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Bill McCready
Alternative Financing: Venture Capital Is Not The Only Way
Formal Venture Capital is not the only way to finance your
venture. Although the following methods are not commonly known,
they are legitimate and effective ways to obtain business
capital.
Consider these scenarios:
Buildout Allowances from Landlords:
Banks will often allow you to count buildout allowances as
capital (unless it has to be repaid) in your source and use of
funds statement. While the money comes in and goes out, it does
increase the overall cash flow and size of your deal.
Example: This writer recently counted $450,000 buildout
allowance of a $1.5 million deal as equity, when obtaining a
$350,000 loan for a client. The other $750,000 came from the
founders and investors. By counting the buildout allowance as
equity, the debt to equity ratios were much higher.
Vertical Integration:
Capital can often be raised from outside companies with a vested
interest in developing either distribution channels, or assuring
themselves of adequate product flow from cash-starved companies.
Two examples:
(1) A distributor invested in his supplier in order to assure
himself adequate inventory.
(2) An oil company franchisor provided startup capital for a
client when asked. Although treated as a long term loan by the
oil company (it only had to be paid back if the company didn't
reach its distribution quotas), it was a capital infusion from
the bank's standpoint.
Professionals Associated with the Business:
Investments through architects, accountants, lawyers and other
suppliers can also be also be arranged. Just present a way for
investors to be more profitable in their own companies through
the proposed investment.
Today, law firms, advertising agencies, executive recruiters and
professional consultants often will accept partial payment in
stock, warrants or options in return for services. This is an
excellent way to build a powerful team of professionals with a
vested interest in your success and your success in raising
capital.
Many of these professionals are also angel investors, who can
champion your cause with other private investors. Do not make
the mistake, however, of assuming that you will get both and
investment and discounted services from the same group. They
will risk either their time or their money, but not both with
your company.
White Knights:
If you are a retailer with poor credit, and cannot get
merchandise shipped without a direct payment, have someone with
better credit buy the products and resell them to you. You may
pay a premium (3% - 6% per order), but the White Knight will
collect a few percentage points each month. If you have a high
turnover ratio, it will allow you to reestablish cash flow and
credit. Only a few specialists handle these types of operations,
but you can find them through factoring companies.
Technical or Professional Expertise:
Many professionals are willing to reduce their fees in exchange
for equity. This method is used as part of a corporate strategy
to acquire equity in a large number of companies. Although the
services will not be totally free, they will usually reduced by
about 50%. You may even be able to arrange options or warrants
to avoid initial dilution. Plus, you can provide the
professional with an exit strategy prior to an IPO, if another
large investor enters your market.
Sell Licenses or Marketing Rights:
Selling off rights to foreign or geographic markets, or private
labeling products, is an excellent vehicle for young companies.
You can use both exclusive and non-exclusive arrangements. All
methods should have some type of quota and non-compete clauses.
The downside is that later investors may feel that you have sold
off too much of the potential, so they will not invest as
readily.
Twenty Two Other Alternative Financing Sources
There are at least twenty two other methods of raising capital
for your venture other than formal venture capital. You many
also find combinations of these methods also work well. Visit
our website for more detailed coverage of these alternative
financing methods.
Venture Planning Associates, Inc., http://www.ventureplan.com
Tel. 858.457.3434 / efax 425-955-7531
capital@ventureplan.com
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