Business Financing

By William Cate

It's never been easy to find risk capital for any business venture. Even during the heyday of the DotCom frenzy, only one business plan in two thousand five hundred was funded by venture capitalists. "Angel" investors funded about one business plan in three hundred. Wealthy private investors are called "Angel" investors. Some of these Angel investors are members of Venture Capital Clubs. Often, the road to their money has been giving a presentation of your business plan at the local Venture Capital Club's monthly meeting.

When the DotCom Bubble burst, a few venture capital firms disappeared. Many Angel Investors became extinct. At least fifteen percent of the Venture Capital Clubs no longer exist. There are no longer any National Associations of Venture Capital Clubs. Your chances of finding risk capital from a venture capital firm are less than one in ten thousand. Your chances of raising money from Angels are less than one in one thousand. If you're spending time and money to raise money for your private business, you're betting on a long shot. The odds are overwhelmingly against you. To even those odds, you must offer potential investors a better risk/reward ratio. The emphasis should be on lower risk of financial loss and not greater reward.

The simplest way to reduce risk and leverage reward is to take your company public. The investors can sell their shares and recover their risk capital. In most public companies the share price outperforms the company's balance sheet. Thus, your investors will earn more from the sale of their shares in your public company than they would make from the sale of their equity in your private company. And, there are far more stock buyers than buyers of equity in private companies.

Costs are one prohibitive factor in taking any company public. If your plan is to do an Initial Public Offering (IPO), your SEC registration costs will average about $1.5 million. Your odds of getting a "No Action" letter from the SEC are about even. It will take over a year to complete the registration process. The underwriter must be paid and usually gets at least eighteen percent of the money raised.



You can buy a public shell trading on the Over-the-Counter Bulletin Board (OTCBB). Assuming you get at least ninety percent control of the issued shares, the cost will be about $1.5 million. NEUP (Net 1 Ueps Technologies Inc.) was a trading OTCBB shell. It recently sold for $52 million and to my knowledge has been the highest priced shell sale on record. Shells aren't cheap.

You can do a reverse merger with an existing OTCBB shell. The cash costs are usually less than $200,000. However, the shell insiders retain their shares in your company. They will sell their shares into any effort you make to try to create a strong and sustainable share price. In the end, your investor relations costs of a reverse merger shell are a multiple of your costs of simply buying the shell. If you decide upon a shell solution, buy the shell. Never do a reverse merger.

Beowulf Investments [ http://home.earthlink.net/~beowulfinvestments/] offers a program that will take your company public for about fifty thousand dollars. It takes a few months and not a year to complete the process. Unfortunately, this merchant bank limits its services to operating, non-U.S. companies seeking to become multinational corporations. They require that the public company use its shares to buy cash-producing assets in the tradition of Cisco Systems. They require that the insiders pool and vault their shares for years. It's anything but a get-rich-quick scheme, but it does offer Private Placement financing for its clients.

If you don't do an IPO, you must raise money through a Private Placement. This means that you must find a venture capital firm, angel investors or a merchant bank willing to risk money in your public company. While being public makes this process easier and surer than seeking funds for a private company, you have less than an even chance of securing a Private Placement for your public company.

If you are seeking risk capital for a startup company or simply don't like the regulatory risks involved in being a public company, you need to write a business plan that limits investor risk. If you are a group of Angel investors and don't want to lose all of your risk capital in a failed venture, you need to require some insurance against business failure. I can help you develop a limited risk, startup speculative investment insurance plan.



Go public, if possible. If impossible, offer insurance against total business failure. In either case, you are more likely to find investors, if you are an entrepreneur. And, if you are an investor, you are less likely to lose all of your risk capital.

To contact the author: Visit the Beowulf Investments website: [ http://home.earthlink.net/~beowulfinvestments/] Or, visit the Global Village Investment Club Website: [ http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]

About the Author

William Cate has been the Managing Director of Beowulf Investments [ http://home.earthlink.net/~beowulfinvestments/] since 1981 and is the Executive Director of the Global Village Investment Club [ http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]