Bootstrapping Should be Part of Self-financing Formula

While I was off the grid over the Easter weekend, my Sunday column about self-financing and bootstrapping ran at the Tennessean:

The thought of having to put your life savings, your home, or your retirement accounts at risk to launch a new business can send a chill down the spine of even the most committed entrepreneur.

And for the accidental entrepreneurs who have to start a business to make it through the current recession, it can create an almost paralyzing fear.

But self-funding is a part of the financing equation for almost every new business.

The base of self-funding comes from the entrepreneur’s personal savings. When my partners and I started a health-care business in the 1980s, we had to rely on our savings to help us start the venture.

As the owners, we only received paychecks about half the time during the first two years. By having savings in place, we were able to maintain the lifestyle we had experienced before we launched the new venture.

Entrepreneurs come in all sorts of packages. Some new businesses need to be developed while the owner continues to work at another job.

If your business can be worked on during any time of day, find a day job that can pay the bills. Or, be prepared to take on an evening job, such as waiting tables or bartending, to help create a bridge until the new business brings in a steady income.

Of course, at some point the business will demand too much time to allow you to maintain two jobs. Hopefully, this will occur at a time when the new venture is able to pay you a regular salary.

Learn to pinch pennies

Banks generally do not lend money directly to startup businesses. However, you may be able to get a personal loan that you can use for the business. If you have enough equity in your home, you may be able to secure a second mortgage.

Another option is to put up property such as stocks that can serve as collateral to back a personal loan. Understand that such loans put your personal property at risk, if you default on the loan.

The most effective means you have to minimize the amount of cash you will need to put into a business is to find ways to bootstrap or shave dollars off your startup costs.

Bootstrapping can help reduce the time it takes to reach break-even in the business by reducing the overhead expenses you have to pay every month. That is why so many entrepreneurs start their businesses out of their kitchens, their garages or their basements.

Bootstrapping can also reduce operating costs, giving the owners more profit from each dollar of sales. The sooner you reach break-even and cover your basic expenses, the sooner you will have enough cash flow to pay yourself a salary and stop putting more of your own money into the business.

Theme for the Day — Bootstrapping

Yesterday ended up being a “bootstrapping” kind of day.

In my class during the day, Clint Smith, co-founder of Emma, talked to my students about his company and its growth.  He told my students that bootstrapping is best described as “you don’t get it until you have to have it.”  He went on to say that with that comes a trade-off.  “It takes longer to get out ahead of your growth.”  So patience is a virtue that bootstrappers must have as they build their businesses.  Good advice!

Then last evening I met with a new group of local entrepreneurs, called Better Bootstrap,  who are getting together once a month to talk about all things bootstrapping.  This was their first meeting and about two dozen people showed up — a great initial group.

The group heard from local entrepreneur, Ernie Clevenger, who co-founded a company called Care Here.  It has grown from a highly bootstrapped start-up into a very impressive operation.  Since they had no money during their launch, they had to find creative ways to bootstrap their company, which establishes in-house medical clinics for employers.  This is not the typical kind of business one might think of to bootstrap, but they did, and it has yielded remarkable results.

The group then shared some of their own bootstrapping challenges and got some useful feedback from their fellow entrepreneurs.

The Better Bootstrap group is something that I think could and should serve as a model for other communities.  Bootstrapping entrepreneurs, just like any business owners, need help, advice, and wise counsel.  The problem is that they often cannot afford to join typical business organizations.  This group charges no dues — you just have to agree to try and buy a little food at the restaurant where they hold their meeting.

Tech’s Future in the Recovery

Tim Jackson, Canadian entrepreneur and venture capitalist, offer his thoughts on our economic future in an interview by Gordon Pitts at ReportonBusiness.com.  Here is a sample of what he had to say:

So if you are laid off from your job and have a business idea, what do you do?

You beg, borrow, steal and you get it going – and you find a customer.

I know that sounds overly simplistic and there are certain companies where you need a venture-backed business because it will take three or four years to develop the technology. But traditionally, businesses have been started by designing something or creating a service or a product.

Then you went and sold it, and you used the revenue from the first customer to get your second customer and improve the product slightly. The revenue from the second customer was used to improve it again and you get the third customer.

We saw 300 companies last year [and funded two] and the vast majority should never have been looking for venture capital. Our advice is just go and start the company. Go and sell this. If you have something people will buy, they will partner with you and you can build a business.

Great advice not only for the accidental entrepreneur, but anyone starting a business.  Your goal is never to raise money — it is to build a business.  If you are successful at that and eventually need funding, it will follow.

