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?
Professor Bruce M. Firestone
• 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
Professor Bruce M. Firestone
• 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
Professor Bruce M. Firestone
Golden Rule?
S/he who has the Gold, Rules
Professor Bruce M. Firestone
•In five year period to 2010, approximately 91.6%
of all tech startups in the US selffunded/bootstrapped
•8.1% were Angel-backed
•Just 0.3% VC-funded
Professor Bruce M. Firestone
• Makes for stronger enterprises
• More focused on results and clients
• Schumpeter 1934, ‘Entrepreneurs are innovators who use a
process of shattering the status quo of existing products and
services, to set up new products, new services.’
Professor Bruce M. Firestone
• Entrepreneurs are persons who efficiently use scarce
resources, most of which not their own, to disrupt status quo
• Discussions of business valuation, first round financing,
second round, mezzanine financing, bridge financing and
IPO are almost wholly irrelevant to vast majority of startups
around world today
Professor Bruce M. Firestone
• “Empty pockets never held anyone back. Only empty heads and empty
hearts can do that,” Norman Vincent Peale
• Texts on financing new ventures focus either on micro-finance for tiny
businesses mainly in Third World or VC-track enterprises
• Leach and Melicher (Entrepreneurial Finance, J Chris Leach and Ronald W
Melicher, South-Western College Publication, 2009) refer to early stage
financing as ‘seed funding’ whose ‘primary source of funds at the
development stage is the entrepreneur’s own assets’
• Only reference to self-cap in entire text
Professor Bruce M. Firestone
• In 2009, trade credit (or supplier credit) surpassed bank
lending as source of finance for business in US
• TC amounted to $2.15 trillion that year versus $1.5 trillion in
bank lending (which was down more than 6.5%, year over
year) according to data from US Federal Reserve
Professor Bruce M. Firestone
• For startups, trade credit or supplier credit key source of funding
• For tech startups, supplier inputs include—software and hardware
(both off shelf and custom), consulting services, office space,
fabricators, designers and developers (GUI, packaging, website,
mobile app), product managers, HR, law firms
(corporate/commercial and IP advisors) and accountants as well
as IT and telecommunications infrastructure
Professor Bruce M. Firestone
• For startups, inputs may be contributed by
suppliers on credit
• Why would they do that?
• First of all, they do it because they trust the
business they are providing credit to, to eventually
pay them
• Secondly, they want to expand the market and
their market share—one of their key weapons for
doing this is to provide credit to firms that buy
from them
Professor Bruce M. Firestone
• Thirdly, this tends to lock clients into their
business ecosystem—once a client has been
approved for trade credit, they tend to buy from
the same source over and over again using their
approved credit facility on a revolving basis. They
also tend to be less price sensitive than retail
buyers since they are using credit instead of their
own cash and they often have the ability to pass
on higher costs to their clients
• Fourthly, once they establish good credit, they
may apply for a higher credit limit to expand their
business further
Professor Bruce M. Firestone
• Fifthly, suppliers expect to be paid not by their clients but by
their clients’ clients. So a supplier is actually funding
(indirectly) credit worthiness of their client’s clients
• Sixthly, suppliers want their clients to survive for a long
period. They will often go out of their way to help out a loyal
client who gets into financial difficulties by giving them
improved terms for their financing, forgiving portions of their
debt or trading debt for equity. Commercial banks may call
their loans if they learn a new business is experiencing
cashflow issues. Suppliers tend to remain supportive (to a
point)
Professor Bruce M. Firestone
‘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.
Professor Bruce M. Firestone
•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
Professor Bruce M. Firestone
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
Professor Bruce M. Firestone
Is lack of access to capital really main barrier to entry for
entrepreneurs?
More of an excuse in my view
Professor Bruce M. Firestone
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.
