Thursday, December 29, 2011

State Small Corporation Offering Registration (SCOR)

Federal securities law requires that securities issued by companies to their investors must be registered with the Securities and Exchange Commission unless the offering qualifies for an exemption from registration. Registration is a complicated and expensive process, generally prohibitive for smaller companies.

One exemption from registration is available if the company offers securities only to accredited investors in a private offering.   An accredited investor must meet certain criteria, the most important of which is that he or she, including the spouse if one, has a net worth of more than $1 million, excluding the value of the person’s primary residence.  A private transaction means that there can be no advertising or publicity about the offering, including no mention of the offering on the company’s web pages.

This type of offering is problematic for many entrepreneurs.  If they don’t have deep networks of accredited investors, it may be virtually impossible for them to raise capital, given that they can’t talk publically about their offering.

There is an alternative.  An entrepreneur can chose to register its company’s offering with its state securities regulator.  This offering is known as a Small Corporation Offering Registration or SCOR.  A SCOR offering allows a company to raise up to $1 million from an unlimited number of investors resident in the state using public advertising. The investors do not have to be accredited.

A SCOR offering is not simple, but it is doable. Boise entrepreneur Doug Joseph is currently conducting a SCOR offering for his company Locate Express as a means of raising capital to expand his business.  Doug reports that he was able to do most of the work of registering his offering himself.

In Idaho our regulator is the Securities Bureau of the Idaho Department of Finance.  The Bureau has published a SCOR manual and other useful documents on its web site. Click on “SCOR/U-7 Filings” under “Forms Available Online” in the upper right of their home page.

I’ve summarized the basics of a SCOR offering below.  But there are technical details that are important and anyone contemplating such an offering must engage legal counsel to advise the company and to give an opinion regarding the securities.

According to the SCOR manual the company must be a corporation or limited liability company.  This offering cannot be used for companies engaged in petroleum exploration and production, mining or other extractive industries.  And the company must not be a development-stage company with no specific business plan or purpose other than a merger.

The stock price must be $1 per share or more.  Financial statements must be provided.  If the company is raising less than $500,000 the statements must be reviewed by a CPA; for offerings between $500,000 and $1 million, the statements are generally required to be audited.

To register your offering with the State, you file a disclosure document known as a U-7 and other documents along with a filing fee of $300.  The purpose of the filing is to disclose all material information about the Company that a typical investor would want to know before making an investment in the company. 

The Idaho Securities Bureau is willing to talk on the phone or meet with an entrepreneur considering making a SCOR offering to review the requirements before the entrepreneur submits the documents.  You can reach the Bureau at 888-346-3378. 


Dr. Kevin Learned is a counselor at the Idaho Small Business Development Center at Boise State University where he specializes in counseling with entrepreneurs seeking equity capital. He is a member of the Boise Angel Fund, and is a principal in Loon Creek Capital which assists angels in forming angel funds. He can be reached by email to

Wednesday, October 26, 2011

New Data on Pre-Money Valuations

I thought my previous article was going to be my last for a while on the topic of valuation. But some germane new research has just been published.

In previous articles I discussed the concept of pre- and post-money valuation. Pre-money valuation is the value the entrepreneur and the angels negotiate before the angels invest. Post-money valuation is the pre-money value plus the amount of the investment, and it used for computing the percentage of stock the founders will retain after the investment by the angels.

In the second article on valuation I noted that one of the factors in setting pre-money valuations is the average regional deal value; that is at what value have other similar deals in the area been done? Since angels tend to invest close to home, the entrepreneur will have to compete for funding locally. Angels will look at the value of other similar deals in the area in deciding what value to offer or accept from the entrepreneur.

Bill Payne is a well-regarded angel investor in Montana. He is a member of the Frontier Angel Fund. The Boise Angel Fund and the Frontier Angel Fund have a close working relationship, from time to time investing in each other’s deals. Bill teaches classes on angel investing for the Angel Capital Association and has made more than 50 angel investments himself.

He just completed a survey of 35 angel groups in 26 states and two provinces. The complete results are available on his blog at His survey asks the question “What was the average pre-money value for investments made by your group in pre-revenue companies?” The average answer was $2.1 million, an increase of $400,000 from the previous year.

