When Convertible Notes Make Sense for Consumer Companies

Great piece by Ryan Caldbeck, CEO of crowdfunder CircleUp, on using convertible debt to grow early stage consumer product companies.  Shorter version: It helps defer valuation conversations when you have solid revenue, but the current revenue does not reflect the company’s potential.  For the full article, click here.

If you are interested in investing in early stage consumer product companies, I highly recommend CircleUp.  They have a number of great investment opportunities.

SEC Lifts the ban on general solitication. What does it all mean?


It’s really just removing the first of two obstacles that stand in the way of crowdfunding.  The 2nd obstacle, which could get lifted later this year, would be to lift the accredited investor restriction.  At that point, private companies could raise equity by advertising to a wider audience through crowdfunding websites such as www.CircleUp.com and www.Fundable.com.  This will make it easier for small businesses to raise the capital needed to grow and stimulate the economy, but it could also open the door to fraud and high-risk investments.  What do you think will be the impact of crowdfunding?  

Can your business pivot?

streetballblogLike a basketball player who keeps one foot planted while spinning on it to explore different directions, companies pivot by staying grounded in what they’ve learned while shifting directions to explore a new customer base or providing different products or services to your existing customer base.  The pivot is a term coined by Eric Reis in his book The Lean Startup and it has gotten a lot of buzz in the startup and growth communities of late.  Nearly every successful company has pivoted on some level and there are many classic examples. Nintendo started selling playing cards before switching to electronic games. Tote was an online clothing catalog before it pivoted and became Pinterest.  So, how do you do it? For starters, make it a topic of discussion in management meetings on a regular basis.

  • Discuss your business environment – your supply chain, your competition, feedback from your customers.  Are there changes on the horizon that will be disruptive to your industry?  They could be opportunities.
  • Brainstorm for ideas on how your company could pivot to improve your position in the value chain, to get a leg up on the competition or better serve your customers.
  • Decide on a course of action and execute it.  Use what you have learned to this point and build on it.  Do not be anchored to things that do not work, but don’t “throw the baby out with the bathwater” either.  Make sure you allocate sufficient resources in terms of budget and training and marketing to implement the pivot successfully.

Being able to pivot is critical for middle market companies.  The good news is, it is easier to do at this stage while everyone is accustomed to constant change.  This makes it easier to pivot without leaving a divot!

Have you pivoted in your company?  Share your story in the comments below.

Photo courtesy of streetballblog.

Business lending: Are you hot or not?

San Francisco Business Times (click here to see full article) reports that “business lending these days is a clear case of the haves vs. the have-nots. The former group has to fight off bankers eager to lend. The latter, which include many small businesses, can’t get a nibble.”


The Ins and Outs of Financial Covenants

Loans generally come with covenants that serve as protections for the lender to ensure that the borrower meets certain levels of financial strength and performance.  There are a variety of ratios or calculations that can be used, but in general they are all designed to predict your ability to repay your loan. The most common types are asset-to-liability ratios such as the current ratio, or income-to-financing costs such as the Fixed Charge Coverage Ratio.  The types of ratios used are pretty standard, but the minimum or maximum restrictions vary and may be open to negotiation.

They are generally reported quarterly to the bank. For internal purposes, they should be reported more frequently and should be forecasted at least two quarters in advance. This will allow time to arrange alternatives in the event that your forecast falls out of compliance with the covenant restrictions.

Covenants are generally designed to change over the life of the loan, and can be adjusted later as well if your situation changes. The loan documents generally contain language that specifically spells out events of default as well as how each covenant is to be calculated. Take the time to study the language so you completely understand it.

In summary:

  • Be aware of the covenants before closing the loan.  That’s the best time to negotiate as much flexibility as possible for your company.
  • Create an easy to use template to calculate the covenants and report them to the bank as required.  Be aware the covenants change over the life of the loan, so build those dates and changes into the template.
  • Build covenant calculations into your financial forecasts.  Predict and internally report covenant compliance at least two quarters in advance.  Graphics and conditional formatting help to highlight potential non-compliance issues.
  • If your business is going through significant changes that may affect your ability to stay in compliance with covenants, consider going back to the bank to attempt to have them adjusted.
  • Understand the events of default, including any events that can occur even if you are in compliance with the covenants, and have a plan in place to deal with it long before you need it.

Those are the ins and outs of financial covenants.  If I left anything out, please add your comments below.


HR1105 to deregulate #middlemarket #PE

H.R. 1105, the Small Business Capital Access and Job Preservation Act of 2013, would allow middle market investors access to capital and exempt investment advisers from having to register with the Securities and Exchange Commission (SEC). Currently under the Dodd-Frank Act, private equity fund managers are subject to time-intensive and capital-constraining registration requirements.

The Association for Corporate Growth (ACG) is in support of this bill.  Their press release is attached here.

Middle Market CFO @cfopub giving away free beer

…related advice. That’s right, free beer related advice about how middle market companies can go toe-to-toe with giant corporations and win.  Consider the case of craft beers.  The number of breweries in the U.S. has more than quadrupled in recent years.  Restaurants that once offered the choice of either American mega-brews or ‘imports’ are increasingly turning to a line-up of craft beers, many of them made in America by middle market breweries.  How are they able to compete with the big companies?

  • Make a better product.  The bland American-style pilsners may appeal to the masses but they leave room for competition.
  • Embrace your underdog status.  Turn their strengths (economies of scale, mass appeal) into weaknesses.  “They spill more than we produce” and what not.
  • Work like hell.  Many successful craft brewers will tell you it was a lot harder than they thought it would be, but it was worth it.
  • Be cool.  Get involved in your community.  Host fun events.  Associate with fun-loving adventurous types, musicians and the like.
  • Use clever marketing tactics, something this blogger knows absolutely nothing about.

Most, if not all, of this free beer related advice applies to middle market companies in industries other than beer.

Poll: Will the #JOBS Act and #Crowdfunding create the next Steve Jobs or the next Bernie Madoff?

The legal restrictions and expenses related to raising capital can be prohibitive for many small to middle market businesses.  The Jumpstart Our Business Startups, or JOBS Act would revolutionize the process of private capital raising through the legalization of “Crowdfunding”.  Although President Obama signed the JOBS Act into law in April 2012, the SEC still hasn’t published the final regulations required for the law to take effect.  The regulations will put a limit on the total amount eligible to be raised ($1 million), the total amount eligible to be sold to any single investor ($2,000 – $5,000 for investors with a annual income and net worth below $100,000, or up to $100,000 for wealthier investors). The issuers will need to file with the SEC and provide the investors with certain disclosure information and the transaction will need to be conducted through a broker or funding portal that complies with the SEC requirements.

The JOBS act will make it easier for small to middle market businesses to raise capital which will jumpstart innovation and job creation.  It will also open up new and potentially very lucrative investment opportunities to unaccredited investors.  On the flip side, these investments are risky and require a level of financial sophistication to evaluate so the JOBS act could result in unaccredited investors getting ‘swindled’ out of money they can ill afford to lose.