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Capital: The best kind is patient
By Jennie
L. Phipps Bankrate.com
A year ago, all the buzz was about fledgling
startups going public and making instant millions for their investors.
Patience was a word best used when discussing
motherhood. The phrase "patient capital" was an oxymoron.
These days, the stock market is a lot more precarious.
Investors are forced to be considerably more realistic. And "patient
capital" has become a phrase that even aggressive venture capitalists
occasionally bandy about.
If yours is a new or a young business and you
as an owner are intent on sticking around and helping it grow, the
best kind of investor to have is one who is willing to be patient.
By today's definition, patient investors are those who are willing
to wait for four or five years before expecting a big payday. As
the business grows and matures, the best investors can be persuaded
to invest still more money because they see that in the end more
will be better.
Investors looking to cash
in
Sounds great, you say, but how do you find that kind of money? How
scarce is it?
Pretty scarce. Despite a market that has cooled
considerably, patience isn't a virtue for many investors. When you
talk to major venture capital firms, the expectation you'll hear
most often is "go public or sell out" in no more than two years.
But there is money out there for entrepreneurs
and businesses that can't be in a rush because they know and can
effectively explain why it will require a longer time frame for an
enterprise to pay off.
Jeffrey Sohl, director of the Center of Venture
Research at the University of New Hampshire Whittemore School of
Business and Economics in Durham, recommends three sources of investment
capital worth mining if you don't think your company can be an overnight
success.
Sohl says angels are often prudent investors
who understand that it takes more than just a good idea to make
a good company -- and good companies aren't built overnight. Sohl's
research suggest that angels usually invest within 50 miles of home,
so a good place to look for them can be the nearest university business
department, investment club or even the Chamber of Commerce.
If you'd like to try your luck online, investigate
ACE-Net,
the Angel Capital Electronic Network, which is managed by the University
of New Hampshire and the United States Small Business Administration.
Other useful resources include vfinance.com,
a venture capital resource library; and The
Capital Network, the oldest and largest of the private entrepreneur/investor
private matching services.
- Ask your largest customers
Another good place to look for patient capital
is corporate and institutional investors. John F. Kwant. managing
director of the Ford (Motor Co.) Venture Capital Group, is like
many corporate investment decision-makers in that he isn't necessarily
looking for big dollar returns -- "although we won't turn them down."
Instead, his company spends its venture capital money on other,
smaller companies whose businesses complement Ford's.
Kwant says companies in which Ford invests are
sometimes firms with which it does a lot of business and thus provides
value. Other times, they are companies whose technology Ford finds
intriguing but for which Ford has no immediate use. "Lots of times
we do it just to make sure that the technology involved stays in
the family," Kwant says.
At the same time, Ford generally has no interest
in owning or controlling the company. As Kwant explains it, "We
take no day-to-day operational positions and only rarely take a
board seat. Wešre like the perfect investor."
In the last two years, Ford has invested in
companies as diverse as Volt, a teen
lifestyle Web site that has a channel focusing on cars, to Amerigon,
which makes technology for cool seats.
Kwant advises companies that think their business
is a likely candidate for a larger company's investment to approach
their contact at the company and ask for advice. If that fails,
contact the customer affairs department and find out who's responsible
for corporate investing then make the pitch there.
- Find investors who have
a personal interest in seeing you succeed
Often this kind of loyalty can be found in university
alumni associations, where investors wearing the old school tie
tend to hang out.
Don't just check in with your alma mater, but
ask around at all the schools with which your company has ties.
In some cases the schools themselves have venture funds that invest
in alumni businesses and companies with which the school does business.
Start by introducing yourself in the chancellor's office, at any
entrepreneurial centers based at the college, the business school
of the university or any business incubators that are associated
with the college.
If you attended one of the country's larger
or more prestigious schools, chances are your alma mater is part
of University
Angels, an online angel investment network that matches alumni
entrepreneurs with alumni investors.
James Marcus, CEO and co-founder of University
Angels, believes alumni investing in each other makes a lot of sense.
Both are smart, well trained and accustomed to competition and --
almost as importantly -- committed to holding up the old school
flag. The school ties tend to make both parties try a little harder
and stay around a little longer.
Says Marcus, "These are not investors who are
going to be constantly asking you when you're going to go public.
They have a vested interest in your success -- not matter what it
takes."
Who's a candidate?
What kind of company is most likely to get patient capital? Sohl
says it's unlikely to be a startup with nothing more than a good
idea. Instead, he offers these traditional criteria:
- A high-quality, experienced management team;
- A clear market niche in an expanding economic
sector;
- Market-ready products or services with the
potential for high margins;
- Proven market acceptance of products or services
with orders on hand;
- Profitability; and
- Solid prospects for growth.
Expect to give up a lot
What can you expect to pay for this kind of patient capital? Sohl
says giving up 30 percent of the business for $500,000 is typical
for a first round. Greater dilution can be expected in later rounds.
When all is said and done, an owner who keeps 10 percent is lucky.
It sounds like a lot, but Sohl looks at it this
way. "Dilution is good. If you insist on owning 100 percent, you'll
probably end up owning 100 percent of nothing."
Jennie L. Phipps is a contributing
editor based in Michigan
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