Low Level Venture Capital

by Mr. Cheap

For those not familiar with it, venture capital is typically a firm that provides early stage funding for new companies (Paul Graham has extensive ideas about funding startups). Think of the TV show “Dragon’s Den” if you’ve seen it. Venture capital firms like to “swing for the fences” and would rather have a small chance of owning part of the next Google instead of a good chance of owning part of a moderately profitable company (which is at odds with the perspective of most founders).

A while back I wondered if there was a way to invest in something like this at a lower level. Instead of trying to fund the next Google, might an interesting investment be helping people start small, traditional businesses (like launching a McDonald’s franchise or opening a bed-and-breakfast) in exchange for shared ownership (instead of a straight loan).

I’m not talking about something like Kiva, this would be an investment, not a donation. Instead of being paid back, the investor would retain ownership of a percentage of the company and collect that percentage of the profits.

I’d be shocked if people aren’t already doing something like this, but I haven’t heard of it if they are. Arguably I’m doing this with the building I’m a silent partner in, but I’m more thinking of a person or organization who does MANY deals like this every year, not just a one-off with a friend. Basically you come to me (an investor with money), show me your plans for the business and convince me you’ve thought this through and are making a commitment to launch. We both put money in (ideally) and work out some sort of shared ownership of the resulting enterprise.

A while back I bounced around the idea of starting a Subway franchise. It seems like most franchisees save or get a bank loan to purchase the franchise, apply to head office and then carry through with launching. For someone who couldn’t qualify for a bank loan but nevertheless had the interest and abilities to start it, it seems to me that friends and family would be their only choice to raise the cash.

The obvious downsides for the investor would be that the business owner might not be able to profitably run the business or that they might lose interest before it got to the point where it was making money. The downside for the owner is that they would obviously pay out the investor far more in shared profits than they would have paid on a loan (since the investor should be compensated for the extra risk).

What would you do if you wanted to start a business, needed money, and were turned down by banks, friends and family? Is there anyone or anywhere that you think you could present a business case to them, show them the figures and get funding in exchange for shared ownership? Do most communities just have rich, old guys that fund stuff like this? Is it hard to get money out of local, rich, old guys? If you met some young go-getter who wanted to start a busines, would you want to the a rich, old (wo)man and fund them?

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