Getting Funded – Synopsis of CSA Explains Funding Sources

A necessary process for every new business is attaining sufficient capitalization for developing their product/service, operations, and market. That need for the oxygen which drives business compelled a bevy of Chicago’s tech community to the sixth in the CSA Explain series, Funding Sources, on Friday, July 19, 2002.

Moderated by Dave Dailey, a panel of three leaders in their fields of financing offered their perspectives and prescriptions on the funding process. Jim Philipkosky, General Partner of CID Equity Partners, represented the Venture Capital community. Mike Profita provided us with his perspective gained from multiple CFO roles in new businesses. And Tom Thornton of the Illinois Coalition described the virtues of government funds for technology and business development.

Mr. Philipkosky provided a clear overview of trends within the current venture capital (VC) environment. The first trend is the lower overall VC activity in relation to the ’99 – ’00 bubble. Presenting data from VentureOne, Mr. Philipkosky highlighted indications of a bubble in the VC activity, which peaked around Q2 of 2000. This VC bubble was driven by a number of factors such as the entrance of institutional investors into the VC market and the high overall stock market valuation.

Unfortunately, we are in a bear market. Many institutions’ target portfolio includes putting 5% to 7% of their funds in new ventures. As the overall market declines, institutional investors’ exposure to new ventures has increased disproportionately. In response, these institutional investors are seeking to rebalance their portfolio to reduce their holdings in new ventures. Unfortunately, new ventures present a liquidity problem. Hence, many institutional investors have greatly reduced their activities.

The second trend noted by Mr. Philipkosky was in regards to the shift of funding away from early stage firms and towards later stage firms. The drivers for this shift to supporting later stage firms parallels that of other flights-to-quality observed in bear markets. Later stage firms have proven CEO’s, lower fatality rates, and lower fund management requirements.

The story isn’t completely bleak for entrepreneurs. Mr. Philipkosky added that CID Equity Partners is looking to make three more deals this year. To win their favor, he outlined some of the requirements for the business plan that were in line with that which has been mentioned in prior articles by your truly and by leading academics. (See Addressing Investor Concerns and Hanging Your Net Shingle – Investors)

Mr. Profita has been the CFO of a number of firms and took a no-nonsense approach to funding. From the firm’s perspective, there are four dimensions for evaluating funding sources. These are: (1) Money as cheap as possible (low interest or low equity requirements), (2) access to follow-on capital, (3) fair terms and conditions, and (4) the source brings more than money to the table. Using this paradigm, Mr. Profita went on to evaluate some funding sources including government grants, bootstrapping, bank debt, angel investors, and venture capital. Each had its own place in the development of a successful business. A few pointers that he offered the crowd included: be careful with board assignments; don’t stress over dilution because 20% of something is better than 80% of nothing; negotiate with banks over fees or capital requirements but not on interest rates; likewise, negotiate with venturecapitalist on ratchets or liquidation but not on valuation.

Mr. Thornton described the mission of The Illinois Coalition as making firms “venture ready”, leading to the creation of jobs and the development of new technologies. To facilitate this goal, The Illinois Coalition has nine courses directed to entrepreneurs. Also, the Illinois Coalition helps firms get government funding to accomplish technical objectives and demonstrate their business viability. Mr. Thorton described some of the virtues of government funding such as it is cheap, businesses do not have to pay it back, and the firm retains rights over all intellectual property developed.

The May Report, TECH BUSINESS BRIEFS, July 23, 2002

CSA Source Code, Aug. 22, 2002