Roundtable: Are we having funds yet?

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September 25, 2018 (From left) Jeanette Bennett, BusinessQ Magazine; Diogo Myrrha, Peak Ventures; Simeon Vance, Fillmore Spencer; Heather Osmond, Osmond Designs; Case Lawrence, CircusTrix; Bruce Gunther, Bank of American Fork.

Are we having funds yet? Five Utah County entrepreneurs, lenders, investors and lawyers put their mouths where their money is by sharing what options are out there for funding.

Jeanette Bennett, BusinessQ: What does the funding environment in Utah County look like, and how much has it changed in the past couple of years?

Case Lawrence, CircusTrix: Speaking personally, the whole key to our success was the right funding by the right people at the right time. No question. My perception is that Utah County, right now, has one of the best funding environments for technology companies. It’s lost on a lot of people that the technology funding environment is the most evolved, process-driven and choreographed out of anything else out there. If you have a tech company, it’s a very clear path how you finance and fund it. Utah is one of the hottest tech funding ecosystems outside of Silicon Valley.

Diogo Myrrha, Peak Ventures: I teach a class at BYU with Greg Earnshaw on creating software ventures. It’s very targeted to computer science students. In technology you can front-load a lot of the costs. The marginal costs of using the product is actually low — near zero for some of the tech companies. With CircusTrix, the marginal cost for creating a new park is the cost of that park. It creates a different funding dynamic because there are tangible assets involved that can’t be re-purposed elsewhere. Whereas with software, it lives in this magical place called “the cloud.” This is why we’re focused solely on tech companies. The ultimate outcome of tech companies is normally an acquisition or becoming a public company. That’s the same outcome that everyone is pushing for, but there the difference is that on the path to get there, you front-load costs and then you milk that for a long time.

Bruce Gunther, Bank of American Fork: Traditionally banks aren’t venture capitalists, and we don’t fund startups unless there is some kind of an asset. Whether base linear, or cash linear. If both are there, then that’s even better.

Myrrah, Peak Ventures: Which in tech, there never will be — there is negative cash flow and zero assets.

Gunther, Bank of American Fork: That’s right. Based on 20 years in this economy, the funding sources out there are the healthiest and best I’ve seen in years. One of the reasons why is because we went through the recession. There were some people who crashed and burned. Like my father would say, they learned a $10 million lesson for a $1 million loss. In this healthy environment, there is willingness for banks, venture capitalist groups and finance companies — places that used to be competitors — to work together.

Case Lawrence, CircusTrix: “It’s lost on a lot of people that the technology funding environment is the most evolved, process-driven and choreographed out of anything else out there. If you have a tech company, it’s a very clear path how you finance and fund it.”

Heather Osmond, Osmond Designs: My background is in real estate. My husband and I made more money in real estate investments than in the furniture industry — let’s be honest. We owned up to 30 rental properties. My husband got bored with that and decided to do assisted living centers. All along, we’ve received funding from banks, so we have a lot of experience as a personal user. Getting the right loans at the right amounts were key to our success. I’m also a host on the KSL Nudge Real Estate Show every Saturday at 11 a.m. and we often discuss funding.

Gunther, Bank of American Fork: I listened last Saturday. You gave a tip about how before you sell a home, you should weed the yard.

Osmond, Osmond Designs: You’d think that’s something you wouldn’t have to say! Being on that show, we have lots of guests, so I get to talk to the real estate appraisers and real estate agents — Central Bank has been on several times — and we also include title companies. The consensus is that Utah’s market is booming. It’s better than it’s ever been, and people just can’t keep up. Utah’s business culture is a sound investment. If you are in the market, stay in the market. If you’re not, get in the market. It’s only going up from here. Our environment and our culture have a lot to do with it. We’re self-starters. We’re innovative and fearless. We think we can do things we don’t know that we can’t do — which I love. We are the envy of a lot of business colleagues across the country. It’s our diversity and our innovation that really set us apart.

