Bootstrap Finance
•How can you start a great business
with no (or little) money down?
•How do you get ‘table stakes’ so you
have a place in the game?
Bootstrap Finance
•CDN Banks lend only to people who don’t
need the money
•Only Grameen Bank led by Nobel Peace
Prize Winner Dr Muhammad Yunus lends
money to people who need it
•Sir Terence Matthews: “We’ll lend you
$7.5m provided you establish a cash
collateral acct of $7.5m for Newbridge
•Only uses CDN Banks to clear funds
Bootstrap Finance
•The rule today is, if you have cashflow, you
will get financed
•Not the other way round
•Mark McCormack started IMG,
International Management Group, with
$500, his law degree and Arnold Palmer as
first client
•Doesn’t hurt if your first client is Arnold
Palmer
Bootstrap Finance
•Golden Rule?
•S/he who has the
Gold, Rules
Bootstrap Finance
•Probably less than 1% of all startups
ever get any funding from VCs
•Means that at least 9,900 out of the
next 10,000 new enterprises will
bootstrap
•Stronger enterprises
•More focused on results and clients
Bootstrap Finance
•‘Bootstrap Capital’ on UrbanDictionary.com
Also known as self-capitalization, this is how most start-ups
actually capitalize themselves. Sources of bootstrap capital
include: soft capital (Mom/Dad/Rich Uncle Buck), home equity
loans, supplier credit, consulting, credit cards, retainers,
deposits, progress payments, receivables factoring, partners,
sponsorships, guarantors, pre-sales, launch clients and more.
Bootstrap capital allows the ownership to keep control of their
own enterprises and not lose them to VCs and other debt or
equity holders.
Bootstrap Finance
•Terry Matthews again:
“Get close to the customer—early and often.”
•All new personnel in his Wesley Clover startups
spend six months in sales
•Same thing at Ottawa Senators—start everyone in
sales
•Next time star player or agent wants extra million,
everyone understands how many season tickets or
hot dogs or signs have to get sold
Bootstrap Finance
•Other ‘Terryisms’:
“Follow the fastest (least effort) route to
revenue.”
“Pursue only those goals that are consistent
with the overall objectives of the enterprise.”
“Leverage your investment with government
grants and OPM, Other People’s Money.”
To read all of Terry’s 10 Rules, See: http://www.eqjournalblog.com/?p=780
Bootstrap Finance
•Is lack of access to capital really main
barrier to entry for entrepreneurs?
•More of an excuse in my view
Bootstrap Finance
The reasons most VCs aren’t interested in most startups are as
follows:
1. Most business startups don’t have the growth prospects to attract
VC funding.
2. Most startups are in industry sectors that don’t appeal to VC funds
anyway.
3. Most startups should be much further along in their development
before they go after VC funding, if they ever do. If their business has
real cashflow and real customers and clients, they are on a much
more even footing with respect to negotiating a fair agreement with
VCs, if that is what they choose to do.
4. Finally, it is much more efficient for Canada if VCs fund more
mature companies that are at a stage where large capital injections
are: a) less risky, b) more inclined to be put to wise use by (now)
experienced entrepreneurs.
Bootstrap Finance
•Shopify.com’s experience
•Established by Tobi Lutke and Scott Lake in 2005
•Original mission was basically to fund the guys’
interest in snowboarding
•Unhappy with then e-commerce offerings, Tobi,
who was a sophisticated developer originally from
Germany, built a better mousetrap using Ruby on
Rails
Bootstrap Finance
•RoR is an open-source web framework
•Inspired choice– coding was no longer an
indecipherable, exclusive priesthood
•Friends started asking them if they could
build online shops for them
•What business are they really in?
Bootstrap Finance
•So typical–business plans or models
introduced into RL (Real Life) transmogrify
into something quite different when they
greet first customers
•Shopify’s business model based on SAS,
Software as a Service
•They have CMRR, Committed Monthly
Recurring Revenues– Holy Grail of Techdom
Bootstrap Finance
•Profitable in first 12 months
•> 10,000 clients
•Fastest growing e-commerce platform in
the world (1,000s of new stores on their
platform ea mth)
•In Dec. 2010– they take in $7m in VC
funding from Bessemer Ventures, 3rd largest
and oldest VC in US
Bootstrap Finance
•This is after they had established annual
run rate of $135 million and become No. 7
on Canadian Business’ List of Canada’s
Fastest Growing Businesses
•Founders retain control
•Doesn’t hurt that Bessemer can intro them
on 1st name basis to tech titans like Twitter,
FB and Google
Bootstrap Finance
•“…we work in a business of tough
competitors,” Jerry McGuire
•When I was a boy, there were about 3
billion people on this planet and perhaps
20% participated in a modern economy
•Now there are nearly 7 billion and probably
60% participate in the modern economy
Bootstrap Finance
•Good news– more people to sell to
•Bad news– much more competition
Bootstrap Finance
•Eseri.com, started by PhD entrepreneur, Bill Stewart
•Provides lightweight Internet-based (actually cloud-based)
desktops using proven freeware
•Eseri based in Ottawa and Montreal
•Started with nothing
•Bill still gives $1,000 per day seminars on project
management software
•Uses stock options to keep his core group of developers on
the job.
