sources of bootstrap capital

8/6/2019 Sources of Bootstrap Capital

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Sources of Bootstrap Capital

How can you start a great business with no money down? How do you get 'table stakes' so youcan have a place at the table too? The rule today is, if you have cashflow, you will get financed,not the other way round.

There really are no 'no money down startups'; there are only those with little money down. Inreality, every business requires some investment. What we are talking about is starting a businesswith an amount of money that is really de minimus with respect to the size of the opportunity.

Mark McCormack started a world-leading sports management business (IMG, InternationalManagement Group) with $500, his law degree and Arnold Palmer as his first client. Mind you,it doesn't hurt if your first client is an Arnold Palmer.

Probably less than 1% of all startups ever get any funding from VCs; that means that 990 out of1,000 new enterprises are forced to use bootstrapping as their only means to success. Someobservers feel that bootstrapped businesses, ones that start with nothing, are actually or canbe better businesses because they are more focused on results as well as efficiency and economyof effort. They certainly appear to be hardier if they manage to get by their first few years.

Maybe its the same difference as between people who win the megabucks lottery as their wayof becoming rich and the self-made entrepreneur. Many million-dollar lottery winners are worseoff five years after their big win than beforeby that time, they have blown their dough oncant miss opportunities and they have no J.O.B. to go back to. Whereas, someone whoearned it himself or herself knows how hard it is to do it and are less likely to throw it away.

Here are some sources of Bootstrap Capital. This is a partial listwhich is all it can be: there areas many varieties of bootstrap capital as there are ideas out there in the minds of cleverentrepreneurs.

1. Soft Capital: Mom, Dad and rich Uncle Buck; basically this is a friends (Angel Investors) andfamily round of financing either formally or informally organized.2. Home equity loans.3. Business plan competitions for cash (e.g., the Wes Nicol Competition or the Celtic HouseCompetition.

4. Future customers, clients or launch clients (e.g., homebuyers in Ontario can be asked fordeposits of up to $20k in advance).5. Future suppliers can sometimes be persuaded to extend long term credit to you (e.g., Vendorfinancing of 30, 60, 90 days or more) or invest cash in your business since they have a lot to gainif you become another (good) customer of theirs. They will probably want a long-term supplyagreement though.


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6. Strategic partners (like Ogden was for the Ottawa Senatorsin return for a 30 year arenamanagement deal plus F&B deal, they invested, loaned and guaranteed significant capital to/forthe nascent team.)7. Micro capital lending and grant programs; for example, the GOCs SBL Program (SmallBusiness Loan or other government-sponsored sources of start-up capital like the Ottawa

Community Loan Fund.)8. Supplier rights, product placement and licensing fees (for example, Molson's purchasedpouring rights for the Corel Centre and the Civic Centre after the City of Ottawa was awarded afranchise by the NHL in December 1990 but before they commenced play in October of1992. Another example was the selling of 15,000 PRNs (Priority Registration Numbers) duringthe Bring Back the Senators campaign of 1990 for $25 each. Each PRN holder the right topurchase a season ticket in their preferred location in numerical order, if the team was awardedto the City of Ottawa in the NHL expansion round of December 1990. Note, however, that therewere no refunds if they were not successful. For $25, one got the right to purchase a season ticketand a bumper sticker and a cool looking certificate too.)9. Patent or other IP licensing fees and royalty payments (e.g., Noma Industries purchase of the

rights to LED Xmas light strings).10. Consulting services (a lot of entrepreneurs support their startups by providing consultingservices at the same time).11. Partners.12. Debentures.13. Financial leasing of fixed assets.14. Receivables factoring.15. Publishers advance on a book or script.16. Sponsors (see for example the signing up of 500 Corporate Sponsors at $500 each and 31Original Corporate Sponsors at $15,000 each for the Ottawa Senators before the team wasawarded.)17. Trading activity: buying low and selling high, taking advantage of arbitrage opportunities(like finding out what percentage of dot-CA holders do nothave their dot-COM equivalents andthe dot-COM equivalents are available and then selling them the dot-COM extensions),building-businesses-to-sell, buying and selling and buying and selling and trading up, ... Checkout this site:http://oneredpaperclip.blogspot.com/. This person traded a paper clip for a pen andtraded the pen for a and then for a generator and then for a snowmobile and then for a truckHis idea is eventually to get a home for himself. 18. Credit cards (oft used strategy but dangerous because of high interest costs and what canhappen to you andyour credit rating if you fail to make payments).19. Scientific R&D Tax Credits (e.g., SR&ED from the GOC).20. Extracting upfront value from your lease for office space-- an example of a services companythat got $800,000 upfront.21. Reverse or Negative Pledging of Assets (e.g., O & Y notpledging the value of an officetower to anyone and extracting loans from banks based on the value of their real estate and basedon their not agreeing to pledge it to anyone Another dangerous strategy because you can endup over-leveraged.)22. Co-guarantor: borrowing someone else's stronger credit rating (e.g., Corel Centre SuiteLeases pledged for construction financing or Mom or Dad co-signing a loan...)


