Boring!

March 31st, 2009 by Sharon Larsen

Today begins Chapter 6: Boring!  We’ll learn about the different business structures available to entrepreneurs, starting with sole proprietorship.

 

 

Sorry. But however boring this chapter may seem, it is every bit as critical as anything else you’ll read in this book. We promise to keep it on task, to the point, and brief (we’re even skipping Porter’s Preface), so stay with us!

 

The kind of business structure you establish really does matter. Talk to your accountant. Talk to your attorney. Get this right. Ask questions and insist that your key advisors give you the answers to the questions you don’t know to ask. If you are going solo, it’s pretty easy to choose how to structure your company. If you are partnering, know what structure provides the best tax advantages, and set one up that easily allows decisions to be made and executed.

 

DISCLAIMER: This chapter does not replace your interaction with two of the three most important relationships you will establish—your attorney and your accountant.

 

 

 

Tomorrow we’ll learn about general and limited liability partnerships.  Hopefully not too boring!

Porter’s Points: Don’t Risk What You Can’t Lose

March 30th, 2009 by Sharon Larsen

Today we’ll finish up with Rich’s thoughts on setting boundaries in your small business with a personal example.

 

 

Let me share one last experience. This is a painful story to tell, not only because my lack of good judgment regarding a cardinal rule cost me the business, but because it almost cost me a trusted friendship.

 

Every good investment plan has a “stop-loss” provision built into it. Your business should have stop-losses built in as well. A trusted friend and I were engaged in a business called Eggnesters. Having previously learned the stop-loss lesson the hard way, we established rules up front. One such rule followed the counsel above—we set up stop-losses in case the businesses took a downturn. The rule was simple: establish a $100,000, three-month buffer. If the buffer ever dipped below the threshold, we had agreed to reduce expenses to allow for a positive cash flow.

 

After several years of mind-blowing success, the business took a downturn. Before long, we had crossed the $100,000 threshold. What did we do? We changed the rule. We didn’t even put a lot of thought into changing the rule. We just changed the buffer to $50,000. We knew we could pull out well before we spent that next $50,000. So what if the market was volatile?

 

Repeat the scenario. We crossed the threshold again. We were not going to be able to pull out. What did we do this time? We came up with a new business idea. Sounds like a smart move, right? It could have been, but even though our current team was not suitable for our new venture, we kept everyone on board. It was a loyalty thing. We watched the numbers and saw right away that our plan was not going to work.

 

Our gut told us to stop. Despite the warning, we held on until we were actually going slightly negative. What was the end game? With no ramp or buffer with which to juice our next endeavor, we had to completely layoff the entire team, terminate the partnership, and part ways.

 

As hard as it seemed at the time, the best thing we could have done was reduce expenses and regroup when we got to the $100,000 buffer. By accepting the need for a few layoffs and cutting some costs, we could have saved our most valuable employees. We could have saved a good partnership. I would have avoided significant personal frustration if I had paid more attention to both sides of the tug-of-war. Instead, I let commitment tug me along and watched as my clear-headed detachment got dragged through the mud.

 

Porter’s Points – Don’t Risk What You Can’t Lose

 

  • You generally know what you can’t lose. Most people do. Why do they risk it, then? Usually, they are addicted either to prior or current success. Recognize that tendency within yourself and compensate with open-minded objectivity.
  • Always take time to back off and assess your progress, even when things are going well. If you get in that habit when it’s smooth sailing, it will be that much easier when the water gets choppy and you have to enforce a rule.
  • Never risk what you can’t afford to lose. If you can’t afford to lose it, don’t risk it. End of discussion.

 

 

That concludes Chapter 5: The Rules.  Next time we’ll start Chapter 6: Boring!  It won’t be as bad as it sounds….

 

 

 

Don’t Risk What You Can’t Lose

March 26th, 2009 by Sharon Larsen

Even though entrepreneurship requires a hard push, set boundaries at the outset of what you will and won’t do.

 

 

As you are pulled by the commitment side of the tug-of-war, ensure that you establish financial boundaries. This is a critical element of success. You must set limits for the amount of resources and energy you are willing to exert to win.

