Terms like Zoom and Slack, for example, have taken on entirely new meanings since the COVID-19 crisis shuttered much of America, while fintech and cybertech are growing even more important to our fragile 2020 economy. However, these tough times are sparking innovations and creating opportunities upon which savvy investors are seeking to capitalize.
Key for high-tech startups and fledgling companies, of course, is seed money, sufficient investment capital and an influx of money to maintain cash flow – especially as battered regional, national and global economies seek to regain footing.
“So No. 1, we’re going to come out of this,’’ says an optimistic Mario Casabona, founder and managing director of TechLaunch LLC & Casabona Ventures LLC in Kinnelon. “Whether it’s going to take six months, a year, 18 months … your guess is as good as mine.”
Casabona and other angel investors and venture capitalists are currently focused on protecting existing investments; ensuring firms in their portfolios have enough cash to endure the crisis. New high-tech investments have slowed, he says, but cautious investors with money on the sidelines are biding their time.
“There are going to be some opportunities out there with companies that we may like that have a lower valuation at this point,’’ predicts Casabona.
In typical times, high-tech startups seeking capital generally look to angel investors, who put up their own capital in promising firms, or money from venture capital (VC) firms in return for equity in their fledgling businesses. Some high-tech entrepreneurs get off the ground slowly by “bootstrapping’’ – using their own extra cash and perhaps some contributions to gain a market foothold. Traditional banks, which require collateral in hard assets or proven revenues, generally are not options at early high-tech business stages.
“VCs and angel investors get them to that place where they can even start to have a conversation with a bank – either for a loan or for an equity investment,” says Rahul Baig, a managing director in Wells Fargo’s technology banking group responsible for venture capital. “You need to show that it works.’’
Some banks like Wells Fargo are increasingly interested in potential partnerships with high-tech companies that can assist the bank with cutting-edge fintech services and vital cybertech security measures.
“Wells Fargo and other banks … have an overarching goal to be a technology company that is also a bank, driven in large part by our consumer and corporate base that expect more services in a digital environment – exaggerated and accelerated by the current coronavirus crisis,” Baig explains
For Baig, this translates to strategic investments by Wells Fargo “in companies at an early stage whose services can lead us to that goal of becoming a technology company. … It’s the whole notion of collaborating with the disruptors.”
A key goal, explains Baig, is finding companies that already have had some commercial success and “marry our priorities” to enhance the bank’s services and operations.
Dan Borok, co-founder and managing partner of Newark Venture Partners (NVP), puts the concept “that venture capital-backed companies are able to grow quickly and create a lot of jobs” to work in New Jersey’s largest city. He says his team believes such efforts have greater economic impacts in cities like Newark, Detroit and Baltimore, than wealthier hubs like New York, Boston and San Francisco.
“We think that Newark is a great city in a lot of different ways,’’ Borok explains. “It has a fantastic community. It’s a transportation hub. It’s the point of entry into the rest of New Jersey, where there are a lot of companies. And it has a lower cost of business operations than 10 miles away in Manhattan.’’
Part of Borok’s firm, NVP Labs, runs an accelerator program in Newark to help very early stage, promising high-tech firms gain a toehold toward viability. Support comes from experts with marketing, sales and communications expertise, or who can develop financial models and help obtain the next round of capital investment.
“We bring people who are functional experts,’’ Borok says.
NVP labs also offers free office space for these companies in a Newark building. Borok’s team focuses on enterprise software that can make a difference in areas like healthcare, education and the transportation infrastructure supply chain.
“We see a lot of opportunities to invest in companies that, in the next five to seven years, will be part of this change in how technology is used to track and create transparency in goods delivery in the market,’’ Borok says.
So, what does Borok’s team look for in a high-tech startup? He says “product market fit’’ is the key yardstick.
“What we’re really looking for is software that’s meaningfully changing an important part of the market,’’ says Borok, adding the makeup of a startup’s team also is important.
It’s much the same blueprint for Casabona, an electrical engineer turned entrepreneur turned angel investor who primarily seeks investments in tech sectors that can provide near-term returns – three to five years, hopefully.
“I really look at the team. … The main thing is that they’ve worked together and that they understand the market,’’ Casabona says. “They’ve got to be smarter than I am in that particular industry.”
Casabona has a simple outline for how high-tech startups can get his attention. It starts with a one-page executive summary – all the better with a referral from someone he trusts. If it piques his interest, he requests an investor-type pitch deck of 15-17 slides and perhaps a 30-minute videoconference.
Most high techs Casabona invests in are seeking between $250,000 and $1 million. He writes checks for $25,000 to $100,000 for initial investments and turns to his network of fellow angels when more is needed. At times, he syndicates large investments.
“There are so many smart people out there. It’s just amazing on the innovations and the ideas they come up with. And they’re all great ideas,’’ Casabona says. “The only question is which one is going to give us a return on investment.’’
Casabona quickly adds it almost doesn’t matter, since he gets “a learning experience” about potential tech developments even if he opts not to invest.
Having started a company by “bootstrapping’’ himself, Casabona mentors entrepreneurs to develop a prototype that earns some revenue. This translates to a higher valuation and relinquishing less equity to investors.
Borok, meanwhile, stresses entrepreneurs are getting more than money by giving investors minority ownership via such deals.
“The good news is, hey, you have some capital, and you have a partner. So, I don’t think a lot of companies think about it as giving up control,’’ he says.
“Now, they have a thought partner,’’ Borok adds. “They want that expertise. So, there’s a real deep connection between capital from venture capital firms and the expertise that goes along with the capital.’’
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