Monthly Archives: September 2017

Show VCs You’re Playing to Win

There is an unconscious bias among venture capitalists that is preventing female entrepreneurs from securing more funding, new research suggests.

A study set to be published in an upcoming issue of the Academy of Management Journal revealed that venture capitalists have different expectations of men and women entrepreneurs, which in turn impacts how much, if any, money they give them.

The research argues that the bias comes in the form of the questions venture capitalists pose to entrepreneurs when trying to learn more about their startups. Specifically, women are asked questions that focus on how they won’t lose a venture capitalist’s money, while the questions to men focus on how much money they can make.

“Female entrepreneurs are implicitly expected to prove that they can execute a safe return for the investor, whereas male entrepreneurs are instead expected to show the opportunity can grow,” the study’s authors wrote.

In turn, the answers the entrepreneurs give match the focus of those questions. The researchers said this prompts female business owners to position their startups as “playing not to lose,” referred to as prevention-focused, while men are better able to position themselves as “playing to win,” referred to as promotion-focused – the latter of which is much more appealing to investors.

The study’s authors said the unconscious bias comes from investors of both genders.

“Both male and female venture capitalists display implicit bias, holding men and women to different standards, [which] implies that the funding disparity cannot be corrected by merely ensuring that more female VCs are in a position to evaluate investment opportunities,” the study’s authors wrote.

Researchers came to their conclusions after analyzing the questions posed by venture capitalists at TechCrunch Disrupt, a startup competition held annually in major cities around the world. Since its launch in 2009, entrepreneurs who have presented at the competition have raised about $7 billion in venture funding over their lifetimes.

For part of the research, the study’s authors looked at data involving 189 startups that presented at the New York competitions organized by TechCrunch Disrupt from 2010 through 2016. The researchers specifically looked at video footage of Q&As between each company’s founder and a panel of venture capitalists. After transcribing all of the videos, they were able to determine the balance between promotion focus and prevention focus in company-panel interactions and the relationship of this balance to companies’ funding achievements over time.

The study’s authors, who statistically confirmed that the male- and female-led startups had comparable capital needs, discovered that male entrepreneurs secured more than five times as much funding as their female counterparts.

“Male entrepreneurs are more likely to be asked promotion-focused questions, whereas female entrepreneurs are more likely to be asked prevention-focused questions,” the researchers wrote. “Comparing dollars raised [over company lifetimes], we note that startups raised an average of $16.8 million when investors asked predominantly promotion questions, 7.21 times more funding than the average $2.3 million raised by those asked predominantly prevention questions.”

The study’s authors also conducted an online experiment in which angel and seed investors were played audiotapes of Q&As similar to the interactions at TechCrunch Disrupt. The investors were asked to allot hypothetical dollars based on what they heard.

Great Ways to Use It for Growth

Unless you’ve aggressively saved money to bootstrap your business, you’ll likely need to borrow money at some point to make ends meet, whether it’s a formal loan through a bank or online lender or an informal one from family and friends.

Regardless of the amount or source of your loan, it can be tempting to make those big “nice to have” purchases when the money hits your bank account. However, it’s important to plan your spending carefully and allocate borrowed funds toward expenses that will ultimately accelerate your business’s growth.

We spoke with small business lending experts about smart ways to put business capital to work.

1. Equipment and operational costs
When you’re just starting out, you may not necessarily have the funds for all the basic elements your business needs to function. Jay DesMarteau, head of commercial bank specialty segments at TD Bank, said early-stage businesses will often use their funds for operational necessities such as buying inventory and building products.

“We are also seeing higher demand for lines of credit, which typically are used to finance short-term needs, such as buying or leasing equipment, purchasing a company vehicle or injecting cash into the business during a lean period, especially seasonal businesses,” DesMarteau added.

2. Payroll and hiring
A company is only as strong as the people behind it, and investing your new loan funds in hiring can be a great way to help your business grow.

“True growth means spending funds to add employees who can take over some tasks such as bookkeeping or ordering supplies and help support the daily functions,” said DesMarteau. “This will allow the business owner to better focus on long-term strategy and driving profitable revenue growth.”

Isaac Rodriguez, CEO of Provident Loan Society, notes that as a not-for-profit collateral lender, most of his organization’s loans are made for short-term expenses such as meeting payroll.

3. Soft costs
“Soft” costs, as opposed to “hard” physical assets or products, are those expenses that don’t directly help create a product or provide a service but are necessary to keep your business functioning. This includes things like licenses, marketing campaigns and professional fees, said Rodriguez. This could also cover fees for advisors like CPAs, attorneys and bankers.