However, averages hide a lot of data. Valuations ranged from a low of $800,000 to a high of $3.4 million. Interesting for local entrepreneurs is that the Boise Angel Fund was one of two with the lowest valuation of $800,000. The other was Fargo/Morehead Angels, another group with which the Boise Fund has a relationship. In fairness, the Boise Angel Fund only did one pre-money deal in the past year, so that value was very specific to the deal that was done.

There are several implications for Idaho entrepreneurs.

1. Many Idaho angels have generally avoided pre-revenue deals due to their inherent riskiness. In order to entice investors to accept that risk, you have to offer a terrific deal, which means a low valuation.

2. While it is even more difficult to secure money outside of Idaho than inside, an entrepreneur with a truly exceptional opportunity may want to try to get the attention of non-Idaho groups.

3. Some valuations are skewed by the fact that bioscience and medical device deals typically receive higher valuations at the pre-revenue stage. Most Idaho angels will not do such deals.

4. Your pre-revenue deal will likely receive a lower valuation in Idaho than it might receive in a money center. The cure for this is to not seek funding until your company has secured its first revenue, thereby lowering the risk to investors. With a lower risk profile comes a higher valuation.

In our consulting practice at the Idaho Small Business Development Center at Boise State we frequently work with entrepreneurs to help them set a value on their businesses before they go to the market to raise capital. Our services are free and confidential. Call the SBDC at 426-3875 for an appointment if you would like to discuss your company’s value with one of our counselors.

Dr. Kevin Learned is a counselor at the Idaho Small Business Development Center at Boise State University where he specializes in counseling with entrepreneurs seeking equity capital. He is a member of the Boise Angel Fund, and is a principal in Loon Creek Capital which assists angels in forming angel funds. He can be reached by email to

Sunday, October 9, 2011

Valuing Early Stage Businesses, Part III, Understanding Angel Math

This is the final article in a series on valuing early-stage businesses from the standpoint of the angel investor.  You can find the earlier articles at my blog,  Thanks to Mark Woychick, a participant in the MBA Honors Program for his assistance in preparing this series.
In the earlier articles we talked about the riskiness of an investment in your company and how lowering that risk will result in a higher valuation. We also talked about the importance of comparable such as the average regional deal value and similar businesses and about the value of the team.
In this article we want to present the math that most investors go through in order to validate a valuation.  It’s pretty simple.  Take these variables:
1.      How much money does the company need in this round?
2.     How much can the company be sold for and in how many years?
3.     What multiple of my investment do I believe I need to have the potential to earn to justify my taking the risk?
Given the answers to these questions, we can compute a preliminary valuation of the company.  For example:
1.     The company needs $500,000.
2.     The entrepreneur and our own due diligence suggest the company can be sold for $20 million in five years. 
3.     Given the risk profile, we believe we need to have the potential to receive ten times our investment. Therefore we need to have the potential to receive ten times the investment of $500,000 or $5 million when the company is sold.
4.     If the company will sell for $20 million and we need $5 million of the sales proceeds, then we need to own 25% of the company at exit ($5 million/$20 million).
If we need 25% of the company at exit in order to meet our return objective, and IF the company does not need to raise any more funds between now and exit (admitted a tenuous assumption in that most companies will need to raise additional capital which will dilute our ownership), then we can compute the value of the company today as follows:
1.      Money raised, $500,000
2.     Percent of company needed for this investment, 25%
3.     Value of the company after investment (the “post-money” value) must be $2 million.  That is, with a value of $2 million, our $500,000 investment will purchase 25% of the company.
4.     This means the value of the company before the investment (the “pre-money” value) must be $1.5 million (post-money value of $2 million less investment of $500,000).
Most investors will triangulate on a number of different approaches to valuing the company to substantiate the value.  In the above example, they will compare the computed value of $1.5 million to what they believe similar companies in the region are worth.  They may adjust the value up or down depending upon the quality of the management team or the strength of the intellectual property.  They may run a discounted cash flow analysis on the pro forma projections to see how it compares. 
Valuation of early-stage businesses is difficult and as much art as science.  In the end analysis, the value is what the investors and the entrepreneurs can agree upon.  But the well prepared entrepreneur will understand the different approaches and be prepared to negotiate with the investors based upon them.
In our consulting practice at the Idaho Small Business Development Center at Boise State we frequently work with entrepreneurs to help them set a value on their business before they go to the market to raise capital.  Our services are free and confidential.  Call the SBDC at 426-3875 for an appointment if you would like to discuss your company’s value with one of our counselors.
Dr. Kevin Learned is a counselor at the Idaho Small Business Development Center ( at Boise State University where he specializes in counseling with entrepreneurs seeking equity capital. He is a member of the Boise Angel Fund, and is a principal in Loon Creek Capital (, which assists angels in forming angel funds. He can be reached by email to