Professor Bruce M. Firestone
Credit: Conn. Technology Council,
2008
• Build and Hold
• Lightning in a bottle
• Mark Zuckerberg and Fb
• Scotty B and SignCo
Professor Bruce M. Firestone
• Roger Duarte
• Former Investment Banker/club promoter/cigar
seller
• Started George Stone Crab in Miami in 2009
• Now delivering $10,000 of crab per day during
May to October season
• DV = frozen gel packs/hammer/mustard
sauce/lower price
Professor Bruce M. Firestone
• Investment Banking– uncool and a peon
• Did not want to do MBA
• No particular interest in food industry
• Reads biz books e.g., Blue Ocean Strategy
• Looking for low startup cost/to be alone in small market w/in larger one
(e.g., Chobani and Greek Yogurt)/high cashflow
Professor Bruce M. Firestone
•Treats daily crab haul like day trader would– no inventory
left at day’s end
•Limited competition (dominated by Joe’s Stone Crab)
•Bought No. 2 in market (D&D) w/ $200k raised from
delivery customers
Professor Bruce M. Firestone
• $3 million in volume this year (2013)
• Private equity offered to purchase 30% stake in 2010
• Valued company at $4.5 million
• Now significantly bigger
Professor Bruce M. Firestone
Marketing dimension:
•‘George’s’ sounds like ‘Joe’s’
•Mini Cooper delivery vans/total paint
•Foodie and wine shows
•Duarte all-night partying/earned media
•Bloggers/ e.g., foodiesunite.com
•T-shirts, flyers, opening offer– priced
60% less than Joe’s
Professor Bruce M. Firestone
Operations:
•“Fire your relatives, scare your employees, and stop whining,” NYT biz
article
•Hires two people for every position; fires one after two weeks
Professor Bruce M. Firestone
Threats?
•Diversification into restaurant chain (My Ceviche) with partner Sam
Gorenstein
•Not going to BUILD AND HOLD
•Plans to sell off George’s
•Go into commercial real estate
•More vacations
(Source: Joel Stein, Bloomberg Businessweek, March 31, 2013)
Professor Bruce M. Firestone
Hamdi Ulukaya
40-year-old Turkish immigrant to US
He is founder & sole owner of Chobani Inc
Professor Bruce M. Firestone
• Ulukaya came to U.S. in 1997
• In Turkey family operated dairy farm
• Ulukaya takes business courses at State University of New York at
Albany
• Begins by making feta cheese
• Background, family history, preparation, passion, focus, seeing, carpe
diem --> success!
Professor Bruce M. Firestone
• Got into yogurt biz in 2005
• SAW classified ad for factory near Utica that Northfield, Illinois-based
Kraft Foods Inc shuttered
• Bought it with help from SBL, Small Business Administration loan
• First cases of Chobani Greek yogurt shipped to Long Island
supermarkets less than 2 years later
Professor Bruce M. Firestone
Shuttered plant + SBL + Americans’ growing taste for Greek-style yogurt
= 17% of US yogurt market + net worth of $1.1 billion for Hamdi in 5
years
Professor Bruce M. Firestone
What’s in a name?
Co formerly known as Agro-Farma Inc
Ugh
Chobani processes > 3 million pounds of milk/day
Since 2009, sales increase almost 400%
Chobani name derived from Turkish word for shepherd
Professor Bruce M. Firestone
•Greek-style yogurt contains less sugar/more protein
•Strained to remove excess liquid,
•Leaves concentrated whey protein behind
•6-ounce serving contains 13 grams protein
Professor Bruce M. Firestone
Threats?
•Ex-wife suing Hamdi for $1.5 billion, says he indirectly used her funds to
start Chobani
•Wants 53% stake in Chobani
Professor Bruce M. Firestone
Alpina Foods, U.S. arm of Bogota, Colombia-based food manufacturer
Alpina Productos Alimenticios SA, and Purchase, New York-based
PepsiCo, Inc. -- through JV with German dairy company Theo Muller
GmbH -- building Greek yogurt plants 175 miles from Chobani’s HQ
Professor Bruce M. Firestone
•U.S. plant of second-most popular Greek yogurt, Fage, ~ 90 miles away
in Johnstown
•Fage sales grew at an average annual rate of 34% since 2009
Professor Bruce M. Firestone
Opportunities?
