Capitalizing Start-up Businesses

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Where entrepreneurs find the funding they need to turn their great idea into a booming business.

Ted Simons: In our continuing coverage of economic growth, we take a look at how fledgling companies find the capital they need to get started. I'll talk to an expert in venture capital. First a look at a local company that used money from owners and government grants to get going.

Scott Grimshaw: let me take you on a journey through Colnatec.

Narrator: To make our high-tech world unbelievably precise measurements are needed. a company in Gilbert produces a device from a disk of quartz crystal that can measure more precisely than any other in the world.

Scott Grimshaw: We're involved in producing sensors that operate on an atomic level, which means quite literally, we measure atoms. Those atoms are used to make things that we all find very exciting these days.

Narrator: The sensors are coated with gold to make them into a device that can detect vibrations. Besides needing gold to make their product work, Colnatec like any other startup needed plenty of gold to get going, relying on money from its partners, and government grants.

Scott Grimshaw: The challenge a small business has in just getting off the ground are myriad. From simple things I don't have enough money in my pocket today to I have enough money in my pocket for today but not tomorrow versus I'm going up against a giant with $1 billion.

Ted Simons: And here to talk about how companies like Colnatec and others find capital is Gordon McConnell, executive director for venture acceleration at Arizona State University. Thanks for joining us.

Gordon McConnell: Thanks for having me.

Ted Simons: Where do start-ups get their money?

Gordon McConnell: It's a question were hear an awful lot. We see a lot of entrepreneurs on a daily basis. It's not an easy answer. In the first case it's what kind of company. A large portion of companies in the U.S., small, medium size companies, and they tend to raise money from what we call the three Fs: friends, families, and fools. Fools obviously because of the high failure rate. And they bootstrap themselves, they use revenue from a product or service and build the company up over time. In fairness most western countries that's the backbone of a lot of economies. If you're talking about growth companies, which is what we tend to see at ASU skysong, then that's slightly different. Colnatec is a good example of a company that has raised money from two sources, one is local, which is the Arizona commerce authority, their innovation challenge last year had a million and a half and they funded eight companies, which we've just seen one. The second source that this company has used is small business innovation research grant, which is government money. Again, it's for companies that have a high-tech knowledge product probably.

Ted Simons: What about venture capital? What does venture capital look for? I understand sources are getting a little more selective out there these days. With that in mind what are they looking for? What methods are best used to get their attention?

Gordon McConnell: Interestingly enough, I supppose most people tend to think of entrepreneurs as being solo players, Richard Bransons, Steve jobs of this world. Ironically it's teams of venture capital people fund. I used to work in an early stage fund many years ago. The first thing we would look at before the idea, is the team. If the idea doesn't work out, if you fund a good team chances are they will figure something out. If you fund a really good idea and somebody produces something tomorrow that wipes it out a weak team will fail to respond. So Team is critical. The first thing we talk about when individuals come in and start talking about a start-up we say, you're probably and there are people who can do it otherwise you'll need to form a team who can strengthen whatever you already have.

Ted Simons: Interesting. Is it tougher in Arizona raising this kind of capital than maybe in other parts of the country?

Gordon McConnell: I think the country probably breaks into two. There's Silicon valley, the original of the species; Boston, New York and other places like Boulder and Chicago. Arizona would probably be in the set of states that are on the way up. I think if you went back five or seven years when the property boom was going on that's where the money was because it was easy to make a lot of profit. Understandably that has changed and won't be coming back any time soon. We're seeing not only a resurgence in entrepreneurship but an increase in interest from investors that maybe would have looked elsewhere. So I think we're on the way up in the state at the moment.

Ted Simons: Interesting you mentioned the housing crunch, and the housing crisis and the whole nine yards because from what I understand, lots of small businesses used to take home equity and those sorts of things as start-up money. Can't do that much so any more.

Gordon McConnell: In fact over the years, Ted, I have met people who have maxed credit cards, taken out car loans that never ended up in a car. Entrepreneurs are people that will do whatever it takes to get to where they need to be and they will pretty much do anything that's legal in terms of raising money. So I'm sure the home equity would have been a source for some people.

Ted Simons: I saw a report that it costs less to start a small business right now than it really has in the past 15 some odd years. Does that make sense to you?

Gordon McConnell: Absolutely. One of the reasons there's such a surge of entrepreneurs is partly because of the recession but partly because it's cheaper. Technology and technology services have dropped the price, so if you were starting a company in 2000, it was going to cost you hundreds of thousands. Now you can do it for tens of thousands if you're in a technology company, so it's radically changed the ability for groups and people to raise cash.

Ted Simons: And yet, on the other side because of the housing crisis, because of the economic slump, all these different aspects, I have also read folks are more wary of starting up businesses just the overall mood. They aren't as willing to take a risk. Make sense again?

Gordon McConnell: It does, but the numbers don't prove that and the Global Entrepreneurship Monitor report, which is the global analysis of entrepreneurship, came out last week and there was a surge of 60%. In the U.S. in 2011 in entrepreneurship. That was after several years where it was a declining number, so suddenly people, whether because of options or because I think we're in the age of entrepreneurship we're entering a period where entrepreneurship is suddenly becoming much more of a cultural phenomenon rather than a small group people in silicon valley. That seems to be a figure that is replicated in many countries in the report.

Ted Simons: I guess like other economic factors, pent-up demand is playing here as well. Got a lot of folks waiting on the sidelines, they're tired of waiting on the sidelines.

Gordon McConnell: Absolutely, and from 14-year-olds to 80-year-olds. The other interesting statistic is that a lot of people over 50 are starting companies, which again seems counterintuitive in the age of the Mark Zuckerberg Facebook-type company, but the fact is this is a game you can play at any age there are companies being formed by 15-year-olds who are selling them for millions of dollars that they developed in their bedrooms. In terms of a time to be involved in this, for us at ASU Skysong, it's very exciting.

Ted Simons: Very good. Good to have you here. Thanks for joining us.

Gordon McConnell: Thanks very much.

Gordon McConnell:ASU Executive Director for Venture Acceleration

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