 

If you have not achieved success when that threshold is met, you must step back and evaluate the situation in light of your rules. Do the rules allow for layoffs? Do they include getting more funding? Reducing salaries? Whatever the stipulations of the rules, remember that you created them when you were clearheaded. You must have the discipline to do the hard thing and stick with it. You can’t let your partner or advisors tell you to go a little further when you know it’s time to stop.

 

Most of the major disappointments I have had in my career have been when I have chased something for too long. In 2000 the Web 1.0 took a horrendous downturn. Despite the terrible market conditions, I held on to a very unprofitable business knowing, just knowing it would turn around. As I passed the thresholds established by my rules, I knowingly ignored them. Why? Because my partner and our prior success reassured me that we could pull out of the nosedive we were in.

 

There is no disgrace in delaying or even postponing the game because the field is too muddy. And since you’re the ref, you can decide. To persist just for the sake of persistence is a slippery slope.

 

When I blew out my Achilles tendon, I was determined to get my ankle working at all costs. If my physical therapist told me to do 10 reps of exercises, I did 20. I knew that if I just worked a little harder then the tendon would heal faster, right? Soon, I was doing aggressive rehab and pushing past all the barriers.

 

Less than six weeks after the initial injury, I tore my Achilles tendon a second time. Going through the second surgery and rehab after failing to follow the rules was much worse than at first. It would have been a better decision to ratchet back and abide by the rules of rehabilitation, rather than rewrite them around my expectations.

 

 

Next time, Rich shares another experience that drives home the idea of setting and respecting boundaries in small businesses.

 

Concrete but Discreet

March 26th, 2009 by Sharon Larsen

Today we learn from Rich about setting proper expectations in entrepreneurship.

 

 

One of the most frustrating characteristics of entrepreneurs is their failing to properly set expectations. “Properly” is the key word: your expectations must be both concrete and discreet. Make sure that you make things clear, but don’t feel like you have to tell all. To do that, you need to start with effective communication through frequent and open dialogue—in other words, don’t push people’s buttons.

 

I recall one particularly grueling trip that I took to Birmingham, England. I never had a minute to adjust to the jet lag, and at the end of a long week, I was way beyond exhaustion. The trip had hit me like a hurricane. Finally, after boarding the plane for the flight home, I relaxed.

 

I comfortably settled into my cushy, business-class seat with finger-tip controls for adjusting lumbar support, leg angle, and chair tilt. In front of me was my personal TV/Game Boy/movie screen. I sank into rest mode, but the stupid buttons weren’t working. I pushed at them like crazy, but nothing happened. There was no movement. Just as my frustration got almost to the point of calling the flight attendant, I glanced at the guy sitting next to me. He, too, looked frustrated, but his face was tinged with a grin as he looked straight back at me.

 

“You’ve been pushing my buttons!” he said.

 

He had been sleeping. I had mistakenly taken hold of his controls, and all this time I had been pushing his buttons. I had him going up, down, sideways, squeezing, sitting forward, and laying back—in short, I was rocking his world.

 

Tantamount to pushing the wrong buttons is allowing a lack of communication among those closest to you about what you are doing. You must frequently dialogue about your plans, how the business is faring, and how both of those will impact those who matter to you and to your enterprise. Be concrete with your descriptions.

 

Entrepreneurship can be a wild ride. You must be open about where that ride is taking you. Do not discount this small courtesy. Clear communication up front and along the way is vital for all your relationships, be they with your significant other, family, partner, banker, customer, or self.

 

Be careful about how much you articulate your ups and downs, though. This is where discretion comes in. Early in my marriage, I was going to school and had not done very well on a significant test. After a long and frustrating day on campus, I walked through the door. The first thing out of my mouth was:

 

“I’m going to fail this class and get kicked out of college.”

 

Funny thing, this declaration had the exact opposite effect from what I had hoped for. Instead of soothing me with sympathy, my wife spiraled into panic mode.

 

“What are we going to do now? I’ll have to make adjustments. Maybe I had better stop school and start working. Maybe we both better drop out and get jobs.”

 

Getting a C-minus on a test was not going to get me kicked out of college. I was just feeling beaten and sorry for myself. In fact, by the end of the semester, I had pulled an A-minus out of that class.

