| 1> | | | | venture leasing over venture capital, startup |
| Venture leasing had literally created millions of dollars | | | | companies have turned to venture leasing as a |
| for Berman’s shareholders. | | | | significant source of funding to support their growth |
| Craig Berman beamed noticeably after completing his | | | | and to build equity value faster. Additional advantages |
| board presentation. Berman, CEO of a startup that | | | | to startups of venture leasing include the traditional |
| develops nanotechnology applications for the defense | | | | leasing strong points --- conservation of cash for |
| industry, had just closed a $ 20 million equity round. | | | | working capital, management of cash flow, flexibility, |
| Berman finalized the round at an equity valuation that | | | | management of equipment obsolescence, and serving |
| made the whole board blush. Only six months earlier, | | | | as a supplement to other available capital. |
| Berman’s team faced a daunting technical | | | | How do venture leasing firms evaluate transactions? |
| delay that set the company back three months. With | | | | Venture lessors look closely at several factors. Two |
| only four months of cash remaining from a previous | | | | of the main ingredients of a successful new venture |
| equity round, the delay would cause Berman’s | | | | are the caliber of its management team and of its |
| company to burn cash faster and to fall short of an | | | | venture capital sponsors. In many cases the two |
| important benchmark. | | | | groups seem to find one another. A good |
| The prospect of raising additional equity earlier than | | | | management team has usually demonstrated prior |
| expected and at a much lower valuation than | | | | successes in the field in which the new venture is |
| anticipated was a chilling thought for Berman and his | | | | active. The better venture capitalists have successful |
| board. Just as things appeared to be headed downhill, | | | | track records and direct experience with the types |
| the company’s CFO broached the idea of | | | | of companies they financed. The best VCs have |
| obtaining $ 1.5 million in venture leasing. Roughly $ | | | | industry specialization and many employ individuals |
| 600,000 of this financing would be used to finance | | | | with direct operating experience within the industries |
| existing equipment. The balance could be used for | | | | they finance. |
| upcoming acquisitions of computer workstations, | | | | After determining that the caliber of the |
| servers, software, and test equipment. | | | | management team and venture capitalists is high, a |
| A colleague had introduced Jamal Waitley, the | | | | venture lessor looks at the startup’s business |
| company’s CFO, to Jerry Sprole. Sprole heads | | | | model and market potential. During this evaluation the |
| Connecticut-based, Leasing Technologies International, | | | | lessor considers questions such as: Does the business |
| a leasing firm specializing in equipment financing for | | | | model make sense? Is the product/service |
| venture capital-backed startups and emerging growth | | | | necessary? Who is the targeted customer and how |
| companies. It took Waitley less than a month to get | | | | large is the potential market? How are products and |
| the financing in place. Cash from selling and leasing | | | | services priced? What are the projected revenues? |
| back existing equipment along with a leasing line to | | | | What are the production costs and what are the |
| add new equipment allowed Berman’s firm to | | | | other projected expenses? Do these projections |
| operate three extra months without additional equity. | | | | seem reasonable? How much cash is on hand and |
| When the firm finally completed its $ 20 million equity | | | | how long will it last the startup according to the |
| round, the pre-money valuation was at least $ 5 | | | | projections? When will the startup need the next |
| million more than it would have been otherwise. | | | | equity round? These, and questions like these, help |
| Venture leasing had literally created millions of dollars | | | | the lessor determine whether the business plan and |
| for Berman’s shareholders. | | | | model are reasonable |
| Like Berman’s firm, a growing number of | | | | The most important question facing a leasing |
| venture capital-backed startups are taking advantage | | | | company financing startups is whether there is |
| of venture leasing to build equity value faster and to | | | | sufficient cash on hand to support the startup |
| expand infrastructure. What is venture leasing and | | | | through a significant part of the lease term. If the |
| why has it become so attractive to venture | | | | venture is unable to raise additional capital and runs |
| capital-backed startups? How are savvy | | | | out of cash, the lessor stands to lose money on the |
| entrepreneurs using venture leasing to increase | | | | transaction. To mitigate this risk, most experienced |
| shareholder value? To find answers, one must take a | | | | venture lessors require that the startup have at least |
| closer look at this important financing source for | | | | nine months of cash on hand before proceeding. |
| venture capital-backed startups. | | | | Usually, startups approved by venture lessors have |
| The term venture leasing describes equipment | | | | raised at least $ 5 million in venture capital and have |
| financing provided by equipment leasing firms to | | | | not yet exhausted a healthy portion of this amount. |
| pre-profit, early stage companies funded by venture | | | | Where do startups turn to get venture leasing? Part |
| capital investors. Like Berman’s firm, these | | | | of the infrastructure supporting startups is a handful |
| startups need business essentials like computers, | | | | of national leasing companies that specialize in venture |
| networking equipment, software, and equipment for | | | | leasing. Like the Connecticut-based lessor introduced |
| production and R&D. These firms generally rely | | | | to Waitley, these firms have experience and |
| on outside investor support until they prove their | | | | expertise in structuring, pricing and documenting |
| business models or achieve profitability. | | | | transactions, performing due diligence, and working |
| Where does venture leasing fit into the venture | | | | with startup companies through their ups and downs. |
| financing mix? The relatively high cost of venture | | | | Most venture lessors provide leases to startups |
| capital compared to venture leasing tells the story. | | | | under lines of credit so that customers can schedule |
| To compensate venture capitalists for the risk they | | | | multiple takedowns during the year. These lease lines |
| take, they generally receive sizeable equity stakes in | | | | typically range from as little as $200,000 to over $ |
| the companies they finance. They typically seek | | | | 5,000,000, depending on the start-up’s need, |
| investment returns of at least 35% on their | | | | projected growth and the level of venture capital |
| investments over five to seven years. Their returns | | | | support. The better venture lease providers also |
| are achieved via an IPO or other sale of their equity | | | | assist customers, directly or indirectly, in identifying |
| stakes. In comparison, venture lessors seek a return | | | | other resources to support their growth. They help |
| in the 15% — 22% range. These transactions | | | | customers acquire equipment at better prices, |
| amortize in two to four years and are secured by | | | | arrange takeouts of existing equipment, find |
| the underlying equipment. Although the risk to | | | | additional working capital funding, locate temporary |
| venture lessors is also high, venture lessors mitigate | | | | CFO’s, and provide introductions to potential |
| the risk by having a security interest in the leased | | | | strategic partners--- these are all value-added |
| equipment and structuring transactions that amortize. | | | | services the best venture lessors bring to the table. |
| Taking advantage of the obvious cost advantage of | | | | |