What if You Don’t Fail: Capital Requirements

Image via Wikipedia

In the last post, I wrote about the Lean Startup philosophy of getting the minimum viable product into the market to see whether it had any market acceptance. If it doesn’t, the Silicon Valley mentality says you fail fast and start something else. But what if you are not in Silicon Valley, and you don’t fail?

If you didn’t actually fail, you got a product to market and you are now struggling. You are struggling for enough traction to take you to profitability, but you are also struggling with the questions that come with scaling a business: how many people can work out of your house/garage before you have to get an office and pay rent? How do you find and hire people to keep up with your growth? Where does the money come from to bridge the gap from startup to sustainability?

In Silicon Valley it comes from the magical angels and super-angels. But they are few and far between in most communities. Instead, there are time-honored ways of financing businesses while they grow. They all suck, I warn you.

1. Credit cards. Yes, the easiest way to finance a growing business is on credit cards, and American Express is usually the best, because it doesn’t have stated upper limits, and while some things must be paid for in 30 days, other things (such as travel) have longer timelines. Along with the Amex card comes a slew of small business discounts, too. It depends on the nature of your business which ones you can use, but FedEx is one of the small business discounts, and almost every business needs that:-) Ignore the things people have told you about not getting too deeply in credit card debt; if you are growing a business, all bets are off.

2. Loans or investment from family and friends. The first round of financing has to come from people who know you, because you don’t have much else to recommend your company outside your own experience, integrity, passion, or expertise. Fortunately, relatives often invest in each other, and so do friends. Is this comfortable? Of course not. If you don’t succeed and they lose their investment or you have to default on the loan, they hate you.

3. Factoring and discounting receivables. Once you have sold a product or a service and money is due your company, you can either factor or discount receivables. Factoring involves selling your receivables to a third party, who pays you about 65-75% of their face value in exchange for immediate cash. Discounting involves getting a loan for which the receivables serve as collateral. That can be even worse, as the loan-to-value can be as low as 50%. When you have to make payroll and the checks aren’t yet flying in, these terrible tools can save your company.

4. Customer-financing. I like this method a bit better than the others, because it doesn’t involved borrowing or giving away your company or your receivables. Customer financing is a negotiation in which the potential customer for your service agrees to pay in advance in exchange for favorable pricing. Although Web 2.0 companies often do free private beta tests, in the past customers have been willing to pay smaller amounts for beta testing.

5. Venture-leasing. In this scenario, a supplier who wants to sell your company something you can’t afford to buy yet leases it to you, assuming some of the risk for your company not being around for the duration of the lease. Rates are not ideal, but – hey – if you need the equipment to scale, this is a way to get it.

The best way to finance growth: In all the years I have been working with startups, both my own and those of clients and investees, I’ve found that the best way to grow is to incur no overhead before its time. Don’t get ahead of yourself. Contract and outsource rather than hire. Work as a distributed team out of homes if you can. Don’t spend money on big fancy brands.

At the end of the day, anyone who lends or invests money in your business assumes power over you and can throw you out of your own company, even though they couldn’t run it as well as you can, and even though they can ruin the entire company by doing so. Their motives are not yours, and as a result, lenders and investors have some pretty strange ideas about how your company should be run. They should be feared, not embraced.