Getting capital to get your startup business off the ground can be challenging. In fact, about 94% of startups fail during the first year of operation due to a lack of funding. As the bloodline of any business, your business needs money in almost every stage, from getting your startup idea up and running to generating revenue.

However, your financing options may be limited if you have a low credit score. However, this doesn't mean you can't qualify for any business loan. These days, there are many bad credit loans that can provide you with the funding you need for your startup business. Besides applying for business loans, there are several other sources of finance available to you. In this article, we'll look at some of the best financing options that you could use to fund your startup business even with bad credit.

1. Crowdfunding

Crowdfunding is one of the newest ways of funding your startup with bad credit. To get financing through crowdfunding, you need to create an account on a crowdfunding platform and post a detailed description of your business idea. The description usually includes your business goals, plan for generating revenue, the amount you need, and for what reasons. Potential investors can then read your business proposal and invest their money if they like your idea.

The great thing about crowdfunding is that anyone can invest their money in a business idea they believe in. It also helps generate interest in your product, boosting your marketing efforts alongside financing, and informs you whether there is demand for your product. Since you'll be funded mainly by the common people, crowdfunding eliminates the need for professional investors and brokers.

2. Get Angel Investment In Your Startup

Another great way to finance your startup business with bad credit is by getting an angel investment. Angel investors are typically people willing to invest their money in upcoming startup businesses. They've helped start up some of the most prominent companies today, such as Alibaba, Google, Yahoo, and many more. Angel investing usually happens in the early stages of a company's growth. They sometimes operate in groups of networks to screen proposals before investing and can ask for up to 30% equity in your company.

3. Get Venture Capital

Venture capital is another option you should consider when looking for financing for your startup business. Venture capitalists usually invest in businesses with tremendous growth potential and often ask for equity in your company. They also look for companies with a strong team and have already gained some traction. Besides providing capital, venture capitalists can also provide strategic assistance, mentorship, and introductions to partners, employees, and potential clients.

However, it's not always easy to obtain venture capital financing. The best and easiest way to reach a venture capitalist is through professional acquaintances like their lawyer or a trusted colleague. Your startup needs a strong investor pitch to attract the VC's interest. You must also ensure their focus aligns with your business and its development stage.

Endnote

There are many different financing options that can help kick start your business and help it grow really fast. While lending options can help get your business started quickly, your loan application may be declined if you have bad credit. If you're facing funding challenges due to bad credit, use the options mentioned above to obtain the capital you need to get your startup business up and running.

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There is the uncertainty of whether your business will gain traction or not. Most small businesses fail, and it’s mainly due to financial issues. It’s true that you can save up before getting started with a business. However, keeping your business running means you need more than just your own money. At some point, you’ll find yourself needing third parties to fund your business. In this case, it’s important to know your funding options ahead of time. We have listed below some funding sources for your startup business.

Where To Get Funding For A Startup Business?

To have a successful startup, you’ll need to invest in other aspects like marketing. Now, you could learn how to determine the best marketing strategy for your company. However, that will take up much of your time. Hiring a startup marketing agency will help you focus on growing your business instead. 

They cover pretty much everything. Brand development, marketing, and advertising. And best of all, some startup branding agencies can connect you with future investors. This is important for any startup business, which will be discussed briefly later.

While this is true, investing in startup marketing can be expensive if you’re just starting. It’s like the chicken and egg dilemma. Luckily, there are other funding options to avail a startup branding agency’s services.

1. Bootstrapping

Bootstrapping or self-funding is a good way of getting funds for a startup. If you’re still in the early stages of your business, it’s difficult to immediately get traction. It’s one of the challenges of starting a business. You can take your chance with some investors. However, without startup branding, you’ll find it hard to convince them to fund your business.

Investors won’t lend money to a startup that is bound to fail. They wanted to partner with businesses with strong chances of success. That’s why most first-time business owners start with investing in personal resources. This means payments for business expenses will come from your own pocket. 

While bootstrapping is difficult, there are some advantages to it. For one, if you survive self-funding, that means you have a good business strategy. And because of that, investors will be attracted to funding your business in the future. They usually consider this as a favourable aspect. And, it is extremely satisfying to see your business grow from your hard work.

However, this is only ideal when your business has minimal needs. Some startup firms need funds from the start. If you find yourself in that category, this method is not the best solution for you.

2. Family Members And Friends

Aside from bootstrapping, your family and friends are also a great source of startup capital. This is one of the simplest ways of getting funds. You can establish your own conditions. Plus, these are the people who know you best. You don’t need to present a track record of previous loaning activity. That is to say, that you asked them properly. If not, there will be consequences not only to your company but also your social life. People reported feeling hurt, as well as resentment towards family and friends. And some even said it resulted in irreparable damages to their relationship. To make sure you’re doing it right, here are some things to consider:

• Think about how it will affect your relationship with them when it gets out of hand. Are you willing to risk your friendship over it? Will there be ways to settle the problems that will arise?
• You should know why they funded your business in the first place. Do they want their money back or is it a gift to you? How long will they fund your business? These are some of the questions that you should know the answers to.
• The terms and conditions for funding should be clear to both parties. To do so, you want to have it written down on paper. Lending money to friends and family can seem informal. However, it’s best that both parties have a clear copy of the terms.
• Even though they are family, they need to know what’s going on with the business. Having open communication with your funders can prevent future problems. They need to know you’re both on the same page.

