Connect with us

Business

Alternative Financing And Why Equity Financing Has Lost Its Luste

Published

on

Prev1 of 5
Use your ← → (arrow) keys to browse

When a startup founder is ready to transform their idea into a viable business, they almost always look to equity financing–whether that’s in the form of checks from friends and family, an angel syndicate, or in rare cases, a early stage Venture Capital fund. This thought process is justified. In the embryonic stage of the startup lifecycle, exchanging equity for capital is often the only legitimate option to amass enough cash reserves to build an initial team, create an MVP, and hit the market, as debt investors will want security over non-existent assets and personal loans/credit cards can quickly become dangerous liabilities. Equity financing is also a proven (and expected) option for creating runway and providing growth capital for business expansion through a potential IPO or acquisition.

However, equity financing has its weaknesses–dilution of ownership stake, relinquishing board seats and autonomy of decision making, and irrational growth expectations, amongst others–and make raising a follow-on, or even first-time round less appealing to entrepreneurs who have creatively bootstrapped their way to post-revenue status. Every founder feels protective over their startup baby, and the thought of having a “growth at all costs” investor take over the helm is irksome. Removing the vagaries and potential biases of founders’ opinions, it’s an industry truism that only a fraction of startups looking to attain equity funding will ever achieve that goal.

What’s interesting though, is that demand for equity financing transcends the allure of other useful financing instruments to the point that it has become intoxicating for any founder expecting to reach unicorn status as quickly as possible. Take, for instance, this generally relatable financing example. New home buyers are always happy when their bank lender is willing to extend a mortgage that will provide reasonable financing terms on their dream house. Rarely do those new home buyers then leverage the accumulated equity in the property plus all of their assets to go out and take mortgages on ten additional properties, making a bet that they can 10x their annual earnings within a year simply to cover the many mortgage payments. As an aside, this situation did occur, and as you all know, it was one of the main precursors to the 2008 financial crisis. When it comes to the startup ecosystem, this mentality has become increasingly normal for the hottest new companies who go from a $10M series A to a $100M series B within three months, inadvertently forcing founders to 10x their monthly burn, headcount, and revenue run rate simply to meet the requisite moonshot growth expectations.

Just this month, well known venture industry and NYT reporter Erin Griffith published an excellent op-ed analyzing the growing founder malaise towards traditional VC fundraising and the potential pitfalls of taking on equity financing when it’s not the appropriate long-term option. In the piece, venture capitalist Josh Koppelman of First Round Capital candidly remarks, “I sell jet fuel, and some people don’t want to build a jet.” Everyone knows what happens when you put potent jet fuel in a slow but steady single-engine prop plane—it stalls out and explodes.

Fortunately, alternatives have emerged to dislodge the binary outcome of either banking VC jet fuel or sputtering out entirely. This piece will shed light on the other financial options.. These providers have emerged to both complement and supplement the old guard of financiers, with most focused on helping post-launch startups meet short- to mid-term cash flow needs—without injecting so much capital as to force their trajectories towards the sun (or seabed). The advent of the cable car did not kill off transportation by horse—it simply served as a flexible alternative to meet local demand. Much like a startup idea, it was edgy, scalable, and pragmatic. Alternative financing upstarts today provide flexible, non-dilutive financing to entrepreneurs whose capital needs are not met by a time-consuming equity fundraise or difficult-to-obtain and restrictive institutional debt financing.

Breaking down alternative financing options for the startup economy (what’s alternative financing, anyways?)

Alternative financing is an umbrella categorization of non-standard financing solutions to supplement plain vanilla equity and institutional debt. For the startup economy, these solutions range from the more traditional: term loans, lines of credit, asset-backed loans, convertible debt, receivables/payables financing to the more creative: hybrid equity funding invoice/SaaS factoring, crowdfunding, microloans, grants/tax credit financing, revenue-share agreements, to the “wild west” of fundraising instruments–crypto/tokens.

Why so many options? If the demand is there, you better believe a savvy capital provider will attempt to manufacture a solution. Plus, the more arcane the structure, the lower the initial competition, and the higher the margins and ability to grab market share. These solutions are not only rising in popularity and easier to obtain, they’re also well-suited for the “torso” of the market—companies with varying levels of traction, a proven user acquisition strategy, and a readiness to grease the wheels on the marketing machine.

