Ep. 89: Mai Luu - Alternatives to Venture Capital for Small Businesses
Mai Luu, CMA, CPA, CFE, COO of Commonwealth Capital LLC, joins Count Me In to talk about the recent results small businesses have been faced with following the global pandemic and explains what funding options they have to rebuild and stay true to their vision. Mai is also the Founder and Owner at Outsourced CFO, Controller, and Back Office Accounting, and recently co-founded and serves as the CEO of White Mountain LLC, an American firm specializing in Made-in-Vietnam personal protective equipment (PPE). In this episode, she summarizes the economic impact of COVID-19 and shares her perspective on how small businesses can renew and reset their strategies to improve cash flow and liquidity. Because of the high-risk nature of small businesses and the selectiveness of venture capital firms, these small- to mid-size enterprises may need to look at alternatives to funding. Download and listen to the episode now to hear how!
Contact Mai Luu: https://www.linkedin.com/in/mai-luu-693596168/
"Small Business Planning During COVID-19": https://www.imanet.org/insights-and-trends/risk-management/small-business-planning-during-covid19
FULL EPISODE TRANSCRIPT
Mitch: (00:05)
Thanks for coming back for another episode of Count Me In this is your host Mitch Roshong, and I'm here to bring you episode 89 of our series. We all know small to medium sized enterprises are a huge part of our management accounting profession, and COVID-19 has greatly affected the way these businesses are run along with the economy as a whole. In this episode, my cohost Adam talks with Mai Luu. Chief Operating Officer at Commonwealth Capital, LLC. She has also funded businesses and is very familiar with the small to medium sized business landscape. While talking with Adam, Mai discusses various cashflow activities, venture capital funding, and other ways these businesses can obtain funding to renew themselves while still staying true to their original business purpose. Keep listening as we head over to their conversation now.
Adam: (00:58)
Small- medium sized enterprises have been affected greatly by COVID-19. How can businesses find a way to renew themselves and become new all over again?
Mai: (01:09)
COVID-19 has a far reaching economic impact in so many areas. Most every industry in every state has experienced the impact of COVID-19. Second quarter GDP job, 9.5%. To put it in perspective, since record keeping began in 1947, quarterly job has never been more than 3%. With so much spending, making up two thirds of the US economy declines 12% percent between April and June, 2020. National debt and monetary policy for coronavirus stimulus packages are added to the national debt. With the Fed loaning money and buying financial assets, 1.41 million daily, the money supply, and two has recent sharply despite the injection of money into the system. Inflation stays close to zero, which could be a signal of a looming deflation in a near future. Disrupted supply chains and shortage of products, especially PPE products. Employment has been heavily affected. Job losses were worse than in the Great d\Depression, 50 million people out of a job. As many businesses closed, permanently and restrictions continue in several parts of the country. How business reinvent themselves in the wake of COVID-19 requires serious reevaluation of their business models, product and service offerings and financing methods to adapt and thrive in the new normal. Some of the old way of doing business are no longer effective and some products and services are no longer relevant. So understanding the renewed needs for both customers and service providers should play the central role in researching for the new business models, strategies, and product and services. While the pandemic reveals business weaknesses, it also presents opportunities for resetting strategy and business residents. With working from home businesses, adapt and embrace flexibility. So work life balance becomes work life integration, automation, core self-service portals, virtual help desk, and the use of productivity tools increase efficiency and adaptation. So this set of changes in our lifestyle transform how we consume products and services and how business operates. One thing that I can think of is cashflow and liquidity. This is one of the most important areas of business continuity. I can think of a few basic principles in managing cash that include one, reduce cost as much as possible and seek alternative financing, including the use of government support policies and working with landlord vendors and suppliers for favorable payment terms. Two, focus on generating cash, also turning a profit. Three, be transparent and fair to employees and share resources in case you end up having to cut staff.