Having full support from your friends and families is the best foundation of a good business. Many successful businesses today resulted from good relationships with friends.

3. Crowdfunding

Crowdfunding is a relatively new method of funding your startup business. It’s the equivalent of getting a loan, donation, or investment from multiple people at the same time. To get funding with this method, startup owners need to post on a crowdfunding site. It usually contains a thorough description of the business, including goals and plans. The platform helps you reach out to people who will be willing to invest in your firm. When they like your business concept, they will donate money. Those who donated will make online commitments in exchange for a pre-order. Anyone can make a financial contribution to a startup that they believe in.

Moreover, it’s not just useful for getting initial funding for your business. You can also raise funds for your products in the future. With an effective startup marketing strategy, you can use the platform to your advantage.

4. Venture Capital

Venture financing is not for every business owner. Investors in this group are more focused on funding technology-driven companies. They are more inclined towards firms with the potential to grow in certain industries. These include industrial technology, communications, and biotechnology industries. Their main goal of investing is for firms to carry out a promising yet risky initiative. This includes handing over a portion of your company’s ownership or stock to them. Venture capitalists (VC) also anticipate a healthy ROI. It means that the company can now sell stocks to the general public. Just make sure to find those with experience and knowledge that match your business. A marketing agency for startups can help you look for VCs that your firm needs.

5. Angels Investment

Unlike Venture Capital, you will be dealing with only one person with Angels Investment. This person is known as an Angel, hence the name. Mostly rich or retired executives, they invest in small businesses run by others. They are usually industry leaders who offer their experience and networks. Alongside these, they are also experts in the technical and/or management fields. This group of investors often fund between $25,000 - $100,000 in the early phase of a firm. If you need larger investments, you should turn to institutional venture capitalists. Looking for them means you have to contact specialised organisations. You can also do an internet search on angels’ websites.

6. Accelerators Or Incubators

Joining an accelerator (or an incubator) programme is another potential fund source. Business incubators are more focused on the tech industry. They assist emerging firms in different stages of business development. Usually, incubators will invite startup businesses to share their facilities. Aside from that, they will also share their administrative, technological, and logistical resources. 

The incubation period can extend up to two years in most cases. When the product is ready, the company leaves the incubator’s grounds. After that, it can now go into industrial production on its own. Businesses with this type of assistance are usually in cutting-edge fields. These include biotech, multimedia, computer, and industrial technology.

7. Government Grants

If you think about investors, the government will be the last thing on your mind. Many people are unaware that their government provides easy loans or full-fledged grants. New enterprises are a major source of economic development. That’s why governments are willing to assist prospective business owners.

However, these programmes and grants are not widely advertised. To know more about how to qualify for a grant, you can look up your government websites. You can also ask other local startup businesses.  Generally, government grants are more focused on projects about science and technology. You will need to provide detailed information about your project. This also includes how you’re going to spend the grant. To get qualified you need to:

• Explain how your project is beneficial
• Enumerate all the expenses you expect to have to work on the project
• Give an elaborate background and related experience of all project managers

Although, there are government agencies that offer programmes for small businesses. For example, the US Small Business Administration has its own investment programmes. 

8. Bank Loans

Asking banks to fund your business seems like the best option. However, that is not the case at all. Most banks are afraid of lending money to startups because of the uncertainty of success. And if startup businesses go bankrupt, they will lose their money. In order to get funded, you need to have a good track record. In addition to this, a strong business plan can also help you land a fund.

Conclusion

It is healthy for any business to have multiple funding sources. With this, you won’t have to worry about financial problems in the future. Additionally, having diverse financial sources helps you invest in startup marketing.

Most bankers assume you have other sources of capital. It will be difficult to ask for funding for your entire business process. More importantly, having multiple sources shows that you’re a proactive business owner. With that kind of reputation, you’ll be more qualified to receive funds.

These tips can help you get the funding you need even if your credit is not the best.

Self-Funding

The best way to fund your business is using your own money, a process known as bootstrapping. You can turn to family and friends or tap into savings. You can even borrow against a 401k to get the funding you need. In fact, more than half of all business owners say that they received financing help from friends and family.

This type of financing is not based on your credit score and, in some cases, borrowing from family may help you increase your credit score if you use the funds to catch up late payments as well as funding your business.

Venture Capital

Another method for funding your business is seeking venture capital from investors. This type of investment is normally provided with a share of ownership in the company. The investor may also want to take an active role in your business. There are differences between traditional financing and venture capital which include:

• Focuses on companies with high growth
• Investments have longer terms
• Investments are in return for equity and are not considered debt
• Higher risk for investor but potential for higher return
• Loss of some control and ownership

There are many venture capital firms who offer funding to business owners. You will need a solid business plan, and there will be a due diligence review. If the investors are interested, you will agree on terms and the funding is provided.

Normally, venture capital is provided as you meet milestones which means you may not get the full amount up front. You will have to meet certain goals included in the terms to receive percentages of the investment over time.

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Crowdfunding

Websites like Kickstarter and GoFundMe allow you to seek investments from a large number of people. The process, known as crowdfunding, lets people donate small amounts to your business to see you succeed. In some cases, you may have to give them a gift or reward as a thanks for the donation, usually a free product, acknowledgement of their contribution or other benefit.

