Creative Ideas for Capital

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.

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Social Media: How Much is Too Much?

Social Times is one of those cool new social media blogs that just happens to be in Washington, D.C. It is a joint venture by Nick O’Neill and is backed by other prominent goons from the DC market, Frank Gruber and Jesse Thomas. All friends of mine, all respectable bloggers that are each doing great things individually.

One of the writers at Social Times, Anthony Lafauce, wrote an article last week “Social Media… I think we need some time apart“. It was particularly a good article, not because of the literal content of the article, which described his time away at SXSW as a “liberating” time free of Facebook, Twitter and other socnets. Instead, the real meat of this article was in the fact that he highlighted a systemic problem in our internet culture.

I don’t want to sound like an old stodge (cue the jokes about, “Back in my day…”), but society has increasingly lost focus of what is truly valuable – that is the personal and human contact that is not afforded by social media. Yes, increasingly we are aware of the life streams of others, friends or followers. Yes, we like to grab beers and hamburgers while chatting over some new juicy bit of gossip. But we’ve lost, in most cases, the sincerest form of friendship and collaboration that there could ever be. Deep, lasting personal relationships with others where empathetic exchange of laughs and ideas transcend the superficial relationships that social media is so adept at creating.

Over at East Coast Blogging, Jimmy Gardner has taken off on this idea about cementing the community. I point you to a telling comment by my friend Keith Casey where he says something that is the antithesis of what social media mavens try to create with wildfire “friends and followers”:

People who want to get a piece of that are likely to jump in. But what about the opportunity to meet/help complete strangers? To be honest, my friends and allies *always* come first.

So, I concur with Anthony. The ability to shut it all down is great. The ability to connect in the real world and develop strong and solid relationships that will and do transcend into business, collaboration and partnerships is a more compelling effect.

Think on it.

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