NJEN Panel Discusses “Where’s the Money?” Alternative Financing for Tech Companies, Part 2

Esther Surden
Publisher & Editor, NJTechWeekly.com

(NJTechWeekly.com is continuing to catch up on pre-Sandy coverage that would have been published in early November but was postponed because of post-storm chaos and the volume of Sandy-related stories. We apologize for the delay.)

While it was often difficult for the N.J. tech community to obtain funding in 2012, there were a variety of alternative options for companies, according to panelists at an October 10, 2012, New Jersey Entrepreneurial Network (NJEN) event in Princeton.

Some 60 attendees heard about crowdfunding, bank financing, a myriad of tools available from the state of N.J. and even a funding vehicle that gives immigrants green cards while providing financing to companies that create jobs.

New Jersey Economic Development Authority (EDA) director of technology and life sciences Kathleen Coviello’s presentation on ways the EDA can help tech companies was extremely comprehensive and demonstrated the agency’s view of its relationship with the state.

“Our role is to function as the bank for the state. We have money. As the bank for the state, we have underwriting standards we have to meet and due diligence we have to go through. Particularly in this tough economic environment, we have a fiduciary responsibility and must be fiscally prudent. We are not throwing money out the door,” Coviello said. However, she added, “we are doing transactions.”

EDA transactions made prior to the October meeting include providing $3.3 million to Fluitec, a Belgian company that had relocated to the U.S. and wanted to develop a manufacturing facility in northern N.J.

“This is one of the most attractive programs we have,” Coviello said, referring to financing through the Edison Innovation Clean Energy Manufacturing Fund, funded by the N.J. Board of Public Utilities and administered by the EDA. Companies can get up to $1.3 million in grant and the remainder in very low-interest loans if they meet certain performance metrics,” she noted. “We get funding for this from a sister agency formed to help promote clean technologies in the state of N.J.”

“We also just closed a transaction for FieldView Solutions (Edison), a company that has received funding through the Edison Innovation Green Growth Fund. “We provided that company with a million-dollar loan and, again, if they hit performance metrics, half of it gets converted into a grant.” (NJTechWeekly.com profiled FieldView Solutions here.)

Another approved company, Phone.com (Newark), “provides phone services to small and medium-sized businesses throughout the state. The company was virtual at the time and already had a little bit of VC funding. We provided matching money to that VC money in the form of a loan with warrants. And the company is going to relocate to the NJIT EDC [New Jersey Institute of Technology Enterprise Development Center] and put down roots in New Jersey,” said Coviello.

CareKinesis , a Moorestown company with a healthcare IT business model, has also been helped by the EDA. Its founder, Cal Knowlton, already had a successful business in Pa. but wanted CareKinesis to stay on the Jersey side of the river, where he lived and had grown up. “We provided a matching loan program to some of the VC money he raised,” said Coviello.

She continued, “As the bank for the state, we administer some legislative programs. You may be familiar with the Net Operating Loss Program, which is unique to N.J. I’ve even spoken to the federal government about this, as they are looking to deploy something like it on a national level. Companies that are losing money can sell those losses for cash today.

“We all know as entrepreneurs that cash in hand today is much more important than taking it as a write-off against your future losses. The state says you can sell those losses to profitable N.J. businesses. We set the threshold and ask that the recipient companies demonstrate they are growing jobs in N.J. There are three checkpoints: year one, year three and year five. Companies have to be at 10 jobs by the end of year ten.”

This program has been very helpful to N.J. biotech companies, Coviello said, and it benefits profitable firms by providing them a tax shield. The process involves an annual application that must be received by the end of June.

“In his budget the governor approved a $60 million annual allocation for this program this year [fiscal year 2013],” Coviello said. There is always an oversubscription, she added. “This year we expect the average award to be around $920,000.” [NJTechWeekly.com will be publishing the 2012 list of tech companies that participated in this program.]

“We also administer tax incentives for job growth, so before any of you entrepreneurs think about signing a lease in N.J., see us about a program we have that can incentivize you to grow your jobs in N.J.”

