In my last column I suggested that New Jersey would benefit from more growing companies that draw money from around the world into our high-cost state, and I outlined some techniques that can be helpful. This column is about where to look for capital.

The best source of funds is your customers. If you have customers and, better yet, a growing stream of profitable customers, you will have no end to capital: It will seek you out and you will have fair terms. Consider the most successful businesses today: They were almost always growing businesses with high margins. Bill Gates started with a BASIC language for hobby computers. He didn’t need capital when he started: He made a product, sold it, and later invited investment as the business expanded into other products. Public investment gave him liquidity and enabled him to diversify.

In an optimal investment investors want to work with companies that put their money to work expanding sales — to be the gasoline poured on a fire — an explosion of sales, profits, and mindshare in which everybody wins. By waiting until you have a viable product and customers, investors can see a quick, rich return.

Continuing with the fire analogy, many investors say they want to see “fire in the belly” — that is, a burning desire in the entrepreneur to make a dream come true, to improve the world, or to see millions of people use their creation. One of New Jersey’s greatest entrepreneurs actually put fire to his arm when demonstrating his product. After oil was discovered in Titusville, Pennsylvania, Robert Chesebrough lost his job refining whale oil. Visiting the new oil fields, he found an annoying byproduct that gummed up the machinery, but that drillers applied to their own cuts and wounds.

Chesebrough spent years refining the goo into a salve he called Vaseline Petroleum Jelly, but sales were slow until he traveled to pharmacies, burned his arms, and applied Vaseline while pointing out the wounds that had healed. This may be the greatest sales pitch ever made: A man squirms with pain, heals himself, and then asks you to buy his new product. For his service to the world, Queen Victoria knighted Chesebrough. He died in 1933 at the age of 96 in Spring Lake, New Jersey.

Pitching customers is the most important pitch you can make. Many first-time entrepreneurs mistakenly believe that, if they only had money, everything would be possible. Not true: The biggest hurdle is changing people’s behavior: Getting people to stop whatever they have been doing for years and to enthusiastically use your product. Maybe they have been applying soap and water to their cuts: You have to convince them to apply a mysterious ointment from the ground.

Chesebrough’s ointment was a waste product that no one wanted, so he could make a lot of money on each batch. But how would you finance inventory? Your savings, a loan against your house, or your credit cards. Debt is OK as long as you’re making more than the cost of financing. I sometimes use a credit card to fund a development project or to purchase 1,000 units of a product that will sell over the course of several months. The interest rate is high, but it’s easier than explaining short-term projects to a banker.

Banks are not a good place to find money for your new business. However, if your business is growing and profitable (customers are flocking to you), banks or finance companies will often loan a percentage of your inventory and your current receivables. The ratios change according to the time and the type of asset, but, in my experience, we borrowed 50 percent against inventory and 80 percent against receivables. By leveraging our growing assets, we took a business with an initial investment of $40,000 and grew it to sales of $20 million before selling any equity.

People invest for many reasons. One is to make money, which is a lesson that entrepreneurs often miss. An entrepreneur once approached me with an awesome new product that screwed into the beach and held up your umbrella. There was nothing like it at the time, and I had an umbrella problem every summer. The entrepreneur wanted me to fund production, but, if he succeeded, he wanted to buy back my shares. Heads he wins, tails I lose. I passed on the deal, but he seems to have succeeded. Maybe he used his credit cards.

A new business also needs a demonstrable “use case.” In 1998 it seemed to me that electronic cameras needed a way to print real photographic prints. Inkjet printers were slow and produced crummy pictures with lines in them. I started a simple web site called that soon received too many orders to print. It was time to raise money for faster equipment and a more professional website. There was clearly an appetite for this service, and investors could understand it. We raised $800,000 from angel investors to set up an online photo lab.

Other reasons that people invest include bragging rights and the desire by older people to pass along wisdom to the next generation. A friend once confided, “I want to be one of those guys who can say that he invested early in some well-known company.” It’s cocktail and travel conversation.