Thursday, September 29, 2011

Valuing Early Stage Businesses, Part II, Comparisons

This is my second article on the valuation of early stage businesses. These articles have been written from the perspective of angel investors in the hope that I can give some insight into this mysterious process for entrepreneurs who have to negotiate valuation with prospective investors. I have been assisted in preparing these articles by Mark Woychick, a participant in the Boise State MBA Honors Program.
The focus of these articles is valuation from the standpoint of the investor.  I hope they will give entrepreneurs some guidance in how their businesses may be valued when they seek capital.  I assume your business plan (e.g., business concept, market size calculations, competitors, use of investor capital, etc.) makes sense.
I should point out that in my opinion the traditional discounted cash flow method of valuing businesses doesn’t work for an early stage business. This method may be appropriate for a stable business with an operating history where you can have some confidence in the projections.  But an early stage business has neither an operating history nor stability and therefore projections for such businesses are unreliable. In the many deals I have reviewed, I have never seen an investor do a discounted cash flow analysis.
Last time I discussed the fundamental relationship of risk and return, how the earlier in the business cycle a business is, the riskier the investment is likely to be, and therefore the lower the valuation of the business will be for purposes of seeking investment capital.  Of course this is an important factor but not the only one.  Here are some others that will likely impact the value of the company:
Average regional deal value. Sophisticated investors know the current valuation of deals in their region.  For example, the Boise Angel Fund participates in a monthly phone conference with about ten other angel groups throughout the Northwest.  We talk about the valuation of the deals we are seeing.  This gives us a basis for the initial valuation of a local deal.  For example, we know from this discussion that pre-revenue deals in the Northwest rarely have valuations of more than $2 million, and they are usually substantially less no matter how exciting the potential.   So if you approach local angels for your startup company with a valuation of $3 million, you are likely to not even get to negotiations as your proposed value is completely out of line with what other deals are being done for.

Comparable businesses. If there have been other companies started in your space, then angels may want to use the valuation of those deals as a basis for the valuation of your deal. For example, many Software as a Service (SaaS) deals have raised capital in the last year.  Generally well thought out SaaS deals are valued a bit higher than businesses which carry inventory and accounts receivable as they have the potential to be very capital efficient and to be highly profitable.  

Team. All businesses are dependent upon the quality of the management team.  A superb team with background and experience in bringing a company to market in your space is unusual and valuable.  In my experience, all investors will increase or decrease the value of a business based upon their perception of the management team.

In the next article we will examine the most important, and most difficult component, which is projecting the exit value for the investors and then try to bring all these factors together.  

Dr. Kevin Learned is a counselor at the Idaho Small Business Development Center ( at Boise State University where he specializes in counseling with entrepreneurs seeking equity capital. He is a member of the Boise Angel Fund, and is a principal in Loon Creek Capital (, which assists angels in forming angel funds. He can be reached by email to

Tuesday, September 13, 2011

Valuing Early Stage Businesses, Part I: The Value of an Early-Stage Company is Related to its Riskiness

One of the toughest things to do is value an early stage business. Yet, in order to sell stock, the entrepreneur has to set a value on his or her company. Today’s article is the first of several on this topic. I’ve been assisted in these articles on valuation by Mark Woychick, a participant in the Boise State MBA Honors Program.

Risk and Return

Investors expect to be compensated for the risk they assume. The higher the risk, the higher the potential return must be to entice the investor to accept the risk. And early-stage investing is a risky proposition. Research suggests that around 40% of all angel investments in early-stage companies result in a loss of the investment, even after extensive due diligence. So investors must see the potential to make substantial returns in order to justify accepting the risk.

