Structure the Deal to Create Value

There are so many good and right things about “bootstrapping”, or growing a business by reinvesting its profits that I won’t even begin to list them.  If necessary, just take it on faith that growing a company through internal means is a time tested, solid method.  However, this series of articles has been addressing looking at the alternative way of growing your company and financing that growth by using “other peoples’ money”, or OPM.

Using OPM allows faster access to the funds necessary to finance your growth.  In exchange for the use of OPM you forego sole ownership and sole control of your company.  So as not to enter a discussion of whether to “bootstrap” or us OPM, let’s just begin at the point that the decision to use OPM has been reached.  To further simplify, we will assume you have a product, service, or idea that is merchantable and for which a good market exists.

Angel and Venture Capital and the entrepreneur have a need for one another. It is more than a symbiotic relationship; it is an absolute need.  A successful or potentially successful company is the vehicle by which capital makes money.  This complete dependency on each other might lead you to think a deal would only be natural... that it would come together by some act of nature, or at least by some Adam Smith free market imperative.  This can be the case if the value of your enterprise is so obvious that the capital source wants to have the exit door barred to keep you from getting away to offer your deal to anyone else.  If the value isn’t quite that obvious, it is up to you to make it so.  It is up to you to create real value in the deal.

You can create value by identifying the right markets.  Being able to save $25.00 on the cost of producing a car’s automatic transmission will have significantly more value to Ford or GM than it would to Boeing.  And the value would be immediately understood by an auto manufacturer, while a venture source might not have the industry knowledge to appreciate the $25.00 savings. By broadening your universe of capital sources to include the industry that you will serve, you have created additional value.

You can structure a contract, design a licensing agreement, set up a franchising arrangement so that people other than yourself get significant benefit, and therefore have a vested interest in getting the deal done.  Find out what is important to the other party, and structure your deal to reflect that importance. Creating value by creative structuring does not mean using smoke and mirrors.  It means taking your terrific idea and making it very valuable to someone else.

That someone else can be a strategic (someone already in the industry) or a financial player.  One deal I was involved with was made extremely attractive by giving the other party a way not to have to book a long-term purchase agreement as a long-term liability.  We gave them the ability to cancel the agreement on short notice, but on terms that would made us more than whole.  By eliminating the long-term liability, the deal increased in value to the other party even though the product, pricing and other terms remained the same.  We created value, and we both shared in the increased value.

Don’t let your creativity stop with your product or service.  Your goal is to get funding and grow your company, so be just as creative in your approach to your markets and to potential capital sources in structuring your deal to maximize value.