Ever since selling my company, C&S Mystery Shoppers, Inc. in 1999, I have been speaking to people around the country, from high school students to senior citizens, on the topic of starting a business. One question that is always raised is, “Where do I get the money?” The question often turns to venture capital, which isn’t surprising. In the entrepreneurial boom of the late 1990s, we frequently read about entrepreneurs – and most dramatically, young entrepreneurs – receiving millions of dollars in seed money to start the next Microsoft.
That was then and this is now. Now we are in the throes of hard times. If ever it was true back then about VCs easily handing over millions to twenty-something entrepreneurial hopefuls, it isn’t true now. For one thing, VCs are looking to invest large sums, usually seven figures, in a business and realize healthy returns in just three to seven years. Few company builders, and even fewer of those who are young, fit that profile. If you are looking for $100,000, that might seem like a lot of money to you, but it’s not worth the VC’s time.
Fortunately, for those of you looking to do what I did in 1995 – that is, build a business when you’ve barely left a college campus – and to do it now when the easy money is gone and hard times are upon us, there are other ways to raise money. All evoke to a simpler entrepreneurial era, and all have their pros and cons. Let’s take a look at each.
Break Open Your Piggy Bank
My wife didn’t want me to do it, but when I needed money for C&S Mystery Shopping, I often went no further than my passbook account. I took out $2,500 to start the company and another $7,500 to keep it going. All those nickels and dimes I had saved from my paper route, working on a lunch wagon and stocking shelves at a grocery store were used to buy a fax machine, letterhead, business cards, and also to front funding for expenses, such as dinners at Pizza Hut before the 60-day receivable period passed. (My company used shoppers to test how employees treated customers at many national and local businesses.) It’s nice to use other people’s money, but you have to have enough faith in your own business to put your hard-earned cash on the line as well. If you don’t, why would others?
The Bank of Mom and Dad
Well, your parents would invest – and you know why. I never turned to my own parents, because I had enough in my bank account. However, depending upon your parents’ financial situation, they may have the money you need to start your business. The positive aspect of borrowing from your parents is that they probably won’t reject your business plan, they may not charge you interest, and they will still love you if you are late in paying them back. Jeff Bezos, the billionaire founder of Amazon.com, got a loan from his folks, so you would be in good company. I met one twenty-something entrepreneur who had to borrow $10,000 from his sister to make payroll until a client paid him. The drawback is that if you can’t pay your family back, it could hurt them financially, and there could be some resentment from other family members.
At C&S Mystery Shoppers, I routinely used two credit cards for expenses, charging as much as $3,000 and paying it back when receivables came in, because cards were easier than cash for record-keeping purposes. One day, I was on my way to meet a successful entrepreneur, and I was listening to one of his books on tape. I was amazed when I got to his office. His home and separate office building were on lake front property. I was told he often took clients jet skiing on the lake. I thought, “This isn’t bad for someone who maxxed out on a few Visas.” He explained that he didn’t want to give up a percentage of ownership in his company, which is what venture capitalists would have wanted, and instead decided to take cash advances. The credit cards would never ask him about sales figures, the competition, his business plan and so on. As long as he kept his credit good and made the minimum payments, he could keep on borrowing. If what I saw at this business was any evidence, he no longer carries any balances. The lesson? Credit cards are probably the easiest way for a young entrepreneur to raise money outside of the family. The danger is that if you can’t pay back what you owe, you could hurt your credit rating or maybe even need to file for bankruptcy.
Your Corporate Headquarters is Located at the Kitchen Table…
Or in a spare bedroom, as mine was, advancing to the master bedroom, and eventually, three years later, into a modest office out of my house. The landlord said there was a desk and file cabinet in the basement if I wanted them, and I said, “Wow, a furnished office!” Seriously, one way to narrow the gap between how much money you have and how much you think you will need is to need less money in the first place. Countless businesses have been launched quite literally around the founder’s table. Jeff Bezos got Amazon.com going from the garage of a house he and his wife were renting. To show that your home is a tried and true entrepreneurial practice, consider that way back in 1939 Bill Hewlett and Dave Packard started Hewlett-Packard in a garage in Palo Alto, California. Conversely, many Internet companies spent a large amount of their seed money on beautiful offices in upscale parts of town. They were fantastically furnished, which was fine until the founders needed money for something important, like keeping the business running. There are ways to take a small amount of money and stretch it, and one of the best ways is not paying rent or buying office furniture. A caveat: don’t overdue it. In the early days, I spent too much time shopping for clients to avoid paying $15 an hour for someone to do it. Instead, I should have been using my time to solidify client relationships.
It would be nice if other people would lend you their money to start your business, but in reality, most young entrepreneurs with ideas for modest businesses and few contacts get the seed capital from a combination of these places. You take some money from your bank account. You charge that new computer on a credit card. Mom and Dad give you an interest-free loan that you agree to pay back “someday.” And you become a “bootstrapper,” the term for people that take a small amount of money and stretch it as far as they can by spending it on only what they need.
You don’t need to be broke if you are young and entrepreneurial. So don’t get caught up in the mistake that many first-time entrepreneurs make – that the more money you have to start the better off your company will be. Sometimes having less money forces you to be more creative and focus on your product and customers instead of having money to burn like so many of the dot-coms did. Think of it this way: one of the most successful businesses of all times, Microsoft, was started by a young entrepreneur and during a bad economy. It takes more than money to make a business successful.