No VC? No Problem!
Financing the early stages of your startup
Startups are the craze nowadays, with every aspirant trying to launch his/her idea into space only to discover that funding will impair their “dream rocket” from launching in the first place.
It's no easy feat.
Idea generation is the easy part. A couple of college graduates or high school dropouts can easily identify a market need and contemplate how to solve it. But even if they did manage to find a solution, building and testing a prototype takes a considerable amount of time and in most cases — money.
Despite that, many young candidates aspire to venture into entrepreneurship. But excluding idea generation and prototype design, one thing every founder/ co-founder should learn to excel at is managing their finances.
You see, most college dropouts don’t own a bank account with thousands of dollars and neither do their parents encourage most of them to risk it all and ditch college altogether. Conventional career paths are still, for the most part, respected and preferred.
But if you happen to be that one candidate who’s downright obsessed about launching your own start-up this could be the one thing that will determine whether or not you will still be in the game for the long haul.
The first aspect is personal. Start of by assessing your existing finances. This could be your savings from your job, earnings that accumulate from your existing job, investment income, or if you are super-lucky: inheritance.
A minimum amount of savings beforehand will stretch every dollar you put into the business a long way. As a rule of thumb make sure you have at least a year’s worth of expenses to get through the difficult times. Analyze your bank statement, cut out unnecessary costs, and divide the amount by 12 to figure out a ‘monthly estimate of your needs’.
Then, analyze all your investments & savings, jot down all the probable passive income sources that may still provide for your expenses, and divide that amount by the ‘monthly estimate of your needs’ to see how long you can survive. While I am not an advocate of selling long-term investments, selling certain short to intermediate-term forms of assets can provide a boost to your “startup lifeline”.
Based on personal experience the ideal time would be 12 months. But I have seen cases where entrepreneurs start out right of the bat in month “zero” without fail.
The second aspect is professional, i.e managing your startup finances. More likely than not, you will be strapped of cash, working from home (hello coronavirus), and go through long, arduous, dark nights. But just like how the ‘dark knight rises’ smart financial management can take your fancy basement startup up to the “unicorn” arena.
Regardless if it’s a technology-based company or a service provider, start small and start with interns. Be transparent in terms of what their pay might be, what hours they need to put in, etc.
With an interconnected world, freelancing and outsourcing are a click away. Put up hiring campaigns and advertisements seeking such individuals and get working. Workers in developing countries are paid far less than workers in developed countries due to the lower cost of living. They are often not unionized as well, which further helps boost cost-cutting.
However, core activities should not be outsourced because firms risk losing competitive advantage.
Outsourcing non-core activities allow firms to focus on the activities they do best and improve their overall performance. Activities such as managing vendors, negotiating with lawyers regarding contracts, dealing with contractors, planning an exit strategy should all be dealt with first-hand.
Now, the aspect of hiring interns and short-term contractuals, might sound wary to some but for a startup, it could be the difference between becoming Enron or becoming Amazon.
This also gives the founder/ co-founders an opportunity to assess the caliber and work ethic of the hired individuals for future prospects.
Hiring full-time employees within the intern pool are often the best strategy for most corporations and as we move more into the future, corporations will only tend to post the job vacancies, but won’t be hiring anyone they have not monitored for a period of at least 3 months.
The other side to recruiting is, “don’t recruit at all unless you desperately need to.” You are trying to save cash, not spend a night out with the boys!
Bootstrap your startup and do as many things as you can on your own till you manage to secure additional funding.
In addition to all of the above, try to find cofounders who will join you for equity. Don’t pay salaries till you have to. Try and be transparent with your cofounders about where you feel the company might be going and how long it will take for you all to reap the rewards (if there are any).
The profit-sharing ratio should be drafted down and submitted to the SEC or the registrar of the joint-stock companies to diminish any legal issues that may arise in the future.
The founders/ co-founders should do ideally try to do most of the sales & marketing stuff.
Ideally, if you are a tech company, coding and online marketing/ promotions are the only activities where you will be spending significant time on.
Any other activity should be assigned to interns.
Last but not the least, calculate and recalculate your burn rate every month. For those of you who prefer the formal definition according to Investopedia, “the burn rate is used by startup companies and investors to track the amount of monthly cash that a company spends before it starts generating its own income. A company’s burn rate is also used as a measuring stick for its runway, the amount of time the company has before it runs out of money.”
Try to find ways and finance it. Raise more funds, once the model is proven, through personal savings, friends & family, angel investors, or even customers.
Crowdfunding is probably the greatest phenomenon of the 21st century. But avoid loans at all costs. Use your credit card to buy some of the initial equipment if need be, but make sure to pay it off quickly before the interest starts piling up.
Be open to picking up freelance/consulting projects in addition to your startup work, to ensure that you have some funds rolling in and only invest those funds in either your venture or on an investment scheme that will for sure provide you with additional returns on top of your principal. High yield corporate bonds with excellent credit ratings, defensive stocks providing hefty dividends, and REITs could all be attractive options for those that prefer little volatility and a ‘monthly investment cheque.’
Just don’t mix your personal & startup finances until you appear on Shark Tank or Dragon’s Den!