By Sharon Fisher
Unless people are independently wealthy – and sometimes even when they are – chances are that their startup is going to need outside funding at some point.
But all outside funding isn’t the same, and trying to get the wrong kind of funding not only wastes time but can damage the company’s prospects for the future.
Here are some different kinds of funding available for Idaho entrepreneurs, the companies each is best suited for, and examples of Idaho companies that have received these kinds of funding.
Early-stage investment fund
StageDotO Ventures made a splash in 2019 when it moved from Seattle to Boise and announced its intention to create a $50 million venture capital fund to invest in Idaho startups. It has made a number of investments since then.
“We don’t write less than a $1 million check,” said Mike Self, general partner. For that, StageDotO gets some equity in the company, and sets milestones for the company’s success. When it reaches that milestone, the company can get more funding.
StageDotO’s target is investing in people with domain expertise.
“We provide a lot of support to get entrepreneurs to Series A,” Self said. “That’s what our true north is.” Entrepreneurs have a higher chance of success if they can get to a Series A funding round, so that’s the problem StageDotO is trying to solve, he said.
Often, that ends up being tech companies.
“Typically, venture works for companies that can grow to be really big, companies that need capital to achieve their goal,” Self said. Not every company can be bootstrapped, and bootstrapping tech companies can be really difficult, he said.
Idaho companies StageDotO has funded include Crave, FlipRide, PlexTrac, and Sindro.
Regional seed fund
Similar to StageDotO, but perhaps on a smaller scale, is Idaho Capital Ventures, founded in 2016.
“We invest in companies that are pre-revenue or early revenue, we focus on the Northwest, and we focus on businesses that have the potential to scale,” said Paul Judge, managing director, in an email message. “We are not well suited for brick-and-mortar type businesses.”
The company typically funds startups between $50,000 to $100,000, after getting to know the founders and performing due diligence, Judge said.
Idaho Capital Ventures doesn’t typically disclose its investments, Judge said. However, according to published reports, one Idaho company that has received funding is Fitted.
Operationally focused private equity fund
TELEO Capital, which just formed in 2018, has a different model. Its plan is to buy companies or parts of companies from elsewhere, and then move them to Idaho and help them grow bigger, perhaps by putting one of TELEO’s partners in as chairman of the board or CEO, said Robb Warwick, one of three managing partners.
“Greater than 60% of the companies we buy are what we call corporate carveouts,” Warwick said. “We’re going to be buying forgotten products, forgotten divisions of public corporations, that as strategies change, they look to exit out of these companies. Many times, they don’t have a headquarters,” which is why they’d be suitable to move to Idaho, he explained.
In October 2020, TELEO started raising funds for this purpose, and accumulated $250 million. “We’re about 40% invested right now,” Warwick said, including one business that will be moving to Idaho when it closes, and one, which has to do with call centers, that first has to move its corporate headquarters, because it doesn’t yet have one.
That said, TELEO did bid on one Idaho company that Warwick said “we were all very excited about,” which he said he couldn’t name because he’d signed a non-disclosure agreement. The company had been in business for more than ten years and was starting to hit its stride, but needed investment capital and operational help, he said. Plus, there will be “some news in the next two or three months,” he hinted.
Like TELEO, Galena Capital Partners — which managing partner Bill Benjamin describes as the only investment bank in Idaho — doesn’t work too much with startups per se. “We tend to play more in the growth stage, the late part of development,” he said. “We’re helping companies position themselves, look for what questions to expect, how to articulate the company story, and connect that story to the financial model.”
That’s not to say Galena never works with startups, but that tends to be more of a pro bono effort, Benjamin said. The institutions Galena represents can’t do too many small deals because it’s too difficult for them to manage a portfolio. “At an institutional level, they want to be helpful in terms of facilitating the company’s growth,” through introductions to potential partners, clients, and its advisory network. “They can’t do that with hundreds of small companies.”
Galena doesn’t take principal positions itself, but advises companies and connects them to investors and acquirers, Benjamin said. Investors could be debt providers rather than taking an equity position, he said. “They’re not putting their money at risk unless the company fails.”
Most of Galena’s work is on the merger and acquisition side, Benjamin said. “We’re working with three different companies right now, and potentially two more right behind them,” he said. He wasn’t able to name them but said they spanned from medical devices to specialty manufacturing to the agriculture industry. Galena Capital helped Melt raise capital to support its growth, in the form of a Convertible Preferred Note. Galena is also raising money for an Idaho company in the energy space, he added.
In comparison, debt-based funding is best suited for companies that are producing some revenue but don’t expect the mammoth growth of a tech startup. One organization that provides such funding to Idaho entrepreneurs is MoFi, a community development financial institution formerly known as the Montana & Idaho Community Development Corp.
This kind of funding is best suited for “nearly bankable businesses,” businesses that can almost get a bank loan on their own but can’t quite make it due to a lack of assets or cash, and that can’t or don’t wish to attract equity, said Dave Glaser, president.
