Knock on Right Doors for Start-Up Capital

The search for outside financing frustrates many an entrepreneur who runs a business at the start-up stage or just beyond it. Indeed, it’s probably harder to finance a business at this stage than at any other.

For one thing, commercial banks don’t lend to companies that are less than 3 years old, as a rule, and in any case they want to see that the business, no matter what its vintage, can service the debt. For another, angel investors and venture capitalists shy away from the risks inherent in start-up or early-stage companies.

Entrepreneurs often waste time and money knocking on the wrong doors--as Joe Rubinsztain can tell you from firsthand experience. His Santa Ana software company, General Medical Applications Inc., targets the record-keeping needs of medical practitioners.

Rubinsztain founded GMed two years ago when he began selling a software package that simplifies the onerous task, cutting costs and keeping physicians in compliance with the dizzying regulatory strictures of government-run payment systems such as Medicare.

Rubinsztain’s first release targets gastroenterologists, and in the hope that he could expand his software to serve other medical specialties, last year he set out to raise $4 million in outside financing. He wrote a business plan detailing his product and its market, sent it to several venture capitalists and investment firms and attended a financing conference in Napa last February that was organized by Golden State Capital Network, headquartered in Chico.

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Of the 17 entrepreneurs making formal presentations at the Napa conference, two won the backing of venture capitalists (including a Marina del Rey software company, Storactive Inc., profiled in this space last week).

Four others remain in negotiations with potential backers, but even though GMed already makes a profit, Rubinsztain is not one of them. Instead, Rubinsztain’s fund-raising efforts ate up a great deal of his time and brought him frustration but no outside capital.

Many another entrepreneur suffers the same fate and gives up the search for outside capital, but Rubinsztain drew a valuable lesson from the experience--namely that you must learn how the capital markets operate and shape your business strategy accordingly.

“I had no contacts,” Rubinsztain said, looking back. “I’m South American, from Venezuela, and I didn’t have a track record in the American market or a network of contacts to give me credibility in approaching venture capitalists. I also didn’t understand that you have to qualify your sources of financing very carefully.

“I wasted a lot of shots, and I learned that what doesn’t work is to target sources with no knowledge of the marketplace where I sell my software.”

Having struck out, Rubinsztain took a new tack playing to his strength--the fact that GMed already turns a profit licensing its technology to customers that include the Beth Israel Deaconess Medical Center at Harvard University’s medical school. Rather than beat his head against a wall trying to raise outside capital to create his own sales and distribution system, he decided to seek a strategic partner with such a system already in place.

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The problem, he realized, was that he needed to penetrate the market with his product, and raising outside capital wasn’t the only solution. If he couldn’t raise capital himself, why not link up with a partner already selling in his marketplace?

“We know how physicians work in keeping records,” Rubinsztain said. “We know what they need to be more productive--a system that allows them to keep records of patient contacts and procedures in compliance with all the rules and regulations of government.

“That’s our expertise. What we don’t have is a sales force, so we want to leverage the sales force of a strategic partner. If that partner brings some capital to the game, fine. But I know now that it’s not crucial.”

The lesson is clear, Rubinsztain said. He might spend all his time seeking outside capital and get no closer to penetrating the market--or strike a bargain with a strategic partner with the muscle to do the same thing.

Rubinsztain is now talking with several potential partners and has much more confidence that he will succeed than he did while seeking outside capital.

“We might still raise some outside equity capital,” he said. “But first we’re going to show what we’re made of by making the product successful so we can say that we have succeeded where others fail.

“It’s going to be a long process, I know. We created a new technology for difficult buyers--physicians, who are conservatively trained. The product fits the need, and if we can close a deal with a good partner, we’ll get this company where it needs to be.”

Juan Hovey can be reached at (805) 492-7909 or at jhovey@gte.net.