Each year entrepreneurs pitch Venture Capital firms in hopes that their startup company or business expansion will get funded by them. The vast majority do not get funded. Furthermore, “getting funding” almost always means the entrepreneur must sell a sizable piece of his company to the VC.

Getting funded by a VC is a dream, but it can easily turn into a nightmare for both the entrepreneur and the VC. Because the VC owns a piece of the company, if further rounds of funding are needed in the future it could mean diluting only the founder’s ownership, depending on how the contracts were setup. It’s not too uncommon for founders to eventually wind up with a minority stake in their own company and to lose control of it. For the VC, there’s a big chance of failure. They usually need an exit strategy, such as taking the company public to sell its shares to the marketplace or to sell the company to a private party. But before they sell it, they need to try to juice up the revenue of the company to max out the sales price. When maxing out revenue becomes the primary unconditional focus, it’s easy for the business to go in a very different direction than the founder had intended.

The above horrors can happen when an entrepreneur does get funding. Let’s not forget that most entrepreneurs seeking capital just don’t get funded.

These are problems. And yet the world has a way about finding solutions to problems and getting them to those who can benefit. Sometimes the solution can be so incredibly simple that it’s hard to believe. In the case of funding a small business, the solution I see is a matter of breaking the habit of selling equity.

Instead, sell revenue. A slice of your gross revenue, that is. Here are the benefits when raising capital:

• Keep all of your company. Don’t sell it to investors.
• A flexible payment. In a month with low sales, your payment to the investor is lower. In a month with higher sales, your payment to the investor is higher.
• More long term profit is kept. Once you’ve paid the investor fully as agreed, you still own and control all of your company.

Here are the benefits to the investor:

• A built in exit strategy. A revenue participation contract can have a fixed repayment period or a fixed repayment amount, similar to debt.
• Lower risk. It’s easier to project gross revenues than it is to project profit. An investor whose repayment is a percentage of gross revenue only needs to be confident the entrepreneur can and will make the payments.
• More winners. Because of the built in exit strategy, the investor doesn’t have to assume most of their investments will tank and thus doesn’t need to have an astronomical ROI for the slim few that succeed.

For example, an entrepreneur has a business with $100k in gross income and $48k in net income. He needs $50k to expand his business by hiring and training a sales force and getting a larger office. He projects that in 6 months the expansion will result in an increase to $400k in gross income and $250k in net income. So an investor pays $50k to buy the right to receive 20% of the business’s gross revenue each month until those payments total $100k.

The investor will make a 100% ROI once the repayment is completed. If all goes as planned, that 100% ROI will be paid in under 18 months. It could happen faster or slower, depending on how well the business performs as projected.

For the entrepreneur seeking capital, the chances of finding an investor (or investors) can significantly broaden when he can pitch a lower risk investment that has a built in exit strategy.

What’s more, this model is very compatible with smaller investment amounts. In today’s world, a startup with tons of potential might not be able to get VCs’ attention unless they need millions of dollars. With revenue participation contracts, an entrepreneur can seek out tens of thousands or a few hundred thousand dollars in capital from smaller local investors and businessmen. That also means the entrepreneur may be dealing with a kinder local businessman rather than heading out to Silicon Valley to deal with the sharks.

A few months ago, I linked you to a shorter, free 30 minute version available on YouTube. If you haven’t taken the time to watch the 30 minute or 80 minute version, then here’s the 2 minute, 24 second version;

[youtube=http://www.youtube.com/watch?v=gGgjU-h_xQw]

^— The hidden track record of U.S. deficits as told by the U.S. government’s chief accountant!

[youtube=http://www.youtube.com/watch?v=-FSoXKapKQs]

^– If you can watch this video and not feel the need to do something, then something is wrong with you  :-O

[youtube=http://www.youtube.com/watch?v=Dp8ZmQMCtqA]

^– This outlines the PRE-BAILOUT/STIMULUS unfunded government promises.

[youtube=http://www.youtube.com/watch?v=FZlmqx8CNKc]

^– The forecast of future debt-to-GDP ratios

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Our economy is 70% consumerism. That means it is mostly based on individuals buying stuff. So the current setup of our economy holds two basic facts:

1. Individuals buying more stuff than they can afford to buy (based on their income) has a net effect that is good for the economy.
2. When individuals lower their spending and save and invest money, the net effect is bad for the U.S. economy.

That said, should we even care about “the economy” in its current setup? If individuals were really doing what is good for themselves (saving and investing), it would be terrible for the economy.

So could Obama’s stimulus really work? Absolutely not. Not if you consider “it really working” to mean more than just temporarily. We don’t need a stimulus. We don’t need a boosted economy. We need a changed economy. There are only three ways out of this mess.

