Chris Woolley is a founder of Square 1 Bank, where he serves as president of Square 1 Life Sciences. With more than 25 years of business and finance experience, Woolley has national management responsibility for the Life Sciences venture banking practice. Prior to establishing this practice, he was the founding president of Square 1 West, where he oversaw five venture banking regions.
Is there anything particularly unique about today's financing environment? How does the situation differ for startups and older companies? How do you see government policy affecting the financing environment?
In a word -- yes! The speed and severity of the economic downturn took a lot of people by surprise. We are seeing fundamental changes at some of our most venerable companies, particularly in the financial sector and in the consumer arena. Some of the old business models appear to be broken, but that means there will be room for new ones to succeed. There are always financial opportunities -- you just need to look hard enough.
For startups, many of the issues revolve around how they can raise capital in a down market. In today's environment, there is less early stage capital available, valuations are lower, and the bar is higher for the entrepreneur (i.e.: the company needs a better business model, more developed management team, and shorter time horizon to break even). Lenders and investors are doing more due diligence, which slows the time to funding, and they are doing more spoon feeding of the money. Having said that, there are literally billions of dollars of available debt and equity capital looking for good deals. Recessions don't kill innovation, and smart, passionate entrepreneurs with novel solutions to big problems in large markets can get funded even in today's environment.
Older companies may face not only capital constraints, but possibly fundamental changes in their existing business models. This may require companies to re-examine their approach, cut less profitable lines of business and find ways to reduce spending. Companies may well find their banks will be more conservative, raising the bar on loan requirements, reducing the size of loan commitments and increasing prices. On the plus side, in this environment, there are highly qualified people in the job market, which can allow companies to upgrade their teams and they may have competitors exiting the business, which could lead to increases in market share.
It is too early to say how recent government policy will ultimately affect the financing environment, but many have deep concerns as to the unprecedented breadth and depth of government stimulus and intervention into the economy. Cyclicality is part of our economic system and in many ways is healthy. To the extent that current policy leads to higher deficits, taxes and interest rates, it would be detrimental. Our economy flourishes when prudent risk taking and entrepreneurship are encouraged and rewarded and we need to make sure our government doesn't lose sight of that.
Where/what are the creative financing opportunities?
Use the downturn as an opportunity to re-examine every aspect of your business, including your financing situation. Find ways to maximize profitability (or reduce losses) to lower the amount of outside financing you need. For example, there should be more opportunities to negotiate lower prices for goods and services (don't be afraid to ask for discounts) and you may not be paying out as much in salaries and bonuses (many employees are happy just to have a regular paycheck). In terms of creative financing, start with the relationships you already have -- go to your banker and talk honestly about what your needs are and find out how they can help. Talk to vendors about financing programs they may offer or ask for extended terms (they probably don't want to lose a customer!). If you are critical to your customers, see if you can negotiate up front deposits with their orders. Get on the Internet and research what government programs might be available, including various grant programs.
How would you characterize the company able to get financing? What are some common assumptions/mistakes that are made?
Tenacious. There is financing available, billions of dollars in fact. But there is no question that it is harder to get than in the recent past. You may have to endure a lot of no's to get to a yes, but don't give up. Obviously, start with your existing banker (they should know you best), but also access your network -- your accountant and attorney, friends, relatives, trade associations, competitors, alumni groups, online business and social networks, etc. Find out who they can recommend, then make the call!
Before the meeting, however, make sure you maximize your chances for success: Know your business inside and out and be prepared to answer questions a financing source is likely to ask. These would include: What is your competitive advantage? What are the strengths and weaknesses of your management team? Who are your customers and how do you get more of them? What are your short-, mid- and long-terms plans to grow the business? What is your exit strategy? What collateral do you have? Also be prepared to provide financial statements and budgets for the business and possibly tax returns and a personal financial statement (depending on the size and sophistication of your business).
As discussed above, the first mistake is to assume there is no financing available in the current economic environment -- not true. Companies also shouldn't assume that they can't talk openly with their banker; he or she is running a business too, and they don't want to lose customers any more than you do. It is true that bankers hate surprises, so don't give them any. Under-promise and over-deliver when it comes to your financial performance. But if things aren't going as well as you'd like, talk honestly about it and get out ahead of problems. In a scenario where your current bank is no longer the best fit, your banker may well be able to refer you to other financing sources (ultimately, it's in his or her best interest to get your loan paid back in full, even if its via a refinancing with another debt provider).
At the end of the day, every well-run company serving a market that needs, wants and can afford their product or service should be able to get financed, even in the current environment.
-- Compiled by Rebecca Go