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Have a new product, process or technology on your mind? Contact the NKU Innovation Center for information on funding http://ic.nku.edu/

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Start-up Slam: Nov 20 for people who want to start a new business. Speakers presenting topics that benefit small companies. Free and open to all. http://www.start-upslam.com

With Venture Capital Scarce, Entrepreneurs Find Alternative Means

OCTOBER 15, 2009

http://online.wsj.com/article/SB10001424052748703790404574471433151548294.html?mod=wsj_share_linkedin

By EMILY MALTBY

Sean Conway needed to raise funds for his start-up, Notehall.com, an online marketplace for college students to buy and sell class notes. But a year into the venture he was broke and investors weren’t willing to infuse the company with a capital boost.

Mr. Conway’s grandfather contributed $17,000 for marketing and operations, which allowed the company to hit nearly 8,000 users at Mr. Conway’s alma mater, the University of Arizona, by January 2009. But the angels and venture capitalists remained skeptical.

“I had invested my life savings and I knew there was no turning back,” says Mr. Conway, a 2007 graduate.

Rob SheddSean Conway, founder of Notehall.com, found creative ways to get funding for his business.

So last March he submitted his idea to DreamIt Ventures, a sort of entrepreneurial boot camp in Philadelphia—funded by four economic development organizations—that provides office space and mentoring to fledgling business owners, and helps set them up with potential investors. Notehall.com, one of 10 ventures chosen to participate in the three-month summer program, walked away with about $500,000 in investments.

Amid a stark climate for venture capital, small-business owners are finding more creative ways to get funding. Some are turning to boot-camp-style programs like DreamIt Ventures, Y Combinator in Mountain View, Calif., or TechStars in Boulder, Colo. Others have found success appealing for funds via television, or even hitting up friends and relatives for cash.

Venture capital deals have been steadily declining since 2007 and are hovering at levels not seen since the mid-1990s, according to data from PricewaterhouseCoopers and the National Venture Capital Association. The amount of funding in the second quarter dropped more than 50% from the year earlier period, landing at 612 investments worth $3.7 billion.

Yet entrepreneurial activity can remain vibrant even in downturns. A June study by the Ewing Marion Kauffman Foundation, a Kansas City group that promotes entrepreneurship, found that periods of unemployment trigger individuals to launch their own ventures instead of applying to corporate jobs. These days, like Mr. Conway, they are needing to find alternative paths to reach investors.

After his success with DreamIt Ventures, Mr. Conway applied to be a contestant on ABC’s Shark Tank, a television show that gives entrepreneurs a chance to pitch to investors and vie for their money. Through the show, which aired Notehall.com’s episode last week, Mr. Conway landed the company an additional $90,000 after agreeing to give up a 25% equity stake. “The last two weeks have been crazy,” says Mr. Conway, who says he hopes for the company to reach 30 colleges by the end of the year.”Everyone is emailing, wanting to partner with us.”

Marc Fienberg, head of Story Films Inc., a production company in Los Angeles, also found his enterprise wasn’t garnering much respect from the venture capital community. So he tapped some acquaintances from his days at Northwestern’s Kellogg School of Management and proceeded to network for about three years.

“I quickly realized that to do this, I’d have to reach outside my comfort zone,” he says. “There was no room to be shy or humble.”

In total, Mr. Fienberg says he pitched to hundreds of contacts, many of whom scoffed at the idea and told him he was wasting his time. But eventually he found 17 people—made up primarily of Kellogg alumni—who were interested. He flew to meet each in person.

From 2007 to 2009, Mr. Fienberg says he secured between $1 million and $5 million. His company’s first film, “Play the Game,” recently landed in theaters and has grossed about $500,000 in box office sales.

In this economy, entrepreneurs need to work even harder and put more effort into thinking outside the box, says Bo Fishback, vice president of entrepreneurship at the Kauffman Foundation.”Smarter entrepreneurs are looking to put more sweat equity into the company, not magic $100 bills.”

Mr. Fishback is seeing a trend of more innovators competing online at NineSigma.com and InnoCentive.com. Large companies post challenges on these sites and award money to the winning inventor or problem solver.

Small projects from large companies can be lucrative. That’s what William Volk found out after he joined a start-up called MyNuMo LLC, a company that produces games for smart phones. In 2008, he reached out to a venture capital firm that had invested in a company where Mr. Volk had previously worked. “I thought for sure we would get it because I had a track record,” says Mr. Volk. But he wound up losing to a competitor seeking capital from the same firm.

Given his background in programming, an undeterred Mr. Volk contacted several companies to see if they’d be interested in a custom smart-phone program. “We were using those smaller projects to keep us going,” he said. The projects financed the research and development for MyNuMo’s game applications, which are now available online and as mobile-phone applications.

Revenue is expected to hit $1.5 million this year. “We managed to create a higher number of titles than our well-funded competitors,” Mr. Volk says.

The Center for Venture Research has provided the following report regarding the deal flow of Angel Investing for 2008.

