By Thomas Hong
Funding early stage companies is currently much more challenging as venture capital funds typically are awarded to businesses with proven products and quality clients. Many early stage firms develop products and secure early customers by “bootstrapping” or use of seed funding from founders, friends, relatives and angel investors. However there are “Alternative Financing” methods that may be available to early stage hi-tech companies with proven products by working with international business partners. This article explains how these “Alternative Financing” methods work based on proven successful implementations.
The first challenge for the early stage company (ESC) is to find an overseas partner (OSP) that has significant financial and marketing resources that is interested in ESC’s unique technology which has proven credibility (successful beta installations and a few paying customers are always helpful). Effort must be expanded to convince the OSP that a business relationship could be structured between the two firms that would give the OSP a marketing advantage to sell these product/products with favorable costs and attractive lead time over other sellers of similar products. Two business models will be discussed; one for hardware product and one for software product.
Hardware Product – Use extended payment terms for alternative financing. The target OSP should have manufacturing resources for the ESC product. Negotiate with the OSP to build two versions of the ESC product; one using the ESC brand and the other on a OEM basis with the OSP brand. The product cost to ESC should be based on standard costs of components (which would be automatically adjusted over time) plus labor plus agreed profit margin. Negotiate with the OSP to provide extended receivable terms (90 to 120 days) for the products to be built.
The OSP brand products would be built and marketed by OSP and a royalty to be paid to ESC but it would be lower than the normal licensing fee due to the financial support of the extended receivable financing. The ESCs can sell it’s branded products to its resellers with 30 day receivable terms with average receivable term of 45 days. Having the 90 day and 120 day receivable terms from the OSP will enable the ESC to collect payment from it customers before paying the OSP. All inventory will be carried by the OSP, the ESC will only carry “Finished Goods Inventory”.
Software Product – Nonrecurring engineering and prepaid product licensing for alternative financing. For software products, the target OSP may be, for example, a major OEM reseller with significant financial and marketing resources that is interested in the ESC product/technology. Motivate the OSP with offer to work on co-operative partnership basis to develop localized version of the product for the OSP’s region.
Negotiate to obtain non-recurring engineering (NRE) payment from the OSP and 12 month’s advanced payment for licensing of the ESC product. Significant licensing fee discounts would be used to motivate OSP for the implementation of this business model. Most OSPs are extremely reluctant to make equity investment to an ESC; also the executive management approval time would be much too long. Prepaid software licensing is much easier to get approval from the OSP.
Although the above business models and alternative financing methods seem relatively simple, it is quite difficult to implement successfully. Great effort is often expanded to identify the appropriate OSPs and experienced negotiation skills are required to secure these types of alternative financing. However the rewards are very attractive because often little to no equity is involved in these methods.
The Board of CEOs Principals have substantial experiences in various areas of alternative financing. They may be contacted for possible assistance in these endeavors.