•Leverages what money he puts in with GOC (Government of
Canada) IRAP grants
Bootstrap Finance
•Great Depression of 1930s
•King Clancy built old Maple Leaf Gardens same way
•Paid his workers with ‘script’
•If ‘Carleton Street Cash Box’ failed, script wld be
worthless
•Fortunately for workers and Toronto Maple Leaf
fans, it wasn’t
•Able to redeem it for more familiar currency and
feed themselves and their families
Bootstrap Finance
•In the US, number one source of finance for
SMEEs in 2009 was supplier credit
•Sometimes called Trade Credit (TC)
•Amounted to $2.15 trillion
•Dwarfed bank lending to SMEEs of just $1.5
trillion
Bootstrap Finance
•Suppliers want new enterprises to be
successful—that way they will have helped
create new client for themselves
•Supplier credit and funding from your
clients– cheap sources of capital and FAST
Bootstrap Finance
•Siavosh Noruziaan: Empire Fences and
Decks
•Order for new deck for $8,000
•Asks client for a deposit of 50%
•Balance due on completion of job
•Orders $5,000 worth of materials from his
suppliers who have extended credit
Bootstrap Finance
•Now has $4,000 in cash in the bank and
$5,000 worth of supplies on site
•Plus $4,000 receivable
•Enough cash on-hand to pay workers and
himself and later pay his suppliers…
Bootstrap Finance
•What is cheaper—debt or equity?
•Many people think equity is free
•Not so
•VCs want at least a 20% p.a.
•ROI and Vulture Funds are aiming for a
ROE of ~ $40%
•Today you get variable rate home LOC for
just 2.15%
Bootstrap Finance
•Say you need $10k worth of software
development
•Pay the developer in cash not, say, 10% of
your equity
•You only have ten, 10s to ‘give’ away
•If one day, a few years later, you sell the
biz for say $1m, you gave the developer
$100k to do $10k worth of work
Bootstrap Finance
•Even if you use 2nd mortgage type debt,
say, 8% to 12%, still cheaper than most
forms of equity
•So now you know, debt is (usually) much
less expensive
Bootstrap Finance
•But what is cheaper than debt?
•It’s supplier credit and launch client money!
•They usually charge you nothing for it
Bootstrap Finance
•Clients give you their money in the form of
deposits, retainers and progress payments
for free because they want to buy your
products and services
•And they want you to survive
•And they trust you
Bootstrap Finance
•What is the most important thing in
business (and life)?
•Trust!
•Marketing  Brand  Trust  Sales
Bootstrap Finance
•Cash Conversion Cycle (basically, Accounts
Receivable + Inventory – Accounts Payable)
must be short or, better yet, negative
•Means as sales grow, you generate cash
instead of needing to raise more cash
•Crucial to entrepreneurial, bootstrapped
startups
See: http://www.eqjournalblog.com/?p=2257
Bootstrap Finance
•Fuel Industries
•One of top three advergaming businesses
•CCC is out of whack
•Client base to die for: Pepsi, Coors, GM,
MTV Networks, McDonalds Europe…
•$1m orders
•10% down, 1 year to complete, balance
due: delivery + 30 days
Bootstrap Finance
•Hire expensive developers
•Build the ‘pipeline’
•RBC calls their LOC
•What to do?
Bootstrap Finance
•Four Places to go for help
•Shareholders and Directors
•Employees
•Suppliers
•Clients
____________________________________
Possibly your competitors (co-opetition): eg
Microsoft bailed out Apple to avoid more anti-trust
Bootstrap Finance
•All stakeholders want you to survive (but
for different reasons)
•For FI, clients to the rescue
•Why?
Bootstrap Finance
•If FI goes out of business, competitors too busy to
deliver their work on time
•Prices will increase
•Now, 30% down, two 30% progress payments
upon achievement of milestones
•Only 10% on delivery + 30 days
•CCC is –ve, paid from ‘retainers’ (like lawyers)
•Faster they grow now, the more cash on hand
Bootstrap Finance
•How would you like to own a business that made
you $100,000 per year and took about 200 hours of
your time ($500 per hour)?
•Richard Rutkowski, former Kanata City Councillor,
REALTOR, Owner, Best of Kanata
•$600 per page to advertise in book/lots of pages
•Books sell at retail for $20 each
•Two main sources of revenues
Bootstrap Finance
•Each book buyer becomes a member and gets 10%
off at all participating retailers using BOK CARD
•“Secret sauce”: his advertisers are also one of his
main distribution channels
•They buy books to sell to their customers at $20
and keep $10
•If a full page advertiser sells 100 books, the cost of
their ad is -$350! (Negative Cost Selling!)
