Bootstrap Marketing and Financing

The A to Z "Expert System" List of Questions for Your Bootstrap Start-up

You need to test your business model implementation at every step by asking some simple questions like:

a) Is this a nice to have new hire or new purchase or do we really need it now?
b) If we really need to do it now, can we afford it?
c) Can we afford not to do it?
d) How much cash do we have in the bank today, how much did we have last month and how much are we going to have in a month?
e) What's our 'burn' rate and if we didn't make a sale and close it and collect our receivable from the sale, how long will we last? (Tech firms try to keep one year's cash on hand, a lofty and usually unatainable goal for bootstrap businesses.)
f) Can we turn a cost centre into a profit centre?
g) Is there another organization that can do a task better than you can do it in-house?
h) Are we really ready to cross the 'chasm' now or should we wait to spend our marketing dollars until we're sure we're not just blowing our money? (Will a ten cent web site that we program and update ourselves and photocopied brochures do for now; like, do we really need that 30 second superbowl ad right now for $2m as so many dot bombs recently concluded that they did need it?)
i) Is there someone else who is going to the trade show or advertising and marketing in our field that we can piggy back on? (Co-op advertising, for example.)
j) Can we collect early and pay late? (Always ask your suppliers first.)
k) Who benefits from our activities and what can we ask them to do to give us a hand up? (We want a fishing pole not a fish from our stakeholders- suppliers, shareholders, clients and customers.)
m) Do we really need to finance our equipment with equity or can we do some fixed asset financing or leasing?
n) Can we factor our receivables for cash?
o) How are our margins- are we really sure that if we work harder, if we make more sales, we'll make more money? (How many business plans are there out there that even if they execute them perfectly, they are still losing money on a monthly cashflow basis (EBITDA). No matter how much capital you start with, if you lose money every month, you'll eventually run out!)
p) Are we doing business with people who do business with us? (The Sens always check that if someone is fixing their plumbing, they have a season ticket package and a sponsorship package too.)
q) Is there anyone on staff who we could do just as well or nearly as well without them? ("We could've finished last without you," former Atlanta Braves Manager to their star players when they asked for a raise when the Braves were B.T.T. (before Ted Turner).)
s) Is there something we're missing out on that if we did it, our bottom line would increase?
t) Is there something we're doing that if we stopped doing it, our bottom line would increase?
u) Have we remembered that sometimes the best place to find more sales is from our existing customers and their friends too? (Your receivables list and your former customer lists are hugely important assets of your bootstrap startup- the best place to find new customers is your old customers.)
v) Have we asked our suppliers, clients and customers for their endorsement of our products and services? (Everyone reads the book covers before they buy: "It was a page turner. Couldn't put it down," Acme book critic.)
w) Have we asked people in related fields to cross-market our services or products. (Service clubs and hockey tickets, for example. Toy companies and burger fry chains for another. Home builders and insurance brokers.)
x) Can we negative pledge some assets to acquire greater levels of financing? (Pledging not to pledge certain assets- to leave them unencumbered to obtain non recourse financing.)
y) Have we remembered that everyone in our company is in sales and that sales is all about providing accurate, timely information to people who need our service or product? (You need to provide staff training and you should remember that your accounting staff is a manistay of your eraly days sales effort! "How's that," you say? Your payables list is one of your most important assets. Yes, assets. If you owe people money, they're your partners. Is there anything you can sell to them; are there any products or services that you make or provide that they may want to buy from you? This is reverse selling or tied selling and it is a powerful force in bootstrap startups.)
z) Have we made maximum use of the web and technology? (The web and technology is all about automation. That's the easy part. It's all about reversing out the work to your customers and clients and your suppliers too. Have we made it possible for our clients to fill in all the 'forms', book appointments, follow the progress of their new acquisition (whatever it is), etc. on the web by doing all the data entry themselves? Can our supliers find out when we need lumber for those new homes we're building by logging onto a passowrd protected web space themselves?)

