Monthly Archives: January 2017

Information About 4 New Ways to Self Fund Your Startup

Self-funding, or bootstrapping a startup company, means different things to different people. To the Silicon Valley serial entrepreneur who just sold his company to Google for $100 million, bootstrapping is just writing yourself a big check. To the newer entrepreneur who is lucky enough to have some personal assets, it may mean tapping into savings or a retirement account to come up with $50,000 to $100,000 to get things rolling. To others still – those who represent the vast majority of entrepreneurs – it means living on Ramen noodles and peanut butter sandwiches, calling in favors from friends who will work for free, and squirreling away a few hundred dollars at a time to keep the lights on.

Is it possible to self-fund a company if you don’t already have a fat bank account? Sure, but the amount of capital (or lack of capital) you have will influence the type of business you are in. Fortunately, because of cloud innovations that exist today, you won’t need nearly as much to launch compared with just twenty years ago.

Alternative borrowing: Banks aren’t the only game in town
While some entrepreneurs have a long and steady job history and excellent credit, most do not – the entrepreneurial mindset doesn’t really lend itself to working at the Post Office for 30 years and living around a steady paycheck. As a result, the majority of entrepreneurs don’t have enough savings or assets built up to go the true “back pocket funding” route, and instead look to borrow. A few visits to the bank and most will be quickly disappointed, especially as low interest rates have driven banks and traditional lenders to raise underwriting standards, eliminate smaller loan thresholds and focus more on established businesses. Even if you’re lucky enough to find a bank that is friendly to startups, unless you have an exceedingly high FICO score, you’ll be out of luck no matter how great your idea may be. You may be creating the next Google, but if you don’t have collateral and a high FICO, the bank doesn’t care – and it’s just not profitable for banks to make loans to small businesses any more.

“The new regulatory environment under Dodd-Frank doesn’t make it profitable or easy for banks to make loans to small businesses,” said B.J. Lackland, CEO of Lighter Capital. “Banks will eventually have to make some changes to address this new environment, but they won’t make major shifts until the regulatory doors open.”

Entrepreneurs may have to turn to a new crop of alternatives, the most interesting of which is peer-to-peer lending – an option that is often more expensive than the low-interest bank loans, but still less costly than the usurious payday loan firms. Once you do have some revenue coming in, factoring, or borrowing against receivables, may become an option, and that usually does not require the same sort of scrutiny a conventional loan carries. This option can be inflexible though, with fixed daily or weekly payments required. Revenue-based financing (RBF) is a more flexible alternative. According to Lackland, “Traditionally, tech startups had to sell equity to get growth capital as a result of having no hard assets (like equipment or inventory) for a bank to lend against. RBF fits the needs of tech entrepreneurs because it is a flexible instrument, doesn’t require hard assets, and combines many of the best aspects of debt and equity, since it’s non-dilutive yet aligns the interests of the entrepreneur and investor toward growth.”

Targeted loans: What makes you different?
It’s a common myth that the SBA and other government agencies have special business loans or grants for minorities or other under-served populations. While there are policies that provide easier access to contracts once a minority-owned business has become established, when you need cash to get started, everybody’s on a level playing field.

Entrepreneurs often find themselves in the “underserved” category, but may benefit from reaching out to local community organizations, community banks or online lenders who specifically offer loan products for borrowers who are underserved or in a minority class. Become knowledgeable of programs that target specific groups, businesses launching in distressed areas, or minority-owned businesses.

William Underwood, Public Relations Director at ezDinero Loan Solutions, noted, “Latino business owners and startup entrepreneurs in the U.S. have an impressive success rate in paying back small business loans, but are still often unable to obtain credit due to outdated scoring models, and the lack of interest on the part of traditional lenders in offering business loans of $50,000 or less, effectively closing the door on many worthwhile SOHO business startups.”

You don’t need as much money as you thought
According to Cary Landis, one of the architects of the NIST cloud computing reference architecture and founder of SaaSMaker, “It’s often possible to launch with a lot less capital than was required just twenty years ago, due to the existence of cloud-based software and infrastructure, along with platforms-as-a-service that allow you to more easily create and market your own apps.” Landis notes that newer startups are often “born-in-the-cloud,” operate virtually and often are able to operate with minimal on-premises equipment. “Besides the obvious cost advantage that comes from not having to operate your own servers, newer DevOps platforms are bridging the gap between IT and business, letting you get up and running quicker and with better apps that are more attuned to the business end of your startup.”

