NEWARK – Three leading Delaware entrepreneurs and a major venture capital advisor recounted their journeys in raising capital to grow their businesses in the latest panel discussion sponsored by the Small Business Development Center and Delaware Business Times.
It has long been said that the lack of venture capital firms in and around Delaware hurts the exposure and network needed to grow startup companies. For these four entrepreneurs though, it has been far from a death knell, as other funding options exist and the world is changing.
Mac Macleod, the CEO of Carvertise, a fast-growing advertising business that utilizes rideshare vehicles wrapped in ads, recalled getting his company off the ground with co-founder Greg Star after starting it while at the University of Delaware.
The marketing major developed the idea while setting up tables as a waiter on Main Street in Newark one day and seeing a Red Bull branded car drive by.
“I thought the Red Bull car was outstandingly branded, and I fell in love with this concept of using high-mileage, everyday drivers to participate in the opportunity,” he said.
Macleod and Star bootstrapped the start of their business by handing out fliers at local venues and shopping centers to entice enough drivers to make it worthwhile for advertisers.
They met their first angel investor – who knew about vehicle wrapping – after networking through local business events and pitch contests.
In 2014, they were hanging out at The coIN Loft, a former Wilmington coworking space, when they met a leasing manager for Buccini/Pollin Group. He connected them with co-founder Chris Buccini, who invested in the fledgling startup – Macleod recalled that the developer was particularly interested that he then lived in Wilmington’s Trinity Vicinity neighborhood.
Their third angel investor, Wilmington developer Paul McConnell, reached out after seeing the young entrepreneurs at events around the city.
“The difference between angel investors and venture capital firms is they’re betting on you as a person,” Macleod said. “An angel investor is somebody who is affluent enough to be able to afford a very high risk situation of saying this guy or this gal definitely does not have figured it out, but I’ll give you $50,000 while you figure it out.”
Pedro Moore, a venture capital advisor who works with investor Draymond John, a star of ABC’s “Shark Tank,” and the founder of the University of Delaware’s Entrepreneurship Club, agreed with Macleod. He noted that for investors of all types, a personal connection was as important as any pro forma.
“Sometimes you may be able to get an investor over that line simply because of your character,” he said. “As an investor, we’ve got to do our best to almost read your mind, to read their character and their intentions; and the more we trust you, the better we feel.”
The good news for those in the First State is that the community here is very good for angel investors with many high net wealth households, Macleod said.
“There’s a lot of affluence in certain areas; you’ve got to be aware of where it is, but it’s accessible. It’s not in ivory towers,” he said, noting networking at major chamber events is an effective tactic.
For those who don’t find angel investors, there are still traditional paths to capital including convertible notes and simple agreements for future equity (SAFEs), both of which act as a loan in exchange for the promise of future equity, although a convertible note adds interest while SAFEs do not.
Nicole Homer, a co-founder of the Wilmington-based sports science company Hx Innovations, noted that East Coast investors don’t tend to be as interested in SAFEs, in part because they aren’t considered debt and don’t have to be repaid in the event of liquidation.
“We want to know what to expect, and a SAFE doesn’t give you that type of security as an investor,” she noted. “It is important that you have an attorney who is for you, because there are certain clauses within those notes that will determine when you get your cut of the pie.”
Nick Martin, co-founder and chief operating officer of Carbon Reform, a carbon capture technology company targeting the commercial real estate sector, said the startup utilized two rounds of SAFEs with friends and family, and a convertible note before seeking venture capital in a Series A round.
“We were not ready for a price round, so that’s when the convertible note made sense. It gave us about another six to nine months to get ready, to actually have all the milestones met to go for our Series A,” he said, advising that entrepreneurs should expect some hiccups in the early days. “Raising your first venture capital is like construction on your house, it takes 50% longer than you expected and it’s 50% more expensive than you expected.”
Martin noted that the growth of venture capital funds connected to established businesses – one under Exelon invested in Carbon Reform – have helped to even the playing ground for companies outside of traditional innovation centers like Silicon Valley or Boston.
Macleod noted that entrepreneurs shouldn’t see raising venture capital as a milestone for their business though. It should be done for a specific purpose and only for companies that see a path to $100 million in annual sales.
“It’s got to be big enough where it is worth investors risking an investment in your company. It’s got to be a way higher return than a 10-year Treasury note,” Macleod said.
