Popular Articles

Sweet marketing music

Tanner Montague came to town from Seattle having never owned his own music venue before. He’s a musician himself, so he has a pretty good sense of good music, but he also wandered into a crowded music scene filled with concert venues large and small.But the owner of Green Room thinks he found a void in the market. It’s lacking, he says, in places serving between 200 and 500 people, a sweet spot he thinks could be a draw for both some national acts not quite big enough yet for arena gigs and local acts looking for a launching pad.“I felt that size would do well in the city to offer more options,” he says. “My goal was to A, bring another option for national acts but then, B, have a great spot for local bands to start.”Right or wrong, something seems to be working, he says. He’s got a full calendar of concerts booked out several months. How did he, as a newcomer to the market in an industry filled with competition, get the attention of the local concertgoer?

read more
by Andrew Tellijohn
Sept - Oct 2018

Related Article

New competition means more options for small-business owners

Read more

Workshop: Raising capital, Finding financing

Raising capital ranks among the most daunting challenges faced by small businesses. Not only do entrepreneurs have to make the case for deserving the investment, but they often aren’t aware of all the available sources.

A session co-sponsored by Upsize and Rick Brimacomb’s Club Entrepreneur at the Minneapolis Club in late August provided information on several. The basics are covered here.

TRADITIONAL DEBT & EQUITY

Angel financing:

Dave Harig, founder of mystride

Angel financing comes from private investors or affluent individuals who provide capital in exchange for debt or ownership equity. It typically has long terms because entrepreneurs often seek such investment early.

“There’s far more things they don’t know about their business than they do know,” says Harig, who currently is in planning to create a mobile platform for the equestrian industry.

That can make seeking angel financing hard. But company owners can improve their chances by selling the value they are creating rather than being seen as buying value. The caveman chiseling out the first wheel “didn’t sit around and say ‘well, if I find angel investors, I’ll hire a granitesmith to chisel this out,’” Harig says. “He picked up a rock and stone and started making it happen. That’s the mentality you need.”

 

Angel groups:

John Francis,founder and president of Next Level Franchise

Twin Cities Angels, Gopher Angels and the Sofia Angel Fund are among metro-area investors organized as clubs.

Francis’ group, Sagis Club, invites four presenters to each of three events per year. The group is looking at the concept, the entrepreneur’s history, the product and the processes. They meet in a group, but members with interest invest individually.

Each club is different, but “what we look for is … deals that are already going. Not true start-ups, not true concepts, but businesses where guys have done some work, have got some revenue and are looking for growth or expansion capital.”

Venture capital and early-stage financing:

Chris Reedy, venture partner with Royal Street Ventures

Venture capitalists raise money into a series of funds and then invest that money into a variety of companies. Most venture capitalists are specific in the stage and type of companies they want their money invested in, Reedy says.

Royal Street, for example, typically looks to do seed and Series A investments of between $250,000 and $1 million. It invests in high-growth digital businesses that are not terribly capital intensive. It avoids medical technology.

“We don’t invest in anything that touches the FDA,” he adds.

Other funds are different, but Reedy says Royal Street invests  in companies with several proof points in the market and strong management teams. “If you are a passionate founder working alone … think about who are the other people you might be able to sell early on to join your team.”

Growth capital and recapitalizations:

Gary Kohler, board member with Air T

Kohler, last year, sold his small-cap growth portfolio of public companies to Air T, a publicly-traded holding company, that looks at deals in a multitude of spaces. Air T offers growth capital to companies past the start-up phase that aren’t good candidates for other types of financing

“We don’t pigeonhole anything,” he says.

Most are debt-related deals. And the company will look at assets, such as intellectual property or real estate, that typically won’t interest banks. The company’s sweet spot is between $2 million and $10 million, but “we’re very flexible,” Kohler says.

Finding companies like Air T can be hard. “You have to bang on a lot of doors … to see if someone will do a transaction of the nature that we do,” he says. “We’re not the only ones that do it but it’s not an organized group.”

Mezzanine growth capital:

Patrick Donohue, president and CEO of Hill Capital Corp.

When banks are unable to lend based on an applicant’s asset structure and VC firms are uninterested because they require a high return, entrepreneurs aren’t always out of luck.

“People believe there is bank financing and then there is pure equity,” Donohue says. “There is a massive space in between.”

Hill Capital Corp. fills some of that space. The company has a collection of private investors. It’ll do debt or equity deals, depending on the need. Deals most often range from $500,000 to $1 million, with companies that have $5 million or more in annual revenue. But Hill Capital does avoid start-ups.

“You don’t need to be the next Google,” Donohue says. “You can have a nice business that is small, that is doing 5 percent to 10 percent growth and you have capital beyond what you can get from an SBA loan or the bank.”