This type of funding is best for companies that produce creative works like art or film as well as those who have created a unique product, such as a high-tech vacuum. There is very little risk to your business and, if your business fails, you are not required to repay the investors. The crowdfunding sites do take a percentage of anything you raise, however.

Traditional Financing

Loans are another popular method for funding a business. However, if there are obstacles to getting a traditional business loan, the Small Business Administration partners with banks to offer loans that are guaranteed by the organisation.

This type of loan is especially designed for those who may have difficulty obtaining a traditional loan, like those with poor credit. There are special requirements and stipulations you must meet in order to qualify, but your lender should have information about the Small Business Loans that will work for your company.

Grants and Gifts

There are many grants and gifts available to help small businesses, but it is important to be careful. Companies that offer to locate a government grant for a fee are often fraudulent and can lead to excessive costs that you will not be able to recover.

There are grants available for specific types of industries, such as technology or retail, but you will need to search in order to find one that works for you. Also keep in mind that grants are very competitive, so you may need to fill out quite a few applications before you are successful.

Gift financing may also be non-cash benefits such as free office space or free services from businesses who want you to succeed.

Further information on business loans is available if you would like to learn more about your options.

Ramphastos Investments is a venture capital and private equity firm focused on driving top-line growth in enterprises in all stages of their evolution: from start-ups to scale-ups to high-growth medium-sized companies and mature enterprises.

The firm was founded in 1994 by Marcel Boekhoorn, who left a career in accountancy at Deloitte after becoming the Netherlands’ youngest Partner to pursue his passion for entrepreneurship. Within a few years, Marcel had grown the firm’s portfolio and invested capital exponentially after realising spectacular returns through several high-profile exits. In this period, he also laid the foundations for the approach toward building businesses that the firm pursues today: a focus on driving growth on the revenue side of the equation through buy-and-build strategies, marketplace innovation, internationalisation, management empowerment and strategic partnerships.

Today, Marcel is joined by a team of seven partners who share his passion for and hands-on approach to business building as well as his upbeat, solutions-focused and status quo-challenging mindset. As founders, builders, operators and investors in businesses of all sizes and in all phases in their evolution across multiple sectors and geographies, Ramphastos’ partners have successfully turned around businesses, created and sold start-ups, launched IPOs and completed de-listings, achieving outsized average returns on investment throughout the firm’s growth.

The firm currently holds interests in more than 20 companies with a cumulative revenue above 3.5€ billion and more than 8,000 people employed across a range of sectors from financial services, gaming, new materials and advanced manufacturing and energy and across all continents. Ramphastos is focused primarily on acquiring majority stakes in companies that meet three criteria: a unique competitive position (through a patent, brand or operational efficiency), strong intrinsic growth potential and favorable underlying trends in the industry or marketplace. As an investor of its own capital, the firm has the financial independence and appetite to take on complex transactions and special situations.

This month, Finance Monthly had the privilege to catch up with Marcel Boekhoorn and hear about the exciting journey that founding and running Ramphastos Investments has been to date.

What was setting up your own investment company in the Netherlands back in 1994 like? What were some of the hurdles that you were faced with?

When I left my job as a Partner and M&A Expert at Deloitte & Touche, I had no money of my own to invest, so my first step was to set up shop as an independent M&A consultant. That work brought in enough money, and when one of my clients was unable to pay for my invoices, I decided to take a stake in his business. I made just about all the mistakes you can make, starting with taking a minority stake and having no control over the direction of the business. I also witnessed first- hand that a Founder’s entrepreneurial creativity doesn’t necessarily translate into day-to-daymanagement or leadership skills.

Within eight months, the company had folded, and I was on the verge of bankruptcy. But poverty breeds creativity, and within a year, I had earned enough to try it again, this time taking control of a struggling wood box maker and turning it around by focusing production on cigar boxes. We produced boxes for Davidoff, Tabacalera and other global brands, and I sold my shares for a good profit – enough to branch out into more investments.

My strategy from the start was to focus on unconventional companies that no one was interested in, like small wheelbarrow or spray can manufacturers, and to build them into market leaders through buy-and-build strategies. By realising significantly higher margins as market leaders through premium pricing strategies, these companies were able to accelerate outsized growth in their sectors. By purchasing them when they were small and selling them quickly as market leaders, I was able to realise outsized returns in the process.

Now, almost 25 years later, we’ve moved on to larger, different and more complex investments, but our fundamental emphasis on top-line growth, as well as our preference for taking a majority stake in our investments and our interest in companies, markets or complex transactions and special situations that others shy away from, are still our main priorities.

A key component of any successful PE investment is to turn the business around; what are the considerations in terms of operational integration? What are the typical challenges you face?

When we consider investing in a business to turn it around, we look to see how we can add value on the revenue side of the equation – through a buy- and-build strategy or by challenging the status quo with the introduction of a new channel strategy, internationalisation, or a new product portfolio or pricing strategy. We have seen that it’s on this side of the equation that we can make the biggest difference and add the most value. It’s also where we’re most at home. We are entrepreneurs and business builders first and foremost.