1. The financial and economic system of the U.S. (and much of the world) is not repaired and we enter a very long, long, long depression that includes unprecented levels of poverty in the U.S.
2. The U.S. merges with one or more countries. In the same way Merrill Lynch had to be bought by Bank of America… the United States might have to be bought by one or more financially sound countries.
3. We redefine the rules of our economy to be healthy and sustainable. Rather than require individual consumers to jump on the grenade of “just spend, spend, spend for our country’s sake”, we completely rethink our economy to measure its health in a way that it is parallel to the financial health of the individuals who live here.

It all starts with the individual. And for the individual, it all starts with the basics of financial statements: the balance sheet and the income statement. Individuals’  income statements need to be in the positive. If we can figure out a way to measure “the economy” in a way that would celebrate individual financial health, that would be great. If we can’t, then we should be building and spreading individual financial health anyway, despite its terrible effects on “the economy”.

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CNN to Broadcast I.O.U.S.A. | Obama Foresees Trillion-Dollar
Deficits |
A Bipartisan Plea for Fiscal Responsibility | The Government We
Deserve

CNN to Broadcast I.O.U.S.A.

The public has spoken, and we’ve listened. In response to demand
for information about our country’s financial challenges, CNN/U.S.
will air the broadcast premiere of the acclaimed documentary
I.O.U.S.A. on on Saturday, January 10 at 2:00 p.m. EST and on
Sunday, January 11 at 3:00 p.m. EST. Accompanying the documentary
will be an unscripted panel discussion with policy leaders about
various economic solutions currently under consideration.

This exclusive televised event will air only on CNN, and will be
hosted by Ali Velshi and Christine Romans, co-anchors of CNN’s
Your $$$$$, the network’s weekend business roundtable program.
Throughout I.O.U.S.A.’s broadcast premiere, Velshi and Romans will
engage a distinguished group of panelists, including Pete
Peterson, Chairman of the Peter G. Peterson Foundation and former
U.S. Commerce Secretary; Dave Walker, President and CEO of the
Peter G. Peterson Foundation and former U.S. Comptroller General;
Alice Rivlin, noted economist and former Director of the Office of
Management and Budget; and Bill Bradley, a Managing Director of
Allen & Company and former U.S. Senator and Democratic
presidential candidate, in discussions about issues raised in the
film and their ties to current economic events.

Learn more about the film at www.IOUSAtheMovie.com. And be sure to
spread the word about the U.S. broadcast premiere!

Obama Foresees Trillion-Dollar Deficits

CNNMoney.com reported on Tuesday that when President-elect Barack
Obama takes office on January 20, he’ll inherit an economy deeper
in debt than ever.

Obama commented on the unprecedented deficit, saying, “At the
current course and speed, a trillion-dollar deficit will be here
before we even start the next budget.” In reference to his planned
economic recovery plan with an $800 billion price tag, Obama
added, “And potentially we’ve got trillion-dollar deficits for
years to come, even with the economic recovery that we are working
on at this point.”

Even with Obama’s promised budget reform, our economy will still
remain in the red — at least for the next few years. However,
incurring a trillion-dollar deficit in the short-term in order to
stimulate the economy is, according to organizations like the
Center on Budget and Policy Priorities, essential in order to
prevent “a deep and prolonged recession.”

Dave Walker, president and CEO of the Peter G. Peterson
Foundation, was also asked to comment on the deficit and Obama’s
proposed stimulus. A “timely, targeted and temporary” stimulus is,
according to Dave, the best way to shore up the economy while our
deficit continues to deepen.

To read the original article, visit CNNMoney.com.

A Bipartisan Plea for Fiscal Responsibility

On Monday, January 5, the two most prominent members of the Senate
Budget Committee – Sen. Kent Conrad (D-ND) and Sen. Judd Gregg
(R-NH) spoke out about the need for fiscal responsibility,
especially in the face of our current economic crisis.

In an impassioned editorial for the Washington Post, Conrad and
Gregg called for Democrats and Republicans to unite in support for
an economic recovery package, even with the short-term addition it
will make to our larger deficit. The senators also called for a
“bipartisan fiscal task force” to help create concrete solutions
for America’s long-term fiscal woes.

To read the full text of the editorial, visit the Washington
Post.

The Government We Deserve by Gene Steuerle

“Investment” and Obama’s First Budget

President-elect Obama’s chief in-house economic advisor Larry
Summers suggests in a recent Washington Post piece that the new
Administration will put a lot of effort into addressing long-term
growth challenges, not just short-term policies that generate
consumer spending. How? Through “investments.” To make sure we get
the point, Summers uses that word or some variation 12 times.

But the first Obama budget will not be oriented toward investment.
Just as with recent administrations, the words will stress
“investment” but the numbers will emphasize “consumption” – not
only in the short-term but, more dangerously, in the long-term. In
fairness, this is the budget the new administration inherits. They
gain control of the wheel of a battleship sailing full-steam ahead
toward the icebergs. But by using terms like “down payment” to
describe new proposals, Summers hints that no major course
correction will be sought.

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