Simeon Vance, Fillmore Spencer: Ditto. I very much agree with the assessment of the healthy funding environment. In terms of clients that I’m working with, there are so many avenues for funding. At one point in time, the conversation was all around, “How can we get funded by an angel investor or venture capital group?” That’s not the only conversation now. We’re talking about other avenues like crowdfunding. In Utah there is a lot of wealth. We do a lot of deals where there are no funds involved at all, just accredited investors whose deals are getting funded. The investment environment is so healthy. Now we are even into issuing tokens and coins in exchange for capital.

Bennett, BusinessQ: Can you explain initial coin offerings to us?

Vance, Fillmore Spencer: At the simplest level, it’s all about going to a company who is going to give up equity in their company in exchange for investment capital. Now companies are raising capital without giving up any equity at all and without any promise of repaying the debt. It’s tokens. They will issue tokens that will have some sort of value. There are different values that can be attached to those tokens.

Bennett, BusinessQ: What types of companies are using this strategy.

Vance, Fillmore Spencer: It’s purely a tech thing.

Myrrha, Peak Ventures: Locally, Mainframe did it.

Osmond, Osmond Design: People really sign up for that?

Myrrha, Peak Ventures: Yeah, it’s an interesting phenomenon.

Lawrence, CircusTrix: Is it just another name for a share?

Heather Osmond, Osmond Designs: “Utah’s business culture is a sound investment. If you are in the market, stay in the market. If you’re not, get in the market. It’s only going up from here.”

Myrrha, Peak Ventures: No, because you don’t own the company. You own the right for a service the company is going to render eventually. You’re financing a future service. The SEC has yet so say yea or nay on that — correct me if I’m wrong. It’s murky right now.

Vance, Fillmore Spencer: The regulatory backdrop for virtual currencies ranges from the SEC and securities laws to the way the IRS looks at virtual currencies as property to the way FCEN — the Financial Crimes Enforcement Network — looks at money laundering and money transmitter laws to the CFTC and their positioning of virtual currencies as commodities. You have this vast regulatory backdrop, so it becomes a challenge trying to navigate that.

Myrrha, Peak Ventures: If any of those entities were to issue a statement on their own, you could get somewhere. But they all need to agree before they say something. And they haven’t. At all.

Vance, Fillmore Spencer: In one sense you have to treat this token as a security.

Myrrha, Peak Ventures: It can also be a utility.

Bennett, BusinessQ: It will be fun to revisit this topic in a few years when all the regulation has been ironed out.

Vance, Fillmore Spencer: The point is it shows how healthy things are. We have new forms of funding.

Myrrha, Peak Ventures: Historically funds have existed as some of the only sources of capital. It was only funds or banks for the longest time. Whatever didn’t fit funds and did not fit banks could not get financing. One of the healthiest things we’ve seen is all these companies getting funded through individuals who made money in one of those local success stories. We love those.

Osmond, Osmond Designs: There are so many of those local success stories. We love it!

Myrrha, Peak Ventures: It allows new seedlings to come from that.

Gunther, Bank of American Fork: It’s also really good for a bank — which has been the traditional cornerstone in funding — to be able to say, ‘We can’t do that deal, but I know somebody who can help you.” We love that because we’ve typically been the bad guy — we always have been. That also allows for some competition in funding. There are more opportunities to find the right fit for a startup or any other business. It used to be the bank rate was 6 percent and venture capital was 18 or above. Now you’re finding finance companies will do 9 percent. Then a venture capitalist group that’s not as aggressive as others might come in and do 14. You’ve got this range that you can fit into somewhere and find that funding.

Myrrha, Peak Ventures: You’re probably  talking about venture debt or private debt. The definition of venture will be exclusively equity, so you don’t have a guarantee for returns.

Gunther, Bank of American Fork: The other really critical thing is that before the recession, it was a bank and a private equity and maybe a finance company. Now there are so many options. That recession did so many good things. We talk about the negative effects of a recession, but it produced some really positive effects. When people get slammed to the ground, it often produces smarter ways, more competition and better results.

Bennett, BusinessQ: With so many options available, how does a company or entrepreneur know what options are best for his or her situation?

