VCs remain cautious as dollars, deals start low in 2012: Source: WRAL Tech Wire

Funding for startups fell 19 percent in the first three months of the year, as cautious venture capitalists funneled less money into fewer deals.

VCs invested $5.8 billion in 758 deals in the first quarter of 2012 compared to $7.1 billion in 889 deals during the same period in 2011, according to the latestMoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association, based on data by Thomson Reuters.

According to the study, quarterly VC activity fell 19 percent in terms of dollars and 15 percent in the number of deals compared to the fourth quarter of 2011.

North Carolina was ranked 14th nationally in VC deals last quarter with a little more than $15 million invested in seven companies. California ranked No. 1 with 294 deals for more than $3 billion.

There were four companies in Durham that received deals: Sarda Technologies; SCYNEXIS; Semprius; and Zift Solutions. Three others were in Charlotte: Adaptivity; Conclusive Analytics; and Forest2Market, Inc.

Nationally, the companies receiving deals were mainly in the Internet, energy, and medical device sectors in the later stages of development. The Life Sciences (biotechnology and medical device industries combined) and Clean Technology sectors saw marked decreases in both dollars and number of deals in the first quarter.

However, there were double-digit percentage increases in dollars invested in the Consumer Products and Services, Medical Device, and Telecommunications industries. Additionally, investments into companies in the later stage of development experienced an increase, rising 11 percent and accounting for 40 percent of total dollars invested during the first quarter of 2012.

Industry Analysis

Software industry received the highest level of funding for all industries with $1.6 billion invested during the first quarter. This level of investment represents an 18 percent decrease in dollars, compared to $2 billion invested in the fourth quarter. The Software industry also had the most deals completed in Q1 with 231 rounds, which represents a 12 percent decrease from the 262 rounds completed in the fourth quarter of 2011.

Biotechnology industry was the second largest sector for dollars invested with $780 million going into 99 deals, falling 43 percent in dollars and 14 percent in deals from the prior quarter. The Medical Devices and Equipment industry experienced an increase, rising 33 percent to $687 million, while the number of deals dropped 6 percent to 72 deals. Overall, investments in the Life Sciences sector fell 22 percent in dollars and 11 percent in deals, which was the fewest number of deals since the first quarter of 2009.

Internet-specific companies, whose business model is fundamentally dependent on the Internet regardless of the company’s primary industry category, received more than $1 billion for the eighth consecutive quarter with $1.4 billion going into 188 deals. This investment level is 3 percent lower in dollars and 23 percent lower in deals than the fourth quarter of 2011 when $1.4 billion went into 244 deals. Two of the top ten deals for the quarter were in the Internet-specific category.

Clean Technology sector saw $951 million go into 73 deals, representing a 30 percent decrease in dollars and an 11 percent decline in deals compared to the fourth quarter of 2011. Three of the top deals from the quarter were classified as Clean Technology investments.

Eleven of the 17 MoneyTree sectors experienced decreases in dollars invested in the first quarter, including Semiconductors (43 percent decrease), IT Services (26 percent decrease), and Industrial/Energy (14 percent decrease). The Consumer Products & Services sector experienced a 78 percent increase during the quarter due to the largest deal of the quarter ($238 million) occurring in that sector.

Stage of Development

Seed stage investments fell 9 percent in dollars and 41 percent in deals with $141 million invested into 53 deals in the first quarter. The average Seed deal in the first quarter was $2.7 million, up from $1.7 million in the fourth quarter. The average Early stage deal was $5.6 million, down from $6.1 million in the prior quarter.

Expansion stage dollars decreased 32 percent in the first quarter, with $1.7 billion going into 207 deals. Overall, Expansion stage deals accounted for 27 percent of venture deals in the first quarter, a slight uptick from 26 percent in the fourth quarter of 2011. The average Expansion stage deal was $8.3 million, down from $10.9 million in the prior quarter.

Investments in Later stage deals increased 11 percent in dollars and 13 percent in deals to $2.3 billion going into 208 rounds in the first quarter. Later stage deals accounted for 27 percent of total deal volume, compared to 21 percent in Q4 when $2.1 billion went into 184 deals. The average Later stage deal in the first quarter was $11 million, which decreased slightly from $11.2 million in the prior quarter.

First-Time Financings

First-time financing (companies receiving venture capital for the first time) dollars decreased 22 percent to $783 million, the third lowest level in survey history. And, the number of deals fell 28 percent to 195 deals in the first quarter, the lowest level since the third quarter of 2009.

First-time financings accounted for 14 percent of all dollars and 26 percent of all deals in the first quarter, compared to 14 percent of all dollars and 30 percent of all deals in the fourth quarter of 2011.

Companies in the Software, Media & Entertainment, and IT services industries received the most first-time rounds in the first quarter. The Life Sciences sector experienced a dramatic drop, falling 60 percent in dollars and 43 percent in deals during the first quarter to $120 million going into 21 companies. The average first-time deal in the first quarter was $4.0 million, up slightly from $3.7 million in the prior quarter. Seed/Early stage companies received the bulk of first-time investments, garnering 81 percent of the deals.

About Scale Finance

Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices in Charlotte, NC, the Triangle, the Triad, Southern Pines, and Wilmington with a team of more than 30 professionals serving more than 100 companies throughout the region.

Source: Jeff Wright, Senior Vice President, Hennessey Capital

Managing cash is key to the success of any business. Without it, management cannot operate efficiently to address the needs of its customers and take advantage of new opportunities.

