In today’s tight-fisted lending markets, students wanting to start a company should look first to their families or friends for seed loans, according to Robert Crutchfield, a partner with Harbert Venture Partners, which provides growth capital for early stage information technology and health care companies.
Crutchfield provided future entrepreneurs with a step-by-step approach to attracting venture capital investment during his lecture “Venture Capital: The Entrepreneurial Asset Class” at Gleacher Center in Chicago August 8. The event was hosted by the Private Equity, Entrepreneurial Ventures and Venture Capital Club, an Evening MBA and Weekend MBA student group.
A second source of risk capital for entrepreneurs is angel investors, who are now taking on a bigger, more aggressive role in the start-up environment. “In the old days, angels — who were high net worth individuals who’d put up $50,000 to $100,000 — would come in and help you get out of the gate. They were motivated by altruism as well as return prospects,” he said. “Today we see angels coming in, syndicating like venture capital groups do, and putting in as much as $1.5 million to $3 million in the first round. They’ve really moved up the scale where venture capital used to be, while venture has moved a little later in the life of a company.”
Another good way of financing a new company, according to Crutchfield, is through federal grants, private foundations and state-sponsored business incentive programs.
He said government grants from such organizations at the National Institutes of Health, Small Business Innovation Research, and the Small Business Association’s Small Business Technology Transfer program are great sources of capital. “It’s money you don’t have to pay back and it’s non-diluted. The challenge is that grant writing is difficult. It’s a science and an art form.”
Once a start-up begins to grow, venture groups like Crutchfield’s Harbert Venture Partners begin to take an interest. “We’re late round A, early round B investors,” he said. “We’re the builders and growers. We’ll put in $2.5 million to $3 million as an initial investment. Typically that’s with $2.5 million to $3 million from a couple of other investors. So average round size is $7.5 million to $10 million and then, as a syndicate, we’ll typically set aside another $7.5 million to $10 million for follow on.”
Harbert, which currently has over $100 million in total venture funds under management, normally likes to hold companies for four to six years maximum before exiting, Crutchfield said. Investors typically take a board seat and want a voice in driving the company forward. Venture capital investors have become very protective of their capital in the post-apocalyptic economic landscape, he said. Before investing, they make sure that a company is solid and has a high quality management team.
“We typically track a company for six to 12 months before making an investment,” Crutchfield said. “We dig into the management team’s experience and background. Companies like Harbert are looking for guys who’ve operated businesses.”