Banking:

Troy Rosenbrook, president of Highland Bank

Highland Bank offers straightforward debt financing for businesses looking to acquire or expand real estate holdings, purchase equipment, improve working capital conditions or grow through acquisition, Rosenbrook says.

Bankers want to see predictable earnings and cash flow, but also industry, management and financial experience. “It’s not just about the numbers,” he says.

Highland offers fixed- or floating-rate options. Borrowers will have financial covenants around cash flow and tangible net worth. There will be standard reporting at least annually.

Rosenbrook noted that Highland also often partners with firms that engage in equity or mezzanine deals. Often, several kinds of financing make up a transaction and deals over about $9 million actually require partners.

“This conversation is not about picking one or the other,” he says. “Many of them we work with on a fairly regular basis.”

SBA:

Kim Storey, senior vice president and SBA lending manager at Highland Bank

Minnesota is one of the top SBA lending states in the country. Banks use SBA loans when looking at companies needing a longer maturity for their loan or with thinner collateral. That might be start-ups, she says.

“Having an SBA guarantee provides that additional degree of protection a lender is going to want,” Storey says.

There are three main SBA loan programs: 7A, which is mainly used for equipment purchases, acquisitions, long-term capital and real estate. It’s up to $5 million. The 504-loan program is for major fixed assets, such as commercial real estate. An express loan program offers up to $350,000 for lines of credit.

“It’s a great option for companies that are between venture capital stage and conventional financing,” she says.

Accounts receivable/inventory financing:

Cathy Sedacca, director of sales and marketing for Sage Business Credit

Young, fast-growing companies with financing needs that have tapped out banks have options with loans based on accounts receivable or inventory financing.

“Banks tend to look at the rear-view mirror at historical performance when making lending decisions,” Sedacca says. “Asset-based lenders look at the future.”

These lenders will want to understand what your product and market, but if convinced, they might advance between 70 percent to 90 percent of accounts receivable or 60 percent of inventory, when paired with an AR loan.

“The bottom line is ‘did you deliver what your customer asked for and are they willing to pay for it,’” Sedacca says.

These loans are more expensive than traditional bank financing, but less than online loans with no requirement of giving up equity. Spotless credit history not required.

“Asset-based lending facilities allow you to get the most cash out of your business,” she says. “And they are scalable.”

Alternate sources of financing

Customers:

Scott Clasen,director of marketing, TimeSolv Corp.

TimeSolv is a web-based company that sells subscriptions for time-billing software to lawyers and other professional service organizations that track time for invoices. Customers pay the Thomson Reuters spin-off every month to gain software access.

Since two top executives invested when it spun off in 2006, TimeSolv has been 100 percent funded by customer revenue. Several factors have helped, including the use of remote employees, both here and in Pakistan. And TimeSolv’s subscription model, ensures cash flow.

“That means even if I don’t have a sale at all this month, I still have revenue coming in,” Clasen  says.

That allowed TimeSolv time to perfect the product. Now it is growing faster, both incrementally and by acquisition.

“If this was the race between the turtle and the hare, we’re definitely the turtle,” he says. “It’s been low and slow but it is sustainable.”

Crowdfunding:

Brian Edstrom, shareholder with Avisen Legal P.A.

Indiegogo and Kickstarter aren’t the only sites for crowdfunding anymore. Securities crowdfunding allows businesses to approach accredited or non-accredited investors online to sell debt or equity offerings through a registered portal.

A federal law passed in 2017 allows businesses to raise a maximum of $1.07 million through crowdfunding in a 12-month period. MNvest enabled online crowdfunding in Minnesota of up to $2 million from Minnesota residents.

About half-dozen MNvest offerings successfully reached at least the minimum target necessary for raising the desired funds. Until that minimum is met, the money is held in escrow and it’s returned to investors if it is not met. Edstrom suggested connecting with a community that may support the business first and then driving them to the portal.

“The most successful crowdfunding offerings are where the business brings its own crowd,” he says. “It’s unlikely that you can just post something online and expect people to stumble on it.”

Contest/prizes:

Garrick Villaume,chief technology officer with NetZro

Contests that come with varying levels of prizes are a great way to compete for money, but also to learn, gain exposure and work with people and gain exposure for your business.

“Why not do that in a way that gives you the most learning, the greatest fun and puts you in touch with wonderful people,” he says.

There are several contests locally, from the Clean Tech Open to the Minnesota Cup. You may win some cash, “though I wouldn’t put that into your funding plan,” Villaume quipped.

The competitions can be as fast as a few weeks or as long as several months. The investments and prizes vary. But, he adds, they are an opportunity to meet some potential mentors. “These are great people who are committed to your success.”

