Alternative Financing
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Alternative Financing & Global Partnership
by: Thomas Hong

Funding early stage companies is currently much more challenging since the "Dot Com Bubble" bust. Series A round from venture capital funds typically are awarded to businesses with proven products and quality clients.  Many early stage firms developed products and secure early customers by "bootstrapping" or use of seed funding from founders, friends, relatives and angel investors.  There are  "Alternative Financing" methods that may be available to early stage hi-tech companies with proven products 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 few paying customers would be helpful).   Effort will 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.  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 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 the OSP to provide extended term (90 to 120 days receivable financing) for the products built. The OSP brand products built and marketed by OSP will incurred a royalty to be paid to ESC but it would be lower than the normal rate due to the financial support of the extended receivable financing.  This business model has been successfully implemented by several ESCs with different OSPs.  The ESCs sold 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 enable the ESC to collect payment from it customs before paying it product supplier, OSP.  All components and inventory will carried by the OSP, the ESC only carry "Finished Goods Inventory".  The business model enables the ESCs to operate the business with minimal equity funding.

Software Product.  For software product, the target OSP could be a major distributor 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 a much easier task 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 must be expanded to identify the appropriate OSPs and extremely convincing 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.

About The Author
Thomas Hong has successfully implemented several of these "Alternative Financing" methods obtaining multi-million dollar 90-day and 120-day receivable terms.  Mr. Hong is the Founder of Board of CEOs, www.boardofceos.com, a paid membership organization for hi-tech CEOs in Silicon Valley.  Mr. Hong has been helping and advising hundreds of CEOs during the past 5 years.  Earlier, he was the Principal Founder/CEO of four computer peripheral and networking companies during a 20 year span. He has also served as manager, director and vice president of engineering for companies such as IBM, Apple, National Semi, Commodore and Intersil.

This article was posted on July 27, 2007

 

 

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