Business Stage

Risk is, in large part, correlated with the stage of the business. Here is a rough listing of risk, stage and returns expected in order to accept the risk.

Stage           Level of Risk           Return expected (compounded
                                                    per year)

Idea             Extremely high        100%+

Prototype    Very high                 75%

revenue       High                        50%

customers   Modestly high            40%

Growing     Intermediate              25%

To put this in lay terms, if angels invest in a business that has started to generate some revenue, and if they expect a return of 50% (called the internal rate of return), then they are seeking to make about ten times their investment in five to six years.


Most sophisticated angels use the concepts of “pre-money” and “post-money” valuation. The pre-money valuation of a company is the value that the entrepreneur and the investor agree the company is worth immediately before the investment. The post-money valuation is the pre-money valuation plus the amount of investment. If the entrepreneur and the investor agree that the company is worth $500,000 before the investment (the “pre-money” valuation) and the investor invests $250,000, then the company must be worth $750,000 immediately after the investment is made (the “post-money” valuation).

You can derive percentage ownership from the pre and post-money valuations as follows:

Pre-money valuation          $500,000        67%

Plus investment                  $250,000       33%

= Post-money valuation       $750,000      100%

After the financing the entrepreneur (and those who have previously invested) would own 67% of the company and the new angel investors would own 33% of the company.

Relationship of Risk and Current Value

The riskier your business proposition, the lower the current value of your business and the higher the proportion of ownership the angel will demand. If the angel is considering two deals, one which is only at the idea stage and the other is at the initial revenue stage, then, all other things (e.g. management, size of opportunity) being equal, the value of the company at the initial revenue stage will be higher than the company at the idea stage and the percentage ownership the entrepreneur will have to give up will be less. For example:

Stage:                     Idea                    Initial Revenue

Money needed         $100,000            $100,000

Value of company    $200,000             $400,000

% of company
to investors               33%                    20%

The lesson for the entrepreneurs is the further developed you can get your company before you seek outside capital, the more valuable your company will be and the less you will have to give up to investors.

Of course, valuation takes into account more factors than stage of business. We will explore other factors in subsequent articles.
This article was originally published in the Idaho Statesman's Business Insider on August 10, 2011 under the title "How to set a value on your business so you can sell stock."

Dr. Kevin Learned is a counselor at the Idaho Small Business Development Center  at Boise State University where he specializes in counseling with entrepreneurs seeking equity capital. He is a member of the Boise Angel Fund, and is a principal in Loon Creek Capital Group which assists angels in forming angel funds. He can be reached by email to

Monday, August 15, 2011

What is an Opportunity?

Published in the Idaho Statesman Business Insider, July 6, 2011

I recently spoke to BSU Professor Kent Neupert’s MBA class on opportunity recognition. How do we know when an idea is a good business opportunity?

This is an important question for entrepreneurs and for investors.  Seemingly great ideas don’t necessarily result in viable businesses.  The idea has to be paired with a market that will demand the product.

For example, an entrepreneur may have a terrific salsa recipe that has been in the family for generations.  Family and friends encourage her to go into the salsa business because everyone loves this homemade salsa.  Is this an opportunity worth pursuing?

Or some professors have developed a computer game platform that can be used by teachers to create learning quests.  Early research shows that some students may be able learn faster and retain more by using the game rather than more traditional teaching methods. Is this an opportunity worth pursuing?

Here are three questions they might ask themselves before leaping into either business:
            1.  Is there an unmet need in the market place?
            2.  Is the market large enough to allow the company to make a profit?
            3.  Can the market be reached for reasonable cost?
Let’s see how these questions might be applied to these two ideas.

Need. It’s hard to argue that the market place needs another salsa.  The supermarket shelves are filled with national brands.  Specialty stores such as the Boise Co-op carry smaller less known brands, even local brands.

On the other hand, there is a trend in education to reduce costs by deploying more technology.  If in fact this gaming platform does lead to improved student outcomes along with lower cost delivery, then it seems to speak to an unmet need.

Size. Clearly both of these markets are huge.  It would not be unreasonable to assume there are hundreds of millions of dollars spent each year on salsa and on technology in education, just in the United States.  And the worldwide market must be considerably larger.