This sets apart from much of the private equity world, with its emphasis on the cost side of the business. Don’t get me wrong: all of the revenue- driving strategies I just mentioned will only succeed if the organisation and operations are structured effectively to deliver on them. And any successful turnaround includes robust cost control and simplified, streamlined operations. Getting that right will always be part of our turnaround strategy, but we are fundamentally more about catalysing growth through entrepreneurial innovation and management support on the revenue side rather than driving profit by slashing on the cost side of the equation.

A hallmark of our approach to turning businesses around is to focus on company leadership. The company’s management and its employees – the people – are the ones who will make or break the business. Our work starts at the top, getting the leadership bought into and aligned on the new direction, ensuring that they embrace the same vision of the future, the same sense of who we are today and where we are headed. We make it a point to be there for leadership teams and help them work through such processes. We’re hands-on builders, and this is a role we love to play. Getting a turnaround right throughout the organisation – not just among leadership’s direct reports but company-wide – hinges on consistent, well-aligned communication. We find time and again that executing consistent communication – from instilling an understanding of strategy to fostering a growth-focused culture among employees. This is one of the most important operational KPIs for a successful turnaround.

You ask about typical challenges. Well, for starters, most people aren’t hardwired for change, and if the change isn’t something that they introduced themselves, it scares them. They don’t like it – until they see that it works and benefits them, of course. Take the example of introducing a channel strategy to move a retail business entirely online – or vice-versa. We’ve done both in different sectors, geographies and cultures, and we have found that three things help mitigate resistance and galvanise employees to deliver on the new strategy: first, a clear and consistent communication about the strategy and its benefits, second, creating and showing progress against a roadmap with compelling short- and mid-term milestones and third, cultivating a culture of listening and dialogue among employees.

What is the state of the market in relation to venture capital right now? What challenges are faced by businesses looking for funding?

Looking at the markets for venture capital and private equity, we see that increased competition has driven up valuation multiples up consistently.

From 2009 to today, sustained low interest rates have made debt cheap and have driven investors’ money toward VC and PE in their search for higher returns. Strategic buyers with strong balance sheets and big cash reserves are competing with one another, driving prices up.

In spite of this overall pattern, there are plenty of businesses who struggle to find funding. In the VC space in particular, we see that geography plays a role. If you’re a start-up based in the States looking for, say, two-to-five-million dollars, you’ll be well served by the market. If you’re a European company looking for the same investment in

Europe, you’ll struggle. The VC market is far less developed than the market in the States, with investment concentrated around a handful of potential unicorns.

At Ramphastos, we have always focused as much as we can on companies in underserved markets and in investments that others avoid. Conversely, we’ve always stayed as far away as we can from competition with other investors. Our point of view is that if you have to compete in an auction with

20 or 25 other players, then you’ll always end up paying too much and struggle to reach your target IRR.

We build businesses with our own capital, and in doing so, we pursue the high-risk, high-return opportunities that others avoid. We’re currently focused on turning around larger enterprises that face complex challenges. Unlike typical private equity firms that are happy with 25 or 30% IRRs, we are looking for driving significantly higher returns. So far, our approach – which plays to our strengths as creative thinkers and hands-on business builders – has paid off. In our 24 years as a firm, we’ve realised average multiples of money invested above ten.

How are most of your investments structured? To what level do you, as the investor, want a say in the day-to-day running of the business?

We do the majority of our investments on our own.

We invest our own capital and value our financial independence. This keeps us flexible and agile as investors. We usually take majority stakes to allow us to do what we do best – roll up our sleeves to help company leadership hands-on as they build their business. As founders, builders and leaders of businesses of all sizes and in all phases in their evolution, our partners have first-hand experience with just about anything you can encounter as an entrepreneur. We usually take a board position in our portfolio companies working side-by-side with company leadership to shape strategy and – if needed – give them tactical counsel, talent, tools and innovations to deliver on their plans.

Whereas we’ve been successful to date in the VC space across multiple sectors from flight simulators (Sim-Industries) to online brokerage (TradeKing) to flooring technologies (Innovations4Flooring) and open to opportunities, we are increasingly focused with our investments in larger, more mature companies, particularly ones with three qualities: one, a unique competitive position through a patent, brand or operational efficiency; two, strong intrinsic growth potential; and three, strong underlying trends in the industry or marketplace. We also love helping companies tackle tough, complex problems and turn themselves around. We’re actively looking at opportunities in that space, particularly among larger enterprises.

How are exit strategies agreed and structured? What are typically the common areas of disagreement regarding exit timing and strategy between the business owner and Ramphastos Investments?

We don’t have a predefined exit strategy, but we never buy into an enterprise without having a good idea about whom we’re going to sell it to. If we don’t know our exit, we won’t buy it – it’s as simple as that. And because we invest our own money, we have no pressure or obligation to sell. Our capital is patient: we’re in no hurry. Rather than working towards a specific exit, we focus on the execution of a predefined strategic value creation plan. When companies continue to grow, they will sooner or later attract buyers. We are all about value creation, and that can take time. We exit when the time is right.

To date, we have never had disagreements with the management teams on timing or nature of the exit strategy. The social dimension is important to us. With a good deal, everyone should be happy: buyer, seller, management, employees, partners – everyone. When the ABN AMRO bank dared to support us with 200€ million on our first really big deal, we rewarded them with a discretionary 10€

-million premium at exit, without any contractual obligation to do so. They had never experienced anything like that before. We don’t do deals where we can’t make such things happen.

