T 
 
 REMOTE storage 
 
 The Initial Financing of an Enterprise 
 
 By E. R. CHAPMAN 
 
 President, Hudson Trust Co., New York 
 THE PLACE OF THE PROMOTER 
 
 That there is a right way and a wrong way of doing things would 
 seem to be so much of an aphorism that it would be unnecessary to 
 dwell upon it before such an intelligent and experienced body of 
 business and professional men as compose this group; yet there are 
 many men of high intelligence who evidently think that the starting 
 of an enterprise is an exception to this rule. 
 
 When a man or a group of men decide to start a company they 
 realize that certain steps have to be taken, that they should be taken 
 with due care, that they should be taken in proper order, and that 
 these proceedings take time and that time is money. 
 
 Now, to save as much of this time, or money, as possible is proper, 
 but how to save it is the question that always arises. Shall they do 
 the work themselves, or shall a promoter, a man who makes a busi- 
 ness of doing such work, be secured? The name promoter has fallen 
 into disrepute because of the bad work done by men who have been 
 failures at everything else in their lives and have taken up the work 
 of starting enterprises as a profession. Most of these have had a 
 greater anxiety to realize an immediate profit for themselves than to 
 j assure the capitalists whom they were endeavoring to interest in their 
 projects a safe and remunerative investment. But because there have 
 been bad promoters does not necessarily mean that there have not 
 /' been and are not good ones. There are good and bad workmen in 
 all lines of business, and this is not an exception. 
 
 So it will come down to this: It will cost a certain amount of 
 money to get started anyway. It will cost less money in the long run 
 to start right than to start wrong. If one is equipped with the neces- 
 sary knowledge to start right himself, it would be a waste of money 
 to hire some one to do the work of starting for him, but if not, then 
 
 Read at the first meeting of the Efficiency Society, held in New York City, March 18 
 and 19, 1912. 
 
 17— I 
 
I 
 
 by all means a man who has a good reputation for honesty and for 
 success in that kind of work should be secured. 
 
 There have been about as many industrial failures that can be 
 traced to incapable promoters who brought the enterprises into the 
 world as there have been human failures in life who can trace their 
 weaknesses back to the ignorance of their parents, and the attendants 
 whom they secured to assist them, at their birth. 
 
 THE IMPORTANT CONSIDERATIONS IN A PROMOTION 
 
 In promoting a corporation which is to take over patents, rights, 
 or properties, the following points should receive careful consideration 
 and the most rigid investigation. 
 
 First, the validity of the patents, or the clear and unincumbered 
 title of the rights or properties must be secured as nearly as the 
 closest investigation can determine them, for the entire structure of 
 the enterprise must be built upon this validity, or these rights. 
 
 Second, the probability and strength of competition must be fully 
 investigated. 
 
 Third, the probability of the proposed corporation being able to 
 command, at a reasonable cost, the talent necessary to make the enter- 
 prise successful must be assured. 
 
 Fourth, the amount of capital required to insure the success of 
 the enterprise should be amply sufficient to cover all expenses, in- 
 cluding experimentation if necessary; and to provide whatever facil- 
 ities are necessary for successful operation, so that it will be unneces- 
 sary to apply a second time to the subscribers of the stock of the 
 corporation. The capital should also be so limited in amount that 
 interest and dividends will not be so heavy a burden as to lead to 
 failure, as it is manifest that both under-capitalization and over-capi- 
 talization must be avoided if the enterprise is to be successful. 
 
 Fifth, if the enterprise is of a character that is likely to appeal to 
 a large number of small investors, the capital stock of the corporation 
 might be fixed at a small valuation, but if investors of large resources 
 are to be solicited, the shares of the stock can be more conveniently 
 fixed at not less than one hundred dollars per share. Experience has 
 demonstrated that in the majority of industrial and railway enterprises 
 the most convenient value of shares is this amount. 
 
 Sixth, as to the amount that should be expended for promotion, 
 it would seem that the corporation might properly pay in cash the 
 actual disbursements of the promotor, but that his compensation 
 
 17 — 2 
 
should in every case be in the shares of the corporation he is pro- 
 moting. If he is not satisfied to accept such shares as his compen- 
 sation, it would indicate a lack of confidence in the success of the 
 enterprise, and his appeal for capital might be looked upon with some 
 misgiving. 
 
