The search is on: will our entrepreneur find his way through the funding maze to land the investors he needs?

Entrepreneur, June, 2004 by April Y. Pennington

LAST MONTH, WE LOOKED AT SCOTT Duffy's financial strategy as he worked to secure investors for potential acquisition or development deals. So did his efforts pay off?

Well, Duffy was able to build a partnership with the number-one financier of self-storage facilities, Buchanan Storage Capital in Newport Beach, California. "I can get 75 percent loan-to-value on most of what I want to do," says Duffy, founder of Self Storage Capital Group (SSCG) in Santa Monica, California. "So I have to raise z5 percent."

Unfortunately, that doesn't cover facility improvements he may want to make or changes in infrastructure or other additional costs. Although Duffy, 33, was pleased to establish this relationship with Buchanan, he still wanted a backup. "I believe if you only have one partner, you have no choice," he reasons. "If you have two, you have a choice. If you have three, now you have some real options." He's since found two additional banks for financing should he need an alternative.

When it came to seeking individual investors, Dully compiled a list of people who had been referred to him, people he had worked with in the past, and people who were familiar with his track record and had contacted him. He built a list of about 75 private equity investors, all of whom he's talked to. But without a promising deal ready to be inked, he can't have investors just yet.

Looking at the path he's chosen, with investors acting as limited partners in each deal, Duffy explains, "I could've started a fund and had people invest in my fund, holding their money so that when we found the right deal we could move quickly [with] the capital. But I decided not to do that for a couple of reasons: One, I'd never done a deal in this space, so there's no real credibility, and it's hard to ask for that money. Second, I didn't know how long it would take and didn't want to have [someone] expecting a return, and that return coming out of my pocket."

Instead, Duffy decided the smartest thing to do was to line up potential investors and educate them about what he's offering. Duffy would then try to get verbal commitments from each with an understanding of how much they'd be willing to invest and what type of investment return was expected--so that when a deal was presented, he knew who to approach.

Duffy is excited but also a little anxious about the first deal, especially in terms of how smoothly the equity raising will go. "It always seems that the people you believe are a sure thing are in Europe, or their wife's having a baby when the deal comes," he says. "I never believe I have that money until the check is cashed."

Many entrepreneurs turn to friends and family for startup capital, but Duffy feels close ties can make for an uneasy situation when trying to collect. With outside people, Duffy adds, "It's easier to get commitments from those people and to follow through [aggressively]."

An interesting aspect Duffy has integrated into his business is a commitment to donating a share of the profits to the community, namely local educational programs. Although he's built that into SSCG's costs, he knows investors won't get warm fuzzies over philanthropy, particularly because it takes part of their return. Duffy, who remembers the cold weather and rampant homelessness when he lived in the San Francisco Bay area, also works with a group there that provides winter clothing for the homeless. And he's devoted enough to pass on investors who aren't willing to give back to the community.

With a primary market of Arizona, California and Nevada, and a secondary market of Colorado, New Mexico and Utah, SSCG had two properties in escrow as of March. It took some time for things to start moving, but Duffy made it through the frustrating times with something his former boss Anthony Robbins taught him: "Every day, write down one or two things you accomplished, no matter how bleak it seems." Duffy could see that SSCG was further ahead than he thought it would be, particularly in regard to building relationships with the right people who either are--or will introduce him to--potential investors. Says Duffy, "If we stick with it, we'll sustain and get the result."