Business Incubator Series: Tim Lavengood, Technology Innovation Center – Evanston, Illinois (Part 10)

By guest authors Irina Patterson and Praveen Karoshi

Irina: Are there any financial firms that specialize in software escrow?

Tim: Very few. It’s a good business to get into. It is emerging, because software code is an asset. It is a transferable asset, unlike making something in a factory. If this code has proven commercial value, it is one of the financing options that I recommend for companies.

I am talking to a team of software developers right now who can do that kind of development work for equity. I see so many people who are trying to raise $150,000 in capital from angel investors, and I see most of it is going to go to programmers.

What they are doing is taking a year to raise capital to pay programmers, when if they can get three programmers to commit to do the work, they can be in business tomorrow. One of the reasons you can do that is because of equity investment.

One of the crucial things about equity investment is that it has to be translated into things that show up on the assets side of the balance sheet as rapidly as possible, because that’s how your valuation goes up.

So, this is one of those things that if you invest in it, within a matter of a few months, you have a functioning software product. Then, with some skilled finance people on your side, you can justify that as being worth $400,000 and you can borrow against it.

That’s a much more effective way of doing it. Now, you risk losing your software. But risk is inherent in a startup. It can be better than taking a year to run around trying to raise cash to simply give it to programmers.

Obviously, there are pros and cons. It is a complicated thing. I don’t want you to misunderstand, you lose a lot of flexibility. Think about money. You can work with any programmers as you want, because money is the most tangible thing. Money give you the most management and power, the most choices, the most options, because everybody will take it.

If you commit to some programmers and they don’t work out, you have a problem. So, you have a fairly complicated deal that has to be made upfront. It’s not for everybody. But it’s a kind of thing that, as I say, when you’ve been doing this for 25 years and you’ve worked with hundreds of companies, this is something that most software entrepreneurs have never done. But we work with hundreds of them, and so we know things that are a little more off the beaten path that might be of use to some startups.

Irina: What about regular banks?

Tim: Yes, we work with banks everyday. I met with a banker today.

Irina: How do your banks work with startup companies?

Tim: Less now than they use to. But, yes, to some extent, they do. However, we are working with a lot more of factoring companies. The guy I work with was just telling me that we did $300,000 in financing last week. Well, yes, one was with a bank. So, we did a bank deal last week.

It was a financing deal for a company. They had some sales and they were doing some financing against some payables. Roughly speaking, it was a receivable financing.

Then, we got somebody else to underwrite to guarantee a contract for about $150,000 that we did last week. So, things like that, also, not just banks –especially today, you’ve got to go beyond that.

That [banker] was an individual, for instance, who had done three or four deals with companies that we have. I know him personally and I called him and asked him to come by, and he agreed to underwrite on that occasion.

Irina: Thank you, Tim. Very interesting. Thank you for sharing your insights.

This segment is part 10 in the series : Business Incubator Series: Tim Lavengood, Technology Innovation Center - Evanston, Illinois
1 2 3 4 5 6 7 8 9 10