Raising Capital for Your Small Business
By Paul Lawrence
The 28-year-old man was in a difficult financial predicament. He had an idea
for a business ... but he had no money in the bank, no job, and a general
track record of failure.
The odds of getting the tens of thousands of dollars in capital that he
needed would've seemed "slim to none." Yet within 10 days of his formulating
his concept for the business, an investor had put in the money. And he was
earning a healthy profit in less than 30 days.
As you might've guessed, the man I'm talking about was me.
Armed with a new plan to reverse my dismal position in life, I decided to
start a snack-vending business. Not surprisingly, people weren't banging
down my door to give me a loan.
Fact is, if you have a great business idea but don't have your own capital
... or excellent credit ... or collateral to secure a bank loan ... your
choices are limited.
Yes, some venture capital firms will invest in new businesses, but such
businesses are usually involved in technology or some other high-growth
area. Frankly, for most small businesses, venture capital isn't even an
option. It's rare for a small-business concept to have the kind of mammoth
payoff venture capitalists look for.
Plus, the cost of doing business with these companies is high. It's basic
economics. Their risk is high, so their reward must also be high. Even if
you were to interest a venture capital company in your business, you'd be
aghast at what they'd want in terms of their ownership position.
So if you forget about commercial bank loans and venture capitalists, you're
left with only a few ways to fund your small business. One of the best is to
find a business partner.
Now, when I say "find a business partner," I'm not talking about pleading
with your parents to get a second mortgage on their home or twisting the arm
of a lifelong friend who always said he'd do "anything" for you. (Although,
if you do have affluent family members or friends who might want to invest
in your business, you should certainly pursue that possibility.) I'm talking
about hooking up with someone who is willing and able to invest in your
business in return for a share of the profits.
Seeking a small-business partner is not much different than seeking a
"To be successful in obtaining a loan," the U.S. Small Business
Administration tells us, "you must be prepared and organized when making
your request. You must know exactly how much money you need, why you need
it, and how you will pay it back. You must be able to convince your lender
that you are a good credit risk. All the same holds true in seeking out a
small-business partner to invest in your business."
As most everyone knows, small businesses have an abysmal failure rate.
According to Business Week Online, "64.2 percent of businesses fail in a
10-year period." No wonder potential investors tend to be so skeptical of a
new business's chances for success!
When I wanted to enter the snack-vending business, I needed capital to
purchase the machines. To overcome the understandable reluctance an
investor/partner might have, I used some strategies that I have since
developed into a technique I call "SIPE" - which stands for Solicit,
Interest, Persuade, and Execute.
With the SIPE strategies, I quickly and easily found a former co-worker who
was eager to be my partner.
Here's how you can use SIPE to find and solidify your partnership:
1. Solicit: Present the hypothetical possibility of a future business opportunity.
Casually ask your prospective partner, "If I happened to come across an
interesting business opportunity, would you be interested in hearing about
It's important to note that you're not asking her if she would invest in a
business, but if she'd like to hear about potential opportunities. Since she
won't feel that she's being pressured, it's more likely that she will give
you a positive response.
You also immediately rule out people who have no interest in any business
proposals ... without putting them (or you) in an uncomfortable position
regarding your project. In my case, I mentioned to my former co-worker that
I was planning to start a small business, and asked if he wanted to be kept
in the loop during the process. He readily agreed.
2. Interest: Give your prospective partner a one-sentence description of
A long-winded explanation can sound like you don't have confidence in your
business idea or that you don't really know what you're talking about. So
keep it short and to the point.
You then follow up with a couple of supporting statements that provide
strong reasons to believe your business idea is viable. In the case of my
vending-machine business, I used the example of a friend of mine who, with
no experience in the business, was able to start a profitable 10-machine
3. Persuade: Use statistics and estimates to convince your prospective
partner that your business is a good investment.
Your persuasion efforts will have two goals:
First, to prove the substantial profit potential.
While you don't necessarily need a fully detailed business plan, you should
be able to offer some basic numbers. For example, you could estimate your
gross revenues for the first year and provide some reasonable basis for the
estimate. Then offer a reasonable estimate of your expenses. If it adds up
to a healthy estimated net profit, you're off to a good start.
Second, to demonstrate the low-risk factor.
Although you can't ethically or legally guarantee that an investor won't
lose her money, you can explain why there is a good chance she won't lose
it. Your evidence could include industry growth statistics, a sound
marketing plan that will allow you to swiftly capture market share, and
examples of similar successful businesses.
In my case, I created a profit projection sheet that broke down the revenues
and the costs of the business. I then cited specific suppliers who sold the
products we'd need and provided several examples of local entrepreneurs who
were successful in the snack-vending business.
Turn a discussion into an actual business deal.
Once my co-worker indicated that he was interested in investing in my
business, I suggested we have another meeting to formulate a deal. I arrived
at that meeting prepared with a "deal memo" - a basic outline of our
understanding. The main reason to have a deal memo is so that, in the
future, there will be no debate as to what was originally agreed to. If your
deal is large or complicated, you may want to have a formal partnership
contract. But in many cases, a deal memo clarifies the terms of the
agreement and is strong enough to be legally enforceable.
In my 15 years of being successfully self-employed, the great majority of my
partners have profited from our ventures. There are certainly risks involved
in investing in any small business. But if you have a solid business
opportunity to offer, you'll likely be able to structure a "win-win"
situation for both you and your partner.
Published by Himarticles