While browsing through earth2tech’s daily roundup of headlines for green startups we came across a couple of stories about startups receiving “Series A funding,” which made us think about the many ways to finance new businesses. Getting an idea from A to Z requires money, often from an outside source (if you can get any these days). Outside money typically comes in the form of bank loans, a sale of securities (often called a “private placement of securities”), venture capital or government financing, or a combination of any of those. We’ll generally go over those options in this post, and discuss some resources available to Oregon companies. Owners of new companies should keep in mind that financing often involves issuing “securities” as that term is defined under state and federal laws. We’ll post more about complying with securities laws soon, and we’ll make sure to link back to this post.
Loans
Banks traditionally have played the main role in supplying capital to new businesses, especially through loans. Just as consumers seek to build up credit histories through credit cards, home and auto loans, new businesses build up their credit with short-term, working capital bank loans. Banks usually require that their loans are secured by accounts receivable or inventory, and guaranteed by the shareholders (or unitholders in the case of an LLC). As credit history is established, a bank may offer long-term loans or other forms of financing like inventory and accounts-receivable financing, or even venture capital, which we’ll discuss after the next form of financing.
Private Placement of Securities
A private placement is another way of saying that a company is selling securities — most often stock, in the case of a corporation, or “units” in the case of an LLC, to raise money. The sale of securities can be a complicated process, even for small, privately-held businesses; owners who choose to offer or sell securities must be very careful to comply with state and federal securities registration and disclosure requirements, which can be ambiguous and unclear largely due to inconsistent judicial and administrative interpretations. Raising outside capital through selling securities is, therefore, a fact-intensive and advanced financing method.
Venture Capital
Venture capital typically consists of large amounts of money invested by wealthy companies (sometimes individuals) in fast-growing companies by purchasing and then quickly selling shares in those companies. It’s an exclusive form of financing reserved for businesses in rapid growth industries (think the tech boom of the 90’s) that already have made a lot of money — and anticipate making a lot more — and are on their way to an initial public offering (IPO). Venture capital is largely dormant at the moment, because there is little, if any, rapid growth. Some, including venture capitalists themselves, are speculating that green energy technologies (so-called “green tech”) may be the next rapid industry sector, especially considering the Obama administration’s call for a new green economy. If that’s the case, Oregon appears to be in an ideal position, judging from its strengths in solar manufacturing. One local resource that connects venture capitalists with growing companies is the nonprofit Oregon Entrepreneur’s Network.
Government Financing
The largest source of government financing for Oregon companies is through the federal Small Business Administration (SBA). The SBA runs two financing programs geared specifically towards high-tech start-ups, an area in which Oregonians seems to excel. More information about those programs can be found here. A multitude of federal government financing options exist; more information about them can be found here. Some Oregon companies may be fortunate enough to qualify for the financing through the local and State programs, most of which are operated by the OECDD. Emerging companies, especially those commercializing technology, may be eligible for funding through the Oregon Growth Account, a privately managed state account that was created in order to provide seed capital to the State’s emerging growth businesses. We haven’t covered everything here, and would be interested in finding out what other forms of government financing exist for Oregon companies.
So What is Series A Funding?
Well, the answer depends on the company. Corporations can issue different classes of stock; often the classes receive different labels, such as “A”, “B”, “C” etc. The classes give their investors different rights and obligations, such as voting vs. non-voting shares. The rights and obligations of each class are defined in each corporation’s articles of incorporation (at least that’s the case in Oregon). So Series A funding consists of investments in a particular company in exchange for that company’s series A stock.
Tags: financing, green business, Securities, startups
[...] (SBA) plays a significant role in providing financing to start-ups, as we wrote in our recent Financing Startups post, but also plays an advisory role in business planning, networking and training. One of the [...]
When I went to start my first business I had no idea on how to get funding. Once I started digging around I found lots of sources that were willing to give someone like me a chance to start a business.
Now that we have the internet to conduct research the task of finding funding is much simpler. But some common sense is needed since there are lots of scams out there on the net.