“Maximize the use of capital,” Rodriguez told Business News Daily. “For example, don’t just pay legal fees and get tax returns done – explore how those professionals can help grow your business through referrals, recommendations, introductions, etc.”

4. Technology
From mom and pop shops to software startups, technology plays an integral role for most modern businesses. Even businesses that aren’t focused on a tech product may still need to invest in hardware and software to make their daily operations more efficient.

David Reiling, CEO of Minnesota-based Sunrise Banks, confirmed this trend, noting that many of the bank’s small business customers now use their borrowed capital for technology purchases.

“Traditionally, businesses come to us when they need to expand, whether they have outgrown their space, are increasing their production capabilities, or [are] adding staff,” Reiling told Business News Daily. “Recently, there has been a change, with a large number of businesses investing in their technology infrastructure to keep pace with growing digitalization.”

What’s the Best Choice for Your Business

Finding ways to fund your business is often a major concern for entrepreneurs. While there are many types of financing, don’t settle for just anything.

If you are looking to open a business or expand your current operation, there are two main financing options: debt financing or equity financing. Deciding which one is right for your business can be confusing. Below we’ve outlined each option, including the pros and cons of each method.

What is debt financing?
Debt financing is borrowing funds from an outside source with the commitment to repay, plus interest. This encompasses traditional loans, such as those offered by banks. Borrowers make payments monthly and offer a form of collateral, such as inventory, real estate, accounts receivable, insurance policies or equipment, which can be used to repay the loan if the borrower defaults on the loan.

The Small Business Administration (SBA) is a popular choice for business owners. The SBA offers loans with lower interest rates and longer terms, but there are stricter requirements for approval.

Alternatives to business loans include merchant cash advances, personal lines of credit and business credit cards. With some of the alternative financing methods, borrowers may be required to make weekly payments or repay a percentage of their profits rather than make fixed monthly payments.

Pros and cons of debt financing
Debt financing is available in some form for most small business owners. It is most popular with traditional business, such as those companies in the manufacturing or retail sectors. With traditional debt financing, borrowers retain complete control of their business, and they have a finite agreement with their lender.

However, the repayment and interest terms can be steep. Borrowers typically begin making payments the first month after the loan has funded, which can be challenging, because the business isn’t on firm financial footing yet.

Another disadvantage of debt financing is the potential for personal financial losses if it becomes impossible to repay the loan. Whether a business owner is risking their personal credit score, personal property, or previous investments in their business, it can be devastating to default on a loan.

What is equity financing?
Equity financing involves funding business aspirations by selling individual shares of the company to investors. Business owners who choose this method don’t have to repay the money with regular installments. Instead, those individuals who purchased shares of the company become partial owners who are entitled to a portion of the profits for as long as they hold those shares.

One of the most common arrangements has investors waiting to be repaid until the business is earning a predefined profit. Payments then continue until investors have been repaid and received the agreed-upon profit.

In other situations, investors may retain their shares unless they are sold. Usually, smaller businesses approach friends and family to invest, but angel investors and venture capitalists may invest in a business.

Effectively Market Your Equity Crowdfunding Campaign

Equity crowdfunding, a creation of the 2012 Jumpstart Our Business Startups (JOBS) Act, is an alternative way for startups and small businesses to crowdsource capital from investors and consumers who are passionate about their products or services. However, running an equity crowdfunding campaign can be difficult; there are many startups vying for the crowd’s dollars, and making your voice heard in a sea of exciting ideas can be difficult.

The success of these types of campaigns largely rides on how you market your company to the crowd. Establish a unique brand and a voice that cuts through the clutter, and you’ll get you the capital you need to get moving. Fail to forge an essential emotional connection, and your equity crowdfunding campaign could end in failure. Here’s how to make sure your crowdfunding endeavor pays off in both capital raise and brand awareness.

1. Know your audience and cultivate relationships.
The first step toward any successful equity crowdfunding campaign is to understand your audience. What are their needs or desires? Why would they support your product? Even more importantly, why would they be passionate about your product? Forging an emotional connection starts with understanding your potential supporters and catering to their needs, both with a quality product and impactful storytelling.

“Emotional connection really comes when you understand your audience and the people you’re trying to reach,” said Chris Westfall, a pitch strategist and author of “Bulletproof Branding” (Marie Street Press, 2014). “Oftentimes for entrepreneurs, this means look for the impact. Giving people something to believe in, that emotional connection, that’s what [draws the crowd].”