Don’t quit your day job
Entrepreneurs with little cash may need to bite the bullet and keep the day job while they launch their entrepreneurial effort. Kaleigh Wiese, co-founder of Garment Exchange, a peer-to-peer rental marketplace for women’s clothing, launched in March of this year. Wiese says, “We have found it beneficial to self-fund so we could access our potential users creatively and move rapidly and lean. Making decisions quickly has allowed us to get to our potential users quicker and allows for pivots along the way to start generating income.” In five short months, Garment Exchange has built up $40,000 in retail business, now allowing Wiese to begin late seed fundraising. By initially self-funding, Wiese was able to prove the concept, prove her dedication to the idea, and become a more attractive target to potential investors.

“To fund Garment Exchange, we have of course decreased our personal spending, but have looked for innovative side projects that would bring in residual income as we put our day-job income into the business. Some of our favorite side income sources have been renting out our cars on Turo and selling our expertise, like creating custom Snapchat filters. Moving quickly and thinking innovatively about bringing in side income has been such a success for us.”

More startups, less money
During the dotcom boom of the 1990s, startups were well known for landing multi-million dollar venture capital deals on the strength of a business plan written on a cocktail napkin, burning through those millions in the first few months, then going back for more – and getting it.

Venture capitalists aren’t doing that any more, and they don’t need to. The self-funded or lightly-funded startup is the foundation of the next wave of startup innovation – and lack of funds is no longer a reason not to launch.

Some Finance Tips For All Business Owners

I don’t know about you, but finances aren’t really my strength. I’m an entrepreneur — a big picture guy. I like to tackle big problems and develop big visions. I don’t like to sit around staring at a financial spreadsheet while I spend hours upon hours entering expenses by hand.

But whether we like them or not, finances are a necessary part of running a small business. To get some insight on effective procedures that entrepreneurs can adopt to improve their own accounting practices, I sat down for a quick chat with LessAccounting founder Allan Branch.

Here’s what he had to say on this critically important subject:

1. Don’t procrastinate.
One of the biggest mistakes Branch sees new entrepreneurs make is that they put off their bookkeeping needs. If you aren’t financially-minded, programs such as Quickbooks can make small-business accounting seem completely unmanageable, especially if all you need to do is send out a few invoices and track a few expenses.

The problem is, of course, that if you put off your accounting work, it doesn’t go away. It just gets bigger, and eventually you’re going to be faced with an overwhelming mess that you’ll need to sort out. The bigger the mess, the more you’re likely to procrastinate.

Fortunately, though, Branch argues that small-business bookkeeping is actually very simple. If you break everything down into small categories — categorizing expenses, paying employees, sending invoices — the whole thing becomes much more manageable and the compulsion to put it off lessens.

2. Understand your seasonal cash flow.
Another cautionary tip Branch gives to young startups is to understand seasonal cash flow — and that pointer comes directly from his personal experience. LessAccounting, for example, has major seasonal spikes that occur during tax season, followed by a slowing of conversions from April to October. It wasn’t an easy lesson to learn, but Branch eventually realized that he needed to maintain a three- to four-month cash cushion to help get the company through these slower periods.

You need to know your sales cycles as well. If you’re a business-to-consumer retailer that sells $20 items, your sales cycle is likely fast enough that having a cash buffer on hand is less of a concern. But if you’re a business-to-business company whose sales cycles last months, or even years, having extra capital in the bank can mean the difference between being able to weather the long periods before revenue from past sales manifests and having to fold early because your cash has dried up.

3. Focus on your core strengths.
One issue that both Branch and I see far too much is startup owners, particularly software-as-a-service providers, believing that they need to create everything from scratch. I get it. If you’ve already got a coder on your team, it can be seriously tempting to have him or her build internal apps and products rather than investing in existing solutions.

The problem with this approach is that it wastes your time. It might save you a few pennies at the end of the day, but the cash you’ll save is peanuts compared to what it cost you to take a key employee away from those activities that drive revenue for your business. Instead, it’s far more cost-effective to work with existing providers and use the tools that they’ve already perfected, rather than trying to reinvent the wheel on your own.

4. If you have to work 80 hours a week, you’re not profitable.
This lesson from Branch was an interesting one for me. I’m big on growth hacking (I don’t run a website called Growth Everywhere for nothing!), but Branch’s approach to business has been much more moderate. Of particular interest to me was his assertion that, if you have to work 80 hours a week to keep your business afloat, you’re not profitable.

