Our journey has taken us from identifying a relevant market demand, to selecting a business model, to designing an organisation and finally to identifying the need for funds to run the business. And we have just discussed the fact that different types of funds have different “flavours”. In upcoming posts we will look at these different funds in a little more detail. But before we do, here are a few things to be aware of.
Learn to walk before you try to run
First is that, not all types of financing are available to every kind of business. If you are a corporate lawyer servicing a large corporate client, you can take your pick from almost anything that exists. And if you don’t see something you like, you can probably invent your own. Having access to all these sophisticated instruments is very exciting from a professional point of view, but it can also distract from the core economics of what the funding is for, and what you will actually pay for it. For this reason we are going to start from first principles and look at the sources of funds that solo entrepreneurs and small businesses also have access to, and we will build from there.
Funding puzzles have many pieces
Second, remember that different forms of financing really do shape the business along different axes. It is not enough to say that some types of funding are cheaper than others, and therefore better. It is very important to understand the client’s needs and priorities, in terms of urgency, operational freedom, control and returns, and solve accordingly. Though you will likely be looking at a particular loan, a particular equity stake or a particular income stream, make sure you understand each funding arrangement in the context of the whole funding structure of the business.
Two lenses: operational and financial
Third, you must understand what the funding does for the business, both in terms of its real operational consequences and its appearance on the financial statements. You need to be be able to visualise and explain the opportunities and risks associated with an arrangement, and you need to be able to project how the balance sheet, income statement and cash flows will look as a result.
An Occam’s razor for finance
Keep things simple. As a lawyer, there is a temptation to dazzle clients with new, smart, innovative ways of structuring things. No one cares. In fact, it makes clients uncomfortable and suspicious when they see their money tied up in structures that they need a glossary to understand. That’s another reason to have a rock solid grounding in finance: Even the most complex arrangements can be reduced to simple flows, rights and contingencies. It’s your job to explain, design, and implement arrangements that are as intuitive, effective and efficient as you can make them.