Question
An aspiring entrepreneur from Brisbane, Queensland asks:
I’m raising
capital for a start-up consulting business. I have 18 years consulting
experience and, throughout, the assignments were provided by my
conglomerate employer. I understand cultivating each client takes a
year. I do have a house as collateral for a loan. My mortgage
represents 72% of the current property value, and there are no savings
after repayments and living expenses. I have 4 similarly-qualified
people joining me, all critical to this venture, with each possibly
defecting for a $220,000 salary. I’ve found a city office at $40,000 pa.
What are my capital raising options? A critique would assist.
Answer
Kenelm Tonkin, Chairman, Tonkin Corporation answers:
An entrepreneur has eight capital sources, each progressively harder to
secure: himself, family, friends, colleagues, banks, business angels,
venture capitalists, and the public.
First, without his own savings, an entrepreneur is forced to ask
family. Perhaps his frugal aunt is convinced but, if not, he must
approach friends, a tougher proposition. Maybe a work colleague with an
entrepreneurial itch might invest. If no luck there, then the money
search turns to banks with their vaults of strangers’ savings. Since
banks try to be conservative with others’ money, property is required to
back most loans. From there, it’s to business angels, sophisticated
investors with their own savings. Thereafter, one approaches venture
capitalists, professional investors of others’ savings. Finally, money
is raised from the public.
This proposal suffers two flaws.
First, the aspirant has no savings to invest. This self-elimination
as a funding option instantly removes venture capitalists and business
angels who require “skin in the game.” The aspirant’s inability to save and high mortgage to property value raises serviceability and capacity red flags with banks.
Second, the proposal is ill-conceived. It shows a $1.1 million
year-one cash burn, no capital to fund it, no management or marketing
team, and no clients. This will spook colleagues, including the possible
four, and hopefully warn friends and family. Finally, the public
markets are inappropriate here.
An entrepreneur failing to invest is a dreamer looking for a job. The
plan itself is correctable. The founder’s lack of investment is fatal.
