From the January 1999 issue of Startups

Ask Generation X entrepreneurs how they found start-up capital and they'll say they simply walked into a bank and requested a loan. Yeah, right. A baby-faced CEO has about as much of a chance of landing a loan from a traditional bank as Bob Hope does of winning the X Games' synchronized skydiving competition.

Talk to a bunch of young entrepreneurs, and they'll all tell you the same thing: To banks and government institutions like the SBA, they're not gray and fat enough to be taken seriously.

That may sound bogus, but that's the way it is. Still, savvy young entrepreneurs are finding creative ways to beat the start-up cap trap. Some ask mom and dad to "send money now!" Others turn to college connections to collect the coin they need to launch their businesses. It all boils down to this: Finance 101 is a self-taught course. On the following pages, meet eight entrepreneurs who passed with flying colors. You'll probably find one whose methods work for you.


Christopher D. Lancette, a journalist in Atlanta, writes for a number of local and national publications.

X-IT Products LLC

business: home safety products
founders: Andrew Ive, 30; Kevin Dodge, 28
year started: 1997
location: San Francisco
employees: 3
1997 revenues: N/A
1998 revenues: about $1 million
start-up costs: $250,000 (first round); $300,000 (second round)
sources: college professors; a wealthy Harvard alumnus

Andrew Ive and Kevin Dodge considered seeking venture capital to fund their company, which sells emergency ladders that help people escape their homes during a fire. After doing their homework, however, they opted not to waste the time. "Most VCs are focused on high tech," says Ive. "It's incredibly hard to find one that will loan to a consumer goods company."

They also considered raising bigger bucks by selling a greater percentage of the company. Instead, they chose to sell about 30 percent of the company to multiple parties, including a couple of college professors they knew from Harvard. College connections then led the partners to an additional angel investor, a wealthy Harvard alumnus. (Angel investors are wealthy individuals who put some of their disposable income into start-ups, assuming risk in exchange for a percentage of the profits.)

With funding secured, the pair convinced major outlets such as Kmart to carry their ladders, which have tangle-free steps suspended on heavy-duty, fire-resistant webbing. They also earned a spot in the Sears catalog, among others.

With success under their belts, Ive and Dodge are currently developing a second home safety product they hope to release in March.

Zydeco

business: computer software
founder: Greg Meffert, 33
year started: 1992
location: New Orleans
employees: 25
1997 revenues: $2.5 million
1998 revenues: $3 million to $4 million
start-up costs: $7.5 million
sources: Hollywood actress; state government program

If Greg Meffert's story sounds straight from Hollywood, that's because it is.

An attorney for one of Hollywood's hottest young actresses was in New Orleans, looking for a company in which to invest some of her money, when he got lost. Stumbling upon a good citizen, he asked for directions. That citizen happened to be an attorney connected to Meffert. By the time the chance encounter was over, an investment of $3.5 million was in the works.

"It's a weird story, but it's true," says Meffert, who's done some acting of a sort: After several banks turned him down, Meffert asked an older friend to pose as company president while he played the role of head of technical support. Despite the ingenuity, however, the effort failed. "The banks down here didn't know how to spell PC," Meffert remembers. "They just didn't get it."

A second source of funding that did pay off was a unique state government program that uses premium tax credits to fund entrepreneurial ventures. For Meffert, that meant $4 million, which he used to develop 11 products designed to link various computer applications with scanned documents.

Says Meffert, "The banks didn't help me at all. Even after Bill Gates changed the image of young entrepreneurs for the better, they still didn't loan me any money. They were just nicer to me because they didn't want to take the chance they might be pissing off the next Bill Gates."

Honest Tea Inc.

business: bottled tea manufacturer and marketer
founders: Seth Goldman, 33; Barry Nalebuff, 40
year started: February 1998
location: Bethesda, Maryland
employees: 5
1997 revenues: N/A
1998 revenues: $500,000
start-up costs: $600,000
sources: the majority from Nalebuff's business contacts; the rest from Goldman's friends and family

Seth Goldman was a thirsty guy who really loved tea. Barry Nalebuff was a Yale professor and marketing expert who really loved tea. Several years after kicking around the idea that genuine, made-from-real-leaves stuff didn't exist in the market, Goldman quit a high-paying job at a mutual fund company in Bethesda, Maryland, so he could bring it there himself.

Nalebuff, ready to bet on the idea, put up the first $200,000 of seed money. He used his contacts in the business world to find additional dollars. Goldman, meanwhile, made batches of his dream brew in his kitchen and gave tastes to supermarket buyers. He also showed them his distinctive labels that featured original artwork representing each flavor--such as a mosaic pattern for Moroccan Mint. "I told them `This is what I've got and I'd like to have it on the shelves in a month and a half,' " he says.

