Industry Watch

To be young and funded

Short on equity and experience, young entrepreneurs must get creative — or lucky — in their pursuit of funding

By Kevyn Burger
Monday, July 25, 2016

Sitting in coach on a flight to Austin, Texas, for his grandmother’s birthday, Robbie Harrell didn’t have much leg room.

The guy squeezed in next to him was big.

“I mean, really big,” says Harrell, 25. “Like, out of the movie ‘The 300,’ big.”

The two struck up a conversation and Harrell eventually mentioned his struggles in funding his startup, Minnesota Ice Sculptures.

“Then the guy says, ‘I might be interested in getting into that business,’” Harrell recalls. “That’s when I said, ‘Who are you?’”

Turns out his seat mate was Cullen Loeffler, the long snapper for the Vikings who played in purple for 11 seasons.

The NFL veteran went on to invest in Harrell’s company at a critical juncture — when the young St. Thomas student needed an expensive freezer to keep up with demand for his sculptures.

Loeffler made a direct loan and continues to hold a small stake in the company.

“He came along when we were make it or break it,” Harrell says.

The fortuitous plane ride in 2014 happened shortly after Harrell had been rejected for a small business loan. Two-and-a-half years later, with 20 employees, an impressive number of contracts for his ice sculptures and artisan ice, and on track to close $1 million in annual sales, Harrell again sought a small business loan — and, in the spring of 2016, was again turned down.

“Getting money shouldn’t be this tough for what we’ve already proved,” says Harrell.

The Funding Dilemma

Finding funding represents a variation on the classic just-out-of-school employment dilemma — you can’t get a job because you don’t have experience, and you can’t get experience because you don’t have a job.

For Minnesota’s young entrepreneurs, founders and startup developers, it’s an uphill climb to get money for a business when they’ve never run one.

Of course, by nature, bankers are small-C conservative.

“We look carefully at a lot of factors. Nobody wins if the customer can’t repay their loans, not the customer, the community or the bank” says Becca Cooper, the South Central district manager for Wells Fargo, which is the largest SBA lender in Minnesota and in the country.

“A young company looking for startup capital is going to need at least 10% down. That’s a struggle to find,” adds Annie Deckert, 34, president of the Decklan Group. Her Elk River-based company provides strategic assistance to businesses that are starting or growing.

“Funders send a lot of [businesses] back to the drawing board. With our clients it’s about 50-50 if they can move forward,” she said. “They turn to savings, gifts from family, crowdsourcing. As a last resort, they offer a portion of the business to an investor.”

The Minnesota way   

Matt Otterstatter finds that youth is regarded differently in the Midwest than what he saw on the West Coast.

A partner in Vilicus Ventures, an Eagan-based early stage VC firm, Otterstatter, 32, invested in and worked with startups in California before returning to his native Minnesota four years ago.

“In California, it’s a virtue to be young. It makes you more attractive, funders see you as not being bogged down with reasons why an idea won’t work,” he says. “I don’t see that in the Midwest. People want to give money to the experienced, someone with background in an industry.”

So — go west, young entrepreneur?

Otterstatter offers another solution to those in the early phase of climbing the ladder. He recommends looking up a few rungs.

“If the problem is inexperience, the solution is to find it by proxy,” he says. “Have an experienced person join you as an adviser, a mentor; they can vouch for you. That’s powerful in a state where reputation is so important. It’s effective when investors see someone in a senior position who gives their seal of approval for a business seeking funding.”

There are other out-of-the-box options. WomenVenture, Minnesota’s economic development agency for women, can provide start-ups with business loans up to $50,000.

“If they need more than that, we have partnerships with community banks,” says Gertrude Matemba-Mutasa, director of the Women’s Business Center for WomenVenture. “They have to qualify, but we can look at nontraditional sources of collateral.”

But Matemba-Mutasa has noted a cautious pattern in many female entrepreneurs that can hold them back.

“We see women as more reluctant to seek capital for their business. A woman will borrow from her 401K, load up her credit cards, sell her ring before she will seek a loan,” she says. “Undercapitalization is one of the top reasons why businesses fail. We see women hesitating when men in the same position don’t.”

Alternative (nonfinancial) support

It’s not just an infusion of capital that can take a small business to the next level.

Startups can find novel ways to get investments that have value but do not involve cash.

Sarah Moe, 33, won a fellowship from Clockwork, which is sponsoring a local minority-owned small business through the adopt-an-entrepreneur program at co-working incubator COCO. The interactive design and technology agency is financially backing Moe’s workspace and mentoring her company, Sleep Health Specialists.

“This will be a game-changer in my business,” Moe says. “This has opened my eyes and accelerated my growth. It is propelling me to a new level of professionalism.”

A Registered Polysomnographic Technologist (RPSGT), Moe began working overnights in hospital sleep labs more than a decade ago. She’s supervised thousands of sleep studies and, working as a college instructor, trained sleep technicians for years.

Fascinated by the mysteries of slumber and concerned about the large number of people with health-robbing sleep disorders, she created a business that brings her expertise into companies. She has begun teaching seminars and leading lunch-and-learns as part of corporate wellness initiatives.

Moe could talk all night about Circadian rhythms. Business cycles? Not so much.

“What I’m selling is in my brain and my background. I know my field,” she says. “I’m learning about running a company. I’ve been blown away by other entrepreneurs. I’m taking advantage of great information every day. Being in this rich culture of business owners and hard workers makes me better.”

The bottom line is still the bottom line

There comes a time for many companies when only an influx of cash will lay the groundwork for growth.

That’s where Robbie Harrell sees his company. He is operating at capacity right now, creating and delivering his custom ice creations. He needs an investment to expand. He’s found several sources willing to pony up $10,000, but he’s on the prowl for a bigger chunk — a round-two capital investment of a half million bucks.

He wants a deep-pocketed investor who will regard his youthful stamina as an asset.

“Three times in the past week, I was in the office from 9 a.m. until 6 a.m. the next day. I have the energy and I love it,” he says. “My age is my superpower.”