NEW ENGLAND CAPITAL VENTURES

• Yield Returns Matrix: Banks have a stringent time line on when you need to start paying them back. VC’s are more risk adverse in that sense and are not going to come after you and seize your assets. If you need a year more, it is likely that the venture world will oblige with you compared to the banks. It will be difficult for you to justify to a banker how you need 6 more months to be revenue positive compared to a VC who understands your business. How well you hedge your bets for starting to pay back to the bank in order to be in good standing is critical than you think. If you can, negotiate at least double the payback timeline the bank requires you to make.

• Additional Financing Strategy: You get a $1M from the bank and have a product. Now you need additional $1M to sell it but can’t go to the bank as you have nothing for collateral. You go to a VC – 6 months gone. Assuming you couldn’t strike any licensing or reseller deals with your lame a** and don’t have a penny in sales or even a pilot site that pays your overheads, and say by some miracle, a VC finances you for $500k. But now you are already required to pay your bank by now with interest and so you write 50% of this amount to Bank of Morons and you are back to where you started. And don’t even think about giving equity as collateral to a bank (unlikely they may even accept it as all the collateral you can give). You are better off giving options to those who are in the business of building companies like yours and may be able to give you additional financing and help you grow your business than some iBanker who is just going to sit in a downtown building with tall ceilings sipping starbucks and wearing a cheap stripped suit and a pink tie.
  
  Now think about selling to a VC when this bank owns 20% (if not more) of your company. Good luck on this one! You got to have one hellova product to make this happen. Not to mention the fact that if you default on your payments to this bank, you may be sued or may serve an injunction or even a liquidation, not to mention the emotional trauma you or your family have to go through. It is of great important to choose your 1st financier very carefully and strategically. Who comes in the door next depends on who the company has been dealing with in the past. Lastly, try and predict as closely you can on how many rounds and how much capital will you need to be cash positive.

• Product Strategy: As mentioned early on, if the product or the service idea is simple and addressing a saturated market or you just want to start a small business that addresses a need in a small geographical area, need a one time investment of a fairly low amount that you are sure to translate to sales dollars early on, talk to a bank. But if you are eyeing an IPO and trying to build a complex enterprise or a retail product that will require R&D, logistics, manufacturing, marketing, training, business development, legal councils, IP audits, advisory boards, engineering, product management, etc., it may be time to think about talking to a VC. Reason: VC’s may have proven track records in the space you are addressing, they may have companies in their portfolio that may compliment your solution, they may be able to raise bigger sums of money by attracting other co-investors (there is a prestige status associated with who finances you that attracts later stage rounds) and lastly, VC’s are in a better position to place a ‘professional’ CEO who can actually execute and deliver on promises outside the lab; compared to your lousy self. Banks can’t do any of these and if they claim they can, most probably they are liars. Bankers are in the business of lending money and getting their interest amounts. They are not in the business of building businesses. And don’t go comparing yourself with big companies who take millions in loans from banks. There is a clear distinct difference between you and someone like Merck Pharmaceuticals. Off course you will never hear someone like that approaching a VC. Entrepreneurs created VC’s. They are like politicians. They seem to be in power for you, you put them there, they seem to be working for you, yet they are disliked (hated in some cases) by most and most often don’t seem to be in your favor. In fact, they may hug you the day you sign the LP but a year later may fire you. There are the Ted Kennedy’s (Neanderthal meathead bozos) of venture capital and we too have a fair share of left and right-wingers from the SF Bay to Bean Town.

• Personal Risk: You set up a LLC or a ‘C’ corp. and think you are free from potential debt if the business goes under. If you collateralled your house, guess who shows up at your doorstep Sunday morning 9:00 AM? Even if you did not give anything to the bank as security, state and federal laws against declaring bankruptcy and potential liquidity may not completely allow you to go scott free. VC’s tend to ‘buy’ out founders and off course you don’t need to take out a second mortgage or give your house to the guy. You are in fact, profitable even if you get bought out individually. VC’s tend to bring the risk upon them in this case and let you live worry free (only to the extent that you will still have your house and clothes on if you fail). They should probably be called ‘Venture Risk Capitalists’ according to me. Banks are passive lenders.

• Finally, The Famous ‘Exit Strategy’: Face it; you want to flip the coin on the idea in 2 years and get your 50 footer of the docks of Ft. Lauderdale and go fishing sipping exotic beers and come back to your villa to see how the company stock is performing. The path is very clear: Banks = NO; VCs = YES. Sell the idea, execute the heck out of its opportunity, forget about ops & actually running the show and you have your wish. Easier said than done, you have to be an ace entrepreneur to make this happen but it does happen, even now and even for the simplest solutions in business that I considered dead-weed. If you are smart enough to think about this, you are smart enough to know why I choose VC’s for this strategy. Think leverage buying-outs, turnarounds and rollups.
  
  Having made some basic co-relations of managing financing your venture, nothing stops you from begging your friends-n-family before you approach a bank. But as I have always told you, leave family money out of business and you will still have some left when you die. A bank is as good as a VC who just writes a check and VC’s are as good as banks if you forget to read the fine print on the documents. In the end, if your strategy matrix allows, there could be a combination of both banks and the private equity market to harmoniously live together.

posted by Janak Joshi @ 3/31/2006 03:50:00 PM