Episode 17: Fundraising
What would you do if you needed $10Million to fund a creative production and you were in the wake of a big shock to the folks with all the money? Listen in as Doug and Glenn swap stories on creative fundraising success stories while they survey the conventional landscape and how to navigate it. This is a big episode, so buckle up.
Transcript
Glenn Suart 0:00
…rather than go to these… try to convince these big whales the value of the show, she went to some small investors, we’re talking small investors putting in like $10,000, $20,000 and she got friends of friends… once they put money… other people put money in, and the next thing you know she had 300 investors putting in $10 million.
Doug Ross 0:32
Welcome to Conversations on Startups, a podcast brought to you by Douglas Ross, author of the book, Spark Click Go: How to Bring Your Creative Business Idea to Life, and Glenn Suart, of Today’s Great Idea, a radio series featuring over 300 origin stories of businesses, brands and inventions that have changed the culture. Welcome to today’s conversation.
Doug Ross 0:56
Hello, and welcome to another episode of Conversations on Startups with Doug and Glenn. I’m Doug Ross, coming to you from the US of A today. And my colleague Glenn Suart is here in sunny Calgary, Alberta. How you doing, Glenn?
Glenn Suart 1:13
I’m doing great, Doug. It is a beautiful day in Calgary, a beautiful day for the weather and a beautiful day to talk about a subject that lots of entrepreneurs wrestle with. Fundraising. How do I raise funds for the business, I want to get off the ground?
Doug Ross 1:29
Great topic. As my father said, If you’ve got more than one problem, and one of them is financing, you’ve only got one problem.
Glenn Suart 1:41
That is really good. I like that.
Doug Ross 1:43
Yeah, one of them is money. So it’s… it’s a great topic. I think of it as it’s really the fuel for the business. [Yep] And just like real fuel for your automobile, or whatever your mode of transport is, you’ve got to have fuel in the tank, you’ve got to be thinking about where your next tank is going to come from, you cannot run out of fuel [or] you’re going to be dead in the water. I think of it that way. It’s just that fundamental to every business.
Glenn Suart 2:16
Yep, there’s the traditional ways of fundraising. But I also think you got to think about creative ways of fundraising, because sometimes the avenues you have available to you might not be available to you.
Doug Ross 2:30
Well what are some of those more traditional avenues? And then yeah, let’s… let’s get into the creative ones, too, in this episode. That’d be great.
Glenn Suart 2:37
The most obvious is friends and family, people… for their ideas, usually talk to their family about it, and sometimes members of the family put money in to help that IDEA along. It’s a good thing, but it’s got very limited – usually – opportunities. So that’s one way. Then you go to… people may borrow money from a bank, they have some credit, they sometimes take that money out and start a business that way. That could be good. But it could also be dangerous. If things don’t go well.
Doug Ross 3:09
I’m always worried about that. If you’re ever putting a personal signature to a loan that’s meant to carry your business. Always risky. But if you mean taking a few advances on your credit card to create a prototype or get started or you’re draining some of your savings a little bit, that kind of thing, I’m all for it. That’s a good way to start.
Glenn Suart 3:34
Oh, for sure. It’s an easy way to start too, if you’re careful and diligent. People, obviously try to find investors is a good thing, they’re going to ask, Are you putting some of your own money into this thing? So it’s good that you do that, to some degree, but not all of us have lots of money. So if your idea requires a lot more money, you have to go and find investors – and it’s hard to find good ones. There are, of course, venture capitalists to go to but that’s probably for another stage of… after you’ve had, sort of, angel investors because they want a whole bunch of stuff, including your left and right arms.
Doug Ross 4:09
So wait a minute, there are Angels out there that will invest in your company. What do you mean by that? Wow.
