25 May, Wednesday
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A conversation about funding a pre-seed startup

T his July, Utah Business hosted the Funding Summit, an exclusive panel discussion with funding and venture capital leaders, Jeremy Neilson, the co-founder and CEO at BoomStartup; Doug Keefe, the executive director at Utah Micro Loan Fund; and Dave Christiansen, the AVA SBA sales director at Mountain America Credit Union. Moderated by Elle Griffin, editor-in-chief of Utah Business, we’ll dive into the nitty-gritty of finding pre-seed funding, no matter your idea. Watch the filmed panel above, or catch the transcription below. 

What options are available if you’re a small business and looking to get funding? 

Jeremy Neilson: There are lots of different formats, but I focus on private investing. BoomStartup is an accelerator that allows anybody in the world to get started. As you progress through the programs, the education, and all the systems and resources that are there, you can then attract capital from individuals who are interested in your idea, your business, your vision, and your strategy. 

Doug Keefe: Our primary market is underserved businesses in Utah. We also have a not-for-profit mission-based organization that really tries to really help out lower, middle-income people, minority populations, women in businesses, and the like. We’re a lender, but we also have more liberal credit guidelines to allow more money to get to those businesses. 

Dave Christiansen: The SBA program is designed to encourage lenders to lend when, in normal circumstances, they might not want to. It’s a program that’s available throughout the financial services industry among banks and credit unions like MACU and it’s a great program to help get financing out to our small business members and borrowers who need that access to that capital.

When would an entrepreneur/founder want to go the loan route and when might they want to go the equity route? Is this industry-specific? 

Dave Christiansen: I’ll address the more traditional source of financing first, loans. We look at kind of the basics like credit history, repayment ability, experience, and collateral. Sometimes, an entrepreneur will have an idea and an idea doesn’t necessarily get them a traditional bank or credit union loan, even with the backing of the SBA. So someone who’s really at the ground level and has an idea of where they want to go, but not sure really how they want to get there probably isn’t the best fit for a bank or a credit union. Banks are looking to finance the projects that we can really get our arms around and have a degree of confidence that we’ll get paid back.

Doug Keefe: Lenders want to get paid back for sure but our mission’s a little softer, more liberal than that because we do get funding that will tolerate people not paying us back. We’re a little bit different than most private lenders but generally if you want a loan but you don’t want to sell parts of your company, yet you need capital for a variety of reasons, but with the eventual expectation that you pay back the lender, if that all happens, the capital we provide could be best for you. 

Jeremy Neilson: On the equity side, there’s some kind of generalities that you should be aware of, which is kind of this rule of 10X. So if somebody puts in a dollar, they’re going to want to receive $10 back in return. With investing, the type of business that you’re building needs to be that type of business. If you’re starting a business that’s going to grow five percent a year, awesome. But an equity investor is not going to be as interested in you versus a business that says, “I’m going to grow a hundred percent a year or 1000 percent a year.” The investors are really looking for high growth, high reward businesses because they are taking the risk of a complete loss. 

Dave Christiansen: That gets into pricing as well, really. We price based on risk. The lower the risk, the better deal you’re going to get as far as an interest rate. The higher-risk loans are going to pay a little bit higher an interest rate. 

Jeremy Neilson: Can I touch on a point where we’re saying cost, what’s it going to cost you? And so on the equity side, it costs you zero by way of cash, but it costs you in equity. And if you value your business, every equity share may be worth $1, $10, or $100. And then if that value continues to increase, you ultimately could be giving, it’s not really giving, but it’s exchanged. You receive capital, and you’ve exchanged a billion dollars, a hundred million dollars, $1 million, right? So had you not done the equity deal, all of that money would have been in your pocket because you would have held those shares.

It’s very easy to say the cost of a loan owed every month is X number of dollars. On the equity side, I don’t owe anything monthly, but at some future point, I can really back in to say, “How much did that really cost me in a return that could have been in my pocket?” So it’s a little different, but ultimately you pay out the money now or later. 

How does the industry breakdown for funding work? What kind of amounts are these people usually trying to raise?

Dave Christiansen: The fun thing about the SBA is that it’s not industry-specific. We’ll do assisted living centers, gas stations, and retail. Anything and everything, so long as it makes sense and they have OK credit and can demonstrate an ability to pay us back, whether it’s through historical cash flow or projected cash flow, it doesn’t matter the industry.

Doug Keefe: I would say our profile is also not restricted, it’s probably a lot like Dave’s. We require less of a collateral requirement, less of a cash flow requirement, and we’re a little more lenient on years in business. So hence, a higher risk situation, but some were types of companies that Dave would finance.

Are these people trying to raise $10,000 or $100,000? What’s the range that you’re seeing?