Too many startup entrepreneurs blow through the earliest stages of their company’s growth by putting all their time and energy into their businesses at the expense of their health and relationships. While I’d argue that that’s fine for short periods, I get why Branch says that this shouldn’t be a part of your long-term financial calculations. It’s simply not sustainable.

If your company is only in the black because you’re working yourself to the bone, your numbers are going to take a major turn once you scale back your workload — if you don’t collapse from exhaustion first, that is.

Whether you choose to apply Branch’s “no growth hacking” philosophy to your business, make sure that your labor costs are fully accounted for. Undervaluing the time you invest in your business hurts everyone involved.

5. Ask for discounts.
Finally, here’s a fun tip from Branch: if you’re seriously tight on available funds but you want to take advantage of existing solutions, try emailing the founder and asking for a discount. It won’t work in every case, but you’ll be surprised by how often you can get free stuff just by asking.

Tips To Choose a Crowdfunding Platform

Crowdfunding has become the way to raise money for all kinds of projects in the early 21st century. Businesses, nonprofits, artists, and entrepreneurs of various stripes have all succeeded in running startup funding campaigns on one of the many crowdfunding platforms that have sprung up in recent years.

But crowdfunding isn’t as easy as simply signing up for a service and listing your financial needs. The first step is finding the platform that is just right for your business.

An Introduction to Various Types of Crowdfunding Sites

Like many other things, crowdfunding sites come in a lot of different shapes and sizes. There are crowdfunding sites for nonprofits and social causes:

Crowdrise
Rockethub
Causes
These are just a few. There are plenty more.

Crowdfunding sites for independent artists and people spearheading creative projects include:

Kickstarter
Indiegogo
Pubslush
If you want to start a business or find investors for your million dollar project, then perhaps one of these crowdfunding sites will be more your speed:

AngelList
Fundable
Somolend

The JOBS (Jumpstart Our Business Startups) Act of 2012 has opened up thousands of opportunities for entrepreneurs who need money for their projects. Before, startups looking for financial backing had to request financial assistance only from their internal networks or through connections made while networking. They could not advertise publicly that they were looking for financial backing. That has changed, and the change has created a new culture of crowdfunding that is just getting started.

A Survey of the Crowdfunding Industry

Crowdfunding is not just one class of individuals or set of organizations. It’s for everyone. In fact, many types of people from a variety of backgrounds have been successful in using crowdfunding to get the finances they need for their projects. This includes:

Artists
Small business owners
Serial entrepreneurs
Philanthropists
Scientists
There are four basic types of crowdfunding. You should be familiar with each of them.

Equity-based – These types of sites reward investors with a stake in the company.
Donation-based – Contributions could be tax deductible and go toward funding a specific cause.
Lending-based – Investors are repaid over time and may even be paid interest for their investments.
Rewards-based – Contributors receive something tangible for their money.
Some crowdfunding sites specialize in a particular industry or niche, such as WeCANNA, a site geared toward funding cannabis startups. Other sites, like Kickstarter and Indiegogo, are more general in nature and help people fund a variety of types of projects. Others may offer two or more of the above types of funding in a hybrid approach. Gofundme is a crowdfunding site where people can fund personal needs such as medical expenses and educational goals.

How to Get the Money You Need Through Crowdfunding

The first step to successful crowdfunding is to define your project and fundraising needs. Are you looking for angel investors or do you wish to fund a single project of an existing business? It makes a big difference in how you approach your funding campaign, so start by defining your project. Then follow these steps.

– Determine how much money you need to successfully implement your project. Don’t just guess. Get real financial data by securing quotes from contractors you will be dealing with, bids on building materials, and sound financial information on all other aspects of your project before you start asking for money. It might help to create a business plan.
– Before you start, let your network know of your plans. Ask members of your network if they can recommend any sites. Ask them why they recommend that platform. Also, be sure to ask what incentives would make them invest in your project. That will let you know whether you should be looking at equity-based platforms or rewards-based crowdfunding sites.
– Research the crowdfunding sites to determine which ones are a good fit based on the types of crowdfunding they specialize in and whether they target a specific niche. Also, find out if anyone else has been successful seeking funding for similar types of projects. Which crowdfunding source did they use?
– Interview someone from each of the crowdfunding platforms you are considering. Ask good questions that will narrow down the sites to one or two good fits for your project.

Keep in mind that crowdfunding isn’t for everyone. It’s still new. The most successful projects are based on a solid plan. Know what you want out of a campaign before you start one, and know what you have to contribute to potential investors.