Fledgling entrepreneurs are hungry for funding, but in order to attract investments or loans they need a formal business plan, a strong management team, and a product or service that is almost ready for market.
They also need what’s called "skin in the game." No bank officer or angel is going to invest in a business until the entrepreneur and his friends and family members have put some of their own money into it.
Then the entrepreneur is ready to go to a bank loan officer. Graduates of the Entrepreneurial Training Institute (see story below) may get preferred treatment because their business plans have already been refined. But if the bank says no, which is likely for a fledgling business, the next step is to try for an Small Business Administration loan. SBA loan programs enhance the entrepreneur’s chances of getting money, because they relieve some of the lender’s risk. Another avenue for companies having trouble accessing traditional financing is the Mercer County Loan Fund administered by the Regional Business Assistance Corporation.
High tech businesses have additional options, because the state of New Jersey is bending over backwards to encourage them. Grant and loan programs that were cut under the slash-and-burn budgets of last year are being resuscitated by moving them to an agency that has its own source of funds, the New Jersey Economic Development Authority (EDA). In 2003 the EDA provided nearly 60 percent more funds than in 2002, and this has resulted in job growth, more than twice the number of new jobs than a year ago.
The EDA’s Springboard Fund is the first and best option for young companies because it requires no personal guarantee. If your company never has revenues, you won’t lose your house.
Other EDA programs are more stringent but still offer greater opportunities to young businesses than banks do. They include the New Jersey Seed Capital Program (see below and page 18) and the New Jersey Technology Funding Program.
The federal government’s equivalent to the Springboard Fund is the Small Business Innovation Research Grant (SBIR), funded through the New Jersey Commission on Science and Technology and facilitated by the Technology Commercialization Center. This traditional boon to young businesses is a grant, not a loan. Often the imprimatur of SBIR money will shake loose other money from investor trees.
After government grants and loans, the next level of funding is angel money (investments from wealthy individuals who gamble on future profits), followed by venture capital money. Advisors can connect young businesses with angels and VCs, or the entrepreneurs can meet investors through the entrepreneurial networks. Both angels and VCs take an equity stake (an ownership percentage) and may want to participate in running the business. Most entrepreneurs try to grow their business as big as possible before selling off a percentage of it.
Confused? One good place to start is a federally-funded Small Business Development Center or, if you have a high-tech business, the Technology Commercialization Center.
The College of New Jersey Small Business Development Center, 36 South Broad Street, Trenton Business & Technology Center, Trenton 08608. Lorraine Allen, director. 609-989-5232; fax, 609-989-7638. E-mail: firstname.lastname@example.org. Home page: www.njsbdc.com
Free professional business consulting services and affordable training programs to start-up and established businesses in Central New Jersey.
Service Corps of Retired Executives (SCORE), Chapter 631, 231 Rockingham Row, c/o Princeton Chamber, Princeton 08540. 609-520-1776; fax, 609-520-9107. Home page: www.score.org
Volunteer arm of the US Small Business Administration — private counseling at no charge for entrepreneurs.
New Jersey Small Business Development Center, 49 Bleeker Street, Newark 07102. Brenda Hopper, statewide director. Bernadette Tiernan, associate state director. 800-432-1565; fax, 973-353-1110. Home page: www.njsbdc.com
Free management consulting and affordable training for entrepreneurs through 11 regional centers, also satellite centers and incubators.
SBDC Technology Commercialization Center, 43 Bleeker Street, Newark 07102. Randy Harmon, director. 973-353-1923; fax, 973-353-1030. E-mail: email@example.com Home page: www.njsbdc.com/scitech
This is the first place to go for help and networking: the telephone help desk at 800-432-1832. Get help with commercialization and grant opportunities and also sign up for SBIR workshops. The center has funds to pay for 10 to 12 hours of coaching to help a qualifying entrepreneur develop an SBIR loan and review and critique the draft. The center gets funds from the New Jersey Commission on Science and Technology and from the U.S. Small Business Administration.
New Jersey Technology Council, 1001 Briggs Road, Suite 280, Mount Laurel 08054. Maxine Ballen, president. 856-787-9700; fax, 856-787-9800. Home page: www.NJTC.org
This statewide membership group provides recognition, networking, information, and services for the state’s technology businesses. Each year, it holds scores of meetings in every part of the state, some for the general technology community, and some only for CEOs or for CFOs. Members pay reduced admission.
