Your Butt on the Line
What Price Risk?
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Should his risk-taking strategy be considered ill-advised and
dangerous? Not from the perspective of raising additional equity
capital to fund the business, says Michael Reisert, president of
the J. Michael Reisert Group Inc. in Fort Lauderdale, Florida.
According to Reisert, who has been helping companies raise money
for more than 30 years, "Where most entrepreneurs fail to
raise capital is not putting themselves at a sufficient level of
risk to entice investors to do the same." Remember, when a
business fails, the equity investors usually take a hit on the full
100 percent of what they put in. With the service-oriented
businesses of today, there are usually very few hard assets to
liquidate. And what is left over from asset sales usually pays
lenders, often at just cents on the dollar. Reisert adds that when you consider most businesses are funded
by angel investors, and not professional venture capitalists, the
aversion to risk is even higher. "A venture capitalist is
losing someone else's money," he says. "But angel
investors are different. They're self-made. They often grew
their own businesses the hard way. They have a real appreciation
for positive cash flow. When you add it all up, they hate to
lose money." The ways entrepreneurs can put themselves at risk may seem
fairly obvious, but Reisert says many entrepreneurs still think all
they need to bring to the table is the idea and that outside
investors should ante up for the "privilege" of
investing. In truth, however, the entrepreneur must finance that
idea with whatever funds he or she has available—whether he
or she has $5,000 or $500,000. By doing so and taking on some risk,
the entrepreneur makes the venture viable for outside investors.
Here are some reliable, albeit hair-raising, techniques: - Liquidate savings. If you've got it, give it up.
There's just no way an investor is going to put in tons of
capital that's totally at risk while all or part of your nest
egg sits safely in CDs and blue-chip stocks.
- Take out a home-equity loan. Investors love this one
because they know that nothing makes an entrepreneur work harder or
smarter than the prospect of the bank repossessing his or her
home.
- Get a bank loan. If you can actually get a bank to lend
you money, you'll be demonstrating the kind of chutzpah
investors like. Why? Because any bank loan will require a personal
guarantee, or the guarantees of friends or family members, which
tells investors that somebody else is at risk as well.
- Sell a vacation home. Is there a risk in selling a
vacation home? Not really. However, it can still mean a lot to
investors because it shows you've given up part of your
lifestyle for the business. More important, the only way to get
back to that lifestyle is to succeed.
- Take out a margin loan against your stock holdings. If
you have, say, $100,000 in blue-chip stocks at a brokerage house,
the firm will give you a loan of up to $50,000 almost
instantaneously—assuming you have applied for, and received,
so-called "margin privileges." Margin loans are
relatively cheap, usually prime plus one to three points, and
perhaps the easiest loans in the world to secure. They're also
probably the most dangerous. Here's why: If the value of the
blue-chip stocks collateralizing the loan falls from, say, $100,000
to $75,000, the brokerage firm will ask you for cash to make sure
the "coverage ratio" of the collateral remains at 2-to-1.
In this example, it would ask for $25,000 in cash. If you don't
deliver the cash in short order, the brokerage firm will sell what
stocks you have left and pay off the loan. The sale of the stocks
could trigger enormous capital-gains taxes, with the whole scenario
causing untold financial problems. Once again, it's this act of
risk exposure that not only funds businesses but is critical for
attracting the other investors that will be needed down the
road.
- Quit your job. Nothing demonstrates personal commitment
like leaving the safety of the corporate nest.
Content Continues Below
Originally published in the July 2000 issue of Entrepreneur Magazine
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