The Elusive Fortune

I talk frequently to hopeful entrepreneurs and groups about a concept I call the “5 Deadly Sins of Entrepreneurism.” Many times these “sins” get into an entrepreneurs mind and take over their thought process. At that point hopeful business owners go from thinking about how to make their business successful to thinking about being successful. Many times this is a premature state and causes the business to stall or fail.

Sin #2 is Fortune. I saw an Inc. magazine article recently that suggested some rather startling statistics about founder fortunes, at least in terms of founder pay in the technology sector where the survey was conducted. I suspect that these statistics are fairly common across the industry spectrum.

The survey measured how often the founder is the highest paid executive in the firm. Here are the findings:

Highest Paid           17%

Tied                       24%

Not Highest Paid     59%

To get really good people, who are typically employees not entrepreneurs, you have to pay them well. There may not be enough cash flow left over to pay yourself well. In fact, the survey found that in the 283 tech companies surveyed, that the founder was paid less than at least one of their subordinates in almost 60% of the companies. This situation has been experienced by several of my business acquaintances who started businesses and were in some cases the lowest paid employee during the start-up phase.

Now clearly this situation will change over time if the start-up is successful. But it’s a cautionary tale for entrepreneurs to think about their expectations for their start-up. You’ll likely not be super successful over night. Time commitments, cash flow difficulties, and the like take their toll on entrepreneurs who aren’t prepared for the lean start-up times.

This discussion is never meant to scare people off, but to prepare them for the reality of starting a business. If you and your family are prepared for what’s coming, you’ll stand a better chance of surviving and getting to the payoff time later.  

Recipe for Success: Do Your Research

As we begin part two of a who-knows-how-many part series on creating success, we’ll be talking about research. This is one of those areas that many hopeful small business owners would rather skip. You’ve been working in your industry or around your industry or as one most likely unsuccessful restaurant entrepreneur told me once told me when I asked about her industry experience, “I eat at restaurants a lot!” Unless you’ve constantly reading and measuring and following the industry, you’ll need to do some research.

So where do you go to get your information about an industry?

I’m going to give you a list of resources; I don’t have the space in a blog post to tell you how to do it. You can probably figure out that part yourself anyway.

Census Bureau:  http://factfinder.census.gov/ You can also link to the American FactFinder database through my website.

Public Library: I wrote about research librarians in a recent post. Most of you didn’t read it because it sounded boring. Maybe it is, but it also a huge resource.

Virtual Library: Ask your public library about access to special database collections and resources available with a virtual library card.

University Library: The business and research sections of university and community college libraries have great research tools for entrepreneurs. Just ask for help if you don’t know where to start.

Chamber of Commerce: One of the main goals of a chamber of commerce is to support the creation of new businesses.

Trade Associations: Most industries have one or more trade associations to support the membership of the industry. You may have to join to get access to their information, but it’s generally worth it to get that kind of data access.

Small Business Administration: www.SBA.gov/ The SBA has lots of resources for small business owners.

Paid Sources:  There are plenty of paid sources for industry information available to small and big business owners. Big national companies who are in the information providing business are ready, willing and able to help you with your research needs…for a fee.

In addition to these commonly used research sources, there are market testing and focus group activities to tell you specific things about a market. While these activities pay huge dividends in terms of specific preferences, you’ll not typically use them in the beginning phase of research.

Do you have other resources that might be helpful for small business owners? If so, please leave a comment.

For those who want to do it right, get my book Business Start-up 101: From Great Idea to Profit…Quick! It’s a how-to guide for entrepreneurs to take you from great idea, to getting yourself ready, proving your plan, and finally writing a business plan and getting funded.

13 Ways to Bootstrap Your Start-Up Capital

Starting a business without borrowed money is an awesome thing.  The lack of readily available funds forces you to concentrate on the basics, maximizing resources to save capital for when you really need it.  Your discipline is sharpened and you don’t waste resources on stuff that doesn’t translate to bottom line success.  But sometimes, business owners need to borrow money to grow or start their businesses.  I recommend borrowing money as a last resort, and when you do borrow, utilize your bootstrapping ways as a first line of defense.  Only resort to banks and other official sources when all avenues have been exhausted.