Glenn Suart 4:15
An Angel investor is somebody who is… got money, might be interested in your particular area, and is interested in putting some money into ideas there. As long as you convince them it’s a good idea. And you have to structure it right for yourself and for the Angel investor because they have a bit of a power position, typically, but Angel investors could also be family members, too, as an example. But they’re usually… typically people you know, or know through other people and then you find out so and so puts, you know, half a million dollars into this because he wants to see it grow. He wants to get in at the early stage, or she I guess too. The potential is very good because it’s easy to get money from those kinds of people because they’re there and they might be able to put more money in later on. But you have to be very, very careful. I’ve done some stuff with Angel investors – some of them are great, some of them are not so great. It’s very tricky. You’ve done stuff with Angels, and venture capitalists, what’s your experience been done?
Doug Ross 5:12
An Angel investor… they’re becoming even more sophisticated than they have been in the past. So you’re talking about the individual operator, which is definitely the case. And… and they may be interested in your particular cause that… that could be one reason that they get in. They might not put a ton of money in, it depends. But they’re also getting together as groups. So there’s one here in Boston called The Harbor Angels, and there are other groups as well that combine their efforts. So they’re getting close to operating like a venture capitalist – on a smaller scale – but they’re really syndicating themselves. There’s a number of Angels together that will look at particular opportunities and make a decision, maybe one of them goes in, maybe a few of them go in… that sort of stuff. Usually it’s convertible debt that they’re coming in at. So they’ll give you a loan and they will have certain terms in that loan where it will convert to equity, usually at a discounted price, and or they could call the loan as well, which maybe they’ll do, or maybe they won’t do, but they do typically have that contractual right to do so. So it’s a little bit like a loan with features of equity investment into your business where they’re taking a share of the business. But I think it’s good at that early stage for sure to consider Angels and they’ll typically take you further than… well I was gonna say, depending on your friends and family, they might take you further than your friends and family can do.
Glenn Suart 6:50
For sure. And I think it.. the.. it’s a good example, we have that, of course, in Canada too – some of those Angel organizations. The key thing is to diversify… is to mitigate the risk for a lot of these investors… Angel investors now, so that it they say have a half million dollars, rather than put it into one idea, maybe five of them get together and put their million and a quarter into five different ideas that they all share. So if one of them doesn’t go so well, they[‘ve] got a piece of everything. It’s about diversifying risk. But it’s hard. This is not for the faint of heart. You got to spend money and time convincing investors that you’ve got a good story, not just that you got the best widget possible, but that you have the perseverance to make it work, that they’ve got the margins that are attractive, you can beat the competitors. There’s a whole bunch of things you have to do even to get people to even think about putting money into your business.
Din 7:45
You’re listening to Conversations on Startups with Doug and Glenn, thanks for joining us. Let’s get back to the show.
Doug Ross 7:54
And before that, how do you decide whether to go for debt versus equity?
Glenn Suart 8:00
Do you mean whether you want to give up equity or give up debt?
Doug Ross 8:04
Not as an investor, as the entrepreneur? How do you decide I should go to a bank and get a conventional loan, if I can do that, or I should go and find an Angel investor that’s going to take a share in my company or perhaps a venture investor… a venture capitalist who [is] again going to take a share of my company at favorable terms, and they might want to have a seat on my board. They certainly have some protections against downside in future financings. All of those things. These are sophisticated investors that are putting money up on behalf of institutional investors. So you’re a little guy going up against this sophisticated machine. Trust me they have lawyers who know what they’re doing. So how do you decide though equity versus debt or some portion of the two?
Glenn Suart 8:58
I think it’s one of those things, because you explained it pretty well. It’s a personal preference. But you also have to think about today, versus the downstream of tomorrow. I’ve had people say to me, Oh, I really liking [you] Glenn, and I want you to be part of this. I’ll give you some equity early on. I almost don’t like that, because that tells me they’re not sophisticated enough. Because if they’re gonna give me equity right away without knowing who I am really, though, I’m a great guy of course… [Of course] they… what else are they doing in terms of giving equity away. And once you’ve given equity away to somebody – and I’ve been there – if that person doesn’t show up every day after that, or if you have a falling out with them, you’re stuck with them. You want to give up as little equity as possible, especially in the beginning, even though it’s easy to do and doesn’t cost you much at the beginning, it costs you a lot downstream. It could actually – if you screw it up in terms of giving away equity – that can actually jeopardize future finances that people want to put money in but they don’t because they don’t like the ownership structure. You have to be very, very careful what you do. If I was… start with your own money, be careful, don’t go crazy, spend a little bit of money, don’t mortgage the house and all that stuff, then find some family and friends, take it to the next level and then go and find an angel investor. At that point, you’re giving up some equity, even if it’s a loan, it’s equity, in that case, and then bring in the sophisticated people who you just talked about, to help you think about the options and take you to the next level, because it’s hard.