Distribution.  Customers have to be able to learn about and find the product or service. How might that happen with these two ideas?  The consumer products market is quite mature.  Most people will go to a retail store to purchase a product like salsa.  This is an exceedingly difficult and costly market to penetrate.  While it may be possible to build an Internet-based salsa business, shipping costs will likely be a significant barrier.

With regard to the technology product for education, distribution is not as defined as with consumer products.  Reaching the market will depend upon which market.  Will the target be school districts, home schooled children or individual teachers, just to name a few?  But since technology is frequently marketed through on line techniques, it may be possible to cost-effectively reach the market.

So is there an opportunity for either of these products?  I think the answer for the salsa is no.  The market appears saturated and the costs of distribution are overwhelming.  I think the answer for the gaming platform is maybe.  There appears to be a need for technology in education and the market is large, but it is yet not clear how the market can be reached.

Dr. Kevin Learned is a counselor at the Idaho Small Business Development Center ( at Boise State University where he specializes in counseling with entrepreneurs seeking equity capital. He is a member of the Boise Angel Fund, and is a principal in Loon Creek Capital (, which assists angels in forming angel funds. He can be reached by email to

Monday, June 20, 2011

Where Do Jobs Come From?

We all know good-paying jobs are important to our economy, both locally and nationally.

Our legislative and congressional policymakers spend a good deal of time debating job creation policy. Each city in the Treasure Valley has an individual assigned to economic development. Our chambers of commerce work to improve the economy for our local companies.

But sometimes I fear all this effort, while well-intentioned, is under-informed on how jobs actually get created.

About 30 years ago, Professor David Birch of the Massachusetts Institute of Technology published groundbreaking research showing that about two-thirds of all net new jobs (jobs created minus jobs lost) between 1969 and 1976 were created by firms with 20 or fewer employees (David Birch, “Who Creates Jobs,” Public Interest, Fall 1981, pp. 3-14). This research led us to understand better the extremely important role of small business in the U.S. economy.

Now the Kauffman Foundation has published a surprising new study of job creation in the economy (Tim Kane, “The Importance of Startups in Job Creation and Job Destruction,” The Ewing Marion Kauffman Foundation, July 2010). Their research mined a new U.S. government dataset called the Business Dynamics Statistics, which includes age of company as well as employment data. Here’s what they found: “Startups aren’t everything when it comes to job growth. They’re the only thing.”

The data show that in all but seven years in the period from 1977 through 2005, existing firms on balance lost more jobs than they created.

Clearly employment didn’t drop in the other 22 years. So where did the job growth come from? It came from new companies.

How can this be? If you think about it, a startup by its very nature starts with zero jobs and with its first hire creates a job.

Over this 28-year period, startups created an average of 3 million jobs each year. But once started, some firms add jobs, others lose them. On balance, after the first year existing companies lose more jobs than they create. Of course, not all companies destroy more jobs than they create, but when summed together, existing firms stop growing, may lay off workers or even go out of business.

This has several public policy implications. Of course we should not ignore our existing businesses. Helping them grow is important. But I am intrigued about what we can do to encourage entrepreneurs to start businesses in our Valley. Here are several thoughts.


We should consider investing some of our economic development resources into support for entrepreneurs. Recruiting a company to come to the Valley may lead to good headlines, but may not lead over the long run to job growth. Some states have used tax policy, such as tax credits, for investing in new businesses to encourage capital.


Incubators, when combined with support such as that provided by the Boise State University TECenter in Nampa, can provide nurturing support for entrepreneurs.

Funding research programs in our universities produces new knowledge that can become the basis for a new business.

And joint public/private partnerships such as The Core in Meridian may provide a seed bed that will attract entrepreneurs and capital.

Kevin Learned is a counselor at the Idaho Small Business Development Committee, a member of the Boise Angel Fund and the finance committee of the Idaho Technology Council. Contact him at

Wednesday, June 1, 2011

How To Make an Effective Investment Presentation

Special to the Idaho Statesman

Published: 05/04/11

In my last article I wrote about getting the interest of investors by clearly stating the problem your product or service addresses. So if investors say they are interested in learning more, then what?

