InternationalEntrepreneurship.com

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InternationalEntrepreneurship.com

• Lecture 5
• Bootstrapping and Banks

Raising money has become a disease.
Entrepreneurs are wasting lots of brainpower
scheming to raise money. -Michael Lutz, CEO
Gammalink
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Raising Money

• Allows analytical, button-downed professionals
  (to make) a seamless transition from the
  corporate world to the world of entrepreneurship.
  It is not the real world of the entrepreneur.
• -Amar Bhide, Bootstrap Finance,
  Harvard Business Review on Entrepreneursh
  ip, 1999.

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Raising Money Part 2

• 80 of 100 Fastest Growing Companies in 1989
  were Financed Through Personal Savings, Credit
  Cards, Second Mortgages, and a 50 check that
  bounced.
• Only 1/5th had raised equity finance in 5
  years. Used debt and retained earnings.

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Consequences of Funding

• Hides Faults Lose Sight of Basics
• Easier to Raise 5 Million than 1 Million
• Think a Start-Up Needs ALL the Pieces of a Big
  Company
• Diminished Flexibility Stick to the Plan
• Bootstrapping Rare in Tech World
• Incubators (CMGI)

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Bootstrapping Definition

• A means of financing a small firm through
  highly creative acquisition and use of resources
  without raising equity from traditional sources
  or borrowing money from a bank.
• -Freear, Sohl and Wetzel, 1995

Jims List 12 Dont Give Away Early Equity
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Prevalence of Bootstrapping
Small-business owners in 2000 who used the
following to finance their capital needs in the
preceding 12 months

• Credit cards 50
• Commercial bank loan 43
• Leasing 24
• Vendor credit 23
• Asset-based/inventory as collateral 20
• Personal or home equity bank loan 19
• Angel investors 19
• Private loan 18
• SBA-guaranteed loan 6
• Selling/pledging accounts receivable 3
• Private placement of stock 2
• Venture capital 2
• Public issuance of stock 1
• Other 1

Remember, Dell was bootstrapped
       
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Bootstrapping Benefits

• Best for the Business
• Focus on Profits, Cash Flow
• Owners not Busy with Other Things
• Problems Really Solved
• Best for the Owners
• Retain Much more Equity and Control
• Learn More
• Allows Better Allocation of Time
• Easier to Sell Company, esp. to a Corp. in Sector
• Best for the Employees
• Possible Higher Share in Returns

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Bootstrapping Ideas

• Get Operational Quickly (Copycat pays less in
  Market Research, etc. New Ideas Pop Up)
• Look for Quick, Break-even, Cash-flow Projects
  (Even if the Product is Secondary NOT Accounts
  Receivables, but CASH)
• Offer High-value Products that Rely on Personal
  Selling (You! Same time to Sell 50 Product and
  5,000 Product)
• Forget the Crack Team of Recruits (Cannot Afford
  It, Not Hungry, Scrappy, Attract by Opportunity
  to Upgrade and Build Resumes)

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Bootstrapping Ideas Part 2

• 5. Keep Growth in Check (Invest in People or
  Capacity When Required, NOT in Advance of Needs
  Lets Skills Grow w/ Firm)
• 6. Focus on CASH, Not Profits, Share, etc. (Must
  have 1 strategic goal Sell at high mark up
  Cannot buy business Work on Suppliers
  Relations aggressively)
• Dont Skimp (Pay for the vital thing)
• Cultivate Bank Relationships Early (Winning a
  Relationship Takes Years of Planning Lose the
  ATM Card Keep Great Records and Share Them
  Pay First Loan Back Quickly)
• Do Everything in House (Taking a copier to Vegas)

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Bootstrapping Ideas Part 3

• Start in Your House or Garage
• Dont Pay Yourself or Others (Options)
• Dont Pay Bills Timely
• Argue Every Price and
  Bill (Even Retail)
• Word-of-Mouth Advertising Guerrilla Marketing
• Use the Royal We but DONT Blame Others Like
  Francis

Jims List 14 Dont Ever Spend Money
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Bootstrapping Ideas Part 4

• Ideal for Import/Export
• Learn to Do It Yourself Do it Yourself
• Form Strategic Alliances Others Will Give You
  Needed Services and Marketing
• Prepaid Licenses, Royalties, Advances from
  Customers
• Customer Funded R D

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Bank of Friends and Fools

• Sophisticated (2 million Net Worth) Investors
  Only
• Must Be Willing and Able to Lose Entire
  Investment
• Possible Damages to Relationship?
• No Management Help

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Banking

• Counts on 97- 100 of Loans to be Repaid.
• Low Risk, Not for Start-ups
• Cannot Receive Shares as Compensation
• Cannot Participate in Huge Upsides
• BIG Banks Have VC Funds or Subsidiaries
• Look for Long-Term Partners
• Constantly Evaluating the CEO
• Approach Banks with Cash in Hand Depositor
  Leverage
• Islamic Banking Get Shares Instead of Interest

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Bankers Can Help.

• Spot Weaknesses and Unrealistic Assumptions in
  the Business Plan
• Warn of Upcoming Capital Shortages
• Introductions to Angels, VCs, Talent
• Introductions to Other Bank Customers Possible
  New Customers for You
• Can Provide Insight into Getting Loans
• Can Act as a Credit Reference
• Access to Lease Companies

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Types of Services

• Working Capital Loan
• Usually as a Line of Credit (Letter of Credit)
• To Finance Cash Flow Delay between Shipping and
  Collection
• Very Dependant on Demonstrated Cash Flow
• Much Cheaper than VC Money
• Banker Looks for Receivables and Breakeven Dates

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Types of Services Part 2

• Demand Note
• No Due Date
• Bank Simply Says We want our money.
• After Strong Relationship with Bank
• Payroll and Accounting
• Personal Loans
• Government Backed Loans

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Documents Needed

• Letters of Reference or a Relationship
• Personal Financial Statement
• Business Financial Statement
• Credit Reports
• Business Plan
• Legal Papers (resolutions, articles, agreements)
• Other Loans
• Collateral (assignable leases, receipts, real
  estate, life insurance, or proof of future cash
  flow)

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Banking Suggestions
Jims List 13 Make Friends With Bankers

• Establish Relationship Early
• No ATMs Go Inside and
  Say Hello
• Give Early Brochures
  Establish Corp. File
• Give Profit and Loss Statements Years in Advance
• Have Multiple Relationships
• SunTrust (best in country in customer service)
• Bank of North Georgia (good small business bank)
• Silicon Valley Bank (Introduction to Jims 1st
  Angel)
• Summit National (lots of Asian Import Export)

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After the Loan

• Pay it Off Early
• Payments Made Timely
• Provide Quarterly Financials, Balances
• Monitor Exec Turnover, Inventory, Availability
  (if they ask for a meeting, go!), Lawsuits, AR,
  Amount You Ask for Help
• Be Proactive, Call Them Regularly

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Credit Histories

• Personal Credit Score
• Out of 800, needs to be north of 700.
• Required to give a copy when you ask.
• Required to tell you when someone else requests
  your score. Multiple requests HURT, except 14
  day car shopping period.
• Equifax, TRW, ChoicePoint, FreeCreditReport.com
• Dun Bradstreet
• Describe Credit Worthiness of Company
• Get a number Send them Data too Just like the
  Bank
• Recent TV ad push.
• Helps get new accounts with suppliers.
• Leasing can lower score.