Many Golden Returns

Warrants promise investors great stock prices In the future--and can get you cash now.

The failure rate for new businesses is high. But in truth, most new enterprises don't fail because they can't generate enough business--they fail because they just plain run out of money. When, for instance, you're pouring more and more capital into inventory and selling to new markets, it doesn't matter that your existing clients are paying their bills on time. The fact is you can't sell your way out, and to keep the show going, you need an outside infusion of cash.

The two corollaries to this hard truth are as follows: First, no matter how badly you need this outside capital, it will be expensive and difficult to entice investors to put money into your risky venture. Second, you will not be able to reach your goal with a singular outside investment. Raising money begets the need to raise more money.

These realities lead to a maneuver that should be in the corporate-financing playbook of every entrepreneur: warrants.

David R. Evanson's newest book about raising capital is called Where to Go When the Bank Says No: Alternatives for Financing Your Business(Bloomberg Press). Call (800) 233-4830 for ordering information. Art Beroff, a principal of Beroff Associates in Howard Beach, New York, helps companies raise capital and go public, and is a member of the National Advisory Committee for the SBA.

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This article was originally published in the March 2000 print edition of Entrepreneur with the headline: Many Golden Returns.

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