Published on September 27th, 2016 by Alan L. Sklover
“In capitalism, if you don’t have the capital,
you can’t get the ism.”
ACTUAL CASE HISTORY: Actually, I’ve assisted in numerous case histories on this issue. So many of my clients have, sooner or later, earlier or later in life, decided to leave the world of employment and go out on their own into one sort of business or another. Some have continued in their existing industries or professions, some have ventured out into a new and exciting industry. Some of the new industries they have ventured out into have only existed for a few years.
Perhaps the one misconception that most people have about growing businesses concerns their continual need for new funding: Most people believe that a growing business gushes with extra cash, so that their owners can take out for themselves greater and greater income. The truth is just the opposite: a growing young company – no matter how successful – is almost always in constant need of extra funding. It’s like a 9-year-old child who needs new sneakers and clothing every six months due to rapid growth, but is not yet old enough to get a job to pay for them; instead, parental assistance is necessary.
If your new or growing company is in this mode, here’s a general outline of thinking that has been of help to my clients in your circumstances.
LESSON TO LEARN: If you want to be a business person, you’ve got to accept the cold, hard fact that access to capital is your oxygen; without it you simply cannot survive. Sooner or later you will have a “dry spell” that will strain your resources, or perhaps miss important opportunities due to funding restrictions that will go instead to your well-funded competitors.
There are many sources of business capital, ranging from winning the lottery to robbing a bank, neither of which would I suggest you depend on or resort to. Rather, my own clients have depended upon a variety of funding sources that are realistic. For them, we have identified five sources of potential growth capital, the first letters of which conveniently spell the acronym “S.L.I.C.E.”
Each new company has its own unique circumstances, needs, assets, resources, opportunities and quirks. But each new and growing company needs, too, its own “guide” up “the mountain” of business growth. That is why we offer this conceptual framework for you. With it you can begin to focus your thinking, focus your efforts, and more likely achieve your funding needs and your business growth goals.
A caveat: When you read over this list of five sources of growth funding, and think about it and discuss it with your friends, partners or advisors, you need to maintain a wide-open mind. One or another of the explained alternative sources of funding may, at first glance, seem entirely inapplicable, impractical and/or unfeasible. You will likely be tempted to quickly discard one of more of them as impractical, inapplicable or even beyond your company’s capabilities. I urge you not to close your mind prematurely, or for that matter, ever.
Don’t make up your mind so fast; instead brainstorm to determine how you might possibly consider each alternative funding source. No, you should not rob a bank; but you should seek out even unknown Aunt Sadie’s with lots of money and nothing to do with it. The real trick to identifying and acquiring capital for new or growing businesses is creativity, because no one source of growth capital fits all, and all you need is one. I am convinced that, but for the necessary creativity and perseverance in the search for growth capital, many businesses that failed would not have done so.
A second important point: These sources of growth capital are not mutually exclusive. In fact, they are quite complementary. For example, lenders and investors like to see founders put some of their own money into the mix, or as it is often referred to, “skin in the game” before they “contribute” their own. Such “self-funding” combined with “loans,” is just one example of complementary sources of growth funding.
WHAT YOU CAN DO: With your own business needs, circumstances and opportunities in mind, consider these five broad categories of growth capital:
1. Self-Funding: This is nothing but the old-fashioned “Save your money until you can afford to do what you want to do.” Chances are that you’ve heard that before, maybe even as a teenager, although your wants and needs are now quite different. “Self-funding” is nothing more than savings over time put aside into a “rainy day” or “future growth” fund. Just as putting money away for personal savings is mostly a matter of developing a good habit of doing so, so too is this habit, but in a business context. Of course, continually paying down debts may be the most direct path to being an attractive target for lenders and investors alike.
Self-funding can also include such things as your Bar Mitzvah fund, gifts, grants and “early inheritances” from Uncle Harry, Aunt Maribel, and Grandpa Joe, as well as the sale of such assets as your prized coin collection, beloved sailboat and that great country cabin.
2. Loans: Three things to remember about loans to fund your business growth: (a) Debt can take just a moment to get into, but a lifetime to get out of; (b) Lenders love to make loans to those who don’t really need them; and don’t like making loans to those who really need them. (c) They can be either (1) “personal” or (2) “institutional,” and (3) non-collateralized, (4) collateralized,” or (5) “cross-collateralized.”
(1) By “personal” we mean “from a wealthy person or persons you know “personally.” As an unlikely example, your college roommate named Mark Zuckerberg. The primary problem with “personal” loans are that, if things go “south,” they are one of the easiest way to lose an important relation.
(2) By “institutional” we mean from an established bank or lending institution which is looking at your loan as a means of making a certain and secure profit. Because with these lenders, it is “all business,” you should expect that borrowing from them will entail a very careful and comprehensive review of tax returns, credit history, and cash flow projections. Generally, institutional lenders will also more likely require personal guarantees from the owners of a new or smaller business (or their friends or family) requiring they pay back what the business fails to pay back, regardless of the reason for such failure to pay.”