Economic development:

Cris Gastner,senior vice president of Community and Economic Development Assoc.

Local economic development organization may have more to offer than tax abatement or tax-increment financing. Gap financing may be possible, Gastner says. Agenices may be able to cover the difference between a lender’s cap and your need.

“In a lot of cases, economic development organizations are trying to get creative to get these deals done for their communities,” he says.

Community and Economic Development Assoc. works in rural areas with populations under 10,000 but the concept is not unique. “The message when it comes to economic development is ‘get creative.’ Look in places maybe you wouldn’t have traditionally looked to find dollars to help your deals.”

Small Business Innovation Research program:

Becky Aistrup,managing partner, BBC Entrepreneurial Training & Consulting

If you are researching or developing technology, whether it’s medical, software, military, education or other areas, the government may have grants available.

The SBIR program is an early-stage program aimed at technology commercialization in the U.S. The U.S. Small Business Administration oversees the program and 11 federal government agencies participate.

“This will not require you to pay anything back,” Aistrup says. “It will not require any equity to be given up in your firm and you own the intellectual property you develop as a result.”

Franchise:

John Francis, founder and president of Next Level Franchise

Franchising allows business owners to grow through licensing a concept to other operators. It can be tremendously successful, but it has some barriers.

It’s regulated by the Federal Trade Commission. The necessary paperwork includes audited financial statements and legal registrations. The process of getting certified can cost between $25,000 and $50,000, Francis notes.

“Build more units and prove your model before you really want to franchise,” he says. “You only want to franchise it when you know it is going to be successful for a franchisee.”

If it does work, it can be a tremendous strategy. “Owners who own and operate those units, they spend their time, their money, their energy,” Francis says. “It’s their business. They’re following your model … and paying you a fee and a royalty.”

Not everything should be franchised, he adds. But if the concept is right, “franchising is a great way to grow.”

Intellectual property-secured debt:

Pete Birkeland, chief financial officer with Secured2 Corp.

Secured2 is a data security company that creates products that indemnify and secure data. The company needed capital to grow sales, marketing and product support when it was approached by a fund interested in investing a convertible-term note secured by intellectual property.

Secured2 has seven patents with another 17 in process. “It was a good fit,” Birkeland says. “We did not have the metrics or what we needed to attract equity financing or venture capital. It met our needs and it met their needs.”

Secured2 does have to build an interest-only payment into its model and make sure that, going forward, it works with funders who have the ability to pay off that debt or can absorb it. But it served the company’s needs.

“We made a bet on ourselves and said ‘we are going to perform, we are going to beat our expectations on what we think on those milestones and we are going to reduce our dilution,’” he says.

 

CONTACT THE EXPERTS

BECKY AISTRUP, managing partner, BBC Entrepreneurial Training and Consulting: 734.930.9741; becky@bbcetc.com; www.bbcetc.com.

PETER BIRKELAND, chief financial officer, Secured2 Corp.: 612.756.7084; pete.birkeland@secured2.com;
www.secured2.com.

SCOTT CLASEN, director of marketing, TimeSolv: 800.715.1284; scott.clasen@timesolv.com;
www.timesolv.com.

PATRICK DONOHUE,president and CEO, Hill Capital Corp.: 651.452.8448; pd@HillCapitalCorp.com;
www.HillCapitalCorp.com.

BRIAN EDSTROM,shareholder, Avisen Legal P.A.: 612.584.3407; bedstrom@avisenlegal.com;
www.avisenlegal.com.

JOHN FRANCIS, founder and president, Next Level Franchise: 612.868.0745; JohnFrancisMN@gmail.com;
www.JohnWFrancis.com.

CRIS GASTNER, senior vice president, Community and Economic Development Assoc.: 507.867.3164;
cris.gastner@cedusa.com; www.cedusa.com.

DAVE HARIG, founder and CEO, MyStride.com:
www.mystride.com.

GARY KOHLER,Air T: www.webcongact@airt.net;
www.airt.net.

CHRIS REEDY,venture partner with Royal Street Ventures: chris@royalstreet.vc; www.royalstreet.vc.

TROY ROSENBROOK,president, Highland Bank: 952.858.4810; troy.rosenbrook@highlandbanks.com;
www.highlandbanks.com.

CATHY SEDACCA, director of sales and marketing,
Sage Business Credit: 952.314.7072;
csedacca@sagebusinesscredit.com;
www.sagebusinesscredit.com.

KIM STOREY, senior vice president and SBA lending manager, Highland Bank: 952.858.4590;
kim.storey@highlandbanks.com; www.highlandbanks.com

GARRICK VILLAUME, chief technology officer, NetZro LLC: www.netzro.org..