Monday, May 13, 2019

SEC kicks off Small Business Week with roundtable examining geographical challenges to raising capital

By Amanda Maine, J.D. 

SEC Advocate for Small Business Capital Formation Martha Miller celebrated the one hundredth-day anniversary of the office’s creation with a roundtable addressing issues facing small businesses when it comes to raising capital, focusing in particular on businesses seeking their mark away from the coasts. The panelists included representatives from three startup companies, one of which has gone public, and two representatives from funding organizations.

Geographical limitations. Miller noted that the vast majority of capital is raised in the coastal regions. For venture capital, most funds are raised in four cities: San Francisco, San Jose, Boston, and New York. Only 13 percent of 2019’s first quarter dealflow had gone to companies in the mountain, midwestern, and southern regions of the country, she said. This flow of funding does not reflect the great companies in those areas, Miller observed. 

Several panelists could relate to having problems raising capitals in non-coastal areas. Nic Wilson, co-founder and CEO of Anglr, said the idea for his company started around a campfire among friends about how to develop a concept that would be interesting to other fishermen, resulting in the ANGLR fishing app. Based in Pittsburgh, Anglr was able to raise around $2 million form local angel investing groups, he said.  However, for the next stage of financing, Anglr had to travel to meet prospective investors.  Wilson said that in Chicago, Anglr met a sports tech investor, which led to a Series A round of financing last summer.

SEC Chairman Jay Clayton noted that in certain regions, the network is so vibrant that one can make a few phone calls and be made aware of the array of investor types, legal and financial services, and people who can point you in the right direction.  Bob Crutchfield, managing director of BrightEdge Fund, observed that density is a big component of the advantage that the coasts have over the rest of the country, so the challenge is to create density in communities like Nashville, Birmingham, Atlanta, and Jackson by combining resources or combining networking opportunities between the capital that resides in those communities. 

Harold Hughes, founder and CEO of fan analytics company BandwagonFanClub.com, which is based in Greenville, S.C., said that in some cases, we might be overthinking how much density is needed to get companies off the ground in smaller communities.  Sometimes the resources available in these communities can be enough to get initial funding, he said. However, the harder part is the next round of funding. He highlighted Charlotte, Raleigh-Durham, and Atlanta as a cohort of cities in which to seek funding. 

Funders weigh in.  Cathy Connett, CEO and managing partner of Sofia Fund, based in Minneapolis, said that there is a lack of funding for smaller companies that move beyond angel investing. For companies seeking to raise $3 million to $20 million, there is a lack of funding, particularly in the Midwest, she said. She also highlighted the reality of what it takes to operate a fund.  While Sofia fund essentially operates for free, most funds take a 4 percent fee. A venture capitalist might say why spend time on a $5 million deal when you can do a $100 million deal; investors look at it the same way, she advised. If I can diversify with a very large fund, why would I invest in five different funds, she observed.

Test the waters and going public. Brian Hahn, CFO and senior vice president of GlycoMimetics, brought the perspective of a recently public biotech company to the roundtable.  He praised the SEC’s “test the waters” provision, which, as part of the JOBS Act’s mandate, permitted emerging growth companies to engage in oral or written communications with certain potential qualified investors before or after filing a registration statement to gauge their interest in a contemplated securities offering. He called the provision instrumental in GlycoMimetics’ IPO. However, he noted that biotech firms face challenges that other startups do not face.  For example, compared to a tech startup, you can’t start a biotech company in your garage, he quipped.

Hahn also raised concerns about compliance with the auditor attestation requirement of Section 402(b) under Sarbanes-Oxley. GlycoMimetics went public in 2014, so the company will be going off the 404(b) onramp this year. As a result, it will be spending hundreds of thousands of dollars on 404(b) compliance when it doesn’t even have revenues yet, Hahn lamented. These represent funds that should be going to the work of the company, he said. In addition, Hahn recommended that the SEC focus more on revenue than market cap. Especially in the biotech industry, he said, you can have billions in market cap with no revenue. 

Diversity. Hughes mentioned that he was proud that his company has found ways to diversify his capitalization table, which is more than 40 percent people of color, 22 percent women, and 17 percent LGBTQ investors. He said his company will continue to push diversity in the equity crowdfunding campaign. 

Connett recalled that in the 1990s, the angel network consisted of deep-pocketed former executives who were usually men.  One of the reasons Sofia was formed, she explained, was that she never had a woman knock on her door and say they wanted to invest. There are millions of women meeting the accredited investor threshold, but not that many actually end up writing a check, she said. She also expressed concern about raising the threshold for accredited investors could result in the loss of angel investing opportunities.