 

Think about how you set and communicate expectations. Be clear. Be diligent in reporting the progress of your business and don’t keep changing the rules of engagement with those around you. Do not blow small things out of proportion. Doing so will result in a wild emotional ride that will not be fun for anyone involved.

 

Porter’s Points – Concrete but Discreet

 

  • Who do your rules impact? Keep those people informed. Don’t divulge company secrets or cause undue worry, but do talk about goals, plans, and progress.
  • Let yourself cool down before you talk about failure or success. It is unhealthy both for your expectations and for others’ if you make something too dramatic.
  • Frequently ask yourself and others what you and they expect from your business. Every time you do, articulate the applicable rules. The best way to keep everybody on the same page is to set specific expectations through your rules and then live by them.

 

 

Tomorrow we’ll talk about what you should and shouldn’t risk as an entrepreneur.

 

Hold on Loosely, But Don’t Let Go

March 24th, 2009 by Sharon Larsen

Often when a person has invested a lot of time or money into a business, it’s hard to let it go – even when it’s clearly time.  Rich cautions us about that today.

 

 

When I was a teenager, there was a popular rock band named .38 Special that recorded a song called “Hold on Loosely, But Don’t Let Go.” As “all-knowing” teenagers, my friends and I applied the great wisdom of these drugged-out rockers to our understanding of the big wide “world.” Amazingly, their insight turned out to be true. It was one of the few things I actually got right as a teenager.

 

Have you ever had a relationship or an opportunity that you clung to so tightly that you suffocated it? I have. I wanted several of my early ventures to work so badly that I choked them right to death.

 

I have an uncle who is a very successful farmer, owner of a trucking business, and also the founder of a local bank. He was the mayor of our small town for years and had a way of stating things that only a farmer could get away with. I heard him say several times, “The only deals that ever went bad on me were the ones that I wanted too bad.”

 

When creating a business, entrepreneurs invariably adopt the necessary attitude of forward motion at all costs. The intensity of that commitment grows as more time and money go into the business. Then, ego kicks in and, before you know it, the effort has become all-consuming. At this point you have entered the danger zone. My experience has taught me that I can’t allow myself to get so caught up in achieving success that I don’t recognize when it’s time to let it go.

 

Several years ago while I was golfing one day, I encountered three young boys playing in one of the streams on the golf course. All of a sudden they jumped back a few steps. Then, ever-so-cautiously, they stepped back toward the stream’s edge. Curious, I went over to see what had caused the alarm. There, just below the surface of the water, was a harmless, three-inch crawdad snapping at the boys with all the perceived ferocity of a vicious, three-foot Tasmanian Devil!

 

I did some checking on the monster and learned that it was nothing more than a freshwater lobster—a crayfish. After my research, I went out on my own crawdad hunt, armed with nets and a bucket. I jumped right in the stream and began to stalk my prey. I got close to catching several of these little critters, but they swam much too fast for a novice hunter. At last, I grabbed one and a short battle ensued.

 

It became clear those little pincers could grab and hurt. After a fun but not very productive hunt, I decided to resort to cleverer means. Learning that crawdads were attracted to old bones, bacon, and chicken, I equipped myself accordingly and set out for another try. I was not going to be outsmarted by a micro-lobster.

 

Tying a small chicken bone to a string, I lowered it into the murky water. I soon felt a tug on the line. The pull grew increasingly persistent, and at just the right moment I lifted the string and bone out of the water. To my surprise, there were five little red-headed crustaceans holding onto that old bone for all they were worth. Their beady eyes glared at me. Their free claws snapped and clicked a warning to stay away. With one shake of my wrist, the five crawdads fell into the net waiting beneath them. They simply didn’t know when to let go. As a result, they ended up in a pot of boiling water and made me a tasty lunch.

 

As a business owner, you are no different than those crawdads. If you aren’t careful, your venture that you hold to so tightly may land you in scalding hot water. You can’t afford to let go for just anything, but if you find out that you are holding onto a rotten chicken bone, cut and run. Go snap at something else.

