Untapped Sources of Capital


Recently I attended an iBreakfast event in New York City. The featured speaker was Roger Aguinaldo, an M&A expert from M&A Advisors. Roger posed a question to the audience regarding the best sources of capital for a startup.

People shouted out their answers. Venture capitalists. Friends and Family. Angel investors. Banks. Etc. Etc.

While Roger wrote all of these answers on the board, he said that each of these answers weren't in his top three places to get initial investments.

The crowd stalled for a minute, as everyone tried to stretch their minds from the traditional answers. Slowly but surely, Roger's top three sources of initial investment hit the board. They were as follows:

1. Customers
2. Suppliers/vendors
3. Competitors/strategic investors

It is important to note that these three sources don't work in all situations. For instance, if you are opening up a wine shop and you know a wealthy individual who purchases a lot of wine, they may be a relevant investor. Likewise, the wine distributor from which you plan to purchase hundreds of thousands of dollars worth of wine over the next year might be interested.

Conversely, the wine shop across town surely will not invest in you. Likewise, if you are launching a company targeting teens, your customers aren't going to have the ability to invest in you. Or if your venture exploits weaknesses of other companies in your sector, looking for competitors/strategic investors may tip everyone else off regarding what you are doing.

However, in many instances, at least one of these sources might be relevant for companies seeking capital. In addition, these sources of capital may help in referring other investors and/or be able to provide additional capital in the future should it be needed.

Since capital is the fuel that new ventures need to grow, the entrepreneurs that run them must always think creatively about financing, and never miss out on good potential capital sources.

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Seth W. Aichle says

Another good source for individuals is SBA (Small Business Loans). There are a number of programs for start-up companies and established business to get the capital they need start or expand their businesses. 7a programs and 504 conventional loans are the two most common. These are loans that are guaranteed to financial institutions for individuals who typically couldn't gain financing conventionally from most lenders. This is a great way to get financing. Typically you are looking at rates that are better than hard money lenders and credit cards.

Posted at 5:05 pm
Judy S says

I think the answer goes way beyond this. For a start-up or emerging growth company, it may not be wise to try to tap customers since they might worry that you are undercapitalized and they might be able to rely on you for product. If you pursue them for an investment, you face the possibility that they will want you to be captive. (Also, competitors of your customers would be wary of purchasing from you.) Suppliers can be a good source of financing by extending trade credit so that instead of having to pay the usual net 30, you can pay net 60 or 90. This can only happen if your supplier is financially sound. As an investment, I would be wary of a supplier investing. I would never tap a competitor, as it requires exposure of information that should not get into a competitor's hand. Strategic investors (non-competition) remain a strong source of capital. The best example are the biotech companies that partner with big pharma whereby pharma gets first access to new product and the biotech co gets development capital as well as an established distribution network. Each is giving the other something they need. That is the best investor and works particularly well for start-ups with proprietary technology or services.

Posted at 5:18 pm
Christopher Clay says

I like the customer angle. I worked with a client to raise substantial capital to purchase a poorly managed manufacturing firm whose primary customer was GM. We found adequate capital to bridge the deal and buy the firm out of bankruptcy, however, we should have been targeting GM.

GM used our clients bid to bailout the poorly managed company. We should have sought investment from the customer instead - GM.

Although, I think like the previous post says this can be risky.

Posted at 11:16 am

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