No entrepreneur wants to admit that financing a company is a really tough challenge. This holds true for companies with multi-year operating histories as well as startups. After realizing this point back the 1980s, I started collecting examples of creative financing techniques. There's a solution for almost any situation and this is an example of one.
A chocolate company in the UK is raising capital by issuing bonds which pay the bearer in chocolates rather than in interest:
Holders of the £2,000 Chocolate Bond will receive six free Tasting Boxes
a year worth £107.70 per year which is equivalent to a 5.38% return
(6.72% gross return for a basic rate taxpayer) and those holding the
£4,000 Chocolate Bond will receive 13 free Tasting Boxes – a full year’s
supply! Worth £233.35 per year which is equivalent to a 5.83% return
(7.29% gross return for a basic rate taxpayer). (source)
How to Raise Startup Capital: Lessons From Deal-makers
From working with entrepreneurs since 1986, I have noticed one
glaring problem most have. Most have no idea how to sell their startup
or deal to investors. Instead they just write a business plan and shotgun it out
to everyone. Then after a few months, when no one has jumped on it, they
start complaining that investors are "too stupid" to see how wonderful the investment opportunity really is.
What rookies fail to take into
consideration are tangible economic incentives and psychology. Deal-makers,
on the other hand, understand how to offer short-term economic incentives
made all the stronger by appealing to psychological needs.
like to learn how to put together B2B deals? If you answered, yes, get a copy
of How Deal-makers Raise Capital.
There's no information on this new book on raising money on Amazon yet, but even if it's only half as good as his other business classic, it will be a worthwhile addition to any entrepreneur's library.
Have you experienced the frustration of dealing with a self-proclaimed "interested" angel investor who you just cannot close, no matter how hard you try or how many months go by? If you have, read on.
After writing last month about angel investment "Deal-Killers," I received a slew of emails and calls from frustrated and angry entrepreneurs unable to close deals with angel investors. Many of them had invested more than a few months talking to investors who had repeatedly expressed a commitment to invest. Yet every attempt at closing the deal had ended in frustration. Some of the angel investors finally expressed a reluctance to invest at this time while others have just dragged their heels and avoided the subject. Either way, the result is the same. The frustrated entrepreneur can't get the money he or she desperately needs for their company.
As pointed out in the previous post, the resistance often stems from the angel investor's uncertainty over how they will get their money back plus any profit that may have accrued. To be honest, their fears are warranted. Minority shareholders in a small private company (i.e., a chronically cash-strapped one) are at the mercy of the majority who can easily find a hundred better uses for limited capital than buying out investors--especially the passive variety. Both sides always have a convincing rationale. The minority investor feels that it's time he was finally rewarded for taking a gamble on the company at an early stage. Meanwhile the majority are convinced that if they just hold onto that money for another six or twelve months, it will allow the company to hit a new plateau which will insure its long-term success.
Who is right? Probably both sides to a degree.
With this problem in mind, I developed a tool for raising money that addresses the concerns that all angel investors have about investing. Indeed, it tackles them head on. In a nutshell, How Deal-makers Close Investors demolishes the big deal-killers:
-The inability of investor and founder to bridge the valuation gap.
-The investor uncertainty over the chances of a profitable liquidity event occuring.
-The investorss fears that majority shareholders will run roughshod over him.
Closing Angel Investors With Revenue Royalty Certificates (RRC)
Revenue-based financing is finally emerging from the shadows and I have been one of its pioneers. This product consists of a book in pdf and an accompanying spreadsheet in Excel. Contained within the package is all the knowledge you need to be able to utilize this innovative financing instrument to close the deal with angel investors. The instrument, called a Revenue Royalty Certificate (RRC) or Revenue Participation Certificate, is an off balance sheet loan which clearly demonstrates to the investor how and when they will recover both their principal and profit while also potentially receiving an equity stake in the company.
However, the RRC is not just about benefits for the investor. This instruments also offers substantial benefits to the entrepreneur. I am referring to freedom and autonomy here. With an RRC, the investor is unlikely to interfere with your management style as long as the payments are being made on time. The RRC is a win-win for both parties.
There are a few more bonus lessons contained within which reveal how sophisticated financiers select their target investors and do deals.
Those Deal-Killing Answers to Important Investor Questions
Every month, like clockwork, I receive three to five emails from exasperated entrepreneurs who can't understand why the angel investor, or investors, they were talking to backed out of the deal, despite giving it their thumbs-up. In most cases, the entrepreneur invested several months in answering the investor's questions, editing their business plan to incorporate feedback provided by the investor, and generally trying to build a relationship with them based on trust.
Then just when the entrepreneur was expecting the angel investor to finally pull out his checkbook, the latter either said, "I'm going to pass on this," or they simply stopped returning phone calls and replying to emails.
This leaves a frustrated entrepreneur asking, "What happened? What went wrong?"
While I can't guarantee the true explanation of why your angel investor got cold feet at the end, I can offer you a pretty good guess based on two decades of experience.
No matter how much an investor likes your deal, at some point he or she will start asking themselves, "So, how will I get my money back out of this deal?"
Now here's where the deal-killer answers come into the picture. Every book I have ever read on raising money and writing business plans advises you to answer the "exit question" with this standard line:
"Eventually we will either IPO or be acquired!"
Note my italicization of the word "eventually" here. It's to emphasize just how incredibly vague and meaningless this answer really is to an investor.
When an investor hears these words, the natural response is to get cold feet. It's really no different from hearing your unemployed brother-in-law say, "I need you to give me $10,000 and I promise to pay it back as soon as I win the lottery."
I have sat on both sides of the desk over the years. Initially, I was the entrepreneur using that pat answer and turning off potential investors. Later on, I was the investor whose eyes would glaze over every time I heard it from a money-seeker.
Savvy entrepreneurs structure their financing deals so that investors can begin pulling out their principal quickly. This typically involves a plan for monthly installments which pay off the investment principal over a fixed term much like a bank loan. If you can show an investor that you treat the return of their money as one of your top two priorities, they will be more likely to invest. (The other priority, obviously, is to make the company a success.)
No one wants to hear vague Wimpy-style promises about anything--especially when it comes to their money.