•What a great value proposition: BUY AN AD IN THE
BEST OF KANATA FOR A –VE $350
Bootstrap Finance
•Another channel– charities and minor
hockey/soccer groups buy the Books for $5
and sell them for $20
•Low tech
•Richard can SELL
•Richard is trusted
•Advertisers pay 50% on signing contract
and balance on delivery of books
Bootstrap Finance
•Pre-sold enough advertising to pay for first printing
and then some
•Cash required to start BOK: -ve!
•This biz is scalable
•Maybe there is a market for:
Best of Dartmouth,
Best of Orleans,
Best of Mississauga,
Best of Manhattan!
Bootstrap Finance
•The Disney Company (Fortune 67, 2008
with more than $35 billion in revenues) used
BC!
•They bought the Mighty Ducks of Anaheim
for $50 million in 1993
•Paid the NHL $25 million and Bruce McNall
and the LA Kings $25 million, $5 million/yr. x
5 yrs– a payment plan!
Bootstrap Finance
•They weren’t done yet!
•They got a $20 million leasing inducement from
Ogden to sign a long term lease at Honda Center
(formerly Arrowhead Pond)
•They secured a $30 million LOC based on the
franchise value from a Lender
•Cost of the Ducks?
•–ve $20,000,000
•They had more cash > than <
•This is called accretive buying, another form of BC.
Bootstrap Finance
•I could bootstrap a Lunar
Colony!
•Just ask me how!
Bootstrap Finance
•There is a lot of real estate on the moon– it
has a surface area of approximately 37.8
million sq. kilometres
•That’s about the size of the US, Canada and
Russia
•What if living in 1/6th gravity helped you
live 20, 30, 40 or 50 years longer and let
you boogie like a teenager too?
Bootstrap Finance
LIVE FOREVER…!
Bootstrap Finance
•Now maybe I could convince 100,000,000 people
to move to my Lunar Colony when they turn 70 or
80
•I might charge them $15,000 per month for their
condos
•That’s $18,000,000,000,000 in revenue per year
(18 trillion dollars, about 1.35 times the GDP of the
United States)!
•I would ask for one year’s rent up front!
•I could build a lot of spaceships and lunar condos
with 18 trillion dollars!
Bootstrap Finance
•So don’t tell me you can’t pull yourself up
by your bootstraps– you can
Bootstrap Finance
 Kevin Rose, Founder, Digg.com
 Kevin Rose made $60 million in 18
months
 How did he do that?

a) JOB?

b) Entrepreneurship?
Bootstrap Finance
 “If you spend our last $10,000 on launching
this site instead of a deposit on a home for us,
I’m going to leave,” Kevin’s ex-girlfriend
 Kevin and his partner populated their site by
CALLING 3,000 of their friends
 They didn’t push on a string– an email
campaign might have gotten them 15 users
 I wonder how she feels now?
Bootstrap Finance






DIGG.COM’S DIFFERENTIATED VALUE?
It is a new model for a newspaper uniquely adapted
to the Internet
It is not simply the online version of the New York
Times or some classified advertising page transferred
to the Internet
It is a digital community made up of a fairly
homogenous demographic—80% are male, mainly
young techie readers
Readers are also contributors
Readers dig up interesting stories from all over the
web and post brief synopses to the site and links to
them whereupon other readers vote on them—the
most popular ascend the page
Bootstrap Finance







The site harnesses the competitive instincts of the
readers/contributors to compete to see whose story
will lead
The site works because of its homogeneous
demographic—contributors only post stories that will
be of interest to the group
The site is dynamic—leading stories change by the
minute or hour
Digg.com’s cost for headline writers = ZERO
Digg.com’s cost for journalists = ZERO
Digg.com’s cost for editors = ZERO
Digg.com’s cost for distribution = ZERO (at least, the
marginal cost is practically zero)
Bootstrap Finance
 Digg’s sustainable competitive advantage is its
business model and its readership
 You might be able to knock off its business
model but it is extremely difficult to knock off
its millions of dedicated readers which form a
community
 The key is that the readership and community
are relatively homogeneous and have similar
interests
Bootstrap Finance
Keys to success:
a. Sound biz model: humans curate the news
b. Community makes Digg.com tough to
knock off/beaucoup differentiated value
c. Scalable/Reversed out the work
d. Guts
e. Bootstrap marketing that worked– did not
need SUPER BOWL COMMERCIALS TO
LAND 1ST CLIENTS!
Bootstrap Finance
 Craig Schoen, former
student
 Winner of Wes Nicol
Business Plan
Competition
 Serial entrepreneur
 Hi ECQ Test Score:
http://www.dramatisp
ersonae.org/ECQTest/E
CQ(ns)TestAuto.htm
 Sold (Cutco) knives
door-to-door!
Bootstrap Finance
 Problem: car dealers and REALTORS taking
forever to upload their info to Kijiji.com
 Answer: www.Kijiji-Feed.com
 Irresistible value proposition
 Servers do the work!
 From his apartment!
