Business Incubator Series: Tim Lavengood, Technology Innovation Center – Evanston, Illinois (Part 9)

By guest authors Irina Patterson and Praveen Karoshi

Irina: How many of your entrepreneurs work on software businesses? And what kind of software?

Tim: It would be probably about 50% of our companies, either half or just under half. A lot of people want to hook on to enterprise software programs. Many are interested in social networking, data mining, and Web development.

Irina: What are the resources you offer them?

Tim: It’s all those things that I talked about. Very often, they have little gaps, especially programmers. Maybe there is a language they don’t know. Maybe there is an application they don’t know. If there are some issues with understanding users, user groups, things like that, we can help them. Students can participate in such things.

Also, are they going to get a bunch of programmers and everybody will share in the equity? Are they going to try and raise some capital to do this? Are they going to try to moonlight and do a lot of consulting and keep their other jobs or to raise capital to do it? Most little software startups are struggling with those options as they try to figure out what is best for them.

Irina: What are the financing resources you usually connect them to?

Tim: There is short-term financing, such as short-term 30 day notes against receivables. There is debt financing, bank loans, and equity financing.

Irina: For software entrepreneurs, what do you usually advise them to do?

Tim: Typically, software entrepreneurs have relatively low upfront cost. So, software companies probably will try first to assemble a team that gives them all the pieces they need to build their product and see if everybody can just share in the equity. I am not sure that this is the best thing to do, but it is usually what they start with.

Then, what they will do, typically, is also try to do a few jobs for other people so that they can keep running their apartments and things like that, and just try and bootstrap it that way.

Often, it can be difficult for them to raise equity capital unless they do certain things, such as escrowing their code. Many times, a larger company will not buy from a startup software firm because they would say, We cannot deploy this software in our organization because you might go out of business.

They say, In case you go out business, you have to give us your code. What they will do is take the code and put it in a safe deposit box, and then a company may be willing to buy from them and start to give them a bit of cash flow.

That is another thing I have done early on that is kind of unusual. Software has the advantage in this way, actually. It’s hard to finance in a traditional way, but it has this advantage in that it creates an asset for the company much more quickly than if you were building a piece of industrial equipment.

With the equipment, you make it and you sell it. It never really sits there as an asset. The code does become an asset, and you can leverage that.

It is not easy to do, but we know how to do it. One of the things we would talk to them about is how to do something like software escrow. You can also escrow software in exchange for a collateral, borrow money against it. You can’t really do that with industrial equipment.

Irina: How many times have you helped with escrow financing?

Tim: Probably four or five. Typically, the way I would help is to talk to them. I tell them what little I know about it. I would introduce them to other people who have done it to get the pros and cons. I might have a finance guy who will come to one of our social gathering and who will be willing to sit over a beer and talk to them about the pros and cons of doing it.

That is the way I would help with that, to make sure that they are learning what they need to learn, hearing from a variety of people, and getting a range of opinions. As I said, I am not their board member. I am not going to tell them what to do, but I will make sure if that’s an option that they are considering, that they hear both sides of that story and they will make up their own mind.

This segment is part 9 in the series : Business Incubator Series: Tim Lavengood, Technology Innovation Center - Evanston, Illinois
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