Adam: (04:48)
I think you gave some great advice as people are looking to start new, and one thing I didn't hear you mentioned was something like venture capital. what are some of the considerations that SMEs should look at when seeking venture capital funding if they are trying to use that as starting new
Mai: (05:05)
A traditional venture capital VC business model is built based on hitting a few home runs to make up for many losing backs. Due to the high-risk nature of startup and early stage companies, VCs are extremely selective, only 0.1% of new ventures receive venture capital in any stage that leaps 99 point 99% of startups not receiving VC funding. Ofthose that seek VC funding only 1.5% receives it. Even at this level of selectiveness, the majority of VC investments have attractive returns. VCs prefer to fund high potential disruptive ventures in emerging industries that can offer high returns in a short period of with attractive exit options, acquisition or IPO. So those firms are known as unicorns. Businesses that can benefit from venture capital are disrupted capital intensive high growth ventures in emerging industries, host competitors are also getting venture capital funding. So when you're working with VCs, you need research to find the right VC fund. Some VC funds have restrictions that affect the investment choices. Some VC funds are geographical based or industry based or impact investing, etcetera. With that in mind when seeking venture capital you should first five venture capital funds that invest in companies like yours. Two,ensure that the VC firms invest in the stage of funding, that you are seeking. TThree, check out the VC firms past deals, and four consider location of the VC firm. I can think of as a few other considerations when seeking venture capital. One VC may seek control at the startup by taking a large portion of the equity, selling out common equity in the early stages of the company's existence, generally result in selling out the company's most precious element, which is the common equity ownership. This is a critical mistake made by a lot of entrepreneurs. Two VCs. also set the tone of the deal to make sure that they get multiples of the investment before anyone else, so entrepreneurs usually come last.. Thirdly, VC might replace startup to-dos with higher manager that could lead to the loss of the entrepreneurs, original vision and passion. Lastly, with your VC investors, sitting on the board and closely overseeing the company strategy and operations, your dream might become another job.
Adam: (08:10)
So in a lot of ways, venture capital is a really good investment, and if you're that unicorn that gets that, that gets that funding, it can be really important for you, but then these considerations that you just mentioned, it may not be, it may not always be the best option. Are there any alternatives?
Mai: (08:26)
Correct. Yes. Fortunately entrepreneurs can seek capital for their startup and early stage company without relying solely on the mercy of institutional money. So for the, for the entrepreneurs who understand the private capital markets, they can raise a substantial, substantial amount of capital through something called exempt securities offering without having to give up too much of their equity at the early stage for too little money. Keeping the vast majority of equity ownership and voting control that an entrepreneur can stay the course of their original vision and passion. The JOBS Act of 2012, brought the single most significant change to the securities law since 1933. The JOBS act lowers the barriers in the several area of the securities law permitting smart business to raise capital directly from the general public. So basically they are legally by passing VCs. With less restrictive registration requirements and expansion of the exemption from securities registration, normally cost prohibitive for most startups that makes a security offering to raise capital very attractive. So the most significant improvement the regulation was the lifting of the ban on general solicitation of privately placed security that allows startups to advertise their securities offering to a larger pool of potential investors. Under the JOBS act exempt securities offerings include regulation D rule 506B for private placement. Rule number 506C private placement that allow general solicitation specifically to accredited investors and limited offerings. Rule number 504 regulation A plus, and lastly regulation crowdfunding. In 2019, much more money is invested in exempt offerings than register offerings during which register offerings accounted for 1.2 trillion, which is 30.8% of new capital compared to approximately 2.7 trillion or 69.2% that was raised through exempt offerings.
Adam: (11:15)
So can we talk a little bit about what the current environment looks like for raising capital during COVID-19. Everybody's at their homes and their, there's so many things going on and there's so many other elements involved, but you still need to, run your business.
Mai: (11:32)
Yeah, sure. Yes, absolutely. Experts predict an economic recession that could last several months. From several months to two years. VC's are focused on the existing portfolio companies instead of adding new investments to their, portfolio, however deals are still getting done, but investors are cautious in making new deals and they are staying in the wait and see mode. The good news for founders is that investors are sitting on a record number of capital, 189 billion of dry powder, which is 50% more capital than it was available during the last economic downturn in 2008. Despite the pandemic though, what VCs and investors and target markets look for, hasn't changed. They want great intellectual property, a big market, strong value upside, and a product that has commercial promise and a leader or leadership team that is coachable or has a self awareness awareness of humility to step aside for a more experienced leader on the investor side investor. Also look for leaders that have experienced in building companies, can uplift and empower a team and have a deep network of key opinion leader advocates.
Adam: (13:05)
So it's really high risk to invest in a startup, you know, especially in this market, like you just mentioned, you know, how can SMEs help to keep their initial interests at heart, but also that of the capital investor, how do you balance both.
Mai: (13:21)
Through proper corporate engineering and deal structuring of an exam securities offering one can increase the success rate of raising capital while providing the investors with a good level of protection. So earlier I mentioned, corporate engineering. Corporate engineering is the process of developing, implementing, and maintaining all of the corporate governance policies, procedures, and protocols necessary to prepare and qualify a company and its securities for a public publicly traded listing on the US securities exchange. Secondly, attractive deal structure provide good returns and liquidity for investors. Liquidity in the private market has always been a problem. Hence, a deal structure that has a built in exit is very desirable. Also the use of hybrid convertible securities inherently enables one to raise the maximum amount of capital at the lowest possible cost of capital convertible preferred equity can be temporary equity that have little or no repercussion for investors, if engineered correctly. With respect to the return of principal and profit to investor, the philosophy behind creating a marketable deal structure is primarily based on the priority afforded to investor financials, interests that provide for the maximum amount of security of investment principle, combined with the maximum amount of return on investment. By doing so with hybrid securities, you also accomplish the goal of raising substantial amounts of capital without giving up too much at your company for too little too early.
