We believe the demand for our services is significant. Although in 2015 there have been positive changes in the restrictions related to smaller amounts of funding (Regulation A Revised Rules effective July 19, 2015), the process is still time consuming. There is often a significant overhead cost in the form of legal and accounting fees that must be paid in advance and there is no assurance that any money will be raised to cover such fees. Smaller public companies still have to meet higher and complex disclosure standards. Also, due to the legal exposure, broker/dealers are usually hesitant in sponsoring small private placements and their clients have no exit strategy. Venture funds usually have a threshold of at least $2,000,000 (realistically $4,000,000+) and require that their portfolio companies have a powerful exit strategy. For example, venture capitalists may require prospective portfolio companies to have a sufficient valuation or at least $100,000,000 to support a major public offering within three to five years.
Banks do not want to make higher risk loans since they generally do not want, or don't know how to use, Equity Participations. Some LBO lenders started taking warrants but the loan size to support such a sophisticated lender is an estimated $10,000,000. This leaves small companies few options. One option, SBA loans, are collateral based and therefore are an ineffective alternative for technology companies with limited tangible collateral.
In our market, our only competition are "angel" investors, which are private investors who will invest $100,000 to $500,000 and "friends and family" investors. The latter usually have limited resources and the former is usually very difficult to locate. In neither case is there a realistic exit strategy for these investors? Smaller, financially extended companies have even less funding options available than smaller growth companies. They may have loans in place and do not know how to address the demands that are being made on them for their limited resources. These demands, where their working capital has been used for long-term investment or to fund start-up losses, means that these companies have no cash to perform when opportunities for their products or services finally develop. This is a prescription for failure. Our techniques combined with a small loan can stabilize and address these problems and give the Portfolio Company the financial breathing room to grow.
We believe we are less impacted by the general state of the economy since an economic downturn creates more "turn-around" opportunities and a growing and changing economy provides increased demand and opportunities for early stage growth funding.