Biotechnology Council of New Jersey Inc., the Princeton House, 160 West State Street, Trenton 08608. Debbie Hart, executive director. 609-890-3185; fax, 609-581-8244. Www.newjerseybiotech.org
The council is among the sponsors of the New Jersey Biotechnology Life Sciences Coalition, 866-465-2572
New Jersey Entrepreneurial Network, 600 College Road East, Suite 4200, Princeton 08540. Robert Frawley, president. 609-987-6656; fax, 609-987-6651. E-mail: firstname.lastname@example.org Home page: www.njen.com
Monthly meetings at noon on first Wednesdays, September through June at the Doral Forrestal Hotel, $45, 609-279-0010. On Wednesday, January 7, the NJTC Venture Fund will speak about new venture funds — Zon Capital Partners, Masthead Venture Partners, and New Venture Partners.
New Jersey Entrepreneurs Forum Inc., Box 313, Westfield 07091-0313. Jeff Milanette, president. 908-789-3424; fax, 908-789-9761. E-mail: NJEF@njef.org. Home page: www.njef.org
Assistance in formation and growth of young technology based enterprises in the state. Meets on the fourth Wednesday of the month at the Hyatt Regency, New Brunswick, at 11:30 a.m. Cost: $45. On Wednesday, January 28, Rick Pinto and Jared Silverman will stage a mock negotiation of a venture capital term sheet. Coaching sessions are February 25 and March 24.
Jeff Milanette, president, of NJEF, also has a consulting business, Innovative Partners (www.innovativepartners.com).
Silicon Garden Angels + Investors Network/Silicon Garden NJAngels.net, 32 Cedar Brook Drive, Silicon Garden, Somerset 08873-2854. Daniel J. Conley, venture catalyst. 732-873-1955; E-mail: NJAngelsNet@aol.com Home page: www.OnCallCFO.com
Dan Conley’s business is to help entrepreneurs get seed and start-up capital, venture capital, and expansion capital, and to coach entrepreneurs and business owners introducing business plans and preparing for venture fairs. He is associated with the Entrepreneur University at NJEF.
Among Conley’s events: "Best of the Best Angel-backed Success Stories" on Wednesday, January 28, 3 to 7 p.m. (following the NJEF meeting) and a boot camp for entrepreneurs on Thursday, February 12, both at the New Brunswick Hyatt. He hosts a coffee reception for entrepreneurs, angels, and venture capitalists on Wednesdays, February 25 and March 24 (before the NJEF luncheons).
Venture Association of New Jersey, Box 1982, Morristown 07962-1982. Jay W. Trien CPA, president. 973-631-5680; fax, 973-984-9634. E-mail: email@example.com Www.vanj.com
Meetings are second Tuesdays of the month, at 11:30 a.m. at the Westin hotel in Morristown. Membership is $125, and members pay $25 to attend meetings. Non-members pay $45.
#h#Business Loans from the SBA and Others#/h#
U.S. Small Business Administration, New Jersey District Office, 2 Gateway Center, 15th Floor, Newark 07102-5553. 973-645-2434. E-mail: firstname.lastname@example.org. Www.sba.gov
The SBA 7(a) Loan Guaranty Program. The maximum loan amount is $2 million. However the maximum dollar amount the SBA can guarantee is generally $1 million. Small loans carry a maximum guarantee of 85 percent. Loans are considered small if the gross loan amount is $150,000 or less. For loans greater than $150,000, the maximum guaranty is 75 percent.
One of the SBA’s primary lending programs, it provides loans to small businesses unable to secure financing on reasonable terms through normal lending channels.
SBALowDoc has a one-page application form and rapid turnaround on approvals for loans up to $150,000. The SBA will guarantee up to 85 percent of the loan and usually turns the applications around within 36 hours. Eligible: Start-ups and businesses with average annual sales for the past three years not exceeding $5 million and with 100 or fewer employees, including affiliates.
SBAExpress loans let the lender skirt the SBA process. The SBA will guarantee up 50 percent of the loan, up to $250,000.
SBA CapLines, an umbrella loan program, provides a 75 percent guarantee for short-term and seasonal working capital needs: material and labor needs for a contract, seasonal inventory increases, financing for a small general contractor.