Lawrence, CircusTrix: The reality between the lines of what you all are saying is that there is still a big challenge. Banks are going to fund successful businesses. They will provide tools for those who have overcome a certain hurdle. Venture capital is going to fund technology companies that can scale quick enough to provide a return. All of that is maybe 10 percent of the businesses out there. It’s still the wild cowboy west for many companies to find funding. It helps when you have this network of individuals with money. When that’s the case, what you don’t have is any valuation. If you’re a tech company, you know you’ll have a series A and a series B. If you’re a cookie place, that is a whole different thing. Those places are important. The challenge is there’s no real baseline of how you value those places. This might be harsh, but there are some businesses out there that should not seek finding of any kind. Those are small service businesses. I run into people all the time who think their key to existence is finding funding.

Myrrha, Peak Ventures: They measure their success by funding. That’s what freaks me out about venture capital. People measure how successful they are by how much money they raise.

Vance, Fillmore Spencer: I have that discussion often with clients. Funding has become popularized by mainstream media and Shark Tank.

Osmond, Osmond Designs: I love that show! I don’t watch television, but that one I love to watch.

Simeon Vance, Fillmore Spencer: “When they are looking for funding, people assume they have to fit into that Shark Tank model, and it’s not true. There are so many other options.”

Vance, Fillmore Spencer: When they are looking for funding, people assume they have to fit into that Shark Tank model, and it’s not true. There are so many other options. Sometimes you don’t need to be funded. It’s actually a bigger, better brighter badge in some cases if you are not funded and you are a successful and profitable company.

Osmond, Osmond Designs: I came across a quote by Warren Buffet and it said, “Risk comes from not knowing what you’re doing.” That’s perfect for funding. Sometimes you don’t know what your business is or what kind of funding would be best for you. Solve that by doing research. Sometimes people get more money than they actually need. We live in a microwave society. We want it hot, fast, and right now. We want the nice car and big home like our parents — but right out of college. People don’t realize it takes blood, sweat and tears to get there. Be patient and learn to live in the basement apartment when your friends are in the cute condo with the swimming pool. Make the sacrifices you need to make so you can someday get there.

Gunther, Bank of American Fork: There are some great examples of that in our community. I know about one person who grew things organically. (Jeanette, I’m talking about you.) Bennett Communications itself is a great model for that. I used to not understand this, but years ago, when I would bring a deal to the table all the ratios would look right. They’d have everything we’d look for: character, collateral, capacity, cash flow. I’d think, “Why we wouldn’t we do this?” But the bank would be leaning toward “no.” I would sometimes hear my dad say, “We don’t want to help good people get into trouble.” I thought, “Wow! Sometimes we really aren’t doing somebody a favor by lending them money.” That’s on all fronts. If it gets to be so shark-like, it’s all about the money and you’re not considering some of the intrinsic values, then there is a problem. That might be one of the reasons why Utah is so successful. There are some people who want to take advantage, but there is something deeper. There are good people behind the funding efforts. That makes a huge difference.

Bennett, BusinessQ: That’s a perfect lead in for another topic I want to cover. What would you never change about the funding culture in Utah Valley? And what do you wish you could change?

Gunther, Bank of American Fork: I’m always impressed with people who may not grow as fast or may not be as visible. They are like “The Little Engine That Could,” slowly getting up that hill. Eventually there will be a time when they are visible — not that it’s the goal. But by their nature and their conservative values, they did it the old school way. Like Boyd K. Packer said, “Use it up, wear it out, make it do, or do without.” If that still is part of our business culture, I think we will continue to be successful. We may have setbacks, but the trajectory will always be headed upward if there is value-based business.

Osmond, Osmond Designs: I love the heart and passion of people who own businesses. Every single business has a story and challenges they’ve overcome. In the beginning, we were a little store. We owned a commercial real estate parcel in Pleasant Grove. We rented it out, but I talked to the cute gift basket girl into renting me some back office space. I had desk, a chair and a bookcase. And that was the humble beginnings of Osmond Designs. I would go into people’s homes and they would buy furniture from me without seeing it in a catalogue. There are good generous people who believe in you from the beginning. You start small. As we grew, we decided we were too big for that back office, so we took over the front space. Then we needed a warehouse, which helped us get into our next space. We were in a building with a dance studio above it, so we would hear the dancers jumping and the lights would bounce up and down. Those funny little stories are what made me who I am because I remember all of it, and I appreciate it so much more.

