Over the years I’ve received hundreds of emails from entrepreneurs complaining about banks not lending them money on their business plans. I just got another one this morning, and when I searched this blog I couldn’t find a post to cite as an answer. So here it is, today:
Banks can’t lend you money on your business plan. It’s against the law. They’re supposed to protect their depositors’ money by demanding collateral, credit history, and low risk. And startups are high risk.
Bankers are good and bad, smart and not-so-smart, liberal and conservative. Sure, some just follow rules and fill forms; but I’ve known some smart innovative bankers. Just as an example, one of the senior officers of a local bank is also a fellow member of the Willamette Angel Conference, meaning that he invests his own money in startups – his own money, not the bank’s money.
Banking laws have discouraged banks from investing in your startup since the Great Depression of the 1930s, when lots of banks went under. You have to have some assets – like your house equity – and you have to risk losing them. And if your credit rating is bad, that’s your fault and not the bank’s, but it does make it harder for the bank to lend you money. And that means that you can lose your house.
Yes, there are exceptions to these rules. For example, The U.S. Small Business Administration (SBA) can guarantee portions of a commercial loan so you don’t have to. For that, ask your bank; those loans are managed by commercial banks.
Today’s a good day to post on my angel investment experience, because this afternoon I’ll be speaking to a group on this subject in Corvallis, Oregon. What I want to do is just describe how it went for me, one set of eyes, one viewpoint, without making any generalizations about the rest of the world of angel investing.
Last February I joined Willamette Angel Conference (WAC), an angel investment group in the southern Willamette Valley, including Eugene and Corvallis. Here’s what happened.
It started for me with the discovery, in early February, that the buy-in price was $5,000 plus $250 in fees. I always thought of angel investment as a matter of putting $50K or $100K or more into a startup. But I could manage $5K.
The group entity was an LLC of which every member had shares depending on how many $5K shares he or she signed up for.
I had to certify that I’m an “accredited” investor. Nobody audited my books or anything, but I did have to sign a paper guaranteeing that I met the Securities and Exchange Commission (SEC) guidelines. Details of that here. The point is that this is a very risky investment, and you have to be able to just plain lose that money.
I got access to Angelsoft.net for the WAC group. There were 43 potential investments submitted to the group by late March.
We – about 25 members, each of whom had at least one $5K share in the group — met in the evening every Monday in April. In our first meeting we narrowed the 43 plans to 13 (we had aimed for 15, but there was a natural break at 13). In the next two meetings, we studied the 13 remaining plans. We listened to pitch presentations by the entrepreneurs, and asked questions. We divided into smaller teams to visit their offices, if possible, and talk to them. In the last April meeting, we chose five finalists, and divided into groups, again, to look at them in more detail.
In a last evening meeting in early May, we shared additional information on the five finalist companies.
At an all-day event in middle May, we heard presentations again along with an audience of several hundred people, and voted a winner.
My wife an I now have a small equity share in CenterSpace Software, of Corvallis, the winner we (the investor group) chose.
From my point of view, as someone who’s raised VC money for my own company and been on the board of a company that raised VC money and went public quickly, has taught entrepreneurship and consulted to VCs, and has mentored a lot of startups, and judged business plan competitions, it was an extremely satisfying role reversal to sit on the investor side of the table. I enjoyed the meetings thoroughly. I read the business plans, paid attention to the pitch presentations, asked questions, and enjoyed meeting and working with the other investors. This was all good.
I liked this experience so much that this autumn I agreed to be investor chair for next year’s version.
If this sounds interesting to you, look for local angel investment groups in your area. Ask your Chamber of Commerce. Browse the Web. Go look at Angelsoft.net.