October 29, 2012

State of Alabama
Press Release: Alabama Department of Commerce

Shedding Light on Unconventional Funding Paths

October 24, 2012 


Karen_klein By

Shedding Light on Unconventional Funding Paths

Photograph by PIER/Getty Images 


Aspiring entrepreneurs often hope to convince wealthy individuals to buy stakes in their nascent ventures. With angel investors putting $9.2 billion in U.S. companies during the first half of 2012—up 3.1 percent over the same time period last year, according to a study (PDF) by The Center for Venture Research at the University of New Hampshire—who can blame them?

Trouble is, the report shows that half of angel money goes to just three categories: medical devices, software, and biotechnology. To glean would-be entrepreneurs’ ideas about other fundraising sources, I spoke to the founders of three startups. One got a loan from a micro-lender. Businesses such as Microsoft (MSFT) chipped in technology and services for the second. The last founder did manage to get rich folks to bet on her by joining a network that supports women who run promising growth businesses.

The “Octocopter” Guy

Last year, when Josh Lambeth tried to get banks and angels to back his plan to start Arizona’s first aerial-photography company, which would use a small, remote-controlled “octocopter,” he struck out. So the 25-year-old Phoenix man, whose day job is shooting school photos, turned to a micro-lending group that is part of Accion U.S. Network, a national nonprofit. A credit supervisor at the group, Metta Smith, says it makes loans up to $300,000 and the average loan size is $10,000. She notes that its entrepreneurs typically cannot get traditional bank loans: About 60 percent are low- and moderate-income borrowers and 40 percent are female.

Josh Lambeth, right, with his partners, Darren Ito and Noel Lucas, and their 'octocopter'

Josh Lambeth, right, with his partners, Darren Ito and Noel Lucas, and their 'octocopter'

With an $8,000 loan from Accion and $6,000 in savings, Lambeth bought the octocopter and founded Birds Eye Productions in March. In April, Lambeth got his first paying gig, swooping the copter over a college campus for a student recruitment video. Since then, he’s shot stills and video for commercials, feature films, and corporate clients and has been doubling up on his Accion payments, hoping to repay the 24-month loan early.

The Online Merchant Funders

Atlanta-based Kabbage, which provides inventory financing for sellers on marketplaces such as EBay (EBAY), Amazon (AMZN), and independent online stores, has 75 employees, has raised $56 million, and expects nearly $10 million in revenue this year, according to Co-Founder and Chief Executive Officer Rob Frohwein. When it launched in late 2008, “we were told we had a crazy idea, so we had no success” from venture capitalists, he says.

Frohwein was able to get technology and services worth about $200,000 in exchange for equity stakes in the venture by traveling to several vendors’ offices, relying on introductions from early employees, and pitching them just as he would angel investors. He also used Microsoft BizSpark, a program that provides free software-development tools to startups. Frohwein estimates that the technology was worth more than $100,000 to Kabbage during its early days.

“You need to be able to convince [vendors] that you’re worth making an investment in,” he says. Having that vote of confidence from vendors not only made it possible to get his system up and running, it lent credibility to his efforts. “We could then go back to private investors and show them how our partners had invested in us,” he says.

The Pediatric Chiropractor Tackling Autism

Joan Fallon, a pediatric chiropractor from Bronxville, N.Y., started Curemark in 2004 to develop a new drug that treats symptoms of autism. “I’m not a business person, but I did a lot of work with children with developmental problems and I saw there were some symptomatologies that weren’t being addressed,” she says.

Not only is drug development time-consuming, complicated, and loaded with regulatory hurdles, it’s also incredibly expensive. For instance, Curemark has applied for 48 patents, spending millions to do so. When Fallon went to raise money to fund her research, she found that “traditional VCs have no interest in autism. We talked to them, but they’re much more comfortable funding me-too drugs than disruptive technologies.”

Seed money from friends and associates got her started, but it was Springboard Enterprises, a nonprofit that connects women entrepreneurs with investors, that made the difference. She did presentations at Springboard events where she began meeting private investors. Those individuals introduced her to others; over eight years, she has raised $30 million from more than 100 individuals and companies, she says.

Fallon says a series of clinical trials at 18 clinics and hospitals around the country showed positive results and she is hoping to submit Curemark’s autism treatment for FDA approval in 2013. Raising money outside the traditional approach of pitching venture capital firms isn’t easy, she says: “I squeezed every penny into a dollar by making sure everything we did was very, very efficient, without cutting any corners.”

Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

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