Doug Ross 10:29
I think that’s the disclaimer in this podcast, get yourself decent legal counsel or… or a part time financial person who can help you with that. I totally agree the way it’s structured, from the point of view of your rights going forward and your control in the company, all of those sorts of things, plus the impact on future rounds as you just mentioned, all good tips. So that’s the disclaimer, get some legal advice, or a financial person in your corner but then go out there and do it. So let’s say we’re doing that, Glenn, How do we even find these investors? We’re taking a semi conventional route. Okay, how do we find these people that are likely to want to invest in our business?
Glenn Suart 11:12
Excellent question. As always, it’s really hard. The easiest way is to find people who have an affinity for the industry, you’re in. Alberta, where I am, is oil country. So a lot of people here are wealthy from oil. So if you’ve got an idea that’s oil related, you should be able to find friends of friends who you can go and talk to and then pitch this to because there are people with money, they don’t want to make a big show of it but they would be interested in interesting ideas for the oil patch. But just don’t come and talk to them about investing in a Broadway show. Right? You want to go with an affinity, so go to people who have expressed an affinity for that area. And that means doing research on people. A great tool for doing research is, for example, LinkedIn, to understand people’s backgrounds and what they do and where they are and what they think about, what companies they’ve invested in. Maybe identify a couple of people, and then ask for their advice not to, you can’t go in and you know, pretend to not ask for it. If you’re gonna ask for money, ask for money. Don’t pretend I’m just looking to do research and then ask for money. People don’t like that. You shouldn’t do that. If you think you have an idea for a specific industry, the best way to find potential Angels is to do some research interviews where you’re actually just looking for research, talk to people in the industry, who are the players, ask them who the investors are, Who’d be interested in an idea like that? And then get a list of names. If people like your idea, they’re going to give you those contacts to go… to go see. That’s probably the easiest way of doing it.
Doug Ross 12:48
Hey podcast listeners, we’re gonna take a short break now. If you’re enjoying the show, feel free to invite your friends, remember to subscribe, and if you want to help spread the word leave us a review on Apple Podcasts or your favorite podcast app. Each episode of Conversations on Startups focuses on a single topic. If you want to comment on something you’ve heard on the podcast, or suggest a topic for us to cover in a future episode, send an email to:go@todaysgreatidea.com or douglas@sparkclickgo.com. Glenn and I appreciate you and hope you find our uncut and unrehearsed stories, perspectives, and tips helpful. Speaking of helpful stuff-let’s pick up where we left off.
Doug Ross 13:33
The analogy that comes to mind is an informational interview when you’re looking for a job. So I like that idea of talking to folks and figuring that out. Friends of friends, as you said, that work in a field. And you can also look at companies that recently received some funding and talk to the CEOs there. And they’ll tell you who their investors are, maybe ideally give you an introduction to those investors as well. I think that’s a great way to do it, Glenn. Another way would be… I’m not sure if you’ve used CrunchBase in the past, but there is… it’s an online source and you could do some secondary research there. Love your idea of looking at the field, the industry, and figuring out who those folks are. You can go to those websites then and drill down and really get a handle at a secondary research level, what they are looking to invest in. So your method’s a great one, talking to folks, and there are also secondary methods you can use – probably a combination of the two, you’ll figure out who these guys are. Those are some tips of the trade. So that’s great. Okay, so and then of course we have to figure out a way to approach them, you know, maybe a warm introduction, how do we appeal to them and we’ll have to pitch them and more than that, we’ve got to get our company ready. I think that we should have a future episode on how to get the company ready. Or maybe you know, the pitching, we could take up next time. But these are all things that are important in terms of moving forward with those investors once you’ve identified them. So that’s a great overview of the conventional landscape, as it currently exists. There are other things out there that we didn’t even touch on like crowdfunding, for example. It’s a huge topic and not to mention grants. We didn’t even talk about that… from governmental agencies, philanthropic groups, private agencies… there’s lots of ways to find funding, especially at the early stage. But there are other creative ways too, let’s riff on that for a little bit here, too, now that we’ve walked around this conventional landscape plan, any thoughts, there?