 Financed by dealers– pre-sales, deposits
 Profitable from Month 3
Bootstrap Finance
Ryan North, (now famous) online comic:
Can’t draw (he is a brilliant IT
specialist).
 In 2003, he creates Qwantz.com, an
online dinosaur comic.
 Six panels using clip art/characters
that never move.
 Only dialogue changes, day-to-day.
Bootstrap Finance
Bootstrap Finance
Key facts:
Turns disadvantage (can’t draw) into advantage.
 Guinness Book of Records application– longest
running comic strip where characters never
change/move
 Quirky personality
 Revenue streams: merchandise sales/book
sales/appearance fees/advertising by Project
Wonderful, PW
Bootstrap Finance
Startup Budget:
$15.00 for domain name: www.poo.ca.
 $15.00 for domain name
www.qwantz.com.
 Web hosting: $35 per month.
 Fulfillment costs: outsourced.
 Won $500 in 2003 Business Model
Competition.
 Startup Budget = -$400.
Bootstrap Finance
Marketing:
T-Rex cardboard cutouts.
 Placed around campus with this
domain on them: www.poo.ca.
 Resolves to: www.qwantz.com.
 Ryan is a wealthy person today with
plenty of time to explore new ideas…
Bootstrap Finance
 Launched ProjectWonderful.com
 Democratic advertising platform
 Qwantz.com was the main marketing
engine
 Value of a “celebrity” endorsement
 Profitable within 10 days of launch
Bootstrap Finance
Bootstrap Finance
Remember Internic.ca
• Pixie Dust = its name
• Lawyers, patent agents and TM/copyright
specialists and speculators know “Internet
Nickname”
• CIRA releases dot-ca
• “Gold” rush
• DOC sues in Canada for “Intermic.ca” (owned
“Intermic.com” in USA)
• Rob Hall had GOC protection (Federal incorp. of
“Internic.ca Corp.”) and TM of name in Canada
Bootstrap Finance
• DOC loses
• (DOC controls the Internet – 13x root servers
around the world)
• Rob sets up multiple channels to ping CIRA’s
server (DAC, Internic, others – all accredited)
• 80,000 dot-ca backordered
• 75% success rate
• 60,000 domains at $50/yr (then) x 2 yrs
• $6m in cash in < 72hrs
Bootstrap Finance
• Remember Pool.com
• Snap names $60/backorder up front
• Pool.com: “free to backorder/only pay if
successful”
• several million backorders port over to Pool.com
• e.g. if you have Manchester.ca and want
Manchester.com, if Manchester.com deletes from
VeriSign registry, Pool.com will get the domain for
you
• $60 if successful or highest bid (when >1
backorder)
• Again multiple channels against VeriSign server.
Bootstrap Finance
Make money while you lie on a beach!
Bootstrap Finance
 So here is our list:
1. Soft Capital: Mom, Dad and rich Uncle Buck;
basically this is a family and friends round of
financing either formally or informally
organized. Angel investors may also take part
at this stage.
Bootstrap Finance
2. Home equity loans. This is the number one source of equity
for entrepreneurs across the globe. It is usually accessible at
low cost (i.e., low interest) and can be put in place relatively
quickly. Student entrepreneurs should, in my view, make
home ownership an early priority not only as a storehouse of
value but also as a way of diversifying their asset mix and
doing some creditor proofing too. The home would normally
go int he name of the spouse or partner with the lowest risk
profile. For more on creditor proofing, please refer
to:http://www.eqjournalblog.com/?p=526 and http://www.e
qjournalblog.com/?p=1138.
Bootstrap Finance
3. Business plan competitions for cash (e.g., the
Wes Nicol Competition, EIEF or the Celtic
House Competition.) Student entrepreneurs
get very good at this and often use it to
supplement their startup capital.
Bootstrap Finance
4. Future customers or launch clients are another
large source of startup capital. Home buyers in
Ontario, for example, can be asked for
deposits of up to $40k in advance. Launch
clients are important for other reasons as well:
they give the new enterprise additional
credibility and feedback on their offering that
often results in changes in the product, service
or business model.
Bootstrap Finance
5.
Future suppliers can often be persuaded to extend long term
credit to the entrepreneur (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. (In 2009, trade credit (or supplier credit)
surpassed bank lending as a source of finance for business in
the US. TC amounted to $2.15 trillion this year versus $1.5
trillion in bank lending (which was down more than 6.5%,
year over year) according to data from the US Federal
Reserve. For more on Trade Credit, please
see:http://www.eqjournalblog.com/?p=610.)
Bootstrap Finance
6. Strategic partners. (For example, Ogden Corp. was
a strategic partner of the Ottawa Senators Hockey
Club—in return for a 30 year arena management
deal plus a F&B rights deal, they invested, loaned
and guaranteed significant capital to/for the
nascent team. Valve installer which repairs
windows with broken seals might, for example,
seek investment from curtain wall manufacturers.
Sometimes you can get strategic investors to give
you an advance on revenue– won’t even take part
ownership. Eg, Billion Price Project– advances from
Stats Can and other national stats orgs.)
