Working Capital (Debt) Financing For Entrepreneurs: Heather Onstott, Director Of Small Business, LaunchCapital (Part 6)

By guest authors Irina Patterson and Candice Arnold

Heather: When we hold on to an investment – and this is something that the venture capital industry is really getting its head around today – for a very long time, we really need that multiple to be very high at the exit in order to make a risk appropriate return on the invested dollars.

So, I think our guys are very focused on trying to figure out what it’s going take to get those businesses successful, to a place where they can exit in the least amount of time possible, along with what the entrepreneur wants as well.

Irina: What is their method of investing?

Heather: Good question. Each director has his own preferred methodology, and in actuality, in each industry, often times, it’s what the entrepreneurs in that industry are familiar with.

So, I know, for example, awhile ago convertible notes were very popular. They’re very easy to close, so the cost of closing is very low. Some people will say they’re entrepreneur friendly; some people will say no, they aren’t.

It really depends on the note. The benefit is that there doesn’t need to be a set valuation, which is nice. I know our director out of New Haven has used convertible notes quite a bit. Now, he also uses preferred shares, which our director here in Boston uses.

Irina: What are their capital requirements?

Heather: Excellent question. We do not invest in heavy capital required companies. I think [the reason for] that is that we recognize that one of the biggest risks for us, as seed stage investors, is timeliness and the effects of dilution.

So, what we recognize is that the more capital that is required in subsequent rounds, the more it could dilute our equity portions down to a place where we can’t possibly generate an acceptable return for our limited partner.

What we’ve learned is that, at a seed stage, we really tend to focus on the capital-efficient companies, and just pass those that require a little bit more capital, [such as] some of the heavy R&D industries or some of those industries that take a long time to build out, either they have very long sales cycles or it takes a really long time to get some traction in the marketplace if you’re creating a new market. Those are some companies that we generally pass on to some other partners who we have who focus on that type of investing.

Irina: How many people are employed by your organization?

Heather: In our organization we have seven . . . and a half. We have a part-time person. There are three of us directors, one managing director, two analysts, and we have an office manager.

The way we conduct our due diligence, that initial layer, the competitive landscape, market analyzing, gets handled by our analyst here in-house. Then, if we find that we’re interested in taking the next step, we’ll outsource that, and we’ll hire either a local expert or sometimes it’s even an MBA student, to come in and help us put together what that due diligence process will look like.

Irina: How many deals do you get per month?

Heather: On a monthly basis, I probably see 50 to 75 deals. You could probably double that for the venture guys.

Irina: You get about 50 deals a month but you only fund a few. What is the story with the rest?

Heather: Of the 50 per month that I see, 25 to 30 are not ready for funding, yet. They might think they are, but they’re not. That, generally, means that either they haven’t really thought through a critical piece of their execution or they don’t have the right management team in place, yet, and don’t have a good plan for putting the right management team together . . . or a million other things.

Some of them, to be fair, know they’re not, and they tell you upfront, “I’m not ready, but I just want to talk, briefly, about this,” and that’s completely fine, and I do a lot of that. I think we all do.

Of the remaining 20 to 25, probably about 10 to 15, in my world, decide they have other pieces that they need to put together. So, if I bring $100,000 to the table and they need $300,000, they need to find that other $200,000 to put together.

This segment is part 6 in the series : Working Capital (Debt) Financing For Entrepreneurs: Heather Onstott, Director Of Small Business, LaunchCapital
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