#325 - Funding Your Dealership Through Angel Investors

This is the Independent Dealer Podcast, Education by Dealers for Dealers. Now here are your hosts, Luke Godwin and Jeff Watson.

Hello and welcome to the Independent Dealer Podcast brought to you by Buckeye Dealership Consulting. You know what's really interesting, Luke? When we were down at Buy Here, Pay Here United, we talked about the two biggest kind of topics, right, that came up over and over and over. The first one was the AI conversation, right. How are you using artificial intelligence in your business? And there's so many cool ideas. The other one was, where are you getting money for your operation? That was a harder one.

Yeah, it's always been a harder one. I've been in this business 30 plus years now and it's. My dad had the same problem in, in 1992 is that we're having today. Right. You know, it's really hard to find cash and banks don't want to lend to Buy Here pay your stores, typically unless you get big enough. And so you go to other places and it's all the regulations are really hard. So we're trying to think outside the box on how do we get other people to give us cash privately, you know, private money from friends and family, bigger money from angel investors, and maybe at some point from, you know, big institutional investors, which we've seen kind of maybe get out of, out of this industry in the last 18 months. But today we got a good friend, Dan Height. Hey, Dan, how are you? Hey.

I'm sorry.

Well, I introduced you and all of a sudden you didn't, you didn't. Come on. But Dan, I'm sorry, I'm sorry. How are you doing today?

That screws things up, doesn't it? Sorry. Yeah, I'm great, Luke. I appreciate the opportunity to spend some time with you guys and, and share my angel investment experience with Cool Jeff.

It's a little different episode. It is something that dealers are going to have to. We're not giving you the playbook to go out there and raise money. What we're giving you is an idea because this is what everybody is, is wanting is how do we get capital. Because last time I checked, our business is very capital intensive. We've been in business for almost 40 years and there's still times that we have a cash problem. And luckily I've been able to get a local bank to help with that. But I'm running into a point where we're about, we're about to run out of what we've gotten, so we got to go get some more. Jeff, how about you?

Yeah, well, yeah, I Just keep shaking down the couch cushions and find what I can, Dan. But tell us the story that you've had experience because, you know, you've been involved with some businesses that have gone out and raised capital from venture firms. Right. And, and for dealers listening that don't understand this world, maybe give us the framework of what is a venture firm? Where is this money coming from? Where does it fit in? In kind of the, the spectrum of available money? Maybe give us that setup first.

You bet. So, you know, angel investing, which is what we're talking about, is, is kind of is, is an early stage investment in a startup company. Generally speaking, a lot of times it's either pre revenue or right after post revenue. But you know, it's a, it's more than an idea, it's a business. And it comes after friends and family and before the professional money like Sequoia and some of those folks you hear about, Blackstone, blackrock and some of those guys out, you know, that are, that are writing really big checks. Average angel investment, you know, generally runs a couple of hundred thousand dollars to a couple of million dollars. And it's very early stage.

So if, if we wanted to, to go out and do this, where does someone start? Where'd y' all start when you, when you did this with Dealer Financial? Where. How do you do it?

You bet. Yeah. So Dealer Financial is located in North Carolina. I am a member of an angel investment group called Venture South. And so I had a little bit of insight into it. I made investments and you know, so I turned to them structured early on, back in 2016, structured an offering that was different than what their normal angel investment path would be, and it was successful. So we raised our, A lot of our startup capital for Dealer Financial, which is a floor plan company, came from my angel investment community. But there's, there's a, an organization called the Angel Capital Association. They've got a downloadable list on their website that has angel groups. I don't, I'm assuming there's one in every state, but there's over 200 of them on that list. So there's places for everybody to turn locally. And I would encourage you to go somewhere locally and have a conversation if you're interested in pursuing this source of capital.

And who sits on these own in these associations? Who sits on, on these groups that do the angel investing?

Sure.

So you have to be what's known as accredited, an accredited investor. And that is defined by the securities and Exchange Commission. I'm not going to detail them all, but suffice to say that they're a high net worth, relatively high net worth, sophisticated investor. A couple of the base criteria are they got to have a net worth over $1 million other than their primary residence or make a couple of hundred thousand dollars a year. So these are people who, you know, are, are sophisticated enough to make a risky investment.

I know some hedge funds out there require this type of network to get into. So when we, when we go and send, you know, a lot of people, Jeff, I hear out there talk about, I go and talk to my banker and they don't understand business or they don't understand my business. This isn't the case when you go and talk to someone like this as a. Dan.