Flexible Financing to Drive Growth Without Dilution

When it comes to early- to mid-stage startups, some customizable financing instruments have emerged as clear winners in a competitive market where flexibility is the ultimate selling point. In addition to an emphasis on ease of use, the demand for many of these offerings is spiking thanks to quick access to liquidity and an a la carte menu of fee structures to decide between, from interest rates to transaction fees to revenue share agreements.

This is a unique segment of the market, where high growth rates and monthly revenue volume upwards of $500k-$2m remains unattractive to institutional banks offering single-digit APR debt. While $24 million a year in revenue might seem impressive, a revolving line of credit or an AR line on that sum at 8%/yr will gross just $192,000 prior to cost of capital, which could wipe out at least 50% of that margin. Again, low six figure fees might appear attractive to your average “Joey finance,” but they’re nothing for abank turning billions in volume a year.

In our overextended bull market where cash seems to be omnipresent, here are four of the most prevalent alternative financing categories providing liquidity geared towards growth, without the friction points of traditional debt and equity instruments.

Prev1 of 5
Use your ← → (arrow) keys to browse

Business

(WTF?!) Is The MBA Dead?

Published

on

Well, well, well, what do we have here.

So according to a (totally non-biased) press release from the Graduate Management Admission Council (GMAC) earlier this year, MBA grads are making more money than ever.

(Just for clarity, the GMAC is a “global association of leading graduate business schools.”)

Apparently, US employers plan to offer new MBA hires a starting salary of $115,000, the highest ever recorded in the US when adjusted for inflation.

Key words: PLAN. TO.

In spite of these lofty, non-scientific projections, the number of MBA applications—as a whole—is on the downslide. Here’s a chart from the otherwise very optimistic GMAC.

(Yes, the entire WealthLAB crew is MBAs, too. Jury’s still out whether that makes us marks or smart. 🙄)

And according to Forbes, this makes it the best time ever to pursue an Ivy League MBA.

So what does this all mean? Let’s unpack it for a second.

Top 10 programs are letting everyone in…

According to the various reports, some programs across the country have seen double-digit drops, with the top 10 business schools seeing serious declines. 

At the highly selective Yale University, the acceptance rate jumped by nearly 44%. Dartmouth College’s Tuck School of Business, another Top 10 program, admitted more than one in three of its applicants, a 48% increase in a single year.

Meanwhile its applications dropped by 22.5%.

“The joke among deans is that ‘flat is the new up,'” Andrew Ainslie, the dean of the University of Rochester’s Simon School of Business. “If we can just hold our numbers, that is an incredible achievement.”

Other Ivy League schools have dropped also, with Harvard measuring a fall of 4.5%. Meanwhile, big names like Stanford saw a bit more at 4.6% and UC-Berkeley Haas at a shaking 7.5%.

And outside the Top 10?

When these numbers are narrowed down to individual schools, like University of Michigan Ross School of Business, the picture gets worse. This university saw the biggest reduction, noting an 8.5% decline with just over 3,000 candidates applying. 

There are only a few reported exceptions to this overall decline, but the biggest business schools in the nation agree that there is a serious reduction in MBA interest. 

Ainslie says up to 20% of the top 100 MBA programs in the country are likely to close in the next few years. 

But why?

Uncertainty over work visas for international students, the strong US economy with decreasing job loss, and the rising costs of degrees are all noted as potential causes. 

The positive side to the story, as Ainslie pointed out, is that it’s going to spark new development in the design of existing MBA programs. One particular program has been built around entrepreneurship.

In addition, the prestigious post-MBA job paths—think investment banking and management consulting—have been replaced by jobs in the tech world and Silicon Valley.

Is entrepreneurship the new MBA?

“Tech has displaced consulting and finance as the preferred career path for top-tier college students,” says David Minnick, founder and CEO of Camino Data, and former president of beverage company, Purity Organic.

“When I started Princeton in 2003, it was still a big deal to get a MBA or JD/MBA after college,” he tells Forbes. “That was the thing to do.

“Four years later, when I graduated, we wanted to be more entrepreneurial. We saw people who had started successful tech businesses. We saw there were low barriers to entry, and that it was okay to fail.”

Image: Dunk The sum total of all human knowledge via @James_Kpatrick/ Flickr

Student debt vs. MVP?