 Seventh, in capitalizing a manufacturing business a question to 
 be carefully considered is whether at the initial point of the enterprise 
 the manufacturing plant should be constructed, or the proposed prod- 
 uct contracted among existing manufacturers having the necessary 
 facilities. To determine this question the most careful estimates must 
 be made as to the cost of the proposed plant and the creation of an 
 establishment, fully equipped, to carry on the manufacturing. The 
 closest investigation must also be made of the power and labor re- 
 quired for the production of the article to be manufactured, including 
 also the interest on the investment in the plant and the regular allow- 
 ance for depreciation. With the estimate thus arrived at — and it 
 should be sufficiently large to cover all possible contingencies — owners 
 of other plants capable of producing the articles can then be canvassed 
 with a view of ascertaining the lowest price at which the article can 
 be delivered, with freight added, to the point of distribution. It will 
 then be possible to determine whether, under the circumstances, it is 
 advisable to construct the plant or contract for the article the corpo- 
 ration is to sell. 
 
 Eighth, if it is possible to secure in advance the services of a gen- 
 eral manager who has a record of success in similar undertakings, it 
 is often of great assistance in securing capital required for the new 
 enterprise. 
 
 Ninth, the advantages of a corporation over a partnership in a 
 manufacturing or commercial business, so far as the invester is con- 
 cerned, are so manifest as scarcely to require statement. For any modern 
 business requiring a large aggregation of capital, a large number of 
 people can be found to invest a small amount of capital when it would 
 be found impossible to obtain the necessary amount from a few indi- 
 viduals who would be willing to become partners, particularly in view 
 of the nominal liability of the stockholders in case the corporation is 
 unsuccessful and becomes involved in debt. It is safe to say that 
 the business of the United States would never have been expanded 
 as it has in the last fifty years if it had not been for the laws per- 
 mitting corporations. 
 
 Tenth, in promoting enterprises, the question of the personnel of 
 the capitalists to be approached with the view to securing an invest- 
 
 17—3 
 
ment must, of course, be considered, but, as a rule, it has been found 
 that capital can be obtained for a new enterprise more readily from 
 men with experience in similar lines of business than from other 
 sources. For instance, it is always found that an enterprise proposing 
 to manufacture cotton goods can be more easily financed among men 
 who have had experience in manufacturing cotton goods than else- 
 where. The same may be said of the manufacturing of iron or any 
 other of the numerous branches of manufacture which complicated 
 conditions of life have made necessary. 
 
 EFFICIENCY IN FINANCING 
 
 It is evident that within the scope of this brief paper it is impos- 
 sible to do more than touch upon these points. Each one involves so 
 many considerations that it is in itself a complex problem. Failure to 
 give any one of them its due attention may result in the failure of 
 the whole enterprise. 
 
 The application of the universal efficiency principles to the initial 
 financing is less apparent, but no less certain, than to other depart- 
 ments of the business. Here, as elsewhere, expert guidance is always 
 useful and sometimes essential. Here, as elsewhere, waste can be 
 avoided and greater results secured by proper organization and direc- 
 tion of energy. Here, more than in most other places, scientific knowl- 
 edge and planning must be used, for a mistake at the outset is not 
 easily to be repaired. The financial history of our own Nation teems 
 with instances of the disastrous cost of bad management in raising 
 and expending funds. 
 
 Finance is the basis of all commerce. Inefficient methods of 
 finance are the basis of many inefficiences in commercial and indus- 
 trial enterprise, if for no other reason than the example they give to 
 the other operations. It has sometimes happened that the natural 
 prosperity and increasing wealth of the country has saved an enter- 
 prise that was begun by a wasteful and rash promotion. But this 
 condition will not always obtain. The future will see few successful 
 enterprises that begin with vague promises and a fund of optimism. 
 It will see more that begin with scientific financing in accordance with 
 the principles of efficiency. 
 
 17—4