The desire to pass along wisdom is, I think, a more powerful and wonderful motivation. As we age, wealth creation is still important, but helping the next generation develop is exciting and fulfilling. I was a beneficiary of this impulse in my first business, a computer store chain. Bob Clancy was an insurance entrepreneur who was both an investor and — far more important — an invaluable mentor. For instance, when we needed an IBM dealership, we tried to think of what we could do for IBM that the four existing dealers in Princeton didn’t already provide. Bob concluded, “They’ll just have to like us.” It was so simple, and Bob was so charming that IBM awarded us a dealership. If you can find a truly wise backer who wants to nurture a partnership, you will be much happier than if you have a partner who is purely financially oriented.

Despite the aura around finance, it is still simple math and simple concepts. Bill Gates once said, “Say you added two years to my life and let me go to business school. I don’t think I would have done a better job at Microsoft. Let’s look around these shelves and see if there are any business books. Oops. We didn’t need any.”

Many organizations will charge you thousands of dollars to pitch to investors. I have found these about as useful as tradeshows. When I consider all the tradeshows and mass pitch-sessions I have attended, I am hard-pressed to think of any significant relationships that developed there. Most meaningful business relationships, including investors, have come through customers or personal recommendations. Start with the people you know, and talk to everyone.

In response to scandals like Enron and Worldcom, congress passed the Sarbanes-Oxley Act of 2002 that prevented the bad corporate behavior of 2007-’08. I’m kidding: The subprime mortgage crisis nearly took down the economy, but Sarbanes-Oxley made raising money for new businesses incredibly difficult. The U.S. needed to get new business formation going again, so in 2012 congress passed the JOBS (Jumpstart Our Business) Act, which lowered regulatory hurdles for companies going public. In 2015 Title IV enabled companies to offer shares to the general public — not just accredited investors who have over a million dollars in investable assets.

Regulation A+ is an alternative to a traditional IPO, which makes it easier for smaller, early stage companies to access capital. The NYSE has devoted resources to Reg A+ and is eager to fund companies that can raise up to $50 million. (

Companies can also raise money through crowd-funding sites like,,, and You can study successful offerings on these sites to see how they represent themselves.

Venture capital is a bit of a misnomer because it is not particularly venturesome. In our area many VCs prefer to invest in companies that are not new but have already developed substantial sales and profits. VCs also have opportunistic requirements like “preferences,” which mandate that, when your company is sold, the VC will get three times its initial investment before you take your share.

Let’s say you raise $3 million from a VC with a 3X preference. If your company sells for $100 million, the VC gets the first $9 million (3X the initial investment) and then its percentage share of the remainder. Not so bad, but you’re not likely to build a $100 million valuation on a $3 million investment. In the event of a more likely $12 million sale, that first $9 million plus a share of the remaining $3 million is onerous. A website called provides entrepreneurs’ ratings of venture capitalists, and can help you find VCs whose requirements might match your company.

Associations are a good place to start. The New Jersey Tech Council ( can direct you to specialized lawyers and potential partners and can provide opportunities to meet other entrepreneurs with whom you can compare notes.

New Jersey’s Economic Development Agency (EDA) is helpful, too, but mostly in sweetening your deal. The EDA is not going to invest, but it has subsidized labs for biotechs and can help raise cash by selling your Net Operating Losses (NOLs). The EDA also offers an Angel Tax Credit Program that may give your investors a tax credit of 10 percent of their investment up to $500,000, which is a nice kicker.

Money is hungry for opportunity. Your main job is to find customers, which requires a compelling narrative that is often the same narrative for investors. If you can find customers, you’ll find investors. Consider the terms, and choose your partners carefully because you will live with them long after the money is spent.

Send feedback to Investment recommendations are solely those of the columnists, and are presented for discussion purposes. Columnists may own shares in recommendations. Investors are advised to conduct their own research and that past stock performance is no guarantee of future price.

Facebook Comments