Leveraging Other People's Money and Resources
When it comes to raising money to start a new venture or build an emerging business, entrepreneurs can be anything but entrepreneurial in their thinking.
When additional resources are necessary to take the next step in the business plan, the typical entrepreneur tends to begin thinking about "raising capital" in the most conventional of terms. There are, however, other options that may be far more available and sometimes much less costly.
Put yourself in the shoes of the entrepreneur, and consider your choices. You could:
- Attempt to self-fund (use your own funds or acquire the needed resources on your own by selling assets, accumulating funds from the business' profits (if any) and/or accumulating funds from your other sources of income);
- Use what I refer to as conventional "Other People's Money" (OPM); or
- Use "Other People's Resources" (OPR). (This is where the departure from conventional thinking comes in).
Self-funding has certain advantages. If feasible, you avoid the expense of using OPM, e.g., interest payments or sharing ownership or control of your company, as well as various securities law considerations. Of course, there is the issue of whether you have the funds immediately available, or, if not, whether the window of opportunity will still be open if and when you are finally able to accumulate the funds. Even if self-funding is a viable alternative, the opportunity to leverage OPM or OPR might be greater.
Leverage "Other People" for Capital
There are different flavors of OPM from which to choose, and there are advantages and disadvantages to each. Depending upon the circumstances, some of forms of OPM may be easier to obtain or less costly than others. To minimize the cost, the entrepreneur must make strategic choices with respect to which category of OPM to seek, how much to seek and when to seek it.
The two traditional categories of OPM, at their most basic, can be categorized as debt financing and equity financing. Debt means you take out a loan or sell "bonds" to raise capital. Equity entails selling an ownership interest (equity) in the venture.
Let's take a moment to analyze the process of starting up a venture and bringing in investors. Each participant (co-venturer) makes a contribution to the venture and in return is given some form of consideration. The amount or value of consideration that a co-venturer receives is a function of the value of the contribution made by that co-venturer.
Other People's Money and OPR are often categorized by the type of consideration paid. In an equity transaction the investor's contribution is money and the consideration is a percentage ownership (equity) in the business. In a debt transaction, the lender contributes money in return for repayment of the principal plus a fee (interest).
In both conventional approaches, the co-venturer contributes money. However, there is no rule that a contribution to the venture has to be in the form of money, or that consideration to the co-venturer can't take some form other than equity or payment of a fee.
Consider the reason that money is being raised in the first place -- to get access to the resources needed for the business. Instead of receiving money and using it to purchase services or resources, why not simply go directly to the source of the services or resources and convince them to be a co-venturer? In other words, their contribution would be in the form of services or "resources" that the business would otherwise have to pay for. That is what I refer to as using OPR or "Other People's Resources." So what is the big deal about using OPR? Consider, the three basic issues that must be addressed when an entrepreneur decides to use OPM or OPR:
- Finding a source of funds or resources,
- Meeting the source's investment criteria, and
- The price to be paid for the use of the money or resources.
Other People's Resources are often available when conventional OPM is not. There tends to be much less stringent criteria applied with respect to making services or resources available than with respect to contributing hard cash. Much of the time, providing existing resources to you leverages the co-venturer's existing investment in its company, often at little incremental cost. This tends to make the resources available to you at far less cost than having to build them on your own. The type (and amount) of consideration paid to your co-venturer also tends to be extremely flexible. It could be, for example, equity in your company, payment of a fee sometime in the future, or payment of a percentage of profits from the sales of certain products.
The options for leveraging OPR are limited only by your imagination--and your ability to negotiate. In essence, it is a matter of being entrepreneurial about the way you raise capital for your business.