Out of all of Ramphastos Investments’ success stories, what would you say are your three biggest achievements?

The first is without a doubt Telfort, a Dutch mobile telecom provider, which we acquired as majority shareholder, grew exponentially and sold within nine months to market leader KPN for more than a billion € in 2005. That deal was a milestone for Ramphastos, because it earned us our first half billion. It’s also a good example of the success of a robust top-line strategy. While part of our success involved getting the costs under control, we grew the company’s value explosively by swiftly migrating the business from an online- only platform to the high street retail channel, through creative retail and consumer incentives, and we raised the consumer price sharply while remaining the market’s price leader, driving profits from 50€ million to 150€ million in just eight months. We also capitalised on excess network capacity by opening our network to mobile virtual network operators, and we closed a unique deal with Huawei, as the company’s European launch customer.

A VC success story that we’re super proud of involves Sim-Industries, a developer of flight simulators that we launched in 2004 and sold to Lockheed Martin in 2011. The story is a good one, because it shows how being flexible and thinking out-of-the-box can steer a start-up to success. Sim started out in the software business, developing software for flight simulators. When the market leader in that space stood in our way, we asked ourselves: Why not go further and build simulators too? We fought hard to gain a place in an oligopolistic market, with incumbents poaching our employees and trying to scare away our suppliers, clients and us. In the meantime, by taking a fresh look at design, we built a superior product, overcame legacy issues, installed a senior management team, focused on execution excellence and became market leader in civil aviation simulators for leading aircraft types.

A third story I’d like to share has less to do with business, but everything to do with deal-making. It’s a deal that centres on an issue that is close to my heart: the preservation of species; and it’s a deal that fulfils a dream that I worked personally, persistently and patiently to fulfil over 17 years – making a home for two giant pandas in the Netherlands. That dream began when I bought a zoo located to the east of Utrecht and returned it to profitability. After hundreds of hours’ worth trips back and forth to China, education, complex relationship building with the Dutch and Chinese governments - across three Dutch prime ministers and three Chinese presidents, the dream became a reality in October 2015, when I travelled with a trade delegation and our King to the Great Hall of the People in Beijing to sign a ten-year agreement in the presence of Xi Jinping. The agreement includes an annual contribution of one million dollars to the preservation of the panda and the conservation of its natural habitat in China. The pandas arrived almost exactly a year ago at the zoo and are thriving in their new home, which was voted this year as the world’s most beautiful panda enclosure.

Over the years, what has kept the company moving forward? What sets you apart from the competition?

What’s kept us moving forward first and foremost is that we absolutely love what we do. We love building businesses. We love wrestling with thorny challenges and innovating our way with management teams toward successful turnarounds and outsized growth. We love closing deals that make everyone a winner.

It hasn’t been smooth sailing every year. I founded the company with plenty of fits and starts, as you heard, and when the Great Recession hit, it didn’t look at us and say: They’re a nice bunch of people, let’s give them a break. I’m happy to report that all of the companies in which we hold a majority of shares are turning a profit today.

What’s gotten us through the tough times is a combination of our unbreakable optimism and solutions-mindedness, our deep respect for one another and our collective creativity.

There’s also the fact that that we nurture close, trusting relationships with the management of our portfolio companies. We’re open with one another, and all of us here are ready and willing to jump in and contribute. We’re able to anticipate problems before they surface or tackle them quickly before they spin out of hand.

To put your finger on what makes us different, add to that our resourcefulness, boundless energy and appetite for challenging the status quo. We thrive on pushing ourselves and our companies to innovate and adapt constantly to drive revenue and margin growth, and in today’s world, if you don’t have the mindset and wherewithal to be agile and adapt, you’re in serious trouble. As a financially independent investor, we are free to take risks, tackle problems that others avoid and make the kinds of bold moves that catalyse truly breakthrough growth.

What do you hope to accomplish in the near future? Are there any exciting new projects that you can share with us?

I have an important role to play as the chief motivator, inspiration and driver of creativity within our team, and I hope to continue to do so for many years. Entrepreneurship is what fires my heart and gives all of us here energy, inspiration and strength. And all of us at Ramphastos see the kind of creativity-driven value that we’ve been creating here pays itself forward to beyond Ramphastos to the management teams and employees and suppliers of our companies and markets they serve. We have been doing well for almost a quarter of a century and aim to continue to steer this course.

As for projects on the horizon, we have some really exciting deals on the way. I wish I could tell you more, but I can’t. Stay tuned - there are more chapters to come.

Website: http://www.ramphastosinvestments.com/

There comes a time in the life of many businesses when owners cast around for ways to borrow money for growth. But those intending to use venture capital and private equity should plan particularly carefully before committing. Many don’t, and the result can be catastrophic.

Whilst the challenge is simple enough: to get the best deal whilst surrendering the least amount of control and equity. How to achieve that is less straightforward.

What goes wrong is poor attention put into the three basics: business plan, motivation, and due diligence.

Usually, the fractures start to appear because the borrowing enterprise has just not prepared itself. Unfortunately, the thought of ‘free’ cash in return for a slice of equity can tempt owners to make growth predictions that overreach reality. But the wise tread carefully and take advice. Without careful execution, the deals turn sour, with original management teams seduced into arrangements that end up with them losing both money and control.

