Just because early-stage entrepreneurs aren’t ready for the venture capital market doesn’t mean they’re out of options to get the funding they need to grow their businesses.
For startups whose growth trajectory isn’t yet appealing to investors or entrepreneurs who are skittish about leaping into the waters of venture capital investors, resources are available to help them reach their next funding stage.
Increasingly, other options—such as co-investing, federal grants and accessing other government or university assistance, can help. Some also offer free technical assistance to innovative new companies.
Panelists at this month’s Wisconsin Technology Council’s Early Stage Symposium in Madison sorted through some options and tactics for gaining that funding.
Juan Gomez, vice president of lending and investments for the Madison Development Corp., uses a couple of powerful tools to help startups. The group’s Venture Debt Fund lends money to hard-to-finance tech startups, enabling them to grow.
“We’re talking local community banks that can’t lend $200,000 to a company, but could possibly do $5,000 or $7,000,” Gomez said. “Our structure allows for community lenders to pool the funding so we can make that loan happen. Because we can diversify, that creates a little less risk to the lender.”
The fund has made more than 68 loans, together totaling more than $20 million, in the past 16 years.
Gomez said MDC also administers a program in partnership with the City of Madison that allows it to invest in companies that don’t qualify for venture capital. Because the deal is a contract with the city, it offers more flexible terms than banks could typically offer.
He also advised those seeking funding to avoid saying the money will go toward unspecified “working capital.” “That term is a red flag,” Gomez said. “Be a good storyteller. … The lender will want to know what that infusion of capital will do for the business.”
Idella Yamben, director of the Center for Technology Commercialization (CTC), helps tech companies leverage federal grants and contracts.
“The main thing they’re looking for is a risky process, a technology that could have the potential for a big impact,” Yamben said. “They’re looking for innovation, and that could range from pharmaceuticals to new, innovative ways to farm fish.”
The Small Business Innovation Research (SBIR) program and the Small Business Technology Transfer (STTR) program are highly competitive programs that encourage domestic small businesses to engage in federal research and development with the potential for commercialization.
CTC offers help with idea evaluation, applying and planning for funding, grant compliance, and charting a business course after funding. Its SBIR Ready Bootcamp teaches graduate students and early-career scientists the secrets to articulating a business case, and the competitive SBIR Advance program, a partnership with the WEDC, provides state-match funding, training and other resources to Wisconsin businesses.
Yamben said Wisconsin companies have won about $50 million from the National Institutes of Health. In the past year, 22 CTC clients went on to win about $23 million in SBIR and STTR funding. In the same year, CTC clients reported more than $40 million in additional funding.
“So, the SBIR and STTR programs help position you well for follow-on funding,” she added.
Aaron Hagar, WEDC vice president of entrepreneurship and innovation, said his agency is uniquely positioned to help entrepreneurs build relationships and access resources to build their success.
Hagar urged entrepreneurs to be realistic with themselves and with potential funders when they have those first funding conversations. “You have to level with yourself,” Hagar said. “If you’re the only one who’s telling you that you’re right, maybe it’s time to pump the brakes.”
He added: “You need to be credible. You need to tell a compelling story and provide real value. … On your first day, start acting like a big business. Start keeping track of all your expenses. Be thorough. Eventually, someone is going to ask you for that stuff. The better prepared you are, the better that conversation is going to go.”