•Opened first retail store, in Manhattan’s SoHo neighborhood
•London Olympics sponsor summer 2012
Source: http://www.bloomberg.com/news/2012-09-14/hidden-chobani-billionaire-emergesas-greek-yogurt-soars.html
Professor Bruce M. Firestone
• Runamok Party Rentals
• Wanted to go beyond party rentals
• Add an Amusement Centre for kids and adults
Professor Bruce M. Firestone
• Conditional lease for 38,000 sf
• City of Ottawa zoning question
• Difference between The Athletic Centre & Runamok
Amusement Centre?
Professor Bruce M. Firestone
•Arcade
•Mississauga’s Playdium
•Go karts, baseball domes, bumper cars and games
•Drive, blast and dance your way to a great time
within our indoor playground
Professor Bruce M. Firestone
•Stairmaster versus bounce house for kids?
•$1m startup
•Funding sources?
Professor Bruce M. Firestone
•$200k equity
•$350k SBL
•$300k signage/sponsorship deals (Bell Sensplex
does $700k in sponsorship v avg Ottawa arena
<$10k)
•$50k product rights
•$100k season tickets
Professor Bruce M. Firestone
•City of Ottawa planning department insists on OPA
and rezoning
•Tells Runamok that they will oppose both
•Shameful, disgraceful
Professor Bruce M. Firestone
PERSONAL BUSINESS FOR LIFE, PB4L
Urban Lens Photography
Professor Bruce M. Firestone
•
Urban Lens Photography
•
Wedding photography business
•
Started by Jennifer Schweers
in Vancouver
Professor Bruce M. Firestone
•
Working in Banking/hated it/told it was safe
•
Always wanted to be entrepreneur
•
Then came recession of 2008/09
•
No money/not even for camera and lenses/parents laughed at her
•
Mark Zuckerberg to rescue!
Professor Bruce M. Firestone
•
Just $500 in fb ads
•
Girls who changed their status from single to engaged and lived in
Vancity or Victoria
•
Downpayment on 1st two weddings enough to buy camera/rent
lenses
•
Used her nature shots to convince brides she could do it
•
Turned her biz into a downtown Van condo
•
Rule: anything she buys and brings home/something has to be
thrown out it’s so small
Professor Bruce M. Firestone
• Eseri.com, started by PhD entrepreneur, Bill Stewart (now
cirruscomputing.com)
• 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
Professor Bruce M. Firestone
• 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
Professor Bruce M. Firestone
Reynolds Brothers ran sawmill (est in 1870
by Orson L. Reynolds) in Adirondacks
Professor Bruce M. Firestone
• Due to the Bearer…In Trade At…
• Reynolds has a margin on each trade so a $5 note with a GPM (Gross
Profit Margin of say 40%) only costs them $5/(1 + .4) or $3.57
• Canadian Tire issues script (CDN Tire money) that can only be
redeemed at their stores
• Disney issues Disney Dollars at the exchange rate of $1 DD = $1 USD
Professor Bruce M. Firestone
• Tracey Clark owner of fair trade coffee house, Bridgehead in Ottawa
• Issued several million dollars of script to help fund $15 million
expansion
• Clients buy script in denominations of $250, $500 and $1,000
• Why?
Professor Bruce M. Firestone
• they love Bridgehead coffee
• they love ambiance of stores and free wi-fi
• fact she is local and stacks up to and competes with mega chains
• she’s an underdog
• want to feel like they helped make it happen
• they trust her
• they get a 20% return!
Professor Bruce M. Firestone
• they get $1.20 worth of trade value on every Bridgehead $1.00
• better than putting a $1,000 into Bank savings account and getting .7%
p.a.
• on $1,000, you get $7 in interest for year
• say Bridgehead’s GPM is .6
• cost of $5 in script is then 5 x 1.2/(1+.6) or $3.75
• Tracey’s cost of capital for expansion acquired this way is a negative
$1.25 per every $5 raised!
Professor Bruce M. Firestone
• Andrew Craig owner of Major Craig’s Chutney
• great grandpappy served with British forces in India circa 1884
• Major James Craig experimented with ingredients and cooking
methods for all kinds of chutneys
• brought knowhow with him to Canada—written recipes waited to be
rediscovered (by Andrew) until 2009
Professor Bruce M. Firestone
• Raise dough by selling script!
• Buy $25 of script for $20 redeemable a few months later
• Nice rate of return for moi!
