done, what qualifies as a small business, how are SBICs structured, and what are the advantages of using a SBIC? This site is an excellent source of general information on SBICs.
The Small Business Administration provides links to SBICs licensed through their organization. The list includes approximately twenty-five firms. Those searching for SBIC financing should be aware of the disclaimer of endorsement and liability given by the SBA regarding the SBICs listed on the site. This is a good site for finding links to SBICs, although this is not a complete list of all SBICs on the web.
www.evw.com/manuals/sbicintr.htm
The Eaton & Van Winkle web page offers information about the formation of the SBA and SBICs. The information is clearly presented and may be understood by individuals without a business background. This site is a good place to start for those interested in learning about SBICs.
www.sba.gov/gopher/Local-Information/Small-Business-Investment-Companies/
This page lists all SBIC licensees by state. This is the most comprehensive list available on the Internet. Addresses, phone numbers, and contact persons are provided for each of the SBICs. Links to SBIC web pages are not provided.
II.
Community Development Corporations (CDCs)
Community Development Corporations (CDCs), also known as neighborhood
or economic development corporations, are governmental or quasi-governmental
organizations that invest in companies locating or expanding in their
communities. Almost all CDCs (99%) are
non-profit and most are associated with local economic development programs,
community organizations, or governmental agencies. The primary objective of CDCs is to provide a service to the
local community. CDCs provide tax
incentives, loans, and equity capital to small businesses, community
development programs, and housing developers with the hope that these
investments will result in economic benefits for the local region and its
citizens.
The two main types of CDCs are regular CDCs and bank CDCs. The internal organization and individual
policies of each regular and bank CDC vary significantly. However, regular CDCs are, in general, less
strictly organized and subject to fewer rules than bank CDCs. CDCs may be run by a full or part-time
professional staff or, to reduce operating costs, a volunteer board of
directors. In most cases, regular CDCs
are run by a board of directors composed primarily of community residents,
local business executives, and political leaders. Many CDCs also have subsidiary boards and special advisory
committees to work in conjunction with the primary board. The role of CDC board members ranges from
limited to very active. However, most
boards are quite involved in the CDC’s fund-raising activities, public
relations efforts, policy-making decisions, and project selection. Most bank CDCs employ a paid staff, although
a limited number are managed by a volunteer board.
Bank CDCs come in a variety of organizations and structures, each
tailored to the individual needs of the local community and bank
investors. One common CDC organization
is that of a subsidiary corporation of a bank.
In addition, CDCs may be managed by a parent bank holding company. CDCs can be owned by a single bank or by
several banks. The multibank CDC
organizational form allows several investors to share the start-up and
operating costs of the CDC while reducing the risk associated with the
financing of small businesses. Banks
also may create partnerships with local corporations, utility companies, and
governmental agencies to form multiinvestor bank CDCs. Such partnerships increase the total capital
available for loans and disperse the risk of loan defaults among many
investors. For all bank CDCs, a federal
banking regulator must verify that the investments meet some public, civic,
community, or economic development purpose before the CDC is authorized to
operate under federal banking regulations.
The only organizational restriction made by the IRS concerning CDCs is
that sole proprietorship or partnership is an unacceptable CDC form.
CDCs are tax-exempt “501(C)3” organizations and, as such, must meet
certain IRS requirements. To maintain
its tax-exempt status, a CDC must be organized exclusively for a charitable
purpose. The term charitable purpose
includes lessening the burdens of government, lessening neighborhood tensions,
combating community deterioration, and relieving problems of the poor, the
distressed, or the underprivileged. In
addition, any monetary profit obtained through the CDC’s operations must be
reinvested in the community. Certain
activities, such as lobbying and legislative activities, are generally
permitted for CDCs but funds allocated to such activities may be subject to
taxation if performed in excess.
However, CDC participation in a political campaign is absolutely
prohibited.
CDCs obtain funds for investment from a variety of sources, including
the federal government, state and local governments, foundations, religious
organizations, financial institutions, and private corporations. The primary sources of federal dollars for
CDCs include the Economic Development Administration, the Department of Health
and Human Services, and the Department of Housing and Urban Development. In the last two decades, state and local
governments have become an important support base for CDCs through the
provision of grants, loans, and technical assistance. In addition, many philanthropic foundations provide equity
capital, low-interest loans, and grants to both established and higher-risk
“emerging” CDCs. These foundations
range from small, community-based foundations to large, national foundations,
such as the pioneer Ford Foundation.
Churches and religious councils are also a source of financial support
for CDCs, especially fledgling CDCs that governments and foundations are less
likely to fund. Banks and private
corporations, such as life insurance and utility companies, also have become
important providers of CDC funding.
