It’s not that money is not available. Or that you can’t raise it. Or that it’s a fairytale that come true for only a select few. Truth is a lot less absolute; there is no black and white, only shades of grey.
Let’s take a look at how and why a 37 year old, father of three with no real liquid sources of cash, would mortgage everything in sight (including the roof we live under) to fund a distant dream.
For us it started off with four simple questions…
Is the opportunity being funded convertible into hard cold cash in the near future?
Define near future?
Do we have the track record to make it happen?
What is the maximum downside?
The answer to the first question was yes. Near future was within 6 – 12 months. A six year history of building and growing our business and a devoted team gave enormous comfort.
The absolute downside was that we would be dead as a business in 12 months; the relative downside was that if we survived we would possibly lose between 20% – 100% of our personal capital; the likely downside was that we would waste a year and walk away with some serious bruises and cramps.
The upside was that if we survived, the new Alchemy would be a far more interesting place to work, we would be much closer as a team and the expected return on invested capital would sustain us for our next few jumps in the coming years.
The timing sucked. But when you are buying stuff that everybody wants, the best time to buy is when you are the only buyer. I don’t think you could justify this as a rational or conservative decision and except for a handful of friends everyone thought we had gone loco cabeza. But then there are some investment decisions that can wait, for others timing is irrelevant.
But timing determined how we funded the bet. Equity was out; debt didn’t make sense but was the only option.
It took more than eight months to close the round and it consumed whatever mental and emotional capacity I had. Since May all I have thought about is cash, money and capital. There was no room for real work. It was the year of money.
In the end, I wasn’t enough. Family, friends, senior team members, clients, partners and a number of completely random strangers pushed and pulled to make it happen.
Emotionally it has been one of the most draining events of my life. There is something about being a yoyo between hope and despair for a good part of a year that is just not healthy. Having said that, when hope came, it came from unexpected events, sources and individuals.
I wish I could say it was an exhilarating ride and I would do it again. It was as exhilarating as my last root canal and I look forward to it as much as an impacted wisdom tooth extraction and given a choice I would rather never do this again.
Why debt, why not capital?
Two reasons… Timing killed our valuation, when there are no buyers, you shouldn’t try to be a seller. Secondly, capital contracts are not that dissimilar from debt. As long as your intent is to generate a decent return for your investors and pay them off at some point, there is no real financial difference between debt and capital. Risk and incentive sharing is different, but in real monetary, economic and control terms, capital will always be more expensive.
If you structure debt accordingly, it is always cheaper than capital.
But that is easier said than done. We were lucky we had good advice. Mujtaba in the very beginning had ensured that we had respectable auditors, an accounting process and acceptable documentation. The numbers for the last few years had been decent and we had a clean balance sheet with no debt. And since we worked within the banking industry we were comfortable with how the lending process worked. Remove any of these factors and debt would have not been an option.
How could I mortgage the roof we live under?
With great difficulty… I didn’t have the strength to ask. But when other sources of funds fell through and an advisor suggested it as an option, I shared it. It was not my proudest moment but parents love you beyond rationality.
Was it worth it?
I don’t know. Only time will tell. One thing is for sure: walking on this road opened up so many doors that we had never looked at. While I discovered new depths of personal despair and sources of hope and faith, there was one thing that kept me going more than others.
Faith… not mine, but of others in us and our ability to make it work…