In my first article on finding capital, I discussed the family connection; here I will discuss the vendor and colleagues connection. How do you find them? How do you make the ‘ask’? How do you negotiate the deal?
Before going into the details, you must begin several months in advance to work and discover vendors and/or colleagues as a source of capital. Who are these associates? Well, for you it’s the guy you are going to get resources from while in business. It could be a product supplier, a service/subcontractor, a business associate in a parallel industry, even your competitor. So you have to begin a methodical process of identifying potential candidates. Start out by attending business networking groups and functions. If you are serious about finding money, you need to learn who’s who in the local business world. Join more than one group, get involved. Attend Chamber of Commerce socials and their fundraising events. Get actively involved in the organization. It will take months before the members of this group begin to trust and rely on your input. Get passionate about your product or service. These folks need to see this.
Other sources include the professional world, your accountant knows folks with money to get involved. (S)he needs to see the passion too. Your attorney is another source, discuss the situation with them, they can be helpful. Look at the potential suppliers of raw materials, have lunch with the owners and ask questions about how they expand their markets or market share. What exactly are they looking for in a good customer? Can you generate or negotiate a small one time short term project or deal? This will provide confidence in your ability if the deal goes well.
Go to your potential competition and see if they are interested in expanding operations or doing some kind of a short term partnership arrangement on a single deal. Don’t go in there to take all the money, the key is to demonstrate that you can make money. Oftentimes a competitor is interested in having somebody he can work with to cover territories which he wishes to pursue. You may have to forego the best area of control in order to get in on the ground floor of an operation in a less than ideal zone or geographical area. There might be some production or transportation barrier that the competitor can’t resolve and you might be the guy to solve this. By demonstrating your abilities, they will see potential in you and will want to support you in the future. It is even more likely that your competitor is looking for somebody to buy them out when they want to retire.
If you keep asking questions and get to know the vendors, suppliers, professionals and the competition, they will see you as somebody that really wants this to work. But I again emphasize the importance of starting out now because this will take months and in some situations, a couple of years to develop into a really great source of capital. Now that you have built this network of vendors and colleagues, how do you make the ‘ask’?
If you did your homework well, you will meet several different types to folks in your interactions. Some are there because they want to get in on the deal but don’t have the money. Others have the money and want to be active in the deal, and still others have the money, don’t want to get actively involved but want to be a part of this opportunity. As I stated in the first article on this, LISTEN to them. They will tell you through their conversations exactly how they feel and what capacity they have to support you financially. Statements such as ‘I love this industry’ and the whys. ‘Man, I wish I knew of a way to expand my market or opportunities here’ is another way of saying I want to get involved. Listen to their stories about their families, their financial obligations etc. It is surprising what people will tell you about their personal lives if you will just listen. Create your lists; be careful to not get involved with two or more players that lack respect for each other. Every now and then ask a probing question such as ‘How would you change this industry at the local level?’ Believe me, they will respond. In some cases they’ll go on for a few hours. Listen. Even if he doesn’t have the financial wherewithal, he will be asked for an endorsement from the guy to whom you will make the ultimate ‘ask’. Remember, in most situations, these are small circles of folks that know and interact with each other. So, don’t let on too early of your intentions; you will short circuit the entire opportunity. If you do this well, they will ask you if they can invest their capital in your project!
As you develop your list, pay attention to those folks that are asset rich and have liquidity. If they are just straight asset rich, many times it means that it will be difficult for them to turn those assets into cash. So focus on the potential candidates with cash resources to help you. Once you are ready to make the ‘ask’, it is time to begin the discussions. Meet with the potential investor over several occasions and explain your idea. Let them ask questions and then do your research and resolve any potential obstructions to the ‘ask’. Get them involved in understanding the situation. Once on board with the idea, ask them what they think about possibly funding the business. This is an indirect ask. If they show interest, then let them know that you would like to make a formal proposal in a week. This gives them time to commit to you or to turn you away. You need a fully committed partner in this for it to work. You can’t have them on board and then two weeks later they want their money back. Remind them of the pitfalls and potential for loss, you really need a full 100% participation from the investor so that you can move forward without the stress of dealing with someone who is hedging their investment.
Now that you have made the ‘ask’, bring in a third party usually an accountant and get their opinion on what would be a fair and reasonable deal. What type of documents would be required, get some legal advice for both of you. The key is to make sure that both of you understand and agree to the deal. In law, they refer to this as ‘A Meeting of the Minds’. Both of you need to fully understand the reciprocal nature of your agreement. You are becoming business partners and the best tool is a well written and fully understood agreement.
In my next article on this subject, I’ll discuss Angel Investors, what are they? What are they looking for and how do you find them?
From above, you can see that this is a long term project. So begin now to develop these relationships. You may already have a deep pool of friends, colleagues, and vendors to start out with. It will take time, but the sooner you begin the sooner you will realize your dream. Act on Knowledge.
If you have any comments or questions, e-mail me at dave (insert the usual ‘at’ symbol) businessecon.org. I would love to hear from you. If interested in my services as an accountant/consultant; click on ‘My Services‘ in the footer of this article.