I was fortunate to be part of a Food & Beverage funding discussion – the purpose of which was to determine similarities with TECH and even Entertainment Funding options for entrepreneurs.
F&B, similar to Retail, has a large number of initial start-ups that want to create and operate ONE eatery, or create a brand to earn a living around their passion. Nothing wrong with that. Like TECH and others, they don’t qualify for private equity securities. They are a fit for friends and family (F&F), traditional debt lenders and equity partners with a check who invest for a mutually agreed percentage of the business.
The traditional source of capital for emerging retail-facing concepts are banks. This process, besides requiring 100% collateralization (or more) is geared towards successful track records and brick & mortar proof-of-concepts. Banks are not geared to review and assess printed business plans or napkins from enthusiastic entrepreneurs. Since 2009, the void has widen with fewer and fewer Banks providing start-up capital to launch new businesses. This model does not fit their new ridged LOAN portfolio requirements.
For some, this beginning represents an Alpha/Beta proof-of-principle and success positions the company to expand nationally to big brand channel/s, multi-channel global e-commerce, or to a franchising model.
These expansion models require capital beyond the initial small business revenue success. The good news is… because of the scale, they now fit the traditional Bridge and Private Equity Business model with scalable 5 year revenue models and exit potential.
So….how can we solve the “Birthing” funding GAP for retail, food & beverage, entertainment and perhaps other verticals identified in Innovation Stars?
Two solutions come to mind and purpose of this BLOG is to find out if either exist and where.
SBA Loans and Guarantees: In the 80’s we had SBA loans and Guarantees. SBA loans were in play if you didn’t qualify for a Bank Loan and wanted to start a new business. SBA Guarantee program was targeted for new businesses that qualified for a traditional bank loan.
The Government did not want to compete with Banks – only help start new businesses. The paperwork was overwhelming for everyone and often the Bank required both collateral and the SBA Guarantee.
The question is… do either of these programs exist today and who is the focal point to engage them in our entrepreneur ecosystem?
The Private Guarantee Fund. The issue is can a private version of the SBA Guarantee be created to solve the small business funding GAP and to still support the benefits of the small business banking relationship. How would that work in today’s modern entrepreneurial ecosystem?
First, it would require a screening entity – like an ACCELERATOR to authenticate the Guarantee Candidate. The role of an Accelerator is to screen and then mentor a company through a development process designed to advance candidates to the next level. The Accelerator authenticates companies and submits them for a guaranteed loan from $25K to $150K.
A second authentication authority could be Georgia’s 16+ SBDC’s who provide guidance to small business owners and to entrepreneurs who want to start a venture. SBDC’s have programs and, although not as formal as an accelerator, they could serve to screen and qualify candidates for the Private Guarantee Program.
The SBDC logic also applies to SCORE. The Atlanta Metropolitan area has over 35 co-working space and Accelerators. Some co-working space “incubators” could also mentor and provide “screened” candidates for the Private Guarantee Fund Program.
The private guarantee fund model can be a classic fund framework consisting of a board, fund manager, fund capital sources and a responsible reporting entity. Capital funding sources can come from angels, government funds, charities, foundations, plus corporations dedicated to foster small business and launch new entrepreneurial ventures. The primary value proposition is the PR associated with “Helping Small Businesses Launch.”
The funds are ONLY depleted if a bank loan they have collateralized goes bad. Monies invested in the Guarantee fund are re-invested in a stock portfolio providing enough liquid collateral to cover the guaranteed loans minus fund management. Insuring the loan Private Guarantee Fund portfolio is also an option.
Angel participation could feature specific companies, or verticals, where Angels receive a promissory note for each company their funds guarantee. Part of the note could be a convertible option for any company anticipating downstream capitalization for expanded growth beyond the first pilot. The convertible option represents a discounted option for downstream private equity investment based on pilot success. The alternative option is for Angels to make (and manage) the loan directly to the company.
A major advantage of the Private Loan Guarantee Program is the number of infrastructure WINNERS.
The Bank gets a new customer and a guaranteed loan that is pre-screened by the accelerator or Private Fund Guarantee Partner. The Guarantee Program helps Accelerators and Partners foster new business and ventures. The Entrepreneur gets capital to open their doors and begin selling. The Guarantee Fund backs companies that are screened for a high probity of success.
The Private Guarantee Program can be promoted by the Guarantee Fund Partner Network and Sponsored by Georgia’s own Sun Trust Bank.
The purpose of this BLOG is to identify a NEED in Georgia’s Capital fund raising food chain. It is to solicit input and to surface solutions that exist that can, or could, address this NEED. In that case, the goal would be to promote that solution as an integral component to Georgia’s entrepreneurial ecosystem.