The Secrets to Getting Your Green Business Funded

Financing is the most significant hurdle to getting a green idea off the ground. Venture capitalist Bryan Korba offers an insider's perspective on what VCs are looking for, how not to look like an amateur, and what to do with the money when you get it.

Bryan Korba is the managing partner of Y Street Ventures, an investment management company with an interest in the sustainability industry and the triple-bottom line business philosophy. Founded in 2000, Y Street Ventures handles a broad range of investment categories, including venture capital, private equity, management buyouts and growth investments. According to Korba, executive leadership is the best indicator of a project's potential. In this interview, he shares his views on leaders, amateurs, red flags, and the pitfalls to going public before you're ready.

Anna Clark: Bryan, what got you interested in investing in sustainable companies?

Bryan Korba: I was working on a project in Toronto and met my future wife who eventually received her MBA in Sustainability. The green/sustainable movement was already in motion in Canada in 2000 and the triple-bottom line philosophy resonated with me.

AC: Do you hold clean tech or green-related business plans to a different standard than others that come across your desk? Do green business opportunities have an advantage over more conventional ones in terms of getting VC funding?

BK: I don't use a different standard for analyzing a green-related business plan but I do pay more attention to patents and other innovative green technologies. I probably am more cautious about green businesses because there are so many new technologies; many are competing to solve the same type of challenges. VC funding follows trends in the marketplace and I would say green investments are on the rise because traditional VC firms have launched new green-focused initiatives.

AC: You outline 5 types of investment capital in a business: self-funding, friends and family, angel investors, venture capitalists, and traditional lenders. Which strategy is most appropriate for seed stage, early stage and late stage companies?

BK: Seed stage is really just an idea and a business plan. Early stage is when you have a product or service ready to handle sales and customers. Late stage is when you are up and running, you've got customers, and are further along in generating revenue. Most venture capitalists are early and late stage investors because seed stage deals carry greater risk to the investor. For these seed and early stage companies, self-funding, friends and family, and angel investors are the best bets.

Nine Tips to Get Your Start-Up Taken Seriously

1. Focus on building a company and standard operating systems. 2. Get good people on your team. 3. Get some customers and generate some revenue. 4. Truly assess the risks and issues facing the company and industry. 5. Understand and communicate strengths and weaknesses. 6. Be honest and open-minded. 7. Ask questions and seek guidance. 8. Research everything! 9. Try to understand things from an investor's perspective.

AC: All the media hype about "green" reminds me of the dot.com boom, at least before the recession. Are venture capitalists becoming less inclined to cut green companies slack in terms of leadership, operational readiness, and/or valuation?

BK: People get caught up in chasing VCs. I did this back in the 90s. But it's a new era today, and all that hype around green is not going to change what VCs are looking for. VCs are extremely conservative and look to find opportunities they understand and believe they can help grow. They want to hit home runs so the entrepreneur really needs to research the VC's background and current investment portfolio to make sure they will understand the investment opportunity. Being green will never enable a company to find quick VC financing. There are no quick capital raising strategies in the VC world.

In my opinion, VC capital is very difficult to receive. Investment firms see a large number of deals and fund the deals that make sense for them. You can have a great business concept and never receive VC funding because the focus and stage of the VCs might not match your company. A company can spend too much time and energy chasing VC capital instead of focusing on building a viable business. An entrepreneur should build the business not be in business to raise capital. You need to go build a business first and prove that it works. Not only is it more prudent, but your likelihood of actually getting the money will be so much greater.

AC: During startup, what proportion of time and resources should go into "building a business" (building a customer base, generating revenue, making sales, whatever the company does) versus "building a brand" (publicity, corporate advertising, sponsorships)?

BK: I think companies should focus on revenue, customer adoption, and sales during the startup phase. Brand building should only be a strategy if the available capital integrates this strategy as part of an overall plan. I would not sacrifice capital deployment that could generate revenue. As an investor I want to see sales, customer adoption and a system to manage the growth. There are plenty of PR strategies that would complement the core business functions and remember; value is created through generating revenue, proving a customer base, and building the infrastructure to grow and manage customers. Value is real and not perceived. Financial markets are driven by EARNINGS not PR.

AC: Bryan, entrepreneurs tend to be aggressive, confident and optimistic by nature. What advice can you offer someone with "champagne tastes on a beer budget" -- that is, a big vision but no immediate resources to achieve it?

BK: Obviously everyone wants to hit home runs and dream big. I would focus on how to get your company from here to there. You will have to roll-up your sleeves and get to work and remember there is no quick way to creating value. Focus on building a business first. Being a prudent and wise steward of your capital doesn't mean you are a small thinker even if your steps towards your big dream are small.