 

Porter’s Points – Hold on Loosely, But Don’t Let Go

 

  • Being an entrepreneur takes balance, so keep a healthy dose of reality in your back pocket even when you run full tilt at your venture. Some warning signs can be overcome, but some mean that it’s time to opt out.
  • Success is not hit-or-miss. If you miss it this time but come away clean, you have succeeded and are ready to try again.
  • The best sign that you need to back away from a venture is that it starts to violate your rules.

 

 

The moral of today’s section: don’t be a crayfish!  Tomorrow we’ll learn about setting expectations.

 

Don’t Destroy What You Want to Create

March 19th, 2009 by Sharon Larsen

Rich’s next caution as you start a business, is to leave behind the rigidity of a corporate time schedule.  Be sure to leave time for things that are important to you!

 

 

Many people go into entrepreneurship to give themselves more freedom to choose their lifestyle. However, they frequently end up manufacturing the exact problems they were trying to escape.

 

I live in a beautiful small town that is experiencing a growth spurt. There are countless new move-ins who sold their high-value homes in congested cities to live in a more laid-back atmosphere. Upon arriving, these same folks begin complaining about the lack of shopping outlets, social amenities, and malls. They seem to forget that people move to small towns because they are small towns.

 

These people initially like the slower pace, lack of traffic, and actually getting to know a neighbor or two. But then the memory of convenient shopping and a wide range of restaurants comes back and wins out. This attitude is turning our small town into the congested city those people were trying to escape. Be careful lest you experience the same phenomenon in your business: don’t create what you left behind.

 

One reason that I wanted to get out of corporate America was that I wanted to spend more quality time with my family. I wanted control over when I vacationed, when I worked, and when I took off to attend my children’s activities. However, starting a small business takes a lot of time and energy.

 

I realized this one day when I was dashing out the door and my wife handed me a glass of milk for breakfast. I popped a vitamin in my mouth and washed it down with one large gulp. I was gagging on the pill and coughing as my 7:45 a.m. conference call rang on my cell phone. As I started to jump into my car, my wife yelled after me: “Honey, please make sure you are there for Timmy’s program. He is so looking forward to performing for you.”

 

“I wouldn’t miss it for the world,” I quickly said, dropping into the car and shutting the door. Then I hit the green “talk” button on my phone. Still on the conference call when I got to the office, I whispered to my admin to give me a 10:20 reminder to leave for my son’s performance.

 

Where do the mornings go? After ten minutes of prodding, I jetted out the door at 10:30 and headed for the elementary school. It hit me.

 

I’m going to be late.

 

Cell phone stuck to my ear on another conference call, I swerved through traffic like Jeff Gordon threading competition at Daytona. Ending the call as I entered the west entrance of Timmy’s school, I pasted a calm smile on my face and looked for my wife. The kids had just started singing. As I walked in, my beautiful, amazing wife gave me that look a man can only interpret if he has been with a woman for twenty years: a combination of “thank heavens you’re here—where were you?” coupled with “You know I would have killed you.” 

 

At that moment, the bright eyes of my happy, yellow-haired Timothy caught mine and simply sparkled. They said to me, “You made it! It makes me so happy you are here. I am going to put on this show just for you, Dad.” His look made me avert mine, and I thought, “Boy, am I glad I did not blow this one.”
 

Too frequently, we allow ourselves to get caught up in both the whirlwind and the grind of our business adventures. Invariably, the drama of those adventures tends to muffle our inner voice of reason. It seems to mask the urgency of the truly valuable events in life. Too often we rush from task to task without really making significant contributions. We miss the really important things—the sweet things, the rewarding things—the lasting things of our lives.Likely, I will always struggle with the tugging lure of a successful business and a balanced life, but it is a tug-of-war worth the fight. I do not embrace being my own boss to work less, but to be flexible enough to adjust my work to allow for the weightier matters of life. Weightier matters, like seeing my five-year-old dressed up as the Yellow-Bellied Bluebird in the school play.

 

 

Porter’s Points – Don’t Destroy What You Want to Create

 

  • Many people go into business for themselves to have a more flexibility to do the things they love. Sometimes, what they love trumps flexibility. Don’t lock yourself into a corporate scheduling model that you’ve worked so hard to get out of.
  • Live the rules that you set regarding family, time, and financial boundaries. The fastest way to kill your dream is to go at it regardless of the rules you set.
  • You will never perfectly walk the tightrope in your venture. Getting the right mindset is the first step, though, and will keep you from destroying what you set out to create.

