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So I involved some of the top tax lawyers in the City and we focused on refining the model. Working with the tax code made all the challenges more difficult as it involved not only tax lawyers but the Internal Revenue Service … without their blessing the approach to the innovative financing would bear an unacceptable risk.
Well, to jump ahead a bit, we came up with a solution that passed muster and presented it to both the studios and the banks. The banks loved it because they would now be able to spread their risk over a larger number of projects and be protected by taking the lower seventy five percent of the risk column. The studios were equally attracted to the idea because they could now finance and distribute a third more films. All that was needed at that point was a source of funds that would take the top twenty five percent of the risk in each project.
I had left Wall Street some two years earlier but had maintained a wide range of connections through the other businesses that I had started. One of my services was providing and vetting investment opportunities for the major clients of the front line street houses and what was then known as the ‘big eight’ … my how things have changed. Once the studios, the bank’s and the IRS had signed off, I approached my clients. I presented my proposition. Because of a combination of tax and economic benefits, they and their major clients found the structure very appealing. The model was now complete.
So, after six months or so of hard and very detailed R&D, we were ready to launch the business. We had organized a source of product, a customer base and a source of financing. Beyond that our customer base had financed the R&D process … in other words, they were so interested in the development of a solution to their problem, and so attracted to the possibilities of our solution, that they provided the financing for the development process. The street houses, banks, studios and accounting firms all supported the R&D process because we were making sure that they all won big as a result. Rather than ‘we-centric’, we were ‘you-centric’. We launched with several hundred thousand dollars worth of no-cost R&D that was funded by the clients … and we launched debt free into immediate profitability.
Fast forward to the late 90s. I had returned from doing my PhD work in Scotland. My wife and I decided to settle in the DC area. Here I could pursue my three principal interests … business, politics and fishing. Imagine my surprise as I began to make contact with the ‘bubble businesses’. Here was an entire industry based on the assumption that their clients were idiots who just didn’t get the latest thing that these people were selling. I sat in on presentations where CEOs of equity funded science projects would rant about how stupid their clients were and how much easier life would be if they just left it all in the hands of ‘Bleeding Edge, Inc.’ The image of these pretentious people who never made a bottom line, talking openly derisively about people who regularly did, etched itself into my mind … and, of course, into the minds of their never-to-be ‘customers’.
Mercifully many of these people are now more appropriately placed as service providers in the fast food industry. The newer generation, along with the survivors of the bad old days, have a significantly different vision of the customer. Now the customer is most likely to be seen as the group of sharp people with a real business and real needs that, if effectively and creatively solved, could support an emerging business. Every now and then an entrepreneurial team will also discover potential customers as a source of R&D support and start-up funding. I highly recommend that experience. It sure beats throwing cold water on the fire that is supposed to warm your house.
© Dr. Earl R. Smith II
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Related Articles:
- Presenting to Early Stage Venture Capitalists: A Few Things to Remember
- Gap Analysis
- Venture Capital – The First Meeting
- Red-Teaming: Improve Your Chances of Getting Funded
- Angel’s Sins
- Angel Investing – Governance
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