Maybe you’re an emerging startup and your business case is compelling. Perhaps you even tick all of the boxes for business success. Things like a proven demand for your product or service, scalable business model, and a defensible business with its own IP – yet you can’t raise the capital to get across the valley of death.
That’s when you hit the gap that almost every emerging entrepreneur faces. The gap between getting positive cash flow and the insatiable demands for capital needed to get to break even. What to do?
Crowdfunding is turning heads in the US and angel investors are all over good digital business models which have transactional revenue streams. These, however, offer almost no joy for the majority of early-stage ventures. First up, crowdfunding has strong legal barriers in front of it in Australia (you need a registered prospectus) and finding an angel investor is akin to the veritable needle in the haystack
Bootstrapping – conserving cash; fast-tracking some revenue, maxing out on credit cards, and tapping friends and family remains a viable path to funding early-stage ventures.
In my experience, in establishing a digital publishing business, I have found the supply chain a useful source of funding. Your suppliers, customers, and even brand partners can become a source of funding. Not necessarily as equity partners, but often providers of capital, resources, and mentoring.
Borrowing from network marketing principles: look at your circle of influence. Who do you know? Who have you done business with? Who are your university alumni? One former client, a business selling re-manufactured (printer) toner cartridges, had limited capital for expansion. Together, we worked up an ‘elevator pitch’ for the business owner to present to each of his three principal component manufacturers. One of them did not have to be convinced of the business case; he was impressed by how quickly his customer had grown sales. He took a 40% stake in the enterprise. Once suppliers feel certain that it isn’t just another negotiating trick, many of them are keen to drive such strategic deals forward. As with any successful joint venture, it all comes down to ensuring that both sides gain from it.
Do these strange bedfellows sleep well together? Not always, but if they are realistic about each other’s habits, then there is every opportunity to have, if not a happy, then at least a fruitful relationship.
Investors will, naturally, want a return on their investment. Investing in private companies is not like investing in the stock market or in real estate. It’s a risky asset class. In venture capital, the internal rate of return criteria in excess of 45% per annum is quite common. To compensate for the lack of liquidity and the (generally) minority position, investors will need to be offered entry at discount prices. Be prepared for some robust discussion about valuation.
Silicon Valley venture capital and private equity expert Guy Kawasaki recommends that great care and attention be placed in developing a written agreement. In his blog How to Change the World, he wrote “Get together face-to-face. Discuss the deal points. When you start agreeing, go to a whiteboard and write them down. Follow up with a one- to two-page email outlining the framework for a partnership.
“Reach a closure on all details via e-mails, phone call, and perhaps a follow-up meeting. Get the lawyers to write it in their language.” Smart words.
Morris Kaplan is an author, business journalist, and is principal of RainmakerMedia.