This is due, in part, to the increased willingness of the private sector
to participate in CDC operations as “investors” or partners, instead of just as
“contributors.” In addition, banks
receive Community Reinvestment Act (CRA) credit and private businesses receive
favorable tax treatment from investment in CDCs.
CDCs may participate in a wide range of development efforts, such as
job creation, small business assistance, construction and rehabilitation of
residential and commercial real estate, and skills training. As such, each CDC has its own distinct
investment criteria or goals, depending on the specific needs of the community
and the CDC investors. In terms of
business investment, CDCs consider not only the potential growth and financial
stability of small businesses but also other social and economic benefits the
businesses may provide for the local community. Areas of particular concern include employment opportunities,
wage rates, labor training efforts, and potential local tax revenues. As a result, businesses that were unable to
obtain funding from venture capital firms may receive funding from a CDC. CDCs offer lower rates and longer terms on
loans than other lending institutions because their primary objective is to
meet the community’s economic and social needs.
There are approximately 2,200 CDCs in the United States working to
achieve the successful development and revitalization of local communities. CDCs range from small community-based
organizations with a relatively small amount of investment capital to large, multiinvestor firms with a
large amount of private capital available for investment. Examples of regular CDCs include the City Development
Corporation of El Campo, Texas, the Twin Cities Community Development
Corporation in Fitchburg, Massachusetts, Friendship Development Associates in
Pittsburgh, Pennsylvania, and the Community Development Corporation of Kansas
City, Kansas. Examples of bank CDCs
include the First Bank System Community Development Corporation in Minneapolis,
Minnesota, the Banker’s Small Business Community Development Corporation in San
Diego, California, and the Rapid City Community Development Corporation in Rapid
City, South Dakota.
Sources:
Corrective Capitalism: The Rise of America’s Community Development Corporations,
Neal R. Pierce and Carol F. Steinbach, Ford Foundation, NY, 1987;
“Bank CDCs: Building Partnerships for Community
Development”, Community Dividend, Federal Reserve Bank of Minneapolis,
Fall/Winter 1997; The Growth Company
Guide to Investors, Deal Structures, and Legal Strategies, Clinton
Richardson, Pfeiffer & Company, 1993.
Relevant Web
Sites:
www.nimbus.org/Connections/Links/CDCsandCounties.html
Paul Heimbach, Head Web Designer for Kosciusko County Online, provides an assortment of links to CDCs, non-profit groups focused on economic development, and county Chambers of Commerce on his personal web page. These links may be helpful to individuals searching for CDCs on the Internet.
minneapolisfed.org/pubs/cd/97-f-w/cdcs.html
The Federal Reserve Bank of Minneapolis sponsors this web page. This site provides useful information on the functions and organizations of CDCs. Individuals interested in learning about CDCs will benefit from viewing this web site.
III.
Community Development Venture Capital Alliance (CDVCA)
The
Community Development Venture Capital Alliance (CDVCA) is a group of community
development organizations, state-funded venture firms, private venture capital
firms, and foundations whose missions are to provide sustainable development
for disadvantaged communities through the creation of employment and
wealth. Community development venture
capitalists (CDVCs) differ from traditional venture capital firms in that their
investment decisions are based more on the social and economic consequences of
the investment and less on the projected rate of return. Issues of concern for CDVCs include job
creation, tax revenue generation, and support for minority and women-owned
businesses.
CDVCA
members have a variety of organizational structures. Many nonprofit community development corporations (CDCs) and
community development financial institutions (CDFIs) have created venture
capital funds and community development venture capital (CDVC) subsidiaries. Some CDVC programs are organized and managed
by private foundations or governmental agencies. Other CDVCA members are traditional private venture capital firms
with a development-oriented focus. As a
result, CDVCs can be structured as corporations with publicly traded stock,
subsidiaries of a corporation, or limited partnerships. However, CDVCA members are more likely to be
organized as corporations since CDVCs generally provide long-term financing and
limited partnerships have a limited life.
CDVCs may receive funds for investing from a variety of public and
private sources. These sources include
government, foundations, churches, utilities, large corporations, banks, and
wealthy private investors. Types of funding
for CDVCs include loans, grants, equity capital, and program-related investments. The individual CDVCs investment goals affect
the rate of return on investment and, therefore, the willingness of potential
investors to supply capital. The lower
the rate of return, the less likely it will be for commercial banks and private
corporations to provide funds. In
addition, CDVCs usually provide longer-term equity financing than traditional
venture capitalists in order to achieve their long-term economic development
goals. As a result, many CDVCs obtain
funding from foundations and government agencies. Banks have recently become a more important source of investment
capital for CDVCs since new regulations permit banks to receive Community
Reinvestment Act (CRA) credit for investment in CDVC funds.
