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Don’t Fret When a Bank (Computer) Declines Your Business Loan: Review Your Options
By Anthony Price
Note: This piece was written just as COVID-19 hit the U.S. For most small businesses, the SBA Economic Injury Disaster Loan (EIDL)is your best option. However, a number of states are providing grant and loan programs as well. Information and programs are changing daily. Contact me for more information.
When it is time to raise capital, entrepreneurs check their pockets, ask family and friends, then go to a bank. Startup founders must accept that a bank loan usually is not in the cards. They are more likely to get approved for a personal credit card at an annual effective rate exceeding 30 percent than for a business loan.
Commercial bankers decline loans for a myriad of reasons: 1) Operating history is fewer than three years. 2) Historical cash flows will not support the proposed loan request. 3) Credit score is too low. 4) There is insufficient collateral. 5) The business has not generated a profit in the past. Adding insult to injury, the decision-making process at large national banks is done by computer algorithm, not humans.
Don’t fret about a “no,” because there are nonbank alternatives. But before you start searching for capital, ask yourself this question: Am I running a business or a hobby? A business must be focused on generating a profit, which is the result of creating value for customers. Profit is the money above what it cost you to produce the product—a reward for solving a vexing problem. On the other hand, a hobby is something you like to do but may not be a viable business.
Start with the basics. A successful business does three things better than the competition: 1) Solve a problem that is a pain point for customers. 2) Create value by making customers’ lives better. 3) Build a business that builds the product consistently every time. Your value proposition (what differentiates your business from the competition) and marketing will be the difference makers.
Next, are you seeking debt or equity? If you are seeking debt, try a community development financial institution (CDFI). The Riegle Community Development Banking and Financial Institutions Act of 1994 was signed into law in September 1994 by President Clinton, providing government support for CDFIs. CDFIs promote economic revitalization and community development in underbanked, underserved and underinvested communities throughout the U.S.
The Hartford Economic Development Corporation (HEDCO) is a nonprofit CDFI based in Hartford that lends to small businesses throughout Connecticut. Other nonbank lenders in Connecticut are worth getting to know such as the Community Economic Development Fund (CEDF) and the Community Investment Corporation (CIC). Do your homework, and you’ll find new options, from Honeycomb Credit offering crowdfunded loans to revenue-sharing notes on Mainvest.
Technology has allowed the creation of new capital options. GoFundMe is a platform that businesses can use to raise capital. Over $9 billion from 120 million donations has been raised on the platform since 2010, mostly to individuals. At the other end of the capital spectrum, Gust is the preferred platform where 85,000 investment professionals vet over 800,000 startups seeking investors.
Kickstarter and Indiegogo are the two top reward-based crowdfunding platforms. Over $4.8 billion has been pledged on Kickstarter and over 178,000 projects have reached their goals, since its inception in April 2009. Project organizers offer a reward (their product) to raise funds.
This author conducted a Kickstarter campaignto raise $20,000 to bring mini books to the masses. Mini books are 30 minutes of reading that fit in your pocket for on-the-go people. This is my second campaign. My first campaign raised $5,000 to write the book, “Get the Loot and Run.”
Another option is investment crowdfunding, which was made legal when the SEC implemented regulations in 2016 as part of the Jumpstart Our Business Startups (JOBS) ACT of 2012, signed into law by President Obama. Start Engine, Republic and Wefunder are investment crowdfunding platforms. These platforms require a considerable amount of work, but once approved, you can solicit funds from the public on the platform and raise up to $1,070,000 annually.
There is no Staples Easy Button to raise capital. But if you’re patient and do your homework, you may find attractive nonbank options that say “yes”.
The Venture-Capital Game: An interview with McKeever (Mac) Conwell II, co-manager, Pre-seed Builder Fund, TEDCO.
Note: This interview has been edited for clarity. Consult a securities attorney before raising investment capital.
Whatʼs the best thing an entrepreneur can do to get themselves ready for seed funding?
If you think about seed or traditional seed funding, and the way we look at venture capital, and you consider where venture capital is today, in 2000, 2010, 2012, you could get seed capital without a problem, without any customers or anything like that. And there are some instances where that happens today. More often than not, you have to have traction. Traction is defined differently from investor to investor, company to company.
But it boils down to the most effective way to go out and raise funding is when you donʼt need it. So that means you probably figured out your customer acquisition strategy. Because customer acquisitions will get you paid as an entrepreneur, either through revenue or through way of traction to get funding.
What do you say to an entrepreneur at the seed stage if they donʼt have traction or customer acquisition?