Listed below are six ways to improve cash flow:
1 . Manage your receivables

• Before you sell to a new customer, do your homework. Order credit reports, check credit references, ask others who may have some experience with the customer. You may want to sell on C.O.D. until you have some payment history before extending terms.
• Have a policy in place to follow up for collection of outstanding receivables. Staying in contact with customers is critical. Initiate calls to ensure the customer has received the product or service, call once the invoice goes past due and execute a follow up call for payment status. Also, send letters requesting payment if the invoice starts to stretch. If all else fails, get the attorneys involved early. The squeaky wheel does get the grease.  Improving turnover days can significantly help cash flow.
• Offer discounts if they pay early. This offers a win-win for both parties. The customer saves money and you get cash sooner for other expenses reducing the need to borrow from your bank and paying interest costs.
• Make paying easier. Allow the customer to pay with a credit card or with electronic payment.
• Invoice promptly. Once the product is delivered or the service is provided, send your invoice. Have purchase orders and shipping evidence or time sheets signed to support the invoice.

2. Control inventory

• Negotiate better terms with suppliers. Shop around for suppliers that offer better pricing and extended terms without giving up quality.
• Only order materials for jobs for which you have purchase orders and not for jobs you may get. Inventory can tie up a significant amount of cash.
• If cash is tight, negotiate with your customer to supply the material. While you may sacrifice some profit margin on the marked up inventory, it requires no out lay of cash.
• Offer slow moving or obsolete inventory at a discount to generate cash.
• Offer to return slow moving inventory back to supplier in return for material you need.
• Have a perpetual inventory system in place to manage the  inventory you have on hand.

3. Sell idle equipment
4. Review operating procedures

• Are all levels of management and employees communicating  effectively? Breakdowns in communication can lead to quality and customer service issues that can result in increased material and labor costs not to mention dissatisfied customers.
• Does your facility’s floor plan allow for efficient movement of material and employee safety? Consultants who specialize in Sigma Six analysis can frequently pay for themselves through the costs savings they implement.
• IT systems must be in place to provide timely, accurate
  reporting for management to make decisions.

5. Constant review of operating expenses

• Review your insurance policies for acceptable coverage. Negotiate better rates without giving up the protection you need.
• Negotiate better terms on your rent. With the number of vacant buildings around, landlords may be more willing to accept less to keep the building occupied and generating income.
• Review employee benefit plans. Benefits are a significant cash item on your profit and loss statement. If necessary, have the employees share some of the cost.
• Hire competent outside professionals. A good CPA can provide tax advice to save cash.
• Manage labor cost. Labor is one of, if not the largest, expense item. Review job responsibilities. Is overtime necessary or do you need to bring on additional staff? Can you use temporary staffing to fill a need at lower wages and no benefits?
• Are marketing dollars being spent wisely? Are they generating qualified leads and new business and strengthening your brand name?

6. Assess lending relationship

• Does you lender provide support and flexibility to meet your cash needs?
• Review your loan documents. Do you have a contract that requires you to stay in the relationship for a period of time and pay an exit fee if you leave early? Shop around with other lenders for better rates and terms.

Understanding and improving the conversion cycle from the time materials come into the plant until the receivable is collected is critical to improving cash flow. Use cash flow forecasting to monitor cash needs and assess unfavorable trends.

About Scale Finance

Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices throughout the southeast including Charlotte, Raleigh/Durham, Greensboro, Wilmington, Washington D.C. and South Florida with a team of more than 30 professionals serving more than 100 companies throughout the region.

Source: Chris Dixon, VC

Three years ago, Fred Wilson wrote a great blog post called When Talking About Business Models, Remember that Profits Equal Revenues Minus Costs. The point he made was both simple and profound. The simple part is summed up in the post’s title[1]. The profound part is that high growth, early-stage tech companies often have a choice about how to become exceptionally valuable businesses: they can focus on growing revenues at the expense of margins, or margins at the expense of revenues.

Most recent successful tech companies seem to have chosen the former: growing revenues at the expense of margins. Again and again, we see S-1 filings with revenues growing rapidly but profit margins that are low to negative. The same is true for the rumored financials of private companies. I think I understand why they made this choice, but wonder if it was a mistake.

To understand why these companies made this choice, you need to look at their formative stages. Many of them raised money from VC’s at multi-hundred-million to multi-billion dollar valuations, often before the companies were profitable or had even settled on a business model. In most cases, the companies and investors were acting reasonably[2]. But the end results might have been to unwittingly commit themselves to revenue over margin growth.

Why? Money has its own inertia and somehow always seems to get spent. Some of this spending is reasonable and even necessary (infrastructure, defensive expansion to international markets). But then there are harder choices. For example, do you invest heavily in sales and marketing to grow your revenue faster? Do you stay open and try to become a platform and therefore force yourself to experiment with new business models? Or do you become closed to “own the user” and therefore benefit from existing business models like advertising? Fast revenue growth seems to be the best way to justify your valuation. But the next thing you know you have a high cost structure that requires you to raise even more money and grow revenue even faster.

The root cause here is a deeply held belief throughout the business world that exceptional revenue growth is more likely than exceptional margins. For example, if you talk to professional public market investors and analysts you’ll often hear statements like “that’s a low margin industry” – implying that every industry has “natural” profit margins which companies can only defy for short periods of time. This belief is also reflected in public market valuations for recent tech IPOs: companies like Groupon that put revenue over margins command very healthy valuations.