Gunther, Bank of American Fork: I have another good example. Capital is what my product is, but human capital has always been the difference. Heather does this well. A couple years ago we remodeled two rooms in our home, so I went to Osmond Designs in Orem. She came up to me. She was actually in her store. I was a little peon trying to buy some cushions, but she basically took me by the arm and showed me what would look good. She could have been in her office, but she was there. She’s hired people who emulate what she does. I’ve been to her Lehi store, they are the same kind of people. Her values made the difference. It’s all about the human capital behind the monetary capital.

Osmond, Osmond Designs: Every successful entrepreneur has an amazing team supporting and helping them. Jeanette and I, we have kids. We have husbands who make sacrifices so we can do what we do. Sometimes we do takeout for dinner. You make it work. You involve your kids and husband or wife. It’s a team effort.

Bennett, BusinessQ: I like that this discussion is turning back to people. Because business is always about people. Tell me more about crowdfunding. Let’s define the term and discuss how it can be used wisely.

Vance, Fillmore Spencer: There are different types of crowdfunding. There’s crowdfunding where you are giving up equity in your company, but there’s also the crowdfunding most people think of, which is where you are not giving up equity. Instead you’re giving out T-shirts and mugs.

Myrrha, Peak Ventures: VidAngel is an example of the first definition. They raised $12 million — which was something I was involved in early on. All the Kickstarter success stories are an example of the second definition.

Vance, Fillmore Spencer: We have a ton of the stories around here.

Gunther, Bank of American Fork: That second example is more of what I’ve seen. I’ll have a buddy send me something on a fly fishing rod, and he’ll say, “If you put $1,000 down on this rod, you’ll get one of these when we go to production.”

Vance, Fillmore Spencer: Yeah, that’s exactly how it works.

Lawrence, CircusTrix: The thing I love about crowdfunding is it’s becoming a new source of funding for non-tech ingenuity. It trades on the capital of the normal consumer who appreciates and wants things. That’s a whole segment that didn’t exist 10 years ago.

Bruce Gunther, Bank of American Fork: “We talk about the negative effects of a recession, but it produced some really positive effects. When people get slammed to the ground, it often produces smarter ways and better results.”

Vance, Fillmore Spencer: One of my clients had a crowdfunding campaign for the Aquabats Super Show. Last time I checked, they raised half a million for their project, and they didn’t have to give up any equity.

Osmond, Osmond Designs: Is it preselling?

Myrrha, Peak Ventures: Sometimes it is just mugs and t-shirts, but oftentimes there is an element of presales. The hardest part about a business is validation. How do you know that people want what you think they want? Through crowdfunding, people are voting with their wallet. People are saying, “I will give $1,000 for this fly rod. I want that enough that I’m willing to risk $1,000 to get one. And I think it will be great.” There are a lot of well-known businesses that have done this. It’s fascinating. People get money to build something that didn’t exist before. It’s a new avenue for businesses that could not get money in a different way and to validate products before they even go to market.

Gunther, Bank of American Fork: It’s brilliant. It’s also a good way to have market research. What do they have to lose if nobody puts money down or signs up? They realize there’s no traction and they don’t need to continue down that path.

Lawrence, CircusTrix: To add to that, think about how many ideas there are. Creative people have those ideas, but maybe they haven’t had the confidence to push it over the cliff and make it happen. Kickstarter is the biggest dose of encouragement and motivation. I can’t imagine — this would be hard to quantify — how many businesses formed just because of a momentum of a Kickstarter.

Vance, Fillmore Spencer: Once upon a time, they didn’t have that platform.

Gunther, Bank of American Fork: Back then, their platform was just friends and family.

Myrrha, Peak Ventures: Think of the amount of businesses or products that would never exist. Some might be those hyper-niche products for the hardest-core fly fisherman. Some of these are super niche-y, but it’s a product that would not exist otherwise.

Gunther, Bank of American Fork: The platform, like you said, is game-changing.

Bennett, BusinessQ: What are some cautions you would give to people doing a crowdfunding campaign?