I try to be as honest with them as I can, mainly, investors and venture capitalist will just string them along and tell them they are not ready. Helping them understand if you want to get funding, these are the types of things we look for: We are going to look for you to have traction. We are going to look for you to have customers, paying customers. We are going to look for you to have some trial data or companies accepting a trial beta.
And it they give me the response, I donʼt have money to market or get it out there, my response to them is the chicken and egg, right? As innovative and creative as youʼre trying to be with your business, you should be just as innovative with customer acquisition.
You have two things: You either have time or you have money. So if you donʼt have money, you need to use all your time to figure out how to capitalize it. Because you already used all of your time to build and get the product, now you got to use all of your time to figure out how to get customers.
Thereʼs plenty of channels to start getting customers—to start generating revenue that doesnʼt cost money—but requires effort and time.
What do the companies look like that you have invested in the seed stage?
They have one to three founders. Their development may be in-house or may be from a third party, whether they are contracting out with somebody or using a dev (development) shop. They are still trying to figure out what their long-term strategy is.
But what they have figured out how is to get a group of people to start paying them for their product or a group of people to start using their product. We are not at the point of whether or not this truly scales. But we are at the point where we think it might.
The money we are giving them is for them to figure out can this scale beyond the group of people paying you or using it now. From a product standpoint, itʼs usually a product that is mostly baked, but not fully baked. Thereʼs still some things that need to be done. Itʼs just now getting to the point they got some revenue coming in.
They are starting to think through partnerships and doing some biz dev (business development) and they are at the earliest stage of creating themselves, branding themselves as subject matter experts.
If youʼre going to create a startup and youʼre going to be a leader in the space, it always helps for the founders to build a brand and start to be known as subject matter experts or whatever space it is.
What do you want to see in terms of a companyʼs ability to scale up?
Typically, when we talk about [scaling up], depending on the company, thereʼs a company that has a product that is being used really well in their local area. If we are talking about Maryland, DC, Virginia area, now he has the ability to be a national company.
This is a place where a lot of startups will fail because they are able to get the people in their local community, local state, or people they should go to. But what happens if youʼre based in Maryland and you want to expand to Texas? Do you have to hire staff or physically move your operation to Texas to get up and running? Or is there a way for that to happen organically or programmatically?
If you need to put boots on the group for that, thatʼs not going to scale well. That takes a lot of money. That becomes very capital intensive. Grouponʼs way to grow was to have a gigantic sales force. And it didnʼt last.
If we are talking numbers, when you come to me, we are doing pre-seed funding. Maybe youʼre doing $100,000 or $200,000 in revenue, how do we get you to $1 million or $2 million in revenue? Can you get there?
Letʼs say youʼre selling a product. How do we get you to grow by 50 percent month over month for the next six months? Can you do that or can you at least start charting in that direction so that we know if you get more money you can continue in that direction going?
At the pre-seed level, whatʼs the range of funding youʼre contributing to these businesses?
For my organization specifically, at pre-seed stage we do $50,000, seed stage we do $100,000 to $500,000, and at the venture stage, we do $500,000 to $2 million plus.
Do you put someone on the companyʼs board and provide additional services at this stage?
No. For pre-seed and seed, itʼs personally my belief, you shouldnʼt have a board. If youʼre raising money at the pre-seed or seed stage, you should probably be raising a convertible note or SAFE (simple agreement for future equity) note. Thatʼs a note for equity in the future, based on a future evaluation. They are much simpler to use. They donʼt necessarily require you to have a board, so you can continue to grow the way you want to.
When you get to a series A round, whoever your lead investor is, they are probably going to ask for one or two board seats. I typically tell entrepreneurs, if you have a series A round, youʼre a C corporation, you need a board, try to keep your board to three, definitely donʼt go over five.
I think five-person boards are hard for a series A company. You really want three. You want your lead investor (or most impactful investor), you as the CEO, and then a third party, who is a trusted party that you as the CEO chose. And you chose them for the business acumen, not because they are always going to agree with you.
Is your organization setting aside money for a follow-on investment, after your organization has made a series A investment?
Yes, absolutely. The venture fundʼs initial investment in a series A is somewhere from $2 and $5 million. But as you raise additional capital there is capital set aside to do follow-on funding.
What are your thoughts on the Silicon-Valley model, where they are trying to invest in unicorns (billion-dollar companies).
They kind of have to because thatʼs the way the economics break out. If youʼre a fund, the majority of the investments you make are going to fail. Typically, the economics state that the one-year investments are going to hit and the recurrence from that should be large enough to return the entire amount of the fund.