 

 

Next week we’ll travel back in time with an insight from a popular rock song, “Hold on Loosely, But Don’t Let Go.” 

 

 

Rich’s Rules

March 18th, 2009 by Sharon Larsen

After a short break yesterday to announce the new book title, Bootstrap Business: A Step-by-Step Business Survival Guide, and the updated website, we return today to Rich’s rules. 

 

 

Rich’s Rule: Never put my house or my family at risk.

 

I have chosen not to use the equity in my home to finance my businesses. However, it may be a viable option for some. (See Chapter 4, “Got Gas?”) I made this rule for my psychological well-being. I find great comfort in knowing that my house is paid off whenever the worst-case scenario becomes the real-life scenario. In fact, this rule allows me to take even bigger risks because I am not worried about my family’s welfare. Because I follow this rule, I sleep very peacefully at night.

 

Rich’s Rule: With each new business endeavor, I set limits for my investment of time and resource.

 

At the very beginning of each new adventure, I write down just how much time, money, and other necessary resources I am willing to invest to go forward. Although I write down all of my rules, writing down this rule makes it especially real. When I know how far I am willing to go, I have a better feel for the finances, the time, and the commitment required. Then I can really apply the “Got Gas?” chapter. I can say, “Here is what I can give. Is that enough to get this baby off the ground?”

 

Rich’s Rule: I always sift each idea through my four filter rules list.

 

Every idea I consider bootstrapping gets asked each of these questions:

  • Is my idea a digital asset?
  • Is it transactional in nature?
  • Will I own the customer?
  • Is it riding a wave?

Your questions will be your own, but always ask them. No exceptions. (See Chapter 3, “Power Tools.”)

 

Rich’s Rule: I will not engage in friends and family businesses.

 

It is not my intent to offend the many good people engaged in friends and family businesses. This is just a rule for me. I choose not to sell to friends and family. I do not want any unhealthy strings attached to my close personal relationships.

 

I have a few friends and extended family members who only call when they want me to join a so-called “great new business.” Personally, this gets on my nerves. I remember when I was first married and my wife and I moved into married student housing. The first people in our complex to approach us feigned friendship when all they really wanted was to sell us on a new business scheme. (Of course, we didn’t know that at first. They were just nice people.)

 

They said that they would love to get together and start building a friendship. We were excited that someone wanted to get to know us, so we invited them over to dinner. My wife spent hours preparing a nice meal to impress them. They enjoyed the dinner, and we enjoyed their company. But just as we finished dessert, out came the sales pitch: “We would like to share something very, very special with you…”

 

As I’ve gone through my rules, you’ve probably noticed that I have picked those that address each sector of my business life. These are just a few of the rules I’ve established for myself. They mean something to me. Yours will mean something to you. Take the time and find the joy that comes from creating your own set of guidelines.

 

Porter’s Points – Make the Rules, Live the Rules

 

  • Review the seven basic categories of rules that Rich has outlined. Think about where you stand in your own life. Write down at least four or five guiding principles to govern how you’re going to bootstrap your business.
  • Take those principles directly to your significant other. Make sure that he or she agrees and is fully invested in them. Do this with anybody whom your rules impact.
  • Set boundaries. List the top five most important things to you in your life. Ask yourself: what am I willing to do to get these? What will I not do to jeopardize these? If your rules do not agree with each other, fix them!

 

 

Using Rich’s rules as an example, come up with your own set of rules – rules that are specific to you and your situation.

 

Bootstrap Business: A Step-by-Step Business Survival Guide

March 17th, 2009 by Sharon Larsen

It’s only been a few weeks since we announced the official title of the book, but already we’ve had a change of heart.  Or, more precisely, the publishers changed our hearts!  They pointed out that “bootstrapped” is not a term that many people are familiar with and that using “small business” in the title was limiting our potential reader base.  In the spirit of their feedback, we have selected a new (and permanent) title for the book – Bootstrap Business: A Step-by-Step Business Survival Guide. 