Dave Christiansen: The SBA will guarantee up to $5 million, but we can do more. I think the biggest project I’ve participated in is a hotel in Moab. And you can kind of probably imagine what a hotel in Moab might cost, but we can do larger loans. 

Doug Keefe: We’re called microloan for a reason and we currently go up to $50,000. We don’t lend on real estate directly, mostly business loans.

Jeremy Neilson: So in equity, you have all these stages, pre-seed, seed, A, B, and it keeps going up. And as you move up that chain, the dollar amounts get larger and larger. So in the pre-seed, you’re really kind of sub $500,000. And if your business is “pre-seed,” it’s an idea, there’s not much there, maybe a little code, a couple of customers. The value’s not there yet, and so you are going to be giving away a large portion of your company for a million dollars or $5 million. Maybe the value is only $3 million. So you’re going to want to raise $150K, $200K in order to take it to that next value inflection, where the value of the company goes from maybe 3 million to 10, 15, or 20. So there’s some strategy there with regards to how much you can raise. As a founder, you must ask, how much do I want to give away or exchange for capital versus how much is actually interested in the business? There’s that dance that you would take.

At what point should somebody even look at funding? 

Dave Christiansen: We’re going to look at credit history. We’re going to look at cash flow, whether it’s historical or projected. If it’s a newer business, we’re going to look at experience. We’re going to look at collateral. We can tolerate some risk in one or two of those areas, maybe with the SBA backing, but we’re in the business of controlling risk as much as possible. The benefit of that is our rates are going to be a little bit lower on pricing. Usually, founders come to us when they want to get some working capital to market or grow their business, hire new employees, or purchase assets like equipment and real estate. 

Doug Keefe: Bootstrapping is generally a good idea. When starting out, try to use your own funds, easy ways to get money, or as easy as possible without a lot of hooks to them. That can give you some operating history, maybe years in business, and a bit of collateral strength, too. All those are important to everybody, anybody that lends money anyway. 

What makes a founder’s idea worth investing in?

Doug Keefe: The people need to have an idea, and they need to have some sort of a business plan that they can pitch and demonstrate to somebody. And so somebody needs to believe that there’s a road to cash flow, and a road to pay back to the lender, even if it’s down the road and there’s a bet taken with that. It’s not necessarily a five-year projection, but it is a part of a requirement of applying with us is to generate a business plan. And so that’s integral to it, actually.

Dave Christiansen: If we’re looking at a startup business, we like to see the first-year projections broken down month by month so that we can kind of see what their plan is from day one and how they’re going to grow their business during the first year. Years two and three, we usually ask for three years of projections. We don’t need to see a month-to-month breakdown, but we do want to see what their plan is and how they’re going to grow their business right out of the gate.

What are some red flags that an investment may not work out?

Jeremy Neilson: It really depends on the industry and the team, but I mean, red flags could be anything. Have they demonstrated things in their lives where they’re going to stick to this? Or are they just going to take your money and the first day it gets hard say, “I’m out?” You really want them to be dug in. Do they really understand the market or did they just do some research online? Ultimately, for all of us, it’s about money. Can they sell? Early pre-seed founders need to sell. 

Dave Christiansen: Well, I kind of look at it when I approach a potential borrower, I ask myself the question, “Have they paid the bills in the past? Can they pay their bills today? And what happens if they don’t pay their bills tomorrow?” And if anytime during the discussion on credit history, there are sometimes obvious red flags if they have some derogatory items on their credit, pays or things like that.  Honestly, those kinds of issues don’t concern me as much because a lot of business owners, as they get into their business, struggle, and sometimes that affects their credit, but so long as we can get our arms around it and understand it, I think we can get OK with it.

Doug Keefe: With me, it’s usually about if they appear to know where they’re going. Does it appear like they’re going to keep going? With a willingness to communicate, willingness to administer their business, and knowing the basics of how to run a business.

Do you prefer to work with entrepreneurs who are breaking into an established market or ones who are breaking into a new market?

Dave Christiansen: I like the excitement that comes with a new market, but I also don’t like the unpredictability of a new market. As a traditional kind of conservative lender, I like security and safety and that comes with experience and well-established industries, but there are a lot of industries that are emerging that are going to do well. And at some point, everybody needs to be able to take on a little bit of risk in order to participate in that potential growth.

Doug Keefe: Lenders usually like predictability. But if they’re new companies, chances are they’re in old markets or older markets and just trying a new idea.  So there’s a mix of it, but yeah, we definitely prefer, or at least I definitely prefer markets that have been out there for a while so you can study it and have some benchmark to evaluate.

Jeremy Neilson: Personally, I like new markets. Although what you’ll find in equity investing pre-seed companies, they’re really trying to disrupt an established market or add a new feature or product to an established market.

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