From the July 2000 issue of Entrepreneur

So you want to start a business? You've researched the market, figured out potential cash flow and identified your competitors. Now all you need is start-up capital. As anyone who's already tried knows, it's not quite that simple. In fact, finding the money to go from an idea to an actual business can be one of the most difficult hurdles entrepreneurs face.

This is particularly true if you've used up, or just can't access, traditional seed-financing sources: personal savings, friends or family, credit cards or personal loans from banks or other financial institutions. So what's left? Surprisingly, quite a few options, depending on who and where you are and what type of business you're starting. Here are four sources to get you going.

1. Business Plan Competitions

Does anyone offer "free money" to start a business? Business-plan competitions come pretty close, typically featuring small pots of money, up to $50,000.

University-sponsored contests are popping up all over the country, with participants required to be current students, recent graduates or business-founding teams that include at least one university student. Winners of local university competitions also sometimes go on to national (and international) ones. For example, teams from around the world competed at the Moot Corp International Business Plan Competition at the University of Texas, Austin, described as "the granddaddy of business competitions." This year's contest featured 26 teams, including one each from licensed Moot Corp competitions in Africa, Asia, Australia and Canada. Contestants competed for a first-place prize of $15,000. Hewlett Packard also offered $100,000 in goods and services to one lucky team that agreed to launch an Internet company.

A number of municipalities have jumped on the business-plan-competition bandwagon to stimulate economic development. Probably the oldest such contest is sponsored by the Eau Claire Area Industrial Development Corp. in Wisconsin. Since 1986, the agency has invested $29,500 in companies.

Others who have followed the Eau Claire example include Amarillo, Texas; Carbondale, Illinois; Haverhill, Massachusetts' Cyber District; and Pittsburgh.

Hot Opportunities

Competitions associated with universities typically require that at least one member of the founding team be a current student or alumnus of the school.

  • Burton D. Morgan Entrepreneurial Competition (at Purdue University): more than $30,000 in cash prizes. Open to Purdue students and teams that include a Purdue student.
  • Harvard Business School Business Plan Contest is open to second-year business schools students and team including at least one second-year student. Awards include cash and in-kind services.
  • UC Berkeley has several contests--the Haas Social Venture Business Plan Competition and the UC Berkeley Business Plan Contest, open to students and alumni. The social venture contest offers a top prize of $10,000 to companies with a positive financial and social or environmental outcome. The regular contest in 2000 offered $50,000 for the winner.
  • MIT $50K Entrepreneurship Competition targets students and researchers in the MIT community. All teams must have at least one full-time MIT student as a principal contestant.
  • The Hummer Winblad February Madness Start-Up contest is open to individual or business teams where the founding management team is currently enrolled in a post-secondary college or university. The first-place winner will receive an offer of funding from Hummer Winblad. (415) 979-9600. (Lisa Anderson)
  • Babson College holds several competitions. The Douglass Foundation Entrepreneurial Prizes, for one, offers graduate students a total of $10,000 in awards ($6,000 to the winner, $3,000 for second place and $1,000 for third place). The John H. Muller Jr. Business Plan Prize Competition awards $5,000 to an undergraduate.
  • Indiana University conducts three competitions: The Indiana University Spirit of Enterprise Undergrad Business Plan Competition; the MBA Business Plan Competition, organized by the Kelley School of Business; and the invitation-only Indiana University Spirit of Enterprise MBA Business Plan Competition. The latter contest features the winning teams of local contests at nine Midwestern schools.
  • Enterprise Creation Competition sponsored by Ball State University in Muncie, Indiana, and Miami University in Oxford, Ohio offers more than $12,000 in cash prizes to teams of undergraduates from universities around the nation.
  • The inaugural Duke University Startup Challenge in 1999, operated in three phases, offered the winning team a $30,000 first prize. Teams must consist of at least one current Duke student, and mixers are held during the preliminary stages of the competition to facilitate team formation. For more information, call: (919) 660-7700.
  • Howard University holds a business-plan contest for students offering a cash prize during its annual Black is Business Week program. Applications are available in the fall. Call Dr. Saunders for details: (202) 806-1533.
  • NASDAQ/SDSU International Student Business Plan Competition sponsored by San Diego State University, Entrepreneurial Management Center. Open to faculty-sponsored full and part-time graduate and/or undergraduate students currently enrolled. (619) 594-2781.

2. Grants

This is probably the most talked about and least understood source of business financing. For the record, there are no general small-business start-up grants. But you can find grants tailored for specific needs.

The largest of these are two programs operated by the federal government: the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs.

Obtaining an SBIR requires strategy, says Chris Berka, CEO and co-founder of Advance Brain Monitoring. "It's very important that your idea fit some framework of one of the government agencies [participating in the SBIR program]. At first, [our applications] didn't interest any agency," explains Berka, whose Carlsbad, California, firm won three grants after a couple tries. Their first success: a $100,000 award to create and demonstrate a prototype of a baseball-cap-style alertness-monitoring device.