Bootstrap your business- use both guerrilla marketing and bootstrap financing. Start small and grow it. The slower you go sometimes, the faster you go. Business Week (February 19, 2001) ran a headline in their e.biz report: "Shakeout! ... How will their (VCs) woes affect startups?" Well, some of the best businesses were started with bootstrap financing (Mark McCormack started IMG, an international sports management group with $500 and one client who happened to be Arnold Palmer). Bootstrap startups won't be affected at all by the VC shakeout of 2001. Cashflow is King. The best startups are capital starved. They learn how to use a dollar wisely. "Simply put, an entrepreneur is someone who can (creatively) do with a dollar, what any fool can do with two." They build the old fashioned way- with custoemr service and good products. You need financing? Everyone suggests start-up founders go to the 'bank', VCs, rich 'Uncle Buck', Mom, Dad, your friends. How about 'none of the above'? None of these folks have any real stake in your business plan. So, who are the true stakeholders? They are your suppliers, your (future) customers- people you buy from and sell to. They will help you get started if they see that your b. plan will address one of their needs. Afterall, what is your new business worth if you have an advance order or contract with a credible customer or client? A lot more than it is without it. It builds your credibility; it builds your potential cashflow; it reduces uncertainty; it allows you to finance future revenues (receivables). Presell everything. Now you need a ton of money to build your product or service; get at least half of it on supplier credit. Use guerrilla marketing to make your limited funds go further. Again, the slower you go, the faster you go. If you have a secure base to venture out from, you are more likely to succeed. For every 'overnight' success there are thousands of examples of people who built great companies over very long periods of time measured in decades. Sam Walton comes to mind. Remember you are not the market. You may like your idea but maybe you are the only person who does. The reverse also applies. The market is always right, even when it's wrong. Understanding the market and developing a world view or a 'mental map of the way the world works' is incredibly valuable to the entrepreneur. That way you can perform what Albert Einstein called 'thought experiments' to assess whether your great new idea is going to work before you do it. The human mind is the fastest tool and is a far more accurate barometer of success than any number of market surveys if you have developed an accurate mental map of the way the world works.

Nortel after the recent stock melt down ran a full page text ad in the Financial Post on Friday March 9, 2001 explaining to (upset) Nortel shareholders how the company intended to deal with certain matters. It was a well written piece signed by John A. Roth, President and CEO. There was only one thing wrong with the all text ad- it didn't run a picture of John. People relate to faces. Marketing without people, and specifically without faces, misses the mark.

Avoid reverse marketing and PR. There are a lot of things that you initiate that make the situation worse.

Most likely, you will rely on the following for bootstrap financing of your new business: a) angel investors, b) family and employees, c) supplier or vendor financing (30, 60, 90 day terms), d) customer pre-sales, e) factoring, f) fixed asset financing (leasing), g) personal debt, h) credit cards, i) trading activity (trading up the food chain is a typical entrepeneurial strategy- start a business so that you have some 'chips at the poker table' then sell it before the peak of the market is reached and start the (bigger) one you really wanted in the first place- trade up to the Sens and the NHL, for example; always sell 'too soon' and leave something on the table for the purchaser- obviously, the purchaser needs some value otherwise why would they buy it in the first place?), j) strategic partners, k) employees, l) accretive selling (FKZ consulting assignment, for example), m) accretive selling with strategic partner (Ogden, the Sens and the OSHCLP), n) accretive buying (a homebuilder start-up, for example, or the purchase of a division of an (often large) company which division doesn't fit their model anymore. You use the assets of the targeted division to secure the debt you need to buy it in a classic LBO or MBO. Even after paying the debt, you are left with positive earnings, you hope. Accretive buying means that you buy when you are weakest and sell when you are strongest in a counter intuitive way. This is different from 'buy low, sell high', which is counter cyclical in a macro economic sense.) Investors are likely to come from a group that has an interest in your success- strategic partners, suppliers, family, employees, future customers. Even persons or organizations that are geographically tied make ideal targets for certain types of investments. Find out who benefits and sell them on your start-up. He/she who benefits, pays. He/she who pays, benefits.

(Trading activity includes such strategies as buying an option on a piece of land and flipping it (real esate speculators are professionals at it), buying stocks on margin, selling short, buying airplane options and selling them, LBOs, MBOs, arbitrage, and so forth. All are risky but can yield large sums in a short period of time, enough to give you a 'grub stake'. Even large companies do this- flipping electricity contracts in the California power crunch of 2000/01 was immensely profitable for aluminum producers. It paid them to shut down operations- they could make more money by speculating in the power market than producing metal. They bought power on long term contracts at $22 per KWH and sold it in the spot market for $430!)

