INSTANT FUNDING WEEKLY EDITION - #13
Karl Dakin
Capital Coach | Stakeholder Investor Campaigns | Design, Stage, and Manage or Support | Reduce Time, Money, and Risk of Raising Funding | Increase Probability of Success! | Opportunity Management
QUICK CALENDAR
NEXT MONDAY, August 12, Don Cohen show, 9 am MDT, LinkedIn Live
NEXT TUESDAY, Tuesday, August 13, Successful Funding, 8 am MDT, LinkedIn Live - TBD
NEXT THURSDAY, Thursday, August 15, Community Revitalization, 8 am MDT, LinkedIn Live – Jeff Dangremond – Impact Investing in Communities
August 22, Community Revitalization, 8 am MDT, LinkedIn Live – Stephen Shaff – Community Engagement
?FUNDING POINTS
REAL ESTATE FUNDING – LAND DEALS
?One of the best ways to raise funding for real estate is to reduce the cash payment for the land. If the total cost of development includes the land, pre-development, construction, and operations, the needed capital can be substantially reduced by not paying for the land upfront.
?Almost every developer I have ever met has stated the maxim, “You make money on the buy!” By this, developers want to pay the lowest possible price for the land. This maxim reflects buying the land at below market value. The market value can always be argued between current use and the value after development, but if you are a landowner and see a developer coming, you want to run the other way.
?A real estate developer should not start raising funding for a project until the property has been locked down and under the control of the developer. The land owner must either complete the sale to the developer or agree not to sell the property until the developer has their funding in place. This is commonly accomplished through an option agreement where the developer pays the landowner to sit on the property for a period of time in exchange for a small dollar amount.
?Paying cash upfront is very risky for a developer where the developer still needs zoning approval, a building permit, community approval, and construction funding. Many things can and often go wrong, resulting in long-term delays or complete abandonment of the development.
?One option to avoid upfront cash payments to the landowner is to make the landowner a partner in the development with the market value of the land treated as an in kind investment in the project. This approach defers payments to the landowner till revenue or profits are generated with the landowner participating based upon their share.
?Another option is to lease the land instead of buying it. There are many properties where leasing may be the only option because they are owned by a non-profit, the government, or held in a trust. I have seen many churches and schools exploring how they can make money off of their undeveloped property. Development projects may also contribute to the mission of the landowner by providing housing or community space. Similar to a joint venture with the landowner, the developer may pay the landowner a percentage of rent or other revenue. Obtaining construction financing without ownership of the underlying land will be more complicated, but there are several well-established models.
?Some cities are engaging in ‘shared equity’ developments to create new housing. In these situations, the city retains ownership of the property. This reduces the amount of mortgage financing needed by the homeowner. Lending Tree published an article on this topic: What is a Shared Equity Mortgage?
?Private equity investors, as well as construction lenders, are more friendly when they are not asked to include the price of the land in their investments. Of course, these same funding sources would prefer that the developer have acquired the land out of their own money and have ‘skin in the game.’
?REAL ESTATE FUNDING - STRAW INTO GOLD
I was in several conversations this week on raising funding for real estate projects. Real estate is often viewed as a safer investment when the capital market and Wall Street demonstrate uncertainty. However, real estate investment cannot guarantee an outcome any more than any other type of investment.
My conversations had people pointing out that they hold market data, land, and even completed buildings that may serve to attract investment dollars. However, what all of these situations have in common is that they are still pre-revenue.
Pre-revenue is a label given to any business that has yet to make a sale and receive payment. From an investor’s perspective – pre-revenue and post-revenue are like night and day. This reflects that achieving revenue not only demonstrates that the business has something ready to sell but also that customers in the marketplace acknowledge the value of what they are offering and are willing to pay the asking price. This is checking many of the boxes that are on an investor candidate’s list.
The reluctance of investors to place their money in pre-revenue businesses – not just limited to real estate – is it raises the question if there is a real product or service, can the management team perform operations, and whether the product or service is a hit or a miss with prospective customers. An investor can put on their due diligence hat and try to answer all of these questions. However, why should they? If there are all these other businesses that are more advanced and generating revenue, it is simpler to pick amongst these candidates than to guess the outcome of a project still in formation. In addition, most investors lack the training or experience to answer all of these questions. They have never developed property, never fought with a local government to get a permit, promoted to tenants to fill the building or other common actions in developing real estate. As a result, what they do not know is viewed as a risk that they are unlikely to accept.