For example, I just launched a new company last March. I lost money the first month. Since April, we have been profitable every month and growing. Our initial investment was used for marketing materials, a website, and some lead generation strategies. Then we got on the phone and made calls, networked, and aligned ourselves with an industry veteran to leverage his contacts. It's all about revenue and clients. Since then, we have invested our free cash flow back into the business and are focused solely on what's generating more revenue. At the same time, we have been building our operations manuals, training manuals, etc. We want to build a business, prove it has demand and be able to manage our future growth.

Now, I could have started this venture and said, "Wow, we're going to be the biggest and best company in our industry." I could have spent time and energy creating the best business plan and started pitching my deal to potential investors. Who knows if I could have raised the money but it would have taken a lot of time and energy to convince someone to invest in my business concept. Instead I used a small amount of capital and focused on how to start building a company. I needed to prove it could work first. Twelve months from now, if I'm generating free cash flow that is trending upward each quarter, I can actually present a business that is worthy of a capital investment. I could still be out trying to raise investment capital during that same 12 month period with no success. Anyway, it's a fun challenge to start businesses with limited capital. The most valuable capital you have when you start a business is human capital and let your customer sales be your startup capital.

AC: What are some red flags that turn off investors?

BK: Here are eight big ones:

1. Closed-minded entrepreneurs.
2. No real startup experience.
3. Need to spend millions of dollars to generate insignificant revenue.
4. The company has no model to generate revenue (it's customers, not buzz, that generates revenue).
5. The company can show no operational roadmap on how to build and manage the required business processes (sales, accounting, customer service, quality control, etc.).
6. Unrealistic valuation of the company.
7. Entrepreneurs that try to control everything.
8. Trying to raise money instead of building a business.

AC: What can an entrepreneur do to avoid looking like an amateur?

BK: If you can show potential investors that you've covered these points, you stand a better chance of being taken seriously:

1. Focus on building a company and standard operating systems.
2. Get good people on your team.
3. Get some customers and generate some revenue.
4. Truly assess the risks and issues facing the company and industry.
5. Understand and communicate strengths and weaknesses.
6. Be honest and open-minded.
7. Ask questions and seek guidance.
8. Research everything!
9. Try to understand things from an investor's perspective.

AC: When a company does get money, what should its priorities be in using it?

BK: Here are the top six things to keep in mind when you first get funded:

1. Get customers! Validate demand!
2. Keep overhead low!!! Do as many jobs as possible! SELL!
3. Network and figure out ways to SELL and get customers!
4. DO NOT rent fancy offices, hire a bunch of people or pay goofy salaries.
5. Manage your expenses. Justify every penny.
6. Ask for help and guidance (nobody knows everything).

AC: If a company is owned by more than one person, what advice can you offer in terms of leadership? How do you avoid "too many cooks in the kitchen" syndrome?

BK: An organization needs clearly defined roles and goals. There must be a leader who can define the strategy, create the execution plan to complement the strategy, and actually get it done. No leadership, no company.

AC: What leadership traits are critical for a CEO?

BK: Here are the characteristics I look for:

1. Good people driven by the right motives and ethics.
2. Willingness to work hard and do every job.
3. Open-mindedness.
4. Ability to focus and lead a team to a common goal.
5. Passion.
6. Honesty.
7. Experience.

AC: At what phase in a company's life cycle is it appropriate to go public?

BK: Going public is usually an exit strategy, not a business strategy. Bigger venture capital companies use public markets as a way to realize their investments. It is very expensive to maintain a publicly-traded company, plus you are held to very high standard of disclosure. I don't see the value of going public unless the company requires growth capital AND the company valuation is very high.

A company really needs to be proven and generating consistent and growing revenues before it will have a successful IPO. The days of going public based on potential or a business plan are over. Facebook, MySpace and YouTube have never gone public. Google went public after generating significant revenues and earnings.

If a company is truly valuable, there are plenty of options to raise growth capital and exit a business. Beware of the investment banker selling the merits of going public. You don't go public unless you can get good valuation. Always remember there is no quick way to create value and this includes going public on dreams of what could be.

AC: What outcome should one expect when building a business?

BK: Don't expect to get rich quick, or even to get rich. Keep grinding away. Make more revenue by selling more items, and the rest will take care of itself. Just watch your revenue, earnings, and operations and forget about chasing money. Put your head down, work hard, focus on operations and customers, and remain open-minded and flexible. If something doesn't work you have to be willing to change your idea. Things will change. You get all that down, and the rest will take care of itself.

AC: So you're saying there are no shortcuts?

BK: No shortcuts. Focus on building a business, not a dream. Do not get so focused on the dream that you become exasperated by your business. There is no such thing as a free dollar or quick value. Customers, revenue, hard work, persistence and perseverance will create success. The nineties are over, and only a handful of those guys actually lasted anyway.

Anna Clark is president of EarthPeople, a full-service consulting firm that helps companies of all sizes create and execute green strategies to save money and bolster their brands.