Most
CDVCs have similar overall investment objectives, although the specific
selection criteria for each CDVC vary.
In general, CDVCs attempt to maximize the return on their investments
within the limits of their core development goals. CDVCs typically finance start-up or early stage businesses with
moderate growth potential, good management, and a proprietary good/service or a
good/service that fulfills some key community or societal need. Each CDVC develops its own set of
agreed-upon investment goals and requirements based on the CDVC’s social
mission and the expectations and objectives of its investors. In addition, each CDVC employs its own set
of measures for the potential social and economic impacts of business
investments. These measures include job
creation and retention, wealth creation by income class, employment practices,
environmental practices, and export-enhancing/import-reducing potential. Furthermore, some CDVCs fund only
cooperatives, worker-owned firms, or firms with a majority ownership by some
disadvantaged group. Other
contingencies to funding may include CDVC representation on the company’s board
of directors and the targeted hiring of females, minorities, or low-skilled
labor.
The
CDVCA has grown significantly since its inception in 1995 and currently has 45
member organizations. Boston Community
Loan Fund in Boston, Massachusetts and Cascadia Revolving Fund in Seattle,
Washington are two CDFIs that belong to the CDVCA. Two CDCs in the organization are Kentucky Highlands Investment
Corporation in London, Kentucky and J.P. Morgan Community Development
Corporation in New York, New York. Of
the many venture capital firms in the CDVCA, two of the most prominent are
Northeast Ventures Corporation in Duluth, Minnesota and CEI Venture, Inc. in
Portland, Maine.
Sources:
“Thoughts on the Community Development Venture Capital Field”,
Meriwether Jones, Rural Economic Policy Program, The Aspen Institute; “Wall Street on Main Street”, Rebecca
Carter, Communities & Banking, Federal Reserve Bank of Boston, No.
19, Summer 1997.
Relevant Web
Sites:
The Community Development Venture Capital Alliance (CDVCA) is an association of venture capital firms and community development corporations that are members of the Coalition of Community Development Financial Institutions. The members of the CDVCA believe that venture capital and community development should be brought together to form an infrastructure strong enough to assist communities looking for funding to promote employment, solve social problems, and assist economically disadvantaged populations and regions. Their goal is to help small firms find equity financing and manage long-term capital. This association will assist small businesses looking for funding under certain circumstances, which can be discussed by contacting the CDVCA.
Creative Investment Research is an investment research company that targets socially responsible investments. The site lists approximately 100 Certified Community Development Financial Institutions by state. The resources on this web site are useful for those searching for funding from CDFIs.
IV.
Private Venture Capital Firms
Private venture capital firms provide risk equity capital and
entrepreneurial management expertise to innovative and rapidly expanding
businesses. These venture capital
companies are an important source of capital for start-up companies who lack
the collateral and income necessary to obtain traditional debt financing. Unlike other financiers, venture capital
firms are actively involved in the management, marketing, and strategic
planning of the companies in which they invest. This active role in their portfolio companies’ decision-making is
integral to the venture capital firm’s management of their high-risk
investments. Venture capital firms
further alleviate their high investment risk by developing a portfolio of many
entrepreneurial companies in each individual venture fund. In essence, a few outstanding performers in
a venture fund portfolio make up for the portfolio’s weaker performers and
complete failures.
All venture capital
firms are organized as some form of private partnership or corporation.
In general, most firms invest their capital in venture funds organized
as limited partnerships. These pooled funds have a general partner,
or the venture capital firm, and limited partners, or various other investors. The partnership is closed to further investment
once it reaches its target size so there is a fixed capital pool available
for investment. Typically, these funds
have a fixed life of approximately ten years. Most venture capital companies have several,
separately managed venture funds, each of which has its own distinct investors
and general partner. New tax regulations
also permit venture capital firms to organize as limited liability partnerships
(LLPs) or limited liability companies (LLCs). Regular limited partnerships, LLPs, and LLCs
differ regarding liability, tax regulation, and management issues.
There are many
different types of private venture capital firms. The most common type is the “private independent”
venture firm, which has no affiliations with other financial institutions.
Venture capital companies also may be subsidiaries of commercial banks,
investment banks, insurance companies, or non-financial corporations.
As a subsidiary, a venture firm may make investments on behalf of outside
investors or the parent company itself. The “direct” investing of a parent company’s capital in portfolio
companies by subsidiaries of non-financial institutions or venture capital
programs is referred to as “corporate venturing.” Corporate venturing programs make venture investments in accordance
with the parent company’s strategic goals and may be organized as an independent
association with strict corporate guidelines or as a loosely-structured cooperative
program.
