Creative Ideas for Capital

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stupomitron helmet2.jpgA great side-effect of entrepreneurs’ optimism in tough times is creativity. At our OpenCoffeeDC last week, discussions got lively when talk turned to bootstrapping — not just self-funding, but all sorts of alternatives for producing live-giving capital and conserving what you do have. Time to put on your thinking caps.

Have you gone through the check list of capital sources? Here are several (offroad from the traditional angel and VC route) that popped up in our discussions, plus a few others.

1. Sales! Duh. Number one will always be revenue. It was just February when Wired magazine chief editor Chris Anderson dubbed this the era of ‘Free.’ (Yeah. A lot of good that’s doing us now.) But don’t blame him — he’s just the messenger. Consumer expectations have been set at $0.00 by big dogs like Google, Craigslist, and Yahoo, leaving everyone to figure out creative ways of making money in the new ecosystem. Wired elaborated with a wiki for Making Money Around Free Content that provides some novel notions for doing so. It’s even been suggested (heaven forfend!) that Facebook start charging — something, anyway, for a premium services (the freemium model) of some sort. Careful thought needs to be given to just what it is that paying customers get, above the non-paying. Look into currently working models (Flickr vs. FlickrPro, Mozy free online backups vs. MozyUnlimited and MozyPro, etc.)

2. Corporate Investment Corporate customers and prospective partners can be turned into investors. In pre-Web 2.0 era, it happened all the time — usually to ensure that the product or service would prevail, the corporation made an investment. The terms were often good, with one twist: if the startup were to fail, the corporate investor got rights to IP. So it was interesting to see Martha Stewart Omnimedia lead a $2.85M investment in Evite-clone Pingg. We’ll probably see many more of these in the coming months.

3. Consulting/Contracting Doing work for hire can be extremely morale-robbing for a startup that had its heart set on making a living with a new web application — but many startups have turned pragmatic. The duality approach is simply more conservative . . . but when external funding is in a state of flux (like now), it may be key to survival. What makes it hard is the emotional and cultural schizophrenia (maintaining a solid reputation in contracting, vs. the live-or-die passion for a product and the customers who count on it are two different head sets), but some organizations appear to be making it work (Intridea, SetConsulting), while other have made the full-scale transition from services to products (37 Signals).

4. CIT GAP Fund Not to be overlooked, Virginia’s Center for Innovative Technology (CIT) provides (through its GAP program) loans of up to $100k in the form of an interest-bearing promissory note that converts to preferred stock in a forthcoming round of fundraising. It’s a great, low-pain process that helped mobile-gaming platform Mpowerplayer and a dozen other Virginia-based startups. (Disclosure: I’m a shareholder in Mpowerplayer.)

5. Venture Loans Used to be, firms abounded that provided venture lending — growth capital and equipment financing to startups that had already secured equity investment from top-tier VCs. It was still a But these firms — which were a notch less risk-averse than banks, and usually in solid association with VCs (they only made loans to startups that already boasted top-tier VC investors). But a few entrepreneurs have recently mentioned offers of ‘loans from VCs’ as a recent funding alternative. The exact nature of these isn’t clear — did they mean convertibles, which pop up whenever valuations get shaken up (like now)? But one thing to keep in mind: promissory notes and loans of any kind need to be repaid, even if the business fails. Moreover, they often have covenants that allow them to be called ahead of schedule. And finally, you may be asked to personally guarantee them. (Did you really want to lose your house?). I say, steer clear of them.

6. Bank Financing Banks, wha? Not often on entrepreneurs’ radar, but if you’ve got any stream of revenue underway, financing receivables can be a relatively straightforward process for smoothing cash flow. In fact, whether you have receivables or not, or venture-capital funding or not, banking relationships should be struck up sooner rather than later. Credit lines can buffer slow-paying customers — this economy is certain to increase receivables aging — but everything you’ve heard about credit lines tightening is true. Even established businesses are seeing them dry up.

7. Factoring At one of my service companies, we relied on factoring to keep cash flowing. (Truth be told, we would have missed several payrolls without it.) Factoring firms — which purchase your invoices and collect on them, advance you some portion (up to 90%) of the invoice, depending on the caliber of the customer, and charge a fee (usually 1% – 3%) — can pull revenue that might normally arrive in 30 to 60 days ARO into a week or less. And, unlike banks, the only due diligence is verification of product acceptance; I bet they’re seeing a pick up in activity lately. Of course, you have to be comfortable with you customers knowing that you’re resorting to factoring (not exactly a sign of stability) . . . so better pick only those you have a close relationship with.

8. SBIRs Not too likely a candidate for social-networking startups, but a wide range of technology companies have taken advantage of Small Business Innovation Research (SBIR)and other grants. The Small Business Administration (SBA) Office of Technology administers the SBIR program, as well as the Small Business Technology Transfer (STTR) program. All told, 11 federal departments participate in the SBIR program and five departments participate in the STTR program, together awarding more than $2B annually to small high-tech businesses. Unfortunately, these things take time . . . sometimes more than a year.


