Start-ups need skilled advisors
In Alaska, frequently the business plans for new businesses are underdeveloped and the operational skills of management are untested. It is very important for most new ventures in Alaska to seek active capital before seeking passive uninvolved capital.
The active capital investor should have documented successes in operating and investing in businesses similar or related to the new business opportunity. The active investor should be on the board of directors or have a representative on the board.
He or she would usually own a more senior class of stock than the founders and require rights. For instance, if certain operating benchmarks aren’t attained, then the active capital investor has the right to do whatever it takes to salvage the business. This type of investor is very important to the future of high-growth business opportunities in Alaska.
Alaska has very few "business validators," but we do have numerous "real estate validators." There are several real estate developers who have successful track records as well as repeat investors waiting for the next opportunity. This is the type of successful network we need to grow for nonreal estate opportunities.
Seldom do first-time entrepreneurs realize that the appropriate initial money usually has many strings attached, but those strings frequently turn out to be lifelines that rescue the company.
In concert with active investors, developing a strong board of directors or advisory board is often the difference between success and failure for many companies. The initial "business validator" helps a new business establish credibility. This investor is considered an active capital source and helps the entrepreneur validate his or her business model and provides valuation to other potential investors.
Most available capital sources in Alaska are considered passive and should not invest in local deals unless they have a "business validator" that has committed to the opportunity. It isn’t that Alaska is lacking in investment capital so much as it is lacking in lead investment capital.
One of the proven ways of nurturing this process is by developing an "Angel Network." This is normally a formal network of successful business individuals and organizations that are "business validators" in various types of business.
It also includes wealthy individuals and organizations that are looking for suitable investment opportunities, but the successful business individuals and organizations with documented operating skills are initially the most important seed in growing the network.
This network usually evolves into one of the most important sources of active capital, co-investment capital, advisory board members and prospective directors for new businesses.
This initiative is now under way in Alaska under the Alaska InvestNet banner. It is an excellent opportunity for village and regional Native corporations to nurture shareholder development by signing up some of their current and future leaders and dealmakers into these types of self-help organizations.
Alaska InvestNet’s mission is not to replicate any existing support activities, but rather to initiate missing components and encourage collaboration among like-minded existing organizations. To get a feel for the incubation process in action, I encourage prospective participants to watch Bruce Borup’s Alaska Business Plan Competition at Alaska Pacific University.
In the competition, master of business administration students are paired with an Alaska entrepreneur or develop an idea from one of their student team members. The students develop and refine a business plan with all the appropriate financial information and compete in a well-rehearsed and dynamic investor presentation.
Hopefully, the business plan competition model will expand statewide and other schools will have feeder competitions that will lead to an annual competition co-sponsored by all institutions of higher learning in Alaska, all financial service organizations and all for-profit Native corporations.
I envision that the Alaska InvestNet "Angel Investors" will be involved in numerous advisory boards on winning business plan competitions. Some of the winning business plans will probably receive active funding from their advisory board members, and many students will find jobs either from the entrepreneurial businesses or from one of the advisory board contacts that were impressed by the students’ thought process, initiative or other factors that were displayed through the competition.
Alaska InvestNet needs early adopter civic entrepreneurs to join to help the organization reach critical mass. Early investors in the organization shouldn’t be too concerned about what type of deal flow they will be exposed to, but how they can help support and incubate the process.
Allan Johnston is chairman of the Alaska InvestNet Advisory Board and a co-founder of the Alaska Business Plan Competition. He can be reached via e-mail at ([email protected]).