Financing: Understanding the Ins and Outs

New report!

Bridging the Valley of Death: Transitioning from Public to Private Sector Financing
By Lawrence M. Murphy of NREL and Peter L. Edwards ofAltira Group LLC

The public sector makes early stage, high risk investments in promising innovative technologies that can address public good needs of energy diversity, national and energy security, environmental quality, and economic sustainability. Private sector investors, on the other hand, focus their resources and efforts on market focused businesses with good profit potential - not technologies. Hence, once, these technologies have been created, many challenges in attracting private sector investors remain, since a technology does not a product, business, markets, and profits make.

This report examines these challenges and provides some solutions to enhance the probability that the private sector will exercise their option to invest in businesses that will commercialize the products based on the technologies created by the public sector. Specifically, this report focuses on the significant gap between when the technology is created, and when market focused businesses with commercial products are realized, by using three different view points: a) differences in the values, perspectives, needs, and approaches that separate the two investment sectors have, b) the case-flow valley of death, and c) risk perspectives.

Transitioning to Private-Sector Financing: Characteristics of Success
By Lawrence M. Murphy and Chris of Boyle of NREL, and Julie Brokaw of Bechtel

This report helps entrepreneurs commercialize clean energy, technology-based products. By shedding light on the private capital investment process and the characteristics and strategies of entrepreneurs who obtain financing, we can assist and encourage others to do the same. Find out more regarding business plans, marketing, commercialization, and the financial community as a whole by accessing this report. (PDF 793 KB) Download Acrobat Reader

Publications/Books

The following are resources that provide financing information for entrepreneurs at a variety of levels. There are several publications dedicated to the subject—these are a few that we found especially helpful.

The Guidebook of Funds and Incentives for Distributed Energy Resources, produced by EFI/ XENERGY, is a valuable resource for energy industry professionals involved with renewable energy, distributed generation, cogeneration, and energy efficiency projects. You can access more information on the Web site

Renewable Energy Report. Monthly analysis of global markets, finance, and policy. Published by Platts, a division of The McGraw Hill Companies.

Renewable Energy World. Published by James and James, this bimonthly magazine accentuates the achievements and potential of all forms of renewable energy sources and the technologies being developed to harness them.

Angel Investing: Matching Start-up Funds with Start-up companies - the Guide for Entrepreneurs, Individual Investors, and Venture Capitalists, Mark Van Osnabrugge and Robert J. Robinson, 2000. This authoritative, comprehensive guide to angel investing offers indispensable insights into the current state of the angel investment market, and provides a resource section designed to link investors and start-up companies. Angel investment is becoming a popular way for entrepreneurs to bring their companies from the "idea stage" to the full-blown funding of venture capital or an initial public offering on the open market. For the individual investor, becoming an angel may generate potentially enormous financial returns; he or she can invest in a company with tremendous growth potential in the early stages -- before it goes public. Angel Investing is an indispensable guide for both entrepreneurs seeking capital and would-be angel investors in search of a big return. Its in-depth coverage reveals what active angel investors seek in a start-up, how entrepreneurs can pitch their company, financing strategies, and the invaluable resources used by the pros. The book includes an extensive listing of organizations, Web sites, and other networks that link investors and entrepreneurs.

Business Angels: Securing Start Up Finance, by Karl Moore, Patrick Coveney, John Wiley & Sons, June 1998. Amazon.com says: "Featuring new findings from a landmark Oxford University study of the informal venture capital market, this book gives clear and essential advice for entrepreneurs seeking funds to facilitate their plans. While much has been written about financing through the formal sector (banks), this is the first book to focus exclusively on the informal market-family, friends, and private investors, the real "business angels."

Business Angels: A Guide to Private Investing, by Robert Keele, Jeffery Cooper, and Gary Bloomer was published in 1998, and is available through the Colorado Capital Alliance (CCA). According to the CCA, "this book provides the tools required to evaluate, structure, and exit a venture investment. A useful tool to slip in your briefcase and refer to again and again! This guide doles out sage advice on how to get the most out of angel investing."