So what are the bootstrapping ways of borrowing money and what other unofficial sources are out there other than banks?  I’m glad you asked…

1. e-Bay – Sell your stuff.  You’ve probably got an attic or basement or both full of stuff, junk mostly.  But some of it could be dusted off and sold on e-Bay or other auction sites, in a local antique or flea market or at a garage sale.  Remember the adage, “One man’s trash is another man’s treasure.”  
2. Pawn Stars – Pawn valuable stuff you don’t want to sell.  Okay, this isn’t a great plan for long-term financing of your business, but it could be used to raise a small amount of capital for an immediate need that could be repaid with other more long-term sources of funding.  It’s a way to raise capital quickly, in a pinch.
3. Car Equity – Tap into your car’s equity.  Refinance of finance your vehicle to get the ‘equity’ out of it.  Just remember, as your vehicle gets older, its value will decline and so your opportunity to get cash from it.
4. Credit Cards – Borrow money off your credit cards.  While this technique isn’t as readily available as it once was, you can use personal credit cards to pay your business bills.  Apply for cards and use balance transfers to pay off older balances with new cards at introductory rates.  I have a friend who built a house using credit cards to finance the construction.  He paid the cards off with a permanent first mortgage after the construction process was over.  This is a short-term solution as credit cards have high interest rates.  This also isn’t a solution for individuals who have no money management skills.  Wait!  On second thought, starting a business isn’t a good option for individuals with no money management skills.
5. Family – Borrow from your family.  An infamous local entrepreneur is often quoted as saying, “Don’t borrow money from people you sit across the Thanksgiving table from.”  The downsides of borrowing money from family are too many to enumerate.  However, the transaction can be fast and easy if you have a family member who has the extra cash and is interested in investing in your business.  There are two keys for borrowing money from family.  First, don’t borrow money that the family member will likely need to live on.  Unless you plan to support the family member and be responsible for all the bad things that happen to them when their living expense money disappears because your business couldn’t repay the money when expected or needed.  And second, treat it like a bank loan.  Get a note document on-line and modify it to meet your needs and then live by its terms.
6. Friends – Borrow from your friends.  SEE #4 above for ground rules.
7. Local ‘Angels’ – Borrow from local business acquaintances and professionals.  Most ever city and town has a group of wealthy citizens, whether they are retired businessmen and women or professionals or maybe they inherited their wealth.  The point is these people have more money than they have good options for investing it.  If you have an interesting plan and can compellingly sell your idea, these folks may be just the ticket.  You’ll need official legal documents, but it’s significantly easier than borrowing from a bank.
8. Vendors – Borrow money or products from your vendors.  If you have a major or potentially major vendor, they might be interested in help you establish a business.  These vendors have a vested interest in your success since you’ll be buying must of your product from them.  In some cases, these vendors maybe willing to help you get your business established by either loaning you money, product, location or other resource to help you get in business.
9. Factoring – Sell your accounts receivable.  Factoring may not be a great way to get into business, but is can help in the beginning.  If you have some large accounts receivable from a special job or large order, consider factoring.  You sell your receivable to a third party firm in exchange for cash.  You’ll receive between 70% - 90% of the value of the receivable, depending on the risk involved.  It’s an expensive financing method, but might help you out in a pinch or allow you to take a huge job that you wouldn’t have been able to take otherwise.  Just remember to factor in the cost in the analysis.
10. Clients – Borrow from clients or have them pre-pay for services.  While this may seem like a dumb move, your clients may be intimately knowledgeable of your start-up plan and more than just a disinterested third party in your success.  Your client may help you to get started so that you can provide products and services to them.  If you have an excellent relationship with a potential client who could benefit from your success, maybe they’ll help you get started.  If they aren’t interested in loaning you cash, maybe they’ll pre-pay for products or services at a slight discount to help out.  I don’t recommend that you ask random clients to borrow money, but for those clients with whom you have a special relationship, this could be a great option.
    When all else fails, consider these options.
    
11. Investments/401(k)/IRA – Borrow from or liquidate retirement accounts. You may have options for borrowing from or cashing out investment and retirement accounts.  These are more last available option type choices, but they are available if you have money invested in these type accounts.  Remember, withdrawing money from a pre-tax retirement account will mean tax penalties and income taxes have to be paid on these withdrawals.  Factor these costs into the equation and understand the consequences before using this source.
12. 529 College Savings Plan – Liquidate or borrow from your child’s education fund.  While using your child’s college savings to start a business might not be such a great idea; it might have to do in a pinch.  This is another last line of defense consideration.  Just be prepared for your kid to work her way thorough college if your business doesn’t make it.  On the other hand, you’ll be especially concerned about achieving success and paying this money back before her college years begin.
13. Home Equity – Tap into your home’s equity.  Either refinance your home mortgage or take a second mortgage or equity line of credit to utilize the equity in your home.  I consider this a second tier option due to the possible side affects should your business fail.

Have you got some other ideas?  Let's hear them.