Although real estate is commonly viewed not only as a safer investment but also as collateral when seeking debt financing because of the perception that the land will always have value, any investor in commercial office space today is questioning this perception. Yes, real estate may ultimately go up in value, but if a business is responsible for building maintenance and a debt load on their mortgage, many real estate businesses are currently upside down with properties they cannot lease and which they cannot refinance. There are many assessments of the commercial real estate market that show that assets worth as much as $1.5 trillion are in trouble.
Presently, multi-family and industrial properties remain in short supply and in demand. Nonetheless, if investors have a choice between a pre-revenue property and a revenue-generating property, the demand is significantly different. Investors ask if the business can convert straw into gold.
During my conversations with real estate developers this week, I pointed out this major distinction. In raising money for real estate in that the developer must try to pre-sell occupancy of the buildings they would like to construct.
This suggests engaging possible tenants – both residental and commercial – in the capital campaign strategy. Future tenants may be offered special deals for investing now and paying rent later.
Other possible investor candidates are business and organizations that need housing in their backyards. A business may invest to assure availability of housing for their employees. Economic development organizations, civic organizations and community foundations may invest to fill housing gaps in the local market that are hurting the local community.
Finally, and not last in investor candidates, are any businesses that are vendors, suppliers, or other contractors to the development project. These businesses all stand to make a profit if selected to build sewers, pour a foundation, stand up a wall, or paint the building. These profits will not occur if the developer does not raise money and if they are not selected to be part of the building team. A strategically placed investment will make these businesses the exclusive pick.
All of these possible investor candidates only need to provide enough cash to enable the developer to leverage the cash with debt financing for construction and mortgages. It is possible to obtain conditional loan commitments before raising equity investment so that investor candidates don’t have to worry about the remainder of the capital stack.
BUILDING FUNDING COMMUNITIES
Almost all capital campaigns hit a wall when the small business exhausts all the investor candidates known to its leadership, and it becomes necessary to reach out to people they don’t know. The campaign must overcome all the challenges that exist when there is no existing relationship with the investor candidates:
·??????? Trust
·??????? Credibility
·??????? Knowledge of business
·??????? Knowledge of market
·??????? Time to meet or gain an introduction
·??????? Establishment of communications
There are a number of ways to get around or mitigate this challenge which take time, may take money and may not work.
The first approach is to get an introduction. This activity is getting someone who knows you and the investor candidate to make an introduction. There may not be anyone who exists that fits this role. A person who fits this role may be reluctant or unwilling to make an introduction (I fall in this category frequently because I know a lot of people and some of them have money to invest, but the person asking for an introduction is not a match or not ready to receive capital and I consider it to my benefit and to both the small business and investor candidate to not make the introduction.)
Technically, matching a business with an investor by a ‘finder’ or ‘broker’ is an introduction. Hopefully, the introduction will be professional and productive. There is an expectation or a contractual commitment to pay a fee for the value of the introduction. When a fee of any kind is paid, the activity becomes regulated by the government. The type of regulation and associated government agency varies with the type of investment, source of funding, and dollar amount.
Anytime there is an intermediary between a business seeking funding and the funding source, issues may arise with regard to the quality and accuracy of the message – the pitch. We all learned as kids playing the game of ‘gossip’ that sharing a message from person to person will result in a degradation of the message as the interpretation and transmission of the message alters from passage to passage. This happens when using an intermediary. To address this issue, small businesses should craft all of their own communications and provide them to the intermediary to be passed on to the investor candidate without change. This will prevent or limit the message from being amplified or overstated, creating expectations in the mind of the investor candidate that will have to be backed off.
A variation on an introduction is a public endorsement. In this situation, there is an intermediary who makes a statement associating themselves with the investment opportunity and sharing it with a large number of people. An example may be a leader of an organization who endorses an opportunity for their membership, constituents, or customers. Another example may be an influencer who endorses the opportunity through a blog, podcast, or interview with their followers and connections. The ability of the person making the endorsement to cause someone to take action by linking to a website or investment platform, making a phone call, or otherwise acting to obtain a copy of the pitch.
