Alternative financing sources

Friends and relatives

Many companies have financed their development stages through the help of friends and relatives. Points to consider include: (1) how much equity to give to these early investors; (2) how to keep family relation-ships intact if the venture fails; and (3) involvement of family members in the daily operation of the business. Be sure to consult an attorney specializing in venture-backed deals for guidance on proper structuring to avoid possible hang-ups later.

Angels

Angels are investors in small companies using their own money. Many of today's more active angel investors created their own wealth in successful entrepreneurial companies. Angels provide funding and a varying range and depth of value-added assistance to the entrepreneur.

Many of the new breed of angel investors have organized into formal and informal groups, many of which have staff to screen and do initial evaluation work on business plans submitted by entrepreneurs seeking funding. These groups are far more organized and active than the "investment clubs" of the early 1990's.

There is no organized registry or listing of angel investors or groups. The best way to contact these financing sources is through local chambers of commerce, economic development authorities, business incubators and local universities.

Debt instruments

If the business opportunity you are pursuing is the purchase/ expansion of an existing business, you may want to consider various debt instruments. Advantages include retaining equity, fixed interest payments and flexible payment/payback terms. Convertible debt is useful for companies that have a high degree of risk but do not want to give up a large portion of equity. The conversion feature of convertible debt is attractive to investors or banks who typically make loans but require equity for their added risk.

Joint ventures

These have become increasingly popular for medical/biotechnology companies in the past few years, but any company can benefit from having a strong corporate partner. Joint venture agreements must be carefully structured to avoid relinquishing major shares of royalties or marketing rights to the partner. Expectations for both sides should be carefully documented.

Corporate venture capital

Many public companies have either a venture fund or business development group for strategic alliances and acquisitions, or both. Generally the venture arm of a public company will only invest "behind" a venture capitalist, leaving the due diligence and active management involvement to the venture capital investor. As noted earlier, your network of advisors are an important referral source to venture financing. Contacts you make with corporate venture professionals are another means to identify the "right" venture firms to approach and could lead to direct referrals. While there are no comprehensive guides to locate corporate investors, most participate actively in venture conferences and local industry organizations and associations.