Coviello said the EDA is constantly approached by people who need early-stage capital, but as a bank, the organization doesn’t give out “risky money.” However, the state does invest in venture funds, working with partners and professional managers.

“We are invested across 11 funds currently,” she said. Some of the funds are fully invested, and some have capacity in them. “We take a portfolio approach: we have healthcare, life science, early-stage, and growth venture funds.” The state puts money into the funds as a limited partner and requires the venture partner to match the money the state contributes with a three times multiplier, said Coviello.

“Most recently we announced a $3 million investment in Osage Partners [Bala Cynwyd, Pa.]. Osage had been doing transactions in N.J. on a one-off basis but was located in Pa.” Funds were selected during a competitive application process that evaluated the VC’s activity in N.J. Now Osage has opened an office in N.J., Coviello said, and it has to “turn $3 million into $9 million in early-stage investments” by funding companies with less than $3 million in revenues.

“This approach takes the due diligence process and puts it in professional hands,” she pointed out. “The VCs can offer the coaching and mentoring we can’t,” she added.

The state has also invested $2 million in NextStage Capital (Audubon, Pa.), “which will be turned into $6 million for N.J. entrepreneurs.”

Coviello also spoke about TechLaunch (Montclair), the first N.J. tech accelerator funded by the EDA and which NJTechWeekly.com has covered in depth.

Coviello discussed her organization’s support of biotech through a real estate play. The EDA has purchased a complete campus in New Brunswick from Johnson & Johnson and put in a state-of-the-art wet lab facility close to Rutgers and, geographically, in the heart of the pharmaceutical industry. “We have strategic relationships with Rutgers, so our tenants can use its resources for mentoring and cooperation on animal studies. We are really looking to build that pharma community,” she noted.

Esther Surden is Publisher and Editor of NJTechWeekly, and a contributor to Philly Tech News. This article originally appeared in NJTechWeekly, and was reposted here with her approval.



permalink

NJEN Panel Discusses “Where’s the Money?” Alternative Financing for Tech Companies, Part 1

Esther Surden
Publisher & Editor, NJTechWeekly.com

(NJTechWeekly.com is continuing to catch up on pre-Sandy coverage that would have been published in early November but was postponed because of post-storm chaos and the volume of Sandy-related stories. We apologize for the delay.)

The New Jersey tech community knows how difficult it was for companies to get VCs and angels to write checks in 2012. Acknowledging this, the New Jersey Entrepreneurial Network (NJEN) organized a panel discussion on alternative means for entrepreneurs and businesses to obtain financing.

Some 60 attendees at the Oct. 10, 2012, event, held in Princeton, heard about crowdfunding, bank funding, myriad financing tools made available by the state of N.J. and even a vehicle that gives immigrants green cards while providing financing to companies that create jobs.

Part 1 of this post covers the crowdfunding presentations, including an interesting discussion by Savraj Singh Dhanjal, a Princeton entrepreneur who gave a Kickstarter campaign a try.

The first speaker was Freeman White, CEO and cofounder of Launcht (Buckingham, Pa.), a website providing custom crowdfunding platforms and white-label sites for nonprofit social fundraising, online voting and use by universities.

White spoke about the history of crowdfunding, including the difference between the form of it authorized by the Jumpstart Our Business Startups (JOBS) Act and the version of it carried out today via Kickstarter, Indiegogo and other sites. For entrepreneurs, today’s sites are used to build something of interest to the market and then presell it, White said. “However, if you want to invest in the business itself, that is still illegal, unless you are an angel investor or an accredited investor through a Rule 506 offering or a Regulation D offering,” he noted.

When the rules are finally promulgated, the JOBS Act will change things so that ordinary people can invest upwards of 5-10 percent of their income in startups and small private companies, White said. The investment can take many forms, such as revenue sharing, equity, debt and any kind of regulated security, he added.

However, “if you see anyone offering you a crowdfunded security today, they are trying to defraud you of your money,” White told the group. When the rules are finalized, it will be ethical to invest this way, and “you are going to know when that is, because the Securities and Exchange Commission and the Financial Industry Regulatory Authority are going to shout it from the rooftops!”

