NVTC is inviting members and industry leaders to serve as guest bloggers, sharing insights and information on trends or business issues relevant to other members. Matt Rajput of CohnReznick shares his insights on identifying the right sources for early-stage funding below.
With the economy continuing to recover, a soaring IPO market, strong forecasts for merger and acquisition activity, and abundant funding options and capital availability, middle-market technology companies are positioned to extend 2013’s surge in revenue and profits. Funding sources are plentiful as entities with capital that sat on the sidelines―venture capitalists, private equity firms, and strategic acquirers seeking cutting-edge technology and talented engineers―are vigorously searching for solid investment opportunities.
In its 2014 Middle-Market Technology Industry Outlook, CohnReznick advised: “The U.S. technology merger and acquisition (M&A) market heated up in 2013 and we believe conditions are ripe for the temperature to rise again in 2014. Overall, U.S. M&A activity increased 14% in 2013, making it the strongest year for U.S. deal-making since 2007”.
The highlights for the sector include:
• Telecommunications M&A transactions increased 119% on a global basis to $263.7 billion, led by Verizon’s $130 billion acquisition of the remaining stake in Verizon Wireless
• High technology M&As were up 8% year-over-year
• Information technology comprised almost 50% of all venture-backed M&A deals in 2013 (332 of 673 deals).
Even in the face of a very active M&A marketplace, capital doesn’t fall from the skies for early-stage technology companies. Great companies typically start with great business ideas. However, turning those ideas into reality requires capital—sometimes, a sizable amount of capital. Many entrepreneurs dream of landing a huge round of venture capital to meet their funding needs, but in the beginning, that is unlikely to happen for early-stage companies. In fact, according to the National Venture Capital Association, only about 1,000 of the 627,000 new businesses started each year receive venture funding in the U.S.
Fortunately, there are many different financing sources for early-stage technology companies. But identifying the ideal source(s) of capital can be tricky. Although early-stage companies may view a windfall of venture capital as the grand prize, early-stage companies should explore other sources of capital until venture capital funding is more likely. As companies contemplate various funding options, it is also important to consult with professionals so that peripheral challenges and issues related to funding, such as due diligence and various tax implications, can be appropriately addressed.
In his whitepaper, Early-Stage Company Financing Options – With Alternative Sources Offering Hidden Treasure, Alex Castelli, CohnReznick Partner and Technology Practice Director, shared the following insights that apply to most early-stage technology companies–
- Unless you are a serial entrepreneur who has had successful exits and provided large returns to your past investors, consider bootstrapping your new venture until you have at least developed a beta version of your product or service. Being able to show your investors a working product that is in the hands of potential users will help persuade them that you have a business they could invest in. Put your own money in first before you ask others to invest. Sweat equity is expected and generally does not take the place of your invested cash.
- When you fund your business from angel investors or venture capitalists, there is an expectation that you will create a liquidity event for your investors within the next 5 to 7 years, if not sooner. If you see your business as a “lifestyle” business, outside investment is not advisable unless your investors understand the kind of return and the time period over which they can expect. With outside investment come heavier expectations about how you will manage and accelerate the growth of your company.
- Outside investment to grow your company and quickly reach your intended market could be exactly what your company needs. When talking to investors, consider who will be a good strategic investor – someone with the ability to help you grow your business through their contacts and experience. Since many investors ask for seats on your Board, you will want to make sure that you have the right mix of insight and experience from those investors.
- Lastly, always be ready to respond to requests from potential investors. It is encouraged that those seeking capital be prepared with a sound business plan. Keep your business plan and projections current and your records organized. Demonstrating that you are operating a real business with a plan for growth will make your company a more attractive potential investment.
To close, the outlook for the technology industry is positive. Additionally, solid, middle-market technology companies are likely to be well-received by investors while early-stage companies will find hidden treasure in all of the alternative sources of capital in today’s market.
Matt Rajput, CPA, is an Audit Manager in CohnReznick’s Tysons Corner office. He has more than six years of experience servicing publicly-traded and closely-held companies in a number of industries, including technology, hospitality, and professional services, and he has significant experience providing services to private equity and venture capital backed companies. Contact Matt at firstname.lastname@example.org.