Finding Your Wings: How to locate Private Investors to Fund Your Venture, is a recent book by Gerald Benjamin about angel financing, and was recognized as one of the best business books in 1997 by the Financial Times of London. Notably, besides providing insights on locating angels, the book also provides ways to characterize and analyze the different kinds of angel investors, and provides ways for the entrepreneur to screen investors consistent with her/his needs. The book is published by John Wiley & Sons; cost is about $35.00, and it is widely available in book stores. The author claimed in 1997 that this is the first book on angel investing produced by a major publisher in the past 10 years.

Entrepreneur Magazine Guide to Raising Money by Entrepreneur Magazine, Paperback, John Wiley & Sons - 256 pages (October 1997). The publisher, John Wiley & Sons, says, "The 'small business authority' shows new and would-be entrepreneurs how to find money to grow their businesses. The book describes the pros and cons of a wide variety of funding sources, including banks, SBA offices, venture capitalists, on-line sources, and even some quirky nontraditional sources of capital."

Capitol Capital: Government Resources for High-Technology Companies is a 214-page book that describes in a comprehensive, easy-to-read manner federal and state government programs that companies can access. These include funds for research and development (Chapter 1), tapping into federal laboratories (Chapter 2), defense conversion and dual-use programs (Chapter 3), manufacturing programs (Chapter 4), sources of domestic financing (Chapter 5), and international financing (Chapter 6). There is also a chapter of seven case studies describing success stories of companies that have accessed programs and services. Contact: AEA Customer Service Center, 5201 Great America Parkway, P.O. Box 54990, Santa Clara, CA 95056-0990; phone 1-800-284-4232; fax 408-970-8565.

Pratt's Guide to Venture Capital Sources has been widely hailed as the leading reference to the worldwide venture capital industry for entrepreneurs and growing companies. The 1995 edition contains investment, operating, and management data on more than 950 venture capital firms. Each listing includes contact name, phone and fax number, geographic and industry preferences, recent investment data, management rosters, and project preferences, including the roles played in financing, types of financing provided, and preferred investment sizes. The price is $249. Contact: Securities Data Publishing/Venture Economics, 40 West 57th St., 11th Floor, New York, NY 10019; phone 212-333-9274; fax 212-765-6123.

New Jersey Financing Resources Manual (1994), published by the South Jersey Entrepreneurs Network, provides new or growing businesses with a broad overview of the various aspects of business financing. The manual contains chapters on preparing a business plan, developing a relationship with a banker, lease financing, private investors and networking, later-stage financing, and federal/state financing sources. The contributing authors are experts in their respective fields, including corporate and securities attorneys, corporate executives, and commercial loan officers. The book explains each type of financing and includes sections detailing what to expect when approaching bankers, leasing companies, venture capitalists, or other financial sources. The cover price is $25. Contact: The South Jersey Entrepreneurs Network, Longwood Center, Suite D-2, 600 Route 38 West, Cherry Hill, NJ 08002; phone 609-665-8855; fax 609-665-6767.

The Guide for Venture Investing Angels: Financing and Investing in Private Companies (1996), by Arthur Lipper III, has a primary objective to assist the individual angel investor in making better decisions as to whether or not to invest in private companies and how to do so more effectively. Thus, although it is not directed at the small business and entrepreneur, it can provide some valuable insight on the criteria and the corresponding rationale which venture and angel investors use in making investment decisions. Contact: Missouri Innovation Center, Inc., 5650A South Sinclair Rd., Columbia, MO 65203; phone 573-446-3100; fax 573-443-3748.

Winning Strategies for Capital Formation: Secrets of Funding Start-Ups and Emerging Growth Firms Without Losing Control of Your Idea, Project, or Company, by Linda Chandler, 1997.

The Venture Capital Cycle; Paul A. Gompers and Josh Lerner; October 1999. In the last 25 years, the venture-capital industry has grown from a less than $1 billion to an over $60 billion business--growth that has far surpassed any other class of investment products. Today, the industry consists of several thousand professionals working at about 500 funds concentrated in California, Massachusetts, and a handful of other states. Despite the industry's size, there are many misconceptions about the nature and role of venture capitalists; their trade remains shrouded in mystery. The authors are Harvard Business School professors who have researched extensive original data to analyze venture-capital fund-raising, investing, and exiting methods.