Private venture
capital firms receive funding from a wide variety of public and private organizations.
Funding sources for venture funds include foundations, corporations,
endowment funds, foreign investors, and wealthy individuals and families. However, over 50 percent of the funding in private venture capital
firms currently comes from private and public pension funds. “Fund-raising” by venture firms is the process
of seeking investment commitments from investors. It may take anywhere from a few days to several
months for a fund to reach its target size. The specific types and number of investors in each venture fund
depends on the general partner of the fund, the types of portfolio companies
targeted, and the target fund size. The
venture firm’s investment history and the compensation structure of the venture
fund also affect the type of investors willing to commit to a fund and the
amount of capital they are willing to commit.
Venture capital
firms have many different types of investment strategies, but most can be
termed either generalists or specialists.
Venture firms that do not restrict their investment activity to particular
industries, company life stages, investment sizes, or
Several criteria
are used by most venture capital firms in their evaluations of the financial
prospects of potential portfolio companies. One of the most important characteristics that venture firms look
for in prospective investees is a strong, capable management team. Credible, experienced management is critical
to the successful growth of a company. In
addition, venture capital firms prefer companies with proprietary products
or services because they have a significant competitive advantage.
Since venture capital firms expect a 20 to 50 percent annual return
on their investments, they also look for companies with a great market potential
to support extensive market growth. Other considerations made by venture firms
in their investment identification include the extent and timing of financing
needs and the speed and likelihood of favorable exit. Finally, venture capital firms seek to exit their investments in
three to seven years through a company merger, sale, or initial public offering
(IPO). Thus, the owners of prospective
portfolio companies must be amenable to such exit strategies.
The primary objective
of private venture capital firms is to establish funding arrangements that
maximize the rate of return on their investments and, therefore, the wealth
of their funds, investors, and investees. Generally, funding agreements entail the relinquishment
of some level of company ownership and control in exchange for capital investment
in the form of stock or an instrument that can be converted into stock in
the future (e.g., convertible debenture or debt with warrants).
For the most part, venture capital investors prefer an issuance of
preferred stock because of the associated preferred rights to dividends and
preferential treatment upon liquidation or sale of the company.
Control rights typically included in venture capital funding agreements
are information rights, first-refusal rights (allows for participation in
future company financings), anti-dilution provisions (protects against future
reductions in percentage ownership), and registration rights (gives investors
liquidity by permitting IPOs).
Venture capital
firms come in various sizes, from small, seed specialist firms with only a
few million dollars in investments to large international firms with over
a billion dollars invested. Depending
on the size of the venture firm, individual company investments may range
from $50,000 to $20 million, although the average investment is between $500,000
and $5 million.
Sources: Directory
of Venture Capital, Catherine E. Lister and Thomas D. Harish, John Wiley & Sons, Inc., 1996.; “The Venture Capital Industry”, National
Venture Capital Association homepage; The
Growth Company Guide to Investors, Deal Structures, and Legal Strategies,
Clinton Richardson, Pfeiffer & Company, 1993.
Relevant Web
Sites:
www.numen-lumen.com/BkR/RiskReward_87.html
Numen Lumen is an audio book supplier. This site is an advertisement for the book titled Venture Capital and the Making of America’s Great Industries. The book gives advice for small businesses on how to manage money and cash flow situations.
www.krislyn.com/sites/venture.htm
This web page displays Krislyn Corporation’s favorite venture capital sites on the Internet. No insights are given as to how these sites were rated or selected. These twelve links generally are to the larger and better-known firms in the venture field.
This web page is provided by the National Venture Capital Association. This site includes information related to association events and publications, industry statistics and overview, and public policy news of interest to venture capitalists. Links are provided to regional and international venture capital organizations and NVCA partners.
This site provides a means of searching for venture capital online. Vcapital.com permits businesses and entrepreneurs to search a network of more than 130 venture capital firms for potential investors. Also provided are news stories of potential interest to venture capitalists and entrepreneurs and hot links to other sites.
A student organization of the Harvard Business School, the Investment Club, provides a link list of their top ranked venture capital firms. The club does not mention the ranking procedures or guidelines for selection to their site. Individuals not associated with Harvard can join the investment club for an annual fee of $90.
This is a home page for the quarterly magazine American Venture. Small business owners seeking capital can find a limited list of firms offering venture capital by industry. The site provides little additional information besides magazine subscription directions.
