Pico Ventures (www.picoventures.co) is a group of seven investors that acquires small businesses and tests new business concepts.
One concept we are testing is an innovative capital provider for small to midsize businesses that provides funding via a hybrid debt/equity product. The current name of the business is CDG.
You would serve as a Recruiter who would help us recruit an “Entrepreneur” (as described below). A successful Recruiter will:
- Have a basic understanding of corporate finance
- Be well connected on LinkedIn to people who might be good candidates for the position of Entrepreneur
We need an "Entrepreneur" to test the CDG concept by talking with wealthy people and institutional investors about serving as guarantors for CDG's liabilities in exchange for a fixed recurring fee and equity ownership of CDG. We would compensate the Manager with $25/hr cash + $250/hr in a note converting to equity upon startup funding.
A successful "Entrepreneur" will
- have deep and broad connections with wealthy individuals and institutional investors that he or she is willing to tap into for this project
- be literate in corporate finance
- be quantitatively literate
The "Entrepreneur" does not need to have entrepreneurial experience.
You can see the below description of what the Entrepreneur's work might entail. All the quantitative work described below would be done by a person other than the test manager, but the Entrepreneur (and I) would collaboratively oversee it.
----DESCRIPTION OF WORK FOR ENTREPRENEUR (NOT FOR RECRUITER)---
Overall, the biggest challenge will be getting the Guarantors, so that is where the most focus and resources should be placed. Steps 2-9 below are focused on that.
These steps are in brainstorm form and may change substantially.
(1) Business Model. Figure out the right business model given legal, regulatory, and SBA constraints. Three possible business models have been proposed.
(2) Feedback. Have conversations with parties that might be Guarantors (maybe hedge funds). Talk about how we plan on presenting to them the risks and returns of the proposition. Revise the plan accordingly.
(3) Specifying the Business Cash Flow Variable. Create a model for projecting the distribution of a business’s cash flow given its historical revenue and cash flow (requires doing analysis of small business revenues and cash flows to recognize patterns). We may have necessary data available.
(4) Specifying the Distribution of Businesses. Estimate the distribution from which businesses seeking an installment loan would be drawn. We may have necessary data available.
(5) Guarantor Model. Using (3) and (4), create a model that projects the distribution of cash flows to Guarantors given (a) a placeholder function for determining whether to accept a loan applicant given the current and expected loan portfolio, the applicant's business, and the applicant's likely alternatives ("Decision Factors"); (b) a placeholder function for setting the terms for a loan applicant given the Decision Factors; (c) a best-guess function specifying the number of loan applicants per month as a function of time; and (d) best-guess of agreement terms with Guarantors and the provider(s) of funding (i.e. wholesale lender).
(6) Loan Decision Functions. Create (a) a function for determining whether to accept or reject a borrower and (b) a function for determining what terms to offer a borrower that maximize value created and value captured given the Decision Factors. Add these functions to the Guarantor Model from (5).
(7) Risk and Return Analysis. Determine whether the Guarantors who agree to provide cash during the initial expected cash flow dip should be given equity in the business, whereas subsequent Guarantors should not be given equity. Do a risk and return analysis for all possible classes of Guarantors.
(8) Presentation. Create a presentation for Guarantors.
(9) Get Guarantors. Get commitment from Guarantors. Maybe hedge funds would be suitable because they are good at assessing unusual risk-return opportunities.
(10) Get Provider of Funds. Whether this is needed depends on the business model. This may be a wholesale lender.
(11) Get Equity Funding. This would be used for funding marketing and operations.
(12) Begin Marketing and Sales.