The problem is that this deeply held belief in “revenue exceptionalism” over “margin exceptionalism” is a hangover from the industrial era. Unlike industrial era companies, information businesses tend to be deflationary, shrinking the overall revenue of an industry. They also tend to have network effects (and complementary network effects), making them more defensible and therefore higher margin than non tech businesses. Given this, why do companies continue seeking revenue at the expense of margins? Fred made this same point in his original post, but people didn’t seem to listen.

[1] Companies (like all cash generating assets) are ultimately valued at a multiple of present and projected future profits. The historical average P/E ratio of the DJIA is about 15, meaning that (on average) if a company is generating $100M in profit, it is valued at $1.5B (Fred prefers to use a 10 multiple, perhaps to be conservative?). One way to understand this is to imagine that companies dividend out all their profits every year. If you bought something for $1.5B and it dividended out $100M every year, that would be a 6.6% annual return.

[2] Why are these high-priced financings reasonable? From the company’s perspective: your traffic is growing so fast you need to invest millions of dollars in infrastructure. Meanwhile copycats are popping up in other countries. You don’t know if the financial markets will suddenly dry up. Someone offers you, say, $50M for minimal dilution. Seems like a reasonable hedge. From the investor’s perspective: the history of venture capital shows that almost all the returns are generated from big hits like Amazon, eBay, Facebook and Google. (As Paul Graham once put it: “The difference between a bad VC fund and a great VC fund is one big hit”).

About Scale Finance

Scale Finance LLC (www.scalefinance.com) provides professional CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices in Charlotte, NC, the Triangle, the Triad, Southern Pines, and Wilmington with a team of more than 30 professionals serving more than 100 companies throughout the region.

Source: Doug and Poly White, Whitestone Partners

It’s undeniable that small business is the growth engine of the economy. The Small Business Administration reports that there are 22.9 million small businesses in the United States.

The Bureau of Labor Statistics (BLS) states that 90 percent of all net job creation from 1996-2007 came from small businesses. There is little question that if the US is to recover from this recession and if unemployment is to be driven down, small business will lead the way. Yet, not all small business owners choose to grow.

Harvard Business School teaches that the primary objective of a business in our capitalist system is to create shareholder value. To oversimplify only a little, businesses increase shareholder value by growing the bottom line.

To be sure, if a business has financial investors, there is a fiduciary obligation to grow the bottom line. You might think that this is a no-brainer.  Certainly all business owners would want to grow their enterprise. What we found might surprise you.

During the course of conducting research for our new book, Let Go to Grow; why some businesses thrive and others fail to reach their potential, we interviewed the owners of more than 100 small and midsize businesses.

More than a few had made a conscious decision not to expand their companies any further. Growing their businesses is simply not something they wish to do or feel they can do. We found three primary reasons that small business owners decided not to grow.

1.   To avoid risk and maintain their lifestyle – We spoke with a concrete contractor who has revenue of about $2 million per annum. The owner pulls enough cash out of the company each year to make a very nice life for himself and his family. He has time for a wonderful personal life and is able to pursue some hobbies that he loves.

As a businessman, he is highly respected in his industry. Because he is honest, trustworthy, reliable, and good at what he does, there is usually more work than he can accept. Even when times are tough, he keeps his crews busy.

There is little doubt that he could grow the business significantly if he decided to do so. Growing the business would mean buying more equipment, hiring more people, probably working longer hours, and definitely delegating significant decision-making authority to new managers. The owner has decided not to take that path, at least not right now.

All things considered, it’s a completely reasonable decision. We spoke with numerous business owners who, like this concrete contractor, had made the decision not to grow their businesses to avoid further risk and to maintain their comfortable lifestyle.

2.   To avoid regulation – A local bank was very successful. Through hard work and excellent customer service, it had grown its assets exponentially. In the process, it had created wonderful jobs and hired many people. It was a great example of small business fueling the growth of the American economy.

As the number of employees grew the diligent head of human resources approached the president and said, “You know, when we hit 50 employees; we’ll be subject to FMLA” (the Family Medical Leave Act). After gaining a thorough understanding of the complexity of complying with the Act, the President made a conscious decision to stop the growth of his bank. Job creation came to a screeching halt.

The president wasn’t opposed to extending the benefits of FMLA to his employees. Rather, he made an informed decision to avoid the considerable cost associated with the complexity of maintaining records and making judgments about what qualified for FMLA and what did not?so much for small businesses fueling the growth of the economy.

Large Fortune 500 companies may be able to afford the cost of regulation because they can amortize it over tens of thousands of employees and over billions of dollars of revenue. Unfortunately, small businesses don’t have that luxury. Further, a company doesn’t have to reach the 50 employee mark to be subject to significant regulatory requirements.

In fact, in the Commonwealth of Virginia (a relatively business friendly state), we count dozens of different state and federal regulations with which a business must comply when it hires its first employee. They include acronyms such as CCPA, FLSA, USERRA, OSHA, FICA, FUTA, HIPAA, ERISA, and the list goes on and on. It’s enough to make an entrepreneurs head explode.

We spoke with a small general contractor who, after trying to grow, made the conscious decision to eliminate all of his employees to avoid the burden of these regulations. He remains in business as a “solopreneur.” We were quite surprised to find that a government, which claims to be focused on reducing unemployment, is actually crushing job creation with over regulation and yet, there it was.

3.   To avoid having to delegate responsibilities – Through hard work, perseverance and sacrifice, George Carson had grown his cabinet business, Riverside Manufacturing, to a company with 40 employees. The employees operated the equipment. They built and installed the cabinets. They made sales calls and resolved customer service issues.

