Articles

Alternative Capital Formation

Out of sight in plain sight

Everyone is looking for money - in all the same places. If you want to find money, you need to look elsewhere. But it is out of sight in plain sight.

The process of raising capital has remained largely unchanged for more than twenty years. With the exception of sophisticated derivatives and complex insurance swaps, (the likes of which many wish they never see again), raising capital is a relatively easy to understand process, depending upon the stage and type of organization that is seeking funding. There are countless books and white papers easily available covering the steps to raising capital. The circumstance in which one raises capital may change, such as the state of the economy, but the paths remain relatively the same. And there is always money available for a good deal if one follows the proper process.

The Cart Before The Horse

With over $500 million in capital raised over the past 20 years, ranging from friends and family to venture capital, philanthropy and the finest investment and merchant banks, our experience shows it is not the capital that is the important area of focus for entrepreneurs. Money is the cart before the horse.

The Secret To Capital Formation

The most important element in effective capital formation is the orienting perspective. The context for fund raising is the primary determinant of success in capital formation which has nothing to do with money; Money is an outcome of the capital formation process. It is the psychology of capital formation which is the true determinant of capital formation.

Five Basic Perspectives

The hidden secret of capital formation is the perspective of alternative capital formation™. The truth of capital formation is a blinding flash of the obvious, and it is relatively simple. In order to understand alternative capital formation, several orienting perspectives need to be explained:

1. Let Go of Needing Money

First, focusing on money when you have none makes for neediness. Being needy is the wrong place from which to raise capital. Neediness is a recipe for a host of mistakes. People instinctively react negatively to neediness, neediness creates poor decision making, and neediness leads to impatience, false assumptions and loss of discernment. There is an old saying: "When you no longer need the money, people will offer to finance you." This saying reflects the mindset and preparation necessary to make both a leader and an organization attractive for funding. But it is an apparent paradox, a riddle for the person who needs to raise money to grow his or her organization. It is a paradox if one's focus is only on money. It is a truism when one follows the path of alternative capital formation, and it can reduce fund raising neediness.

2. Master Storytelling

Second, capital formation is not about fund raising, it is about story telling. Every dollar ever raised was raised based upon a story, whether a simple conversation, an idea on the back of a napkin, or an elaborate business plan. The art and science of fund raising lies in the art and science storytelling. Every successful entrepreneur must master great storytelling.

3. Align Value or Fail

Third, fund raising is about attitude and alignment. It’s about kissing frogs in order to find a prince or princess, or a group of them, and liking the process, eager to fail until the prize is found. Passion, positivism and perseverance are all hallmarks of effective fund raisers.

Moreover, those who understand value alignment are the most effective fund raisers. Value alignment is critical to not only finding capital that is attracted to ones particular organization, but also in finding capital that is aligned with one's organization.

Finding the right kind of capital is essential to long term success in both entrepreneurship and capital formation. So many entrepreneurs try to raise capital from funders who simply aren't aligned with their values, or their story isn't presenting the story of value in such a way as the alignment it is easily apparent and recognized at both intellectual and visceral levels (both are needed for the commitment of significant investment dollars).

Rather than dreading the fund raising process, the entrepreneur should be happy to go on a quest to find the value-aligned investor, This means that the entrepreneur has to do homework, to clearly identify their own value and to them research and identify funders who will align with this, Most entrepreneurs think that if they simply shoot enough bullets, they will find a target, not realizing that even if they hit a target, it may be the wrong target and backfire later.

Most entrepreneurs place more of a premium on the money than the alignment, and the results are generally poor both short-term and long-term.

4. It's not about Money, Stupid

Fourth, capital formation is based entirely upon sentiment. Regardless of the metrics and quantitative methods and sophistication of investment algorithms used to determine an investment's worthiness, everything is a reflection of sentiment, both in the marketplace and in the minds of those making investment decisions. Our economy is a case in point. It is ruled by sentiment.

Hence, mindset, attitude, storytelling and the capital formation process are the places to put ones attention when considering raising capital.

5. Money is Only One Form of Capital

Most importantly however, is the perspective that money is only one form of capital. Rather than being the primary objective, it is secondary. Money is the end result of monetizing other forms of capital.

Entrepreneurs can be taught the traditional steps to raising capital, but without this fundamental perspective they can chase an endless rainbow and waste a lifetime of dreams missing the point and striking out in their efforts to raise funds, Or worse, their neediness, missed approach and flawed process can lead them to the wrong type of money, the wrong type of investor and the wrong type of deal, which can have disastrous results. There is a psyche of money that few entrepreneurs understand, that will affect their behaviors, their culture and their actions from the minute they determine to take Other People's Money ("OPM"). And once one has taken OPM it will change the psyche and culture of their organization.

The Ecology of Commerce

Our entire economy operates as an Ecology of Commerce™, a living system of the Commerce of Value™, where a multitude of Currencies of Value™ are exchanged in a continuous complex system.

This system can be seen in both the natural environment as well as the human economy. Value, ranging from food and resources to emotional needs are met with the exchange of something of commensurate value. Money is only one of a wide number of currencies of value. The common mistake many make is to only look at the exchange of money as the only currency of value, when there are other essential currencies of value that must be accumulated in order to then be monetized. Successful entrepreneurs have a knack for accumulating alternative capital.

Alternative Capital Formation

The process of alternative capital formation is the accumulation of these other forms of currencies of value, both tangible and intangible. Tangible assets can include equipment, prototypes, buildings, cars, etc. all of which add to momentum, social proof of worth and confidence. Intangibles can include confidence, momentum, intellectual property, team members, plans, endorsements, credibility, tenure, sponsorship, and other elements of the storytelling that help build, the emotional and intellectual; storytelling that this idea or plan is good, real and has potential". Otherwise, why would anyone follow the leaders, chase the idea or fund the organization? Few stop to take a look at the "Blinding Flash of the Obvious", that alternative capital formation precedes monetary capital formation. Raising capital is the act of monetizing alternative capital.

A Strategic Shortcut

If one masters the concept of Alternative Capital Formation™ then the entire process of business planning and capital formation, from due diligence, team gathering, story management, presentation, investor selection, advisor recruitment, etc. becomes easier to understand, more strategic and tactical as a go-to-market action planning and logical steps, Entrepreneurs can map out the things they need to do before they can raise money and therefore have a much easier time managing their own expectations as well as the expectations of their stakeholders. The mythic nature of fund raising becomes de-mystified, much more like common sense.

Addicted to Hopium

There is nothing worse than becoming Addicted to Hopium with no money and no plan. It makes no difference whether you are a solopreneur, a serial entrepreneur or the CEO of a Fortune 500. Everyone must master the art of alternative capital formation in order to effectively monetize any concept or innovation. With this approach, it is also more probable that the entrepreneur can innovate, learn alternative capital formation techniques such as partnerships, joint ventures, barter, sponsorships, or other creative and non-traditional techniques to raise the merchantable value of their idea or organization. It's not rocket science. It is however an important paradigm shift for most entrepreneurs.

We have been specializing in Alternative Capital Formation for decades. If you would like to learn more, contact us.

Random Testimonial:

“Stewart is a top mind who knows how to help solve tough problems. He creates a unique “collaborative” environment that encourages open dialogue and provides endless learning content. He works tirelessly to help his clients build strategic and very practical solutions to complex challenges and is that rare blend of intellect tempered with business savvy overseen by an Ego that is firmly “in check”. Beyond saying, “this is one Bright Guy”, Stewart is THE consummate supportive professional.” June 27, 2008

Andrea Tobor (client)