Q: How do I raise financing for a new brand with negative cash flow?
Gaurang Naik, CEO
A: When a business enterprise is currently in an early, negative cash flow stage, the only capital source that is generally feasible (unfortunately) is some sort of equity. I say unfortunately because while equity gets you the “patient” kind of investors that you need to survive the negative cash flow stage, the cost is the dilution of ownership. In other words, when your firm eventually becomes profitable, the profit and equity value must be distributed among a larger number of stockholders than before. And the voting control of the original founders is reduced, as well.
There are many stories of founders starting a firm and then being voted out of their own companies at a later point. If you could raise debt, you would not suffer this earnings-and-voting dilution effect, but debt contracts typically require immediate interest payments, which require a positive cash flow. If you already have at least a little cash before you run out, and if your main need in expansion is opening new stores, you could possibly be eligible for a sale and lease-back arrangement to expand.
In a sale and lease-back, a store is built with other investors’ financing, frequently a REIT (real estate investment trust), on the condition that you promise to sign a very long-term lease. To pursue equity investors or REIT-type financing, contact an investment banker that specializes in early-stage financing in order to start the process of securing new investors.
Most likely, you will be using a combination of equity, sale and lease-back, and good old fashioned “bootstrapping” to get through this stage. Bootstrapping generally gets you only through operating crunches, rather than expansion.
David Vang is a professor of finance at the University of St. Thomas Opus College of Business.