They scheduled production, shipped product, sent invoices and paid bills. Overhead was still very low. There were no supervisors or managers. To the extent that there was any formal organizational structure, everyone reported to George.

George was unwilling to let go of decision-making responsibility and he wouldn’t delegate the hiring or management of any of the workers. Once his capacity to perform these tasks was exhausted, growth stopped. Although he struggled to explain why, George just wasn’t comfortable delegating decision-making authority.

He was probably right, because Riverside lacked the infrastructure necessary for successful delegation. It didn’t have the right managers in place. It didn’t have well documented processes to communicate to employees how George wanted things to be done. Finally, it didn’t have a robust set of metrics to let George know what was going on in his business if he weren’t personally present.

Without these three things, delegation is risky at best. George chose to continue making all of the decisions himself. When George’s capacity was exhausted, Riverside’s growth stalled because he decided not to delegate decision-making responsibility and he wouldn’t delegate because he didn’t have the right infrastructure. Although he didn’t realize George was the constraint to growth in his own business.

Whether it’s satisfaction with the status quo, a desire to avoid the burden of regulation or not understanding how to delegate, many small business owners have implicitly or explicitly made a decision not to grow their businesses. Some pundits subscribe to a mantra that in business you have to grow or die. We found example after example of entrepreneurs who debunk this myth every day.

It’s completely reasonable for business owners to make an explicit decision not to grow because they are satisfied with the current size of their enterprise. That’s their choice. It’s shameful that our government incents small businesses not to hire and crushes job growth with unnecessarily burdensome regulation. It’s unfortunate that some entrepreneurs unwittingly become the constraint to growth in their own businesses because they don’ know how to delegate properly.

Doug and Polly White are Principals at Whitestone Partners; a management-consulting firm that helps small businesses build the infrastructure they need to grow profitably. They are also coauthors of the groundbreaking new book, Let Go to GROW; why some businesses thrive and others fail to reach their potential (Palari Publishing 2011). The book, which was named a Best Business Book of 2011 by the NFIB (National Federation of Independent Business) explains how entrepreneurs can avoid the most common pitfalls as their businesses grow and is available at www.WhitestonePartnersInc.com

About Scale Finance

Scale Finance LLC (www.scalefinance.com) provides professional CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices in Charlotte, NC, the Triangle, the Triad, Southern Pines, and Wilmington with a team of more than 30 professionals serving more than 100 companies throughout the region.

AtoZ Companies, Inc, a high growth, 22-store online retailer leveraging advanced, analytics-based customer acquisition technologies, has closed a major capital raise led by VisionQuest Capital. SF provided advisory support and has been an investor in AtoZ since 2011.

Lonny Bernath, founder and President of AtoZ Companies, disclosed on Monday, April 16th that VisionQuest Capital acquired 20% of the company through a related entity and the option to purchase an additional 12.8% over the next 12 months for an undisclosed amount.

AtoZ Companies, located in Matthews, North Carolina, was founded in May 2010 and launched its first niche website in November of that year. Today, they manage 22 niche sites and are projected to reach $3M in revenue in 2012.

Bernath said that by selling a portion to VisionQuest Capital, AtoZ Companies will have expanded financial resources to grow the company. He plans to use the capital for hiring additional employees, expanding on-line stores, and increasing their marketing and brand efforts.

“We are very excited to have VisionQuest as a partner and investor in AtoZ,” said Mr. Bernath. “Their financial backing will provide the runway we need to grow into a sizable force in e-Commerce. Their talented team will also prove to be a great resource as we continue to expand.”

Online retail is the fastest growing segment of retail sales as more and more consumers have access to the internet and have grown comfortable buying online. With the growth of online retail, there is ample room for AtoZ Companies to grow within this $200 billion e-Commerce space.

In a statement, Stephen C. Peters, President & CEO of VisionQuest Capital, called “AtoZ Companies is an incredibly strong business in a fast and growing market. He continued by saying that “what impressed us the most is the speed in which AtoZ Companies has grown, their focus on their customers, and the quality of their operations.”

VisionQuest Capital disclosed that they had been in discussions with AtoZ Companies for about a year, but didn’t really get serious on deal structure until the beginning of 2012. Both owners share a connection to MIT’s Sloan School of Management, but what is most important is that they share the same vision for AtoZ.

About Scale Finance

Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices in Charlotte, NC, the Triangle, the Triad, Southern Pines, and Wilmington with a team of more than 30 professionals serving more than 100 companies throughout the region.

Scale Finance LLC, the leading provider of CFO & Controller support services in North Carolina, announces the firm’s expansion into Florida.  Leading Scale’s local presence in Florida is Steven zum Tobel, a veteran finance and accounting executive.

Steve’s executive management career, spanning over twenty years, includes experience building high growth companies in the functional areas of finance, SEC reporting, operations, and business development.  Steve has held senior finance roles including Controller, VP Finance, CFO and President in the following industries: financial services, legal services, student housing, real estate development, commercial and residential lending, and fantasy sports entertainment.  Steve has an MBA from Florida Atlantic University and obtained his CPA while a partner with national brokerage consulting firm, Securities Consultants, Inc.

Scale Finance’s experienced financial professionals will help existing firms in Florida efficiently expand via improved internal controls, meaningful management reports, sound strategic advice, and additional sources for growth capital.   Scale Finance’s proven business model is expected to drive growth for small to mid-size businesses in Florida while providing jobs for highly skilled financial professionals presently looking for work.

