Startup Financing: Where's the Money?

By Heidi Genoist -- Tradeshow Week, 3/26/2007

OK. You're a smart person with a great idea for an event. Problem is: There's no corporate CFO you can schedule a meeting with to ask for the funding. You are the CFO. And the CEO, COO and CIO, for that matter ... You're an independent, small to midsized business owner who doesn't have the resources of a large corporation to draw from.

So, where do you get the money to finance your idea?

"That's a really good question, because it's the most difficult thing an entrepreneur has to come up with after he comes up with a show idea," said David Cheifetz, managing partner of the Compass Group.

Back in the 1970s, when he started launching shows, $20,000 was enough to "try it out and see how it went," he said. "But it was a different industry then. It wasn't even an industry."

That's part of the reason Compass acts as an angel investor for shows today. "We've had people come to us requesting anything from $100,000 to $500,000, and we've done a couple," he added.

Robert B. Crosland, III, president of media consultancy Ultra Pergere, said today's financial environment is startup-friendly: "The fact that interest rates have stayed lower than historic averages is certainly advantageous for any type of transaction."

Still, money isn't exactly growing on trees, said Ted Bahr, a 12-year Miller Freeman veteran who co-founded BZ Media seven years ago.

"It is completely different from what we hear of today surrounding private equity firms and funds to buy existing businesses and existing profits. You have no profits, and, as such, are of no interest to most investors," Bahr said.

Many of the entrepreneurs at SISO's CEO Summit this week have money on their minds. To lend a hand to those looking for financing, Tradeshow Week asked Cheifetz, Bahr and Crosland their opinions of various options. Following are the highlights of their advice.

Forget this option, sources said. Bahr put it best: "Banks don't take risks. They are banks. That's why we love them. But they won't back you. Banks will offer deals like this: 'We'll give you a $100,000 line of credit, but you must personally buy a $100,000 CD and promise not to cash it in.' Seriously."

Cheifetz noted that, in the events business, all the assets are intangible. Banks are reluctant to finance such ventures, unless the entrepreneur is willing to put up his money alongside theirs, he said. "Even then, they look at it askance."

Although a more likely source for funding than banks, venture capital is still an iffy option for entrepreneurs.

Curiously, noted Cheifetz, it can be more difficult to raise a few hundred thousand dollars than it is to raise a few million, because venture capitalists look for bigger deals. They have high fixed costs going in, because of the due diligence they conduct, accountants and lawyers they must pay, and so on.

Or, as Bahr put it, "VCs swing for the fences, and that means an IPO exit in five years or so. How many publicly traded tradeshow companies are there?"

"You have to have a heck of an idea to ask for investment," Crosland said.

Other sources agreed. Private equity firms rarely invest in startups, they said. What they're more likely to do is help a small, but thriving, company take the next step. If an entrepreneur can show a track record of success, a private equity firm may be interested.

But that's a big "if." As Bahr pointed out, these firms frequently have a set agenda.

"If your definition of 'startup' is 'buy lots of other companies, strip the infrastructure costs, leverage good ideas across products and flip it to the next PE firm in 5 years,' then private equity is the place to go," he said.

... Or "friends, family and fools" as Crosland called this financing option. "The three Fs figure you're going to get the money sooner or later anyway, so they might as well take a chance on giving you theirs and see if you can make it productive."

Cynicism aside, Crosland admitted that he's presently in the middle of helping someone with "triple F" financing buy a show (he's on the show's side).

It makes sense, said Bahr, because to take a risk, an investor has to trust you. Who trusts you more (if you're trustworthy to begin with) than someone who knows you?

"There are many, many, many places for a well-heeled investor to place their extra cash, and when we launched BZ Media, we heard every possible excuse," Bahr recalled. "The ones that invested in us were people that knew us for at least 15 years and knew our track record in good times and bad."

The biggest difference between friends-and-family investors and private equity investors or venture capitalists, according to Cheifetz, is that the former invests in the person first and in the idea second, while the latter two put more stock in the idea.

Not a bad idea, if you've got straps on your boots.

"There's always using your own money," Crosland said. "Tradeshows and conferences are very good cash flow generators, so it doesn't take a lot of working capital to get into the business, because people pay ahead."

Even the things that do require a capital commitment, like holding exhibit space and hotel rooms, don't require capital up front, noted Crosland and Bahr. The greatest up-front expenses come from marketing to potential exhibitors and attendees, who usually pay in advance, providing the funds for further development of the idea.

There's a big caveat, here, though: Unless convention center operators, hoteliers, exhibitors and attendees have a reason to trust you, they're not going to give you anything.

"If you're not well known in the industry, how do you get the dates?" Cheifetz asked. "Even if you pay them in advance, (convention centers) aren't interested. They're interested in successful shows. Their purpose is to deliver people from out of town."

The most successful bootstrappers, sources said, are those who have as many as possible of the following qualities:

• experience organizing tradeshows or conferences
• expertise in the industry they're serving
• the support of trade groups in the industry they're serving
• sponsors, collocators, joint-venture partners or others who help defray the initial risk.

Apart from commenting on specific financing options, our sources had some general advice for entrepreneurs in search of financing:

• Remember: It's tough out there. "Be prepared to solicit and be restricted in your funding to friends and family partners and yourself," Bahr said. "No matter what your pedigree and willingness to sweat for equity, you will be expected to have significant skin in the game."
• Think small — at least at first. Crosland advised entrepreneurs to "start off with something modest that's for a growing niche, maybe as a tabletop at first. It takes time to build the thing up."
• Know your business. Your weightiest leverage is your knowledge and experience. Be prepared to prove that you're a good investment in black and white, and dollars and cents.
• Know the tradeshow business. "The barrier to entry, both financial and strategic, is higher than it's ever been," Cheifitz said. Everyone involved is more sophisticated than they used to be.