Bootstrap Finance
7. Micro capital lending and grant programs. For
example, the GOC’s (Government of Canada’s)
SBL (Small Business Loan) Program is run very
effectively by the Canadian Chartered Banks.
SBLs are available up to $350,000 and the
GOC will guarantee 90% of the loan so that if
the enterprise fails, the founders are only
(personally) responsible for 10%.
Bootstrap Finance
8. Supplier rights, product placement and
licensing fees. For example, Molson Brewery
purchased pouring rights for the Corel Centre
(now Scotiabank Place) 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.
Bootstrap Finance
9. Patent or other IP licensing fees and royalty
payments. Noma Industries purchased the
rights to LED Xmas light strings designed by
the author.
Bootstrap Finance
10. Consulting services. A lot of entrepreneurs
support their startups by providing consulting
services at the same time. Eseri.com, started by
PhD entrepreneur, Bill Stewart, provides
lightweight Internet-based (actually cloud-based)
desktops that use widely-available and proven
freeware. Eseri is based in Ottawa and Montreal
and was started with nothing—Bill still gives
$1,000 per day seminars on project management
software so that he can fund his real passion—
building a great business of his own. For more on
this, refer to:
http://www.eqjournalblog.com/?p=752.
Bootstrap Finance
11. Partners can bring cash to a business or they
can bring sweat equity. The latter reduces the
capital the enterprise requires while the former
adds to the capital base of the new company.
You have to be careful though: “There are still
two chairs in Heaven waiting for the first two
partners to get there and still like each other,”
Anon. Also, if one partner has access to
significantly more financial resources than the
other, he or she may well end up owing 100%
of the business, squeezing out the other
partner or partners.
Bootstrap Finance
12. Debentures (mostly a form of debt). Family,
friends, angels may prefer to invest their
money in the form of debt with equity
conversion rights or equity bonus.
13. Financial leasing of fixed assets (such as
computers and phone equipment, photocopiers
and the like although it can apply to almost
anything. I have heard of financial leasing for,
of all things, roller coasters.)
Bootstrap Finance
14. Receivables factoring. If you have clients with
strong credit, you can sell your receivables for
cash. Car dealers sell their car leases and
loans for cash.
15. Publisher’s advance on a book or manuscript.
Bootstrap Finance
16. Sponsors. You can get people to sponsor
practically anything. A couple of young
REALTORS I know raised donations (cash and
in-kind) for a local food bank last year while
raising their profile in the community. By
getting sponsors on board, their costs for the
food drive were negative. Sometimes, it’s as
simple as just asking for donations and
sponsorships. You don’t need to be a charity or
NTP to ask for sponsorship: co-marketing/cobranding. For more about this, please see:
http://www.eqjournalblog.com/?p=400.
Bootstrap Finance
17. Trading activity: buying low and selling high. In essence, you
are taking advantage of arbitrage opportunities or
asymmetrical information. One domain name registrar I
know found out what percentage of dot-CA holders did not
have their dot-COM equivalents while the dot-COM
equivalents were still available. He sold a ton of dot-COMs
that way by making the owners of the dot-CAs aware that
they could have their dot-COM extensions. Early in my
career, I did a lot of trading up.
Check out this story: 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 was to eventually get a home
for himself (which he succeeded in doing).
Bootstrap Finance
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 & E, D Tax Credits from the GOC,
IRAP Grants.
20. Finding capital where you least expect it. For
example, a services company extracted capital
($800,000 of it) from its below-market office
space lease deal:
http://dramatispersonae.org/CapitalFromLease.htm.
Bootstrap Finance
21. Reverse or Negative Pledging of Assets. Years
ago, Olympia and York raised 100s of millions
by not pledging the value of their office towers
to anyone. They extracted mega loans from
their Banks based on the value of their real
estate and based on their agreeing to not
pledge their assets to anyone… It’s another
dangerous strategy because you can end up
over-leveraged which O & Y did.
Bootstrap Finance
22. Co-guarantor. You can often borrow someone
else’s (stronger) credit rating. For example,
Suite Leases for Scotiabank Place (when it was
called the Palladium) were pledged to support
construction financing. Basically, the Bank was
loaning money on the strength of the covenant
of lessees. Of course, you could also ask Mom
or Dad to co-sign for a loan…
Bootstrap Finance
23. Accretive buying. This occurs when you buy another company using
the target company’s balance sheet as collateral. That way, you
may end up with more cash on hand after the purchase is complete
than you had before. Disney’s acquisition of the Mighty Ducks is an
example of this.
More recently, a financial advisor I know by the name of Tim bought
a book of business from a retiring colleague. He took over the
advisor’s clients in return for monthly payments to the soon-to-be
retired individual equal to a percentage of the commissions he
would have received for the next three years. This was accretive to
Tim– the cash he pays out every month is less than what he
receives and it’s guaranteed: if any clients leave, the commissions
are reduced accordingly. The reason Tim got the opportunity was
because the selling broker trusted him.
