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May 29, 2012

Q&A with John Rainey, Small Business Development Center, Clark University

Amid the current state of the economy, what’s the most pressing concern today for someone who wants to start his or her own business?

I think the biggest issue they have is finding capital, still. And normally … they’re going to find it in one of three places, what we call the three Fs: family, friends and fools. They’re going to find it through banks, through debt and debt financing, or they’re going to have potential investors. And the investors can be the family, friends and fools investors to the angels to the private investors, all the way up to the venture capitalists, depending on where they are in the process.

What’s the most important part of a startup’s strategy that will cause an investor to say “This is a good bet”?

They’re going to look at the market and make sure there’s a large enough market that this can really have some impact. Then they’re going to look at the product or the service you’re providing and say “Is this something new and dynamic?” And then they’re going to look at the management team and say “Can they pull this off?” Now that would be for what we would call an equity type of situation, which would be your high growth-potential clients. That’s a very small percentage of the client base. Most of your clients are going to start with what I call their war chest: their personal savings, maybe combined with a bank loan, possibly combined with an SBA guarantee.

When it comes to your initial investors, is it easy to see scalability at the start?

That you determine over time. … A lot of our clients are what we call “pre venture,” which means … we need to make sure they’ve done a decent feasibility study and see if it’s even worth pursuing the opportunity. Once they go through a feasibility (review), we try and put together a good, solid business plan. And that’s when you really start to get the feel as to what the potential is.

There’s been a lot of talk about the potential boost a startup can get from “crowdfunding.” Is there more potential good than harm in it?

If we do it right and we have enough (regulatory safeguards) in place, I think it’s a great possibility. The problem that I think we could get into is they could either overregulate it or under-regulate it.

Crowdfunding could be you get 10,000 people coming in at 100 bucks apiece. I haven’t figured out yet if I’m an investor, does that mean you have to give me an annual report? (Is the company) going to have to produce 100,000 annual reports for people that gave 10 dollars apiece? I think the administration can be very, very expensive.

My concern is that we’re going to have some frauds out there. They’re already dreaming up how they’re going to do it. And my question is: How are we going to put enough regulations in to stop them, but not choke the legitimate people off?

I suspect it will be another six or eight months before we really get enough information to make that determination.

Many small businesses fail not long after they’re launched. What are two or three of the chief reasons that happens?

One of the first reasons is they’re undercapitalized. And what happens to a small business is they hit a bump. If they don’t have enough in reserve, they just can’t make it. You’ve got to be prepared early on to know that you’re going to need more money. And most people tell me they terribly underestimate how much money they’re going to need to get going.

A second one is you’ve got to really know the customers. If nobody is going to buy, then nothing good is going to happen. And then you get into the management capabilities: Can you manage the people? Can you manage the finance? Do you understand accounting?

Massachusetts is seen as a major incubator for startups. How does Central Massachusetts compare in startup performance and sustainability compared with the rest of the state?

I have no statistics on how we’re doing (compared) to anybody else in the state. I know we’re very active. I think it’s a great area. We have great banking relationships and great bankers. 

This interview was conducted and edited for length by Rick Saia

Worcester Business Journal Staff Writer

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Expert advice from John Rainey of the Small Business Development Center Network at Clark University.

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