How bedrock entrepreneurs fund their startups
In the previous sprint we discussed two different strategies for funding startups, which we described as bedrock and high-risk. In this sprint we focus on bedrock tactics used to fund startups. These tactics are used specifically to fund a startup with the following goals:
Minimize chances of failure, because the loss of savings, status and relationships are challenging to recover.
Avoid bringing on partners who are strangers, including investors or bankers, that have the power to change the goals of the enterprise or who runs it.
Achieve financial and commercial stability and self-sustainability as quickly as possible with a minimal amount of investment.
Preparation and frugality are essential
With these goals in mind, a founder needs to be deliberate and thoughtful about each step because unproductive steps waste precious time and money. Every thoughtful step saves money and brings you closer to achieving your goals. Fortunately, our sprints are designed to help you figure out how to take the next most thoughtful step.
Thinking and preparing for each step ultimately takes you further- faster. Ultimately many of the greatest entrepreneurs of all time—people like Sam Walton of Walmart or Walt Disney or Estee Lauder—were bedrock, so being thoughtful, deliberate and prepared for each next step is in no way a limitation.
At this point you want to just think about where funding can come from, and that is if and when you need it.
Where startup funds come from
Profits and deposits: 30% of all startups and 60% of all solopreneur ventures fund themselves because they are inherently immediately profitable or they are structured such that customers or clients pay an upfront deposit that is used by the entrepreneur to fund out-of-pocket expenditures. This is your ideal scenario, and bedrock entrepreneurs ultimately want to structure their business models to reach profitability as quickly as possible because profits always minimize the need for funding.
Savings: The next least risky way to fund your startup is to do it with your savings. You know where the money is, how much there is, and you can get to it when you need it. Entrepreneurs that can fund their own startups from their savings have a greater chance of success than entrepreneurs that take out loans or how outside investors. This advantage is also related to the fact that founders with significant savings are often also frugal and deliberate with their spending. There are no extra costs associated with using your savings to fund your startup and new career. As we mentioned in the previous sprint, 30% of all startups that are not immediately profitable are funded solely with the founder’s savings.
Friends and family: You may have people that believe in you and want to see you succeed. Some of these people will be happy to help you with a loan or investment. These loans or investments come with emotional and relational expectations, which we discuss in our sprint 16 about partnering with family and friends. About 1 in 7 of all startups that raise money, do so with a loan or investment from friends or family members.
Loans: Think of a loan as a method for turning fixed assets like your home into some liquid assets like cash or a credit line. The credit limit on your credit card reflects your ability to turn your reputation as a reliable person—which is a very important asset—into additional liquidity. Loans cost money and create additional risks because you could forfeit your asset if you cannot pay back your loan. There are government backed programs that offer loans at lower than market interest rates to entrepreneurs who are already cashflow positive and seeking funds to expand. For inherently profitable businesses, these loans can be lower risk options than taking out a first or second mortgage. Local SBA (Small Business Administration), or in other countries economic development offices, would be the place to seek information for finding out about specific subsidized loan programs.
We also note that there are people and organizations that prey on people looking for loans, so borrowing money from other than a credit card company, a reputable bank, established mortgage provider or credit union is not worth the risk.
Second jobs: Bedrock entrepreneurs often fund their startups by taking an additional part-time job. It is hard and exhausting to do so, but it is a classic way to increase savings quickly.
Development contracts: In fields that require highly specific knowledge and research expertise, bedrock entrepreneurs can sometime win contracts where they are paid to develop new software, tools or machines. In doing the development, the entrepreneur further benefits from gaining valuable technical knowledge and skills and getting access to the social and commercial contacts of the person or organization giving the contract. These types of opportunities go almost exclusively to individuals or teams with unique world-class technical, professional or research skills.
Kickstarter and other crowdfunding platforms: Relying on crowdfunding is risky because most attempts fail. Some types of businesses, mainly entertainment focused, can raise enough funds on crowdfunding platforms to launch their business. Most attempts fail and those that do succeed, almost always had been good at getting widespread attention ahead of their crowdfunding campaign. Entertainment type businesses like comics, games, and music productions that already have followings have decent chances of succeeding. It is critical for anyone seeking crowdfunding to have established credibility that the funds will quickly lead to the launching of their product.
Grants: Established non-profit organizations can seek grants to expand their operations, but it is very difficult to receive grants to start a new non-profit. Seeking grants to support existing operations are not the same and should be viewed the same as seeking customers. Non-profit operating grants are best solicited the same way as any well led B2B firm would solicit a tough business customer. We will soon provide sprints specifically on B2B and non-profit selling methods.
The long game
Frequently none of these funding sources are available to a founder, in which case it is time to rethink. Many eventually super-successful entrepreneurs have reached this point.
The classic rebound strategy is to rethink your idea of how you’ll make lots of people happy. Put your current idea on hold—even if you are positive that it gets potential customers excited. Instead, think of a simpler, less costly and immediately profitable way to make the same potential customers happy. Perhaps serve them one at a time as a second job using inexpensive infrastructure rather than serving many at once.
Think about how fast your slimmed down plan to serve the same customers can yield you enough savings to invest in the startup infrastructure you originally wanted. Many entrepreneurs, including Sam Walton, Walt Disney and Estee Lauder, first built small scale startups to create the funds, and also the experience, required to then start their bigger scale startups.