During the struggle to get the cash the ‘close knit consortium’ was proposed. It works as follows;
Decide on the size of the raise. Determine how much equity you are prepared to forgo. Determine the number of participants. For example $500k for 40% share, from 20 people. Hence, one parcel of $25,000 would then equate to a 2% stake in the firm. Participants can buy multiple parcels.
Important: More than 20 investors requires a prospectus.
Your best bet is colleagues. Those who’ve been telling you for 10 years to go out on your own.
The reason is 2 fold:
- They believe in you and your potential.
- Vicarious living is alluring.
In addition, you’ll feel less guilty losing the money of a grand standing corporate vassal.
Family – I wouldn’t take their money, as I value our relationship more than their bank balance. If you can only get it from them, you might need to question your business proposition. Two guys in a garage must realise that Macquarie Bank is hardly about to invite you into their boardroom. You have to leverage connections and be audacious.
When engaging prospects tell them about the 90/9/1 reality:
- A 90% chance of losing their money
- A 9% chance of getting it back
- A 1% chance of making 10 times their cash
The law of candor is largely underrated.
You will be able to reduce your cost of capital considerably by selling risk in smaller chunks. Risk is bought exponentially. The larger the chunk of risk, the higher the cost of capital.
This is easier than you think. While broaching the topic of funding many of my colleagues have said they will invest a small bundle of cash of $10k – $20k. This is a small risk for bragging rights and the potential to own a bit of the dream. it could be likened to owning shares in a race horse.
Currently we have a list of 20 names ready to go. However, It’s our backup plan. Remember 20 colleagues funding your widget won’t give you expert mentoring, but you may end up with 20 unwanted CEO’s.
It is also possible to put in buy back clauses for their share. Who wouldn’t be hapy with 5 times their initial investment in 2 years?
If any friends are telling you to just do it and stop mucking around, just say “Sure thing, write me cheque for $500K and I will start tomorrow!”