There’s also the whole cost thing. Business school can run you $200,000, making it a cringe option for 20-somethings already riddled with debt. For founders, this is money better spent building an MVP.

(No, not Most Valuable Player. Minimum Viable Product.)

Not to mention the experience it brings.

“When I interviewed people with an MBA, or experience at a big beverage company like Coke or Pepsi,” says Minnick, :I was concerned that their personality type wouldn’t be the right fit for a young and growing company like ours.”

In his view, hustle, skills and culture fit are far better predictors of performance than a degree.

Ivy League MBA fire sale…🗑

Apparently this all means that IF you are one who’s always dreamed of an MBA from a prestigious school, there’s no better time than now.

“With an unprecedented decline in MBA application volume at many business schools – including iconic, top-tier programs – there’s definitely a ‘perfect storm’ happening for prospective applicants,” Alex Min, CEO of The MBA Exchange, a top admissions consulting firm, says.

“Deans and admissions committees are feeling strong pressure to fill available seats with qualified candidates, even if some of these individuals might not have been admitted in previous years when application volume was growing.”

Continue Reading

Business

How To Launch Your Business In 30 Days Or Less

Published

on

Got a great business idea that you think might be the next big thing? Despite the uncertainty and the risks tagged to becoming an entrepreneur, you wouldn’t know until you try. Besides, it takes less than a month to launch a product or service. Here’s how you make that happen.

Continue Reading

Business

The Art And Science Of How To Keep Talented People Around

Published

on

(Editor’s Note: The following article is a guest post by superstar entrepreneur and tech investor Jonathan Schultz.)

The number one reason talented people leave their jobs is because of the failure of their direct managers. Businesses are defined by the strength of their people. Even in the most successful company (think Google, Amazon, etc.), a bad manager can drive talented employees out the door. So what is the true art and science of keeping talented people around?

SITUATIONAL LEADERSHIP

Successful managers apply targeted, dynamic coaching to each individual team member. There is not one management style that works for everyone or every situation. Managers need to adapt their approach to every situation and every team member. This is called situational leadership. This situational leadership model has been used across 70 percent of Fortune 500 companies and has received numerous accolades from training experts.

The model details how we learn new skills and the four stages of mastering new tasks. For every stage and task, managers need to adapt their approach to managing their report.

STAGE 1

When your team member approaches a new and unfamiliar task with a determination to master it, they see opportunity. They are complete beginners in execution, but they possess high motivation and low skill. In this step, the manager needs to take a highly directive approach, where they demonstrate how the task should be done, setting concrete goals and closely reviewing the report’s progress as well. You are not being a micromanager by supporting the growth and training of your team. Sometimes your team needs to use your expertise as training wheels.

STAGE 2

This stage is full of frustration. Why? Because it generally takes people more time to master a skill than they’d like. Discouragement will set it and their confidence will lower. While they have built up more skills, their confidence is at its lowest in this stage. In this stage, the manager needs to serve as a cheerleader and remind their team member of why they were chosen to do this task and remind them of how far they have already come.

STAGE 3

In the third stage, people have gained enough skill to complete the task but still maintain a mentality of imposter syndrome in which they are more skilled than their confidence allows them to believe. They may even still be discouraged. In this stage, managers need to do less guiding and allow their team member to perform while self-directly more consistently. These acts of trust can boost the team member’s confidence and their dependence on the manager will fade while their confidence increases.

STAGE 4

People reach stage four when their confidence is at the same level as their skill. They become veterans and will continue to boost their confidence and skill set. This is the stage in which the manager steps back and gives the employee the space to continue fostering growth. Check in every now and then and help as needed. Also be sure to recognize the team member for all of their accomplishments along the way.

Keeping talented people around is not hard. Managers just need to apply situational leadership and remember that every team member works and learns differently and need an environment in which they can thrive in. As the leader, you are building this environment, so make sure it is a healthy one.

Jonathan Schultz is an entrepreneur, real estate tech investor and influencer. He’s the co-founder of Onyx Equities, a leading private equity real estate firm, and has been voted one of the most powerful people in real estate. Follow Jon’s blog here

Continue Reading

Trending


Warning: count(): Parameter must be an array or an object that implements Countable in /homepages/28/d742565295/htdocs/clickandbuilds/WealthLab/wp-content/themes/zox-news-child/single.php on line 683
5 Articles Left
Get unlimited access
X

Forgot Password?

Join Us