Then after that, youʼll have a few other companies that are going to hit and they are going to be your singles and doubles and triples that are going to give you some okay returns. Thatʼs where you make your money off of. That only really works for a unicorn model.
From a venture stand point, you only make money back if the company gets acquired or goes public. Thatʼs a high bar to reach. Whereas, I think revenue-based investing allows for you to investment in a lot more diverse set of companies because you get returns back based on the companyʼs revenue growth, as opposed to a zero-sum game.
Venture capital is a zero-sum game. Most companies are not going to get acquired or go public. But there are plenty of companies that may never be big that are going to grow and grow their revenue significantly over a period of time. You can get good returns back and be just as financially rich. Thatʼs a very different model.
The Silicon-Valley model works because they are only trying to feed those super huge outcomes. I think thatʼs a form of investing that is overhyped and is one that we overvalue because at the end of the day, venture capital (VC) is nothing but a subset of private equity. Venture capital is like pennies compared to the money spent in private equity.
What do you say to a company that is not going to be a unicorn, but could be very successful at the $10, $20, $40, $50, $100 million level? What do you say to that company that is not going to be a unicorn or shouldnʼt go to funders out in Silicon Valley?
I tell them to be creative, and I tell them thereʼs more than one way to get funding. I tell them there are plenty of angel investors out there that do revenue-based investing.
You watch Shark Tank, thatʼs a lot of the kind of investing they do. I also tell them the people with the most money that can make that kind of investment, are family offices. They are offices ran by families that basically have endowments or have generational money that is being managed by someone to grow. They understand revenue-based investing, very well. And thereʼs opportunities there.
I tell them donʼt get so caught up in the venture capital, Silicon-Valley hype, because it is hype. Thereʼs a lot of marketing around it. Itʼs sounds cool. It makes for good stories. It makes for good movies.
Thereʼs more than one way to play any game. Thereʼs a bunch of different ways to do this game. Find the one that works best for you. Thereʼs several books out there on other models and other ways to raise capital.
Are there any books you want to mention?
Jenny Kassanʼs book, Raise Capital on Your Own Terms: How to Fund Your Business Without Selling Your Soul. I believe she gives like 16 different ways for you to raise money for your company, without having to go the VC route.
Why donʼt women and people of color receive funding comparable to white males?
I think itʼs a really complex question. There are layered reasons for it. Very often—especially for people of color, I donʼt know if this is true for women, but Iʼm not going to speak on that—we donʼt have access or are not part of networks where money flows.
There are people in this country who grow up in blue-collar households, who live in neighborhoods where their neighbor owned a plumbing business, or their uncle was a doctor, or their teacherʼs brother was a lawyer. And they are able to have conversations and be around people who think about money differently or have disposable income.
Whereas, very often people of color will come from communities where that didnʼt exist. So even the idea of how money works in general in our capitalist society doesnʼt even get picked up, whether it be from an early age or later on in life. Itʼs not there.
I would also say because of that, people of color and women are not necessarily exposed into the game of money and the game of raising money. Thereʼs a strategy to raising money. Itʼs not just I have a business, you should give me money, or I have a business thatʼs doing good, you should give me money.
Thereʼs a process to it. And it youʼre not in those circles where you get to learn that process, and you come in without having the network and without understanding the process, without understanding itʼs a bit of a dog and pony show. Youʼre several steps behind, no matter how successful your business is, or how successful your business will be.
How do we teach people of color and women to play the game of raising money?
If you want to learn that game, a lot of that knowledge is out there. A lot of investors have blogs, where they breakdown exactly what theyʼre looking for when they talk to entrepreneurs. A lot of them have written books about exactly what they are looking for when it comes to entrepreneurs.
Guy Kawasaki has a famous book called The Art of the Start, where he gives a breakdown on what the pitch looks like. They give some very practical advice. There are tons of YouTube videos of pitches, people giving advice on pitches, but you have to know to look for that. If you donʼt even know the language of startups, you wouldnʼt even know where to start. You wouldnʼt even know what to Google.
I would also say programs like Founderʼs Gym. Founderʼs Gym is run by a former investor [Freada Kapor Klein] from Kapor Capital, who saw that these underrepresented founders were having a hard time raising capital because they didnʼt know the game. She literally created a program that teaches people the game of raising funds.
Accelerators can be a good place to learn the game and then having the ability to reach out to mentors, or gaining mentors from entrepreneurs who have already done it who could share that advice.
