Searching for Capital

A broker assesses the small-business lending market.

I spoke recently with an entrepreneur who is trying to start a security business. He and his colleagues plan to offer high-end security to executives of large corporations, and they called us hoping we could help them find money.

My immediate reaction was to cringe, which is what I usually do when I get a call from a start-up. At my company, we only help entrepreneurs with debt. And most of the time, it is extremely difficult to arrange debt financing for companies that are just getting started, although there are exceptions. If the start-up is going to offer a business-to-business service, it can often use alternative financing strategies, like factoring or purchase-order financing, to get the cash flow necessary to make it through the painful early stages.

This time, I sighed with relief when the entrepreneur said he was interested in executive security — and not in trying to open an ice cream parlor or a coffee shop. But then I asked how much money he thought he was going to need, and he replied, “About $250,000.” This was not going to be an easy conversation.

This entrepreneur was focused on equity and had a plan in mind to impress potential investors. He thought he needed money for nice offices, a proper business plan, a management team and even a succession plan in case something happened to him. He was getting ready to spend months doing a lot of work preparing to appeal to a group of hypothetical investors who might or might not ever come forward with cash. And during this period, he had no intention of earning a penny. Even though he insisted that he had several prospective clients who were already interested in his service, he believed there were other things to do first before he opened his doors.

From my perspective, he was getting ready to do the dance to lock in investors, and in the process, he was going to give away a piece of his company forever. He was falling for the myth that comes from Silicon Valley and shows like “Shark Tank” — that you need investors to make great things happen. Sometimes these investors go so far as to criticize the idea of starting a company with debt. In last week’s “Shark Tank,” Mark Cuban, the billionaire owner of the Dallas Mavericks, told an entrepreneur that debt is not your friend — that it’s a trap that a lot of entrepreneurs fall into. In my opinion, the situation is never that black and white. Both options should be considered.

In this case, I suggested that my executive security entrepreneur take a cold shower. What he really needed, I said, was his first contract. The moment he gets his first contract in place, his company will begin to have real value, and he will have started to prove his basic proposition. And then we can turn to factors to help him accelerate his cash flow so that he can make his payroll. He would be up and running the moment he got his first customer in place — and he wouldn’t incur the expense of spending months courting investors without operating the business.

How did he respond? At the end of our conversation, he seemed relieved — and excited. His list of a hundred things to do had been hammered down essentially to one: get a paying client. He had a sense of purpose. And if in fact he can deliver on that first contract, I think he will be on his way to building a business.

If you’re thinking about starting a business or taking your business to the next level, there is a good chance that you’re stuck because you think you need more money than you actually do. If this is the case, you might want to work with a mentor or friend to figure out what the most fundamental thing you need to do is in order to prove your basic proposition. If you strip away everything else, there is a chance that you will be successful sooner than you think.

Ami Kassar founded MultiFunding, which is based near Philadelphia and helps small businesses find the right sources of financing for their companies.

Article source: http://boss.blogs.nytimes.com/2013/02/11/maybe-you-really-dont-need-investors/?partner=rss&emc=rss