A Debt and Equity Partner for an Early-Stage Traditional Business

Today I talked with a founder looking to start a new brick-and-mortar business. His model is interesting. He’s renting out space in a building designed to cater to an overlooked segment of entrepreneurs. It’ll be recurring revenue, and he already has a few customers committed once he launches. We talked through capital for his project. The revenue potential of the business is capped based on the square footage of the real estate, so it won’t be high-growth. He wants to do debt, but he’s faced some hurdles in getting financed with banks because their underwriting is more conservative. Venture capitalists would love to invest in him, but that isn’t an option because the company isn’t high-growth.

We started talking about the perfect situation for him, and it ended up being a mix of equity and debt. The equity would be permanent capital, meaning the investor isn’t targeting to sell in a certain number of years like a PE or VC fund. They would plan to be an owner and receive profit distributions in perpetuity. The debt would be normal term debt with fair terms. The kicker is that he’d like to do this type of deal with a single person or capital partner.

The more we talked about it, the more I thought about how big the market is. Many entrepreneurs building traditional businesses would probably benefit from a capital partnership like this, especially if interest rates stay at current levels or go higher.