The Great Startup Game

The Smart Startup Guide: Creative Financing for Startups

This is the first chapter from the creative financing manual The Smart Startup Guide.

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How to Finance Your Startup in a Depression

Where do you rank on the entrepreneurial scale of 1 to 10? Find out.

If you are trying to finance your startup in today's depressed economy, I feel your pain.

It's tough out there. Even the Venture Capitalists are seeing their money supply reduced dramatically. Angel investors aren't as liquid as they used to be.

With all the cash taps basically shut off where do you find startup capital for your business?

As the economic news becomes bleaker by the day and the word "depression" no longer feels like hyperbole, it's time for entrepreneurs to hunker down and become very realistic about how they will finance their startups. The days of writing a business plan, traipsing into an investor's office, and dropping off a copy are over. Indeed here at the opening of 2009, we are in a situation which is the exact opposite of 1999 when there was loads of capital available to fund even the silliest of ideas. Back then it seemed as if at least half the workforce was walking around with a stack of business plans under their arms knocking on venture capital firms' doors.

Well, not anymore.

Only the tough and financially savvy will be able to cobble together the financing that their startups need to launch and survive in this economy. This is not an economy for wannabes.

With this reality in mind, I am starting up a new newsletter which will cover startup financing lessons for a depression or deep recession.

You can subscribe for free here: Subscribe Me to Startup Financing

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Startup Business Financing for the Depression

Are you trying to finance your startup?

I feel your pain.

With all the cash taps shut off where do you find startup capital for your business?

As the economic news becomes bleaker by the day and the word "depression" no longer feels like hyperbole, it's time for entrepreneurs to hunker down and become very realistic about how they will finance their startups. The days of writing a business plan, traipsing into an investor's office, and dropping off a copy are over. Indeed here at the tail end of 2008, we are in a situation which is the exact opposite of 1998 when there was loads of capital available to fund the silliest of ideas. Back then it seemed as if at least half the workforce was walking around with a stack of business plans under their arms knocking on venture capital firms' doors.

Well, not anymore.

Only the tough and financially savvy will be able to cobble together the financing that their startups need to launch and survive in this economy.

With this reality in mind, I am starting up a new newsletter which will cover startup financing lessons for a depression.

You can subscribe for free here: Subscribe Me to Startup Financing

Learn how to close deals with angel investors.

What's the worst part about startup funding from family?

I was just talking to someone about startup funding sources and the question came up, "What the worst thing about having startup funding from family members?"

The one word answer:  "Thanksgiving".

If you are going to take money cousin Bob or uncle Ignatius, treat them as you would any arms-length investor. In other words, paper the transaction in the same manner that you would paper an angel investor investment or loan.  This way all parties understand fully what they are getting themselves into.

Never rely on anyone (including yourself) to accurately remember what was agreed to. Even though you may be able to do so the other party might have heard something completely different.

That's why there's an old saying, "A verbal agreement isn't worth the paper it's written on."

Creative Financing for Startups: Mobilization Capital

Mobilization Capital

Although normally overlooked as a financing technique for startups, prepayment is a proven and effective means of raising capital without surrendering equity or taking on debt. It is used in many industries to mobilize financial resources for specific projects—hence, its name “mobilization capital”. The surprise to many entrepreneurs is that it can also be used to raise the equivalent of the seed capital needed to launch their business.

Prepayment, as a means of raising startup capital or expansion capital, can be obtained from customers under two typical conditions:

1) the customer perceives an economic benefit from the discount resulting from paying up-front (e.g., savings will result),

2) the customer perceives a social benefit from the recognition stemming from early financial support of an enterprise (e.g., prestige, status will increase)

There are numerous ways of obtaining prepayment from potential customers.  For example, most contractors require 50% deposits before commencing work. This is a legitimate and reasonable request when you must make cash outlays for the materials and supplies necessary to commence the work.  Many sophisticated technology entrepreneurs planning on selling B2B intentionally design their startup strategy to justify the provision of mobilization capital in the customer's mind.

Here is a real life example with a unique twist on getting prepayment:

Allerca, San Diego-based company started in 2004, by claiming an innovative genetic technique, that has “bred the world’s first hypoallergenic kitten, opening the doors and arms of millions of pet lovers for whom cuddling a cat has, until now, been a curse … After identifying the genes of kittens with proteins that provide less of a reaction in humans, they selectively bred litters over several generations to end up with an allergy-friendly super cat.” The company had started to collect deposits about two years before they were able to deliver first allergy-free kitten. Hypoallergenic kitten futures were sold for $4,000. Today Allerca sells allergy-free kittens with even steeper price tag of $6,000 with standard order delivery in 24 months and premium placement  in 12 months. According to earlier Allerca statements, tens of thousands of people have sent refundable deposits within the first months. Quick estimation shows revenues of at least $40 mln (sic)- more than enough to fund startup operations for years to come.

I devote an entire chapter to mobilization capital techniques in the Smart Startup Guide.

Additional startup financing tools

For financing businesses through government programs see government loans. If a large part of your startup financing is for commercial equipment consider leasing for your Business Equipment Financing.  

Creative Financing for Startups

And so with the earlier post on cash floats as a form of sophisticated creative financing for startups, begins our new series on how to use creative financing for a startup when both venture capital and angel investor money are not available. 

Have a question about creatively financing your startup? Send me an email describing your situation and needs. The more detail the better. I can't promise to answer every email but will use the two or three best ones each week.  My email link is at the bottom of the website.