SBA 504 loan is a long-term financing tool for economic development with long-term, fixed rate financing. The maximum debenture is $1 million for meeting the job creation criteria or a community development goal. The maximum debenture for meeting a public policy goal is $1.3 million.
The SBA 7(M) Microloan Program can be from $100 (for very small projects) up to $35,000 for capital expenditures and working capital. The average loan size is $10,500. This is a "last resort" loan available to nearly any company, administered by the Regional Business Assistance Corporation.
Regional Business Assistance Corporation, 247 East Front Street, Trenton 08611. Deborah Osgood, executive director. 609-396-2595; fax, 609-396-2598. Www.rbacloan.com
Community development small business loan fund providing financing and technical assistance to business in five-county region. The Mercer County Loan Fund, with participation from 13 banks, can lend from $25,000 to $125,000 to small businesses or nonprofit organizations. "The basic requirements are to apply," says Deborah Osgood. "We fund start-ups."
New Jersey Community Capital, 16-18 West Lafayette Street, Trenton 08608-2088. David M. Scheck, director. 609-989-7766; fax, 609-393-9401. Home page: www.njclf.com
A statewide, nonprofit community development financial institution providing loans and technical assistance for low income housing and economic development.
#h#High-Tech Monies from the State and VCs#/h#
The Springboard Fund for high-tech companies has been revived for 2004. It requires no personal guarantee. Rather, it has been described as a "recoverable grant" program, not a loan program, because the money is not secured. Companies can get these grants of from $50,000 to $250,000 on 10-year repayment terms. Recipients must agree to pay back the principal from gross revenues and must match the money from their own funds, third-party investors, or in-kind contributions.
Until recently the fund was managed by the New Jersey Commission on Science and Technology, which gave out a total of $18.4 million to 84 companies. But during the dry spell of 2003 no new money for the Springboard Fund was available. Now the Economic Development Authority has new money, $10 million, plus the residual monies from paid-back grants to manage the program.
There is a one-time forgiveness — if there are no sales there is no repayment. That does not mean the company has to be profitable. If it gets any revenues at all, they must be used for repayment.
New Jersey Seed Capital Program has loans of from $25,000 to $500,000 to help companies bring their emerging technologies to market. The EDA makes these five-year loans at a below-market interest rate. Loans of up to $250,000 can pay for working capital, and up to $500,000 pay for fixed assets. To apply, submit a formal, detailed business plan, have a strong management team, be operating in an emerging technology sector, and have begun product testing. The loan is structured similarly to a bank loan.
Previous recipients have been Princeton Multimedia Technologies on Witherspoon Street, the Credo Group on Alexander Road, InMat LLC in Hillsborough, Precision Instrument Corporation in the Hill Refrigeration Complex in Trenton, and Chromocell at the Technology Center of New Jersey in North Brunswick. Perhaps because there were no Springboard Fund grants in 2002, only one company made the cut for the Seed Capital loan program in 2003, and that was Checkspert (see page 4).
SBIR Grants, the federal government’s largest R&D grants program for small businesses, can yield $100,000 to take a technology out of the laboratory. In the second phase, bringing the product to market, it can yield $750,000. "It is inarguably the best source of risk capital available to help fund the development of promising new technologies," says Randy Harmon of the Technology Commercialization Center (973-353-1923, E-mail: email@example.com). See article on Abhay Joshi of Discovery Semiconductors at page 15.
The EDA’s New Jersey Technology Funding Program makes term loans of $100,000 to $5 million to second-stage technology companies for working capital or fixed assets (buildings and equipment). Working with banks, the EDA makes part of the loan at below-market interest rates, and cooperating bank charges its usual rates. Sometimes the EDA will guarantee half of the bank’s part of the loan.
Just announced in 2003 is a biotechnology venture fund worth $10 million.
The Jumpstart Angel Investor Network can provide from $200,000 to $500,000 to early stage technology businesses in these sectors: communications, electronics and advanced materials, life sciences, IT/software, energy, environmental, and engineering. Along with the money, the companies will also get mentoring from the angel investors, and in return they will give up some equity in the firm.
In the first year about 20 angels have committed to invest $50,000 a year in New Jersey tech companies. Katherine O’Neill, the executive director, expects to announce the first deals this January.
