March 20, 2014
In the young startup space, it is acknowledged that finding investors is the Holy Grail. Oh those many hours of listening to presenters at conferences and reading the forests of articles written or how-to’s created – on better success at raising capital through investors. In truth, all this attention to finding investors can lead an entrepreneur down a blind alley up to a brick wall.
If we can agree that OPM (Other People’s Money) is an acceptable way to grow a company, I will argue that in many situations equity capital is more expensive in the long run, has a tendency to become highly volatile for the entrepreneur, and more often than not is an addiction without a fix.
Because the equity players (outside of Northern California) have come around to revenue being in the projections, it is apparent that building a profitable and sustainable business is now in vogue. “How many paying customers?” is the question you need to answer these days. It was once the case that a good team could trump a bad idea – now it’s good traction and strong profit margins that will get you to the winners circle.
I will be discussing various tools available to you that might better enable the company to grow with a more consistent trajectory. At the end of the day, money is a way to get something done. And access to money is a tool to get those things accomplished. Tools such as loans, advances, settlements, grants, and alternative financing can be used in simple or complex ways to take growth to the next level.
Each tool comes with a best-case set of circumstances to enable the provider of funds the easiest avenue to get on board. If you can model your business to closely fit the parameters of a capital provider, you will be soliciting the most acceptable terms rather than settling for whatever is offered.
To be clear, taking on equity investment means selling part of your idea and gaining partners, while using debt to finance a business means having something tangible or liquid to offer as collateral for borrowing. Now, both sides of this equation have been bleeding into each other. Equity investors are using subordinated debt to hedge their investment, and banks eager to cash in on a startup’s potential have begun loaning capital without collateral.
Knowing the pros and cons of using any particular set of financing tools will better prepare the entrepreneur to navigate through many options readily available.
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