4 New Ways to Self-Fund Your Startup
Bootstrapping is a perfectly viable option, unless you're launching a business that needs staff, equipment or contractors, in which case you need money.
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Self-funding, or bootstrapping a startup company, means different things to different people. To the Silicon Valley serial entrepreneur who just sold his company to Google for $100 million, bootstrapping is just writing yourself a big check. To the newer entrepreneur who is lucky enough to have some personal assets, it may mean tapping into savings or a retirement account to come up with $50,000 to $100,000 to get things rolling. To others still – those who represent the vast majority of entrepreneurs – it means living on Ramen noodles and peanut butter sandwiches, calling in favors from friends who will work for free, and squirreling away a few hundred dollars at a time to keep the lights on.
Is it possible to self-fund a company if you don't already have a fat bank account? Sure, but the amount of capital (or lack of capital) you have will influence the type of business you are in. Fortunately, because of cloud innovations that exist today, you won't need nearly as much to launch compared with just twenty years ago.
Alternative borrowing: Banks aren't the only game in town
While some entrepreneurs have a long and steady job history and excellent credit, most do not – the entrepreneurial mindset doesn't really lend itself to working at the Post Office for 30 years and living around a steady paycheck. As a result, the majority of entrepreneurs don't have enough savings or assets built up to go the true "back pocket funding" route, and instead look to borrow. A few visits to the bank and most will be quickly disappointed, especially as low interest rates have driven banks and traditional lenders to raise underwriting standards, eliminate smaller loan thresholds and focus more on established businesses. Even if you're lucky enough to find a bank that is friendly to startups, unless you have an exceedingly high FICO score, you'll be out of luck no matter how great your idea may be. You may be creating the next Google, but if you don't have collateral and a high FICO, the bank doesn't care – and it's just not profitable for banks to make loans to small businesses any more.
"The new regulatory environment under Dodd-Frank doesn't make it profitable or easy for banks to make loans to small businesses," said B.J. Lackland, CEO of Lighter Capital. "Banks will eventually have to make some changes to address this new environment, but they won't make major shifts until the regulatory doors open."
Entrepreneurs may have to turn to a new crop of alternatives, the most interesting of which is peer-to-peer lending – an option that is often more expensive than the low-interest bank loans, but still less costly than the usurious payday loan firms. Once you do have some revenue coming in, factoring, or borrowing against receivables, may become an option, and that usually does not require the same sort of scrutiny a conventional loan carries. This option can be inflexible though, with fixed daily or weekly payments required. Revenue-based financing (RBF) is a more flexible alternative. According to Lackland, "Traditionally, tech startups had to sell equity to get growth capital as a result of having no hard assets (like equipment or inventory) for a bank to lend against. RBF fits the needs of tech entrepreneurs because it is a flexible instrument, doesn't require hard assets, and combines many of the best aspects of debt and equity, since it's non-dilutive yet aligns the interests of the entrepreneur and investor toward growth."
Targeted loans: What makes you different?
It's a common myth that the SBA and other government agencies have special business loans or grants for minorities or other under-served populations. While there are policies that provide easier access to contracts once a minority-owned business has become established, when you need cash to get started, everybody's on a level playing field.
Entrepreneurs often find themselves in the "underserved" category, but may benefit from reaching out to local community organizations, community banks or online lenders who specifically offer loan products for borrowers who are underserved or in a minority class. Become knowledgeable of programs that target specific groups, businesses launching in distressed areas, or minority-owned businesses.
William Underwood, Public Relations Director at ezDinero Loan Solutions, noted, "Latino business owners and startup entrepreneurs in the U.S. have an impressive success rate in paying back small business loans, but are still often unable to obtain credit due to outdated scoring models, and the lack of interest on the part of traditional lenders in offering business loans of $50,000 or less, effectively closing the door on many worthwhile SOHO business startups."
You don't need as much money as you thought
According to Cary Landis, one of the architects of the NIST cloud computing reference architecture and founder of SaaSMaker, "It's often possible to launch with a lot less capital than was required just twenty years ago, due to the existence of cloud-based software and infrastructure, along with platforms-as-a-service that allow you to more easily create and market your own apps." Landis notes that newer startups are often "born-in-the-cloud," operate virtually and often are able to operate with minimal on-premises equipment. "Besides the obvious cost advantage that comes from not having to operate your own servers, newer DevOps platforms are bridging the gap between IT and business, letting you get up and running quicker and with better apps that are more attuned to the business end of your startup."
Don't quit your day job
Entrepreneurs with little cash may need to bite the bullet and keep the day job while they launch their entrepreneurial effort. Kaleigh Wiese, co-founder of Garment Exchange, a peer-to-peer rental marketplace for women's clothing, launched in March of this year. Wiese says, "We have found it beneficial to self-fund so we could access our potential users creatively and move rapidly and lean. Making decisions quickly has allowed us to get to our potential users quicker and allows for pivots along the way to start generating income." In five short months, Garment Exchange has built up $40,000 in retail business, now allowing Wiese to begin late seed fundraising. By initially self-funding, Wiese was able to prove the concept, prove her dedication to the idea, and become a more attractive target to potential investors.
"To fund Garment Exchange, we have of course decreased our personal spending, but have looked for innovative side projects that would bring in residual income as we put our day-job income into the business. Some of our favorite side income sources have been renting out our cars on Turo and selling our expertise, like creating custom Snapchat filters. Moving quickly and thinking innovatively about bringing in side income has been such a success for us."
More startups, less money
During the dotcom boom of the 1990s, startups were well known for landing multi-million dollar venture capital deals on the strength of a business plan written on a cocktail napkin, burning through those millions in the first few months, then going back for more – and getting it.
Venture capitalists aren't doing that any more, and they don't need to. The self-funded or lightly-funded startup is the foundation of the next wave of startup innovation – and lack of funds is no longer a reason not to launch.