Your Butt on the Line

Measured Insanity

Back at 1-800 BIRTHDAY, Jersey hung on. By the latter part of 1998, he didn't have much to work with-but then, he had lots to lose, so somehow Jersey kept the business afloat. Then, near the end of the year, he was introduced to executives of The Fingerhut Companies, one of the largest database marketers of gifts and housewares in the United States. "Finally, somebody got it," says Jersey. In 1999, Fingerhut took a 20 percent stake in 1-800 BIRTHDAY, a move that was instrumental in Jersey righting the company-and helping take the company to the Internet in the form of Today, Jersey feels there were three reasons he was successful in raising money from Fingerhut.

"First," he says, "1-800 BIRTHDAY is a great idea." No surprise there; what else is the founder of the business going to say? "Second," notes Jersey, "it had a management team that the investors could believe in." Ditto. And finally, he says, "I believe one of the reasons Fingerhut invested was because [1-800 BIRTHDAY] was led by an incredibly motivated person with a lot at stake, who needed to succeed in order to avoid making a serious dent in his career, ego, home life and pocketbook."

It's important to keep in mind that taking risks does not mean committing senseless acts in the name of ambition. Jersey, who might be considered perhaps a cautious risk-taker, went out on a limb in measured doses. Specifically, during 1998, when the company was running out of money and venture capitalists weren't showing even a whiff of interest, Jersey himself didn't go in any deeper either. "Sure, I could have taken out a home-equity loan, but it would have been crazy because I couldn't have gotten the business to the finish line with the proceeds from the loan. So why risk everything if you can't succeed?"

Jersey's initial investors were thinking the same thing, and Jersey empathizes: "I'd only be willing to take risks if others were taking risks alongside me."

When it comes to raising money, risk-aversion/risk-assumption behavior can turn into a Mexican standoff-everybody waiting for someone else to make the first move. But ultimately, because the investors can wait forever or look at other deals, it's the entrepreneurs who'll have to move first, and get whatever skin they can into the game.

Next Step

Add up your personal assets minus liabilities. Decide which of these you are willing to put at risk, and determine how far these funds might take your business. Estimate the total cash needed to fund the business. The difference is how much capital must be raised. The formula shows how much personal risk must be assumed.

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 July 2000 print edition of Entrepreneur with the headline: Your Butt on the Line.

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