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Business Rx: Health consultancy seeks answers to questions about pursuing outside investors

By Special to Capital Business
Monday, September 6, 2010; 22

The entrepreneur

Cherise P. Scott and Sylvie A. Kwedi worked together in the same department at a health nonprofit organization, helping to develop sites for clinical trials. When the department was eliminated by the organization, they decided to take the skills they had developed and use them to address other health problems.

Scott and Kwedi, along with a few additional partners, began CLEAR -- or Capacity for Leadership Excellence and Research -- in January 2010 with the goal of helping health organizations in emerging markets. Right now, the consulting company is focusing its efforts primarily in Africa, where it is setting up and managing health programs and clinical laboratories, and helping groups with regulatory compliance, quality assurance, program management, information technology and staff development.

"The goal is to develop and improve these organizations to the highest possible standard of excellence and compliance to applicable international and local regulations," Kwedi said.

The pitch

Kwedi

"The success of CLEAR Inc. depends on maximizing the extensive experience and network of the owners in the field of global health and capacity building. Our company has already established an excellent track record with many professionals, decision makers and health institutions in several countries in Africa such as in Cameroon, Congo, Kenya, Mozambique, South Africa, Tanzania and Uganda, and in Asia in India and Cambodia.

"We will work hand in hand with the health programs and research in-country for the duration of project activities, something many other consulting firms do not do. This physical presence will allow for real-time exchange, troubleshooting and of strategizing to address problems as they arise. CLEAR's staff works side by side with local staff from the client health organizations."

Scott

"One of the things we struggle with is how to get the money we need to sustain the company while we pursue contracts. All of the partners put in a small investment, enough to get us started. We've thought about investments, but investments come with issues as well. When you have people investing, they want a piece of your company. How large of a piece do you give? What are the different means of financing available for a small start-up consultancy firm such as ours?"

The advice

Melissa Carrier, executive director of the Center for Social Value Creation at the University of Maryland's Robert H. Smith School of Business

"Consultant firms are traditionally not financed by outside investors, in part because they typically work on a contract basis and do not have capital requirements that a start-up technology firm may have. That being said, there are several options for fundraising.

"The first option, which you've already done, is putting your own money into the company. You can also ask friends and family to invest in your company. The third is getting a traditional loan from a bank. You can also think about convertible debt financing, which is where the investments begin as a debt instrument where there is a set term, let's say five years at a 10 percent interest rate. At the end of five years, the investor has the option to convert that into equity, giving you a longer runway before making decisions on how to value the firm. The last is to have outside investors, which requires giving up equity in your company.

"Most businesses start with the route you've taken or with investments from family and friends -- it's typically the easiest money to get and the least expensive for the firm. Convertible notes work really well with friends and family. For one, there is a formal contract with the investor, whether it's your grandma, your best friend or your next-door neighbor. That's important if you expect to stay friends. Second, there is an opportunity for them to earn interest through the investment. Also, loan payments can be managed by services companies quite easily. But you'll need to make sure you manage your cash flow and have the money on hand at the end of the note should the investor want full repayment.

"However, it is not a bad thing in the course of fundraising to give up equity in your company. The right outside investors and an advisory board can help you navigate strategic decisions and fund your growth. CLEAR is probably not a candidate for venture capital, but could be interesting to an individual investor who is looking to support a company with your mission. I definitely recommend using the convertible debt or bank loans over equity at this stage in your development. In part, this allows you to avoid negotiating in great detail the value of your company, which is nearly impossible to do right now because you are only eight months old.

"The best thing to do at this stage is to keep your costs as low as possible while you bid on contracts and look for ways to differentiate yourself as a corporation focused on a social mission. The state of Maryland just passed a law that goes into effect in October for B corporations, which provides a legal framework for companies to pursue a social mission in addition to a for-profit mission. An investor community is developing around B corporation status, with investors looking to invest in firms that are creating social and economic value. So seeking a B corporation certification could be a great way to distinguish your company in the field."

Entrepreneur's reaction

Scott

"We will investigate filing for B corporation status -- that's a great idea. And we are in the early stages of forming an advisory board and also wondering if we need an outside investor on our board of directors. The question then is, how much of the company do you give up to an outside investor and when do you bring them in? We are doing a significant amount of the work now, so what kind of piece of your company do you want someone who isn't putting in time or will not do a lot of the work to have?"

Carrier

"You need capital to build your business, so don't think of it as a trade-off -- both are equally important in funding your business. Without the right funding mechanisms, your team can't do the things it needs to do to seek and win contracts, grow and develop staff, and become a premier provider.

"In terms of how much you give up, it absolutely depends on what your cash flow situation looks like and how much money you need to achieve your specific goals."

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