Remarkably, he did. Before long, the two had sold 100,000 bottles in stores nationwide. Their strategy? Honest Tea offers five flavors that sell for 20 to 40 cents more than Snapple and others.

After their booming start, the partners are now quenching their thirsts with cash.

Swayne Agency Literary Management & Consulting

business: literary agency
founder: Lisa Swayne, 29
year started: 1997
location: New York City
employees: 2
1997 revenues: N/A
1998 revenues: $2 million
start-up costs: $3,000
sources: personal savings; husband's moving allowance

Lisa Swayne easily wins the award for doing the most with the least. She didn't really even have "start-up capital." Sofa-cushion change is more like it.

"I was so broke I stole paper clips," she says. She's not kidding. Swayne was working for a literary agency in Washington, DC, when she was bitten by the entrepreneurial bug. Figuring no one would be interested in loaning a one-woman show money to peddle books, Swayne pillaged her meager savings account. "I was more frugal than I've ever been in my life," she remembers.

The penny-pinching paid off. Thanks to the three clients who signed on with her when she and her husband moved to New York City, Swayne managed to pay the bills those first few months.

Then the revenues poured in. Swayne's specialty is working with new media clients such as Aliza Sherman, author of Cybergrrl! A Woman's Guide to the World Wide Web (Ballantine, $12). Though some publishers are still wary of anything Internet-related, Swayne is certain the print media success of Sherman and others will show that cyberstars are generating new fields of interest people will want to buy books about.

At least one lender agrees: Citibank's entertainment division just loaned Swayne enough money to launch a small-scale campaign promoting her agency. "By the time it's over, I won't have spent more than $90,000," she says. Considering what she started with, though, she'll likely turn that bread into enough to feed the entire publishing industry.

EEF Productions

business: video production
founders: Jon Efraimson, 32; Hayden Scott, 32
year started: 1996
location: Vail, Colorado
employees: 8
1997 revenues: $600,000
1998 revenues: $750,000
start-up costs: $50,000 cash; $240,000 equipment lease
sources: Scott's father-in-law; medical foundation

Talk about using your head. Jon Efraimson and Hayden Scott couldn't find a bank that would go near them. Nobody, it seemed, wanted to give two young guys the money needed to buy some very expensive video equipment to run a kind of business not usually talked about on Wall Street. They knew they had something on their side, though--contacts.

As employees of another video production company, they were already doing pieces for the famed Steadman Hawkins Sports Medicine Foundation in Vail, Colorado. When the foundation began looking for its own video production chief to handle day-to-day production of videos and programs about knee surgery and the like, Efraimson and Scott cut a deal: They would provide the foundation with the daily work equivalent of one full-time employee in exchange for use of the foundation's $200,000 equipment. They also brought to the effort their own stuff, including a $40,000 camera obtained through a lease guaranteed by a supplier they used at their previous job.

"Our association with the foundation gave us instant credibility," Efraimson says.

In addition to serving the foundation, the company also produces videos of local skiing and mountain biking races, plus promotional pieces for numerous resorts. Next up: a drive to produce more TV programming for Fox Sports and others. Says Efraimson, "A lot of things are falling into place."

Jackpot!

Think all banks are callous cash cows that only help companies that already have money? Think again.

While many traditional lending institutions turn their noses up at Gen Xers, Silicon Valley Bank doesn't--especially if you've got emerging technology on the brain, and the ability to explain it with the mouth.

"The entrepreneur who stands out has a clear vision of what he or she wants to do," says Harry W. Kellogg Jr., an executive vice president whose bank taps $3.1 billion in assets to serve more than 3,500 companies. "A lot of people come in with a huge business plan and a lot of talk but can't articulate a crisp vision of their mission. State it succinctly. Tell us what you're trying to do."

If you own a high-tech firm, the 15-year-old bank, which has 15 offices nationwide, can help you get your show on the road. Though many of its clients already had venture capital when they came through the doors, bank officials take great pride in nurturing the promising companies that do not.

"We try to do more than put them in our bank," Kellogg says. "We try to help them raise money--introduce them to venture capital and angel investors. We also refer them to a CPA and point them in the right direction. What we're really trying to do is build lasting relationships."

For more information on Silicon Valley Bank, visit http://www.svb.com.

Contact Sources

EEF Productions, (970) 479-6333, eef@vail.net

Honest Tea Inc., (301) 652-3556, http://www.honesttea.com

Silicon Valley Bank, hkellogg@svbank.com

Swayne Agency Literary Management & Consulting, (212) 391-5438, lswayne@swayneagency.com

X-IT Products LLC, (415) 929-9487, andrew@x-it.com

Zydeco, 1600 Canal St., 14th Fl., New Orleans, LA 70112, (504) 539-9301.