Jeffrey Sohl, “The Angel Investor Market in 2008: A Down Year In Investment Dollars But Not In Deals”, Center for Venture Research, March 26, 2008

Market Size
The angel investor market in 2008 had a considerable contraction in investment dollars from last year but exhibited little change in the number of investments.  Total investments in 2008 were $19.2 billion, a decrease of 26.2% over 2007, according to the Center for Venture Research at the University of New Hampshire.  However, a total of 55,480 entrepreneurial ventures received angel funding in 2008, a modest 2.9% decrease from 2007, and the number of active investors in 2008 was 260,500 individuals, virtually unchanged from 2007.  The significant decline in total dollars, coupled with the small decrease in investments resulted in a smaller deal size for 2008 (a decline in deal size of 24.0% from 2007).  In contrast to venture capital, in which money must be invested during the life of the fund and is in part based on the size of the fund, angel investing is an individual decision and angels invest from their net worth.  These data indicate that while angels have not significantly decreased their investment activity, they are committing less dollars resulting from lower valuations and a cautious approach to investing.

Sector Analysis
Healthcare Services/Medical Devices and Equipment accounted for the largest share of investments, with 16% of total angel investments in 2008, followed by Software (13%), Retail (12%) and Biotech (11%).  Industrial/Energy accounted for 8% of investments, reflecting a continued appetite for green technologies, and Media (7%) rounds out the top six investment sectors.  Retail and Media have solidified their presence in the top six sectors, mainly due to a continued interest in social networking ventures.

 Sector Healthcare  Software  Retail  Biotech Industrial/Energy Media
 Deals  16%  13%  12%  11%   8%  7%

Return Rates
Mergers and acquisitions represented 70% of the angel exits, and IPOs 4%, in 2008.  Bankruptcies accounted for 26% of the exits.  Annual returns for angel’s exits (mergers and acquisitions and IPOs) were 22%, however, these returns were quite variable.

Stage
Angels have maintained their position as the largest source of seed and start-up capital, with 45% of 2008 angel investments in the seed and start-up stage, a slight increase of 6% over 2007.  Angels also exhibited an interest in post-seed/start-up investing with 40% of investments in this stage, also an increase from 2007.  Expansion stage investing (14%) showed the largest decline.  New, first sequence, investments represent 63% of 2008 angel activity, unchanged from the last two years, indicating a continued preference for new, as opposed to follow-on, investments.

Yield Rates
The yield (acceptance) rate is defined as the percentage of investment opportunities that are brought to the attention of investors that result in an investment.  In 2008 the yield rate was 10%, continuing a decline in yield rates that began in 2005 (23% yield rate).  This reduction in the yield rate indicates a cautious approach to investing, reduces the concern of an unsustainable investment rate, but also reflects an increased difficulty for entrepreneurs to secure angel funding.

Women and Minority Entrepreneurs and Investors
In 2008 women angels represented 16.5% of the angel market.  Women-owned ventures accounted for 15.7% of the entrepreneurs that are seeking angel capital and 9.5% of these women entrepreneurs received angel investment in 2008.  Thus, while the number of women seeking angel capital is low, the percentage that receives angel investments is in line with the overall market yield rate.  These data indicate that when women do seek angel capital they fair well, but the need is to increase the number of women entrepreneurs that seek angel capital.

Minority angels accounted for 3.6% of the angel population and minority-owned firms represented 3.7% of the entrepreneurs that presented their business concept to angels.  The yield rate for these minority-owned firms was 11.3%, which for the second straight year is in line with market yield rates.  However, the small percentage of minority-owned firms seeking angel capital is of concern, as is the sustainability of the yield rate.

The Center for Venture Research (CVR) has been conducting research on the angel market since 1980.  The CVR’s mission is to provide an understanding of the angel market through quality research. The CVR is dedicated to providing reliable and timely information on the angel market to entrepreneurs, private investors and public policymakers.

The Center for Venture Research would like to thank all the angel groups and individual angels that participate in our research efforts.  The response rate for this survey was 35%.  The Center for Venture Research also provides seminars to angels and entrepreneurs, and research reports on aspects of the angel market are also available.  For more information visit http://www.unh.edu/cvr or contact the CVR at 603-862-3341.

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Kings Island Halloween Haunt tonight – ghouls, zoombies, . . . and lots of kids (now that’s scary!)

Investors are hip to “Startup lies” Oct 13, 2009 When marketing their start-ups, entrepreneurs will naturally seek to put their companies in the best possible light. Investors are a cynical lot, however, and there are a number of “red flags” which every potential investor unconsciously listens for in elevator pitches, business plans, and executive presentations, notes Martin Zwilling, CEO and founder of Startup Professionals, Inc., and managing partner of Southwest Software Ventures and Consulting. He offers a list of ‘Ten Start-up Lies,’ “not to impugn the honesty and integrity of entrepreneurs, but maybe to curb your natural over-enthusiasm that might detract from your impact.”