Myrrha, Peak Ventures: Don’t over-leverage. If you don’t deliver on a product, it’s an ugly story. Make sure you budget correctly so you can deliver on your promises.

Bennett, BusinessQ: What advice do you have for entrepreneurs on how to budget? What’s the right amount of funding to seek?

Vance, Fillmore Spencer: At the most basic level, you want the product to provide some sort of return on that money or investment. With venture capital, it’s an actual investment. With crowdfunding, it’s just a T-shirt and a mug, so it’s not an actual investment. At the end of the day, you want to be able to show that you’ve provided the value you promised you would provide. When you’re talking about, “How much money do we need?” You should really ask, “What are we promising we will deliver?” And, “How much money do we need to keep that promise?”

Myrrha, Peak Ventures: Take it one step further than that. The nature of funding is such that once you take on funding, your business changes. You give up options whenever there is money coming through the door, at least in the form of equity. Debt is different. When you take on equity, the nature of your business changes because now you need to align your future goals. We have a belief that we will never block a sale. If it’s right for the founder, it’s right for us. Not everyone shares on that perspective. One of the most common investor rights is the right to block a sale of a company. It’s happened before, and it’s caused huge battles in Silicon Valley. Some of the biggest debacles over there are over, “Do we sell for a $100 million? Or do we grow to a billion dollar outcome?” Well, you just raised money at a $150 million valuation, and you have an offer on the table where the founder makes $30 million. Who wouldn’t like 30 million liquid dollars? Yet the founder might be forced to stay because there might be a financial partner at the table who might not be gaining what they wanted or what they signed up for a couple months before. Even though that’s something we wouldn’t do, a lot of groups do that, especially as groups get bigger.

Diogo Myrrah, Peak Ventures: “When you take on equity, the nature of your business changes because now you need to align your future goals. We have a belief that we will never block a sale. If it’s right for the founder, it’s right for us. Not everyone shares on that perspective.”

Osmond, Osmond Designs: When money is readily available, it’s easy to want more than you actually need. In purchasing a home or financing your business, just because you can qualify for a $500,000 home, doesn’t mean you should max out with a $500,000 home if you only need a $300,000 home. It’s just being wise. I love our culture. We are conservative in Utah. It’s easy to get overextended in credit cards or loans and interest rates. That’s a lot of sleepless nights. Just be wise.

Myrrha, Peak Ventures: And yet we’re not conservative in the sense that people assimilate funding with success, because that 1 percent of companies that do get funded get a lot of press. As people correlate the two things, they always go for as big as they can.

Osmond, Osmond Designs: It causes problems.

Myrrha, Peak Ventures: It causes huge problems. Oftentimes, they spend on things they don’t need — exactly like what they do in their personal lives.

Osmond, Osmond Designs: Who wants to be in a home where you’re maxed out and you can’t go out to eat or can’t go on vacation because you’ve spent everything you have?

Vance, Fillmore Spencer: With my clients, I have to remind them that with all the security documents we’re working on with risk factors and disclosures, those are not just to protect the company in the event there is not a return on the investment. It’s also to protect them in the event that there is not a big enough return on investment. That will happen as well, even in such a healthy funding environment.

Osmond, Osmond Designs: The market crashed here, too.

Vance, Fillmore Spencer: There is sometimes a return on investment, but not as massive as the investors may have expected.

Bennett, BusinessQ: We did a cover story a few years ago on Josh Coates, and he talked us through a failure. That’s not an easy thing to do. My favorite quote he gave was that he took on too much money, and he said, “Too much money makes you stupid.”

Osmond, Osmond Designs: You are more careful when it’s money you earned rather than when someone hands you money.

Bennett, BusinessQ: Any last minute advice for our readers?

Gunther, Bank of American Fork: Anyone who is willing to put skin in the game has a greater chance to get funding at any level — and especially at the traditional level. For the deals I see with someone who doesn’t want to put in equity in some form, we don’t want to be part of that. If your hide is on the line you’re going to take care of it, nurture it and make it go.

Bennett, BusinessQ: This has been a fascinating discussion. Thank you all for coming in!

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