Click to Print

Funding Outside the Box

Investigate these alternative sources of capital when it comes to raising money for your business.
September 21, 2006
URL: http://www.entrepreneur.com/article/167580

Entrepreneurs are an interesting lot. They work long hours perfecting their ideas and exercising massive creativity then, when it comes time to raise money for their companies, they can only think of three options:

The first is certainly a logical choice, but the remaining two, depending on whom you ask, are only recent developments. (I've read a few articles that put the dawn of venture capital at the feet of Queen Isabella of Spain when she decided to fund the voyages of Christopher Columbus, but personally, I consider that a government grant, not venture capital.)

The first true start to the venture capital industry began after World War II when there was a surge in America's creativity and many new businesses were started. Since then (despite certain downturns in the periods from 1989 to 1992 and 2000 to 2004), the venture capital community generates such high profile publicity that struggling entrepreneurs often think that VC money is the only way to fund their companies. Such thinking couldn't be further from the truth.

First, let's talk a bit about personal sacrifice. Many a successful company has been funded on the shoulders of its visionary through the liberal use of debt. Just think about it: If you added up the credit limits on all your credit cards combined, how much cash could you access? Then there's the unused equity in your house, the cash value of your insurance policies, the money in your 401(k).well, you get the picture. In today's society, for better or worse, we actually have access to more capital than we probably should. And if your idea is truly that good, it'll all be worth it. In addition, if you can go this route, you won't end up selling off the majority of your company when its value is at its lowest.

A second option that a lot of companies forget about is sales. Prior to the VC era, a struggling new company had to focus on something that a lot of today's entrepreneurs forget about: sales. If your idea didn't sell, there was no way to generate the cash to keep going. Besides, without a demonstrated sales history, no bank would even talk to you.

The same is true today. If more companies would focus on a strategy that optimized sales (and profits), they'd at least have the option of seeking capital from banks and may even be eligible for low-interest SBA loans. But don't bother even looking if you don't have a financial track record. According to the SBA's site (http://www.sba.gov/financing), here's what you'll need:

The strength and accuracy of your financial statements will be the primary basis for the lending decision, so be sure yours are carefully prepared and up to date. (Note: The SBA-qualifying standards are more flexible than other types of loans, but lenders will generally ask for specific information before deciding you qualify for an SBA loan program.)

I do realize that many entrepreneurs have business ideas that may take years to develop into a salable product and require millions in invested capital just to get there. Obviously, for you, the above options won't work. But, at the same time, you need to be aware of one thing: When investors evaluate the potential investment value of a business, one of the most important factors they consider is how fast the company will be able to turn a profit. Speed to profitability is one of the consistently most predictive factors in determining the success of a company. If your business is on the slow track when it comes to profitability, your road to finding capital will be extremely rough.

That said, there's still one additional source of capital that many entrepreneurs ignore: strategic partnerships. Generally, the main reason why entrepreneurs fail to explore this option is because of the fear that a bigger, well-capitalized partner will steal their idea from them. Fair enough. But my contention is, if you do your homework and check out your potential partners thoroughly, you'll avoid those with a reputation for dirty dealing.

The key is to find partners who will benefit from your success--not as a competitor but as a partner. For instance, look at how Bill Gates got started. He just happened to invent an operating system at the precise time IBM wanted to introduce a PC that would compete with Apple. By investing in Gates' pre-developed product, IBM was able to provide a competitive alternative to Apple's product in a timely and cost-effective way. Both Gates and IBM received benefit, and the rest was history.

Although many regard Microsoft's success as a fluke of timing, you can experience some of Gates' success if you know where to look and how to sell the concept. Here are two ideas to get you started:

Research companies that would need what you have to offer. Ideally, your product will give them some kind of competitive advantage over their competitors and/or they can provide a product or service that leverages off your success. For instance, the company you find provides worldwide technical support for products like yours. You agree to give them a worldwide exclusive on the servicing of your product in exchange for an investment that gets you to market. And, if structured properly, you won't have to give up any equity for this type of partnership.

Or maybe your product is a perfect add to the product offering of a large distributor of similar products. Their industry is extremely competitive, and the distributor selling the latest "hot" product will reap a bundle of "tag along" sales from customers who want a one-stop shopping experience. So you offer them a three-year exclusive sales contract (subject to meeting certain milestones) in exchange for a healthy, non-equity investment. Call this option a "sales & marketing partnership."

These are just two ideas for setting up a mutually beneficial arrangement that will support your growth while providing great value to your partners. The key to strategic partnerships is to find out what each side values and then work to give each what it wants--within reason and with appropriate controls in place.

Break out of your VC box, and look for some creative alternatives to get that much needed capital into your business. They're out there, and if explored, you may just find that they're much more available and productive than either angel or VC funding.

Jim Casparie is the founder and CEO ofThe Venture Alliance, a national firm based in Irvine, California, that's dedicated to getting companies funded.