Click to Print

Young Millionaires on . . . Financing

One of the major causes of startup failure is undercapitalization. Avoid this sandtrap with advice on financing from these successful entrepreneurs.
October 22, 2004
URL: http://www.entrepreneur.com/article/73238

To help you avoid the money troubles that often plague startup businesses, we asked our 2004 young millionaires for their wisdom on the sticky subject of financing. What they learned the hard way may just help out your business.

Christina Bartolucci and Laura DeLuisa, owners of Duwop, a manufacturer of specialty makeup and body creams
DeLuisa: The money you have you have to be willing to lose. I had $50,000 saved up in an account earmarked for my future business. Then Cristina borrowed $20,000 from her family to get us going. We didn't pay ourselves for two years. We worked part time in the film industry to supplement our income while we were trying to get the business off the ground.

Bartolucci: Those were some lean years. [But] Laura is genius at balancing and knowing where you need to spend the money, and getting that money and cutting back everywhere else. And sometimes I would just hate her. I'm like,"Can we please have a hundred more dollars this week?" And she'd say, "No-you'll thank me in the end. Your kids will thank me in the end."

Marco and Sandra Johnson, founders of Antelope Valley Medical College, an accredited medical college that provides EMT, medical assistant, paramedic and other training
Sandra: [We were self-financed and] there were many times when we couldn't pay our mortgage, and we had to sacrifice our home, but we made sure the business was always going to be taken care of because we believed in our dream. And it was worth the sacrifice we made.

And we had two business angels [landlords and business advisors Jack Ravan and Fred Yassian] that helped us a lot. A month would go by and they'd say, you don't have to pay rent this month because we know that you'll be able to pay for it at the end of the contract. They always helped us. We truly believe that without them, we wouldn't have been able to get as far as quickly as we have.

Nicole Licata, 35, and Suzy da Silva, 33, founders of CCM Marketing Inc., a media buying advertising agency specializing in the direct-response market
Licata: We [financed our business] with cash and credit cards. To be honest, I don't know if that was the right way to go or the wrong way to go. Mostly I think that if you really believe what you're doing and you're willing to give up your own personal money, then do it. If you have that faith. Da Silva: And that drive. Licata: And you're willing to say, hey, I've got that $30,000, and I'm willing to lose it on trying this because I believe in it.

Stewart Levy, 37, founder of Tokyopop Inc., a multimedia publishing company specializing in English-language "manga"-Japanese comic books
When I first started doing multimedia stuff, even pre-Tokyopop, I financed [it] two ways: First, I was doing consulting on the side, which is a pretty typical way I think a lot of entrepreneurs start. You get a couple clients; they don't pay that much money, but it's enough to cover your overhead. Second, I had savings. It wasn't a lot of money-$30,000 I had saved up. In the very beginning, in my mid-20s, I bought rights to a CD-ROM from America with that and turned it into a Japanese-language [version]. I cut costs everywhere in the beginning, boostrapping, sleeping in my office-doing all those typical hard-core entrepreneurial things that you look back and think, God, how did I do it? Then I got to the point where I raised some initial financing when I started Tokyopop, but it wasn't a lot of money, half million dollars in the beginning.

James Funderburk, 39, founder of Urban Evolution, Civilian and Lotus; Tonic; and J-Squared LLC, which are clothing stores, a private nightclub and a real estate company, respectively
I opened up my first retail store [pre-Urban Evolution] for less than $30,000. [For Urban,] I financed from a very meager savings and a $10,000 loan from a family friend. I sold a car that was paid for and bought a much cheaper one. Now I've acquired a bit of real estate, leveraged my holdings or retained a line of credit. I have investors.

Jon Cohen, 36, and Rob Stone, 36, founders of Cornerstone Promotion, a lifestyle marketing company, and The Fader magazine
Stone: It's self-financed between Jon and myself. When I first left the corporate music industry, there was a real void in the marketplace, and it was something that Cornerstone really filled. I was able, fortunately, to finance the company off of projects the day I left Arista. It was basic hitting the ground, running with projects, and it was financed straight out of any personal money. Cornerstone was profitable in its first month, which is very unique. When Jon joined, the company really saw some tremendous growth because it was now the two of us together. We've been very fortunate that way

Cohen: We've used a line of credit when needed, but we've been so fortunate, we haven't needed any real financing. We've built a company with 60-plus people and a really big infrastructure and been able to do it out of our own success. I think the reason for that is we've been really smart and strategic about our growth.

It's not about what your source of financing is, it's about the quality of who's helping you with that. We became strong partners because we both brought something to the table. If you're going to take investment or look for financing, make sure you invest with someone who's bring something to the table.

Craig Allen, 35, founder of All Star Wine & Spirits, an upscale wine and spirits shop
I went to the bank, and I said, "I need half a million to start this." And they said, "You need 150,000 in cash." I put out a private placement offering and went to some customers that I knew who were big wine people and [told] them that I was going to build this superstore. It took a while, but I got a few people on. Once I got some people, it took a little bit longer to get more people. I got a group of people who were into wine, who knew me, who believed in me. It wasn't a ton of money-$10,000 to $25,000 a pop to start. I did a second round a year later.

Return on investment right now for these [investors] is almost four times in six years. In the future, I'm hoping to do a stock buyback of everything. We're in the process now of hopefully getting something like that done so I can use this more as an asset to get other loans. All you've got to do is work hard and talk to people. [It also helps] if you can express your passion and they can see it, and if you've got a little bit of a track record. You just have to convince someone to believe and invest in you.

Josh Linkner, 34, founder of ePrize, an interactive promotion agency
We're independent. I originally funded it out of my own pocket. Then I raised some venture capital and subsequently bought out the VC folk. We started out servicing many venture-backed dotcom companies, but most of those companies have evaporated. In about mid-2000, we saw the writing on the wall and had to adapt our complete strategy and company to service the large brands that would be around to pay the bills.

Art Alaniz, 33, founder of Progressive Telecom, a wholesaler and distributor of cell phones and accessories
SBA has been the secret to our success on the financing side. I recommend anyone in a startup phase to pursue SBA as a financing resource. SBA will guarantee up to $1 million to a bank. Once you outgrow this financing, then it is time to look at subordinated debt or selling equity. We are in this phase of our business now.