No, no, I mean these are, I mean these are, you know, everything from a dentist to a serial entrepreneur. But, but these are people who are interested enough to be involved in the angel community. So they're looking to help people be successful. You know, a lot of them have mentorship programs and stuff like that. But these are people who are engaged in the entrepreneurial community and are actively making investments in that entrepreneurial community.

Yeah, I think one thing for dealers to understand is, you know, we don't use the word hard money, right? But it's, some of those could venture into that area of, of looking for hard money. These are, I mean, as a, as an angel investor, it's a high risk, very few payoff rewards and the ones that do have to hit it really, really big. I mean, that's your typical angel investment strategy, right? You're going to send out fifty hundred thousand dollar checks and you're hoping that one of those 100 x's right. Typically, from what I understand, most of that is reserved for the dot coms, right? You gotta have a dot, AI or a dot com at the end of your name to get interest from those guys that are looking to, you know, have some massive public offering or a buyout or a big round from one of the big guys in Sandhill Road. So when we go to them, which I'm guessing was your story, Dan, like you said, you kind of presented them with something maybe a little not as traditional, right? Like, hey, I'm not a dot com. I'm not trying to reinvent how people get their cars or pick up their food. But what I am trying to do is this kind of basic financial service that has a killer return. And let me show you why it's a killer return for you. And as a dealer, if we present that to, you know, angel investors, whether it's our neighbors or whether it's these networks, we can paint a picture that can be attractive to these guys. Is that, is that what you did, Dan? Did you go to them and say, hey, yeah, we're not going to, we're not going to be the next Uber, but guess what, we got a pretty solid business model and we're going to get you a killer return.

Yeah. And let me back up just a little bit, Jeff. And I'll say not all of these businesses are dot com. So Ventures out just made an investment in a business that turns hog waste into fertilizer. You know, so that's about as real as it gets right there. They're pulling hog poop out of, out of lakes and turning it into, you know, high value fertilizer. And we made a pretty significant investment in that, in that startup. It's a, but it's a, it's a hands on, hands on organization. So. But personally, yes, you know, I knew that Dealer Financial was going to be needing, you know, if Venture south hasn't invested, you know, $85 million since 2008 and over 100 startups we raised, we didn't raise that much money from them, but we raised a lot more than the average angel investment. And you know, so what we did was when we were looking for bigger checks than are normally written, you know, we had a return initially we made it semi liquid so they can recall their capital after two years on a limited basis. So we put some thought into how am I going to compete for this money with this group that I know very well, but they have lots of options. And so we, we put together something that the membership, individual members, you know, if, if, if venture south has 500 members, we probably pitched it to 250 of them and you know, probably had 30, you know, 30 or 40. Bite on the, on the offer.

So as we talk about finding money, getting avenues to get your money right now, Luke, I've done it through my reinsurance company, which is like my own little forced savings account. Right. So last three, four, five years I've been putting money aside from each warranty, each service contract that I've given out for free or that I've sold. And now I get to borrow that money back to myself at a very favorable interest rate. And guess what? I don't have to go through a long interview process.

Nope. It takes probably 10 minutes to make sure you can, you can bring that money out. And I've done it over the years, Jeff. We've had our reinsurance company for 13 years now. And we borrowed hundreds of thousands of dollars back out of it to grow our business. So not only is reinsurance good to help you make more money to save a little bit of money on taxes, it's also a great way to fund growth in your business. So reach out to Buckeye, get it set up, and if you already have it, find new avenues to shelter some money and to make more money doing.

Gap, doing whatever, and these guys can walk you through. I know a lot of dealers are listening to this and they're thinking, wait a minute, I'm trying to get money. Why would I start funneling off three to four to five to ten to fifteen grand every month into a side account that I can't touch until it earns out? Right. That can be a cash constraint. It can hurt your cash flow. Like I said in the beginning, it's a forced savings account. So you have to be ready to force yourself to put money away now, which is obviously tax advantage to be able to borrow it back out later. So, yes, make sure you're doing the math with Buckeye to say, okay, is this going to kill my business if I start sucking this cash out every month, or is this a good strategy for me? That's going to pay off huge down the road? So call the guys at Buckeye.

So, Jeff, interesting. You know, you brought us up. We were talking before we went on the air. I mean, what does a car dealer have to give one of these investors that, that somebody else doesn't? What is it? I mean, what can we offer?