“Often, the businesses that we fund are smaller and have much smaller growth potential, whereas someone seeking angel or venture capital is anticipating fairly significant growth, which is why they’re seeking venture capital,” Glaser said. “That’s ‘patient capital,’ as opposed to ‘impatient capital.’ We’re expecting cash flow.”
And some entrepreneurs don’t realize that and assume they have to look for angel or venture funding. “I can’t tell you how many times people want to start a retail clothing business or a restaurant and they’ve heard about angel and venture capital, and it’s just not suited to that kind of business at all,” Glaser said. “One of the things for a business owner to know is, ‘Am I going to start a Main Street business that will be my business that I’m going to run? I might have some employees, but I’m not going to start the next Kount.’”
About half of MoFi’s loans go to startups, with the average loan size $200,000. For example, MoFi financed Tin Roof Tacos. The goal behind MoFi is for the business to eventually be able to get a standard business loan from a bank.
That’s not to say that MoFi never funds technology companies, Glaser said. Two Idaho technology companies that MoFi has funded include LeanLaw, a legal software company, and Lone Cone, which designs outdoor gear for children.
A similar type of investment is provided by Sage Growth Capital. Sage Growth Capital makes “revenue-based investments” .
“With RBI, the company agrees to pay us a percentage of its revenue until we have been paid back our investment plus a return,” said Kevin Learned, partner, in an email message. “Unlike selling equity, we are non-dilutive to the owners. Unlike a traditional loan, we do not have a fixed monthly payment.”
The advantage of this type of funding is that Sage takes no ownership and requires no collateral, payment depends upon revenue, and the company knows exactly how much the funding will cost, Learned said. The disadvantage is that after a grace period — typically 90 days — the company must start making monthly payments. “However, if the company can deploy the capital to increase its sales, then the additional margin it produces should be greater than the monthly payments,” he said.
RBI can’t be used for pure startups.
“They must have some revenue before we will consider investing,” Learned said. “We require a minimum of 12 months of operating history, and minimum revenue of $300,000 per year, before we will consider investing.”
Sage Growth Capital typically invests between $100,000 and $400,000, up to 30% of sales.
“In unusual situations, we may be able to arrange for greater investment by syndicating the investment to other investors,” Learned said.
Examples of Idaho companies that Sage Growth Capital has funded include Edible Armstrong, which produces the Killer Creamery brand of ice cream; Prosperity Organic Foods, which produces the natural butter substitute Melt; and eTripTrader, which provides software as a service to the airline industry.
“We are agnostic as to the industries we invest in,” Learned said. “But the companies must have a recurring revenue model, must have good margins, and must be able to demonstrate how they will deploy our capital to increase their sales.”
If you think you’re founding the next Microsoft, Guidant Financial Group Inc. is probably not where you’re going to go. But if you’ve always wanted to have your own small business and are ready to work with the Small Business Administration (SBA) or use your life savings to do it, that’s where you’d go.
“The reality is, the way most tech deals are structured, we’re not a good fit,” said Jeremy Ames, cofounder and chief product officer, who opened Guidant’s Boise office about two-and-a-half years ago. “A VC raise, that kind of money is going to put it outside our wheelhouse.” Guidant’s “sweet spot” is generally in the range of $100,000 to $1 million to buy or start a company, he said. Guidant also does SBA loan brokering, where he helps clients package up the documents and shop around for the loan, he said.
Currently, Guidant serves about 8,000 small businesses, about 140 of which are active in Idaho. Due to privacy, he couldn’t name them, but they include a bed & breakfast in Garden City, an RV park in Sandpoint, full-service restaurants in a number of Idaho cities, service companies such as carpeting and janitorial services, oil change places, and hardware and convenience stores.
Companies that can partner with Idaho universities on development that could be considered research are eligible to apply for grants from the Idaho Department of Commerce.
“The Idaho Global Entrepreneurial Mission (IGEM) program funds university research to advance private sector technology to commercialization,” said Carmen Achabal, IGEM program manager, in an email message. “IGEM is founded on a partnership between industry and Idaho’s public research universities (Boise State University, Idaho State University, and the University of Idaho). These state-funded grants help Idaho companies and industries access Idaho research university resources for their research, development, and commercialization efforts.”
The advantage of these grants is that they’re non-dilutive, and give the companies access to the resources the universities have, Achabal said. However, the funding can’t be used for expenses such as personnel costs, equipment, rent, or operation costs, she said. They are suitable for costs such as efficacy or regulatory testing, or help with design and development of technology, she said.
“If a startup is interested in IGEM, its technology, product or service needs to be past the point of concept,” Achabal said. “The startup can be pre-revenue; however, it should have sufficient capital to carry the startup through the duration of the research project. As this grant is state-funded, the startup would need to demonstrate the return on investment back to the state of Idaho.”
Examples of companies that have received IGEM grants include Washie, Free to Feed, Pitch Aeronautics, Idaho Hydro Technology, Inergy, Shaw Mountain Technologies, and Evolutionary Markings Inc., Achabal said. “After initial IGEM funding, several of these startups were successful in attracting investment capital,” she added.
Sharon Fisher is a digital nomad who writes about entrepreneurship.