Bootstrap Finance
24. Accretive Selling. When you sell products or
services with third party customer financing in
place, you end up with more cash after the
sale than before (e.g., Leon’s don’t pay a cent
event…. (OAC). Leon’s than turns around and
sells the sales contract for cash.
Bootstrap Finance
25. Employee ESOPs (Employee Stock Ownership
Plans). Employees can invest part of their
earnings back into the company. Wesley Clover
(an Ottawa based business incubator) uses
this extensively not only as another source of
capital but as a way to keep highly skilled staff
from leaving and to provide further
performance incentives for them.
Bootstrap Finance
26. Pre-sold services. For example, here is an example from Craig deSchneider, a former
student: “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.” Basically, Craig and his partner turned their investors into customers and
their customers into investors. Nice going.
Bootstrap Finance
27. Collectibles sales and auctions. This was a
new one to me. 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.
Bootstrap Finance
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. Seller Take Back (STB) mortgages—typically
used in real estate transactions, the Seller
provides some or most of the financing for the
sale by way of a (first or even second)
mortgage back to the Purchaser.
Bootstrap Finance
30. Sweat equity. Don’t underestimate the
contribution you make to the enterprise in
ways that are unpaid and often not sufficiently
recognized. Youth and energy count for a lot.
31. Investor syndicate or investment club. You
might form your own club and some of that
investment could be used for funding your new
enterprise provided that you disclose and get
the agreement of the other investors.
Bootstrap Finance
32. Retainers (typical for consulting services or legal
and accounting services) and deposits on sales.
Lawyers do it but more startups should be asking
for retainers and deposits on sales contracts.
33. Collecting early and paying late (boosts cashflow
in the short term). Delayed payments.
34. Progress payments on contracts. Advances for
work-in-progress.
Bootstrap Finance
35. Advance ticket sales. We sold $22 million in
season tickets for the inaugural Senators
season 22 months in advance of the first
game. These funds are impressed with a trust
and are, in fact, a liability on your balance
sheet: they can not be recognized as an asset
or cashflow until you start actually delivering
the service (i.e., playing NHL games).
Bootstrap Finance
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 U.K.) apparently wanted to pay for his tuition and so
he created a million pixel home page. You could buy an ad for $1 per pixel
(minimum ten pixels) linked to your site. He sold all 1,000,000 pixels so
guess what? He got his tuition and a lot more. I presume the ads are for a
limited time so he also has the chance to resell the million pixels over and
over again. The site gets a LOT OF TRAFFIC… Remarkably, this might be a
sustainable business (aPersonal BusinessFor Life!)
Bootstrap Finance
37. Importing.
38. Distributing products for other companies.
Bundling their products and services in with
your own can often add large margins for you
since the cost of providing those products and
services are often paid for by the suppliers:
you take a percentage of the sales you create
for them. This is ‘money for nothing’.
Consulting companies use and markup sub
contractors.
Bootstrap Finance
39. Exporting.
40. Exploiting signage rights. We built right into
the fabric of SBP ‘Architectural Signage’. $12.5
million per yr vs $3.5 million at the Arrowhead
Pond.
41. No money down, land speculation/flipping.
Buying more land than you require, developing
a portion of it and selling the balance at a
higher price per acre since it is more valuable
due to the fact that you have added value in
the form of the now completed first phase.
Bootstrap Finance
42. Using OPM (other people’s money)—raising
funds through vehicles such as limited
partnerships. Using leverage in your
transactions– borrowing money at rates that
are less than the IRR (Internal Rate of Return)
on your equity. This ‘gooses’ your returns.
Finding deals and getting paid a finder’s fee,
often in terms of equity at no cash cost to you,
the finder.
Bootstrap Finance
43. Asset flipping. Buying low/selling high.
44. Buying under power of sale or through
foreclosure (again, mostly real estate related).
45. Buying distressed companies or divisions of
companies and turning them around.
Bootstrap Finance
46. Day trading.
47. Asset speculation.
48. Franchising.
49. Branchising.
Bootstrap Finance
50. Training and uniform fees (e.g.,
GradeATechs.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…)
Bootstrap Finance
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.
Bootstrap Finance
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.
Bootstrap Finance
53. Land options—sometimes you can convince a landowner to
give you an inexpensive option to buy his or her land at a
fixed price at a later date. You can then use the time to set
up a sales office and begin pre-selling. As discussed above,
you can then take cash deposits (which are impressed with a
‘trust’ in that the money doesn’t really belong to you until
you actually have delivered the condo, townhouse, single
family home, whatever), finance against Agreements of
Purchase and Sale executed by you and your clients,
approach a Bank or private lenders for funding (often
through a mortgage broker), arrange for private equity
lenders or other investors to invest in your project, etc.
Bootstrap Finance
54. I learned about a new method of bootstrap capital from my
(then) 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…
Bootstrap Finance
55. Finding money in the deal flow itself. When
we built Scotiabank Place, the contractor was
able to complete in 22 months instead of 30—
the extra 8 months in a larger structure not
only raised revenues over what the Sens could
earn in the much smaller Ottawa Civic Centre,
it saved about millions in interest payments
owed on borrowed money during construction.
