Paying Monthly Bills Before the Company Has Earned a Dime
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Not every startup is lucky enough to score sales or investments early on. Often an entrepreneur must manage without a source of income for several months at a stretch.
What entrepreneurs do to pay their monthly bills during a startup's infancy can involve a mix of activities as creative as their inventions. Here's a roundup of approaches from nine entrepreneurs who shared their experiences with me by email or Skype for my book How We Did It. Their replies ranged from restricting their living expenses or moving in with a girlfriend to working at a furniture store or a restaurant. Others sold shares of the enterprise or did consulting or even worked two jobs.
Borrowing from retirement savings and taking a part-time job. "It took about six months for my business to turn a profit and money was definitely tight," says Debra Cohen, president of HRN, a company with a home-improvement contractor referral network in New York City. "My husband and I had just purchased our first home and we were living on one income. Plus, I had to take a $5,000 loan from his retirement savings plan to launch my business," she says.
"I took a part-time job in a local furniture store just to bring in a few extra hundred dollars a month," Cohen adds. "It also gave me the opportunity to network with decorators, painters, movers, etc."
Moving in with a girlfriend and her parents. "When I started, I was lucky enough to live with my girlfriend’s parents," recalls Patrick DeAmorim, founder of Decate.no, a social network company in Bergen, Norway. In doing so he had a roof over his head, food and basic comforts. But if he had to do it over again, he would take on a job and save enough to live for six months without an income. "I’d also have made sure to have some kind of safety net, just in case," he adds.
Restricting expenses and waiting on tables. "I intentionally reduced my living expenses as much as possible by making a lot of hard decisions and sacrificing pleasantries," says Chandler Crouch, the owner of Chandler Crouch Realtors in Fort Worth, Texas. "It also helps that I didn’t have a wife or kids. Starting out I worked at a restaurant as a waiter. This helped because I could take home a lot of free food."
Exchanging an investment in the company for an equity share. "We went through the first six months of the startup without pay," says Raj Sheth, CEO of Recruiterbox, a Westborough, Mass., company with a recruitment software application. "We had an investment of $20,000 that got us through the first six months of 2011. This was an investment by family and friends against equity in the company.
"We got through the 'cash crunch challenge' by selling fast," he says. "At six months, we were doing about $5,000 to 6,000 per month in revenue, which started paying our bills."
Selling a stake in the business. "My wife and I had $200,000 to our name and were raising four kids, and I ran it down to zero before even selling a pillow," says Michael Lindell, the CEO of MyPillow, a pillow manufacturing company in Chanhassen, Minn. "Be careful [about] getting too caught up [with] investors because then you risk selling out your idea and product or selling too much of your stock." Adds Lindell: "I had to sell some of MyPillow to keep up with capital demands in the beginning. If you are going all in and don’t have cash flow, find the right investor who believes in your idea or product just as much as you do."
Related: 5 Tips for Launching a Side Business
Tapping savings and doing consulting on the side. "We started off by investing $5,000 each and we all came in with savings so we were prepared to go months without pay," says Aaron Skonnard, CEO of Layton, Utah-based PluralSight, which offers an online library of IT video tutorials. "Each of us did continue some side projects as well, including speaking at conferences, writing books and doing consulting."
The side projects prompted the question: “Where does this side income go -- to the individual or the business?” Skonnard explains. "You have to get along with your co-founders well enough that you can resolve tough questions like this."
Pursuing consulting work. Blake Smith, the co-founder an online personal-stylist service Cladwell in Cincinnati, quit his job and went nine months without pay while his team built an initial product and raised money from friends and family. "During that period, my wife and I did some consulting," he recalls. "Watching our money go down that quickly was really scary." The experience "pushed us a lot in our faith and friendships," he says, claiming that jumping all in to his business proved advantageous in helping attract investors.
Hanging onto the job. "Because my business is online, I was able to hold down a job as well," says Jay Barnett, the CEO at Priority Pickup, a passenger-services company in Perth, Australia. "I financed the early setup, paid my bills and saved a little through my job. I planned for the business to pay me back and pay me a wage eventually. It is important to give a business time. I had a two-year plan initially. And I was able to make it because I kept my job."
Running two busineses. "I had my own internet marketing business when I started working on Grindr with $5,000 of my own money," says Joel Simkhai, CEO of Grindr, a geosocial network for the gay community based in Los Angeles. "I worked on both businesses during the time we were in development. Several months after we launched Grindr, I stopped working on my other business."
Correction: This story has been updated to reflect that Recruiterbox is located in Westborough, Mass.