Typically the next step is an investment presentation, or pitch.

Your pitch is a sales presentation. You are selling your belief that you can execute a business plan that will make the investors money. Of the 60 entrepreneurs who made pitches to the Boise Angel Fund over the past four years, only 25 moved to the next step. More than half didn’t inspire the confidence of investors. Here’s some of what I’ve learned from listening to all 60 pitches:


I have been surprised how many entrepreneurs treat this step casually and come underprepared. They stumble through their pitches, they read their PowerPoint slides and they make a disjointed presentation.


Typically the time allocated to the pitch is short, perhaps 15 minutes or less. Funding Universe of Salt Lake (in which local VC Highway 12 Ventures invested) gives entrepreneurs only four minutes.

You’ve got to get directly to the point of the business proposition quickly. Guy Kawasaki, in his excellent book “The Art of the Start,” says, “I’ve never heard a pitch that was too short … a good one will motivate listeners to ask questions that extend it.”


One angel said, “Never have I sat in a pitch wishing the entrepreneur had told me more about his life.” Yes, of course you should be passionate about your business. But get to the point. The investors don’t need to know much about how you came up with your idea, just what it is and what problem it solves.


The point of your presentation is not to demonstrate your prowess with PowerPoint. While slides may be helpful in reinforcing your points, the investors are primarily interested in your ability to explain your proposition. If you are going to use slides, avoid distracting dissolving and flying transitions. Put a maximum of three points on a slide. Remember that slides are best used to present bullets, not long dissertations.


Investors want to know first about the problem you are solving — what it is and how big it is.

After you have convinced them that such a problem exists, you can tell them briefly how or why your product or service addresses this problem.


Once you have addressed the problem and your product, the next question will be, “How will you get a customer?” Entrepreneurs frequently believe that if they make the product, the market will somehow miraculously come.

The investors know better. You must convince the investors that you have a reasonable plan to distribute your product or service and the cost of going to the market (advertising, sales personnel, distributors, etc.) will be low enough that the business will be profitable.

The entrepreneur who makes a concise and thoughtful pitch that addresses the magnitude of the problem being solved, how his or her product solves the problem and how the product will be taken to the market, will have potential investors saying, “That’s interesting. Tell me more.”

Kevin Learned is a counselor at the Idaho Small Business Development Center, a member of the Boise Angel Fund and the finance committee of the Idaho Technology Council. You can reach him by email to

Thursday, May 26, 2011

Investors want to hear about problem first, product later

Investors want to hear about problem first, product later
By Kevin Learned - Special to the Idaho Statesman

Published: 04/20/11

The Boise Angel Fund was formed four years ago. It makes equity investments in early stage Idaho companies. Since formation, the fund has considered applications from 199 companies; it has made 10 investments. Why so few? Clearly, most entrepreneurs don’t understand what the angels are seeking.

Entrepreneurs are always proud of their product or service. They frequently begin with how terrific it is. But angels and other sophisticated investors aren’t very interested in the product or service, at least not at the beginning of the conversation. Rather they want to know what problem or opportunity exists in the marketplace.

In its section on pitching an investment idea, the website for the Boise Angel Fund ( says: “Our experience is that most entrepreneurs devote too much time describing the product or service and not enough time describing the opportunity. By ‘opportunity’ we mean we are more interested in the problem the customer has and how important it is for the customer to solve this problem.”

First you have to convince investors that you have identified a problem of significant financial magnitude. After you have established this with the potential investors, then they will be interested in how your product or service speaks to that problem.

Here are two examples of Idaho companies that have raised capital from sophisticated angel investors in the past several years and the problems their products attack.

Inovus Solar ( recognized that there are millions of streetlights in the United States drawing energy from the electrical grid. Energy is costly and in short supply. Each streetlight stands in sunlight during daylight hours. Inovus recognized that a streetlight could generate its own power by converting the solar energy hitting it during the day into electricity that the pole can use at night. The company now produces and markets a line of solar light poles.

Prosperity Organic Foods: Hailey entrepreneur and scientist Cygnia Rapp suffered from digestive health problems. Her problems caused her to study the spread (e.g., butter and margarine) category.

