Many entrepreneurs have great ideas but struggle to bring them to fruition due to a lack of funding.
Venture capital can be the answer, leading to success, and, ultimately, to the sale of the company, says Kenneth Levine, CPA, a director in assurance services at SS&G.
“There are advantages and disadvantages to venture capital funding,” says Levine. “But for the right company in the right situation, it can be a win all around.”
Smart Business spoke with Levine about what kinds of companies can benefit from venture capital and how it’s helping to change the Northeast Ohio landscape.
What kinds of companies can benefit from venture capital?
Businesses that are a good fit for venture capital are companies that have significant growth potential and are in situations in which they would need funding over and above what could be typically funded out of personal resources. In most instances, they are companies that are not bankable; in other words, they could not go to a bank and get a loan because they have no assets to loan against. Most often, the company is in some category of technology, which could be anything from software to chemicals to biotechnology to medical devices. If someone were starting a smaller manufacturing company or distribution business, that would probably not be a candidate for venture capital funding.
It also has to be a situation where the founders of the business would need to understand that the venture capital funding is temporary. Venture capital investors are looking for an exit strategy, generally from the sale of the business, typically within a three- to seven-year timetable.
Where can a business turn for help in getting started with venture capital?
In Northeast Ohio, support organizations include BioEnterprise and JumpStart; in Akron, The Austen BioInnovation Institute and the Akron Global Business Accelerator; and in Youngstown, the Youngstown Business Incubator. These are all organizations that are working to facilitate the startup, growth and success of companies that often look to venture capital as a primary source of funding.
Once a company has found funding, does it have to fully ramp up before other companies become interested in buying it?
No. Venture capitalists are not necessarily looking to grow a business into a fully functioning company. Instead, they are looking at growing to proof of concept.
For example, in a medical device company or a biotech company, that could mean doing things such as obtaining patent protection and going far enough through the FDA and clinical trial process to prove the idea will work and that it is valid. Then once there is a potential drug or a potential medical device, the company becomes of interest to much larger companies.
Nevertheless, there’s a win in it for everybody when a bigger player buys the business, because those companies have the marketing, the distribution channels and the ongoing research and intellectual property to support those activities. At the same time, the founders and investors can be handsomely rewarded for their efforts and investments.
If a business owner accepts venture capital, does he or she have to give up control of the business?
You’re generally giving up control at the board level, not at the day-to-day operating level, as long as things are moving forward in a positive direction. Typically you’re going from majority ownership to minority ownership, which is one of the dynamics of having outside investors.
However, the other side of the coin is that you’re also getting an outside perspective and expertise. Anyone who has an idea thinks that it’s a really good idea. But these outside investors are experienced and they specialize in certain areas and have backgrounds in different industries. Going to them is a good check on whether an idea is really a good one, or if maybe it’s not because another company is already doing it or the market potential is limited.
It’s very beneficial in that regard. Sometimes people get answers that they don’t like to hear, but that’s not the worst thing in the world.
Is this a difficult time to secure venture capital funding?
If you have good management, a good idea and a good product, there is always funding. Venture capitalists want to be able to look at you personally as someone who is good to work with as part of their overall organization and their team. If you have those attributes, there is always funding for good ideas.
If you look locally, there are companies that are getting started with local or Ohio-based venture capital money and then, as the business expands, funding is coming from all over the country. I think it’s important for the community to focus on all of the positive that is going on right now. It’s easy to criticize and say, ‘This company didn’t get funded,’ or ‘That one didn’t succeed,’ but if you look at the big picture, Northeast Ohio is really making a major transition from a manufacturing-based economy to service and medical industries, including a large number of technology-based businesses that have raised significant amounts of venture capital funding.
You’re going to have some wins, some in the middle and some that don’t succeed, but if you compare the number of companies up and running now to the number five, 10, 20 years ago, we are light years ahead of where we were as a community.
Kenneth Levine, CPA, is a director in assurance services at SS&G. Reach him at (440) 248-8787 or KLevin[email protected]