Lecture5BootstrapBan ks

InternationalEntrepreneurship.com: 

InternationalEntrepreneurship.com Lecture 5 – Bootstrapping and Banks “Raising money has become a disease. Entrepreneurs are wasting lots of brainpower scheming to raise money.” -Michael Lutz, CEO Gammalink

Raising Money : 

Raising Money Allows “analytical, button-downed professionals (to make) a seamless transition from the corporate world to the world of entrepreneurship. It is not the real world of the entrepreneur.” -Amar Bhide, “Bootstrap Finance,” Harvard Business Review on Entrepreneurship, 1999.

Raising Money Part 2: 

Raising Money Part 2 80% of 100 Fastest Growing Companies in 1989 were Financed Through Personal Savings, Credit Cards, Second Mortgages, and “a $50 check that bounced.” Only 1/5th had raised equity finance in 5 years. Used debt and retained earnings.

Consequences of Funding: 

Consequences of Funding Hides Faults – Lose Sight of Basics Easier to Raise $5 Million than $1 Million Think a Start-Up Needs ALL the Pieces of a Big Company Diminished Flexibility – Stick to the Plan Bootstrapping Rare in Tech World Incubators (CMGI)

Bootstrapping Definition: 

Bootstrapping Definition ‘A means of financing a small firm through highly creative acquisition and use of resources without raising equity from traditional sources or borrowing money from a bank.’ -Freear, Sohl and Wetzel, 1995 Jim’s List #12: Don’t Give Away Early Equity

Prevalence of Bootstrapping: 

Prevalence of Bootstrapping Credit cards 50 Commercial bank loan 43 Leasing 24 Vendor credit 23 Asset-based/inventory as collateral 20 Personal or home equity bank loan 19 Angel investors 19 Private loan 18 SBA-guaranteed loan 6 Selling/pledging accounts receivable 3 Private placement of stock 2 Venture capital 2 Public issuance of stock 1 Other 1         Small-business owners % in 2000 who used the following to finance their capital needs in the preceding 12 months: Remember, Dell was bootstrapped…

Bootstrapping Benefits: 

Bootstrapping Benefits Best for the Business Focus on Profits, Cash Flow Owners not Busy with Other Things Problems Really Solved Best for the Owners Retain Much more Equity and Control Learn More Allows Better Allocation of Time Easier to Sell Company, esp. to a Corp. in Sector Best for the Employees Possible Higher Share in Returns

Bootstrapping Ideas: 

Bootstrapping Ideas Get Operational Quickly (Copycat pays less in Market Research, etc. & New Ideas Pop Up) Look for Quick, Break-even, Cash-flow Projects (Even if the Product is Secondary – NOT Accounts Receivables, but CASH) Offer High-value Products that Rely on Personal Selling (You! & Same time to Sell $50 Product and $5,000 Product) Forget the Crack Team of Recruits (Cannot Afford It, Not Hungry, Scrappy, Attract by Opportunity to Upgrade and Build Resumes)

Bootstrapping Ideas Part 2: 

Bootstrapping Ideas Part 2 5. Keep Growth in Check (Invest in People or Capacity When Required, NOT in Advance of Needs & Lets Skills Grow w/ Firm) 6. Focus on CASH, Not Profits, Share, etc. (Must have 1 strategic goal = Sell at high mark up – Cannot ‘buy business’ & Work on Suppliers Relations aggressively) Don’t Skimp (Pay for the vital thing) Cultivate Bank Relationships Early (Winning a Relationship Takes Years of Planning – Lose the ATM Card – Keep Great Records and Share Them – Pay First Loan Back Quickly) Do Everything in House (Taking a copier to Vegas)

Bootstrapping Ideas Part 3: 

Bootstrapping Ideas Part 3 Start in Your House or Garage Don’t Pay Yourself or Others (Options) Don’t Pay Bills Timely Argue Every Price and Bill (Even Retail) Word-of-Mouth Advertising – Guerrilla Marketing Use the Royal “We” but DON’T Blame Others Like “Francis” Jim’s List #14: Don’t Ever Spend Money

Bootstrapping Ideas Part 4: 

Bootstrapping Ideas Part 4 Ideal for Import/Export Learn to Do It Yourself – Do it Yourself Form Strategic Alliances – Others Will Give You Needed Services and Marketing Prepaid Licenses, Royalties, Advances from Customers Customer Funded R & D

Bank of “Friends and Fools”: 

Bank of “Friends and Fools” Sophisticated ($2 million Net Worth) Investors Only Must Be Willing and Able to Lose Entire Investment Possible Damages to Relationship? No Management Help

Banking: 

Banking Counts on 97- 100% of Loans to be Repaid. Low Risk, Not for Start-ups Cannot Receive Shares as Compensation Cannot Participate in Huge Upsides BIG Banks Have VC Funds or Subsidiaries Look for Long-Term Partners Constantly Evaluating the CEO Approach Banks with Cash in Hand = “Depositor Leverage” Islamic Banking – Get Shares Instead of Interest

Bankers Can Help….: 

Bankers Can Help…. Spot Weaknesses and Unrealistic Assumptions in the Business Plan Warn of Upcoming Capital Shortages Introductions to Angels, VCs, Talent Introductions to Other Bank Customers = Possible New Customers for You Can Provide Insight into Getting Loans Can Act as a Credit Reference Access to Lease Companies

Types of Services: 

Types of Services Working Capital Loan Usually as a Line of Credit (Letter of Credit) To Finance Cash Flow Delay between Shipping and Collection Very Dependant on Demonstrated Cash Flow Much Cheaper than VC Money Banker Looks for Receivables and Breakeven Dates

Types of Services Part 2: 

Types of Services Part 2 Demand Note No Due Date Bank Simply Says “We want our money.” After Strong Relationship with Bank Payroll and Accounting Personal Loans Government Backed Loans

Documents Needed: 

Documents Needed Letters of Reference or a Relationship Personal Financial Statement Business Financial Statement Credit Reports Business Plan Legal Papers (resolutions, articles, agreements) Other Loans Collateral (assignable leases, receipts, real estate, life insurance, or proof of future cash flow)

Banking Suggestions: 

Banking Suggestions Establish Relationship Early No ATMs – Go Inside and Say Hello Give Early Brochures – Establish Corp. File Give Profit and Loss Statements Years in Advance Have Multiple Relationships SunTrust (best in country in customer service) Bank of North Georgia (good small business bank) Silicon Valley Bank (Introduction to Jim’s 1st Angel) Summit National (lots of Asian Import –Export) Jim’s List #13: Make Friends With Bankers

After the Loan: 

After the Loan Pay it Off Early Payments Made Timely Provide Quarterly Financials, Balances Monitor Exec Turnover, Inventory, Availability (if they ask for a meeting, go!), Lawsuits, AR, Amount You Ask for Help Be Proactive, Call Them Regularly

Credit Histories: 

Credit Histories Personal Credit Score Out of 800, needs to be north of 700. Required to give a copy when you ask. Required to tell you when someone else requests your score. Multiple requests HURT, except “14 day car shopping period.” Equifax, TRW, ChoicePoint, FreeCreditReport.com Dun & Bradstreet Describe Credit Worthiness of Company Get a number & Send them Data too – Just like the Bank Recent TV ad push. Helps get new accounts with suppliers. Leasing can lower score.