Accelerate This: Investors

To invest or not to invest – that is the question.

For Mofin Labs, it’s part of the customer experience, and for co-founders Eric Ham and Josh Willis, it’s the pipeline for getting products out of development and into the revenue stream.

The company is in a unique position among those in The eFactory’s business accelerator program in that they already have financial steam behind their first product, Secure Statements, based on a business model that promotes growth without giving up equity.

In the startup world, such self-generated progress is known as bootstrapping, and CEO Ham said Mofin is ready to start climbing.

As the developer of software for credit unions and community banks, Mofin partners with institutions to create and develop an end product. In a typical arrangement, companies invest an equal amount of money and in return for providing ideas, performance feedback and enhancement suggestions, Ham said they continue to use the product at no charge and receive royalties from product sales.

Entrepreneur-turned-investor Dan Cobb, who presented to the accelerator businesses on investor relations, said self-funding progress is a preferred route for startups. Having sold two prior health care technology companies, Management Software to McKesson Corp. in the mid-1990s and HealthMedX in 2011, Cobb knows how that work can pay off.

“I counseled the companies to not get investment if you can avoid it, because equity is your most valuable asset,” Cobb said, noting each venture of his was self-funded, utilized forms of financing other than outside investors and took more than 10 years to reach an exit. “That worked well because if you get too much money up front, you can’t control your own fate.”

Ham’s takeaway? Good growth is a balancing act. “Each company has to evaluate the same decision: Is the growth enough for what you’re giving up?” Ham said. “And everyone has to give up something. There is no free money.”

Scaling strategies
To create Secure Statements, Ham said four Missouri credit unions – including Metro Credit Union and CU Community Credit Union locally – funded between $40,000 and $50,000 total, and would equally split 10 percent of quarterly revenues on future sales.

“We can bootstrap a little easier because each solution we build could be funded prior,” Ham said. “I’m not saying if we had the need for outside investments we wouldn’t look at it – we would. But if we can get investment organically in the segments we’re trying to serve, I’d prefer to go that direction.”

On the other side of the coin are investors’ considerations, including sustainability and scalability. Jami Peebles, executive vice president and market manager of Central Trust Co., was a member of the committee that interviewed and selected the accelerator businesses from a pool of 40 hopefuls. She had those long-term questions in mind. “That was a big part of the discussion – does this business have staying power or is it just a good idea that will be gone tomorrow?” Peebles said.

JMark Business Solutions Inc. CEO and President Thomas Douglas is well versed in strategic investments. His company has acquired four tech firms since 2008, twice crossing state lines. He has a general rule of thumb for evaluating investment: “Fundamentally, what value does the organization bring to the market and is it substantial enough people will pay for it? If the answer is yes, vet the model. Make sure it scales and ultimately makes value substantive enough for the risk of investment.”

Douglas said because investing in software carries potential for both high margins and high risks, JMark looks at a 10-year projection of worth and wants to see at least six times return – ideally, 10 times or more.

“Part of the consideration is am I just investing cash – or time, sweat equity and support?” Douglas said. “That substantiates a higher percentage.”

Eyes on the exit
Cobb said it’s never too early for startups to plan their exits, but he cautions against a quick sale. Instead, companies should set milestones, such as a sales goal or market share, stick to it and deflect outside inquiries until the objective is reached. HealthMedX, he said, received inquiries regarding an acquisition for several years before the company reach an internal exit goal, and went through another year of inquiries and negotiations before finally selling the business.

“Once your company is successful, it’s tempting to improve your life, but ask yourself, ‘Does that make the company more valuable?’” Cobb said. “The answer is usually no.”

Although Ham can envision a possible exit for he and Willis, the co-founders aren’t rushing to sell their company. The only piece they plan to give up is the 8 percent equity exchanged with a subsidiary of Springfield Innovation Inc. for $30,000 in startup capital as part of the accelerator.

“If we can build two or three products that pique the interest of the industry and the rights to those are bought by a Jack Henry [& Associates Inc.] or someone, that’s an option,” Ham said. “Right now, we’re really focused on building.”