I have had some conversations lately about capital to help a business grow. The conversations have not gone well and I am trying to post here to help people be a bit more thoughtful as it relates to raising capital for their business. We have talked about all kinds of investors whether they are Financial, Strategic, or Angels. But the thing that I think people want are Unicorns. Investors who don’t actually exist.
Let me take a step back and outline the fundamental problem. I think this came from Kickstarter and the like where people give you money with really no expectation of a rate of return. This kind of funding works for a very small slice of businesses. An Electrician or a Clothing Store is unlikely to have a viable Kickstarter. They basically work for Product Development Projects that have some meaning to a Millennial Audience. Most businesses can not use that kind of vehicle to raise money.
This leaves us with our two traditional funding mechanisms: Equity and Debt. Yes, there are hybrid vehicles but most Small Businesses don’t have the infrastructure to deal with Warrants or Preferred Stock. So, let’s just stay the course and focus on our two mechanisms. Debt is a loan of some type. There is interest to be paid on a loan as well as eventually paying back the principal. This means that many people are interested in Equity investments. This way the money comes in and there is no direct obligation to pay this money back. That makes things attractive for people. The downside is that Equity likely comes with some interference with how the business is operated. This can be troubling for some owners.
But we need to talk about two things that need to be included in any request for funding: A plan for Return and Use of Proceeds. The former creates a whole set of problems as Owners are often unclear on how they are going to make the money up that they are taking in. Think about an investor. If you are unclear or uncertain, why would they give you money to use on your business. That kind of clarity is paramount. With Equity, there is an additional challenge. They are not concerned with getting interest but at some point being able to sell their portion of the business at a higher number than they put in (with some thought to a reasonable return on their investment). Does that mean you have a plan to sell the business or take it public? If not, how are they selling their stake? The Use of Proceeds asks how the money is going to be spent. Often times, owners know they need capital to grow but don’t have clarity in planning how they are going to use the money and what alternative uses their might be. Investors will evaluate the Use of Proceeds to see if the plan makes sense. If it doesn’t they are unlikely to give you capital.
All of these things cause people to be adverse to raising capital to properly execute their business. But all of this is well within the Owners thinking and is easy enough to write down in a clear manner. It can help a business prioritize how it is spending its money even without additional investment. If you know a business that is struggling with raising capital or is unsure what that would mean have them contact me. Would be happy to talk to them to see what their options are.
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