Finance Hub offers links to articles about venture capital. The site allows those searching for venture capital to place an advertisement online for a fee. By placing an ad, firms may save time searching for financing if venture firms view the ad and then contact the individual.
www.findingmoney.com/money.html
The format of this web page is similar to that of a book review. The site raises important questions about the different types of financing available for small business. Answers to these questions can be found by purchasing the two books advertised on this page, Finding Money and The Directory of Venture Capital. The Directory of Venture Capital provides a list of the most active U.S. venture firms. This list (totaling 630 firms) is extensive and can be useful for those searching for venture financing. The book can be ordered over the Internet.
VentureOne offers a range of products and services to assist entrepreneurs in identifying venture capital firms, assessing the valuations of companies comparable to their own, and tracking venture investment activity in their industries. VentureOne also profiles venture-backed companies and delivers this information to possible investors through an online database service and a variety of publications. These products and services are available only to VentureOne clients, although their web site provides links to various online resources and organizations of interest to entrepreneurs and small businesses.
rigel.pepperdine.edu/resources/guides/wwwvc.htm
Pepperdine University provides this page under library resources. The page links to several other venture capital pages. This is one of the best sources of venture capital connections available on the Internet. The links on this web page are to some of the major players in venture capital financing. This is a good place to start a search for venture capital.
This site provides an extensive and well-organized list of links to venture capital firms. A program inside this web page allows one to link to a venture capital firm’s homepage then directly back to the main list. This feature proved to be valuable when researching differences in venture capital firms. The list comes alphabetically, but can be grouped by industry. This site will be very useful for individuals looking for venture capital funding.
Asset Alternative Inc. places on-line news about equity and venture capital firms and the latest trends. They also supply a directory of venture capital firms and dates of conferences dealing with venture capital. This site is helpful for finding up-to-date news about venture capital firms.
The Venture Capital Marketplace is a listing of investment opportunities for venture capitalists. Small business owners will find it a valuable resource for investment opportunities and investor listings. The site also provides useful links to other venture capital sites.
http://pacific.commerce.ubc.ca/evc/vc_title.html
This site is supported by the W. Maurice Young Entrepreneurship and Venture Capital Research Centre at the Faculty of Commerce, University of British Columbia. This site will be useful to “start-up” venture capitalists in search of investment opportunities. Over 150 links related to venture capital are provided here, and categorized according to specific investment needs.
This site is primarily an advertisement for American Venture Magazine. This site is dedicated to entrepreneurs, “angel” investors, and venture capitalists. Information provided by this site includes recent news related to the venture capital industry and an extensive venture services directory.
www.cftech.com/BrainBank/FINANCE/FinanABizThrVC.html
This web site lists approximately sixty venture capital firms, contact phone numbers and headquarters’ locations. The list contains only a small fraction of all the venture capital firms in the United States and there are no links to the listed firms’ web sites. Cool Fire Technology publishes this web page.
V.
Angel Investors
“Angel” investors
are wealthy individuals, often former or current entrepreneurs, who provide
seed capital for start-up businesses and equity financing for more established
small firms. Angels generally know
the individual seeking funding through a personal or business relationship,
although the growing popularity of angel “networks,” or commercial match-making
databases for angel investors and entrepreneurs is changing this.
In addition, angels often understand the business they’re investing
in through past investments or entrepreneurial experience.
As a result, they provide start-up businesses with valuable business
knowledge, industrial expertise, and business contacts.
Angels may invest individually, through groups of pooled funds, or
through networks and generally expect 30 to 50% capital growth over a 3 to
5 year period.
The typical angel investor is a well-educated businessperson looking
to invest anywhere from $10,000 to $2 million in a start-up business.
Many angels are working or retired CEOs, top technology executives,
company presidents, and other industry professionals. Rising stock prices,
rapid technological advances, and an increasing number of IPOs and acquisitions
have enabled these individuals to accumulate significant personal wealth.
Angels also come from the ranks of celebrities, sports figures, lottery
winners, and people with inheritances, but these types of investors are much
less common. In general, angels only
provide patient money, or long-term investment capital, for one or two businesses
at a time. Most angels invest in industries
or markets with which they are familiar and in companies close to their home.
Angels also expect some limited involvement in the companies in which
they invest, often as a mentor or source of expert advice.
However, working angels, or private investors still actively involved
in their own careers or companies, generally prefer a less involved role in
their investments than retired angels due to time constraints.
Many individual angel investors pool their capital with other angels
to form angel groups or “bands.” Angel
groups are loosely-organized investor alliances that provide an effective
way for individual angels to review potential investments, distribute due-diligence
work, and share information and opinions. This consolidation of capital allows individual
angels to diversify their portfolios and invest in larger ventures.