Closing: (15:20)
This has been Count Me In IMA's podcast, providing you with the latest perspectives of thought leaders from the accounting and finance profession. If you like what you heard, and you'd like to be counted in for more relevant accounting and finance education, visit IMA's website at www.imanet.org.
"Small Business Planning During COVID-19": https://www.imanet.org/insights-and-trends/risk-management/small-business-planning-during-covid19
FULL EPISODE TRANSCRIPT
Mitch: (00:05)
Thanks for coming back for another episode of Count Me In this is your host Mitch Roshong, and I'm here to bring you episode 89 of our series. We all know small to medium sized enterprises are a huge part of our management accounting profession, and COVID-19 has greatly affected the way these businesses are run along with the economy as a whole. In this episode, my cohost Adam talks with Mai Luu. Chief Operating Officer at Commonwealth Capital, LLC. She has also funded businesses and is very familiar with the small to medium sized business landscape. While talking with Adam, Mai discusses various cashflow activities, venture capital funding, and other ways these businesses can obtain funding to renew themselves while still staying true to their original business purpose. Keep listening as we head over to their conversation now.
Adam: (00:58)
Small- medium sized enterprises have been affected greatly by COVID-19. How can businesses find a way to renew themselves and become new all over again?
Mai: (01:09)
COVID-19 has a far reaching economic impact in so many areas. Most every industry in every state has experienced the impact of COVID-19. Second quarter GDP job, 9.5%. To put it in perspective, since record keeping began in 1947, quarterly job has never been more than 3%. With so much spending, making up two thirds of the US economy declines 12% percent between April and June, 2020. National debt and monetary policy for coronavirus stimulus packages are added to the national debt. With the Fed loaning money and buying financial assets, 1.41 million daily, the money supply, and two has recent sharply despite the injection of money into the system. Inflation stays close to zero, which could be a signal of a looming deflation in a near future. Disrupted supply chains and shortage of products, especially PPE products. Employment has been heavily affected. Job losses were worse than in the Great d\Depression, 50 million people out of a job. As many businesses closed, permanently and restrictions continue in several parts of the country. How business reinvent themselves in the wake of COVID-19 requires serious reevaluation of their business models, product and service offerings and financing methods to adapt and thrive in the new normal. Some of the old way of doing business are no longer effective and some products and services are no longer relevant. So understanding the renewed needs for both customers and service providers should play the central role in researching for the new business models, strategies, and product and services. While the pandemic reveals business weaknesses, it also presents opportunities for resetting strategy and business residents. With working from home businesses, adapt and embrace flexibility. So work life balance becomes work life integration, automation, core self-service portals, virtual help desk, and the use of productivity tools increase efficiency and adaptation. So this set of changes in our lifestyle transform how we consume products and services and how business operates. One thing that I can think of is cashflow and liquidity. This is one of the most important areas of business continuity. I can think of a few basic principles in managing cash that include one, reduce cost as much as possible and seek alternative financing, including the use of government support policies and working with landlord vendors and suppliers for favorable payment terms. Two, focus on generating cash, also turning a profit. Three, be transparent and fair to employees and share resources in case you end up having to cut staff.
Adam: (04:48)
I think you gave some great advice as people are looking to start new, and one thing I didn't hear you mentioned was something like venture capital. what are some of the considerations that SMEs should look at when seeking venture capital funding if they are trying to use that as starting new
Mai: (05:05)
A traditional venture capital VC business model is built based on hitting a few home runs to make up for many losing backs. Due to the high-risk nature of startup and early stage companies, VCs are extremely selective, only 0.1% of new ventures receive venture capital in any stage that leaps 99 point 99% of startups not receiving VC funding. Ofthose that seek VC funding only 1.5% receives it. Even at this level of selectiveness, the majority of VC investments have attractive returns. VCs prefer to fund high potential disruptive ventures in emerging industries that can offer high returns in a short period of with attractive exit options, acquisition or IPO. So those firms are known as unicorns. Businesses that can benefit from venture capital are disrupted capital intensive high growth ventures in emerging industries, host competitors are also getting venture capital funding. So when you're working with VCs, you need research to find the right VC fund. Some VC funds have restrictions that affect the investment choices. Some VC funds are geographical based or industry based or impact investing, etcetera. With that in mind when seeking venture capital you should first five venture capital funds that invest in companies like yours. Two,ensure that the VC firms invest in the stage of funding, that you are seeking. TThree, check out the VC firms past deals, and four consider location of the VC firm. I can think of as a few other considerations when seeking venture capital. One VC may seek control at the startup by taking a large portion of the equity, selling out common equity in the early stages of the company's existence, generally result in selling out the company's most precious element, which is the common equity ownership. This is a critical mistake made by a lot of entrepreneurs. Two VCs. also set the tone of the deal to make sure that they get multiples of the investment before anyone else, so entrepreneurs usually come last.. Thirdly, VC might replace startup to-dos with higher manager that could lead to the loss of the entrepreneurs, original vision and passion. Lastly, with your VC investors, sitting on the board and closely overseeing the company strategy and operations, your dream might become another job.