There is a role for crowdfunding right now. Current sites can be used for product development, for example. They basically let companies that want to design a product’s first run do so, if they have the design and suppliers, White said. Companies are essentially preselling “cool gadgets.” This kind of selling is based on how commerce is already being carried out, as in the case of preselling books.

Another interesting use for today’s crowdfunding sites is tech transfer for universities, White said. Universities are setting up campus crowdfunding portals and offering research projects to be funded, or they present a product ready for commercialization, requesting funding to make a first run at the market. With this model, crowdfunding becomes market research; you learn very early on whether someone will buy the product, he noted.

Dhanjal, CEO of the startup Wattvision, which ran a successful Kickstarter campaign this year, was the next speaker to tell his story. A Princeton graduate, he had an idea in 2008 for a gadget that would record how much energy a home or business was using at any given moment. He made a prototype of his product and tested it in his parents’ house. A neighbor saw it and wanted it, and Dhanjal thought he had a business.

In 2009 he was able to raise money with the help of Y Combinator (Mountain View, Ca.) founder Paul Graham. “I pitched him, and he realized this was a cool energy monitoring system that was really simple and didn’t involve electricians,” explained Dhanjal. Graham liked the idea because it incorporated both hardware and software, “and most people only do one or the other.

“This was after I had spoken to angels in the Princeton area. At that time there were no local accelerators. So I moved to California for three months, refined the prototype a bit and raised more money from angels. … We spent ... time turning a standalone device into a tiny box that connects to the wireless network in the house and a sensor that you put on your meter.

“There are three ways to raise money from VC firms. The first is if you are a cofounder at something like Facebook. If you’ve already achieved a lot of success, you can probably raise money from a VC. Another way is to have something so cool and amazing that everyone will want one. If it’s low-cost enough, you can raise money for that. The third way is to have traction [ongoing revenue generation, users and success in the market].

“Angels have the same three requirements, but they may be personally vested in your product and you can connect with them,” he said.

Dhanjal was able to produce and sell the first version of his gadget, which he named Wattvision. When it was time to produce an updated version, however, the company needed to raise more funds. “We saw another Y Combinator company that made watches, Pebble put its [smart] watch up on Kickstarter and be wildly successful,” he said.

With Kickstarter, if you can convey your product as cool or interesting, you can connect with that audience, Dhanjal noted.

“This was a risk for us. We had already taken angel funding, and we already had a product out there. We didn’t know how we would be received on Kickstarter. Also, we were selling our product to homeowners — someone who has a house, not someone in a New York apartment who wants a cool watch.” Dhanjal said the company thought long and hard about how to frame the product in a light that would inspire people to pre-order it.

“We put up our campaign in late August. Our goal was $50,000 for version 2 of Wattvision. We had a local filmmaker make a marketing video.” Dhanjal said being located in the Tigerlabs (Princeton)coworking space was an advantage for the firm, because others working there helped out, lending scenery to make the video “cool.”

“We made the video and we waited,” he said.

That’s not all the company did.

“We emailed our existing user base. We had had some great press in 2009. Forbes and Business Week covered us, and we collected the email addresses of users interested in the product.”

In the email it sent them, Wattvision offered existing users a better deal: if they preordered , they would receive the next version of the device at a discounted price. Other Kickstarter users had to contribute a higher amount to preorder. “Thanks to our own email list, we raised $18,000 in 24 hours, which was exciting,” noted Dhanjal. The campaign raised $67,000 in total.

There are some things to note about Kickstarter, Dhanjal said. The site takes 5 percent off what you raise, and 2 percent goes to credit card processing. So people considering using it should do the math. Also, you have to have a physical product. Finally, Kickstarter reviews products, so yours can be rejected.

Esther Surden is Publisher and Editor of NJTechWeekly, and a contributor to Philly Tech News. This article originally appeared in NJTechWeekly, and was reposted here with her approval.



permalink