Modwenna, Jim Estill, Stephen Pegge on: Hot Sectors Getting Funded, The End Game, Women Entrepreneurs, ‘Finding the Money for Growth’

There’s a substantial amount of life in some early stage funding markets:  ‘Modwenna’ (AngelNews) interviewed Jim Estill (Canrock Ventures) and Stephen Pegge (Lloyds’ and Chairman, Small Firms Advisory Panel at British Bankers’ Association) during a MyVenturepad webinar Thursday, July 8^th, 2010 providing a guide to the current financing market in the US and in Europe. 

Entrepreneurs have more challenges than just the "selling of an idea"

 

Both panelists, Stephen and Jim indicated that they are seeing things starting to turn around. Margins are a bit higher than they had been (due to higher risk) and there seems to be more pressure to get out and look for new business opportunities.  According to the recent NFIB survey, some small business managers are optimistic towards second half of 2010 in terms of revenues, but still a tinge of uncertainty in markets is holding back the aggregate.

Who’s going looking to lend and for what?

“With interest rates where they are, Angels are coming out of the woodwork”, according to Jim Estill.  Few investors want to continue to get 2% return from a CD, so they are looking at trying some new things out, and for entrepreneurs that means there is a greater amount of less expensive money out there.

“Investors are looking for real profits and real companies.” says Stephen Pegge. 

Alternative financing approaches / tactics

“Businesses today are being funded on discounted cash flows, not on valuations”, according to moderator Modwenna Rees-Mogg. 

Looking back to two years ago, the perception had been that valuations had gotten so high business angels couldn’t invest.  Now things are more reasonable.  What that means from a business perspective is that you, as a growth company principal, are held accountable; you want to deliver what you say you’re going to deliver back to your investors.

The demand side impact is that established businesses with good business models who never thought about sharing their equity – have begun considering doing so – whereas in the past they had been cautious about overleveraging.

Drop inventory, increase payables, drop receivables to improve your cash conversion ratio.  Under a  certain amount take on credit card. 

Is there Leverage in smaller company deals?

The panelists believe that there is room for debt as well as equity in financing growth.   The multiples which had been possible are not likely – at least not to the same degree – as in the past.   Financial engineering is not as fashionable; there aren’t as many management buy-outs in the market.  So the consensus is that debt has its place as does a bit of traditional bank lending, supplier finance, equity.

On Women Entrepreneurs

The speakers advise women entrepreneurs looking for capital to “ask for what you need!” Men typically ask investors for double what women do – Jim Estill mentioned working with “Golden Seeds” angel investors in New York and finds that woman are more open to coaching, more transparent, have numerous  advantages, but also harbor disadvantages: such as not having the rolodex some other entrepreneurs may have.

Stephen added that he sees more structured plans, more caution in women, at least as a general perception. Both Stephen and Jim believe that as they begin to see women role models join angel and VC networks, rolodexes will grow and women will be able to demonstrate business plans with ‘BIG Thinking’.

What’s Hot?

Jim sees the technology sector is “always hot”, and to that also “always changing”.   He referred to companies / products we’d not heard of 10 years ago: Twitter facebook iPHONE.  Anytime there is a change, there is an opportunity – if you’re an optimist. Jim took brands that you’ve never heard of to market – as he grew, he took bigger and bigger lines on and so on and so on, and much of that was being the right-sized company at the right time. 

Stephen indicated that research shows growth business sectors always depend on the business cycle:  “If you are a long term investor or with a bank, you need to work through that cycle.  At present, good old-fashioned manufacturing is hot: sterling’s competitive, Asia and Africa have multiple growth opportunities.  Companies supplying the public sector will find it start to get difficult as fiscal policy comes in to play.

Jim added “I hope manufacturing Improvement isn’t just for eastern countries.  Innovation, design, especially in manufacturing is unprecedented in US and Europe.”

What’s the end game?

• Start to build relationships with VCs and boutique-lenders. This will start to be useful for both startup and follow-on financing, too.
• The speakers are proponents of debt and ‘vendor financing’… you can fund a business if you do it well.  If you have a proof of concept – and can demonstrate a scalable model to drive 50 MIO in sales, funding will allow you to hire a sales person, hone your quality control, and follow your  proven process. 
• If you get away without taking cash, don’t take cash, grow with profitability.
• Growing slow often leads to a better company, provided no one is riding you closely enough to take over your market.
• Franchising shows good numbers. This provides the advantage that someone else may finance your growth.
• The best stage for an Angel to invest in is the idea phase due to the best returns
• IPOs are coming back on Nasdaq in a viable way.  If you have a good viable company and need cash – you can grow a $50 -100 million company to several hundred million
• Being a socially responsible company can be the end game –

In conclusion, the panelists agree that there is a tighter overall market for capital – but discipline will make stronger companies.  Investors will ask entrepreneurs:  Can they do it with less? 

If you’ve got a strong, good, quality, business, it’s a good model no matter what the business cycle.  The market will come back, markets do come full circle and funding liquidity wisely will get you to where you want to be faster and smarter.  Thanks to Jim, Stephen and Modwenna: it’s great advice for the days and markets ahead.