As previously described in this Instant Funding newsletter when engaging in crowdfunding, a strategy is to borrow other people’s crowds. By aggregating the networks of several people, organizations and businesses, it may be possible to quickly present an investment pitch to a large number of people with more top spin than cold calling or pitch slapping.
I am experimenting and exploring the concept of building communities for funding. As I currently define this activity, a community is a digital community with a common cause. They may support a capital campaign because of their common beliefs, interests, or personal missions. Whatever the glue that binds this alignment of interest, it may be sufficient to gain an investment. I distinguish an investment from a community from that of an impact investor as representing an ongoing relationship, whereas a simple impact investment may be a singular incident or transaction.
I see a correlation between the extended benefits of a Large Language Model (think Chat GPT) and a Large Relationship Model (a community of common action – TBD).
Developing relationships is rarely instantaneous. Certainly, love can happen at first sight, and I have seen investment opportunities that immediately captured my interest. However, my special definition of membership in a community is based upon a long-term commitment.
A funding community cannot be built overnight. Like building a brand, it is a progression over time. The length of time means that while adding more members, some members will quit or fall out of the community.
The existence of a funding community should be viewed and managed like an asset. There will be an investment in its creation and in its maintenance. It may require constant improvements to maintain its existence. The time and cost of building a community will address the need for money ‘right now’ or ‘yesterday’, so work in advance of seeking funding is needed.
VALUATION – DISCOUNTED CASH FLOW
Valuation of a business using industry multipliers may produce a lower price than using a discounted cash flow when the business is outperforming the industry.
Yesterday, I discussed using ‘industry multiples’ as a valuation approach, which takes the most recent annual EBITDA amount and suggests a sales price that is a multiple of that amount. Every industry of any size has a proposed ‘industry multiple’ that reflects the average growth of businesses within the industry. If your business is ‘average’ and looks pretty much like other businesses within your industry, this third-party number may be used.
If your business is a fast growth company, in all likelihood, it is growing faster than the industry average. A higher growth rate may be a result of new or better product or service, management or other factors. A higher growth rate may also be no more that a startup company that doubling its sales every six months because the initial sales were so low to begin with. In either case, an industry multiple may not be the right choice.
With a fast-growth company, I recommend using a discounted cash flow projection.
Discounted cash flow or net present value (NPV) is based upon projections of net cash generated from the future operation of the business over a period of time. With this projection, the dollar amount of the cumulative net cash is then reduced to account for the price of money.
If the money may come from a bank, then bank interest rates are used as the price of money. If the money comes from a private investor or equity fund, then the required rate of return of the investor is used as the price of money.
Another key factor is the term during which cash flow is measured. It is common for investors to use a three year or five-year term with the obvious different outcomes.
Depicted below is the application of the Discounted Cash Flow approach for a small business that is earning positive cash flow of $100,000 per year. In once example, a small business interest loan rate of 11.5% is used and in the other example, an angel capital rate of 35% is used. Both examples are shown with a three year and five year term investment.
As is expected, a five-year basis for valuation is greater than a three year basis and a lower price of money for valuation is greater than a higher price of money.
When crafting an offer for debt financing, the lower the interest rate, the lower the needed cash flow to cover repayment of the loan.
When crafting an offer for equity ownership, the lower the return on investment, the lower the amount of stock or membership interest that must be given up to obtain the funding.
At the point that the discounted cash flow value exceeds the outcome of applying an industry multiplier to the most recent EBITDA, then the business should use the discounted cash flow value in pricing sale of ownership or sale of the company.
Use of a discounted cash flow projection requires a completed cash flow projection with sufficient information to strongly support it.
VALUATION – EARNINGS MULTIPLES
When discussing the value of a business, it is common to value a business using a multiple of its earnings. You may hear someone talking about “3x to 5x” which means that a value was set by taking the earnings of the business and multiplying it by 300% or 500%.
The earnings of the business are stated in EBITDA – earnings before the inclusion of interest, taxes, depreciation, and amortization.
EBITDA represents a more accurate picture of the true earnings of a business before the accountants start implementing actions to reduce tax liability. It is very similar to the cash flow of a business but excludes investment, loan repayments, distributions, or other non-income activities.
As an example, if a business has an EBITDA of $1 million, a value may be assigned of $3 million to $5 million. The value over the dollar amount of EBITDA represents the anticipated future profits of the business.
