Innovative College Programs Foster Small Business Growth

Mercer Business, Sep 01, 2002 by Ramsey, Ed

Venturing into business: full of ideas but short on cash? Journeying down the road of entrepreneurship certainly requires capital. True, most startup capital comes from a business owner's family and friends, but other business financing is available if you know where to look. A venture capital fund (or VC) may be a viable source.

In general, venture capitalists infuse cash into enterprises at various stages of growth (early, expansion, or late stage, for instance) in return for ownership interest. Typically, when a business wants to market an idea or product that is deemed too risky for a traditional lender, the enterprise can embark on a path toward venture capital. For small businesses seeking funding, it all comes down to being resourceful and persistent. So you think you have a great idea for a product or service the masses are waiting for, but you need money. How do you capture the eye of an investor?

"Finding venture capital is very much a networking challenge," says Kenneth A. Kamen, president of Mercadien Capital in Hamilton. "My company helps clients get from Point A to Point B by acting an as intermediary and introducing small businesses to the players in the venture capital industry." Kamen notes that most smallbusiness owners don't hobnob with venture capitalists, so they need to use whatever connections they do have to access people who can be a source of funds. Attorneys, accountants or business consultants usually have connections that entrepreneurs lack. And a reference from one of these service providers is held in high regard by most venture capital firms. Kamen encourages entrepreneurs to build relationships with them.

Likewise, Arthur J. Klausner, general partner with Domain Associates, a venture capital management company in Princeton focused on life sciences and healthcare, reports Domain receives more than 1,000 proposals for funding annually. "We actually invest in ten to twelve projects a year," Klausner said. Often, a referral from a CEO from one of Domain's portfolio companies is key is getting an investment proposal to the top of the pile. Other ways to network with movers and shakers in the venture capital arena are to foster credibility by association. "Attending relevant meetings or having a respected, industry-savvy individual on your Board of Directors are good ways to network," Klausner said.

What do investors look for? Management is the key, experts say. "Surround yourself with Grade-A people," said a financial expert in Lawrenceville. "No matter how much money you're trying to raise - or from whom - the key to success is persistence. Getting venture capital is almost like a full-time job." Other professionals believe it's all in the concept of the company. "We are looking for that big idea, a technological breakthrough with major upside potential that will address an unmet medical need," Klausner said.

According to Kamen, venture capital firms put money into a company and in most cases take a seat on the company's board of directors and will obtain some accountability in exchange for providing their capital. The advantages are many to the company. "They get the money that they need by bringing in this partner and it gives the company the opportunity to grow," Kamen said. Often,

venture capital firms act as an incubator - preparing a company to again operate on its own. Venture capitalists are typically institutional investors who put up $1 million or more, receive convertible preferred stock and require a board seat.

Once a partnership is established between a business and a venture capital company, there are significant advantages for the business. "When a good VC invests in a business, they typically provide a wide network of opportunities, including access to potential clients, potential senior executives and potential additional investors; they try to spin a web of talent around the portfolio company," said Edward M. Zimmerman, Esq., of Lowenstein Sandler, PC based in Roseland.

Zimmerman often works with clients in Mercer County and often handles matters for clients including Rutgers University and Princeton University. Recently, he moderated a panel on Venture Capital for Princeton's Entrepreneur's Network: Current Trends in Financing. Further, Zimmerman believes that a venture capital firm affords a company sound business advice and experience. "Your VC can be a fairly objective third party, with a fresh perspective informed by working with lots of different companies," he said.

Although the pros generally outweigh the cons, it's realistic to expect some disadvantages when partnering with a venture capital company. "Some entrepreneurs shy away from yielding authority on core business decisions to investors; which can make it difficult to effectively partner with institutional investors like VCs," Zimmerman said. Also, it's important to check into the venture capital company's track record. "Not all venture capital companies are created equal. Look into their professional integrity, understand the level of their cash resources, and check references," cautions Klausner.