Sources of Bootstrap Capital
How
can you start a great business with no money down? How do you get 'table
stakes' so you can have a place at the table too? The rule today is, if you
have cashflow, you will get financed, not the other way round.
There
really are no 'no money down startups'; there are only
those with little money down. In reality, every business requires some
investment. What we are talking about is starting a business with an amount of
money that is really de minimus with respect to the size of the opportunity.
Mark
McCormack started a world-leading sports management business (IMG,
International Management Group) with $500, his law degree and Arnold Palmer as
his first client. Mind you, it doesn't hurt if your first client is an Arnold
Palmer.
Probably
less than 1% of all startups ever get any funding from VCs; that means that 990
out of 1,000 new enterprises are forced to use bootstrapping as their only
means to success. Some observers feel that bootstrapped businesses, ones that
start with ‘nothing’, are actually or can be better businesses because they are
more focused on results as well as efficiency and economy of effort. They
certainly appear to be hardier if they manage to get by their first few years.
Maybe
it’s the same difference as between people who win the megabucks lottery as
their way of becoming rich and the self-made entrepreneur. Many million-dollar
lottery winners are worse off five years after their big win than before—by
that time, they have blown their dough on ‘can’t miss’ opportunities and they
have no J.O.B. to go back to. Whereas, someone who earned it himself or herself
knows how hard it is to do it and are less likely to throw it away.
Here are some sources of Bootstrap Capital. This is a partial list—which is all
it can be: there are as many varieties of bootstrap capital as there are ideas
out there in the minds of clever entrepreneurs.
1. Soft Capital: Mom, Dad and rich Uncle Buck; basically this is a friends
(Angel Investors) and family round of financing either formally or informally
organized.
2.
Home equity loans.
3.
Business plan competitions for cash (e.g., the Wes Nicol Competition or the Celtic House
Competition.
4.
Future customers, clients or launch clients (e.g., homebuyers in
5.
Future suppliers can sometimes be persuaded to extend long term credit to you
(e.g., Vendor financing of 30, 60, 90 days or more) or invest cash in your
business since they have a lot to gain if you become another (good) customer of
theirs. They will probably want a long-term supply agreement though.
6.
Strategic partners (like Ogden was for the Ottawa Senators—in return for a 30
year arena management deal plus F&B deal, they invested, loaned and
guaranteed significant capital to/for the nascent team.)
7.
Micro capital lending and grant programs; for example, the GOC’s SBL Program (Small
Business Loan or other government-sponsored sources of start-up capital
like the Ottawa
Community Loan Fund.)
8.
Supplier rights, product placement and licensing fees (for example, Molson's
purchased pouring rights for the Corel Centre and the Civic Centre after the
City of Ottawa was awarded a franchise by the NHL in December 1990 but before
they commenced play in October of 1992.
Another example was the selling of 15,000 PRNs (Priority Registration
Numbers) during the Bring Back the Senators campaign of 1990 for $25 each. Each
PRN holder the right to purchase a season ticket in their preferred location in
numerical order, if the team was awarded to the City of Ottawa in the NHL
expansion round of December 1990. Note, however, that there were no refunds if
they were not successful. For $25, one got the right to purchase a season
ticket and a bumper sticker and a cool looking certificate too.)
9.
Patent or other IP licensing fees and royalty payments (e.g., Noma Industries
purchase of the rights to LED Xmas light strings).
10.
Consulting services (a lot of entrepreneurs support their startups by providing
consulting services at the same time).
11.
Partners.
12.
Debentures.
13.
Financial leasing of fixed assets.
14.
Receivables factoring.
15.
Publisher’s advance on a book or script.
16.
Sponsors (see for example the signing up of 500 Corporate Sponsors at $500 each
and 31 Original Corporate Sponsors at $15,000 each for the Ottawa Senators before the team was awarded.)
17. Trading activity: buying low and selling high, taking advantage of
arbitrage opportunities (like finding out what percentage of dot-CA holders do not have their dot-COM equivalents and
the dot-COM equivalents are available
and then selling them the dot-COM extensions), building-businesses-to-sell,
buying and selling and buying and selling and trading up, ... Check out this site: http://oneredpaperclip.blogspot.com/.
This person traded a paper clip for a pen and traded the pen for a … and then
for a generator and then for a snowmobile and then for a truck… His idea is
eventually to get a home for himself.
18.
Credit cards (oft used strategy but dangerous because of high interest costs
and what can happen to you and your
credit rating if you fail to make payments).
19.
Scientific R&D Tax Credits (e.g., SR&ED from the GOC).
20.
Extracting upfront value from your lease for office space-- an
example of a services company that got $800,000 upfront.
21.
Reverse or Negative Pledging of Assets (e.g., O & Y not pledging the value of an office tower to anyone and extracting
loans from banks based on the value of their real estate and based on their not
agreeing to pledge it to anyone… Another dangerous strategy because you can end
up over-leveraged.)
22.
Co-guarantor: borrowing someone else's stronger credit rating (e.g., Corel
Centre Suite Leases pledged for construction financing or Mom or Dad co-signing
a loan...)
23.