Adam: (08:10)
So in a lot of ways, venture capital is a really good investment, and if you're that unicorn that gets that, that gets that funding, it can be really important for you, but then these considerations that you just mentioned, it may not be, it may not always be the best option. Are there any alternatives?
Mai: (08:26)
Correct. Yes. Fortunately entrepreneurs can seek capital for their startup and early stage company without relying solely on the mercy of institutional money. So for the, for the entrepreneurs who understand the private capital markets, they can raise a substantial, substantial amount of capital through something called exempt securities offering without having to give up too much of their equity at the early stage for too little money. Keeping the vast majority of equity ownership and voting control that an entrepreneur can stay the course of their original vision and passion. The JOBS Act of 2012, brought the single most significant change to the securities law since 1933. The JOBS act lowers the barriers in the several area of the securities law permitting smart business to raise capital directly from the general public. So basically they are legally by passing VCs. With less restrictive registration requirements and expansion of the exemption from securities registration, normally cost prohibitive for most startups that makes a security offering to raise capital very attractive. So the most significant improvement the regulation was the lifting of the ban on general solicitation of privately placed security that allows startups to advertise their securities offering to a larger pool of potential investors. Under the JOBS act exempt securities offerings include regulation D rule 506B for private placement. Rule number 506C private placement that allow general solicitation specifically to accredited investors and limited offerings. Rule number 504 regulation A plus, and lastly regulation crowdfunding. In 2019, much more money is invested in exempt offerings than register offerings during which register offerings accounted for 1.2 trillion, which is 30.8% of new capital compared to approximately 2.7 trillion or 69.2% that was raised through exempt offerings.
Adam: (11:15)
So can we talk a little bit about what the current environment looks like for raising capital during COVID-19. Everybody's at their homes and their, there's so many things going on and there's so many other elements involved, but you still need to, run your business.
Mai: (11:32)
Yeah, sure. Yes, absolutely. Experts predict an economic recession that could last several months. From several months to two years. VC's are focused on the existing portfolio companies instead of adding new investments to their, portfolio, however deals are still getting done, but investors are cautious in making new deals and they are staying in the wait and see mode. The good news for founders is that investors are sitting on a record number of capital, 189 billion of dry powder, which is 50% more capital than it was available during the last economic downturn in 2008. Despite the pandemic though, what VCs and investors and target markets look for, hasn't changed. They want great intellectual property, a big market, strong value upside, and a product that has commercial promise and a leader or leadership team that is coachable or has a self awareness awareness of humility to step aside for a more experienced leader on the investor side investor. Also look for leaders that have experienced in building companies, can uplift and empower a team and have a deep network of key opinion leader advocates.
Adam: (13:05)
So it's really high risk to invest in a startup, you know, especially in this market, like you just mentioned, you know, how can SMEs help to keep their initial interests at heart, but also that of the capital investor, how do you balance both.
Mai: (13:21)
Through proper corporate engineering and deal structuring of an exam securities offering one can increase the success rate of raising capital while providing the investors with a good level of protection. So earlier I mentioned, corporate engineering. Corporate engineering is the process of developing, implementing, and maintaining all of the corporate governance policies, procedures, and protocols necessary to prepare and qualify a company and its securities for a public publicly traded listing on the US securities exchange. Secondly, attractive deal structure provide good returns and liquidity for investors. Liquidity in the private market has always been a problem. Hence, a deal structure that has a built in exit is very desirable. Also the use of hybrid convertible securities inherently enables one to raise the maximum amount of capital at the lowest possible cost of capital convertible preferred equity can be temporary equity that have little or no repercussion for investors, if engineered correctly. With respect to the return of principal and profit to investor, the philosophy behind creating a marketable deal structure is primarily based on the priority afforded to investor financials, interests that provide for the maximum amount of security of investment principle, combined with the maximum amount of return on investment. By doing so with hybrid securities, you also accomplish the goal of raising substantial amounts of capital without giving up too much at your company for too little too early.
Closing: (15:20)
This has been Count Me In IMA's podcast, providing you with the latest perspectives of thought leaders from the accounting and finance profession. If you like what you heard, and you'd like to be counted in for more relevant accounting and finance education, visit IMA's website at www.imanet.org.
