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Alternative funding works, but don’t ignore traditional banks

From left to right: Lynn Bromley, Moderator, Region 1 Advocate, SBA Joe Lyons, Co-founder, Boston Boot Company Henry Noel Jr., Co-founder and managing partner, Essencial Capital Tom Wooters, Seed Venture Finance  Jerry Bird, Mass Ventures Annette Reynolds
From left to right: Lynn Bromley, Moderator, Region 1 Advocate, SBA Joe Lyons, Co-founder, Boston Boot Company Henry Noel Jr., Co-founder and managing partner, Essencial Capital Tom Wooters, Seed Venture Finance Jerry Bird, Mass Ventures Annette Reynolds
Doug Atkins

This past Thursday, the US Small Business Administration celebrated National Small Business Week with a conference at Microsoft’s NERD Center in Cambridge. There were speakers, panels, networking opportunities, and yes, and even the mythical free lunch.

Funding is always an issue for small businesses, so it made sense that they had a panel called “Finding Capital for Your Business – Crowdfunding, Angel and Other Options.”

The panel was moderated by Lynn Bromley, the SBA’s Region 1 Advocate and had five guest speakers.

Unanimously, the panelists stated that the key to successful funding is that there needs to be some (if not lots) of proof of concept. That is to say, the fund seeker must demonstrate that customers are lining up to pay for the entrepreneur’s product or service.

Joe Lyons, Co-founder of the Boston Boot Company found his funding and proof of concept through a crowdfunding campaign.

“I knew if we could sell 200 pairs through the campaign, that would tell me that people really wanted our boots,” he said. The campaign was a hit. They sold 1,600 pairs, got over 2,000 backers, and exceeded their original goal of $20,000 by over ten times. At that point, they realized they had a viable company.

Another point toward funding success was to do lots of networking.

Panelist, Henry Noel Jr., Cofounder and Managing Partner of Essential Capital – a boutique investment bank – said, “You always need to be networking. Share your idea with everyone. Someone will know someone. Look for opportunities like this [National Small Business Week].

However, it is also important to be aligned with the goals of the funder. Understand their funding goals first so efforts are not wasted. If it’s what they do, an opportunity may be there.

“You have to get out there. Get a lot of no’s,” said Jerry Bird of Mass Ventures, the Commonwealth’s venture capital arm, and he gets to say “No” a lot. “I see 300 – 400 business plans a year. If you send me a blind email, you probably won’t hear back. Somebody needs to make a warm introduction. It’s a must.”

One local networking group is the 128 Innovation Capital Group (http://128icg.org).

“We meet regularly and people come to learn,” said Annette Reynolds, the group’s Executive Director. “We always have a speaker and everyone gets to pitch.” The audience frequently has investors, so as Noel implied, someone may now someone else who is in a position to help.

Venture capitalists and angels are fine, but keep in mind that outside investments frequently mean loss of control. Although VCs claim they rarely oust founders, it does happen. The intricacies of starting a company only to be cast away can be pure agony.

Although banks are setup to always get their money back, what they provide is a loan, meaning the founders lose no equity and maintain ownership. Although banks advise, they won’t alter management teams, pay owners peanuts, or decide who to hire and fire.

Traditional banks cover their back sides with a founder’s collateral, but they don’t want to foreclose, especially if they are a local bank that knows the owners. They may bend when times are tough. Big banks, not so much.

Perhaps this is not welcome advice for college startups, but a loan on a car might be just enough to launch something great. However, avoid credit card debt at all cost. The high interest will kill a company.

Also, banks are not good for a company that needs to scale fast. Overall, banks are often a better option than many founders realize. The SBA is a great resource for bank lending and has billions to spend. They can be an entrepreneur’s lifeline.