Secrets to Funding a New Business Without Venture Capital
There is a myth that if you are going to start a company, you need to get outside funding. It is completely not true and it is harmful to a would be entrepreneur to think that way. There are many ways to get the funds necessary to start and operate a business that don’t involve giving ownership of any of your company to outsiders. Of course it depends on what kind of business you are looking to start, but if you want to start your own business and don’t want to have to get investors it you can get it done. There are three ways to make it possible: Keep expenses down, bring in significant revenue quickly, and use other people’s money.
Keep Expenses Down
The biggest expense of any business is payroll. Don’t hire people until you absolutely have to! In fact, don’t put yourself on payroll until necessary. Business owners should only get paid well after the business is profitable and self-sustaining. The best way to start your business is on the side of your existing job. I am not saying that you should take time away from your current employer, but there is a lot of time available during nights, weekends, and vacations to get the business going in the right direction.
If you are going to have a business partner or two, then they should be able to stay off the payroll as well. Because it is necessary to have sales, technical, and financial skills in the company, and a group of three people is more stable than a partnership, I recommend having two business partners. Get them to work the business on the side as well. When it makes sense, have one of the partners start working full time, then add the others when you can afford to.
Keep expenses low in other ways by not getting an office, sharing living quarters, and otherwise being frugal. The less cash you burn every month, the longer period of time you will have to get the company going. It can be tempting to rationalize that you need an office, or nice furniture, or have to buy new computers, but don’t. Instead scrimp, save, and meanwhile work your butt off to get some revenue in the door and service your customers above and beyond their expectations. It will pay off down the line.
Even though it is tempting to offer equity to people that you hire, I advise against it in just about all cases. Instead, try to find the underlying reason they are asking for it. Some people think it will let them have a say in how the company is run, and you can explain to them that they have a much bigger impact by doing their job well and taking on more responsibility. Others think they will get a big payout if the company gets sold, and you can explain to them that if they are looking for a big payout, you can structure a bonus or commission plan that would get them a big payout sooner. The only time you may want to consider offering equity to an employee is if they are a proven rainmaker and they can bring your company a lot of business quickly, and you can’t afford to hire them in any other way.
Bring in Revenue Quickly
A functioning business has to have cash, and the only self-sustaining way to get it is to have customers buy from you. Every owner has to be a salesperson, and the owners need to be annoyingly persistent in turning up revenue from everyone they meet. But don’t alienate your friends by trying to sell to them, since you will either run out of friends or prospects quickly. Instead figure out the best market that needs your product, and go after it with a vengeance.
Startup companies are very hard to compete against when they are in initial growth mode. Their expenses are low, and they are looking to gain customers any way possible, so in many cases they are able to offer better service at a lower price than established businesses. While you are a startup company, take advantage of this by explaining to your customers they will get a good deal because you are looking for reference customers, and you do not have the same management and infrastructure overhead your competitors do. But charge a fair price and as much as you can get away with so you can be as profitable as possible, because you need those profits to grow.
Use Other People’s Money
Besides revenue from sales, there are two ways to get money — equity and debt. If at all possible, stay away from equity funding, because it is bad for you. Even though there are many tales of startup companies making the rounds of friends and family, angel investors, and venture capitalists, I tell you from experience to stay away from all of them if you can.
Unless you are already running a profitable business and you can dictate the investment terms, each one of those sources of funding are going to want an unreasonably large ownership percentage of your business. The best way to get an initial quantity of cash to put in the bank is to have the owners who are working in the business pony up a cash stake, and do not take money from anyone who is not going to put their fortune at risk and be part of the crew working 20 hours days to make the company a success.
Debt can be used intelligently to help the business grow quickly. First off, understand that as a new business, you are going to get zero credit without signing a personal guarantee. Second, since you have no business history, your business will get maybe a few thousand dollars in credit. So the only way you are going to be able to get your hands on enough borrowing capacity to be useful is with your personal credit. A proven way that works is to take out as many credit cards as possible while you still have a job at your employer — you will still have that credit available when you start working full time for your startup.
But don’t use debt to fund continuing operations like payroll, rent, or other things you can’t afford to fund out of cash from operations. Debt should be used to buy products that you resell to customers. Don’t even buy inventory with debt! And only buy products after you have a purchase order from a customers. Furthermore, any terms you present to customers should have them paying for at least half the equipment and services up front, and for all of the product once it is delivered to them at their location. In this way the amount of debt taken on is equal to or less than accounts receivable, which means the company essentially remains debt free.
If your industry supports it, buy your products from a stocking distributor. Even though there may be multiple distributors, develop a good relationship with one that will help you out. Distributors can offer much more than products and a line of credit — they can offer advice on what markets to go after, what products are up and comers, and what areas to stay away from. Vendors and distributors want to see your company succeed, and if they can help you get bigger faster, it is a good thing for them. If you get a big order, and don’t know how to swing the credit needed to purchase product, distributors have many creative ways to help you get that done because they want to see you succeed.
Establish a relationship with a local bank branch that is small business friendly. Make a point of finding out who the small business account specialist is and getting to know them. Share your plans with them, and start a small line of credit with them, even if it has to be secured by your deposits. Over time that relationship will grow and blossom, and if you need something, you will already have built a base of trust and a track record of reliability, so they will be willing to listen to you and maybe even help you.
Don’t Run Out of Cash and Don’t Give Out Equity!
Just because you own a business, it does not make you special. Many people assume business owners have money, but don’t realize that in the first few years of a business all profits are plowed right back into the business to help it to grow to a survivable level. Make sure you are growing the top line revenue while minimizing expenses so you can keep that reinvestment going. Always add to your debt capacity whenever you can, and remember that you distributors, vendors, and banks want you to succeed, so they will help you out if you share your plans with them and get them to buy into your vision. And don’t give out your hard earned equity to anyone!
Author: Rolf Versluis
Published at Priority Queue
