Posted: March 15, 2013
Show me the money!
An entrepreneur's guide to accessing capitalBy Theresa Mehringer and Kyle Newman
Despite the recent recession, Colorado is at the forefront of efforts to make capital more accessible to entrepreneurs, buoyed by the support of policymakers determined to spur economic growth through small business.
Gov. John Hickenlooper recently told the Colorado Springs Business Alliance he wants the state to be “relentlessly pro-business” and to “[cut] red tape and [increase] access to capital.”
Many startups find themselves in the middle of the “Death Valley Curve," defined by Investopedia as the “time from when a startup firm receives an initial capital contribution to when it begins generating revenues.”
Fortunately, Colorado entrepreneurs can tap a variety of resources to get in front of potential investors.
Entrepreneurs unable to identify financial advisors or mentors might start with one of the state's incubators, which are tailored to a variety of businesses.
Some incubators, such as The Business Incubator Center in Grand Junction, operate as a mixed-use facility where startups can rent office space, obtain guidance from business professionals, be around like-minded entrepreneurs and attract interested investors.
“We work with universities, but we really focus on every kind of business we can – mining companies, oil companies, office, energy, you name it,” says Jon Maraschin, Executive Director of The Business Incubator Center.
To be accepted into a mixed-use incubator like Maraschin’s, entrepreneurs need to have already laid the groundwork for their startup.
“You need to give us a statement of business concept, which is actually a pre-business plan,” Maraschin says. “You’ve got to be able to really communicate who you are, what you’re selling, what you’re doing, how you’re going to make money and your business model in very general terms.”
Once a company has been accepted into the incubator, it becomes part of a business network that eventually leads to funding from a variety of possible sources, including but not limited to loans from the incubator, venture capital funding or sweat equity.
And even if entrepreneurs have to resort to giving up partial ownership of their company, incubators such as The Business Incubator Center often give companies a chance to buy it back.
“The last thing in the world I would recommend to somebody who’s got a great company is to give ownership away,” Maraschin says, “so we typically push them to the loan side. If we do take equity, we do give them the option to purchase it back at a profit to the business within five years.”
Mixed-use incubators offer a variety of networking opportunities that can lead to a big payoff. For example, at Innovation Pavilion, a mixed-use incubator in the Denver Tech Center, entrepreneurs benefit from “productive collisions” that put them in contact with those most knowledgeable about the hunt for capital.
“You don’t really know who you’re going to meet, or what’s going to come from [your time in the incubator],” says Josh Wrede of Innovation Pavilion. “We just want to provide that ecosystem for entrepreneurs where you’re working alongside other entrepreneurs, convening and making great connections.”
In the case of Innovation Pavilion, entrepreneurs accepted into the program will find that the incubator removes much of the guesswork involved in the search for capital.
“Once a company comes in, we want them to get funded, and it happens very quickly, within four to six weeks,” Wrede says. “We take out of the equation all the due-diligence, all the legal structuring of deals, all of that so the [potential] investor doesn’t have to worry about it. Then we present the deal to the investor.”
There are also options for entrepreneurs reluctant to move into an incubator. Virtual incubators, such as the Roaring Fork Business Center, provide much of the same support as brick-and-mortar incubators without the commitment of becoming an actual tenant.
Roaring Fork, which serves entrepreneurs from Parachute to Aspen, is one of several virtual incubators in the state that work to get startups access to long-term capital.
“We recommend that our start-ups do a cash flow projection and/or a written business plan and that they [get capital] for the amount they’re going to need over a long period of time,” Roaring Fork founder Randi Lowenthal says. "It’s difficult to keep going back to funders for small amounts of money.”
In addition to physical mixed-use incubators and virtual incubators, entrepreneurs with technology or research-driven startups should consider the services of high-tech incubators such as Innovation Center of the Rockies and Fort Collins-based Rocky Mountain Innosphere.
“We engage with university researchers [across Colorado] to explore the commercial potential of their research,” says Tim Bour, executive director of Innovation Center of the Rockies. “Also, if things are favorable, we can facilitate the formation of new companies.”
Alternative resources include government agencies such as the Denver Office of Economic Development (OED), the Colorado Office of Economic Development and International Trade (OEDIT) as well as the Pueblo Economic Development Corporation.
Through the OED, Denver companies can receive loans, network with investors, and identify and access customers.
“We have about a $40 million loan portfolio for small businesses, and we loan about $4 million to $5 million annually,” OED Executive Director Paul Washington says. “We look to loan money to businesses that are going into areas that we are looking to redevelop or to catalyze. We are also looking for companies that are going to provide good jobs for Denver citizens. And we look to industries that are poised for growth in neighborhoods that need those types of jobs.”
Washington’s office is also developing a $20 million, privately funded small business loan program as well as a privately funded angel capital fund.
“We are going to explore the development of a privately-funded angel capital fund and resource to help businesses navigate the Death Valley,” Washington says. “Typically, that’s financed by angel capitalists, but angel investors are hard to identify, so we want to try to convene the angel capital community with some type of institutional fund or product so that it’s easy for businesses to access that type of capital.”
Additionally, the OEDIT will manage The Advanced Industries Accelerator Act, which is currently moving through the Colorado Legislature as House Bill 1001—yet another indication of the state’s bipartisan effort to assist entrepreneurs in the quest for funding.
According to Gov. John Hickenlooper’s website, the economic development legislation will be aimed at seven advanced industries in the state and “will create new highly-skilled jobs, increase exports, drive innovation and capital investment, create stronger partnerships between educational institutions and industry, accelerate technology commercialization and promote Colorado’s research and development activities.”
Clearly, the journey to accessing capital is not a short or easy one for any entrepreneur. But by utilizing the wide range of startup resources – from incubators to government economic offices to angel investor networks to venture capital groups – entrepreneurs can better position themselves to raise funding and ultimately succeed in the marketplace.
Go here for a complete list of Colorado incubators and other resources.