February 7, 2011
Raising Capital is Tough When You've Got Nothing to Lose
IconBy Cliff Ennico www.creators.com "For the past couple of years I have run a brick and mortar retail store specializing in customized merchandise.   I really want to take this business to the next level by building a website that will enable customers nationwide, and maybe even internationally, to customize our merchandise online.  We have a proprietary technology for customizing our clients' orders that our attorneys tell us can be patented.  We also have one of the best software developers in America wanting to work with us to develop the website. The problem, quite frankly, is money.  I will need $100,000 to get our technology patented and our website up and running, and I just don't know where to find it.  The business is generating enough profit to keep me alive but not much more.  My credit cards are fully maxed out, and there's no way I can get another one.  My spouse is in the process of divorcing me, and will probably get the house, so I won't be able to tap any equity there. I've given this business the last four years of my life, and I will continue to work 24/7 in this business until it succeeds.  Yet one of my advisors recently told me raising the $100,000 will be a problem because I 'don't have any skin in the game.'  How can he possibly say this when I've maxed myself to the limit, worked 90 hour weeks without vacations for the past four years, and have let everything else in my life slide to the point of ruining my marriage?  What more do these people want from me - a pound of flesh?" You really have to feel for this person.  She is everything you think of when you think of an entrepreneur - passionate, committed to a fault, driving herself to the point of neglecting everything else in her life, and perhaps a little crazy.  In a just world, venture investors should be lined up outside her door. But, alas, this is not a just world. The current investment climate is one of the toughest on record, especially for startups without proven technologies.  If this person is lucky enough to find an investor, she probably will have to give up control (at least 50%) of her company. Why so much?  Because venture investors do not want to run the businesses in which they invest - they are counting 100% on the entrepreneurs they back to drive themselves through walls to make their businesses successful and give the investors the above-market-rate returns on investment they crave. I have no doubt this reader is exactly that type of person.  But investors don't see it that way.  They want their entrepreneurs to have "skin in the game" - meaning they have something to lose if the business goes down the toilet.  That's what will keep the entrepreneur working 24/7 to make sure that doesn't happen. The problem is that this reader has already done that.  She has put everything she has into the business (and a failed marriage), and, in the immortal words of Bob Dylan, "when you've got nothing, you've got nothing to lose".  If she burns out or gets bored with the business, has a heart attack, or files for bankruptcy, she will walk away without the risk of any further loss, leaving the investors "holding the bag" to pay off creditors, clean up the mess, and write off their entire investment. Needless to say, investors don't like it when that happens.  So in this situation they will behave in such a way as to virtually guarantee the business will fail.   Here's how it will happen:  they will ask for 60% to 70% of the company in exchange for the $100,000 investment this entrepreneur needs.  If the entrepreneur takes the deal, she will find themselves a minority owner of the company she founded, with the possibility of even greater dilution once the business grows and needs some real capital ($1 million or more).  In that situation, most entrepreneurs, being only human, would be less likely to give a 100%, 24/7 effort to the business (frankly, if it were me, I would start looking for a day job).  Thus, it is less likely the business will succeed, and the investors probably will have to write off their investment.  A "lose lose" for all concerned. Clearly, this reader should do everything possible (short of committing a felony) to get the $100,000 she needs to launch the website.  A "microloan" from a local bank, secured by all the business assets including perhaps the patent on the website, should get her halfway there.  She should consider borrowing from friends and family members at 3% to 5% over current bank interest rates.   As a last resort, she should consider giving her investors a royalty on sales from the website in lieu of, or in addition to, a minority share in her company.  More on that next week . . . Cliff Ennico  ( crennico@gmail.com ) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at  www.creators.com . COPYRIGHT 2011 CLIFFORD R. ENNICO.  DISTRIBUTED BY CREATORS.COM. Permission granted for use on  DrLaura.com .

Posted by Staff at 1:34 PM