Entrepreneurs nationwide can apply for SBIR/STTR grants from any of the 10 federal agencies involved in the program. Phase One grants money for finance development and testing of a prototype; after the prototype is completed, companies can seek Phase Two grants in amounts of up to $750,000 to start them on the road to commercialization.

"A lot of people get Phase One grants, but Phase Two is extremely competitive," says Berka. "We went through several rewrites and finally figured out the formula." Thanks to these grants, Berka and her co-founders, Daniel Levendowski and Zoran Konstantinovic, should have their product ready for the market by 2001.

Only two of the 10 agencies--the National Science Foundation and the National Institutes of Health--actually use a grant system to award money. The others use either the Federal Acquisition Requirement (FAR) process or federal contracting.

"These grants are not giveaways," stresses Arthur Collins, acting assistant administrator for technology in the SBA's Office of Technology. "It's a competitive process in response to specific agency needs. Each agency will put topics out there that meet mission needs and lend themselves to commercialization."

According to Collins, the difference between the programs is that, while SBIRs focus on funding new technologies, STTRs require a nonprofit research organization and a business to jointly focus on technology transfer. Organizations around the country help entrepreneurs apply for these awards. To learn more about the program, visit www.sba.gov/sbir.

The Inventions and Innovation Grant is another government program operated by the Department of Energy Office of Energy Efficiency and Renewable Energy. Its goal: to encourage development and adoption of renewable energy and energy efficiency. Inventors and small technology-based companies can review solicitations issued annually that spell out what the agency is seeking and include instructions for completing proposals. Up for the taking are grants of up to $40,000 to fund development, or of up to $200,000 in prototype development or commercialization grants.

The National Institute of Standards and Technology, through its Advanced Technology Program, can award a single company up to $2 million over a period of up to three years for research and development. The program invests in cutting-edge technologies that promise significant commercial payoffs and widespread national benefits. For details on past winners and applications for the next competition, call (800) 287-3863 or visit www.atp.nist.gov. A number of states and cities have their own targeted grants. For example, the Illinois Recycling Grant Program encourages private organizations to apply for grants that promote diverting recyclable commodities. North Carolina's Division of Pollution Prevention and Environmental Assistance offers several grants, including up to $20,000 in matching funds to develop and implement projects that eliminate, prevent and/or reduce solid waste.

In the Savannah River Region of South Carolina and Georgia, entrepreneurs starting tech-based or manufacturing companies can apply for several grants. The Small Business Seed Fund for Technical Innovations offers two-year loans of up to $50,000 to support startups or business expansions offering new products or improvements of old ones. Those who successfully complete this grant can apply for a two-year grant of up to $250,000 from the Challenge Fund Program for Technology Development.

These are just a few of the grants available. To find others takes persistence as well as some creative and strategic thinking. Start by finding the government office that handles business or economic development; then ask for more information.

Hot Opportunities

  • Thornton, Colorado, has a promotional and facade Improvement grant for companies located in the Urban Renewal Zone. For details, call (303) 538-7358.
  • Low-income residents of California, Connecticut, Iowa, Maine, New Jersey, New York, Pennsylvania and Vermont can apply for grants of up to $700 in two phases to start a business through the Trickle Up Program. This national effort operates in conjunction with local partners. For the nearest Trickle Up Program, call (212) 362-7958.
  • Pennsylvania's Alternative Fuels Incentive Grant Programs will cover up to 30 percent of the cost associated with field testing and evaluating new and innovative alternative-fuel technologies. Applications are available beginning in August. For details, call (717) 783-9242.
  • The Energy Innovations Small Grant in California provides up to $75,000 to small businesses, small nonprofits, individuals and academic institutions researching the feasibility of new and innovative concepts. For details, contact the California Energy Commission at (619) 594-1049 or visit here.
  • Minnesota offers a number of environmental assistance grants for startups with relevant innovative technologies related to pollution prevention, recycling market development, environmental education, sustainable communities development and/or resource recovery. These are one-to-one matching grants (match can be cash or in-kind). For details, call the state's Office of Environmental Assistance in early spring, call (800) 657-3843 or visit here.
  • Iowa's Entrepreneurs With Disabilities programs provides technical and financial assistance grants of up to $10,000 each to qualified individuals who are active clients of the Iowa Department of Education Division of Vocational Rehabilitation Services or the Iowa Department for the Blind. Proceeds can be used to pay for business-related consulting services leading to development of a business feasibility study or business plan and for other startup costs.
  • The Defense Advanced Research Projects Agency (DARPA) offers research and development grants, contracts and innovative agreements to individuals and small businesses that have scientific and technological ideas related to its strategic mission. For more information, read the Commerce Business Daily, a daily list of U.S. government procurement invitations, contract awards and foreign business opportunities or visit DARPA's site or call (703) 526-6630.

