Funding Sources Range from Angels to the Not-So-Angelic

According to Adarsh Arora, CEO of Lisle Technology Partners, there are two ways of securing financing for your new business: “family and friends, and robbing the bank. And I strongly disapprove of raising from family and friends.”

Actually there are more choices than that, Arora and other panelists acknowledged at Management Conference at Gleacher Center on May 18. In discussing financing options to maximize business valuation, speakers explored raising funds from angels and venture capitalists.

Moderator Linda Darragh, adjunct associate professor of entrepreneurship, said that when her students talk about securing venture capital, “We say, ‘Stop!’ Going after that is very costly. You have to build value in your company so capital is less costly.”

As for angel investing, it is “alive and kicking,” said Vishal Verma, ’07, partner in Edgewood Ventures LLC and a founding member of Hyde Park Angels. In 2004, $16.7 billion was invested by angels in 36,000 companies, Verma said. Last year the figure was $25.6 billion—a growth of 11 percent—in 51,000 companies. Angels numbered 234,000.

By contrast, venture capitalists invested $5.7 billion last year, a 12 percent increase over 2005. Defining angel funding as “coming from individuals putting in their own money,” Darrah noted, “One problem with angels is no one has a Web site. You have to do networking to find out what they do.”

“Your angel is your business partner,” said Dick Shuma, vice president of the middle market banking division at Harris Bank. “You want somebody who knows your business. It’s a dating process.”

Arora sounded some warnings about venture capitalists. If one owns 15 to 30 percent of your company, “Don’t fool yourself into thinking you are in control,” he said. Venture capitalists take a cookie-cutter approach, he added. “They don’t feel your pain,” Arora said. “Go to venture capitalists when you absolutely have to.”

He also cautioned against acquisitions as “the biggest mistake” made by company owners who are seeking rapid growth. “Most of the time mergers don’t work out,” he said. “It’s different cultures. They’re good people, just coming from a different perspective.”

Going the friends-and-family route should also be done with care, the panelists said. “Every time you go to a barbecue or Thanksgiving, the first thing they say is, ‘How’s the company doing?’” Verma said. “But sometimes the only option you have is friends and family.” Arora added, “If you’re going to be an entrepreneur, you have to be sure you have the support of your significant other.”

—Gary Wisby