There are horror stores out there. One UK business originally worth £5 million saw a £7.5 million private equity investment turn rapidly from a lifeline to a millstone, as it failed to meet challenging targets to which its owner had originally agreed. The software company now owes its backers £22.5 million in unpaid interest and redemption charges. Only one of the original management team is still in place and their stakes are now worth little.

This particular nightmare is neither the rule, nor the exception, but illustrates what can go wrong.

Private equity and venture capital can positively transform the fortunes of a business, injecting expertise as well as cash to help it grow. When it works, everyone benefits from a deal between risk and reward. But when it fails, the biggest loser often turns out to be the original management team.

In the end, the siren call of ceding absolute control for someone else’s financial support is not for everyone. Clients of mine stepped back from the brink, despite a willing lender. The reason was unease that the lender’s need for a return on their cash over a fixed term was at odds with the more relaxed instincts of the management team to let things in their restaurant chain grow organically.

The business plan is crucial and more than just a calling card. It is the basis on which the institutional equity investor decides how much to lend and what to demand in return. Firms that overstate likely growth to get investment are doing themselves no favours.

This is because valuations, upon which the entire deal will be based, are dependent on cash flow forecasts. Get them right, or better still, set them lower than they subsequently turn out, and everyone is happy.

But if the business has to keep going back to the investor, the lender will gradually wrest away control in exchange for their cash. They will insist, for example, on new agreements that may keep notional share ownership intact, but take control of decisions over fund raising and board membership.

In simple terms, the more a business falls short of an agreed business plan, the more it ends up giving away.

Which brings us to the next important area: motivation. A management team must ask itself what kind of life it wants. Once private equity is on board, a roller coaster ride starts. Demands are made, targets need to be met. The lender’s need to recover cost and secure a return requires growth at an agreed rate. This can be incompatible with watching your children play sports on a Wednesday afternoon, say. Do the soul-searching.

Nothing will be a problem if your business is growing, of course. But if it isn’t, expect a tough life. The management team must be wholly committed or problems start, particularly when targets in the all-important business plan fail to be met.

The final key component to borrowing money is to carry out due diligence on any lender. Examine the portfolio that every equity house lists. Speak to the firms involved and find out their experience.

Borrowing money from a bank is a far more removed, transactional experience than taking it from a venture capitalist or private equity lender. Their loans come with an expectation of involvement, so personal and professional chemistry is important. The process is effectively inviting a new member on to your key team.

Sometimes organic growth is best - not only because it allows more control to be kept by the original owners, but it can also be better as a fit. The culture of a business can be rudely disrupted by the keenly focused financial demands of an agreement with venture capital and private equity funders.

And choose wisely. The ideal lender will treat your enterprise as more than just a risk to be shared amongst many other. But remember: Private equity wants to have your cake. The trick is to avoid being eaten entirely.

Our July Investment Insight section looks at the work of Jeff Evans, who is a Partner & Managing Director at Volta Global - a diversified private investment group focused on direct investments in venture capital, private equity, and real estate. Volta was formed in 2015 to manage the proprietary and permanent capital of its founder and partners of the firm. Prior to joining Volta, Jeff had over a decade of multi-faceted experience as an active investor in both public and private companies, and as a co-founder of a venture-backed technology company.

Tell us a bit about what makes Volta Global’s philosophy and company culture unique?

Everything about our investment philosophy and corporate culture stems from our permanent capital base. Because we don’t manage a fund or have external investors to answer to, every investment decision we make is viewed through a long-term lens and must pass the test of being undoubtedly the best usage of the two resources we care about most - our capital and our time. Because we are active in so many different areas and maintain a relatively small headcount at the corporate office, our culture remains very entrepreneurial and filled with intellectual curiosity.

Can you give an example of how your personal investment approach has evolved during your career?

Like many people drawn into this field, I’ve always considered myself to be a value-oriented investor. The idea of being one of the first to discover a business with an underappreciated competitive advantage (or “moat”), and that was currently mispriced by other investors, was an idea that captured my interest very early in my life even before I started doing this professionally. As my career has progressed and involved making investments in many different markets, I think realizing how the characteristics of competitive moats themselves can change or adapt over time has been an important evolution. Many elements that defined what a sustainable and durable competitive advantage looked like 10 or 15 years ago may have been drastically altered over time by factors like technology and changing consumer behaviour. Think about large incumbent businesses in the consumer goods space as a good example. For many decades there existed a hugely profitable moat versus smaller upstart competitors – big barriers to entry built up over time thanks to distribution being incredibly expensive and difficult to accomplish at scale, and the advertising dollars necessary to match brand recognition and awareness with the big players being prohibitively costly for most. Fast forward back to today, and businesses like Dollar Shave Club and Harry’s have leveraged direct-to-consumer distribution models and extremely low-cost (but equally effective) marketing efforts to steal almost one-fifth of the razor market from the big incumbents in only a matter of years. I still believe that investing with a focus on the original value principles is the best path to long-term success today, but investors need to be aware and attentive to how sources of competitive advantage can evolve and erode over time.

What types of businesses does Volta look for in your private equity strategy and can you share one lesson you’ve learned from your activity in the lower middle market buyout space so far?

