Business involves calculated risk-taking. Our job is the same as your job – we all have to assess the risk of loss in light of the potential gain. If you fail to appreciate this fundamental premise you are going to be part of the more than 80% of businesses who fail to obtain capital financing and become a failure. The common term is “skin in the game”. If you have none of your own capital at risk, then the legitimate conclusion is that you are only a person with an idea and ideas without money backing them always fail.
So changing the odds means you have to understand how the game is played and what the rules are so you can bend them to your advantage, thus creating the opportunity for a successful outcome.
Bank financing requires you to demonstrate to the bank that you want them to lend you your own money and pay them for the privilege. Banks exist to convert non-liquid equity into liquidity. They do not take risks in any other context. This means you have to demonstrate you have the net worth necessary to support the loan and that you will pledge your net worth (business, personal or both) to demonstrate you are willing to put “skin in the game”. If you are not willing to do this or do not have the net worth to pledge, then the outcome is guaranteed to be a rejection.
Individual “angels” or “angel funds” specialize in assessing high-risk transactions and making investments where there is a huge payoff opportunity. In the angel financing vertical, you have to be willing to give control of the enterprise to the investor. They have the capital and you don’t, and they know this. You will have the opportunity to buy back a portion of your company down the line, provided; you are still with the company and everything works perfect. You still must have skin in the game. Shark Tank is a television show. They not only make money off the deals they do, but they make money off of the television show whether they invest in a person’s idea or not. Every deal comes with them owning the controlling stake in your company. It’s no longer your company, your idea and your future. You put skin in the game but will likely end up with giving it away. There are absolutely no guarantees of success as you have to prove the deal will work and even when you do they still can walk away if you won’t give away everything they know they can get.
Investment Funds & Family Offices
Investment funds and family offices are run for the benefit of shareholders. This relationship means the people that run the fund (or office) have the obligation to act only in the interest of the people who gave them the money to invest. Accordingly, the outcome is essentially the same as angel financing: you have to be willing to accept: (1) the costs of proving your idea/project will work (pay the due diligence costs out of your pocket knowing you don’t get that money back) is your responsibility only; and (2) you will be a minority stakeholder; and (3) you will report to them and they will make the final decisions about the business; and (4) there are no guarantees of acceptance – you are likely to still have paid out a lot of money and spent a lot of time to get rejected.
Changing the Odds in Your Favor
In each of the above scenarios you are negotiating from a position of having no leverage – you need the money and they know it. They make the rules and you are deemed to have no alternatives so you either accept or go without. More than 80% end up going without.
This common problem is rooted in our securities laws. Until the passage of the JOBS Act entrepreneurs, businesses and real estate developers could not run advertisements to solicit capital financing from the public unless they went thru the SEC registration process and launched an IPO. This isn’t a great situation as more than 97% of businesses in the U.S. do not qualify to undertake an IPO. The JOBS Act changed this fundamental problem in important ways.
Now you can have the same odds of success as do the companies that routinely launch IPOs on Wall Street and raise capital financing in a relative flash. The change in the laws means the projected cost of completing a financing is a tiny fraction of the typical IPO cost and a tiny fraction of the time it takes to get to the point of launching an IPO.
So what is your risk appetite?
Since the passage of the rule change in September of 2013 more than 7,000 of these offerings have been completed – far outpacing the capital routinely raised on Wall Street via IPOs. That should tell you something.
For those who understand calculated risk-taking and the new rules of the game, the odds may always be in your favor.