Please note that often a bank will be more liberal and open-minded in its decision on a loan applications if there already exists a banking relation with the loan applicant. For example, if your customers pay for your products with credit cards, and your bank makes a lot of money processing those credit card payments, it may be willing to make the loan you seek to keep those card-processing fees from going to another bank. If your bank does not process your customer credit cards, they may be convinced to make your loan if you offer them the opportunity to do so.
(3) By “non-collateralized” I mean that your company is so attractive a loan candidate, that lenders may be willing to make a loan without the loan be secured by any particular asset. For example, a mortgage loan is secured by a house or other property. If the bank lent you money and said, “We simply trust you,” that would be non-collateralized. If a lender sees your company as a potential “beachhead” or “toehold” in an industry it has no presence, it may be convinced to grant a non-collateralized loan. This can maintain your freedom to use any collateral you have to secure a later loan with the same or another lender.
(4) By “collateralized” I mean that some things(s) of value have been pledged to the lender as security for the amount borrowed. For example, if you collateralize your home (as you must do in order to get a loan from the U.S. Small Business Administration (“SBA”), if you default on the loan, you lose your home to the lender. If you collateralize the expansion of a fledgling publishing business, you can put up (called “pledge”) the future earnings from royalties of books that your business published three years ago. It is not all unheard of for a record label to borrow money and use as collateral the income flow anticipated from the future streaming of tunes to which it is entitled a royalty.
(5) “Cross-collateralization” means that a loan is secured by one or more assets or income streams at the same time, usually permitting the lender to seek to take any one or more of such assets in the event of loan default, at the lender’s discretion.
3. Investors: The many times I have been retained to represent the founders of smaller, growth-seeking companies in their dealings with potential investors, I have begun my counsel with two pieces of advice: First, as a general rule, “In capitalism, the person with the capital is the one who usually gets the ism.” Second, ”Happiness equals reality minus expectations.”
Any time you discuss “investment,” you also must discuss “divestment” as part of the process. In other words, “What are you willing to give up in order to get what they have?” That is usually a matter of what percentage of the ownership will you give up to gain access to their capital?”
Much more importantly, any time you discuss “investment,” you inevitably face the issue, “How much control of the company might you give up? Issues of “control” are much more important, much more subtle, and surely require the guidance of legal counsel experienced in that particular issue. Sure, if you are in the logistics industry, you need the help of an attorney experienced and familiar with the issues that commonly arise in the logistics industry. But he or she must also be fully familiar with the intricate details of legal paperwork concerning issues of “control” of a corporation, limited liability company, joint venture or partnership
For example, if your investors come to dominate your Board, can they issue themselves a million new shares for a total of $100 making you almost a non-owner? Can they fire your General Manager, and hire Melvin, their second cousin, to replace him? I’ve seen that very thing happen. Professional investors have attorneys who, it seems to me, specialize in just such “control.”
When considering outside investors, there’s an important distinction to make: “long term” investors versus “short term” investors. Long term investors are those who are looking at your company in the longer perspective, as one that has good chances of growing over time. Short term investors – and I put private equity investors in that category – seek to (a) buy in, (b) fix up, and then (c) sell out to someone else in a 3-year to 5-year timeframe.
Depending on your own goals – build for a lifetime or sell in a few years – you should concentrate your efforts on one of the other. The absolute worst thing to do is to invite short-term investors into your company if you have a long-term view, yourself.
Considering sharing a great, new Business Idea? Consider our Model Informal Non-Disclosure Agreement “NDA” a simple memo that says, in effect, “You promise not to steal this idea or use, share of disclose our confidential information.” To obtain a copy you can adapt, just [click here.] Delivered by Email – Instantly!
4. Crowd Funding: A recent and interesting entrant to the panoply of “growth funding” alternatives is “crowd-funding.” This new funding platform has clearly filled a void by building a bridge between “a few people with Ideas” and “a lot of people with a few dollars.” For example, if you have a great idea for a new kind of luggage, or if you have begun to sell them, you may find a thousand people willing to “fund” your effort to mass produce them each to the tune of, say, $100. That would start you off with a cool $100,000. Some have gone into the millions of dollars.
Each crowd-funding platform has its own rules and limitations, so if you want to go in this direction, you need to spend a decent amount of time and effort to find the right crowd funding platform for you, There are many crowd-funding platforms out there. These are names of just a few: Kickstarter, GoFundMe, Patreon, PledgeMusic, Razoo and Sellaband. According to published reports, crowd-funding platforms raised over $34 billion for projects in 2015. Musician Amanda Palmer raised $1.2 million to produce just one album. Filmmaker Spike Lee raised $1.4 million to produce a film entitled Da Sweet Blood of Jesus. Interesting possibilities, and rapidly evolving.
5. Enter an Affiliation: By far the most interesting, challenging and potentially risky and rewarding growth funding alternative is the “Affiliation Entry” alternative. By this I mean consideration of (a) merger, (b) partial sale, (c) becoming a subsidiary, (d) mutual branding, (e) cross-branding or (f) any one of a hundred other business “affiliations” that might provide your company with growth capital on terms of a relation that make sense to you. Basically, this is going to a larger company with greater capital resources and offering a relation of sorts that appears likely to be mutually beneficial.