When an investor funds a business through purchase of equity ownership, they are buying a percentage of the future earnings of the business. In some situations, the investor may only look forward three years in which case they would use the 3x multiplier. Other investors may look forward five years in which case they would use the 5x multiplier.
Different multipliers are used when the business is expected to grow over the next three to five years because the anticipated amount of profits will increase with this growth. The rate of growth may cause the multiplier to increase to double digits – 10x to 99x. In some cases, multipliers have exceed 100x or may be technically even higher where the business is pre-revenue and there is no earnings baseline.
The pricing of a multiplier may be achieved through forecasting and cash flow projections. Alternatively, an industry multiplier may be used. An industry multiplier represents an average or median based on investments in or the acquisition of a large number of similar businesses. The industry multiplier reflects trends within the industry that may be weaker or stronger than an individual business within the industry.
A fast-growing, disruptive business may be able to command a multiplier of its earnings that is much greater than the industry multiplier.
The determination of a price for ownership of a company, whether an investment or an acquisition, is a bit of good accounting but mainly speculation with some mitigation through negotiation. Every entrepreneur setting a price as a multiple of their earnings will need to defend their pricing. This may be accomplished through market data, comparison with similar businesses, or purchase commitments. However, startups and businesses in niche markets may find little or no comparables.
Keep in mind that value is in the eye of the beholder and therefore a price that may be paid by one investor or buyer may vary greatly from another.
Earnings multipliers are an alternative to discounted cash flow projections, however the valuation outcomes of these two approaches to business valuation should not be that far apart.
RAISING $5 MILLION IN 6 MONTHS – PART 4
When asked about raising funding for any particular project, there is no simple, common capital campaign that will meet everyone’s needs.
Is it possible for a startup to raise $5 million in 6 months? The answer is yes, but it has many concerns and limitations.
I plan to raise $5 million within the next six months into a community investment fund designed and managed by RCI Community Funds. As I engage in this project, I will share my work with readers of this Instant Funding newsletter weekly.
I plan to raise money from:
领英推荐
·?????? Individuals – consumers living within the selected community
·?????? Financial activists – individuals who have self-identified as committed to social change
·?????? Impact investors – individuals who have self-identified that they seek to make investments that have a significant positive impact that addresses a social need
·?????? Family offices – private family investment pools with a stated interest in helping the geographic area within which the community is located
·?????? Allies – organizations whose mission overlaps with RCI in working to turn around underserved communities, with preference given to those organizations who are working with multiple communities
As discussed in prior editions of this Instant Funding newsletter, raising money in small dollars from a large number of people increases complexity. Complexity takes the form of:
·?????? Establishing relationships with a large number of people (raising $5 million with a minimum investment of $100 may require 50,000 investors – the size of a small city)
·?????? Infrastructure to manage 50,000 relationships and investment transactions (accounting, CRM, communications, work management software)
·?????? Engagement of Regulation CF crowdfunding platform
·?????? Engagement of other contractors
·?????? Distributed and targeted promotion placing pitch to invest where it will be seen by all investor candidates within their respective communication channels (including all of the candidates that may look but never invest – conversion rate unknown).
·?????? Extra complexity of hybrid investment package with both equity ownership and products, discounts, and other perks
·?????? Staffing to support the campaign ?(promotion, sales, relationships, allies)
Like mounting an expedition to climb Mount Everest or the production of a Broadway play, planning and preparation are the order of the day. I allow for a minimum of three months to get everything ready to launch a capital campaign of this complexity, leaving three months to conduct the campaign.
The complexity of the campaign and the volume of activity require an honest self-assessment of what an entrepreneur and their team can do and what they can do. However, it should still outsource to remain focused on the operation of the business and elevate the performance of the activities.
Even if one is not ready to commit to a campaign, it is possible to begin preparations by adding or upgrading infrastructure and lining up contractors. It is also possible to begin crafting possible offers that are tailored to match up to each type or group of investor candidates.
More importantly, start building relationships immediately, starting with customers, vendors, and allies.
SUCCESSFUL FUNDING
NEXT TUESDAY, August 13, Eric Hanson will be my guest again on my Successful Funding show. Our topic of conversation will be “Getting to Yes”. We will discuss how to tip over an investor to provide funding.
