AMA - Which is Easier to Raise, Equity or Debt?

This question has been asked so many times by audience members, I'm not going to attribute it to a single person. It's a great question, and the answer is highly situation dependent. 

I’ve experienced situations where raising money has been easy, and other times when it has been very time consuming. 

The main issue is whether the venture is going to be appealing to the sources of debt financing and the sources of equity financing you are talking to. It’s easy when you get a quick yes. It’s hard when you get a lot of no’s. It means that you need to figure out what is the reason why you’re being declined. Are you talking to the wrong people, or is there something fundamentally wrong with your offer?

I strongly believe that if you have a compelling opportunity, your job is to find the money and most importantly make sure you create that perfect fit between the goals for the money and the goals for the project. If you don’t have that perfect alignment, then raising the money is going to be extremely difficult. 

For example, sometimes you need to match the type of money to the phase of the project. The cheapest money for permanent financing will almost always be bank debt. The risk premium attached to the debt is a function of risk. 

If you’re undertaking a construction project. You might be better off working with a lender who specializes in construction financing. You will pay more for that money in the short term. Once the project is leased and stabilized with an income history, you can then refinance and get very low cost permanent financing on a 25 year, 35 year, or perhaps even 40 year term. But you may not qualify for that financing during the construction phase. 

If on the other hand, you look for a conventional lender to fund both the construction and the permanent financing, you will pay a premium because of the added risk, and that higher risk premium might carry forward for the life of the project. You will pay less during the construction phase, but more during the entire life cycle of the project. 

Sometimes packaging the investment to have the best possible characteristics during each phase of the project can make the difference between difficult and easy. 

Sometimes you may find that you need additional balance sheet strength in order to get a large loan. In that case, you may need to bring a partner into the project with a very strong balance sheet in order to co-sign on the loan. In that case, you’re going to be giving up some equity share in order to secure the debt. That’s different than raising equity money in exchange for an equity share.

It’s a fallacy to think that a project is hard to finance, assuming you haven’t made any major mistakes that would make the project broadly unattractive. If a large established developer could do it easily, then so could you. The only difference between them and you is that they have established better relationships than you. They may have more financial capital but they also have greater relationship capital. Relationship capital is the value of their relationships. If an established developer were to lose all their money, it would not take very long for them to make a substantial amount of it back. The reason for that is that they have the relationships. 

If you’re like many, you have experienced some success in raising money. But perhaps you have some relationships, but have exhausted the capacity of your existing ecosystem. So you may need to expand your Network of relationships. This means getting out and building relationships that you won’t need next week, but perhaps in 6-12 months, or beyond.