Last bits of advice:

- Hoard cash — but don’t tie it up; in other words, even if you’ve raised capital, acquire PCs on credit (don’t lease them, if the lease lines need to be secured). And never secure borrowings with cash.

- Barter when you can — services of any sort.

- Co-habitate — during the last downturn, we opened up our oversized space to another company. If you’re looking for space, post on Craigslist and message boards to co-habitate — you may be surprised at the response.

- Crowdsource design work (logos, literature) you may need. Consider GeniusRocket, or Crowdspring, which Frank Gruber recently used to update his logo. Or do the logo your own damn self, until you can afford a professional.

- Pay with stock/stock options, rather than cash. Or a mix of the two. Worth a shot.

- Negotiate everything.

Startups Need Management, Too

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Grove High Output Management (FINAL).jpgProspectors joining the dot-com gold rush in the ’90s were mainly coming from large organizations seeking to capture some of the new wealth. But along with the promises of stock options and casual dress came another bonus — no bureaucracy. No meetings! No Microsoft Exchange! And no more onerous management systems.

Disciplined startups recognized that management systems were important — for setting and hitting milestones, and for giving employees adequate frameworks to perform and feel good about themselves and their company. But more often there was extreme swinging of the pendulum that led to free-wheeling, hair-on-fire mismanagement, wildly missed targets . . . and lots of disgruntled campers.

Driven by the mantra of ‘first to market wins,’ dot-com startups were hiring way too fast, pushing employees way too hard (I remember one of our VCs saying he expected all employees to keep a sleeping bag at the office), and eschewing management systems entirely. In the end, a lot of folks went back to their big companies, happy for a return to structure, sanity, and their 401k . . . even with a pay cut.

The fact is, every organization needs a management system. It just needs to be appropriate for the company’s stage.

Much has been written about motivating employees. The admirable folks at web-app developer 37 Signals (makers of Basecamp and other popular utilities) espouse a four-day week and flexible hours, and for the most part, I ascribe to their philosophy. But I also have seen lots of companies provide increasing perqs to increasingly dissatisfied lots of employees.

What it gets down to is that providing the right amount of structure, goal-setting, and feedback — and communicating clearly — does more for esteem and spirit than all the free food and Friday afternoon keggers ever will.

After a six-month stint consulting for a startup to help it transition from a service to a product business, I joined the company full time as COO. It had about 20 employees. The CEO had good transparency — employees got monthly updates on progress and direction — but individuals had tasks, rather than goals, and no way of seeing how their roles fit into the bigger picture.

This is one of the key tenets of management: people want to know how their contribution fits in — how their efforts (along with their counterparts’) ‘roll up’ in support of the company’s overarching goal.

One of my charges was to institute a planning and management system. And it’s honestly one of the most satisfying aspects of management — especially when you see people responding . . . when they come by at the end of the day to tell you ‘I really appreciate what you’re doing here,’ or ‘we really needed this.’

Startups’ management systems (and culture) are usually brought by the founders from their antecedents. Most of my management experience came from a manufacturing startup. My co-founder came from chip-leader Intel Corp. — along with a fairly high percentage of our initial hires — we essentially followed Intel’s management disciplines, policies, and procedures. In hindsight, it was one of the smart things we did. Intel was an extremely well run company. (I subsequently became a huge fanboy of then-CEO Andy Grove and his management books.)

I adopted Intel’s Quarterly Objectives and Key Results methodology, and have used it (with a few of my own variations) ever since.

To be sure, shipping a manufactured product requires a different discipline than the ‘just get it out there and revise it later’ strategy of web apps. But certain management principles are universal, and over the course of working both in hardware and software companies, I came to understand which ones they were.

One of the principles that always took a while to convince people of was the work-week calendar. Lots of them are available, but in particular, many manufacturing companies split the year up into four 13-week periods . . . usually with ‘4-4-5‘ months. (Mainly to ensure a ‘linear shipping’ schedule, making it easier to hit quarterly shipment targets and to compare quarter-to-quarter performance.) But it’s something I found to work well in hardware, software, and Internet businesses.

Why? Because over time — it usually takes three quarters or so — the numbered weeks start to stick, and people in the company realize that it’s a lot easier to reckon you have 11 weeks till year end (we’re in Week 41 right now) than calculating the number of days between October 8 and December 31. More importantly, employees and managers get into a recurring 13-week rhythm, which has certain psychological advantages.

And why is it so important to think in terms of quarterly performance? Whether you’ve just got plans to make money, hit revenue and profit targets, and grow — or serious ambitions to become a public company (IPOs will return someday!) — ‘making the numbers’ each quarter is a discipline that should begin early.

Next post: The Basics of the Quarterly Objectives process.