After The Pitch

StudioStick Gets $25k from Innovation Fund

SunDown Pitch Alum StudioStick gets $25k  from The Innovation Fund

The Innovation Fund awards $175,000 to four Northeast Ohio Tech Startups. The companies will use awards between $25,000 and $100,000 to complete specific projects that will bring their technologies closer to market.Aatru Medical ($100,000 | Cleveland) is developing a wound dressing product platform that leverages market-ready technology and should disrupt the multi-billion dollar wound therapy market.Timothy Wojciechowski, in the foreground is CEO of Aatru; and Tom Lash, COO, is in the background.

Source: Innovation fund – Photo Gallery – cleveland.com

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Ohio House Bill 10 Proposes to Help Equity Crowdfunding in Ohio

Ohio is making progress in trying to make it easier for startups to raise equity and start their businesses via crowdfunding.  As introduced, House Bill 10 changes a few of the rules and brings state law more in-line with federal laws.  As it stands, the proposed legislation is about 90% of the way there, but there are a few items in the bill that are not fully aligned with the federal rules and needs some wordsmithing.   Here are the suggested amendments I put together and sent to Representative Arndt a few days ago.

Here is the email I sent:

Dear Rep Steven Arndt:

It is great that you have introduced legislation to drive additional interest in helping startups raise capital for their ventures. As the chair of Ohio’s largest non-profit organization for entrepreneurs, I fully applaud your efforts and appreciate your attention to this space.

I have three minor suggestions for amendments to the bill as proposed.

1) Remove the $10k cap and bring it more in-line with SEC rules
From FINRA:
Who Can Invest?

Like stocks and bonds, anyone can invest in crowdfunding offerings. But because of the risks involved, you are limited in how much you can invest during any 12-month period in these kinds of securities. The limitation on how much you can invest depends on your net worth and annual income:

If either your annual income or your net worth is less than $100,000, then during any 12-month period, you can invest up to the greater of either $2,000 or five percent of the lesser of your annual income or net worth.
If both your annual income and your net worth are equal to or more than $100,000 then, during any 12-month period, you can invest up to 10 percent of your annual income or net worth, whichever is less, but not to exceed $100,000.
Say your annual income is $150,000 and your net worth is $80,000. JOBS Act crowdfunding rules allow you to invest the greater of $2,000 or five percent of $80,000 ($4,000) during a 12-month period. So in this case, you can invest $4,000 over a 12-month period.

http://www.finra.org/investors/alerts/crowdfunding-and-jobs-act-what-investors-should-know

2) Remove the In-State requirement for investors. We do not have a lot of high risk capital sloshing around in Ohio. Limiting investors to just Ohio, puts a cap on what a company can raise. You want to cast a wide net of potential investors. Many out of state residents have an Ohio connection. If you look at the distribution of high net worth individuals that have an Ohio connection, they are concentrated in New York, Arizona, and Florida. Cutting those people out put entrepreneurs at a disadvantage to raise capital.

3) Reduced the filing fee from $300 to $150, like any other security offering in Ohio. The goal is to make raising capital easier in Ohio and not harder. Doubling the registration fee is a barrier for a startup to raise capital.

Please let me know if I can be of any assistance in helping you get this legislation with the above amendments passed.

Thanks,

Paul

I encourage you to reach out to Rep Arndt and let him know you support the bill with these minor amendments.  His office can be emailed at rep89@ohiohouse.gov

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Things to Consider Before Applying for a Small Business Loan in Ohio

I If you need a business startup loan or a small loan to grow an operating business, applying for one at the bank is the most common avenue of acquiring it. Make sure your business can secure the capital it needs by taking these measures, guaranteeing that the underwriter won’t discard your application before giving it full consideration.

Credit scores 

Assess the current condition of your personal credit score to get an idea of where you stand in the eyes of financial institutions. If your business is already operational make sure to consider the state of your business credit score as well. By being aware of your credit scores, you eliminate the risk of walking blindly into an obstacle like sub-par credit. Typically, banks will find out your FICO SBSS score and use that to determine if you qualify. The minimum score threshold for approval is usually set at 160. 