Well, well, first off, it's an entrepreneurial event, right? So these guys are, these guys are in the entrepreneurial space, you know, very clearly, particularly if it's a buy here, pay here dealer, there's a cash strain. And, and while a lot of angel investors are very fine writing the check and waiting 5 years, 10 years to see if it comes back, you know, a reasonable a, a, a more reasonable return on a recurrent basis is, is attractive to them. There are some folks who are retired that, you know, like to invest in stocks with dividends. So the, the, I think it starts with a conversation, but very clearly, you know, if a buy here, pay here dealer can deliver, you know, dividends or an interest payment, you know, from the get go, that'll get people's attention.

And I think that's no matter where we go to get money. Right now, we're going to, we're going to have to pay an interest payment every month, right, Jeff? And so if, if we say okay, we want, you know, a million dollars, and we're willing to pay you 12% interest monthly. I think that's a big deal. And in. The money's already there. Especially if you're like me and been in business for, you know, 38 years, 39 years, and you're trying to, trying to get to that next level. If you give me $1 million, I can pay you monthly interest, no problem. And probably within five years, once we level out, I can get you that million dollars back. So I think there's a lot of, a lot of ways to structure this that would save you money because you may not have to deal with all the bank audits and all these type things that could actually work out better for you and better for the investor. If you're, if you're paying 12, 13, 14%, it's better than paying 15%, plus all the fees that go into it. Yeah.

And also toss out, Lou. We do quarterly calls with our investors like, like a public company. We tried to structure this like a public company investment. And you get ideas. I mean, you know, I have a very involved, active investor base and it serves the business as well as, as, as I serve them.

Right.

So there's, there's a two way street.

That'S, that's super interesting, Jeff. I mean, how would. I mean, we're lucky enough to have a 20 group that we talk to every four months. But imagine having a group of accredited investors and entrepreneurs themselves that you could get on a quarterly call or a monthly call with that can help you when those struggles comes up. I, I mean, I could see the value in that. Could be worth thousands of dollars a month.

Yeah. It's funny how we have dealers who, you know, some of us look at our, our car dealerships as just kind of a. Where we just sell metal. Right. And if we're just selling metal. Yeah. You know, or we're kind of a, we're a buy here, pay here. Oh, we tote the note. Right. But when you, when you kind of flip it and you look at your dealership from a financial instrument, like, hey, I have a financial tool here where I make, you know, after bad debt, after losses, after everything I'm returning, you know, 30% return. Right. After everything, that is different. You know, you look at it like this is, this is the means to a great return. And we have some dealers, Luke, like, you remember our dealer that we visited in Denver? He looked at his dealership as a dot com. Right. I think his, his, his whole business was wholesalecars, dot com or something. Right. Even though he was just a dealership, but he looked at it like, look, the dot com that I own and the fact that my business sits in a dot com, I am, you know, and obviously you look at the big guys like Carvana, that was their play. Right. They're a car company, they sell cars. But they've wrapped it in a very sexy. We are an online retailer. Yeah. You're a tech company. Well, yeah. You got a fancy website and you deliver cars. Right. Like I can do that as well. So anyways, when you, when you reframe that, I do think as a dealer, you're looking at that and you're saying, okay, that's what I'm going to present to these guys when I go talk to investors. Regardless of who it is, here's all the advantages and the, and the great things that I do as a, as a dealer. Right. But I'm, I'm, I'm a financial investment vehicle that's going to give you X amount of return from day one. You know, I, I think, Dan, you could probably speak to this with some of the companies you look at angel investing. It's a check and it's a. I don't know if I'm ever going to see a dollar back in interest or probably nothing in dividends and interest forever. Maybe I'll get a return of capital at some point, but there's a good chance I never see that again. Right. So we definitely have a different proposition when we say, hey, we are returning dividends from day one on this money.

You bet. I mean, you know, if a buy here, pay here dealer, what did. Or any independent dealer did go to their local angel investment group, they would not be the standard angel investment. You know, they would have to think about what's interesting to them. We paid dividends from, you know, from day one to our members and continue to every quarter. In fact, you know, the operating company for Dealer Financial doesn't get paid unless our members get paid. So it's, and that was something that was interesting and, and I don't want to say comforting to them early on, but they knew that we were all in this together, you know, and I think thinking about what you're presenting to them, but they are again, used to writing checks that they likely will never see again. So the, the risk is not something they're scared of. They want to hear a good, rational, believable way of how they're going to make some dough doing it.

Yeah. Can you speak to the, the, the desirability right now of maybe alternative investments. Because a lot of the stuff that I hear is that the angel investing scene, the dot com, the venture scene is just so overblown and overinflated that a lot of these companies are just kind of sitting on the sideline with money in their hands because they just think the valuations are completely out of whack or the ideas have gotten harebrained or crazy. Is that what you're seeing from your spot?