Glenn Suart 15:49
A hundred percent. We’ve talked about examples in the past, about Airbnb, the founders used… selling cereal to raise funds to start the business. There’s lots of other examples like this. One really interesting one that I found appealing, I’ll tell you the story and you guess the show I’m talking about. Here’s the story. Margo Lion is a theatrical producer in New York City and one day she was at home having a cold and she was watching, you know, a cult movie from the 1980s on television. And she thought about it… this can make a great Broadway show. So she called up the movie company and they didn’t think anything of it… says, oh, yeah, we’ll give you the rights for next to nothing, because they didn’t think it was gonna go anywhere. And then she talked to the writer of the thing and he signed off on it because they both came from Baltimore, and then she hired some creative types to create the song in the book. But she needed $10 million to make the show work. And typically the way a Broadway show works, you get a couple of heavy whales, as they call them, who’ve got lots of money, a couple of those people can underwrite a show, but it’s hard to do that, especially when, you know, Margo was doing this in the aftermath of 911, in New York City, when everybody was of course, frustrated, and scared and everything else. So what she did was creative, in the sense that… rather than go to these… try to convince these big whales the value of the show, she went to some small investors, we’re talking small investors putting in like $10,000, $20,000 and she got friends of friends… once they put money… other people put money in, and the next thing you know she had 300 investors putting in $10 million. And they started the show, they tested it in Seattle and it was a complete disaster. The first week was… 30% of the seats were sold, didn’t do very well, but the next week a lot more seats were sold. And by the end of the run it was sold out. So they moved it to Broadway. And this show was a smash on Broadway, and… all the investors, the guys who put the $10,000 to $20,000 got their money back in ten months, which is pretty substantial. And of course, that show’s gone on to hundreds of millions of dollars… it won eight Tony Awards, [and it] got turned into a movie that made $200 million at the box office. And these investors are very, very happy and rich. Any idea which Broadway show I’m talking about?
Doug Ross 18:12
No. Ideas came up as you were telling that story but then as you gave more clues it knocked everything out, because I think you said it’s it was based on an ’80s cult movie. Is that what you said?
Glenn Suart 18:25
Yep, an ’80s cult movie, and the writer was from Baltimore, which is where the movie is set. And the movie is Hairspray. And of course the Broadway show is Hairspray as well. So Hairspray was originally a John Waters ’80s cult movie, and was not a musical, and then… about his upbringing in Baltimore. And then Margo turned this into a terrific thing and the key here is that she did something different. Instead of funding it in a traditional Broadway show way she did it by going to small investors who liked the movie, who liked the IDEA of the show. So she went to an affinity group and then friends of friends got involved and that’s how they financed the show. So the lesson here is, don’t just do things traditionally, look to understand who benefits from all this. It takes a lot to manage 300 investors, but maybe that’s the way of doing it for your particular idea.
Doug Ross 19:24
Great story. And I love the principle that you’re pulling out of that story. So not a story just for entertainment, but you know, get people thinking creatively. [Oh, ya] We had mentioned venture capitalists earlier in this episode. They are not for every business. That is for sure. So… and bankers aren’t either. I think you’ve had some personal experience with that, Glenn.