But again, very often people of color come from communities where the idea of a mentor isnʼt the same thing, where like your mentor was your big brother from the Boys & Girls Club or your best friendʼs uncle, who had a good government job and had the house that the water was never turned off, which is very different from me meeting an entrepreneur in my industry —maybe heʼs really successful—and me having a conversations, and asking him for advice and having them help me along and building my business.
How do you educate entrepreneurs about being open to feedback?
Thatʼs a tough one because people like that tend to not want to hear what you have to say. What I do is try and have a sit-down conversation and let them know like hey, Iʼm only here to help you. I worked with and helped a lot of companies.
Iʼve seen a lot of stuff happen in this industry. Iʼm only trying to give you the benefit of the knowledge that I have accumulated and things Iʼve seen happen. At the end of the day, you as the founder of your company need to make the final decision, but it is worth your time and energy to at least hear out what Iʼm saying.
And if they donʼt take to that, well it will probably never work. If youʼre an entrepreneur whoʼs not coachable, itʼs going to be really hard for me to help you. If itʼs hard for me to help you, Iʼm not going to be willing to open up my Rolodex and my connections to help you in the future.
If youʼre going to act that way, and be difficult with me, I donʼt want you acting and being difficult with my friends or people who I do business with. Nobody wants to work with a jerk.
Is there any advice you can give a fellow entrepreneur?
Investors are not here to give you money to solve problems you havenʼt figured out.
Very often entrepreneurs are looking to raise venture capital, looking to raise money from investors because they have some problem they havenʼt figured out themselves. They want to figure it out on someoneʼs dime. Very often itʼs how to get the product built or how to find customers and markets.
Nobody really wants to give you money to figure stuff out, unless they just like you and care about you. Thatʼs why your first bit of money comes from friends and family, which is another thing entrepreneurs of color and women entrepreneurs tend to have issues with.
People in African-American communities tend to give us money to get started because they care about us. So if we donʼt [get money from the community], we can only go to people who do this professional. And no professional investors give you money to go figure things out, especially a person of color.
Iʼm not giving you my money to learn, Iʼm giving you my money to grow. Be really open to feedback and be honest with your investors, or the people around you trying to help you. Donʼt try to hide things. Hiding things and holding things back, only holds back your company.
The moment you can be open with the people that are there to help you, the moment they can actually help you get through those things.
How much have you raised? What led to the eventual sale of your company?
For my first company, we only raised $25,000 and that came from an accelerator. We grew that a little over 4 and a half years. What happened was towards the end of that company, we had a large client who was using our product. And they basically wanted exclusivity, and we said instead of exclusivity, would you like to buy it?
And so they came back with some terms and some things. They essentially purchased the technology from our company. In Silicon Valley terms it was an exit. It was a Fortune 100 company that bought the technology from us.
It was an exist. It wasnʼt an exit in what you traditionally see, when you see companies get acquired because they didnʼt acquire us as a company, they just acquired our technology and our IP (intellectual property). That was fun.
What happened next? Did you start another company?
Directly after that, I started the second company. I went through another accelerator. I raised an undisclosed amount of angel investment. For my first company, we werenʼt able to raise money: 1) because we didnʼt know how to get customers and 2) we didnʼt know what we were doing.
For my second company, raising money and getting introductions...that was super easy because I knew everything already. I understood the game of raising money. I understood what the investors were looking for.
I had connections from day one for my second company. I had connections from people to help me and get feedback from. And I learned how to be a CEO and got really good at business development, so I was able to get customers.
My second company everything came so much easier. But the part where I fell apart at, and the thing I messed up on was I just didnʼt get the right team.
What do entrepreneurs need to do to get the right team?
Make sure that the people you are working with are entrepreneurial minded, meaning they are willing and ready to quit their job, put in long hours, sacrifice a whole lot, and may have to do it for an extended period of time because they are doing it because they truly believe in the vision.
If you donʼt have people who have fully bought into the vision, they are just doing it because itʼs cool, fun or something to do, then they are probably not the right people for your team.
We covered a lot of material. Any closing thoughts?
Entrepreneurship is one of the hardest things Iʼve ever done. And one of the hardest things youʼll ever do. And people will rarely talk about the dark side or hard parts about it.
But Iʼll say itʼs the most rewarding things Iʼve ever did. So donʼt go into it thinking itʼs going to be fun, or that youʼre going to have a good time doing it. Thereʼs going to be a lot of hard times. But when you get to the other side, you would have gained and learned, more than you can ever have imagined.
Is it fair to say that you may go back down the road of entrepreneurship again?
I donʼt know, thatʼs up in the air.