Bootstrap Finance
56. Getting your partners to lend you the money you need to
fund your portion of a new enterprise. A young entrepreneur
became a 1/3 partner in a restaurant franchise in a great
location because his other two partners loaned him his share
of startup capital. Interest and repayments came out of his
1/3 share of profits. After seven years, he owned his interest
free and clear. Why did the other two investors agree to this
deal? Because the young entrepreneur was the operating
partner of the restaurant– his participation at both the
operating level and ownership level were crucial to the
success of the new store. Here’s another example of how to
turn sweat equity into cash equity.
Bootstrap Finance
57. Create a Foundation or a Not-for-Profit to
fund a worthwhile project you support/can
become your front end marketing vehicle too.
58. Create one business that helps launch a 2nd.
This is what former student Ryan North did
with Dinosaur Comics which built a big
community for and around him which let him
start Project Wonderful which turned profitable
14 days after launch.
Bootstrap Finance
59. Run a competition like Shopify.com did. It was called ‘Build a
Business’ and it allowed startups to build their business on
Shopify’s e-commerce platform. The fastest growing
company after 3-months would win $100,000. But during the
competition, nearly 1,400 new stores signed up which
generated more than $3.5 million in sales on their platform
and over 66,500 orders. The competition was widely covered
on influential blogs including the NYT. So between margins
generated during and after the competition and the value of
the earned media they received, the cost of the competition
would, in fact, be negative and, hence, a source of bootstrap
capital as well as quality guerrilla marketing. (The
actual cash cost of the competition was ~$15,000 > taking
into account the profits generated by the new e-stores on the
Shopify platform.)
Bootstrap Finance
60. If your enterprise ever gets into trouble,
sometimes you can just ask for cash—from
existing clients or suppliers and they will just
gift it to you. Surprised? Don’t be. They have a
vested interest in your survival.
Bootstrap Finance
61. You can get other types of support from
suppliers, customers, your alma mater,
business incubators or even friends and
relatives or competitors (more on this later):
they can provide you with low cost or no cost
office or production space; lend you equipment
for free; do some testing or R&D; even second
staff to you for a period of time to help you get
started. Sometimes, all you need to do is ask.
Bootstrap Finance
62. You can make use of more social capital in
the form of free or low cost advice or
introductions (never make a cold call, for
example: do some research on the target
company and get an introduction if you can)
from prestigious law and accounting firms,
knowledgeable friends and relatives, former
professors, advisory board members and many
other sources provided they see future
potential either, directly, from having a
relationship with you and your new firm or
through you to your own network of contacts.
Bootstrap Finance
63. Many firms will use barter to get going: for
example, a tech company might exchange
running a server to provide communications
and Internet services for a Landlord and other
Tenants in the building in return for lower rent.
Bootstrap Finance
64. Many types of Guerrilla Marketing are, in fact, also a form of
bootstrap capital. GM happens when you substitute ‘brains
for money’ when marketing your firm. Earned media
(basically, free mainstream coverage and Internet exposure)
is the desired goal of publicity stunts and other forms of GM.
Earned media can be much more valuable than other forms
of advertising: not only can you gain more exposure, faster
and at lower cost, you also gain credibility for your product
and services by having third parties talk and write about
them. For more on GM, please
see: http://www.eqjournalblog.com/?p=643.
Bootstrap Finance
65. Strategic investors. If you look at your enterprise as part of
a business ecosystem, you can often find others in that
ecosystem that will help you. They may not be direct
suppliers or customers, they could be suppliers to your
suppliers or customers of your customers. You may find ways
to exploit those relationships even if there are two or more
degrees of separation from you. Strategic investment is
usually easier and faster to get than VC funding.
Bootstrap Finance
66. Co-opetition can be a huge source of capital. When Microsoft
was under investigation by US and European authorities for
its monopoly practices, it was to their advantage that the
only viable alternative provider of operating systems at the
time (Apple), survive. Apple’s on-going viability was in doubt
and Microsoft loaned the firm the funds they needed to get
through a tough time. Homebuilders like to hunt in packs—if
a potential homeowner doesn’t like your product, they can
often march across the street and buy from an alternative
supplier and, of course, vice versa. So marketing by one
becomes, in a way, marketing for all. So if you think you
have a product with a lot of differentiated value, you could
perhaps convince an established player to back you with
some of their capital…
Bootstrap Finance
67. Keep your operating or capital costs under
control or reduce those costs. If you can’t keep
your costs under control, you are DOA.
Substitute independent contractors or subcontractors for employees. Reducing capital
costs is a form of Bootstrap Capital since that
is money you don’t have to raise.