Angel groups come in a variety of sizes and organizations but most
groups are composed of “lead” and “support” angels and a board of
directors. The lead angel coordinates
the group’s activities and meetings while the support angels provide more
indirect support for the
Formal angel networks reduce the transaction costs of angel investing
by facilitating the linking of investors and businesses in need of financial
assistance. The most comprehensive
network is the Angel Capital Electronic Network (ACE-Net), which is operated
by a group of eight non-profit economic development organizations and sponsored
by the Office of Advocacy of the U.S. Small Business Administration.
ACE-Net is a national, internet-based investment network that provides
angel investors with information on small, early-stage businesses seeking
$250,000 to $5 million in equity financing.
To participate in ACE-Net, investors must be “accredited,” or have
a net worth in excess of $1 million (with or without spouse) or an annual
income in excess of $200,000 ($300,000 including spouse).
Companies must complete an Entrepreneur Application and satisfy federal
and state security registration and exemption requirements.
Like ACE-Net, most angel networks are private listing services for
accredited investors and do not serve as investment advisors or brokers. However, many networks are for-profit companies
with the majority of their revenues coming from subscription fees.
The investment criteria and goals of angel investors tend to be less
strict and formal than those of venture capital firms. Nonetheless, angels have many of the same
investment conditions as venture capitalists, such as documented business
plans, preferred stock, rights of first refusal, representation on the board
of directors, and anti-dilution provisions. Most angels, like venture capital
firms, demand some level of involvement in the company’s decisions, although
some prefer to remain “silent” investors.
In addition, angels often invest in businesses with two of the primary
characteristics that venture capital firms look for in potential portfolio
companies: market dominance and competent management. Angels also prefer to invest in high technology firms, such as software
and telecommunications, because these firms are perceived to have greater
growth potential than businesses in other industries.
Angel groups generally have a more extensive selection process for
investment opportunities than individual angel investors. A systematic approach to firm selection is
essential for the success of an angel group and the satisfaction of its members.
Many groups require that candidates for investment must already be
sponsored, or funded, by one of the group’s members.
For some groups, the group administrator sorts through all the candidates’
business profiles and selects the most promising ones to be reviewed by a
small group of members with relevant expertise.
These sub-groups then decide which firms will provide a formal presentation
to the entire group. Like individual
investors, angel groups often have specific investment conditions, such as
rights of first refusal and representation on the company’s board of directors. These conditions and the agreed upon correspondence
system are outlined in the formal business contract between the angel group
and the firm, as is the case with individual angel investors.
Currently, there are approximately 250,000 active angel investors in
the United States, with the number of potential angels estimated to be between
one million and five million. Angels
and angel groups invest over $20 billion in entrepreneurial ventures, approximately
twice the amount invested by traditional venture capital firms. This active
angel community provides a prime financing source for young businesses in
need of smaller funding amounts since traditional venture firms typically
will not consider investments below $1 million. In addition, tax incentives, liberalization
of securities laws, and efficient computer matching networks have increased
and will continue to increase the level of angel investing in years to come.
Sources:
“Angels of Capitalism: Technology millionaires funnel money into
start-ups”, Pamela Sherrid, U.S. News Online, October 13, 1997; “Pennies From Heaven.”, Anne Field, Worth
Online, May 1998; “The Process and
Analysis Behind ACE-Net”, Terry Bibbens, Gregory Dean, and Fred Tarpley, ACE-Net
homepage, October 1996; “Aided by
Angels”, Korea Money homepage, August 1997;
The Growth Company Guide to Investors, Deal Structures, and Legal
Strategies, Clinton Richardson, Pfeiffer & Company, 1993.
Relevant Web Sites:
www.ilcoalition.org/acenet.htm
This web page is an Internet-based listing service that provides angel investors with information about companies searching for equity. The Ace-Net group is sponsored by the office of Advocacy of the Small Business Administration. Companies wishing to join the Ace-Net group can do so over the Internet. The only obligation is that the firm has to have registered securities offerings under the federal security regulation.
Entrepreneur Investments, LLC has established a members-only organization of angel investors called The Angel Network. This home page details how to join and what the group does. Qualified individuals or groups can join The Angel Network and receive information on ground floor investing. Firms searching for angel investors can request assistance over this web site. The network follows the U.S. securities laws and all members must pass an accredited investor background check.
This web page provides a “business owner’s toolkit” that defines angel investor networks and describes how they work. The “toolkit” is updated daily and contains useful information for the small business owner.
