Access to capital remains one of the greatest challenges to small businesses, social enterprises and community projects. Raising capital is a difficult activity. It can become an impossible activity if the organization does not have enough capital to conduct a capital campaign.
So, the question is presented: If an organization does not have the resources to raise money, is it possible to raise money to raise money? Whenever an entrepreneur encounters an insurmountable obstacle, it is necessary to take one step back and adopt a strategy specifically to address that obstacle.
The simple answer to the question is ‘Yes’. However, the entrepreneur must conduct two campaigns instead of one. Each campaign will be different in terms of size, target and story.
Say for example, an organization seeks to raise $500,000. This capital campaign may be targeting wealthy individuals (angels), average people (non-accredited investors), strategic partners or other stakeholders. The type of capital may be equity, debt or revenue share. However, the organization has completed a campaign plan and has determined that it will require about $30,000 in order to conduct the campaign with a high probability of success (over and above time committed by the organization). $30,000 that it does not have.
It will be necessary to first conduct a capital campaign to raise the $30,000. Although this campaign may target some or all of the same people of the original $500,000 campaign, it will be limited to quick money: capital from people already known to the organization who have a strong interest in its success. The $30,000 campaign will not simply be a smaller version of the $500,000 campaign.
The investment deal will most likely be structured as a bridge loan – a debt of short duration – just long enough to complete the capital campaign. The loan may be paid back out of the money raised in the $500,000 campaign. As an additional incentive, the supporters of the $30,000 campaign may be offered an opportunity to roll over their investment into the $500,000 campaign at preferential (discounted) pricing.
Because of the short duration, the investment in the $30,000 campaign may be perceived as having a lower risk than the $500,000. This may actually be false in that a failure to raise the $30,000 may bring the organization to a halt or actually force it to shut down. The $30,000 campaign may be accurately portrayed as an ‘all or nothing’ gamble. Because of the dependency upon successfully completing the $500,000 campaign, an organization may have to make the same quality investor pitch for the $30,000 campaign as the $500,000 campaign. The organization may find itself in a situation where ‘you can’t get there from here’ with no options on raising the $30,000.
The smaller dollar size of the $30,000 campaign may make the loss affordable (the investor is able to withstand the negative impact of a loss of the investment) to certain supporters. The affordability of the loss may be increased by spreading it out over a group of investors – a capital community – with no one person bearing the brunt of the entire risk.
The smaller dollar size of the $30,000 campaign may enable more people to participate in providing support – people who may provide $100 of support each in the $30,000 campaign that could not provide financial support of $500 or $1000 that might be sought as a minimum investment in the $500,000 campaign.
The smaller dollar size may also enable the organization to qualify for local community and economic development support. Money for the $30,000 campaign may come from an impact fund or be treated as a grant or program related investment (PRI) from a local foundation.
If the target audience changes from the $500,000 campaign to the $30,000 campaign, the organization must also change its story. The story must amplify the relationship with the leaders of the organization (friends, family, associates) or the positive impact on the supporter (strategic) or the positive impact on the community (jobs, economic activity, tax revenues) or addressing a community problem. There must be an affinity between the organization and the supporter that is not based upon an investment return on investment.
Since the $30,000 campaign is intended to pay the costs of the $500,000 campaign, it is possible that some of the costs can be deferred – a commercial line of credit – from the service providers (lawyers, accountants, IT, marketing) and other vendors. This will act to reduce the actual cash that needs to be raised to less than $30,000, making the goal easier to attain.
This topic and other topics related to investment crowdfunding will be presented by Colorado Community Capital PBC at Colorado Lending Source on October 27th (For more information or to register, go to http://www.coloradocapitalcongress.com/events) and at ComCap Colorado on February 1, 2017 (For more information or to register, go to https://www.eventbrite.com/e/comcap-colorado-tickets-27899952509).
Dakin Capital Services LLC
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