Tech startups have challenges, options for financing

A lot has been written in our pages lately about the improving state of local banks and the increased willingness on the part of banks to loan money again after the recession, but challenges still exist for technology startups to find financing.

Banks are trying to make the most prudent loans possible, and for many, that means sticking with what they know. Familiar ventures such as multifamily developments and farm loans are good areas for banks looking to get back in the lending game, but many are not yet ready for the risk that is inherent in lending to young tech companies.

With the presence of CSU and its technology-focused superclusters, the newly created Powerhouse Institute and the Rocky Mountain Innosphere all located in Fort Collins, there’s a relatively high concentration of tech startups present in the area.

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Many of them are still small enough that they’re not yet in the hunt for financing for expansion, but some have experienced enough success that they’ll soon need capital for more equipment, facility expansions and employee hires.

If the companies have enough of their own equity to bring to the table, banks can be open to lending money, but often startups don’t have quite enough skin to put in the game.

Some local banks have made efforts to support technology startups through less conventional means than simply making a loan to a company.

FirstBank, for example, made a three-year, $75,000 sponsorship investment in the Innosphere so that the incubator can continue its work pursuing capital for entrepreneurs. The money also allowed the Innosphere to diversify its income stream, which otherwise comes from the cities of Fort Collins and Loveland, CSU and CSU Ventures.

Home State Bank and the Colorado Enterprise Fund teamed up to offer a pool of $500,000 to Innosphere-housed companies in January. Home State made a low-interest $250,000 loan to the Colorado Enterprise Fund, who matched those funds with its own $250,000.

Companies have already started receiving loans from the fund, administered by the Colorado Enterprise Fund.

“As an entrepreneur, having access to this kind of capital is a big help because it solves our supply-chain issue,” said Gordon Coombes, CEO and founder of Innosphere-housed Canvasback Enterprises.

Other bank-assisted routes include the Small Business Administration’s Small Business Investment Company program, which caters specifically to startups, although is not limited to technology companies.

The program pre-dates modern technology companies by decades, but small businesses that qualify can benefit in a variety of ways. It was created in 1958 to fill the gap between the availability of growth capital and the needs of small businesses.

The SBA’s Investment Division licenses private equity fund managers and provides them with access to low-cost, government-guaranteed capital to make investments in U.S. small businesses.

In addition to being able to receive long-term loans, qualifying businesses can gain equity capital and have access to money-management assistance.

Still, these opportunities are often rare, and not every company can get a piece of the pie, so many startups have to take other routes.

Angel investors and venture capital, often associated with tech startups, aren’t very prevalent in Northern Colorado. For those willing to reach across the Boulder County line, there is venture capital to be found, with more than 10 venture-capital firms in Boulder and Broomfield counties.

Moving closer to metro Denver opens up even more possibilities, but entering the Boulder and Denver markets opens up a great deal more competition for Northern Colorado companies.

At the University of Denver every year, angel investors are rounded up and put in one place at the Angel Capital Summit, which just wrapped up its sixth year. The summit can be lucrative, and good for the economy.

At the 2012 summit, 24 companies raised $15 million in angel investments, resulting in the creation of 200 jobs. But the competition was fierce, with more than 400 people vying for funds.

Fortunately for these fledgling companies, creativity tends to come naturally to those in charge.

Crowdfunding is one route some have taken, although it, too, comes with risks. Provisions in the Jumpstart our Business Startups Act, passed last year and co-sponsored by Colorado Sen. Michael Bennet, allow companies to offer smaller investors an equity interest in a company, if they first register as a broker-dealer.

This action is something that is cost-prohibitive for many small businesses. Other experts have expressed concern over the idea of small companies managing investors.

Under the JOBS Act, investors can receive, in exchange for their contribution, a stake in the company, much like investors involved in the stock market do when they buy shares of a company.
Depending on the size of the company, that could add up to thousands of investors, complete with reporting requirements to the U.S. Securities and Exchange Commission to ensure that companies remain transparent.

Molly Armbrister covers banking and finance for the Business Report. She can be reached at 970-232-3139, at marmbrister@ncbr.com or at twitter.com/MArmbristerNCBR.