Bootstrap Finance
68. Entrepreneurs often can make a meal from the discards of others.
They might find a large company, often a publicly traded one, and
convince them to sell them an under performing division. It’s hard
to imagine but Bloomberg did this recently to McGraw-Hill when
they bought BusinessWeek for a measly $5 million, well within the
range of what an entrepreneur could have accomplished. A large
US-based company was closing up shop in Canada recently and it
was possible to buy both its plant and Canadian business for
somewhere between 30 cents and 60 cents on the dollar. Such
transactions can lay the foundation for an entrepreneur’s entire
career since they can often operate these castoffs more efficiently
as well as raising sales and revenues faster. As a result, they can
experience outsize returns. For a young person willing to move
around, a good place to look would be in the publicly available
documents of a publicly-traded firm.
Bootstrap Finance
69. Entrepreneurs can use Web 2.0 tools which are amazing with
so many available for free or practically no cost. These let
you set up a website, blog, social media presence, do basic
accounting, make and receive payments, process credit
cards, backup your data, transfer data, do your accounting,
what have you for no money or very little money. It is much
easier to start a business in the 21st Century than at any
other time in recorded history.
Bootstrap Finance
• Many student entrepreneurs when they are
building their PBSs (Personal Balance Sheets),
forget to add their equity and sweat equity.
• For example:
http://www.eqjournalblog.com/DealStructure.
xls
• Planning to open a new restaurant franchise in
Baltimore w/ two partners
• Needed to raise $1.8 million, part of it debt,
part of it equity
Bootstrap Finance
• Wanted to start with a LTV (Loan to Value)
ratio of 50/50
• They needed to raise $900k in equity
• Bank loan for $900,000 was contingent on
raising the balance in the form of equity
• Two wealthy partners were prepared to put in
$400,000 each
• Bill had his sweat equity plus $70k in saving
and soft loan from his aunt for $30k
Bootstrap Finance
• This would give each outside partner 44.4% of
the business
• Bill would get 11.1%
• Bill, although still young (just 29), was the
only partner with experience actually
managing a pub
• So he had leverage
Bootstrap Finance
• Partners were willing to enter into shareholder
agreement that would let Bill buy more equity
over time (to get him to a 20% share
eventually) using a complicated formula based
on the FMV of the shares less a certain
percentage
• Ugly deal for Bill
Bootstrap Finance
• Instead I suggested all go in as equal
partners—1/3 each right from the get go
• Bill’s concern was: “Where will I get $300,000?
I put everything I own on the table just to get
to $100k.”
Bootstrap Finance
• Answer is that you can often capitalize a
business (or your share in it in this case) right
from the deal flow itself.
• It’s easy!
Bootstrap Finance
• I told Bill: “What you’re going to do is ask your
partners to each loan you $100,000 for seven
years and you’ll agree to pay them interest at
6.5% p.a. But for the first two years, while
you’re building the business, there won’t be
any principal or interest payments—interest
will be capitalized. Then over the last five
years, you’ll pay monthly principal and interest
to them.”
Bootstrap Finance
• “Why would they agree to that?”
Bootstrap Finance
• Here’s why:
1. Bill is in possession of asymmetric
information—he is the only skilled operator
amongst the group and they need him. His
partners should not even think about going
into this business with no experience—they’ll
get eaten alive by the competition. Bill has
leverage he didn’t even realize.
Bootstrap Finance
2. In many ways, his partners are better off by
lending Bill their money to become an equal
partner. A happy managing partner is a
productive one. Plus they will have a Bill
deeply ‘intricated’ into the business—he is on
the hook personally for one third of the loan
from the Bank and he owes them personally
$100k each. That means, if the business goes
broke, their risk capital has been reduced by
$100,000 each—because Bill still has to pay it
back using his own resources, which means
he’ll have to go get a JOB to repay the loans.
Bootstrap Finance
3. They are making a return on their capital
(6.5%) which isn’t particularly great but for
two middle-aged investors, it’s still better than
most of their IRAs and other investments are
paying (from 3.15% to 6%).
Bootstrap Finance
•
•
•
•
•
From Bill’s point of view, this solution is elegant because,
based on his cashflow projections, he will never actually have
to pay these loans back himself.
Huh?
That’s because Bill estimates, based on his experience, that
the franchise will produce a reliable stream of free cashflow
of ~ $325,000 annually from year 3 to year 7.
Bill’s share of free cashflow is one third or $108,333 less
what he has to repay to his partners over the five years from
year 3 to 7 ($54,383 annually).
So his actual distribution is a net of $53,949 per year. So the
business is actually repaying his partners, not Bill.
Bootstrap Finance
•
•
•
During that period, Bill is still seeing a great ROE: he is
receiving nearly $54,000 a year from the biz on his actual
out of pocket investment of $100k or nearly a 54% p.a. rate
of return. After he pays off his two partner loans, his ROE (in
year eight) jumps to over 108% p.a.
So Bill has, in part, bootstrapped himself to a one third
ownership position in a valuable concession by looking for
capital in the deal flow itself.
He is on his way to becoming wealthy—he will have created
an ‘annuity’ for himself—reliable, reproducible, recurring
cashflow produced by an asset he owns or controls.
More on Bootstrapping at: http://www.eqjournalblog.com/?p=1162