From a high level, in our control investments we are seeking to acquire profitable and durable businesses, each with between $3-10 million in annual cash flow at time of purchase. We tend to like businesses that most people find boring and unexciting, and where we can make them just a bit more exciting. We also prefer situations with an existing management team in place to stay on and operate the business after a transaction, or where we are facilitating a transfer of the business from one generation of family to the next.

The quality of the relationship developed with the sellers or controlling shareholders of the target business is hard to overstate. Not having a proper alignment of incentives in place, or expecting something that starts out as a poor relationship to eventually sort itself out after you have acquired and taken over the business, can be recipes for disaster. For this reason, we choose our partners very carefully based on their track record of displaying integrity and honesty, and we make sure there is personality fit and proper alignment early on in the process process to avoid pitfalls down the road.

Do you have any guidance for how the average investor can improve the quality of their investment decision-making?

Learn from the best. Find great investors throughout history and be an avid reader of their writings, teachings, and experiences. A strong sense of financial market history is also important - what tends to be “new” is often just an old idea that has been repackaged in a different form. Mental models and internalizing a few big ideas from multiple disciplines beyond finance can also be quite useful as an investor. The idea of compounding is powerful, and how continuous, minor self-improvements every day accumulate over time – simple math tells you that a 1% improvement in a skill compounded every day equates to an almost 38-fold total improvement in that skill over one year. Lastly, surrounding yourself with intellectually curious people that ask a lot of questions is a great way to test your own assumptions about the world and continue to expand your own mental framework.

Damon Walford, Chief Development Officer at alternative lending industry pioneers, ThinCats, shares his thoughts with Finance Monthly on how SMEs can get the right mix when it comes to funding.

Alternative funding offers access to finance that ticks many boxes; from faster turnaround times, to flexible rates and a more in depth probing of the story behind the application. It also provides an ideal avenue to supplement private equity, venture capital, Angel investors and crowdfunders.

Alternative loans for business are more accessible when equity is part of the mix, especially in cases of business acquisition, refinancing and property development. Lenders like to see an element of entrepreneur equity as “skin in the game”, but there is an important place for 3^rd party equity which may be on a different scale to that of the entrepreneur, providing meaningful impact on the risk profile of any loan.

Where appropriate an equity and term loan mix will:

• Reduce risk of the debt provider as any security available is against a smaller loan;
• Reduce funds required to service debt;
• Provide all financers with additional comfort regarding the proposition;
• Generally reduce costs of both debt and equity finance due to decreased risk.

ThinCats has huge experience in this area, and has successfully financed a range of projects where a mix of funding has provided the ideal solution. In one case, an MBO team wishing to acquire a business with justifiably high goodwill had their own equity but there was still a funding gap. This is often covered by a deferral of part of the purchase price, but in this case 3^rd party equity was the best solution.

Where a sound business may have suffered a financial shock, e.g. bad debt, an equity mix can be the saviour. ThinCats has funded just such a company, where the balance sheet value needed reinstating with equity, but a cashflow-based term loan was also appropriate given underlying trade. In this case, it was impossible to finance wholly on debt, too expensive purely through equity, but very viable to provide the mix.

A property developer had a project ambition that they couldn’t fully fund through their own resources or with the highest Loan to Value debt commercially available. 3^rd party equity was used to bridge the gap providing a structured debt & equity solution.

Most deals of any size will have an element of equity and debt in them, often provided by the entrepreneur, but 3^rd party equity is key to getting certain deals financed.

Cambridge Companies SPG (Special Projects Group) is a leading private equity firm based in Newport Beach, California with a focus on commercial real estate and venture capital transactions. The company’s estimated $300M real estate portfolio is primarily in California and Nevada, owned in part by investors and is unleveraged. Cambridge Companies has zero debt, a strong cash position and has achieved a 40.6% Overall IRR with a 47.25% average project IRR across 27 principal real estate transactions. The firm also has a Venture Capital platform and buys minority controlling and non-controlling interest in companies poised for growth. Cambridge has a growing advisory board that is comprised of some of the world’s most successful entrepreneurs, investors, financiers, scientists and operators. This month Finance Monthly had the privilege of speaking to Filipp Chebotarev. As Chief Operating Officer of Cambridge Companies, he oversees all daily operations, develops and maintains strategic partnerships and drives initiative for organizational growth. Filipp graduated from University of California Irvine with honours. Prior to establishing one of the leading Private Equity Firms in California, Filipp obtained a wide array of experience in politics, business, revenue operations and organizational development. Here Filipp tells us in more detail about Cambridge Companies’ structure and aspirations. He also introduces us to his role and its impact on the private equity firm's performance.

Cambridge Companies as a game changer investor

 “We are led by a set of core values that define our character and culture; they have been at the core of Cambridge Companies SPG since its inception.”

 Today most real estate investment companies only understand real estate. As long as the real estate market is hot – they find themselves performing well too. They leverage and buy more real estate until a market correction brings them to the brink of despair and as we saw in 2008 - flat out wipes them out. What differentiates Cambridge Companies from other real estate investment companies is that it has a unique non-leveraged strategy which keeps the company investments in a low-risk profile structure. The firm is also well-diversified within its VC platform and has exposure in Food, Beverage, Fintech, Healthcare and a number of other markets. Cambridge prides itself in its world-class team and advisory board, which provides the company with a unique ability to have an industry agnostic investment strategy and an ability to execute when opportunities in the market present themselves.