Glenn Suart 19:51
Yes, I’ve had wonderful experiences. There’s one great banker we dealt with here in Canada, been ultra fantastic. We’ve also had terrible experiences with one of the banks here in Canada, one of our businesses. You know, it’d make your toes curl… about the indifference that this particular bank had for us. But then when you hear the stories about the guy who… the banker we liked… the way he fought for us internally at his bank was what you dream about. You hope that every banker is like that. And of course, they’re not. So just finding the right banker who believes in you, and you have to give them the ammunition to go and sell you… inside a bank, that’s really, really important.
Bridget 20:32
You’re listening to Conversations on Startups with Doug and Glenn, thanks for joining us. Let’s get back to the show.
Doug Ross 20:42
Well, it reminds me too, just in general, that building relationships is really important, whether it’s a banker… as my father used to say, banks only lend money to people who don’t need it. And that’s largely the case. They’re happy to lend to you if you’ve got security coming out the wazoo. But if you don’t, maybe not. But creating relationships with people you get along with, regardless of where they are, is certainly fundamental. Even in your Hairspray example, I think you said it was friends of friends, but there was at least a starting group that they could go to and say, Hey, I’ve got a great idea for this Broadway musical and I’m thinking of getting… basically divvying it up to different folks and making it attractive. I’m sure they threw in a few things too, like front row seats for… for a few of the shows. Some of these [Exactly], who knows, but all part of… of getting creative. I have another small story too that just reminds people that there’s a way of fundraising that does not create an obligation on you. How’s that sound?
Glenn Suart 21:50
Does that sounds interesting? Is that possible?
Doug Ross 21:53
So… other than delivering your product… so this is a story, it’s very brief, but comes out of El Salvador. And believe it or not, although it’s a coffee producing country, they did not have a lot of coffee roasters even up until recent times. So there was a gentleman there, Alejandro Mendez, and what he did with his partners, these folks did not have a lot of money, but what they did was they bought one sack of coffee, they put their money… pooled their money together, they roasted it, they sold it of course at a profit, they added value to it so they should see a profit. Guess what they did with that profit from that one sack of coffee?
Glenn Suart
I’m guessing they bought two sacs?
Doug Ross
[Exactly]. And then they bought four. You see how it goes?
Glenn Suart 22:39
And so on and so on.
Doug Ross 22:41
Yeah. So the point here is… don’t lose sight of revenue as a fantastic source of financing your business. It proves that people want it. It proves your business model’s working. You don’t have an ongoing debt obligation. You haven’t given up a share of your company. Maybe you can’t grow as fast. But to get started this… this can be a good way to go, so…
Glenn Suart 23:08
That’s creative, I like that.
Doug Ross 23:10
Yeah. So I hope we’ve… we’ve shared both a view of the conventional landscape and some creative ideas. I’m sure we have more. Did you have any other creative ones for today’s discussion?
Glenn Suart 23:20
Oh, I’ll save them for another discussion, because there are so many examples of good, interesting companies. I think a story I’ll tell you the next time was about three brothers who suddenly were… who ran a furniture store in Kelowna, British Columbia, they… suddenly the bank suddenly called their loan, and they didn’t have the cash. And what they did, as a result of that became a $5 billion a year business that is known worldwide.
Doug Ross 23:48
Love it. Let’s leave it there for next time. We’ll start with that story. I’m gonna have to guess again who it was. You always keep me guessing Glenn.
Glenn Suart 23:59
That’s the whole point. Because the best learning I think, is from real life stories, because you just… these great businesses did not start with lots of money, sometimes. They started with people like you and I taking an idea, doing something with it, struggling… being creative, and making mistakes along the way, but doing something interesting. And that’s why these stories resonate with me. There [are] great lessons in them.
Doug Ross 24:33
Conversations on Startups is a production of Glenn Suart and Douglas Ross. We hope you’re having fun listening but mostly that you take action on your business idea. For more inspiration visit our websites: todaysgreatidea.com and sparkclickgo.com. Another episode of Conversations on Startups will drop soon, or is already available to binge. Thanks for joining us, and remember to subscribe and invite your friends. See ya next time!
Transcribed by https://otter.ai