Project Funding in 2015
Most people who have a vision or a dream of acquiring a large piece of commercial real estate, launching a new company, or getting their idea funded will face all kinds of challenges on the pathway to funding. Knowing what you need in terms of personal finances, experience, solid business plan, pro-formas and executive team are critical in order to be taken seriously by a private investor. The private capital and VC worlds are very different from commercial lending routes, and here are a few things you will need to know to have a better chance at the uphill climb you will face in getting your project funded in 2015.
At 5th Avenue, we are in the business of helping fund projects and visions for people who are serious about being in business for the long haul. We also get a lot of submissions / requests for private monies where the applicant is really not properly prepared for the private funding pathway.
Most projects do not get funded for 1 of 3 major reasons: lack of due diligence funds or commitment, lack of experience, and lack of a solid project / plan.
The Due Diligence Hurdle. . .
For starters, you must be ready to put some "skin in the game" or be prepared with personal funds or funds from an equity partner to be able to assist in due diligence fees. There are many unscrupulous lenders out there who also ask for up front fees and do not give results or simply disappear. There are also other lenders who will take your fees, will work hard, and will not be able to get your project funded because of certain issues with the business plan, insurability of the project, or other risk-analysis issues that pop up during due diligence.
There are also credible companies who have multiple private funding sources and can get your project funded, like 5th Avenue. These companies usually work a little harder up front to educate the applicant about the private funding pathway, and help you know what to expect during the process. Regardless of your kind of project, if you are seeking private lending or equity monies, you will need to be prepared to pay due diligence fees up front in order to help show the investor that you are prepared to take some risk other than your time, and that you are committed to the process.
The first step that most private investors take in weeding out serious applicants from the rest of the crowd is whether they are ready and able to commit to due diligence fees. As an applicant, first try to put yourself in the lender's shoes, who is often investing his or her own hard-earned private monies or those of JVPs (joint venture partners) to help you, a complete stranger, get a project funded, a business acquired or a piece of stabilized real estate purchased. If an applicant is unwilling to put anything into the project up front, there is nothing holding that applicant accountable to the process and the relationship, and thereby the investor would be assuming all of the initial investment and risk of investing his or her private funds. It is unreasonable for applicants to expect private investors to take 100% of the risk, and also invest their own monies to cover due diligence and risk analysis of the applicant's project. The due diligence process requires that the private investor pay office staff and other out-sources professionals for risk analysis, insurance analysis, legal counsel, appraisals, feasability studies, etc. The private investor also has to block those funds the applicant is applying for, during the due diligence process. Blocking those funds means that the investor is potentially losing ROI on those funds from other viable investment vehicles, strategies or projects.
Additionally, an applicant who is willing to invest in the due diligence process is communicating to the investor that he or she is worth the time and costs that are required in developing a business relationship which will usually last for 2 to 5 years, or more if the relationship works well and multiple future projects are funded through the relationship.
Making a long story short, if you are a serious business person, and are seeking funds in the millions of dollars to realize a goal of a specific project, be prepared to be taken seriously by having due diligence funds ready, and / or an equity partner who will take a share of your project ownership or dividends in return for those up front fees. If you were to attempt a more traditional lending route such as SBA, you would expect to pay upwards of 20% to finance your business project, which is prohibitive for most applicants. Due diligence fees to have the opportunity to access private investment monies are literally pennies on the dollar and much less prohibitive than traditional business lending resources.
The Experience Hurdle:
Most projects funding requests that are pitched by a new entrepreneur, and many projects that are pitched by an experienced business owner for the first time, are done so by an applicant who has less than desirable experience in the market for which he or she is seeking funding. The first reason is that the applicant did not think about presenting himself or herself with the required experience to obtain an investor's confidence in the project. The best way to make up for lack of experience is to add that experience to your team by aligning yourself with a person who has excellent management experience, or success in the type of project for which you are seeking funding. For example, a young entrepreneur who had no experience and no credit was able to acquire a stabilized multi-million dollar hospitality project through private funding. How did he do this? He built a team around him and hired the best hospitality management team, and had all of his documents signed and "ducks-in-a-row" before he packaged and presented his project to an investor. He had no strong credit history, and no management experience, but built the team that had all that he lacked and successfully acquired the real estate. He had to give up some equity in the project, of course, but it was a win-win-win situation for him, the investor, and his executive management team.
If you are seeking funding, or considering seeking funding for a project and your experience is questionable or thin, secure a top-of-the-line management and executive team who will more than cover your experience deficits in exchange for a piece of the pie.
The "Make-Sense" Hurdle:
You may have a great idea, a great passion for your project, plenty of funds for due diligence, and an all star management team lined up, but 1 or more ingredients of the project plan or execution makes the financing too much of a risk for all involved. It is just not a "make-sense" project in the big scheme of things. Perhaps everything lines up well but the project real estate or equipment cannot get insured. Perhaps the equipment that will be funded in the plan depreciates in value too quickly, giving the investor very limited recourse on recouping his or her costs if the project fails. Remember, and investor is wanting the project to succeed, every bit as much as the business owner or entrepreneur applicant. If the project fails, one major factor the investor is considering is whether he or she can get his or her money back by liquidating the property, equipment or intellectual property (IP) acquired through the investment, and how difficult it would be to liquidate in case of default or project failure.
The best investors will quickly say "no" to your speculative project, and will give you a quick review as to what would need to change in order to get the project funded. Your project may not be feasible for several reason that can be remedied with more sweat equity on your part, and in some cases, the project has one weakness that makes it too risky for the most speculative of investors.
A great investor is going to look out for your well-being as well, and will often turn down a project plan in order to protect his or her reputation as well as yours. It would be better for you to return to the investor as an applicant with a much more feasible project and build a long-term relationship than to expect a high-risk, speculative project to get funded easily. Great investors invest in "make sense" projects. As an entrepreneur / business developer, the applicant should try to think more like the investor and secure the weaknesses of the executable business plan, or find another project to pitch altogether.
Be sure that you are not "star struck" at a possible pipe-dream and resist the temptation to get so emotionally involved with any single project that you miss other similar opportunities to assemble and pitch. Know when to cut your ties and find a better, more stable project to assemble and pitch to your investor. And remember, investors like to build long-term relationships based on successful projects, because they are also looking for repeat business. What better way to build wealth than to develop a stable, long-term, successful series of funded projects with private partners who want to partner with you for long-term, mutual success?
5th Avenue Acquisitions & Venture Capitalists specializes in project funding through private investment monies and equity dedicated for many types of projects, including but not limited to stabilized real estate, oil and natural gas, technology, start-ups, dental and medical acquisitions, and more. Contact us for more information about funding your specific project.