David Gilroy, Managing Director of Scale Finance, said “This geographic expansion south into Florida reflects our firm’s ongoing steady growth.  In today’s economy, entrepreneurial companies may not have the resources to employ full-time, expert financial leadership.  Scale Finance’s low-cost, fractional use solutions impact critical needs (bank-ready financial reporting, hard-nosed budgeting, shrewd working capital management, intense scrutiny of cost, realistic forecasts, insightful performance analysis, and pristine controls).  Nobody matches the results we can drive in securing capital for growth, and Steve’s experience in the institutional brokerage industry reflects our commitment to more efficiently address our clients’ capital needs.  We served over 100 companies last year and expect to approach 150 companies during 2012.  Our focus remains serving entrepreneurial companies with extraordinarily compelling finance and accounting solutions – great professionals, flexibly deployed as needed, at unbeatable cost.”

About Scale Finance

Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices throughout the southeast including Charlotte, Raleigh/Durham, Greensboro, Wilmington, Washington D.C. and South Florida with a team of more than 30 professionals serving more than 100 companies throughout the region.

Rex Healthcare Launches Rex Strategic Innovations to Advance Health-Care Innovation
Novel Effort Aims to Improve Medical Care and Support Promising Ideas

Rex Healthcare is proud to announce the creation of Rex Strategic Innovations, a unique effort to spur healthcare innovation, improve healthcare delivery and foster job creation.

The initiative will include Rex Health Ventures, one of the only venture-capital investment funds in the country started by a community, nonprofit hospital. The fund is being launched with an initial $10 million investment from Rex Healthcare and will help finance the most promising innovations among new medical services, tools and technologies.

“For more than a century Rex has been a leader in striving to improve the medical care and services we provide to thousands of patients every year,” said Rex President David Strong. “This exciting new program is another way Rex will encourage and participate in innovation.”

Other components of Rex Strategic Innovations include:

• Rex Impact Grants: a program to provide grants to a wide range of businesses and organizations that are working to help improve patient care or community health status.
• Rex Innovation Facilitator: a formalized way for Rex co-workers and thought leaders in the community to submit innovative ideas and receive technology commercialization and company-building services for promising concepts that could lead to new products or services.
• Rex Joint Ventures: a program to partner with thought leaders in the local and regional technology, research and entrepreneurial communities. The goal of such partnerships will be to team up to develop new products and services that can improve healthcare technology and delivery.

“Rex’s efforts fit well with the city of Raleigh’s commitment to find new ways to increase job creation by supporting innovation and small businesses,” said Raleigh Mayor Nancy McFarlane. “We welcome Rex’s initiative and expect that this community and beyond will enjoy the benefits for years to come.”

Rex Health Ventures will invest in researchers, entrepreneurs and inventors that share in Rex’s vision to provide quality care for patients and improve overall health. By creating the fund, Rex will provide more opportunities for advancements in care and support start-up companies that will help spur new job creation.

“This effort will allow Rex to become a key innovation player in the Triangle and help make this region an even more attractive place for entrepreneurs to grow and succeed,” said Joan Siefert Rose, President of CED, the southeast’s largest entrepreneurial support organization. “Rex is uniquely qualified to help drive healthcare innovation and CED looks forward to working with Rex as it moves forward.”

In some cases, Rex will serve as an incubator or laboratory for new concepts and as a customer for new products and services. For healthcare practitioners, Rex Health Ventures will provide the opportunity to consult and play an active role in bringing new advances in medical care to patients.

“This is an important endeavor for Rex, and an exciting time for innovation in the Triangle. This effort will create new opportunities to advance research and develop breakthrough products and treatments,” said Dr. Ravish Sachar, an interventional cardiologist with Wake Heart & Vascular Associates, one of the Triangle’s largest specialty physician practices. “As a physician, I look forward to helping important innovations and concepts become a reality.”

Rex Strategic Innovations and Rex Health Ventures will be overseen by a team that includes David Strong, President of Rex; Steve Burriss, Chief Operating Officer of Rex; R. Erick Hawkins, UNC Health Care System Vice President of Heart & Vascular Services; and Don Esposito, General Counsel of Rex. Robert Helmedag will serve as Director of Operations and handle day-to-day business. W. Merrette Moore, managing partner with Raleigh-based investment firm Lookout Capital and a veteran early stage venture capital investor, is acting as a key advisor.

In addition, that team will receive guidance and direction from an advisory board that brings deep technology, research, business and investment experience. That group includes:

• Tom Darden, the CEO of Cherokee and founder of Cherokee Investment Partners, Cherokee Property Foundation and Cherokee Sanford Group.
• Jim Hyler, a member of the Board of Trustees at Rex Healthcare since 2007 and a retired banking executive with First Citizens Bank in Raleigh.
• Dale Jenkins, Rex Board Chairman and the CEO of Medical Mutual Insurance Company of North Carolina.
• Dr. Tift Mann, an interventional cardiologist who co-founded Wake Heart and Vascular, one of the Triangle’s largest specialty physician practices.
• Champ Mitchell, who currently serves on the Board of Directors for the 41st Parameter. He is the former Chairman and CEO of Network Solutions.
• Dhruv Patel, a Program Director, Senior Manager of Life Science Programs and Senior Manager of Capital and Technology Development at the Council for Entrepreneurial Development.
• Dr. Cam Patterson, chief of cardiology and associate chair for research in the UNC Department of Medicine, physician-in-chief of the UNC Center for Heart and Vascular Care and associate dean for medical entrepreneurship at the UNC School of Medicine.
• Dr. Jay Yadav, an interventional cardiologist and entrepreneur. He is the founder and CEO of CardioMEMS Inc. and a consulting cardiologist at the Piedmont Heart Institute in Atlanta.
• Ted Zoller, a practicing entrepreneur, the Director for UNC’s Center for Entrepreneurial Studies and Associate Professor of Strategy and Entrepreneurship at UNC’s Kenan-Flager Business School.

