Capital Access Options in a Recession

I have been writing about the issues surrounding the raising of capital for smaller businesses as well as early-stage ventures and the current regulatory environment. Much of what I have been covering has been negative based on solicitation, licensing, fees and deal quality.

If you assume you have a great deal, how do you access capital beyond the family and friends round. At present there are few viable options available for would be business developers that are compliant under the current regulatory frame works.

1.?????Banks and Commercial finance lenders are the most approachable if you have a transaction that qualifies. Most transactions and its principals are unable to qualify for this type of transaction financing based on capital needs.

2.?????Private Equity and Hedge Funds are also very approachable but again most have semi ridged and very specific criteria that will disqualify most transactions. In many cases these control buyers of a business opposed to minority investors.

3.?????Family Offices hard to access without an introduction.

4.?????Investment and Merchant Bankers who are licensed are again approachable and can market a transaction to their investor clients on your behalf. They are very selective and the process can be very expensive. Many have minimum size qualification well above the average transaction seeking capital.

5.?????Venture Capital and Angel Groups are approachable and have more flexible structures but again can be expensive and hard to identify who the right one maybe. There are several networks in the market that are compliant and can be a resource that can match you to investors.

6.?????Brokers, Finders and Intermediaries are the most available but create a number of compliance (regulatory) issues that create significant liability for the business principal and service provider. It is also very hard to qualify these service providers and if they in fact can help.

Depending who you talk to the companies that receive funding beyond the family and friends round are between 1 in a 100 and it may be as bad as 1 in a 1,000 depending on the definition of a business seeking financing.

The lack of resources is very clear and it is unclear to when and if there will be any real relief in this area. Many are hopeful about the securities based crowd-funding and relaxed solicitation rules on accredited investor rules. The pending regulatory scheme may in fact make this process dysfunctional as past initiatives have been.

I have taken a fair amount of flak over the fact that one must work within the regulatory frame work as it exists today or wait and see what the new rules may be. “The best deal in the world has no value if it cannot get to market”! There are a few options (exemptions) but many business owners either are unaware of or are unwilling to commit the time and money required to pursue the option.

One such procedural option to self-underwrite a transaction using an except offering or registration can be a cost effective mechanism and help principals truly vet their transaction early in the process saving time and money on a transition that is unqualified or unlikely to succeed. Too many people do not spend enough time and money validating their projects and thus expend a great deal of time and money chasing capital on a transaction that has little chance of success based on the need for external capital.

In pursuing this type of option the principals should seek out local resources, legal, accounting and advisors creating a team to take them to market or determine that they should not.