The member-led angel organization has an office at the New Jersey Technology Council, and NJEDA is contributing $25,000 to the fund. Other sponsors are Hale & Dorr and Amper Politzner Mattia. Look at www.jumpstartnj.com or call O’Neill at 856-787-9700.
New Jersey Technology Council Venture Fund can provide from $1 million to $2 million for emerging high-tech companies in seed stage, start-up stage, or early stage (up to $5 million in revenues). Prime candidates for these funds are "focused businesses with the potential to dominate a promising market niche," according to EDA material.
"The NJTC’s objective is to become a trusted and valued partner to the entrepreneur," says Jim Gunton, fund partner (846-273-6800 or www.njtcvc.com).
Edison Venture Fund, 1009 Lenox Drive, Building 4, Suite 200, Lawrenceville 08648. John H. Martinson, managing partner. 609-896-1900. Home page: www.edisonventure.com
Edison invests 30 percent of its money into New Jersey companies and receives investment from the NJEDA. "This year we made far more investments than any other venture fund," says Ross Martinson, an Edison partner. It provides equity financing and guidance to growing companies with proprietary technologies or unique services in emerging markets.
#h#Government Help: BEIP and Tax Credits#/h#
Technology Tax Certificate Transfer Program is a way for high-tech firms to sell unused tax credits for from 75 to 90 cents on the dollar. The money can be used for working capital, equipment, facilities, or other business expenses. To be eligible, a technology company must have 75 percent of its workforce in this state and be in the red, i.e. not paying state taxes. Profitable businesses buy the tax credits. One company in Princeton that used this program successfully and is now showing a profit is Integra Life Sciences on Enterprise Drive. The state gives up $40 million in income taxes to pay for this program. For information call the administering agency, the NJEDA at 609-292-0187, and apply by June 30.
Another good source is Bruce Deichl, founder of the Tax Transfer Corporation of New Jersey in Basking Ridge (908-630-0087; fax, 908-630-0653, www.taxtransfer.com). Deichl puts tax credit buyers and sellers together, and last year he represented 132 of the 189 companies that sold their credits for an average of $200,000.
Business Employment Incentive Program will give about $50 million in tax rebates to companies that create new jobs this year. For 2004 the requirements have loosened. To be eligible, a business creates 25 new jobs, and a technology business can qualify with just 10 new jobs. The standard payment is 50 percent of the state income taxes generated by the new employees, and the award can go up to 80 percent for exceptional cases.
If needed the New Jersey Economic Development Authority (EDA) can now issue contract bonds to initially fund the program but it is supposed to pay for itself. No payments are made to the employer until the new employees work one full year. Call the EDA at 609-292-0187.
#h#Angel Funding: Susan Pirog#/h#
Susan Pirog is an angel who works for Swift Response (609-951-2268) an angel-funded start-up. As such, Pirog — sales and marketing director for the Forrestal Village-based Swift Response — has a few things to say about how to attract angel backers.
Pirog, a graduate of Douglass College (Class of 1977) holds an MBA from William and Mary. In the heyday of the Internet boom, circa 1998, she became an angel investor, putting money into one venture that is now booming, and in one that has gone under.
Even with a respectable one for two angel investing record, Pirog has had enough of the game, at least for now. She says she feels much more comfortable with her current strategy of investing with Jim Gunton’s NJTC Venture Fund. Still, her experience has given her a window into the world of angel investing — and how start-ups can best capitalize on it.
Get out there. "It’s a very closed world," Pirog says of the angel network. She made both of her investments with people she knew. Those hoping for angel money need to cultivate contacts with likely early-stage investors.
Stay in contact. Making new friends is far more difficult than keeping in touch with colleagues with whom you are friendly. You never who might have an interest in angel investing two, ten, or twelve years down the road.
Get some experience. Pirog says she has gotten very good at telling which entrepreneurs will make it, which will fail, and which probably will make it — but not yet. Not without a couple of interim failures. The difference, she says, often comes down to experience. The days when a bright youngster with a new Wharton MBA could attract angel capital are, in most cases, over.
Line up capital. Money can attract more money. Showing an angel that you have access to other sources of capital can be reassuring.
Sharpen the business plan. Be prepared to make a sound case for the market for your technology — and how you plan to reach it.