Rememeber that equity is more expensive than debt. But equity is more patient than debt. Equity investors including angels and VCs are looking for returns in the 30 to 40% p.a. range. You, as the founder and key entrepreneur, should expect 100% p.a. returns on the total of a combination of your cash and sweat equity contributions. Bank debt will come in at prime plus one to prime plus three depending on your credit worthiness (currently in the range of 7 to 9% p.a., March 2001). Clearly, use of low cost debt increases your leverage and improves the IRR for equity (it also increases your risks). Shareholders are also frequently asked to provide the company with (relatively) low interest rate loans as well as make direct equity investments in company securities. Debentures are a common form of financing for start-ups and they are a combination of debt and equity. Typically, they have a coupon rate in the range of 8 to12% with an equity conversion privilege that ups the return to the 20 to 30% range.

It is important for most start-ups, even if they are not bootstrapped, to have at least one pre-committed client or customer before much else is done. This is now a requirement for most VC funding.

Cashflow is King. "To me, in order to run a business, you have to be profitable from day one. I never learned this business of, 'Hey, here' $10 million. Go and hire some people and lose money for three years'," Omur Sezerman, Oz Optics. Build a real business with cashflow, profits, customers, clients before going public with discipline and focus. Stick to the business model if its working. If it isn't, change it or dump it. If you have cashflow, you will get finaincing. If you are profitable from Day One, you'll never get bullied by the Golden Rlue Practitioners. Your startup cashflow plan should be: a) as accurate as you can make it, b) conservative (under promise and over deliver), c) once you've set it down, work very hard to deliver. Meet your cashflow goals every month- don't expect to do it all in the last month of each quarter or the last quarter of each fiscal year. If you have cashflow, you will attract capital, not the other way around. If you're looking for financing, demonstrating that your business model makes sense even on a micro scale helps a lot. Do you have any advance orders, made any sales? If you have cashflow, you'll live to fight another day. Most stratups take twice as long and three times as much money before they get to the point of take-off. Their revenue versus time curve looks a lot like a biological growth curve- negligble at first, slow through the early years, then, at some point, they take-off, practically a geometric progression for awhile. Sales eventually plateau; this should be a period of consolodation- secure your 'base camp' for the next assault on the 'peak'. (A peak that you will never reach by the way.) If you have a solid base, even if your next initiative fails, you'll always have somewhere to retreat to. Every startup should have a sales chart on the wall, on the door, on every desktop and on everybody's computer which uses simple tools to prompt folks to be thinking sales, cashflow, clients and customers. Everywhere people look there should be a large graph of 'N', where N = the total number of clients, customers, deals, dollars, lots, downloads, whatever simply measures the business at its most fundamental- where the rubber meets the road- its DNA. Focus on 'N'; make 'N' grow every day.

N = ?, today.

Everyone in your organization is in sales. Nothing is worse than calling a receptionist and asking him or her to direct your call to the right person or department and they answer: "Huh?" Your front line staff are just that- they are the point of first contact for many future and existing clients. Your receptionist is really your CIO (Chief Information Officer) even if you don't think so. Staff training is essential.

Your accounting and finance staff are selling too. Where do you find new customers? Firstly, from your existing client list (your accounts receivable list). Secondly, from your accounts payable. Your AP can be an even more valuable tool- what can you sell to people who you buy from. Many sports teams check to see if their plumbers and electricians and dozens of other suppliers are season ticket holders; if not, they soon will be. This is reverse selling. Don't treat your accounting and finance staff as glorified book-keepers; they are a crucial source of leads and cashflow (collect early and pay late).

Your finance people are selling to a) the banks, b) other institutional lenders, c) shareholders, d) investors, e) debenture holders, f) VCs and more. They renegotiate terms for debt and debentures and they can lower your costs and create additional cashflow that way.

Keep your overheads down. No matter how successful you are as an entrepreneur (and that usually means that you spend most of your time on the revenue or technical sides of your business), your costs always rise to exceed your revenues if you do not exercise restraint and have proper controls in place. (You will find the same thing is true on the personal income side even if you are the CEO of a Fortune 100 company, for example.) Start-ups that invest in luxuries like triple A office space, leather couches, great company cars, ... will not be around long.

Never confuse marketing and sales. Marketers get to wear nice suits and make $35k per year. Top salespersons make six figures and never get laid off. Marketing is part of the tail of an organization; sales are part of its teeth. Market studies are nice to have but can never replace real world experience. A NHL marketing study once indicated that it was possible to sell 100,000 season tickets in that marketplace when even the very elite teams struggle to sell 15,000.

Networking

Bootstrap Sources of Capital

No Money Down Startups

More Examples of Guerrilla Marketing

Twenty Five Steps to Entrepreneurial Success

Test Your Entrepreneurialist Culture Quotient

Entrepreneurialist Culture Home Page