No one ever said that building a business was easy.
Getting it off the ground is the most difficult part, but once you’ve tapped out your savings, mortgaged your house and hit your friends and family up for seed money investments, what then?
Companies that aren’t able to generate enough cash flow in the early days to stay afloat must seek early stage financing elsewhere. Among the options are angel investors, wealthy individuals who not only make investments in fledgling start-ups but bring some business expertise to the venture as well.
Typically, angel money — usually ranging from $100,000 to $1 million — is used to improve a company’s technology, staff up and market its product or service and give the company’s management team time to develop continuous revenue streams.
Those all-important revenue-stream deals will eventually allow a company to rely less on external funding and more on cash flow. But until they start to pay dividends, odds are you’ll have to find more money from outside sources, including venture capital firms, traditional bank loans and alternative options such as mezzanine financing and purchase order finance.
Bruce Abrams knows the situation all too well.
As a former executive with Christian and Timbers, a Beachwood-based management recruitment firm, Abrams saw dozens — if not hundreds — of young start-ups in their pursuit of working capital. He says it takes more than money to make a company successful; it takes innovative ideas and an experienced leadership team.
That’s one reason he left C&T last year to found Abrams/Trangle with partner Kevin Trangle. The pair not only invests cash into start-up ventures, but also supplies human capital.
Explains Abrams, “Young companies need extraordinary leadership in order to succeed. We’re coming at this from a different perspective. We look for people who are going to attract institutional VCs, people who have good ideas and are investable.”
By the time an entrepreneur visits Abrams/Trangle, he or she has already gone the angel-personal funds-begging family and friends route. Abrams/Trangle typically co-invests during the second round of financing,along with the VCs.
At this stage, financing falls between $3 million and $5 million. And while requirements for each level of financing vary according to the money source and financing round, Abrams says he looks at three key components before moving any deal from the negotiating table into his company’s pocketbook.
Big markets with painful problems
The larger the potential customer base, the greater the chance the business owners will find the big money funding they’re after, Abrams says. And, the bigger the problem that needs solving, the greater the opportunity to land those clients.
For example, one recent investment Abrams/Trangle made involved a local technology firm that realized that larger companies like American Airlines and Fingerhut have no way to easily track and maintain customer e-mail addresses. With more and more people ordering products and services online, not being able to track repeat customers makes it more difficult to maintain a loyal Web-based client base.
A solution was needed.
Simple solutions
Innovation is the key behind solving business problems, but the solutions don’t have to be complicated. Sometimes, it’s as simple as good technology that just scales with growth.
“Too often, entrepreneurs develop great technology that works well with a small operation,” Abrams says. “But, when they try to apply that technology to a larger organization, it simply doesn’t work.”
In Abrams’ e-mail tracker example, the company developed a simple method that could be adapted to businesses of any size, he says.
“The key is handling growth.”
Founders not on ego trips
“We don’t mind if they have huge egos,” says Abrams. “But we want them to recognize that they will inevitably have to replace themselves as senior management. They have to be willing to just be really rich and take a different spot in the company or a board seat.”
There’s another attribute Abrams and his fellow investors look for.
“If the owners of these start-ups don’t have a burning idea that they have to do, then they really should get out of business,” he says. “But most important, they can’t just be looking for money; they have to be looking for smart money that brings something more to the business.” How to reach: Abrams/Trangle, (216) 514-8468
Dustin Klein ([email protected]) is editor of SBN.