This site is primarily an advertisement for American Venture Magazine. The site is dedicated to entrepreneurs, “angel” investors, and venture capitalists. Information provided on this site includes recent news related to the venture capital industry and an extensive venture capital directory.
VI.
State Venture Capital Programs
Most states offer a variety of programs targeted at providing financial
support for small businesses. Some states have formed their own venture or seed capital organizations
or funds, while others have subsidized established private funds as limited
partners. Other public programs focus
on tax credits, loan insurance, angel networks, financial and/or technical
consulting, and the funding of other organizations that finance small businesses.
State venture capital programs receive funding from a variety of public and
private sources, including the federal government, local tax revenue, lottery
revenue, financial institutions, utility companies, and other private corporations.
Early-stage technology-based companies, minority or women-owned businesses,
and low-income entrepreneurs are often targeted by state economic and community
development programs. However, most state venture capital programs
assist businesses in a wide variety of industries and developmental stages
provided these businesses meet the state’s investment criteria and have the
potential for favorable economic impacts within the state.
One approach to small business assistance is income tax credits.
State governments make available income tax credits on investments
to qualifying businesses to encourage the funding of early-stage and start-up
companies. Eligible investments under tax credit programs
often are at-risk, meaning the investment is unsecured or has no principal
payments for an extended time period. In addition, the tax credit programs may restrict the type of businesses
eligible to receive funding and/or the type of investors eligible to use the
tax credits.
Many states have created venture or seed capital funds exclusively
to provide small businesses in their states with access to “patient” sources
of venture capital. State venture
capital funds receive funding from a variety of public and private sources,
including the federal government, local tax revenue, lottery revenue, mineral
depletion allowances, state bond issues, and financial institutions.
Generally, state venture capital funds invest only in companies within
the state or companies that will positively impact the state’s economy.
State venture capital firms also provide more patient capital, longer
term financing, and smaller investment amounts than private venture capital
funds. Forms of financing provided
by state venture firms are long-term loans, subordinated debt, convertible
debentures, debt with warrants, loan guarantees, purchases of qualified securities,
certificates of interest, and limited partnership interests. In contrast to private venture capital firms,
state venture capital funds choose investments that will not only provide
the greatest financial returns but also the greatest economic impacts for
the state, since sustainable development is a primary concern. Many programs require businesses to match their
investment from the state venture capital fund with capital from other private
sources.
Some states (e.g., Montana) provide assistance to small businesses
by investing in a private venture capital fund as limited partners instead
of creating their venture capital fund. Other states (e.g., Oklahoma) invest public monies in several private
venture capital funds in order to better diversify their investment portfolios.
Private venture capital firms often fund a specific type of business,
thus state investments in more than one private venture capital firm ensure
that companies in different industries and stages of development have more
equal access to state funding. State investment in private, for-profit venture
funds reduces the operation costs associated with state-run venture capital
funds but, at the same time, decreases the state’s control over businesses
selected for investment. As a result,
businesses are selected for investment by private funds more for their potential
rate of return than for their potential economic impacts or ownership by a
disadvantaged group.
Other programs instituted by states to provide financial assistance
to small businesses are loan insurance programs and programs that invest in
public and non-profit community development organizations. Each state loan insurance program has its own
specifications regarding the maximum percentage they will guarantee on loans
and the maximum loan size they will insure. Many states also distribute funds to public and non-profit organizations
that provide financing to qualified small businesses on a community, regional,
and statewide level. In particular,
state governments have become an important source of funding for community
development corporations in their state. Finally, some states have created investor networks
to assist small businesses in their search for financing. Typically, these networks are statewide databases
of potential angel and venture capital investors, grouped by investment criteria
and preferred investment size, although some databases list businesses and
entrepreneurs in need of funding instead of investors. For example, Louisiana entrepreneurs and small
businesses can pay a $50 fee to the Louisiana Department of Economic Development
to obtain a list of suitable investors from the Louisiana Venture Capital
Network. In addition, some states
have programs that help businesses obtain financing from commercial financial
institutions. Maine’s Investment Banking
Service advises businesses on different means of financing and assists those
businesses in securing funds from private financial institutions through its
contacts. The nonprofit Connecticut
Technology Associates, Inc. (CTA) corporation also provides similar services
to Connecticut businesses.
The National Association of State Venture Funds (NASVF) is a non-profit
organization of state agencies, state-sponsored private investors, and public/private
partnerships that provide risk debt and equity capital to qualified entrepreneurs
and businesses in their state. The NASVF facilitates the sharing of information
among its member firms through annual meetings, discussion groups, and newsletters.
It also provides its members with relevant research and training courses
to help them effectively develop their local programs and improve their efficiency
and productivity.