Praying could not hurt either. There are an awful lot of angels with singed wings. Getting one to commit again is a mixture of experience, great technology, business savvy — and a bit of serendipity.
#h#Government Contracts To Save the Day: Discovery Semiconductors#/h#
Private sector companies have buttoned up their purses, especially where technology purchases are involved. The private sector spending drought adds allure to government contracts. Tech entrepreneur Abhay Joshi founded his company on government contracts, and they have become invaluable in growing it.
"It’s brutal out there, just brutal," says Joshi as he speaks of all the "brilliant scientists and engineers who have been laid off." The telecommunications and semiconductor sectors, in full retreat, have shed tens of thousands of workers, and among them, he says, are top-notch Ph.Ds, many of them patent holders with deep experience.
What are these tech stars doing now? "Starting their own companies," says Joshi. And bidding on SBIR contracts. The acronym stands for Small Business Innovation Research. Handed out by many government agencies, the contracts not only provide fledgling companies — and their experienced brethren — with cash, but they also can lay the groundwork for the commercialization that can lead to business with the private sector.
Joshi, founder of West Trenton-based Discovery Semiconductors, has been winning SBIR contracts since 1993.
Joshi, who holds an MSEE from the New Jersey Institute of Technology, worked at Epitaxx before it was purchased by J.D. Uniphase. There, under the tutelage of Greg Olsen, who is now the president of Sensors Unlimited, he learned how to write SBIR applications. He had always wanted to go out on his own, and when he left Epitaxx in the summer of 1993, the first thing he did was submit several applications for SBIR contracts.
Even though he had experience with the process, he felt he had to "close the missing links" in his knowledge. He did so by attending workshops run by the New Jersey Commission of Science and Technology. He also sought advice from Randy Harmon of the Technology Commercialization Center. "I took notes diligently," he recalls. "I followed them carefully."
He submitted three proposals — two to NASA and one to the National Science Foundation. One, a project for NASA Goddard, was accepted. "Discovery Semiconductor was launched," says Joshi.
SBIR Phase I contracts pay up to $100,000 and extend over six months. They provide the funding through which a company can show proof of concept for its technology. At the end of six months, the company files a report and request a Phase II contract, which provides up to $750,000 over two years. "It used to be that one in every eight to ten Phase I applications were accepted," says Joshi. At the Phase II level the ratio went down to one in two or three. But the odds have grown longer in a market suddenly flooded with downsized Ph.D.s who believe, Joshi says, that they have little choice but to try to start a company.
Over the past 10 years Joshi has won five Phase I and four Phase II contracts, and has been able to commercialize the technology he developed under those contracts. The government agency giving the contract retains limited data rights and user rights, while the company owns the lion’s share of rights to the technology, and is free to go on and commercialize it.
While it is more difficult to win an SBIR contract now than it was three years ago, there are steps entrepreneurs can take to up their chances. Joshi’s advice includes:
Perfecting the technology. "This is the meat," he says. "What are you proposing? The technology you write has to be top class." In addition, it has to be spelled out in a way that is clear and compelling. "The reader has to say `that’s a damn good idea!" exclaims Joshi.
Adding gravitas. Technology proposals need to be backed up by experience. The government agencies reviewing the applications look for credentials and for experience. On one occasion, says Joshi, "we worked with a rising star in material science at MIT." Seeking a partner like this is a way for those without stellar credentials or a track record to win a contract.
Showing potential. The government agencies participating in the SBIR program are interested in obtaining technology for their own use, but even more than that, says Joshi, they want to encourage commercialization. Toward this end, they look for solid business and marketing plans.
This is an area where many entrepreneurs, who often lack business acumen, may need some outside help. It is important to be able to point to potential customers and to lay out a plan for reaching them.
Joshi suggests that entrepreneurs submit more than one application at a time, but that they don’t go overboard. Different agencies close their contract cycles at different times, and similar proposals can be submitted to different agencies. "You have to focus on a few, and do them right," says Joshi. "You can’t have 20 proposals of poor quality. Do three, four, or five in one cycle, and you may click on one."
Discovery Semiconductors Inc., 110 Sylvia Street, Ewing 08628. Abhay Joshi, owner & CEO. 609-434-1311. Www.chipsat.com