A Third Way

Check out this model that Seth Godin elucidates today in his post “Debt, Equity and a Third Thing That Might Work Better.”

As we, at Beyond Profit, are thinking about different structures for social enterprises, this is yet another model for growing businesses to consider as they are getting their start. Don’t miss Issue 3 of Beyond Profit where we will dig deep into the issue of choosing how to structure your enterprise.

Debt, equity and a third thing that might work better

If your business needs money, it seems as though you have two choices:

• Get a loan from a bank
• Raise equity from an investor, giving up part of your company in exchange

Banks are everywhere, so the idea that they can loan us money seems obvious. And venture capitalists and the companies they fund are in the news all the time… and making a billion dollars sounds like fun.

Here’s the thing: for most businesses, most of the time, neither is a realistic option.

Banks aren’t in the business of taking risk. Which means that they make boring loans to boring companies for boring purposes. They do everything they can to be riskless. Which means you need to guarantee the loan with your house or with assets worth far more than the loan. Which means that a good idea is not a sufficiently good reason for a loan.

And equity? Well there are two problems. The first is that the number of investments that professional VCs can make is microscopically small compared to the number of businesses that want them. A bigger reason is that if there’s no obvious and reliable exit strategy (like going public or selling to a huge public company) then there’s no rational reason for someone to make an equity loan. The entire upside comes when you sell, and if you can’t easily sell (which is most businesses–they’re even harder to sell at a profit than a used car) then there’s no VC investment to be had.

But that doesn’t mean you’re stuck. I’d like you to consider the idea of selling part of your income.

To read the remainder of Seth’s Post, visit his blog. To receive Issue 3 of Beyond Profit on your doorstep, subscribe here.