Raising money. That’s at the top of the list for most start-ups. When it comes to raising money and the process of it, they’re some key things we need to consider.
First anyone that’s going to invest in you, will like their money back!
So, the question is: “How are you going to give them the money back?” and they’re only a few choices.
The most popular choice is you give that person stock in your company and that generally means that they own part of your company. Well, if they own part of your company, “How are they going to get the money back?” The only way is for you to sell it! So, a traditional investment deal means that you have already promised that you are going to sell your company as fast as you can.
What if that’s not your goal?
Then don’t raise money that way because if you do there’s going to be this friction and it’s going to start very soon. Which is the investors getting graded on, “How soon do they bring money back?” and you’re saying, “I want to do this for the rest of my life, I’m never selling this company.” Well, someone’s going to end up unhappy.
The other way to pay people back, particularly if you’re not some high-tech start-up is to go to an investor and say, “look I’m putting on a show ( the show can be whatever: dance concert, restaurant, professional development seminar, ballet performance, coffee shop or etc.) and for the first seven months all the profits are yours and then after that the amount of profits I give you go down until I paid back all your money plus this much.”
So you own a piece of it, but then over time the piece get’s lower and lower because I’m paying you back via the proceeds. So, lets say you wanted to rent a community college theater and put on a ballet performance (which my good friend does at http://charlottesvilleballet.org/). Well, as an example the theater cost $5,000 to rent, the ballet dancers cost $3,000, so you need $8,000 dollars. You go to the investors and say, “give me $8,000 to put on this show and the first $16,000 in the door is yours and then we’re even.”
Now if you end up making $50,000 you get to keep the rest and if you end up making $14,000 the investor gets that and you get back $0, but it didn’t cost you anything either. That’s called selling future cash flow from this business or show you where building.
Now a bank is never going to do that deal, but you’re family member might and it completely eliminates all that weird family friction of well, they’re still my partner and I’m never going to get rid of them.
So, the ultimate goal when raising money (I hate to say it) is to get rid of the person who gave you the money.