Startup Cash Flow: Bootstrapping or Professional Funding?

Many entrepreneurs are faced with the question of whether to bootstrap their organization through organic growth or seek professional funding.

Bootstrapping

Over 99% of entrepreneurs will attempt to bootstrap their organization through organic growth. One of the greatest skills of the entrepreneur is their ability for creative financing. Though lack of product-market fit may be the number one reason businesses fail, lack of adequate monthly cash flow may be the most painful. Here are some methods for generating income in the bootstrapping mode.

• Paying Customers – The best way to finance the startup. Find and build your base of paying customers.  You know you’re starting to make progress when you get customers you don’t know that are beyond your family and friends.
• Discounts and Sales – Don’t change your price, price reflects value. But in the early days, discounts and sales can provide greater incentive for customers to try your product or service. Focus on lighthouse users and linchpin customers that provide access to new networks and market relationships. Phase out discounts and sales as the offering matures and your core is strengthened.
• Payment Terms – Work with manufacturers, suppliers, or service providers to extend payment terms. This may provide breathing room while generating revenue through paying customers.
• Build with Customers – Work with customers and get paid to build a product for them that you can sell to others. Make sure the terms are clearly defined.
• Crowd Funding – A popular platform today for fund raising by pre-selling your product. With the new laws, equity crowd funding is also an option.
• Don’t quit your day job – Having regular income while working through the initial stages of the startup can relieve a lot of financial pressure. Think hard before quitting your day job. Or find a part time job you can do on the side for personal income to pay the bills.
• Trade for Services – Much of the challenge with startup financing centers around the cash in, cash out equation. Instead of generating cash to pay for the services you need for the startup, look for ways to trade services that alleviate the cash out side of the equation.
• Hiring – When is the right time to hire people? When you can no longer live without them.  A friend who was the founder of a large software company that grew to over 500 people was the 41^st  He maintained a side job until the company could no longer function without him in a full time position.
• Family and Friends – Most entrepreneurs that look for outside funding start with family and friends. Make sure you clarify expectations. Most will want to know you have plenty of skin in the game, including your own finances, before providing help.
• Bank Loans and Lines of Credit – Bank loans and lines of credit can provide much needed cash flow while ramping up sales. Remember that these finances have a large impact on calculating the lifetime value of a customer, measured in profit not revenues. Typical startups pay 35-70% for cost of capital
• Convertible Debt – Convertible debt can be a loan that is paid back at interest or converted to equity. Both the lender and recipient can negotiate terms.

Even if you have a rapidly growing customer base, if you are expanding too fast, you can still outpace revenue generation and run into cash flow problems.  If your market is large enough to support accelerated growth, you may need to explore professional financing options.

Professional Financing

There are a wide range of professional funders that run from angel investors and venture capitalists, all the way to hedge funds for larger, longer term capital.  Investments can run from $10,000 to hundreds of millions. In every situation, investor expectations are critical to understand.  What are investors looking for?  Here are some critical points.

• You – Are you hungry, persistent, passionate, smart, teachable and can hustle? Do you have skin in the game?
• Team – Is your team capable, proven, and commensurate with the level of funding?
• Product/Service Solution – Innovative, not a me-too product
• Market – Size, accessibility, and competition
• Distribution – Networks, channels, reach
• Traction = paying customers + revenue performance
  Growth Potential – Rapid growth potential and business valuation
• Adaptability – Plans will change, degree of freedom and adaptability
• Use of funds – How will the funds be used
• Key Partners, advisors, and lighthouse customers
• Exit Strategy – How will the investor recoup their investment
• Risk Management – do you understand them, mitigation aspects
• Milestones – To enable continued growth and funding

Bringing It All Together

If you are a lifestyle business, don’t use professional funding.  Carefully think through monthly cash flow requirements and make arrangements to ensure cash flow to avoid the daily pressure of paying the bills.

If you do go after professional funding, to increase your chances for success, build a minimum viable business product and achieve some form of traction before you go after funding. Understand the expectations of the investor and know when and how to most effectively use the funds.

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