Raising Capital by Issuing Scrip

(Plus Tapping Sponsors/Co-Branders/Strategic Investors  and Partners for Free Capital)

There’s nothing new about raising money by issuing scrip. The Reynolds Brothers ran a sawmill (established in 1870 by Orson L. Reynolds) in the Adirondacks that in addition to central logging and operating their mill also ran a company store and developed other sources of income including catering to boarders as well as selling merchandise to loggers in logging camps. (Source: Reynoldston, New York, History of a Mill Town).

When they needed to raise money, they issued their own ‘currency’ called scrip like the $5 promissory note I show below to pay their bills or to fund new ventures or additions to existing ones.

The scrip says it is: ‘Due to the Bearer…In Trade At…’ What that means is that the bearer of the scrip cannot redeem it for cash, i.e., a sovereign banknote of the nation (the United States of America). The fact that it is redeemable only ‘In Trade’ is key. Presumably, Reynolds has a margin on each trade so a $5 note with a GPM (Gross Profit Margin of say 40%) only costs them $5/(1 + .4) or $3.57. It’s a good deal for Reynolds but is it a good deal for a supplier, equipment maker or labourer who accepts scrip instead of banknotes?

The answer is: It depends. If you can’t get any other work, $5 in credit at a Reynolds Company Store, $5 in cigarettes or candy from a Reynolds vendor (which you could then trade for other stuff) or $5 in Reynolds products (milled lumber) might be better than watching your family starve or having you join them in that unfortunate predicament circa 1876 even if you know in your heart of hearts that it’s only really worth $3.57.

Conn Smythe built Maple Leaf Gardens in a six-month period during the Great Depression (1931) at a cost of $1.5 million. He funded it partly with scrip. If the ‘Carleton Street Cashbox” as it later became known had not lived up to its name, that scrip might have become valueless. Nevertheless, for an out-of-work ironworker back in the day, it beat unemployment. They could always find someone in the gray market to take scrip off their hands (at yet another discount) so they could eat today. It is what it is.

Canadian Tire issues scrip (CDN Tire money) that can only be redeemed at their stores. Disney issues Disney Dollars at the exchange rate of $1 DD = $1 USD. They can be converted back to US currency but only at Disney Parks. Hardly anyone does that and Disney has several billion dollars of DD on its balance sheet where they sit as liabilities lest a horde of grandkids and their grandparents suddenly show up at their theme parks clutching millions of DD they found mouldering in their parents’ sock drawers.

Don’t think that script is relevant to you? Think again. What are gift cards really? The lesson was not lost on Tracey Clark owner of fair trade coffee house, Bridgehead in Ottawa where she issued several million dollars of scrip to help fund her recent $15 million expansion. She is building a new HQ for her growing coffee empire and new factory in a trendy part of Ottawa.

Her campaign was called “Plant-A-Bean,” and it worked. Big Time.

Tracey is a cautious, conservative entrepreneur who bought the assets and name from a bankruptcy trustee years ago and has painstakingly built a successful chain of coffee houses in Ottawa. She has an aversion to debt but not scrip.

Her customers bought scrip in denominations of $250, $500 and $1,000 to help her get this expansion done. It’ll open later in 2012. Now why would they do that? Because: 1. they love Bridgehead coffee, 2. they love the ambience of her stores and free wi-fi, 3. the fact that she is local and able to stack up to and compete with mega chains, 4. she’s an underdog, 5. they want to feel like they helped make it all happen, 6. they trust her. But there’s another reason– they get a 20% return.

How’s that? Tracey gives them $1.20 worth of trade value on every Bridgehead Dollar. That’s a lot better than putting a $1,000 into a savings account and getting .7% p.a. It’s true, on $1,000 in a Bank savings account today, you’ll get $7 in interest for the year. If you take off Bank fees, it’ll be obvious that you are paying your Bank to take your money from you.

