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Fishing for Finance

After some slow years, private money again is fueling the communications sector. Its a breeze for the big-name companies to score funding, yet not so simple for lesser-known providers or resellers. Plus, if you dont want more than $10 million, major investment banks and venture capitalists wont even look at you. So what do you do when you an established channel partner or a startup need less than that?

You get creative.

There are alternatives to the financial behemoths and you are about to learn how to find them.

First, youll want to know whats magical about $10 million. Nothing. That just happens to be the minimum amount large firms want to work with; they dont consider anything less to be worth their time. Second, keep in mind that older, profitable companies will have an easier time raising money than newcomers. Investors got burned by pouring money into startups seven or eight years ago; they now have the tread marks from telecom to keep them cautious, says Phil Josephson, a Florida-based lawyer and former telecom executive who advises clients on business matters.

With that in mind, its time to explore your options. Here they are: your own money, family and friends, angel investors, small business government loans, suppliers, or all of the above.

Lets break it down.

Your Money

The term for putting your own money into your company is bootstrapping. Bootstrap resources include home equity proceeds, personal credit cards or personal savings. This is a common approach, and one that was used by Todd Correll, CEO of hosted PBX provider Broadsmart, which uses an indirect sales channel. He delayed outside fundraising by pumping his own money into the company and even forgoing a salary for a few years.

Family and Friends

Before blending personal with business, make sure youre okay with that risk. Correll debated long and hard on this one. You only get one shot, he says. He also talked with professional investors; ultimately, he didnt want to hand over any control of his company. After that, he asked relatives and friends to invest in Broadsmart.

Phil Josephson provides more details on how to grow your business at the Fall 2007 Channel Partners Conference & Expo.

Right off the bat, he spent about $25,000 creating presentations that no one read. Correll advises omitting the flashy, expensive part unless you pursue large investors. Family and friends really just want to sit and talk to you and go over your financial projections and what your vision is for the business, Correll says. Theyre betting on you, theyre not betting on the company.

That might be the case, but dont assume your loved ones dont want to see a return on their investment. Instead, dangle an incentive, a good reason to share their money with you. Correll offered an equity ownership percentage in Broadsmart, and has the letters of commitment to show for it.

Heres another reality: Friends with money dont necessarily want to support your endeavor. For example, Correll felt certain one wealthy buddy would write a check, perhaps even for the full $5 million Correll sought. But the friend said, I dont do personal investments. And he started talking about fishing again right away. He just completely took it off the table immediately.

On the other hand, several acquaintances not close friends agreed with no hesitation. You never know, Correll says.

The downside to friends and family is theyre friends and family, he says. You put more pressure on yourself far more than any third-party investor could ever put on you, just from your own personal moral, ethical standpoint, to make sure that you dont lose their money. So there is an added level of pressure and stress from taking money from people that you go to dinner with.

Angel Investors

Angels are not just the best friend; they sometimes are the only friend on the lonely entrepreneurial road, write Brian Hill and Dee Power in their book, Attracting Capital From Angels.




Click to enlarge

What is the difference between angel investors and venture capitalists? Angels invest their own money (this can come from an inheritance, funds contributed by family and friends or money raised when the angel might have worked as a venture capitalist) in a company. Venture capitalists, on the other hand, use money from wealthy individuals or other financial firms.

Finding angels that specialize in your industry segment can be a challenge, attorney Josephson says. However, if you rely on skills youve already honed as a business person namely, how to research and how to network youll do fine.

Begin with the Internet. Type angel+investor+group into any search engine; pages of directories, names and associations will pop up. Narrow down the results by adding your city or state.

Next, consider your networking circle. If youre not attending the local Chamber of Commerce mixers, start. Find industry conferences where financial folks will be speaking and mingling (xchanges Capital 2.0 event, for instance). Above all, remember this: even if an angel doesnt invest in your niche, he or she probably knows, or knows of, someone who does. If youre looking for money, you need to associate with those that have money, Josephson says.

Government Loans

Uncle Sam wants you, and hell pay.

Because small businesses drive the American economy, the Small Business Administration (SBA) offers government-guaranteed loans to keep that vehicle running. Be prepared to provide collateral, such as home equity, and submit a business profile as well as business and personal financial statements. Your company doesnt have to be new to qualify for an SBA loan.

Suppliers

Warning: Tapping suppliers for money is not easy, nor does it immediately appeal to many channel partners, says Josephson. But dont rule it out. Whatever your place in the telecom ecosystem, look upstream. Are you are a reseller? Ask a preferred CLEC or product vendor to invest in your business, Josephson says. If youre a CLEC, talk to your equipment and network suppliers.

Josephson wont name names or provide anecdotal details except to say this method has proven successful for some clients. He reminds partners that if a supplier does give you money, it will have a say in day-to-day operations. Determine whether that sits well with you before making a move.

All of the Above

Mix and match these options for a solid money flow. The point of landing private investment is to boost your company to profitability and growth. And, if youre ready, Wall Street is waiting.


Keep In Mind

Good Money, Bad Money



Todd Correll, CEO of Broadsmart, shows off his catch. Landing an investor is like landing the big fish it combines skill, patience and luck.

Not all money is the same, in my book, says Phil Josephson. What he means is, business owners must ask themselves how much control theyre willing to relinquish when securing investments. Five million dollars from one person can be very different than $5 million from another person because the former might demand more power than the latter, Josephson says. The pitfall is to overlook the importance of the non-economic costs theyre so hard to put a value on or a number to.

Start Small

Say youre a startup and you want to raise a total of $7 million. Think smaller in the short term borrow money from friends and family and secure loans, just to put some shine on your fur while you get your $7 million, Josephson says.

Should I Hire a Pro?

If you plan to go beyond the friends and family route, and you want $10 million or more, hire a professional to help you, says Todd Correll. Whether you do it yourself or rely on an expert, the key is to stay involved, Josephson says.

Do

  • Know your business, industry and competition, and have a plan.
  • Be professional.
  • Make swift decisions dont let investors drag their feet.

Dont

  • Spend too much time or money creating flashy presentations unless youre targeting investors other than family and friends.
  • Accept bad money (overly controlling investors or high interest rates).
  • Try to explain the details of technology to family and friend investors it generally just confuses them.

Wait, Theres More

www.channelpartners.phoneplusmag.com

Theres so much more to learn, and PHONE+ and its sister publication, xchange, have the answers. Join us Sept. 26-28 in Secaucus, N.J. First up will be xchanges Capital 2.0 day-long event, Funding the Telco Future. Go to www.capital.xchangemag.com for details.

Stick around for the Fall 2007 Channel Partners Conference & Expo where Phil Josephson, founder of the Law Office of Phil Josephson, will talk about how channel partners can raise capital. Click over to www.channelpartners.phoneplusmag.com to register.

Links
Broadsmart www.broadsmart.com
Small Business Administration www.sba.gov

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