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03 Jan Hedging Your Bets When Financing Your Business

It’s human nature to spread oneself thin across a myriad of options. It’s a way of hedging to ensure we get at least one option and don’t get left empty handed. We do it all the time in personal relationship courting, job hunting, college applications (the WashingtonPost has a great article on it) and even in financing growth companies. When it comes to financing, sometimes it’s best to weigh the options and pick the optimum number of directions we need to go. We receive quite a number of folks coming to us with financing needs for various business opportunities and many of them are not seeking a reverse merger because it’s necessarily the best option that fits their needs, but because it is often one of the last options that someone referred them to. The difficult aspect about seeking financing is that it’s often required that you pitch or to every Peter, Paul and Mary. This may not be the most efficient method, but it’s typically what’s required.

All told, financing business ventures is almost always a necessary evil. It takes time away from the business itself, but without it the business will undoubtedly die on the vine. Like the WaPost article, there are ways that ensure the least amount of time is expended in the search for capital:

Matthew Pittinsky, the chief executive officer, compares applying to college to assembling a portfolio of financial investments. By balancing risks against one another, students can minimize the number of applications he or she has to complete. “You can actually have a portfolio weighted toward ‘stretch’ schools, and still have a surprisingly high degree of confidence that you will be accepted to at least one school on your list,” Pittinsky said.

In financing your business, it may be most wise to weigh your various financing options by most desirable to least desirable (in most instances this means the least costly). Many of such goals are highly dependent on the amount of capital you need. The less capital you need, the more likely you are to seek financing through the friends and family route. Larger chunks might require venture capital or private equity financing. Going public with a public shell or alternative public offering raises less capital than an IPO, but it’s also much cheaper and requires less time. The benefits over other methods are helpful, but APO has it’s own downsides.

The best way to hedge your bets is to create a company people want to invest in. Make the company as solid as possible, before you seek venture capital. That’s what Seattle-based Pipeline Deals did. They spent nine years building their company before even thinking about taking outside capital. While this isn’t even close to being an option for everyone, it is certainly the best route for a number of reasons, including the fact that the business is likely to be more sustainable long term. I’ve said this before, but it’s worth repeating: The longer you can wait before [insert financing option here], the better. This is particularly poignant in the RTO space where being public brings a list of other requirements that are often more strict than raising funds from a VC.

Ultimately, raising capital should be a matter of preference–depending on the type of capital you want to raise. It’s a good idea to look at all options (i.e. family & friends, angel groups, venture funding, private equity/private placements, crowdfunding, various forms of debt, APO, DPO or IPO) when seeking capital and not leave the capital raise to chance. But, if your business is more solid than a company simply in start-up phase, it will likely be more advantageous long term to “pick your poison” and stick with it. Certainly you’ll want to hedge your bets, but knowing what types of capital you don’t want will help you not waste time on heading down a road you’d not want to be on long term.

Using reverse mergers as a method for financing is not the best fit for every venture. In fact, we advise against many a business owner from taking this option as it has its own risks for which many an entrepreneur fail to account. It can be the very best method for the company with the right strategic fit for doing so. We, the investors and the SEC all prefer companies with the most solid footing possible. It reduces the chances of company failure, thus protecting any investor capital put into the deal. It also helps to create a more liquid market where keen investor interest can be built over time. Hedging your bets by “applying” to multiple business financing options is a great way to ensure you get financing somewhere. Choosing a couple of select and strategic methods will help you stay focused, get financed faster and ultimately put you on a long-term path toward ultimate company success.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.