 Above all, Cambridge has made it their top priority to serve the needs of their investors and clients. This commitment is reflected in a culture that values integrity, accountability and strong passion for excellence. The company operates with forethought, financial discipline, a long-term perspective, and an unblemished understanding that trust is the cornerstone of their success.

Filipp Chebotarev - one of the top subject matter experts on real estate and venture capital transactions in the US

Fillip’s role as Chief Operating Officer and Partner at the company is defined by character. He has been able to elevate the presence of the firm and make it a relevant player in the private equity world by implementing everything he learned during his tenure in Politics and Corporate America. Filipp’s stint as a Constituency Representative for U.S. Congressman Ed Royce allowed him to see the importance of great leadership, since his role involved gathering information from constituency groups and reporting their needs or concerns directly to the administration – allowing the leadership to understand the issues people faced within their district and react.

Filipp later transitioned to Revenue Operations at DaVita, the only Fortune 500 Healthcare provider with over $12 billion in annual revenue at the time. His daily role was to account for over 70% of total revenue, reconcile and balance the Gl, identify and correct complex payor discrepancies before the reports went off to auditors for Sorbanes-Oxley compliance. In addition, the team that he was part of handled M&A and integration, as DaVita was aggressively acquiring and consolidating smaller providers. DaVita later merged with Healthcare Partners, creating one of the most efficient integrated healthcare systems in the world.  “DaVita taught me the importance of Core Values, Organizational Structure and teamwork - today I bring those important lessons to Cambridge Companies”, says Filipp. He continues:  “My sister Polina and I came from humble beginnings and worked for a prominent business mogul/real estate developer for over 4 years - this is how we learned the business. Eventually, as our mentor got older, our importance in the organization elevated and the three of us became partners. In late 2015 our mentor retired and David Patton joined our firm after a successful career at Citigroup (NYSE: C). Today, our team drives investment strategy, corporate core values and organizational development. The success of our clients and teammates are our number one priority - our job is to maximize shareholder value and this is what drives us”.

Today, Filipp is considered as one of the top subject matter experts on real estate and venture capital transactions in the US. Real Estate is a wide area of expertise and his expansive experience covers assisting with vacant land, land entitlement strategy, ground up development, NNN stabilized commercial real estate, value add commercial real estate, as well as luxury single family. He has vast experience across all property types including single family, multi-family, retail, office, industrial and high-rise residential. Mr. Chebotarev is also a highly regarded Venture Capitalist. At DaVita he and a team engaged in acquiring and integrating over 1000 new clinics, as well as international healthcare joint ventures. DaVita grew revenue from $6.45 Billion in 2010 to over $12 Billion in 2013. When working for the company, he and his team were able to consolidate smaller providers that were not providing the same level of care, improve level of care and access to affordable treatment. Today, DaVita’s clinical outcomes continue to be the highest of any clinical provider, according to Government reports.

Cambridge Companies was honoured when Food and Beverage legend Greg Fleishman, who has created and grown some of the world’s largest and most successful brands during his 18-year career, joined the company’s advisory board. Together with Greg, Cambridge has been able to make a handful of incredible investments that contributed to the elevation of organic and non-GMO brands in the bake mix, food-crafting, baby food and a number of other sectors. Most recently, Filipp and his group led the multi-million dollar Series A round of investment in  Foodstirs, Inc. Foodstirs is the world’s first organic, non-GMO, biodynamic bake mix quickly capturing market share in the $5 Billion U.S. Food craft and Baking market. The widely popular company was founded by Galit Liabow, internationally-known actress Sarah Michelle Gellar, and has been promoted by superstar Jessica Alba. Filipp believes that these investments have a discernible impact on the health of customers and children in the US. “The best kind of investment is one that not only performs financially (which these have done in a major way), but also makes the world a better place. By investing in organic and non-GMO food brands, we are helping to reduce the cost and offer wider access to customers, thus allowing them to live healthier lives”.

Having had experience in healthcare, real-estate, food & beverage, financial services and technology, Filipp is able to understand complicated transactions across multiple economic verticals. “My experience allows me to efficiently understand the structure of the business in which we are looking to make a potential investment. This is a very valuable asset and one of the key elements I bring to the table at Cambridge.”

When asked about his role in Cambridge Companies, Filipp continues: “From the moment I wake up to the moment my eyes close I am thinking, planning, and growing the business. I see it as my responsibility and commitment to our clients and teammates. We are led by a set of core values that define our character and culture. Our team knows that our clients come first, their success is our success. We take commitment very seriously at Cambridge and are accountable to our teammates, partners and clients. Integrity must be at the core of everything we do and trust is the cornerstone of our success. We are a group of passionate professionals focused on performing at the highest level. Our success is built on innovation and hard work. We are continuously improving, building and growing for our clients. I don’t stop until the job at hand is done and there is a favourable outcome, I inspire my team by example”.

Mr. Chebotarev also has an experience in politics, revenue operations, and organizational development. He believes that the most valuable lesson that his varied experience has taught him is the importance of having the right team. “Even a rock star needs a group of musicians, producers, lighting and sound engineers, a strong manager and a host of other teammates to deliver a memorable performance. Otherwise, he is just a guy in tight pants, singing acapella in his bedroom. My advice is - if you meet someone smarter than you, bring them on your team and build a base of intellectual capital that you can draw on for support and knowledge”.