Accretive buying: buying another company with the target company's balance
sheet as collateral where you end up with more cash than before. (E.g., Disney
buys the Mighty Ducks of Anaheim for $50m: $25m goes to the NHL and $5m per
annum for 5 years goes to the LA Kings. Then could borrow $35m against the
asset and, after receiving a $20m leasing inducement to enter into a 20 year
lease for Arrowhead Pond, they could have more cash on hand after than before).
24.
Accretive Selling: sell products or services with financing in place where you
end up with more cash after the sale than before (e.g.,
25. Employee ESOPs (Employee Stock Ownership Plans).
26. Pre-sold services. (For example, here is an example from Craig deSchneider,
a student in EC 491 (2003): "In looking for some start-up capital for our
automotive related business, myself and my partner offered potential investors
future discounts through our business. In selling automotive parts, we had
accounts set up with distributors, accounts which could only be set up through
having a business license, tax numbers, and some negotiating, so the average
person off the street does not have access to these discounts. We set no
specific investment amounts, simply the most the person could afford. We kept
these contributed amounts a secret among the different investors as we offered
them all the same return. Therefore, in return for a fair investment, we
extended to our investors cost prices for all of their future purchases through
our company. The only limit we set on this agreement was that the investors'
annual purchases could not exceed our company's sales revenue from our average
monthly sales figure (not including cost purchases made from investors). The
overall idea was to provide our investors a very fair return on their
investment, and at the same time, these investors would promote our company.
Why you may ask, well the greater our monthly sales were, the greater the
amount of goods they could buy for themselves at a cost price." Ed.:
Basically, Craig and his partner turned their investors into customers and
their customers into investors. Nice going.)
27. Collectibles sales and auctions. Here is a new one. Michael Moshier put the
original version of his SoloTrek flyer up for auction on eBay, hoping a museum
would pick it up. It didn't even fly but by January 12th, 2003, the bidding on
eBay had already reached $6.5 million USD: money he planed to use to fund his
Trek Aerospace startup. Cool.
28.
Extended family savings and investment fund—an old style of acquiring start up
capital is to have the extended family contribute to a pool of funds to help
family members acquire or build businesses.
29.
Vendor take back mortgages—typically used in real estate transactions, the Vendor
provides some or most of the financing for the sale by way of a (first or even
second) mortgage back to the Purchaser.
30.
Swear equity.
31.
Investor syndicate or investment club.
32.
Retainers (typical for consulting services or legal and accounting services)
and deposits on sales.
33.
Collecting early and paying late (boosts cashflow in the short term).
34.
Progress payments on contracts.
35.
Advance ticket sales.
36.
Becoming a reseller (this is big in the Internet age where you can set yourself
up for practically nothing as an agent to resell services such as domain names
or web hosting). There are a huge number of things that can be resold on the
Internet—many sites generate large revenues by reselling ads powered by Google
or other providers. Check out this silly site which generates up to 8,000 ‘facts’
on Chuck Norris and got 18 million hits in December 2005. Really the purpose of
the site is to generate clicks (by asking people to rate the ‘facts’) which
generates a new ad and maximizes revenues for the site’s owner: http://www.4q.cc/chuck/. Or have a look at
this site: http://www.milliondollarhomepage.com/.
Here the young person (age 21, based in the
37.
Importing.
38.
Distributing.
39. Exporting.
40. Exploiting signage rights.
41. No money down, land speculation.
42.
Using OPM (other people’s money).
43.
Asset flipping.
44.
Buying under power of sale (again, real estate related).
45.
Buying distressed companies and turning them around.
46.
Day trading.
47.
Asset speculation.
48.
Franchising.
49.
Branchising.
50.
Training and uniform fees (e.g., GradeAStudent.com required each of their
contractors to be “Grade A” certified before they could provide services to
clients and customers and get access to the billing system and the appointments
calendar (a system called GASnet). To be certified the contractors had to pay
in advance to take the course…)
51.
Pre-sales in real estate allows you not only to ask for cash deposits but also
may give you access to Bank or private lender financing. For example, if you
pre-sell 50% of your condo or townhouse project, you can usually qualify for
construction lending where, in essence, your Bank or
private lender is advancing you money to build the condos or townhouses on the
basis of the strength of the credit ratings of your customers (buyers) and not
your credit rating per se.
52.
The same type of thing can help you a lot if you are a manufacturing
business—if you have a guaranteed supply contract with a credible client or
customer, you can often finance against that.
54.
I recently learned about a new method of bootstrap capital from my 13 year old
daughter, Jessica. One of her best friends lives in a single parent family. Her
friend’s parent is unable to work and lives on a modest income. However, every
year they are able to take a family vacation to a nice destination in a rented
van. How do they afford to do that? Bootstrap capital. They take with them five
other kids—each kid pays $250 for a week’s holiday—that’s a total of $1,250,
enough for a camping holiday and some neat adventures too. It pays for the gas,
the van rental, food and a few outings. The kids’ parents contribute cash and
their children, Jessica’s friend and her parent go for ‘free’ but they provide
the opportunity. Everyone wins…
Copyright. Dr. Bruce M. Firestone,
Bootstrap Marketing
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