For more information, visit rexstrategicinnovations.com and rexhealthventures.com.

About Rex Healthcare
Rex Healthcare, a member of UNC Health Care, is a private, not-for-profit health care system with more than 5,300 co-workers. Rex Healthcare has 660 beds (433 general acute beds and 227 skilled nursing) and treats nearly 34,000 inpatients each year. Rex offers dedicated centers for cancer, surgery, heart and vascular, post-acute rehabilitation and skilled nursing care, wellness and women’s care plus dedicated services for bariatric, heartburn, pain management, sleep disorders, diabetes education, wound and emergency care. Rex’s medical staff includes more than 1,100 physicians and 1,700 nurses. Rex provides various health care services throughout Wake County with facilities in Apex, Cary, Garner, Holly Springs, Knightdale, Wakefield and downtown Raleigh. Rex was the first hospital in the Triangle to receive Magnet Recognition, placing Rex nurses among the top 6 percent in the nation. Rex was named one of the top 100 Best Places to Work in Healthcare by Modern Healthcare magazine in 2008, 2009 and 2011, and was highlighted as one of the Top 50 Hospitals in the U.S. by Becker’s Hospital Review in 2011. Visit rexhealth.com for more information.

About Scale Finance

Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices in Charlotte, NC, the Triangle, the Triad, Southern Pines, and Wilmington with a team of more than 30 professionals serving more than 100 companies throughout the region.

CFO & Director, Scale Finance LLC (Director of Florida)
561.542.8648
zum@scalefinance.com

• Investor, Entrepreneur & CFO.  Private investor and shareholder in several industries including financial services, legal services, student housing, real estate development, commercial and residential lending, and fantasy sports entertainment  (2002 – present)
• Founder, Director & Investment Banker, First American Capital & Trading Corporation.  FINRA/SEC registered brokerage firm that provides  clearing and execution services to broker/dealers, investment advisors, hedge funds and independent institutional brokers (2002 – present)
• CFO & Director, TradeStation Securities, Inc. (Nasdaq: TRAD)  fka OnlineTrading.com (Nasdaq: LINE)  President & CFO of NASD/SEC registered publicly traded electronic stock brokerage business serving professional traders requiring direct access to the financial markets.  Led the firm through its successful IPO, two acquisitions and ultimate merger with a software development company creating a market cap in excess of $300 million  (1997 – 2002)
• Managing Partner,  zum Tobel & Ling, LLP CPAs  Managing partner of full service audit, tax and consulting practice specializing in the brokerage and investment advisory industry  (1995-1996)
• Partner/Vice President, Securities Consultants International, LLC  Consulting broker/dealers and investment advisers regarding compliance, operations & NASD/SEC financial reporting (1988 – 1994)
• MBA, Florida Atlantic University
• CPA, State of Florida
• FINRA licenses: Series 27- Financial & Operations Principal; Series 24 – General Securities Principal; Series 53 – Municipal Securities Principal; Series 4 – Options Principal; Series 7 – General Securities Representative; Series 55 – Equity Trader.

Active Community Service:

• Florida Atlantic University (FAU) – Vice Chair & Board Member, College of Business;  Chair – Academic Planning Committee
• Mentor and judge Adam’s Center for Entrepreneurship, FAU
• Co-founder and sponsor for Equity Analyst Program, Finance Dept., College of Business, FAU

Source: Pascal-Emmanuel Gobry

There are lots of trends people have been talking about in tech financing–”superangels”; delayed IPOs; secondary market sales; and more.

But so far, few people have been putting the dots together: the entire financing landscape for companies is changing.There are lots of trends people have been talking about in tech financing–”superangels”; delayed IPOs; secondary market sales; and more.

And, excitingly, it’s increasingly not just technology companies.

There are many new financing options for growing companies that weren’t available a decade ago.

Here’s how we break them down (we’ll visit each one in turn):

• Crowdfunding
• Accelerators
• Super-angels
• Late-stage private equity
• The long-delayed IPO

Crowdfunding

Projects funded by Kickstarter

Crowdfunding startups has long been a dream deferred. But it’s finally happening.

Direct crowdfunding via equity financing is still a big no-no, because SEC rules make it difficult for non-accredited investors to invest in startups. But exciting things are going on.

One of the most exciting such examples is AngelList, a “Match.com for investors and startups” that lets startups vie for capital from angels and (increasingly) VC firms. AngelList has seen torrid growth on the back of rising early-stage valuations in Silicon Valley. And it has also been expanding horizontally and geographically.

There are non-tech companies listed on AngelList, along with companies from around the world. AngelList is not technically crowdfunding–it just makes it easier for startups to get accredited investors’ attention and get funding–but it is certainly an early step in that direction. (We interviewed AngelList co-founder Naval Ravikant here.)