3. Innovation Contests

Sometimes an idea in the head is worth money in the hand, especially if you win an invention or innovation contest. One to consider is the Intellectual Property Owners Association award, which provides $5,000 to one inventor each year. Nominations are typically due in early spring and winners announced in June every year. Eligible entries must have originated in the United States, be covered by a U.S. patent or have been made commercially available since the beginning of 1996.

Hot Opportunities

  • The Chrysler Design Award gives six $10,000 grants to winners in the following categories: urban design, graphic design, landscaping, architecture, new media and fashion. The competition looks at the breadth of work of designers who have consistently been on the cutting edge of their respective fields. A nominating committee selects candidates. For more information, contact Vikki Hardy at (248) 262-8700.
  • The Lemelson-MIT Awards offers $500,000 to an individual, $30,000 to a student and $30,000 to a student team with a patent that has the potential to make a significant impact on society. This is a nomination process only. Interested individuals can approach a relevant professional organization in the fields of science, engineering, medicine or business as well as regional inventors groups to secure a nomination.

4. Supplier Financing

Imagine being a woman working in the women's swimwear industry, a field dominated by men who don't understand the importance of creating figure-flattering swimsuits.

That situation prompted Patricia Byrnes Kane, 42, to walk away from a business she co-owned to start It Figures. "Now I have complete freedom to do whatever I want," says Byrnes Kane.

Her freedom came in the form of roughly $1 million in financial backing from the manufacturer of her swimwear--Ronnie Strasser of Phantom Industries in Toronto, Canada. Byrnes Kane had already launched her firm when she met Strasser through a mutual friend. "He was trying to start a swimwear company and approached me because he was small in Canada and wanted to build his name in the United States."

The two studied Kane's profit and loss projections before sewing up a 50/50 partnership in which she runs It Figures in New York City and he runs Phantom. They communicate weekly to discuss business issues. All order fulfillment and design takes place at the Phantom plant while merchandising and sales happen at the It Figures offices.

Prior to signing the agreement, Kane visited the factory, researched Strasser's reputation and even contacted his bank to check his finances. "I wanted to make sure I hooked up with someone with integrity and honesty," says Kane, whose past partnerships had left her wary.

Would she have gone on without the partnership? "I probably would have gone to another swimwear company and started up a division there. But at the end of the day I might not have been as happy."

For entrepreneurs like Berka and Kane, the nontraditional route for business financing paid off. But they've also demonstrated that finding the money is no walk in the park, so gird up your "never say die" attitude and start knocking on doors to find that money.

Suppliers & Demand

Jerry Oakes, a business consultant who, in 1974, owned the international-distribution rights to mood rings and received financing from the jewelry firm he worked for back then, offers these tips to help you get financing from suppliers:

  • Be open to those business arrangements that don't always necessarily involve an exchange of cash. Sometimes the access to a supplier's facilities, equipment and his or her valuable expertise can be just as valuable.
  • Prepare. Don't just go to your suppliers with a great idea; go to them with a presentation detailing how your great idea can benefit their bottom line.
  • If appropriate, make sure you have a patent, trademark, copyright on file or patent pending for your product.
  • To show the need for your product or service, do some market research that extends beyond your circle of friends and family.
  • Go to a trade show, get orders, then go back to a potential manufacturer and ask for financing on the strength of those orders.

A Wish Granted

A funny thing happened to Mark Elmore on the way to getting business counseling--the local Small Business Development Center advised him to apply for the Amarillo Enterprise Challenge competition. He did and won.

That $35,000 award helped propel this particular Texan into full-time entrepreneurship.

"I was at a crossroads with my business," explains Elmore, 43. He had run The Pilgrim Company, which makes computer mouse pads, part time since starting it in 1994. "I was ready to launch a business that could support me. I felt I had a product line and production capability to make it go."

But he didn't have the money. The Pilgrim Company was a perfect candidate for the challenge grant, because the $50,000 in sales Elmore was garnering at that time came primarily from outside the Amarillo area.

When he applied in 1998, there were 16 applicants; from those, five finalists were chosen. Taking to heart the committee's comments on the weakness of the marketing part of his initial proposal, Elmore took a chance and spent his precious financial resources to implement a card-deck campaign and Internet-banner advertising 10 days before the presentation. Its efforts generated 30 solid leads and several verbal confirmations. "I was spending over $10,000 a year out of my own pocket on financing, and it was a big stress on me. I felt it was time to see if this business was going to fly or not," says Elmore.

The committee was convinced, and gave him the grant. That cash infusion enabled Elmore to work on The Pilgrim Company full time, do additional advertising, purchase inventory and bring in additional help to handle sales. By 1999, sales had jumped to $300,000; they're projected to increase to $400,000 this year.

"Without the grant," says Elmore, "I probably would have given up within a year."