Category: Entrepreneurship

One of the goals of the most recent quantitative easing strategy (QE2) is to replace investment assets in banks, like T-Bills that make interest, with cash that doesn’t make interest. With cash on hand that isn’t income producing, banks are more likely to loan the money to businesses or consumers, as well as increase the money supply through the money multiplier effect. For technology startups, lines of credit and bank loans are especially difficult as almost all loans are done against hard assets like real estate or equipment. Even the recent increased guarantees by the SBA still don’t account for knowledge industries that are asset-lite.

Here are a few items startups should keep in mind when thinking about a bank line of credit or loan:

• Typically banks will do a line of credit for 75% of current accounts receivable (meaning, if you have $120,000 owed to your business, with $100,000 current and $20,000 overdue, a bank will loan you $75,000)
• Certain banks like Silicon Valley Bank and Square 1 Bank specialize in banking venture-backed startups and provide sizable bank loans based on the reputation of the venture investors (but the VCs don’t co-sign on the loan) as well as loans against a small percentage of recurring revenue
• A new class of investor that provides a loan in exchange for a percentage of future revenue is emerging (see TechCrunch’s article on RevenueLoan)

My recommendation is to build a relationship with a community bank or startup-focused bank, establish a line of credit, and know that the best time to ask for money is when you don’t need it.

Over the past 550 posts I’ve covered a ton of different topics and had over 64,000 page views since January 2009. Most of my posts are related to these categories:

• Entrepreneurship
• Sales and marketing
• Corporate culture
• Software-as-a-service
• Product management
• Operations

I love writing about these topics and plan on continuing to do so. My question is this: what should I write about? What are some specific questions or thoughts you’d like to talk more about related to these categories or others? Thanks for reading and please let me know what I can do to improve this blog.

Earlier today I was talking to an entrepreneur that was thinking about raising money. His technology startup is near break-even and he sees a market opportunity to accelerate growth. We talked for a bit about his sales and marketing progress before jumping into fundraising. After I asked about pre-money valuation, current revenue run rate, and amount he wanted to raise it was clear he hadn’t thought through the differences between raising money from angel investors vs. venture capitalists. Here’s what I offered up:

• Angels are typically more hands-off while VCs typically take a seat on the board and are hands-on.
• Angels are typically happy with a 3-5x return while VCs focus on results with 8-10x returns.
• Angels are typically satisfied with dividends providing some liquidity while VCs want profits reinvested to maximize growth.
• Angels typically don’t make big investments while VCs can provide significantly more equity.
• Angels typically don’t have as many strings attached with the investment (e.g. anti-dilution, liquidity preferences, etc) compared to VCs.
• Angels typically want to invest an amount they’re comfortable with (say $50K) without budgeting for follow-on investment. VCs however, start with an amount (say $1M) and want to put more money to work in the same company in later rounds (e.g. plan for several rounds of financing with the VC route)

These were most of the main points that I thought he should consider. My recommendation for entrepreneurs looking to raise money is to truly understand the differences between typical angel and VC investments.

What else? What other differences between angel investors and VCs would you note?