She learned the U.S. market for butter and substitutes is $3 billion a year and that most butter substitutes are either unhealthy or targeted to address cholesterol concerns. She formed Prosperity Organic Foods Inc. ( to develop and market healthy spreads, primarily to younger women. Prosperity’s Melt buttery spread is now sold in more than 600 supermarkets in the West.

What is common about these companies is that they each began with a problem — streetlights consume electricity, many spreads are formulated from unhealthy fats. They each assessed the magnitude of the problem and concluded that they could develop and market a product that would profitably solve it.

Both companies raised local capital to fund their journey through the Valley of Death, that period of time in every new company’s life when cash goes out the door faster than it comes in.

A successful request for investment capital begins with the question: What is the problem in the marketplace, and how big a problem is it? Answer this question and you are well down the road to developing a business plan investors will find compelling.

Kevin Learned is a counselor at the Idaho Small Business Development Center, and a member of the Boise Angel Fund and the finance committee of the Idaho Technology Council. He is a shareholder in both Inovus Solar and Prosperity Organic Foods. Contact him at
Read more:

Monday, May 16, 2011

Four sources of investment capital for early-stage businesses

By Kevin Learned - Special to the Idaho Statesman
Published: 04/06/11

All businesses pass through a period when the business is spending more cash than is coming in. We call this time the Valley of Death, because if the business doesn’t reach a point where more cash is coming in than is being spent, it will die.

A common misconception is that banks will lend money to cover the shortfall. This is not the role of banks. They finance only businesses with a history of profitable operations. Early-stage businesses must look to other sources, typically equity capital.

Equity capital is risk capital. If the business does not succeed, the capital will likely be lost. If the business succeeds, the capital will earn a share of the profits.

Generally, there are four sources of equity capital, listed here by ease of access:

1. FOUNDER’S SAVINGS. This is the cheapest capital a business can have. It comes without having to share interest in the business. Frequently, no one else will accept the risk, so it may be the only capital available. And any other investor will reasonably expect that the founder has invested his or her savings. If the founder doesn’t have the confidence to commit savings, then why should a nonfounder accept this risk?

2. FAMILY AND FRIENDS. Family and friends invest because they have confidence in the founder. Often they are not experienced business people, and typically they will not do hard economic analyses. Family-and-friends capital is a mixed blessing. It may be relatively easy to raise, but in my experience, there is no pressure like that of knowing your family or friends will lose their money if you don’t succeed.

3. ANGELS. Angels are high-net-worth individuals who invest a portion of their own capital into businesses. They typically invest not just to make money, but because they like to help entrepreneurs. They will do economic analyses and will negotiate terms of their investments. They will invest only in opportunities they believe have an excellent chance of success. The Keiretsu Forum and the Boise Angel Fund are angel groups that accept applications from Idaho companies.

4. PROFESSIONAL CAPITAL. Often referred to as “venture capital,” this money is invested by professionals who make their living by investing in early-stage businesses. Typically, but not always, venture capitalists invest later in the business cycle than the above three types do. Highway 12 Ventures is a Boise venture-capital firm that accepts applications from Idaho businesses.

Raising equity capital is tough for a new business. Successful fundraising requires planning and perseverance. The entrepreneur must have identified a business problem for which there is no optimal solution, must have a product or service that can profitably solve the problem, must have a viable plan to get the product to the market, must persuade investors that he or she can execute the plan, and must present a deal to the potential investors that will allow them to make a profit in line with the risk they assume.

Kevin Learned is a counselor at the Idaho Small Business Development Center, a member of the Boise Angel Fund and a member of the Finance Committee of the Idaho Technology Council.

Read more:

Information for Entrepreneurs Seeking Angel Capital and for Angels Wanting to Invest in Entrepreneurs

I am a counselor at the Idaho Small Business Development Center and the Administrator of the Boise Angel Fund. In these two capacities I often am asked questions by both entrepreneurs seeking angel capital and by potential angels thinking of investing in an early stage business.

To address both of these, I write a column every other week in the Idaho Statesman's Business Insider magazine. Because you must have a paid subscription to the magazine to read the articles, I am going to reproduce them here after they are published in the hope that they might be helpful to both entrepreneurs and angels.

I hope you find them helpful and informative.