• Helps Andrew raise capital
• Helps Andrew sell more
Professor Bruce M. Firestone
•There is some other cool stuff Andrew
can do to raise more ‘free’ money
•Look at this image, can you see
strategic partners everywhere?
Professor Bruce M. Firestone
• It was there staring poor Andrew in the face
• One of his suppliers is fast-expanding Beau’s Brewing
• There, right there on the label!
• How much are they paying Major Craig to be co-branded this way?
Nothing!
Professor Bruce M. Firestone
• That has to change
• What I want Andrew to do is put five strategic partners on his label, his
new website and in his nice Xmas gift boxes
• Perfect vectors to carry strategic partners’ messages to his clients–
things like teensy recipe books, coupons, tickets, biz card, promo items,
what have you…
Professor Bruce M. Firestone
• sign up sponsors for two years
• don’t start over every year at
ground zero
• give sponsor partners option on
third year at same cost provided
they exercise option at least 6
months prior to end of term
• non-linear selling
• Sens sell 300 signs, pair at a
time, min 2 years....75 sales not
300!
Professor Bruce M. Firestone
• could do worse than copy Manpacks.com biz model
• turn products (men’s underwear, cologne, razor blades, etc.) into
service by delivering stuff monthly or quarterly or semi annually
• nice recurring revenue model
• products as a service! (PAAS biz)
• regular chutney delivery service anyone?
Professor Bruce M. Firestone
• How much of his equity does he give up to get their sponsorship
money? Zero
• How much interest are they charging him to give him their dough? Zero
• In fact, he doesn’t even have to repay the money since it is a
sponsorship/ marketing/ advertising cost to them, i.e., an expense
• Truly free money for Andrew!
Professor Bruce M. Firestone
•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
Professor Bruce M. Firestone
• Siavosh Noruziaan: Empire Deck and Fence
• 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
Professor Bruce M. Firestone
• 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…
Professor Bruce M. Firestone
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%
Professor Bruce M. Firestone
• 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
Professor Bruce M. Firestone
•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
Professor Bruce M. Firestone
•But what is cheaper than debt?
•It’s supplier credit and launch client money!
•They usually charge you nothing for it
Professor Bruce M. Firestone
• 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
Professor Bruce M. Firestone
What is the most important thing in business (and life)?
Trust!
Marketing  Brand  Trust  Sales
Professor Bruce M. Firestone
• 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
Professor Bruce M. Firestone
Professor Bruce M. Firestone
•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
Professor Bruce M. Firestone
• Hire expensive developers
• Build the ‘pipeline’
• RBC calls their LOC
• What to do?
Professor Bruce M. Firestone
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
Professor Bruce M. Firestone
• All stakeholders want you to survive (but for different reasons)
• For FI, clients to the rescue
• Why?
Professor Bruce M. Firestone
•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
Professor Bruce M. Firestone
•Cash Conversion Cycle (CCC) changes from +274 days to
-61 days
•Firm goes on to open offices in New York, Toronto and LA.
Total employment now exceeds 170
Professor Bruce M. Firestone
CCC = ART + INVT – APT,
Where:
ART is Accounts Receivable at Year End,
INVT is Inventory at Year End,
APT is Accounts Payable at Year End.
Professor Bruce M. Firestone
Assume do only one transaction in financial year in amount
of $3,000,000
Cost of goods sold is $2,000,000
Pay 1/3 up front to contract developers (i.e., $666,700) and
receive deposit of 50% from client or $1,500,000
Professor Bruce M. Firestone
Accounts Receivable at Year End (AR) $1,500,000
Days Per Year 365.25 Days
AR x Days Per year $540,787,500 Dollar-Days/Annum
Annual Sales $3,000,000 Dollars/Annum
AR x Days Per year/Annual Sales 182.625 Days ART
Inventory at Year End (INV) $0
Days Per Year 365.25 Days
INV x Days Per Year $0.00 Dollar-Days/Annum
Cost of Goods Sold (COGS) $2,000,000 Dollars/Annum
INV x Days Per Year/Annual Sales 0 Days INVT
Accounts Payable at Year End (AP) $ 1,333,300
Days Per Year 365.25 Days
AP x Days Per year $480,700,000 Dollar-Days/Annum
Cost of Goods Sold (COGS) $2,000,000 Dollars/Annum
AP x Days Per year/Annual Sales 243.5 Days APT
CCC -60.875 Days
See: http://www.eqjournal.org/?p=4119
Professor Bruce M. Firestone
Professor Bruce M. Firestone
Anaheim Ducks
Professor Bruce M. Firestone
Can accretive finance work for a large firm like Disney?
