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How Do You Rank in The Investing Hierarchy?
Copyright 2006 CashFlow Avenue
You probably have heard this saying before - "It is lonely at
the top." If you find yourself in this position, then you are
probably at the top of your own niche. Our society is made of
hierarchies. Most...
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Six Things To Do In A High Risk Market
When the market turns against you, what should you do? Sell everything? We discussed that choice in a recent column. Selling everything draws your "line in the sand" and announces that you have determined there is no future for you in the market. ...
Understanding 401k Plans
What is a 401(k) plan?
The 401(k) retirement plan is funded by employee contribution
and a matching employer contribution. The major feature of the
plan is that the contributions are taken from pre-taxed salary.
The fund accumulates...
What is a Mutual Fund?
Ever wondered what is a mutual fund? A mutual fund is a pool of money run by a professional or group of professionals called the “investment adviser.” A mutual fund is a company that pools money from many investors and invests the money in stocks,...
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Raising Money
Raising Money
It isn't cheap. It isn't easy. The winners in the rush for risk capital are the CFOs (Chief Financial Officers) who understand how to play the money game.
Private companies seek risk capital from American Venture Capital Firms (VCs) and wealthy individuals called Angel Investors. A 2003 study shows that U.S. Domestic company odds of raising money from Venture Capitalists are less than one business plan in ten thousand will be funded. The initial VC capitalization will be for less than one million dollars and the Venture Capitalists will want at least half the equity in the funded private company. The estimate of the odds of private non-American companies raising money here are less than one in twenty five thousand.
Costs
What does it cost to seek risk capital for a private company from American Venture Capital Firms? Our Contact Cost Model gives you a rough way to estimate the direct costs of raising risk capital. Your firm will need to prepare, package and mail a business plan to prospective investors. A professionally written business plan should cost your company about $20,000. Assuming that you use First Class mail and not an overnight service within the United States, your cost to mail your business plan will be at least $5 in printing, packaging and mailing for each business plan sent to a prospective investor.
You should follow up your business plan mailing with at least one phone call. That phone call will cost your company at least four dollars in salary paid to a professional telemarketer. If you could contact 10,000 Venture Capital Firms and Angel Investors your costs will be about $115,000 and your odds of success are about 50%. If you contact 5,000 potential investors, your costs are about $65,000. Your odds of success would be about 33%. There probably aren't 25,000 American Venture Capital Firms and Angel Investors willing to risk their money overseas. If you could find and contact 25,000 American Venture Capital Firms and Angel Investors, your costs will be about $287,500. Your odds of success would be about 50%.
Contact Cost Model
Using our Contact Cost Model approach, you can easily determine your fund raising costs and odds of potential success with whatever number of risk capital contacts that you make. If you spend the money to contact enough investors, you'll find someone to risk money in your company. Often, the costs of your search exceed the risk capital raised by your company.
What does it cost to seek risk capital as an American Public Company? Your potential investors are merchant bankers, mutual funds and wealthy individuals. They more readily invest in your public company because public company speculation offers them liquidity and leverage. Liquidity, because after the legally required holding period, they can sell their
Associated Websites
shares into the Market. They don't have to wait until your private company is profitable to make money. Leverage, because the share price of most American stocks is a multiple of the balance sheet value of that company. Your public company could fail, but your private placement investors would still profit.
A public company rarely gives up significant equity for its Private Placements. Your odds of finding a merchant banker, mutual fund or a group of wealthy investors willing to take the far lower risks of buying your discounted shares are about one in one hundred. Using our Contact Cost Model, you could contact 1,000 Merchant Bankers, Fund Mangers and Wealthy Investors at a cost of about $29,000. Your odds of raising your risk capital would be about 90% in your favor.
Going Public Problem
The problem with Going Public in the States is the costs associated with filing your registration statement with the U.S. Securities and Exchange Commission. When you factor in the at least $1.5 million in registration costs, it's no longer cost effective to go public to raise risk capital. As with private company finance, the costs of your search for money will exceed the risk capital you can raise. It makes no sense to spend over $1.5 million to raise less than one million in risk capital.
There Are Easier, Less Costly Ways
As your consultants, we can suggest a way of going public in America that reduces your costs by 95%. We can suggest a way to go public that reduces the time factor by 66%. We can suggest a way to go public that more than doubles your odds of trading your shares in the United States. If you use our Going Public Strategy, your Contact Cost Model would be $60,000 to take your company public and you would pay $29,000 to conduct your investor search. Your odds of finding your million dollars in risk capital would be about 90% in your favor. If you compare our solution with that of raise money as a private company, you'll find:
Private Company TacticCosts: $115,000Odds of success: 50/50
Our StrategyCosts: $89,000Odds of success: 90/10
That's 90% in your favor using our strategy!
If you want to use our public company strategy to raise risk capital for your company, email us today. We can arrange to meet you in the San Francisco Bay Area. We lecture and travel around the world and you can arrange to meet us during these trips. We regularly do phone consultations with prospective clients. Email us today.
To contact the author, email Beowulfinvestments@Earthlink.net
About the Author
He 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/]
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