I was Standing In Line With Mr. Jimmy
OOH …Here’s One Thing
OOH …Here’s One Thing
by Jim Johnsen,
Managing Director, Johnsen, Fretty & Company
I was Standing In Line With Mr. Jimmy
And I went down to the demonstration
To get my fair share of abuse
Singing, “We’re gonna vent our frustration
If we don’t we’re gonna blow a fifty-amp fuse”
Alright, short and sweet today. I can’t tell you how many times over the past 30 years hungry young (and sometimes old) entrepreneurs have come to me and said, “hey Jimmy, can you raise me some of that VC money?”. After a pregnant pause, in my most polite tone, I then ask what he or she is trying to accomplish. Invariably “VC” (or venture capital) money is a bad fit. When I tell my caller that, they usually say, “geez I thought VC’s did everything.”
So at the risk of insulting some, I thought it might be helpful to run through some of the fundamentals of corporate finance, at least at a 50,000 foot level. In no particular order:
- Building or acquiring an outdoor or alternative place based advertising company takes money that is almost always beyond the limits of “self financing” and requires outside capital.
- Outside capital can take on many many flavors and can come from many different types of investors. But two themes always apply. First, when you take their money, you are only renting it. You do not own it. And unlike the Steve Miller song, you will have to pay it back at some point (or at least demonstrate a return). Second, the amount of rent is always in direct proportion to the perceived risk. Said another way, the riskier the project, the more expensive the rent. Note the word perceived. You can tell your would be investor that it’s a no loose proposition till you are blue in the face, but if they think there is risk, your money will come priced that way regardless (or not at all).
- People invest or lend you money, corporations do not. What the heck Johnsen? What I mean is, whether its JP Morgan renting you the money or John Smith your neighbor, there is ALWAYS a person on the end of that decision. And my rule is that that person(s) has to (i) trust you and (ii) understand or come to understand what you are going to do with their money and how you are going to get it back to them. So if you are going to go hunting for money you had better not be the title to the Joan Jett song: https://youtu.be/5RAQXg0IdfI, and you had better be a very good teacher on the business you are hellbent on building.
- Good investors can usually see through the entrepreneurs who don’t treat other people’s money like their own. What do I mean here? Money is a precious commodity. Those who are relentless in putting it to use in building productive assets and leaving the other stuff till later have a much better chance of winning. Does an early stage company really need 5 fancy offices in 5 expensive cities? Usually not.
- More to this point, there is a difference between committed and dedicated. Should I say that again? There is a BIG difference between committed and dedicated. Dedicated is good Johnsen, right? Wrong. Dedicated is “I try my very darndest with every cell in my body until I realize its just too f’ing hard…at which point I call my buddy at Outfront for a job.” Committed means endless sleepless nights in which you wake up realizing you have lost your 401k and will be a greeter at Walmart for the rest of your life it this thing doesn’t work. Needless to say, investors prefer the later over the former.
Okay enough preamble, lets get to the meat. Anyone old enough to remember this one? https://youtu.be/25iOKulsHGM
- IMHO, The rent on money is going to cost you somewhere between 3% and 58% PER YEAR, every year. In the years you miss you get to make up for it the following year. Say whaaaa? Yes depending on how risky your hustle is perceived to be. Okay Johnsen, how do I get at the 3% money? Well Mr. Jones, if you put a million dollars in a checking account at my bank, and agree not to take it out, we might just give you a million dollar loan at 3% rate of interest. Said another way, forget it. All business is fraught with risk. Unless the investor doesn’t understand this (and hoping to find a dumb investor is a fool’s errand), they will indeed charge you for the risk.
- Track record and the type of money go hand in hand. Trying to start a business from scratch? You had better have some nice friends and family that love you more than their money. Have you secured some world class leases or venues but have no idea where the revenue is going to come from? (I like to call this the field of dreams stage). Yup, tap the friends and family again. Have enough “real estate” to demonstrate scale and now you have LOI’s from all the best buying agencies in the country. Guess what. Time to talk to some family offices. Cranking $7MM of revenue and losing $10MM of EBITDA? NOW its time to talk to the VCs. $9MM of revenue and $3MM of EBITDA? Congratulations. Collect $200 for passing GO. You are now ready to take down private equity, senior and mezz debt and perhaps some hedge fund money depending on what you want to do with the money.
- Okay Johnsen my coffee is getting cold. Alright I will try to wrap it up. Want money?
1. Understand where you are on the spectrum;
2. Get you shit together. I mean really together;
3. Make sure that speeding ticket went away (and the stuff on Glassdoor);
4. Understand that all money costs. And the worse thing than expensive money, is no money at all;
5. Be prepared to put some meaningful skin in the game;
6. Be ruthlessly cheap in how you spend the money once received;
7. Return capital to your money partner as fast as possible. As they say, you can fake earnings, but you can’t fake a dividend. Nothing warms the heart of an investor than seeing some money coming back;
8. Don’t hide the bad news. Everyone understands that things almost never go as planned. But not coming clean and sweeping it under the carpet and kicking it down the road is the kiss of death. Good luck trying to raise more money when your current money hates you;
9. Sales 101 – it takes somewhere between 10 and 100 conversations to find the money. Get ready for the long journey to close.
Here’s wishing you some Blue Mountain coffee this am. And 20 bucks to the first person who tells me they do not love this classic, and can say that without lying.
And btw, if you want a little backstory on Mr. Jimmy, here it is:
Securities transacted through StillPoint Capital Member firm FINRA/SiPC
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