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U expert sees growing investor interest in young companies
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John Stavig brings a simple lesson to his job as professional director of the Holmes Center for Entrepreneurship at the University of Minnesota’s Carlson School of Management: Nobody said starting a business was going to be easy.
Stavig works day in and day out with budding entrepreneurs and students. He has witnessed their frustration as economic uncertainty frightened investors away from new businesses and clouded their entrepreneurial futures.
Even so, Stavig sees reasons to be confident about the prospects for Minnesota business. He points to the growing investment infrastructure supporting the kinds of early stage businesses he coaches - including Minnesota’s new angel tax credit and the development of the Minnesota Angel Network. There is also the strength of his school, which enrolled 1,400 undergraduate and graduate students in entrepreneurship classes during the last school year.
And there is the popularity of the Minnesota Cup, the annual competition among entrepreneurs sponsored by the center. The Minnesota Cup has given the center a chance to coach and judge 5,000 young entrepreneurs since it started six years ago.
Stavig shared some of his opinions about current entrepreneurial conditions in Minnesota in an interview Tuesday with Finance & Commerce.
Q. What’s the financing climate like for early stage companies now?
A. It’s definitely challenging. But I’m one of those with the view that it should always be challenging. Not all business plans deserve to be funded; not all management teams deserve to be funded.
But to me the challenge isn’t only on the capital side, it’s on the talent and management side, too. That’s why I’m interested more in working with students and developing that capability. That’s as important, or more important, than the financing.
There are a lot of ways we can help entrepreneurs we work with [at the Carlson School] get closer to capital, through the mentoring contacts we provide, through the Minnesota Cup. The most important thing we provide is access to a network of individuals who can help them become known, who can provide access to the network of angel investors.
Q. How are investor appetites and guidelines changing?
A. Investors in recent years are requiring companies to progress further before they put money in. I think that’s good. It takes substantially less capital to start a business and start generating modest business revenue than it did 15 years ago.
Now companies don’t have to invest in servers and other infrastructure. You can obtain those on a subscription basis, and that means your costs are an order of magnitude less than before. So you can get a business up and running, develop some reach, generate some revenue and prove you have a valid business model before you raise more expansion capital. If companies can do that, investors will invest in them. If they can’t, it raises a big question.
Q. What’s promising on the financing front?
A. I’m a huge supporter of the [Minnesota] Angel Network activity. I think there’s too much focus on the venture investment community. It’s valuable, but it affects a relatively small number of companies. There’s a much broader group of early stage businesses that the angels can help. The networks, in Wisconsin and Minnesota, are building a way to give good companies access to the right investors, and they’re training investor groups on how to go through the process.
Wisconsin started earlier, doing it with state funding. I’m not sure if public funding is the right approach, but they’ve been out educating on a regional basis, talking to farmers, to people with assets, teaching them how to join and run an angel network.
Q. What impact has Minnesota’s angel tax credit had?
A. It’s been very helpful. It helped level the playing field with Wisconsin. The classic angel investors were successful entrepreneurs here in Minnesota and they would like to reinvest here, but when it’s not a comparable investment compared to other states it looks like a punishment. The credit was a great incentive.
Q. Do banks have a role to play in getting capital?
A. For most early stage companies I’m not sure that banks are the direction to look. But it’s smart for companies to start to develop that relationship, share their plan and ask ‘when I get to this point, what can you do?’ A bank may be able to provide an initial piece for the liquidity - that will need a personal guarantee, and an investor might provide that. But for most early stage companies, they’ve got to go to more than one source and tap every available opportunity.
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