Another exciting example is Kickstarter. Kickstarter is a startup that helps creatives of any kind raise funding for entrepreneurial projects. Entrepreneurs on Kickstarter don’t sell equity in their companies–they basically seek donations or pre-payments for perks. So, if you want to self-publish a book, you might set a target goal of $10,000, promise an autographed special edition to those who pledge $100, a regular special edition for those who pledge $50 and a regular book for those who pledge $20. Once the number of pledges hits your goal, people’s credit cards are charged and off you go. Kickstarter helped raise $8.8 million for entrepreneurs in September and is fast-growing, with many projects exceeding their goals as the great infographic above from Bloomberg BusinessWeek shows (click to enlarge).

Another model is peer-to-peer lending marketplaces like Lending Club. These marketplaces appeal to both lenders and investors.

By aggregating loans, they can at least in theory offer better terms to both sides, and manage risk better through data. Right now Lending Club doesn’t offer loans directly to businesses,. But it helps businesses get started, the way many entrepreneurs’ first business angels were Visa and MasterCard.

More importantly, it’s the future of the model that is interesting. The internet can broaden and deepen marketplaces for debt in a much more efficient way. If the SEC doesn’t quash it (it already shut down Lending Club for a while), it’s not a stretch to imagine a small business owner with several quarters of cashflows and financials logging on to a website, filling out a form, and offering bonds at an appropriate interest rate into a marketplace.

Crowdfunding can mesh with new forms of financing that offer an interesting risk/reward profile relative to equity or debt, such as revenue-based lending, where money is loaned against a percentage of a business’s revenues.

AngelList, Kickstarter, peer-to-peer lending… It’s not quite equity-based crowd-funding, but we’ve come a long way from “friends, family and fools.”

Accelerators

Companies graduating from each Y Combinator class

So far, accelerators like Y Combinator, Seedcamp and TechStars have been a mostly tech-centric phenomenon.

These accelerators coach startups for a short period in exchange for a small slice of equity and then introduce them to investors who might invest.

The model has been criticized as being the reincarnation of the infamous “incubators” of the dot-com bubble, but this time around the model is sustainable, because of the radically new capital efficiency of web businesses.

But it’s possible that this model could be expanded to other areas or models. Various forms of incubators, after all, fill a real need for entrepreneurs, especially inexperienced ones, from office space to mentorship. And the web is making startup costs cheaper for all kinds of businesses, not just online-only businesses, especially in a Kickstarter-Lending Club world.

These accelerators have tremendous demand: they typically admit around 1% of applicants (“More selective than Harvard or Yale!”) and raise six if not seven figure amounts right out of the gate (even though Y Combinator and TechStars technically invest only 5 figure amounts, both are accompanied by funds that grant 6 figure amounts to every inductee, before the companies raise any money on their own).

To be sure, the excitement around these is driven at least in part by the broader excitement around early stage startups, which is described as everything from “frothy” to “a bubble.” But, at least in tech, the accelerator model is sustainable, and it’s not as unlikely as many people think that it could expand beyond tech, as services like AngelList have.

Super-Angels now taking place of early-stage VC

Only part of the story

For a while, the conventional wisdom on venture capital was fairly straightforward: because of the dotcom bubble, VCs had grown too fat and raised too much money. This wasn’t apparent because funds are typically raised for 10 years, but now was the time of reckoning, when VCs would start dropping like flies and even the top of the industry would have to slim down.

Then, two funny things happened:

• Plenty of small funds ($20-$50 million) started popping up, in Silicon Valley and elsewhere;
• Some funds have taken to raising huge funds, sometimes in the billions of dollars.

What’s going on?

VC is not just slimming down (though it is, as the chart above shows), it is completely reconfiguring. 

On the side of the small VC funds (the so-called “superangels”), they are largely happening for two reasons:

• Web businesses are incredibly capital efficient and so smaller fund sizes make sense (the demand side);
• Through sheer math, smaller funds have a better time delivering ROI to their investors (the supply side). 

On the side of the mega funds, here’s what’s going on: there is a “flight to quality” for LPs (Limited Partners, the institutional investors who invest in venture firms) who have gotten battered by low VC returns over the past decade (not just in tech–biotech and cleantech have been disappointments as well). Even though they are cutting their allocation for venture firms overall, that’s still a very large pie, and more of that remaining pie is going to the very top funds.

So instead of getting a VC industry that looks much the same except a lot smaller, we’re getting a VC industry that’s smaller but also very different, with a bunch of very small funds on one hand, and a handful of very, very large funds on the other hand.

Stuck in the middle with them, some VC funds that are sticking to the traditional model, like Union Square Ventures and Sequoia Capital, are thriving. (And others dying.)

For companies, this means that there is much more of a continuum from the very early stage through to the pre-IPO stage. But even the pre-IPO stage is changing, because the IPO is much later. We call this the cash-rich adolescence.

New Late-Stage Private Equity Takes Place Of IPO

VC funds at the top of the pile aren’t just getting bigger. They’re changing the way they invest.

Several things are going on:

• Companies are putting off their IPOs, which has led to
• A new kind of late-stage venture investing, and
• The rise of secondary private markets; and meanwhile,
• Investing in more mature private companies is generally getting more efficient thanks to the internet.

First, let’s look at how late-stage investing has changed. Plenty of companies are doing what was once referred to as “DST Deals” after a spate of such investments by Digital Sky Technologies in companies like Facebook, Zynga and Groupon. The reason why they’re not referred to as “DST Deals” anymore is, tellingly, because they’ve simply because they’ve become the standard for late-stage venture deals.