Larger and better financed companies are always “on the prowl” for smaller, less well-financed enterprises that might fit into one or more of their strategic initiatives. That is how one survives in the very competitive jungle that is the business world: continual adaptation to changing technology and tastes, and growing in any number of strategic ways – before your competitors do so.
Several media behemoths courted young-and-hip Vice Media before Disney won the chase. Major luggage manufacturers are always on the lookout for so-called “one-product wonders” in the luggage-and-handbag “space.” Just last week, Rolling Stone Magazine sold a 49% stake in itself to a Singapore-based digital media company. Two years ago, Apple bought headphone manufacturer Beats reportedly in order to acquire the services of its founders. Major high-end retailers daily purchase or invest in the operations of the newest and hottest designers. Large pharmaceutical companies compete to get their hands on a single promising chemical compound, at other times for the commercial advantages of ingenious pill packaging Some companies pay a literal “bundle” just for the exclusive “right to be the first investor” to keep potential acquisition or investment targets out of the hands of competitors.
One thing about affiliations is that, like cooking and clothing, sometimes contrast can be the most complementary. Got a small music label? Your best affiliations may be with, as examples, (1) a natural food distributor that wants to appeal to younger people, (2) a clothing designer looking for a touch of rhythm, (3) even manufacturers of sneakers, vodka and private jet leasing companies might find an affiliation of mutual benefit. Just like in singing, the beauty is in the “pitch.”
Every affiliation opportunity can be negotiated to have different degrees of transfer of (a) growth capital, (b) ownership and (c) control, all depending on what you offer. There is no question that the opportunities to find growth capital in the arms of a more capital-rich company are unlimited. The process, however, just begs the question, “What are you willing to give up, in return?”
P.S.: Before you choose which path to take “up the mountain,” first “Find a Sherpa”: The word “Sherpa” is commonly used to describe someone who is a mountain guide, helping people climb up difficult mountains such as Mount Everest. Though the word is actually the name of the Sherpa people, a distinct and proud ethnic group who live in the mountains of Nepal in central Asia, I use the word “Sherpa” here as it is commonly used.
Simply put, when in search of growth capital, to help you climb “the mountain of business success,” try to locate an experienced guide to doing so in your industry. It might be someone who has done just that himself or herself. With the benefit of hindsight, would he or she have done it that way again? It might be an attorney in the same industry as you are who has previously been through this process with other clients.
Perhaps your best “Sherpa” may be your business accountant, or one of his or her partners. It might be a retired business person in your field. The two most important attributes are (1) his/her experience in such matters, and (b) your and your partners’ sense of trust in the person and his/her judgment. Someone with experience and judgment would be best suited to spot the advantages of each alternative funding platform and warn against the disadvantages as they see it, although the beauty of business is that, in the end, you call the shots, and succeed or fail by the shots you call.
P.P.S.: If you would like to speak with me directly about this or other workplace-related subjects, I am available for 30-minute, 60-minute, or 120-minute telephone consultations. (Even 5-minute “Just One Question” calls). Just [click here.] Evenings and weekends can be accommodated.
In Sum . . .
New, young and growing companies are always in need of growth capital. There are various sources of growth capital, although each comes with its own distinct advantages and disadvantages. Find yourself a good guide to the process, and choose wisely.
SkloverWorkingWisdom™ emphasizes smart negotiating – and navigating – for yourself at work. Negotiation of work and career issues requires that you think “out of the box,” and build value and avoid risks at every point in your career. We strive to help you understand what is commonly before you, and know what to “watch out” for. The rest is then up to you.
Always be proactive. Always be creative. Always be persistent. Always be vigilant. And always do all you can to achieve the best for yourself, your family, and your career. Take all available steps to increase and secure employment “rewards” and eliminate or reduce employment “risks.” There are so many things to consider in possibly leaving the world of employment to going out on your own, acquiring growth capital being one of the foremost. It’s often difficult to make the wisest choices. But that is exactly what SkloverWorkingWisdom™ is all about.
*A note about our Actual Case Histories: In order to preserve client confidences, and protect client identities, we alter certain facts, including the name, age, gender, position, date, geographical location, and industry of our clients. The essential facts, the point illustrated and the lesson to be learned, remain actual.
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Sklover Working Wisdom™ is a trademarked newsletter publication of Alan L. Sklover, of Sklover & Company, LLC, a law firm dedicated to the counsel and representation of employees in matters of their employment, compensation and severance. Nothing expressed in this material constitutes legal advice. Please note that Mr. Sklover is admitted to practice in the state of New York, only. When assisting clients in other jurisdictions, he retains the assistance of local counsel and/or obtains permission of local Courts to appear. Copying, use and/or reproduction of this material in any form or media without prior written permission is strictly prohibited. All rights reserved. For further information, contact Sklover & Company, LLC, 45 Rockefeller Plaza, Suite 2000, New York, New York 10111 (212) 757-5000.
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