Sure!
•(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!
Professor Bruce M. Firestone
.....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.
Professor Bruce M. Firestone
Lessons Learned?
You can bootstrap big projects
Even Fortune 50 companies do that
Sponsorship can apply to many industries and is a form of Bootstrap
Capital
Keep your core competencies– outsource the rest
If you are profitable, you will get financing not the other way round
Entrepreneurs and intrapreneurs make their own rules
Professor Bruce M. Firestone
Strategic Investors
•One of most overlooked sources of self-capitalization for
new enterprises is strategic investor
•What is strategic investor?
•Someone who has strategic interest in your success
•How do you find them?
•Look through your value chain
Professor Bruce M. Firestone
Strategic Investors
•Why go to strategic partners?
•generally make investment decisions faster than Angels,
VCs, banks or governments
•Will have more capital and better connections throughout
your industry than raising money from friends and family
Professor Bruce M. Firestone
Strategic Investors
•What will they ask for in return?
•Often much less than anyone else—perhaps satisfied with,
say, exclusive period during which they feature/market/use
your products or services thereby keeping your products or
services away from their competition and further
differentiating themselves in marketplace
•Funding may also come with fewer strings attached
Professor Bruce M. Firestone
Strategic Investors
•Eg, Angela G and her natural fiber (bamboo-based) line of
sports apparel
•Store-within-store
•Large chains like JCP, Target, Bloomingdales, Saks,
Nordstrom…
•Instead of raising $750k of equity (giving up >35%) or
some combo of equity and (expensive) debt
•Gets $1.5 million pre-order, $750k downstroke
Professor Bruce M. Firestone
Strategic Investors
•Cost of $750k deposit?
•Zero
•Amount of equity given up?
•Zero
•Debt taken on?
•Zero
•Risk?
•Only non delivery
Professor Bruce M. Firestone
Strategic Investors
•What does department store get in return?
•Not to die
•Two year exclusivity on J-W
Professor Bruce M. Firestone
Strategic Investors
•When Apple launches new product like iPhone, iPad or
iPad mini, what is it worth to third party app developer to
be included on home screens?
•Organizations pay significant rights fees simply to be
featured in product launches like these
•What’s good for Apple is good for your next startup too
Professor Bruce M. Firestone
I could bootstrap a
Lunar Colony!
Just ask me how!
Professor Bruce M. Firestone
• 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?
Professor Bruce M. Firestone
LIVE FOREVER…!
Professor Bruce M. Firestone
• 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!
Professor Bruce M. Firestone
So don’t tell me you can’t pull yourself up by your bootstraps–
YOU CAN!!!
Professor Bruce M. Firestone
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.
Professor Bruce M. Firestone
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.eqjournalbl
og.com/?p=1138.
Professor Bruce M. Firestone
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.
Professor Bruce M. Firestone
•
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.
Professor Bruce M. Firestone
•
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.)
Professor Bruce M. Firestone
•
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.)
Professor Bruce M. Firestone
•
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%.
Professor Bruce M. Firestone
•
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.
Professor Bruce M. Firestone
•
9. Patent or other IP licensing fees and royalty payments.
•
Noma Industries purchased the rights to LED Xmas light strings
designed by the author.
Professor Bruce M. Firestone
•
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.
Professor Bruce M. Firestone
•
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.
Professor Bruce M. Firestone
•
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.)
Professor Bruce M. Firestone
•
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.
Professor Bruce M. Firestone
•
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/co-branding. For more about this, please
see: http://www.eqjournalblog.com/?p=400.
Professor Bruce M. Firestone
•
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).
Professor Bruce M. Firestone
•
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&ED 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.
Professor Bruce M. Firestone
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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.