Available funds 

Whether you are seeking a loan through a private investor or bank, evidence that you are financially secure will help them confidently determine that their money will not be at risk. If you are currently employed full time, the benefactor of the loan can be sure that you have some means to pay back the loan; but if you are fully invested in your business this security may not exist in their eyes. With a relatively proportionate amount of cash or collateral on hand, a business startup loan will be easier to get approved.

Just as effectively, a business that is already generating revenue but doesn’t have much liquid cash can be granted revenue-based financing. As long as a company can realistically demonstrate its capacity for growth and the numbers all work out, revenue based financing may be an option.

Available institutions 

The institution that you choose to ask to fund your loan is important as well. If your company doesn’t seem to fit in with the standard recipient of funding from that institution, reconsider them as an option. In the Midwest, larger banks are even more likely to decline smaller loans as they are less profitable. With that in mind, find the investor that is most suited to your operation.

Prepare a business plan 

It is vital to have a business plan that accurately defines how any funds received will be spent. An exact timeline for how your business will handle repayment is key to winning loan approval.

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How Do You Put a Pre-Revenue Valuation on Your Startup?

Startups that have long-term potential for growth and profitability frequently leverage funding from investors to reach their stride.  A high probability of getting the highest return on their investment dollars is the only objective for many investors. So, how can you accommodate this need when determining a valuation for a startup that isn’t yet generating revenue?

Understanding important financial terms

Free cash flow is an accounting metric used to define financial performance, it is calculated as operating cash flow minus capital expenditures.

Post-revenue value is the value of a company after it has received financing or outside capital.

Pre-revenue value is a term widely used in the investment industry to describe, the valuation of a company that has not received outside investment or financing.

Net present value is the sum of all future cash flows.

Do the math

First, calculate your margins. Be transparent and use the most accurate iterations of your expected revenue and your expenses to get a clear representation of potential free cash flow. This is the first step to making sure your financials are in order. If they aren’t, there are not very many underwriters who will want to touch your startup (you may even consider having an accounting professional model a 409a model if your situation is exceedingly complex).

Pre-Money Valuation Formula

Pre-Money Valuation Formula

Use this data to determine your projected terminal value and return on investment (ROI) for a period between 3 and 7 years in the future. Now take the newly defined terminal value of your startup in that period and divide it by the expected (ROI) for that year. The quotient is a valid representation of the post-revenue valuation. Your pre-revenue valuation will be an amount approximately equal to the difference between your post-revenue valuation and any capital you have invested into the company. This process is far from simple, so make sure you are ready to commit a lot of time and resources to getting the most accurate numbers.

Be Realistic

Unrealistic expectations may turn an investor off to your idea entirely and you might not get another audition. This doesn’t mean that you should let investors take advantage of you. If your startup shows signs of growth, positive engagement, traction and exceptional projected revenue, never allow negotiations to remain at a stalemate.

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Your Checklist Before Approaching Investors for Your Startup

If you want to raise some investor money to build traction for your startup. That’s a good decision, but there are some factors to consider before you go looking for investors.

1.  Have An Impressive Story

You should have a great story regarding how your startup came to be and the problem that you are seeking to solve. A beautiful example is the story of the founding of Dropbox.  Drew Houston founded Dropbox after realizing he forgot to carry his memory stick while traveling from Boston to New York City and could, therefore, not work on his computer during the journey.

2.  Have A Minimum Viable Product

The MVP is a first working version of your product with limited features, and which you can show to customers and investors and therefore collect feedback.

3.  Have Users or Customers

Investors rarely put in money for untested solutions. You, therefore, need to demonstrate that there are people who want to use your product to solve the problem that you are seeking to resolve and actually pay you for the solution. Investor money shall, therefore, help you to grow.

4.  Have a Focus on profitability

For startups in the Midwest, one key thing to note is that you should show a focus on profitability the earliest as possible. This situation is unlike in the coasts where plenty of investors are willing to hold out longer before a business becomes profitable.

Checking the above four items on this fundraising checklist will help ensure that you will be on your way to raising the required capital from an ideal investor to scale your company.

Happy hunting!

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