January 19th, 2009 16:30 EST
How Do You Get Suppliers To Provide Start Up Capital For Your Venture?
One of the best questions that people ask me came to me again this morning from someone who is connected to me on LinkedIn. This person is starting a business and is looking for financing, and in the course of looking under every rock, this woman noticed a source that most entrepreneurs eventually think is the perfect place to get their money.
How reasonable is it to get your vendors, suppliers, and service providers to be the financiers of your business? It`s an obvious place to look for money because instead of paying them out, why not use the stock in your new business to pay for the services that they`ve rendered. It would be as if you raised a lot of money, paid them in cash, and then they gave you the money back that you have paid them to buy the shares with. Instead, you`re just cutting out the cash part, swapping shares for the services that they rendered. Very smooth.
It happens every day that vendors, suppliers, and service providers invest in companies -- or take an interest in the company in lieu of payment. Whether those vendors are attorneys, accountants, manufacturers or suppliers of any kind, many like to take an interest in the companies for whom they`re rendering services. After all, why wouldn`t they? They`re right there on the front line when the business is being created, and being experts in whatever field it is that they supply services to, they should be able to recognize a good deal and a smart business proposition when they see one.
So vendors, suppliers, and service providers are an obvious place to go for capital. The kind of capital we`re talking about is not working capital but rather start up capital to help you get going because the vendors are just swapping their services or their products for stock in your new company.
So how do you get them to say "yes" to this proposition? Well, there are three parts that you have to manage in order to convince the supplier to join you in a successful transaction.
Part I: Vision
In order to get anybody to buy into anything that you`re doing, you have to have a vision for your product, your project, or your new venture that is so big and so exciting and so compelling, that they can`t help but want to get involved. (http://tinyurl.com/9gnk3y) They have to want to be part of what it is that you`re building because they believe that if they don`t, they`ll be missing out on something. And human beings hate to miss out on things. My experience is that most entrepreneurs do a very poor job of creating a vision that anybody except for a close family member thinks is compelling. If you can`t raise money, it`s usually because your vision is both small and poorly constructed.
Part II: Communication
Once you`ve created a compelling vision, it`s your job to "pitch" that vision to others in a way that makes them feel like not being involved would be the biggest mistake of their career. You have to demonstrate to the person on the other side of the table who is listening to your pitch that you know exactly what you`re talking about and that the business that you intend to bring to life is not only real but that the markets are ready for you to bring your products to bear. If you do this successfully and clearly and with conviction, then you`ll have a very good chance of getting people to buy into your project.
Part III: Execution
The final part of this process, after you`ve developed a strong vision and communicated to your prospects that they`d be missing out on something big, is to get them to believe that you have the moxie to be able to bring the vision to life. Most companies fail in this third part. They don`t have what it takes to bring the project to life and the project ultimately fails. A successful entrepreneur will demonstrate that the market is ready for them and that they`re ready to go to the market. You also have to have the ability to do exactly what you say. The irony about this part is that if you can successfully convince somebody that your intangible concept is ready to go, then they will believe that you have what it takes to convince the market once the product has been actualized.
Now the Hard Part
How much stock do you give the vendors, suppliers, service providers or investors for their participation? There`s a science to doling out stock, and you have to be extremely careful to value your company appropriately. You want to value it high enough that you don`t give too much stock away but not so high that people think that you`ve been silly and amateurish. But that is a discussion for a different day.
So on the topic of giving vendors, suppliers, and service providers stock for services, it`s absolutely possible. It`s not easy and many people don`t succeed at it, but it`s an obvious place to look for capital. And the vendors who get involved in your successful, early stage project will thank you because when they see a deal that`s right, they`ll know it.
Now here are some steps that you can go about taking to make sure that you`re successful in raising at least some of your start up capital from your vendors, suppliers, and service providers:
1. Carefully document an excellent vision that you believe the people in your industry will understand and relate to.
2. Practice pitching this in a way that not only captures the attention but the imagination of the audience that you`re speaking to.
3. Be prepared to demonstrate that you have what it takes to successfully implement the project. Make sure that your biographical information points to the reasons why you`ll be successful. Be prepared to show other projects that you`ve done with similar success. Show the websites that support your efforts. Show the marketing materials, and show the others on your team, who will all take part in making the project successful. Show whatever it takes to convince your audience that you can "make it happen."
Only when you take these steps, will you be able to raise the capital that you need to help move your projects forward from this source of capital.
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About Joel G. Block, President of Growth-Logic, Inc.
Often dubbed a "Growth Architect" by his clients, Joel Block advises companies on explosive growth strategies by driving revenue and sales. Well known in the capital markets, Joel is a successful entrepreneur, speaker, advisor and faculty member of the iLearningGlobal community. To bring Joel into your company, please visit http://www.joelblock.com or http://www.growth-logic.com. Also, be sure to check out our newest project: a blog to organize the blogs that cover entrepreneurship - http://www.entrepreneur-hub.com. And finally, for film makers: http://www.filmfundingblog.com - our newest project.