Reaching the correct audience is also a matter of medium and messaging, said Mark Stanich, president with the ELEQT Group. High-quality photos and video are huge boosts when it comes to marketing ideas; allowing potential investors to place themselves in the shoes of a satisfied customer brings them one step closer to understanding the value of your idea. It’s also imperative to speak to the things that make your idea stand out from the rest.

“In terms of actual messaging, why is it different than competition? How does it fit a true need or desire for your lifestyle? Is it simple to use? [Does it] free up time to do other things? Make life easier?” Stanich said. “There’s this area of social investing that’s becoming very important … If you can speak to those things, you build this emotional bond. Obviously, financial return is important in equity crowdfunding, but I think that’s not enough. I think many people want to support something they really believe in.”

2. Keep it simple.
Keep your message simple. Overwhelming audiences with too much information or the slew of benefits your product provides – even if they’re all valid – is a surefire way to lose their attention. The shorter and sweeter your pitch, the better.

“You need a simple, distilled description of your product,” Stanich said. “People often launch something and love it and want to go on and on about it, but that’s complicated and noisy. There are lots of other competing products, so you need to keep it very, very simple.

“As you go further down the path of investment, you can flesh the benefits out and talk more and more,” he added.

Consistency and simplicity go hand in hand. That means aligning your brand with the right platforms, speaking to the right audience with the right message, and selling the right idea, Westfall said.

“You want alignment every step of the way,” he told Business News Daily. “Choose the right platform and you’ll reach the right people. But if you have the right idea in the wrong platform, that still adds up to the wrong idea. You want to be careful and deliberate about picking your alignment, from the platform you choose, to the way you approach it, to the methods you use.”

3. Build a strong brand.
Without a clear brand and associated message for your campaign, it’s easy to miss opportunities to engage potentially interested investors. On the other hand, if your brand is successful and consistent, it will be much easier to initially grab people and encourage them to investigate your idea further.

“A broad crowdfunding platform gives you a place to stand in the market square, but they don’t give you a megaphone,” Stanich said. “Successful campaigns have [an] existing connections base already with people passionate about [their] product, or if they don’t already have a big base to tap into or influence, they build an emotional bond with passionate people. That’s when you start to get viral pickup … That’s when you see successful campaigns.”

Finance in the Legal Cannabis Industry

The legal cannabis industry is one of the fastest growing in the U.S. In 2016 alone, the industry brought in $6.9 billion – a 30 percent increase over the previous year, according to Arcview Market Research.

Still, cannabis remains federally illegal, placing the entire legal industry in a precarious position subject to the whims of each Congress and administration. Banks and larger venture capital firms are hesitant to enter the game, leaving the industry undercapitalized.

The undercapitalization of a multibillion dollar industry
The federal prohibition has led to several problems, but few so stark as the lack of access to banking and conventional financing options like checking accounts, lines of credit and business loans. Its breakneck growth might appear healthy, but the cannabis industry has a financial albatross around its neck. Without the ability to bank like other businesses, entrepreneurs and employees alike suffer.

“There’s no regular way to access institutional capital for the cannabis entrepreneur in the U.S.,” said Hadley Ford, co-founder of iAnthus Capital Management. “Unless you have a rich family member or a strong balance sheet, you’ve got to bootstrap. And that [slows] the growth of the industry quite significantly.”

“It’s crippling right now. You don’t realize how important banking is until you don’t have it – just giving employees a paycheck is just brutal,” added Keegan Peterson, CEO of payroll and HR company Wurk. “In a cash environment, it’s difficult to even prove you paid [your employees], or your vendors, or your tax liability.”

Banks aren’t the only ones hesitant to enter the cannabis sector. Large venture capital firms have eyed the industry with interest, but thus far have been reluctant to stake much of a claim in the fledgling industry.

“With later stage companies, [it’s] difficult to make the jump from raising a few million up to five or 10 million,” Micah Tapman, managing director of Colorado-based accelerator CanopyBoulder, told Business News Daily. “There really aren’t larger venture capital or private equity firms playing yet. They’re looking at it but not writing checks.”

A number of reasons beyond simply federal prohibition figure into their calculations, he said. The fragmented nature of the industry and the varying regulations state by state are also great concerns, in addition to the constant fear that the Department of Justice will reverse course on the Cole Memorandum, which has thus far allowed legal entities to operate in compliance with their home states’ laws. All of this adds up to a significant lack of the working capital that would otherwise be in play.

As a result, the industry has produced some workarounds. Largely bootstrapped companies find themselves relying on angel investors and accelerators to get to the next level. Here are some of the solutions that have evolved out of the legal cannabis industry’s financial plight.