Well, I would certainly say that in general and I'll talk about traditional angel investing now, not what happens with an independent dealer, but valuations on the east coast for startup companies are lower than on the west coast. We absolutely see West coast, west coast raises raise a lot more money. We sometimes get a pitch from a company on the west coast and the, you know, what they call the post money valuation is something we won't even consider. But, but I would say that, you know, so the valuations have changed in light of some of the recent market happenings, the Silicon Valley bank implosion, couple of those things. But you know, I go back to, these are, in the space we're talking about, these are individuals, you know, generally, you know, high net worth individuals. And so they're, they're playing with their own pocketbooks. Not, not a fund or not something like that. Okay, but, and I would say that it's very, it's very active right now. I mean, you know, Venture south is on track to have, I'm not sure if it'll be a record investment year, but we're going to make, you know, several million dollars worth of new investments this year.

Yeah, I, I would say that maybe, maybe you have that opportunity, you know, when you, when you say, hey, you know, interest rates are up, so people are getting kind of the risk free return at, you know, whatever it is, 4 or 5%, 5.5 or something. So that's the risk fee. So I have to build that in automatically. But maybe because these other valuations are so out of whack or so unstable, maybe I am an attractive investment for, you know, a home fund or an individual investor that says, hey, maybe I want some stability right now and I'm willing to go with Jeff's car lot, Jeff's buy here, pay here, because he's got a track record. He's going to give me a dividend return that's going to, you know, double or triple what I can get from my local, you know, cd. You know, maybe, maybe that's an opportunity for us. You know, we kind of got to look at where is where, where can, like you said, where can we be attractive to those guys with the money?

Right? And I would say, you know, very clearly, when the interest, when the, when the fed rate was zero, you know, a 12% return was incredibly attractive, you know, and, you know, today, you know, with the Fed rate, you know, being in the fours and fives, I mean, you may have to, you know, you may, you may have to bump that up to be attractive to them. But, you know, if you put together a variable rate type of arrangement, if they're lending you money, you know, that that's more than likely to come down and go up in the near term. But again, I think that comes it. Life's about conversation, right? And these guys aren't, aren't afraid to sell. They're selling cars every day. And in essence, what they're going to be selling next is if they choose to have a conversation, you know, they're going to be selling an idea.

Could I, could I pay dividends in vehicles? Would that be an attractive. Like, I could, yeah, I could pay you, you know, give you a G wagon annually as your dividend and then you could probably write that off as a, you know, over 6,000 pound vehicle. So you'd get the car, then you'd be able to write it. I see that as being like a really good. When you look at the IRR on that, that could be huge.

Hey, Jeff, it's all about cash today. And one of the best ways to get cash into your business is to take credit cards the right way and collect those accounts, get the money in your business. And as we've been saying for several months now, Blitzpay is the way to do it.

Yeah, it's so funny. It seems like every week, at least once I hear some employee say, man, it is really easy to get customers set up on Blitzpay or to get their cards reset up or man, that is so much smoother than our old process to just text them over a link and they just enter a pin and all of a sudden they can update their credit card info and get set up on autopay in like three clicks. So it's really crazy how that is just continually happening every week. I hear that from employees and customers. So they have definitely helped us streamline our process of how to get our cash back quicker.

Yeah, and we, you know, we just bought 80 accounts and they were integrated within 24 hours into Blitzpay. And these customers are being like, wow, this was a lot easier than the Dealership, we used to pay. So just in the last month we've noticed this great product, great services, and we recommend them. What's interesting is that, you know, a lot of, a lot of these angel investing funds, they, they're looking at people that don't have a track record. I think the one thing that many dealers out there have is a track record. And done well, buy here, pay here dealership or lease here, pay here dealership or a good retail dealership makes a lot of money. So I, I think that is one of the most attractive things. Now, are you going to end up having the big long term, you know, to the moon type of return? No, but I mean steady and steady return is, is huge because if you can continue to give 12 to 15 return year after year, you're beating the market by a lot.

That's right.

So I think that it's, this is something we can sell given the right people to listen to us, other than just a banker doesn't want to be in the subprime business anyway.