"How Venture Capital Works"; Bob Zider, Harvard Business Review, November-December 1998. In this article, Bob Zider, president of the Beta Group (a California-based firm that invests in commercializing new technologies), presents an analysis of present-day venture capitalists and shows why its practitioners have a lot more in common with investment bankers than you might think. The popular mythology surrounding the U.S. venture-capital industry comes from a previous era. Venture capitalists who nurtured the computer industry in its infancy were legendary both for their risk-taking and for their hands-on operating experience. But today things are different; and separating the myths from the realities is crucial to understanding this important piece of the U.S. economy. Today's venture capitalists are more like conservative bankers than the risk-takers of days past. They have carved out a specialized niche in the capital markets, filling a void that other institutions cannot serve. The myth is that they invest in good ideas and good plans. In reality, they invest in good industries—that is, industries that are more competitively forgiving than the market as a whole. And they structure their deals in a way that minimizes their risk and maximizes their returns. In addition to analyzing the current venture-capital system, the author offers practical advice to entrepreneurs thinking about venture funding.

From the Field - Inside Venture Capital, Harvard Business School Publishing, 1999. This collection complements B. Zider's "How Venture Capital Works," providing items that reveal particular elements of the venture capital industry. Each is introduced with a summary and followed by "questions and ideas to consider" that will help guide further research. For example, this work looks at a case on W.R Hambrecht and Company's "OpenIPO" process, illustrating both the traditional IPO process and Hambrecht's alternative approach. In another case (Intel Capital), the increasing popularity of corporate venture capital is illustrated. And, finally, the "Note on Private Equity Information Sources" highlights valuable sources of information about private equity, many of which are not available on the Web.

Web Sites

The following are resources that provide financing information for entrepreneurs at a variety of levels. There are several Web sites dedicated to the subject—these are a few that we found especially helpful.

• Garage.com
  "Offers entrepreneurs and investors an innovative, Web-based approach to high-tech and medical sciences venture financing and investing. In conjunction with its broker/dealer affiliate, garage.com helps entrepreneurs attract the high-quality investors they need, and helps investors find the outstanding start-ups they want to fund."
  
  
• The Angel Capital Electronic Network (ACE-Net) ACE-Net was announced by President Clinton in 1996 as a nationwide, Internet-based listing service that provides information available to angel investors on small, dynamic and growing firms seeking equity financing in the $250K-$1,000K range. ACE-Net contains much relevant information for small businesses (the Web site includes numerous useful hot links and references under Sites Of Interest button; also see SBA'S Office of Advocacy ACE-Net and The Process and Analysis Behind ACE-Net).
  
  
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  The Capital Network A founding member of ACE-Net, The Capital Network also has its own database list of providers who can assist entrepreneurial ventures with various types of business expertise including attorneys, accountants, and other business consultants. Entrepreneurs or investors needing expert business advice can call the TCN office to receive a list of three to five experts who may be able to provide assistance to match their needs. They also hold venture seminars and Continuing Education Seminars. Contact Paul Myers, program manager, phone 512-305-0830; fax 512-305-0836.

• BThe National Business Incubator Association's Business Matchmaker Database A service of the National Business Incubation Association (NBIA) and Coopers and Lybrand, L.L.P., this database profiles more than 1,000 early stage (recent graduates of business incubation programs), mid-sized and large corporations interested in forming strategic alliances. Check out the NBIA and membership requirements and the matchmaker database.
  
  
• Local resources
  Many states and regions have organizations and services dedicated to matching small businesses with private investors. (Is there a national directory of state resources??). For example, the Colorado Capital Alliance, Inc., is a not-for-profit organization created to facilitate the match between private investors looking for opportunity and entrepreneurs seeking capital. CCA is a collaboration among the public and business leaders from the Rocky Mountain region devoted to meeting the developmental needs of the small business community. Contact Marcia Schirmer, executive director, phone 303-499-9646; fax 303-494-4146.
  
  
• Regional, State, and Local Small Business Sites
  The Colorado Office of Economic Development and International Trade works with companies starting, expanding, or relocating in Colorado. OED offers a wide range of services to assist new and existing businesses of every size. The site contains links to the Colorado Small Business Development Center Network, which combines information from federal, state, and local governments with information about the educational system and the private sector.

Financing: Government Grants and Other Funded Programs