You may register now to be in the audience at:
YESTERDAY, AUGUST 6, Tom Fanning with Boomzaa was my guest on the Successful Funding show. LinkedIn Live at 8 am MDT. We discuss funding for workforce housing and collaboration within the housing, capital, and economic development markets. We focused on investment crowdfunding as a better tool for raising money that is difficult to find in pre-development.
You may see a recording of the show at:
You may view recordings of all past Successful Funding shows at my LinkedIn profile under Events:
RCI COMMUNITY FUNDS
As a member of this new company, I am working with a team of professionals to craft a new funding mechanism for revitalizing underserved communities.
NEXT THURSDAY, Jeff Dangremond will be our guest on the Community Revitalization show. We will discuss impact investing in communities: how, when, and why.
If you would like to register to be in the audience at:
YESTERDAY, Bill Huston was our guest on the Community Revitalization show. We discussed investment crowdfunding as the best approach to community funding. The ability of ‘everyone’ to invest in a local business is viewed as a game-changer that has yet to earn the reputation it deserves. @Stephen Shaff and Karl Dakin hosted the show.
You may see a recording of this show at:
DON COHEN SHOW
I will be a guest next week on Monday, August 12 at 9 am MDT on the Don Cohen Show.
You may register to be in the audience at:
Don is my mentor and guru on using LinkedIn as a social media platform to build my brand and build my community of individuals and organizations who work like me to help small businesses and communities raise funding.
CAP – DAKIN CAPITAL’S AI AVATAR ON RAISING FUNDING
I am now field evaluating the Capital Coach, an artificial intelligence learning management system avatar (AILMSA) that I have trained on the topic of funding. The Capital Coach is embedded as a widget on my Dakin Capital website at https://dakincapital.com/CAP. The Capital Coach represents a proprietary data set on the Knowledge Avatars learning management system with licensed access to Open AI. Could you give the Capital Coach a try and ask it questions about funding?
I am working with Knowledge Avatars to make CAP the ultimate tool to support small businesses and community projects in raising funding. Two current challenges are (1) training the AI avatar to match specific funding situations and (2) explaining that a highly personalized AI avatar is so much more than a chatbot powered by a Large Language platform. Unique, non-public information about an individual or an organization cannot be obtained through a chatbot. The recent advances in AI have narrowed the field of prospects who stand to gain from personalized AI to high-net-worth individuals, professional service providers, organizational leaders, and other similarly placed who work with fast-moving, fast-changing information that may never be public.
Please share your feedback. Karl Dakin at [email protected]
QUICK ASSESSMENT
I frequently receive direct requests for assistance in funding. As much as I would like to help everyone, I realize that constraints of time, money, distance, prior knowledge of an industry or capital market may prevent me from making a significant contribution.
People send me slide decks and ask for money or for me to introduce them to an investor. It takes time to evaluate an investment opportunity. I cannot refer to an investment opportunity without completing an evaluation first.
To aid me in assessing an investment opportunity and determining if I may be of help, I have created a short set of questions that span a variety of small business topics. Anyone seeking my assistance may download and complete these questions from a folder I have set up in my Box.com account. The answers may be sent to me at Karl Dakin – [email protected].
OPPORTUNITIES
The State of Colorado declared an avian flu emergency. Experts worldwide are concerned that the crossover from animals to humans may present a threat to the world greater than COVID.
I am advancing the use of cold plasma equipment as potentially a superior control of indoor environments that may mitigate or stop airborne pathogen transmissions. A third-party clinical study in 2021 showed the reduction of COVID-19 surrogates within 30 seconds to a non-measureable level and the reduction of bacteria within 1 minute. This study demonstrated the ability to stop COVID transmission in less than the 15-minute limit set by the CDC.
Through my company AeroCine LLC, I am seeking opportunities to demonstrate the efficacy of this Pathogen Focus equipment to serve as a preventive measure.
Anyone interested in participating in a field demonstration, please contact:
Karl Dakin at [email protected]
SUBSCRIBE
You may subscribe to this Weekly edition of my Instant Funding Newsletter, or you may subscribe to my Daily edition.
Karl Dakin, the Capital Coach
Dakin Capital LLC
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Capital Coach | Stakeholder Investor Campaigns | Design, Stage, and Manage or Support | Reduce Time, Money, and Risk of Raising Funding | Increase Probability of Success! | Opportunity Management
7 个月What funding challenges are you facing this week?