So that website is the angel investing angelcapitalassociation.org so that's the one Dan would recommend you go to. They have all their partners on there. It's a directory. You can look up people in your region and then you can go to that regional angel investing group and on there you can see that most of the time they have their portfolio posted, the people they've invested with, contact forms, how to get a phone call or get an introduction. And you can, you know, go down that road. One thing and Dan, maybe you can talk to us about this. Taking money from anyone, regardless of whether it's your grandma, your dad, your uncle, or Mr. Moneybags. In these angel groups, you've got to know what you're doing, right? So maybe talk to that when you know, when you have presentations or you've been pitched by someone, it's probably pretty easy to read through the bull crap or read between the lines and see someone who's done their homework and is learning and knows and someone who's just pitching. You smoke and mirrors.

Yeah. And so I would, I mean, you know, I would encourage anybody who's considering engaging with an angel investor is, I mean, you know, it's kind of like Shark Tank. You know, watch Shark Tank. Watch. Watch the pitches. You can probably go to a pitch, you know, a pitch meeting.

You might get beat up the first couple times is that you might get.

Beat up the first couple of times. Venture south actually hosts sessions where we train entrepreneurs on how to Give a pitch. So I mean, you know, you know, there are, it's, I'll call it, it's a whole new world. Right? You're, you know, but there are resources available to you to help you get ready, help you get prepared. You know, certainly if you make the investment or, or the, the get the loan through the, the angel group, they'll have documents that, you know, that are sophisticated and you're going to sign. But you know, there are plenty of resources to help prepare somebody to not, you know, look completely knuckleheaded.

And I think this is a, if you, if you plan to get an investment from an angel group or from your mom or your brother, your sister or a banker, I think this is something that any entrepreneur, any car dealer should learn how to do is to, to, to see your financials, learn how to pitch your financials and learn how to talk in front of people. Talking to a customer on your lot's one thing. Talking to a group of like minded individual individuals is, is different. Jeff and I have opportunities to speak in front of people a lot. So we've gotten comfortable doing it and I'm still not good at it. So going to these places and learning will take you a long way in the future. If you don't need the money now, might help you when you do need money to, to grow this business or another business.

And reaching out, I think to people like Dan and even, you know, our friends JP and Chad over at the fractional cfo.

Yeah.

Those guys will help you to a, make sure you've translated your lingo into banker lingo. Right. Because there are certain words like we talk about that, and I use the word angel and venture interchangeably, but they're not right. So you can't say that to someone who knows what they're talking about. You can't use the word dividend when you really mean capital. And you can't, you know what I'm saying? So go into those guys to translate what you think is financials into their language, but also to make sure that your numbers are right. Right. Because you're going to walk in there with some sort of a presentation or sheet or financials or PowerPoint presentation and if you haven't verified that your numbers are accurate and that your rate of return is correct and your internal rate of return is correct and your, you know, cash on cash return is correct. If these things are not right, that's a huge embarrassment. So yeah, you've got to do some homework.

That's right. 100%, Dan.

Anything else dealers should know before they step into a realm like this?

I mean, you know, no, I would just, you know, again, it's a different world just because most people don't, you know, most people aren't pitching or most people aren't trying to raise that money that way. But again, I go back to. These are groups of individuals who are interested in helping entrepreneurs be successful. And you know, so it'll be, I'll call it even if it's a short conversation, it should be a friendly conversation.

Yeah. And you never know, one of them could be a previous car dealer, a previous new car guy, a previous somebody that just has an affinity or a taste or an interest in this industry. And you might just strike up a great relationship. Right.

You may, and they may just like you. And if they do, you'll, you'll make a friend and, and you'll, you may get money, you may not, you may learn something from somebody. So always take these opportunities to, to better yourself and in network.

Yeah. And I would just say don't be afraid of rejection. I mean Venture south gets hundreds of inbound inquiries every year. We end up making, you know, eight to 12 investments every year. So you know, and we probably screen three times as many as we, we get invested. So I mean, you know, so that the, there's a lot of no's going on. But you know, that's what, that's when you got to go, okay, why did I get a no? You know, what can I do to, you know, be a little more creative and most people will give you feedback about. Yeah, you know, do you have like.

A big red button? You just smash a big red button and it just like X and they get yeah.

You know, that can be cool. We try and be a little more humane than that.

That's great. That's great.

Dan. Hey, we really appreciate your time. This has been very informative. Hopefully open some dealers eyes onto maybe some alternative sources. If they've tried the price, if they've tried banks, government money, you know, everything else under the sun. This, this is an interesting avenue that might work for somebody. So yeah, really, really appreciate your time.

Thank you for listening. Please leave us a review.

Thank you.

We'll catch you in the next episode.