Now what about Tracey? Say her GPM is .6. The cost of $5 in scrip is them 5 x 1.2/(1+.6) or $3.75 so you can see Tracey’s cost of capital for expansion acquired this way is a negative $1.25 per every $5 raised. Negative perspiration for Ms. Clark. Now try getting that kind of deal from your Bank where they lend you money at interest rates less than zero. Not going to happen.

Recently, I met with Andrew Craig owner of Major Craig’s Chutney who, like the gentleman he is, recently acted in Quantum Entity Short Film. He’s a true volunteer for the acting gig not a voluntold, really.

He told me the backstory on his three year old business. Turns out his great, great grandpappy served with British forces in India circa 1884. While there, Major James Craig experimented with ingredients and cooking methods for all kinds of chutneys and brought those with him back to the British Isles where a subsequent generation somehow found their way to the wilds of northern shelf Canada and brought the knowhow with them and the written recipes waiting to be rediscovered by Andrew in 2009. Thus was Major Craigs Chutney born– if you need North India, Cranberry, Jerk, Butternut and Beer (yum) chutneys, well, now you know where to go.

Andrew came to see me today and, well, it’s a pretty tiny business. He needs a bit of capital to expand and he can’t take on any debt or partners (it’s a PB4L, Personal Business for Life). Why no debt? Cuz he can’t yet support any. Why no partners? Cuz if he has a partner (or takes on any debt) it won’t be long before either the partner owns his family recipes or the debt holders do (i.e., the Bank or other lenders).

So what’s a progeny of Major James Craig to do nearly 150 years later? Issue scrip and find strategic partners and sponsors, that’s what.

His clients, distributors, food prep supplier, his label printer, his ingredient growers, he has a lot of people in his business ecosystem who want him to grow and succeed. If he issues scrip to them in $25, $50, $100, $200 and $500 amounts with a premium of 15 to 20%, that’s a pretty good deal for them and even better deal for him– same as for Tracey Clark.

There is some other cool stuff Andrew can do to raise more “free” money. If you look at the image below, you’ll see that strategic partners are  everywhere, you just have to see. It was there staring poor Andrew in the face all the time. He was looking but not seeing. One of his suppliers is fast-expanding Beau’s Brewing. There, right there on the label! How much are they paying Major Craig to be co-branded this way? Nothing.

That has to change. What I want Andrew to do is put five strategic partners on his label, his new website (when he raises the “free” cash to build a decent site) and in his nice Xmas gift boxes (see the last image I have included near the end of this post) which are perfect vectors to carry his strategic partners’ messages to his clients– things like teensy recipe books, coupons, tickets, biz card, promo items, what have you.

How much of his equity does he give up to get their sponsorship money? Zero.

How much interest are they charging him to give him their dough? Zero.

In fact, he doesn’t even have to repay the money since it is a sponsorship/marketing/advertising cost to them, i.e., an expense. Truly free money for Andrew.

One other note I should add. I suggested to Andrew that he sign up his sponsors for two years. He just isn’t going to have time to start over every year at ground zero. He will also give his sponsor partners an option on a third year at the same cost provided they exercise that option at least 6 months prior to the end of the term of their agreement. After that, if he is as successful as we hope, the price will increase so this is a big benefit to his sponsors.

Lastly, Andrew can use his Xmas packaging as a vector to deliver his sponsor messages. In a way, he could learn something from LooseButton.com: they deliver their monthly Luxe Boxes to subscribers and get paid on three sides of their biz model.

Or he could do worse than copy the Manpacks.com biz model–they managed to turn products (men’s underwear, cologne, razor blades, etc.) into a service by delivering their stuff monthly or quarterly or semi annually and developing a nice recurring revenue model for themselves.

Regular chutney delivery service anyone?

Prof Bruce

FOR REAL ESTATE INVESTMENT AND BUSINESS COACHING THAT’LL HELP YOU PROVIDE FOR YOURSELF AND YOUR FAMILY FOR 3-GENERATIONS, PLEASE CONTACT:

Bruce M Firestone, B Eng (civil), M Eng-Sci, PhD
Real Estate Investment and Business coach
ROYAL LePAGE Performance Realty broker
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