Recession Catches Up with Small Business

The ADP Small Business Report released today shows that 284,000 small business jobs were lost in March. Declines in March and previous months indicate that the resiliency displayed by small businesses earlier in the recession is no longer apparent compared to medium- and large-sized enterprises.

 

The ADP Small Business Report is a subset of the ADP National Employment Report:

 

  • Total small business employment: – 284,000
  • Goods-producing sector: – 111,000 small business jobs
  • Service-providing sector: – 173,000 small business jobs

Best Small Cities for Entrepreneurs

My adopted hometown of Franklin, TN (a suburb of Nashville) has made Business Week’s list of best cities for entrepreneurs to start-up businesses. 

Here is what one local entrepreneur had to say about Franklin:

“It’s a very vibrant, growing community with a good education system and with people who are very attuned to the importance of quality of life, family time, and balancing that with careers and business. Once you identified a top candidate and bring them here, any negative perception that they may have had about coming to a small town in Tennessee is really overcome once they’re here and they see the community and they get the feel for the quality of life.”
-Sam Lynch, founder and CEO, biotech development company BioMimetic Therapeutics

I would agree.  In choosing to move here almost six years ago it was the entrepreneurial culture of the area that, in large part, drew us to Nashville. (Not to mention golfing almost year around).

The Hidden Costs of Financing from Family

My column in today’s Tennessean looks at the challenges of taking financing from family:

In good economic times, 85 percent to 90 percent of capital for small businesses comes from friends, family and the entrepreneur’s own funds.

But during times of tight credit or recession, family members may be one of the few sources of funding for most startup entrepreneurs.

When taking funding for a business from family members, it’s critical that everyone involved fully understands what they are getting into.

Family members provide funding for many reasons. Some are motivated by altruism — they just want to help the entrepreneur get started and be successful. Others can be driven by greed — they see the investment as a way to ride on the entrepreneur’s coattails to fortune and fame.

But no matter what the reason for a willingness to provide financial assistance, defined boundaries and clear expectations must be clearly established.

Here are some rules of the startup road:

• Never take money for a business from a family member as a “gift.” It should be treated either as a formal loan or investment.

Present the interested family member with a formal business plan, which should be discussed in full detail.

• Any loan from a family member should have a formal loan agreement that defines interest rate and payment terms. To help the entrepreneur, payments can be delayed, but interest should accrue during this time and eventually must be repaid.

The Internal Revenue Service publishes the current minimum interest rates at its Web site, www.irs.gov/ (just enter “interest rate” into their search feature).

• Do not structure any loan without interest. There can be tax consequences for all involved if such a loan is not set up with acceptable interest charges.

• If the money comes in as an investment, the family member is now the entrepreneur’s partner. This means they have certain rights that any shareholder has in a privately held business, which can include approving certain major decisions, such as the sale of the business.

Send reports

All investors should be provided with complete financial data at least once a year.

If the business makes a profit, they probably will owe taxes on this profit. All of this must be made clear before any investment funds are accepted.

Whether the money is treated as a loan or an investment, the entrepreneur should regularly communicate good and bad news. Provide regular quarterly or even monthly summaries that include any significant accomplishments, challenges and major events.

All of these steps will help keep issues that are business related as strictly business, and issues that are family as family matters. After all, Thanksgiving comes every year. Don’t let a business deal spoil the family dinner.

True Hope

I don’t get my hope from anyone in Washington, DC.

I have the joy of working each day with young entrepreneurs who are brimming with true hope and optimism about the future.

Today I spent the day leading 72 students at Centennial High School in Franklin, Tennessee on a full day of what we call the Entrepreneurial Challenge.  It is an exercise originally developed by my friend Dr. George Solomon at George Washington University.

Twenty four teams each comprised of three students developed ideas based on the theme:  “Find a business opportunity that can be started in Williamson County that take advantage of or is able to thrive in the current economic downturn”

All of the teams did a wonderful job.

The students came up with their ideas, researched them to turn them into viable opportunities, and then perfected their pitch all in about four hours.  They then pitched to various entrepreneurs from the community for several rounds.

The winners where three young women who came up with a business with the following mission:  “To provide informational and enjoyable cooking programs to kids and teens which promote a healthy lifestyle with affordable life changes.”  Their proposed venture would both teach low cost options for kids to make health meals at home, thus saving money in these difficult times and addressing their concern with obesity among young people. 

I left the school feeling a lot more hopeful about our future.