These deals typically have the following characteristics:

• High valuations (so far) that make pundits howl with fury;
• Very limited control, with typically no board seats, or observer (i.e., non-voting) seats;
• Liquidity for company insiders, not just the company itself.

An under discussed feature of these deals is that the liquidity is often provided on an ongoing basis, with the investor first buying up a chunk of company stock, and then buying stock on an ongoing basis from company insiders.

These investments therefore have all the upsides of IPOs in terms of capital raising, dilution, control and liquidity, without the downsides of regulatory compliance costs and unwanted transparency.

This is a new way of doing business for VCs, who typically crave control and traditionally wanted to keep founders “hungry” and therefore cash-poor.

This means that megafunds are basically turning into hedge funds. We mean that in a totally non-pejorative way: there’s nothing wrong with being a hedge fund. But they’re not behaving like buyout firms, who use leverage and typically exercise control over companies, and not really like VCs anymore. In fact, some hedge funds like Tiger Global are very active in funding private technology companies. The lines are blurring all over the place.

This has also led to the rise of secondary markets.

Let’s get the downsides out of the way first. These markets are not very regulated. There have been reports of “boiler room”-type brokers peddling stock into the hot startup du jour to non-expert “accredited” investors like dentists and lawyers. Once a hot tech company goes public at a lower valuation than its “private” valuation and regular folks get hammered (and it will surely happen), there will be a regulatory reckoning, and it won’t be pretty.

All that being said… Secondary markets are here to stay. The opportunity is real. As companies stay private longer, and some may opt to stay private forever, and as the IPO window narrows ever further, the necessity of secondary markets for private company shares is real.

What’s more, this isn’t just a tech phenomenon. Because of the huge interest in these companies, SecondMarket trades heavily in companies like Facebook and Groupon, but many other companies are listed there, from Bloomberg to Cargill to Burger King.

In fact, secondary markets are only a smaller part of a broader phenomenon: internet-based platforms making private investing more efficient.

Companies like CapLinked, AxialMarket and MergerID provide platforms for all sorts of private transactions, from middle-market M&A to real estate transactions to asset sales.

CapLinked describes itself as “LinkedIn meets Salesforce.com for private investing”; buyers and sellers can set up profiles and connect, and then use tools such as virtual deal and data rooms to facilitate transactions.

These tools are recently-launched and it remains to be seen how much of an impact they will have, but the opportunity is clear: make private financial transactions for mature companies more efficient and broader thanks to the internet.

All of this works out to the cash-rich adolescence of many businesses. They have many, many more sources of funding available between traditional VC and IPO.

A few of them have even gone public. And others will.

Today’s IPO are happening much later

Everyone who has been involved in high-growth businesses has been fretting for the past decade for the return of the “IPO window.” When will it finally become easy again for companies to go public?

Overregulation has certainly played a role. Compliance costs are high, running in the millions or tens of millions of dollars.

Markets have been very volatile over the past year. Events like the debt-ceiling fight in the US and the meltdown of Greece, like butterflies causing hurricanes, threw a spanner into companies like Groupon and Zynga.

After a few companies like Zillow, Pandora and especially LinkedIn had successful IPOs, the window was proclaimed open–and then shut again as the markets convulsed.

More deeply, even if if was easy, many entrepreneurs don’t much want to go public.They complain of enforced transparency and fear being shoved around by short-term-focused Wall Street.

And yet… And yet, some day the IPO will come.

LinkedIn stock price up to and including its IPO (it’s gone down since then)

Some day the IPO will come for two simple reasons:

• The new breed of web companies are real businesses with real revenues and sustainable margins; 
• Most of those companies have taken institutional money and so HAVE to go public some day to give their investors an exit; conceivably some of them could figure out other ways to stay private, and some have speculated that Facebook CEO Mark Zuckerberg would like that, but for most of them, it’s only a matter of time until they do go public.

The LinkedIn IPO was hailed as a “new Netscape”: a big IPO that opened the floodgates for many more tech IPOs and buoyant markets for tech companies. Market gyrations decided otherwise, but it was certainly a trial run. One day there will be a real “new Netscape”, followed by a wave of IPOs.

THE BOTTOM LINE

The bottom line is the way companies are getting financed is changing completely, from start to finish. Crowdfunding and accelerators are helping companies get off the ground; the new VC helps them grow up; new institutions and services provide for a cash-rich adolescence, and some day (soon, perhaps), they will get a huge IPO pay day.

We’ve summarized the new funding chain in the graphic below (click to enlarge):

This note was published as part of BI Research, a new industry intelligence service from Business Insider.

About Scale Finance

Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices in Charlotte, NC, the Triangle, the Triad, Southern Pines, and Wilmington

In conjunction with this institutional growth financing, Enveniam launched a highly innovative RF-enabled pole based technology. Enveniam’s solutions for outdoor lighting are designed to help property managers save money and operate more efficiently. With combined expertise in field service work and technology design and deployment, Enveniam is uniquely equipped to deliver solutions that range from basic lighting maintenance, retrofits and repairs to full implementation of complex lighting control and energy management systems.

Enveniam leverages its proprietary technology to reduce energy consumption, extend service life of lamps & ballasts, and optimize site management for Property Managers. Key capabilities include remote energy management controls, web-based command center software, utility analysis & rebate management, and optimized lighting schematics. For more information, see www.enveniam.com.

About Scale Finance

Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices in Charlotte, NC, the Triangle, the Triad, Southern Pines, and Wilmington with a team of more than 30 professionals serving more than 100 companies throughout the region.