Funding Forecast Brightens

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Tomato Battle does not fit the traditional financial model of a startup. The Seattle company, which produces daylong events in cities across the country that involve beer, bands and, yes, an enormous tomato fight, needed money to fund its growth. It received support from Seattle-based Lighter Capital, one of a number of new institutions that have emerged to assist small businesses in getting through tight credit conditions.

Since the trough of the recession in 2009, Washington businesses have made slow, but steady, progress toward recovery. In 2009, 1,477 Small Business Administration loans were made in Washington, totaling $398 million, down sharply from 2,762 loans for $594 million in 2007. By 2011, however, with help from the American Recovery & Reinvestment Act of 2009 and the Small Business Jobs Act of 2010, those figures rebounded to 1,677 loans totaling $793 million for the fiscal year.

According to data from the National Venture Capital Association, Northwest companies received nearly $693 million in funding in 2009. That total rose to $853 million in 2010; 2011 looks likely to beat that total, with $638 million invested through the third quarter.

All of the figures suggest an economy moving in the right direction. “I would call [the funding climate] warm, alive,” Lighter Capital founder and CEO Andy Sack says. “I would not call it hot, but definitely deals are getting done. I tend to see doom and gloom, but now I’m thinking it might actually be OK.”

During the worst part of the recession, lenders and borrowers were reluctant to pursue financing. That situation might finally be changing. Lending giant Wells Fargo and the Seattle office of the Small Business Administration (SBA) both note a modest increase in the number of customers asking for small loans. “We’re seeing an uptick in the number of applications,” says Matt Fitzgerald, regional business banking manager for Wells Fargo. “Business owners are keeping their decisions modest at best, but there are definitely folks dipping their toes in the pool.”

Nancy Porzio, Seattle district manger for the SBA, says the construction industry has been particularly slow to recover, but there are signs of progress. She notes more business owners have checked SBA resources and explored the possibilities of rehiring staff.

One important legacy of the recession has been the creation of new sources of funding for early-stage companies. Sack founded Lighter Capital, formerly Revenue Loan, as a “middle ground” for early-stage startups that are “inappropriate for venture capital but are growing businesses.” Lighter Capital will make loans between $50,000 and $500,000; the borrowing company uses a percentage of its revenues to repay the debt.

“Lighter Capital funds weird stuff that makes money,” Sack explains. “We look for niche- oriented online businesses. We do stuff that’s really early stage but has some traction.”

To date, Lighter Capital has approved 12 loans and raised $6 million in capital. In addition to Tomato Battle, the company has also approved loans to Valant Medical, which provides management tools for medical professionals, and Bouncy House, which rents “bounce houses” and other inflatable party items.

Another new source of funding comes in the form of a $25 million pool called the W Fund, which includes $5 million in federal moneys designed to back early-stage ideas from Washington state research institutions. Though the concept started before the recession, the funding has finally come through to make it a reality.

“We saw really promising opportunities in the pipeline that we weren’t sure would find the funding,” says Linden Rhoads, vice provost of the Center for Commercialization at the University of Washington.

In the depth of the recession, Rhoads says, venture companies and angel investors put their money into more mature startups, probably leaving less money for truly early-stage companies.

Federal funds will also support a Capital Access Fund, a reserve designed to allow bank partners to make riskier loans than they might ordinarily. Fitzgerald says Wells Fargo favors any program designed to help small businesses. “We’re super excited to see the state participate in any program that will help move the economy forward and glad to see the state make these types of investments.”

Outside the small-business sector, venture capitalists also report an active funding landscape. Madrona Venture Group Managing Director Matt McIlwain says venture capitalists will likely invest $1 billion with Washington companies this year and predicts the gaming, mobile and cloud computing sectors will continue to expand.

One reaction to the recession has been a trend toward “lean startups”—entrepreneurs who launch their businesses on a shoestring budget. With relatively low initial cost and risk, these entrepreneurs need less initial financing and staff to begin their businesses. That makes finding initial funding comparatively easier than for larger, late-stage rounds.

McIlwain notes broader forces have less of an acute impact on the venture capital environment. “If you’re building products and services that solve customer problems better, macroeconomics don’t impact you as much,” he says. “Really good businesses can be built in good and bad economic cycles.”

He adds: “You can try a lot with a little [financing]. Then the question is are you making the business progress, launching and improving products, getting customers, hiring the talent that will take you to the next level and getting distribution partnerships? Those things have always been necessary, but they are even more necessary today.”

Porzio says the combination of lower startup costs and the recession have prompted an entirely new group of entrepreneurs to begin their own businesses. “I think the idea of entrepreneurship is new hope for many borrowers,” she says. “They come to realize they have these skills that they can use and put to their own benefit. They just aren’t quite sure how to get started.”

Spurred on by a region with incredible talent in mobile technology and cloud computing, McIlwain says Madrona remains decidedly optimistic.

“Madrona has a big conviction that the innovation economy is strong and thriving,” he asserts. “We have good anchor tenants, outstanding research institutions, a culture of innovation, and talent and experimentation is rewarded here. We feel great about the region.”

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