Professor Bruce M. Firestone
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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…
Professor Bruce M. Firestone
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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.
Professor Bruce M. Firestone
•
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.
Professor Bruce M. Firestone
•
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.
Professor Bruce M. Firestone
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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.
Professor Bruce M. Firestone
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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.
Professor Bruce M. Firestone
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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.
Professor Bruce M. Firestone
•
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.
Professor Bruce M. Firestone
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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.
Professor Bruce M. Firestone
•
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).
Professor Bruce M. Firestone
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!)
Professor Bruce M. Firestone
•
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.
•
Professor Bruce M. Firestone
•
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.
Professor Bruce M. Firestone
•
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.
Professor Bruce M. Firestone
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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.
Professor Bruce M. Firestone
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46. Day trading.
•
47. Asset speculation.
•
48. Franchising.
•
49. Branchising.
Professor Bruce M. Firestone
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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…)
Professor Bruce M. Firestone
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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.
•
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.
Professor Bruce M. Firestone
•
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 preselling. 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.
Professor Bruce M. Firestone
•
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…
Professor Bruce M. Firestone
•
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.
Professor Bruce M. Firestone
•
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.
Professor Bruce M. Firestone
•
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.
Professor Bruce M. Firestone
•
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.)
Professor Bruce M. Firestone
•
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.
Professor Bruce M. Firestone
•
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.
Professor Bruce M. Firestone
•
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.
Professor Bruce M. Firestone
•
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.
Professor Bruce M. Firestone
•
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.
Professor Bruce M. Firestone
•
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.
Professor Bruce M. Firestone
•
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…
Professor Bruce M. Firestone
•
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 sub-contractors for employees.
Reducing capital costs is a form of Bootstrap Capital since that is
money you don’t have to raise.
Professor Bruce M. Firestone
•
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.
Professor Bruce M. Firestone
69. Entrepreneurs can often share resources with larger companies. They
might get office space for free or at a reduced cost, borrow lab space,
get an experienced employee seconded from the larger company to
the startup, get occasional use of specialized equipment, share
warehouse space …
•
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.
Professor Bruce M. Firestone
•
70. Social Commerce.
•
Lawyers, for example, might be offended if you went to them and asked
them to cut their hourly rate by say ½. But if you ask them to do pro bono
work, an entirely different part of their brain becomes involved. This is
known as social commerce—people will often volunteer for things or lend
you things or give you stuff that they would never do for money. Again,
just ask.
Professor Bruce M. Firestone
•
71. Crowd Funding
•
Becoming more common for projects wholly original or appear to be
•
Craft businesses funded in increasing amounts on sites such as
Kickstarter.com & Indiegogo.com
•
Without giving up any equity, entrepreneurs and artpreneurs acquire
significant amounts of ‘free’ capital by pledging unusual experiences
including first-in-line-to-buy, customized/personalized products or
services, signed copies, dinner with Founders, personal thank yous,
lower prices for products, event tickets, special memberships, invitations
to a house party, off-beat t-shirts and so forth
Professor Bruce M. Firestone
•
MAD RIVER
•
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
Professor Bruce M. Firestone
•
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
Professor Bruce M. Firestone
•
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
Professor Bruce M. Firestone
•
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
Professor Bruce M. Firestone
•
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.”
Professor Bruce M. Firestone
•
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!
Professor Bruce M. Firestone
•
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.”
Professor Bruce M. Firestone
•
“Why would they agree to that?”
Professor Bruce M. Firestone
•
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
Professor Bruce M. Firestone
•
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
Professor Bruce M. Firestone
•
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%)
Professor Bruce M. Firestone
•
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
Professor Bruce M. Firestone
•
Self-capitalization is the most difficult part of entrepreneurship to
understand and internalize
•
Wouldn’t it just be much easier to ask VC or Rich Uncle Buck to give
you $3 million to start a biz with?
•
No!
•
First, it takes too long and second, after trying to convince them for 9
months to do it, they’ll just say ‘No’
•
So instead spend those 9 months getting customers, GTBMR, selfcapitalizing, guerrilla marketing/social marketing…
Professor Bruce M. Firestone
•
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
Professor Bruce M. Firestone