Sources: The National Association of State Venture
Funds homepage; Kansas Inc. “Best Practices of State Sponsored Seed and Venture
Capital Programs and Alternatives to Direct State Funding.” Topeka, Kansas, 1998.
Relevant Web Sites:
This site identifies state programs that are members of the National Association of State Venture Funds (NASVF). There are links to various state programs, although not all states are represented. The site also provides information on specific state efforts, research of interest to state programs, and forthcoming conferences. However, much of the above information on this site is available only to NASVF members.
www.state.(state abbreviation).us
VII.
Community Development Financial
Institutions (CDFIs)
Community Development Financial Institutions (CDFIs) are private
financial organizations that tailor their investment and lending activity to
serve distressed or underserved communities.
CDFIs supply loans and investments to areas, businesses, and individuals
that cannot secure financing from traditional financial institutions. Some financial products and services that
CFDIs provide are mortgage financing for first time home buyers, commercial
loans and investments for new or expanding small businesses, loans for rental
housing rehabilitation, financing for community facilities, technical
assistance for small businesses, and basic financial services for low income
households or businesses. In general,
CDFIs afford impoverished communities the access to equity and investment
capital necessary for revitalization through the creation and retention of
jobs, the rebuilding of neighborhoods, and the financial support of local
businesses.
CDFIs
can be for-profit or nonprofit and come in a variety of organizational
forms. Many CDFIs are federally
regulated commercial banks and credit unions.
Other CDFIs are unregulated nonprofit institutions that have
partnerships with private investors and community development
organizations. The principal types of
CDFIs are community development banks, community development credit unions,
community development loan funds, community development venture funds,
microenterprise loans, and community development corporation-based lenders and
investors. The specific organizational
structure used by each CDFI is dependent on the type of institution, the
sources of its funding, and its strategic goals.
A
primary source of funding for CDFIs is the federal government, although state
Each CDFI has its own unique set of
investment goals and criteria dependent on the type of organization and its
strategic mission. All CDFIs have a
primary community development objective that drives their investment and
lending activity but the exact development focus varies. Some institutions focus on the development
of affordable housing while others may focus on the support of local small
businesses. Some CDFIs target their investments in predominantly
urban areas while others target rural communities. In addition, a fundamental objective of private, for-profit CDFIs
is to maximize the return on their investment within the limits of their
community development goals. As a
result, some CDFIs will be more conservative in their lending and investing
than others.
The
Coalition of Community Development Financial Institutions (CCDFI) is an
organization formed in 1992 that represents more than 350 CDFIs across the
United States. The Coalition played a
significant role in the development and implementation of the CDFI Act of 1994
and, thus, the CDFI Fund. The CCDFI’s
primary goal is to conduct public education, information dissemination, and
outreach programs to strengthen support for the CDFI industry and the Fund.
Sources: The
Coalition of Community Development Financial Institutions homepage.; “CDFIs Focus on Community Development”, Community
Dividend, Federal Reserve Bank of Minneapolis, Winter 1996-97; “CDFI Fund Overview and Regulations”, U.S.
Department of Treasury homepage.
Relevant Web Sites:
www.creativeinvest.com/cdfi/cdfi1.html
This site (produced by Creative Investment Research) lists the U.S. Treasury’s Certified Community Development Financial Institutions by state. This is the most comprehensive listing of CDFIs found on the Internet and is a useful place to begin a search for funding by a CDFI.
The Coalition of Community Development Financial Institutions’ web site advertises their members’ services. The page lists all members of the Coalition alphabetically. An organization can become a member by paying an annual fee and agreeing to work in cooperation with other CDFI coalition members on projects.
www.natfed.org/nfcdcomdevelop.htm
The National Federation of Community Development Credit Unions’ web page provides access to the Community Development Banking List, an Internet discussion group for community development financial institutions (including CDCUs). Discussions on this list range from loan delinquency to legislative to social impact lending. This web page provides a clear discussion of the objectives of CDFIs.
The Coalition of Community Development Financial Institutions placed this web site on the Internet to inform people about the Association for Enterprise Opportunity (AEO). The AEO is a national trade association of micro-enterprise development organizations serving disadvantaged entrepreneurs across the nation. This site is useful for those who are considered disadvantage entrepreneurs and are investigating funding options.
This is the home page for the National Congress for Community Economic Development (NCCED), a trade association of community-based and community-controlled development organizations. This association is approved and supported by the Coalition of Community Development Financial Institutions. NCCED’s mission is to promote community-based industries and work to ensure that communities receive funding and achieve economic viability. This site will be useful to small businesses that fit the definition of community-based industries set by the NCCED.