Venture Financing:

Step-by-step Guide

Alternative Financing

Venture Capital Is Not The Only Way

 

 

By William F. (Bill) McCready, Founder/CEO,  Venture Planning Associates. Used by permission.

 

 

Formal Venture Capital is not the only way to finance your venture. Although the following methods are not commonly known, they are legitimate and effective ways to obtain business capital. Consider these scenarios:

BUILDOUT ALLOWANCES FROM LANDLORDS

Banks will often allow you to count buildout allowances as capital (unless it has to be repaid) in your source and use of funds statement. While the money comes in and goes out, it does increase the overall cash flow and size of your deal.

Example: This writer recently counted $450,000 buildout allowance of a $1.5 million deal as equity, when obtaining a $350,000 loan for a client. The other $750,000 came from the founders and investors. By counting the buildout allowance as equity, the debt to equity ratios were much higher.

VERTICAL INTEGRATION

Capital can often be raised from outside companies with a vested interest in developing either distribution channels, or assuring themselves of adequate product flow from cash-starved companies.

Two examples:

  1. A distributor invested in his supplier in order to assure himself adequate inventory.

     

  2. An oil company franchisor provided startup capital for a client when asked. Although treated as a long term loan by the oil company (it only had to be paid back if the company didn't reach its distribution quotas), it was a capital infusion from the bank's standpoint.

PROFESSIONALS ASSOCIATED with the BUSINESS

Investments through architects, accountants, lawyers and other suppliers can also be also be arranged. Just present a way for investors to be more profitable in their own companies through the proposed investment.

Today, law firms, advertising agencies, executive recruiters and professional consultants will often accept partial payment in stock, warrants or options in return for services. This is an excellent way to build a powerful team of professionals with a vested interest in your success and your success in raising capital.

Many of these professionals are also angel investors, who can champion your cause with other private investors. Do not make the mistake, however, of assuming that you will get both and investment and discounted services from the same group. They will generally risk either their time or their money, but not both with your company.

WHITE KNIGHTS

 

If you are a retailer with poor credit, and cannot get merchandise shipped without a direct payment, have someone with better credit buy the products and resell them to you. You may pay a premium (3% - 6% per order), but the White Knight will collect a few percentage points each month. If you have a high turnover ratio, it will allow you to reestablish cash flow and credit. Only a few specialists handle these types of operations, but you can find them through factoring companies.

TECHNICAL or PROFESSIONAL EXPERTISE

Many professionals are willing to reduce their fees in exchange for equity. This method is used as part of a corporate strategy to acquire equity in a large number of companies. Although the services will not be totally free, they will usually reduced by about 50%. You may even be able to arrange options or warrants to avoid initial dilution. Plus, you can provide the professional with an exit strategy prior to an IPO, if another large investor enters your market.

SELL LICENSES or MARKETING RIGHTS

Selling off rights to foreign or geographic markets, or private labeling products, is an excellent vehicle for young companies. You can use both exclusive and non-exclusive arrangements. All methods should have some type of quota and non-compete clauses. The downside is that later investors may feel that you have sold off too much of the potential, so they will not invest as readily.

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