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23. Accretive buying: buying another company with the target company's balance sheet ascollateral where you end up with more cash than before. (E.g., Disney buys the Mighty Ducks ofAnaheim for $50m: $25m goes to the NHL and $5m per annum for 5 years goes to the LAKings. Then could borrow $35m against the asset and, after receiving a $20m leasinginducement to enter into a 20 year lease for Arrowhead Pond, they could have more cash on hand

after than before).24. Accretive Selling: sell products or services with financing in place where you end up withmore cash after the sale than before (e.g., Leon's don't pay a cent until.... (OAC). Leon's thanturns around and sells the sales contract for cash.)25. Employee ESOPs (Employee Stock Ownership Plans).26. Pre-sold services. (For example, here is an example from Craig deSchneider, a student in EC491 (2003): "In looking for some start-up capital for our automotive related business, myself andmy partner offered potential investors future discounts through our business. In sellingautomotive parts, we had accounts set up with distributors, accounts which could only be set upthrough having a business license, tax numbers, and some negotiating, so the average person offthe street does not have access to these discounts. We set no specific investment amounts, simply

the most the person could afford. We kept these contributed amounts a secret among the differentinvestors as we offered them all the same return. Therefore, in return for a fair investment, weextended to our investors cost prices for all of their future purchases through our company. Theonly limit we set on this agreement was that the investors' annual purchases could not exceed ourcompany's sales revenue from our average monthly sales figure (not including cost purchasesmade from investors). The overall idea was to provide our investors a very fair return on theirinvestment, and at the same time, these investors would promote our company. Why you mayask, well the greater our monthly sales were, the greater the amount of goods they could buy forthemselves at a cost price." Ed.: Basically, Craig and his partner turned their investors intocustomers and their customers into investors. Nice going.)27. Collectibles sales and auctions. Here is a new one. Michael Moshier put the original versionof his SoloTrek flyer up for auction on eBay, hoping a museum would pick it up. It didn't evenfly but by January 12th, 2003, the bidding on eBay had already reached $6.5 million USD:money he planed to use to fund his Trek Aerospace startup. Cool.28. Extended family savings and investment fundan old style of acquiring start up capital is tohave the extended family contribute to a pool of funds to help family members acquire or buildbusinesses.29. Vendor take back mortgagestypically used in real estate transactions, the Vendor providessome or most of the financing for the sale by way of a (first or even second) mortgage back tothe Purchaser.30. Swear equity.31. Investor syndicate or investment club.32. Retainers (typical for consulting services or legal and accounting services) and deposits onsales.33. Collecting early and paying late (boosts cashflow in the short term).34. Progress payments on contracts.35. Advance ticket sales.36. Becoming a reseller (this is big in the Internet age where you can set yourself up forpractically nothing as an agent to resell services such as domain names or web hosting). Thereare a huge number of things that can be resold on the Internetmany sites generate large


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revenues by reselling ads powered by Google or other providers. Check out this silly site whichgenerates up to 8,000 facts on Chuck Norris and got 18 million hits in December 2005.Really the purpose of the site is to generate clicks (by asking people to rate the facts) whichgenerates a new ad and maximizes revenues for the sites owner: http://www.4q.cc/chuck/. Orhave a look at this site: http://www.milliondollarhomepage.com/. Here the young person (age 21,

based in the U.K.) apparently wanted to pay for his tuition and so he created a million pixelhome page. You could buy an ad for $1 per pixel (minimum ten pixels) linked to your site. Hesold all 1,000,000 pixels so guess what? He got his tuition and a lot more. I presume the ads arefor a limited time so he also has the chance to resell the million pixels over and over again. Thesite gets a LOT OF TRAFFIC Remarkably, this might be a sustainable business (a PersonalBusinessFor Life!)37. Importing.38. Distributing.39. Exporting.40. Exploiting signage rights.41. No money down, land speculation.

42. Using OPM (other people

s money).43. Asset flipping.44. Buying under power of sale (again, real estate related).45. Buying distressed companies and turning them around.46. Day trading.47. Asset speculation.48. Franchising.49. Branchising.50. Training and uniform fees (e.g., GradeAStudent.com required each of their contractors to beGrade A certified before they could provide services to clients and customers and get accessto the billing system and the appointments calendar (a system called GASnet). To be certified thecontractors had to pay in advance to take the course)51. Pre-sales in real estate allows you not only to ask for cash deposits but also may give youaccess to Bank or private lender financing. For example, if you pre-sell 50% of your condo ortownhouse project, you can usually qualify for construction lending where, inessence, your Bank or private lender is advancing you money to build the condos or townhouseson the basis of the strength of the credit ratings of your customers (buyers) and not your creditratingper se.52. The same type of thing can help you a lot if you are a manufacturing businessif you have aguaranteed supply contract with a credible client or customer, you can often finance against that.53. Land optionssometimes you can convince a landowner to give you an inexpensive option tobuy his or her land at a fixed price at a later date. You can then use the time to set up a sale officeand begin pre-selling. As discussed above, you can then take cash deposits (which are impressedwith a trust in that the money doesnt really belong to you until you actually have deliveredthe condo, townhouse, single family home, whatever), finance against Agreements of Purchaseand Sale executed by you and your clients, approach a Bank or private lenders for funding (oftenthrough a mortgage broker), arrange for private equity lenders or other investors to invest in yourproject, etc.54. I recently learned about a new method of bootstrap capital from my 13 year old daughter,Jessica. One of her best friends lives in a single parent family. Her friends parent is unable to


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work and lives on a modest income. However, every year they are able to take a family vacationto a nice destination in a rented van. How do they afford to do that? Bootstrap capital. They takewith them five other kidseach kid pays $250 for a weeks holidaythats a total of $1,250,enough for a camping holiday and some neat adventures too. It pays for the gas, the van rental,food and a few outings. The kids parents contribute cash and their children, Jessicas friend

and her parent go for

free

but they provide the opportunity. Everyone wins

Copyright. Dr. Bruce M. Firestone, Ottawa, Canada. April 2004.No Money Down StartupsBootstrap Marketing

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