September 2008 Archives

 Hennessey Capital focuses almost exclusively on working capital finance including working capital lines of credit and factoring. They target "pre-bankable" companies that do not yet have the track record to qualify for bank financing. In this context, the question arises as to how Hennessey assures themselves of the collateral value of these companies' working capital assets. Mike Semanco, President of Hennessey, provides the following insights:

• Often, pre-bankable clients do not have the systems in place to track performance of things like receivables. Hennessey has these systems, and with the client's help uses them to gain a more accurate view of the client's business.
• Once Hennessey has been tracking performance of various assets, it can adjust the terms under which it offers financing to clients. If the assets perform more favorably than anticipated, the financing terms can become more favorable.
• A major issue for firms in Fall 2008 is access to capital. Due to its tracking systems, Hennessey is able to serve a wider client base than most banks.
• Hennessey makes its loans using its own capital as well capital provided by other financial institutions.

We continue our discussion with Terry Cross on angel investing with an explanation of the kinds of risks he is most sensitive to. For the most part, there is not a set of pat answers. Terry wants to see that company management has thought of potential points of failure in their business plan. Common ones include:

• Missing initial sales forecasts by a substantial period of time.
• Unfavorable changes in the cost of sourcing.
• Distribution strategy failing to deliver.

An area of particular focus is intellectual property. Often, it is the only real asset the firm possesses. Because provisional patents are so easy to obtain, Terry has no real regard for them. He prizes full patents and, in some cases, trade secrets more highly.

The Michigan Pre-Seed Capital Fund is targeted at early stage technology companies that need in the hundreds of thousands of dollars. As Skip Simms, the fund's manager, explains:

• The maximum investment the fund will make is $250,000.
• The fund is a matching fund. Its contributions will always be less than or equal to those of outside investors. These investors might include angels, venture capitalists, or friends and family.
• The motivation for creating the fund came after the collapse of the first Internet bubble when angels and venture capitalists demonstrated hesitancy to invest in early stage ventures that were still trying to prove their business concept.
• People interested in the fund should apply through the nearest Michigan SmartZone where it is first reviewed. The application then goes to Skip Simms who presents it to the fund review board consisting of angels, venture capitalists, and service providers.

Additional links

• One reason that venture capitalists might be hesitant to invest in early stage companies is pressure from their own investors seeking high rates of return over a fixed time horizon.

 In this segment, Bill Koehler and Tim Gretkierewicz of KeyBank detail the services KeyBank offers to small and medium sized businesses. These businesses may range in sales from just starting up to $20 million.

Often, while potential clients are aware of their own financial needs, they do not really understand how the bank might view their situation. For instance, would the bank issue a line of credit against accounts receivable or seek a mortgage on a piece of property. Essentially, banks are risk averse and make sure there are adequate assets to secure any loan.

Equity tends to be a less risk averse form of finance. KeyBank has the capability to make equity investments through its venture capital branch. It can also act as an agent, putting together groups of investors.

As explained by Mike Semanco, president of Hennessey Capital, factoring can be thought of as mini loans against invoices. As such, factoring is another way to finance the day to day money you need to run your business, otherwise known as working capital.

When might you turn to factoring?

• You have a customer who pays in 60 days when all your others pay in 15. You want the money that customer owes you sooner.
• You have a few slow pay invoices that you need to collect on.

Factoring is a more expensive form of finance. The cost of financing decreases as the assets used to secure loans improve and as the company seeking the loan gains a better track record.

Additional links:

• Charlie Penner of the SBTDC explains the difference between debt and equity financing.
• This commercial hosted on YouTube gives another take on factoring.

 Steve Warrington operates a web content business that he monetizes through affiliate marketing. As described in our last segment, Steve initially stumbled into this business trying to publish an ebook on mortgage finance and realizing he could make much more money giving the content away for free and placing ads next to it. In this segment, Steve describes how he has systematized these business practices as he has opened new content areas:

• He now discovers new content, assesses the opportunity it presents, and creates content.
• Once a content area shows promising results, Steve hires outside people to manage the sites and post content. His main sources for additional personnel include:
  • elance.com
  • Get a freelancer
  • scriptlance.com 
• Steve focuses his content creation efforts toward the "long tail" of organic search:
  • Organic search refers to the part of search results that are not influenced by advertising, in other words, the search results that are not labeled as sponsored links. Although it takes considerable time investment to do well in organic search results, you do not have to pay per click as you do with sponsored links.
  • The long tail refers to low volume search terms where there is not a lot of competition. On the order of 60 to 70% of searches occur using these terms. It is much easier to appear high in search engine results for long-tail search terms, although more of these terms are required to generated adequate visits.

Steve refers to this process as "automating" his work. What he is really doing is taking advantage of his contributors inputs into a well defined system designed to work in the search engine ecosystem.