 

We realize this is a sudden and unexpected change for many of our readers.  If you’re having a hard time copping with this abrupt turn of events, leave a comment on the Bootstrap blog and I will do my best to console, comfort, and convince you that this is for the best.

 

In addition to a new book title, we’d also like to announce the launch of our new and improved website, www.bootstrapbusiness.org.  The new site makes it easy for readers to preorder copies of Bootstrap Business and features details about and registration for upcoming Bootstrap Business Boot Camps.  If you haven’t already, we invite you to visit the site and reserve your signed copy of Bootstrap Business: A Step-by-Step Business Survival Guide today!

 

Make the Rules, Live the Rules

March 16th, 2009 by Sharon Larsen

We open Chapter 5: The Rules, with Rich’s overview of some of his rules.  Keep in mind that these are Rich’s rules – you’ll need to develop your own rules as you start a business.

 

 

One of the great joys of living the life of an entrepreneur is that you get to create the rules! You have the freedom to build and create according to your own specifications. However, once you have established the rules, you do not have the right to arbitrarily change them. Capricious rule changes result in crises not just in your business, but in all aspects of your life.

 

Will the rules ever need to change? Yes! Circumstances change, objectives change, and markets change. However, if you change the rules, you must do so the same way you created them: with forethought and deliberation. You must then communicate these changes to everyone they will impact.

 

Before you can change the rules, though, you need to write down your rules. This is your task. I cannot and will not create your rules for you. You must thoughtfully and carefully create them based on your value system, your goals, and the level of risk you are willing to take. To illustrate, let me share a few examples of the rules I have set up along the way.

 

Here are seven basic categories that I build rules around when I create a new company:

·         Finances

·         Culture

·         Hiring and Firing

·         Roles and Responsibilities

·         Boundaries

·         Exit Plans

·         Time and Travel Commitments

 

Rich’s Rule: I will not sign a personal guarantee unless I am the primary business owner, and I will always maintain control of company finances.

 

Earlier in my career, I was hired to be the CEO of a highly visible startup web company. I was turned on by the title and really wanted to prove myself. One of my first responsibilities was to acquire computer equipment. This required our taking out a loan, which, in turn, required a personal guarantee.

 

I had no vested ownership in the company and the finances were being handled by an external CPA. But, in my zeal to demonstrate my commitment and team-player attitude to the board of directors, I signed the personal guarantee. Several months later, the web bubble burst, and who do you suppose was responsible for that loan? I spent the next five years paying off those damn computers with my own money. The rule I now live by is:  never sign a personal guarantee for someone else’s business. Ever!

 

Along similar lines, although I have had wonderful accountants, office managers, and administrative assistants, every time I have given someone else complete control of the books, the outcome has been disastrous. No longer do I allow anyone else to have ultimate control of my finances. I always remain actively involved.

 

Rich’s Rule: Be true to my conscience.

 

How I succeed in business has become just as important to me as actually succeeding. In my last corporate job, I was a senior executive in a well-known company. In this role, I became exposed to some unscrupulous activities. As I left to start my own businesses, I recall thinking very clearly, “I would rather not succeed financially if it means doing so through unprincipled means.” I make no claim to perfection—however, there are certain businesses and activities that I refuse to engage in.

 

Each morning, as I shave, I have to look at myself in the mirror. And I’ve learned that’s easier to do if making money is not the most important motivator in my life. Being honest in my dealings coupled with building and lifting humanity is, to me, far more important than any amount of money.

 

 

Tomorrow we’ll finish Rich’s review of his rules.  Be thinking about what rules you might set for yourself.

 

 

Porter’s Preface: The Rules

March 12th, 2009 by Sharon Larsen

Ron opens Chapter 5: The Rules by emphasizing the importance to entrepreneurs of rules.

 

 

Entrepreneurship is a tug-of-war and you are the rope. Total commitment to the battle pulls at one end while clear-headed detachment and objectivity heaves at the other.

 

If you’re going to stay in one piece, pay close attention to this chapter. Rich will discuss several key concepts and methods that have helped him maintain sanity as he has been pulled by the opposing forces of the bootstrapping tug-of-war. Neither Rich nor I would be where we are without having created and followed our own sets of rules. Have we fallen and been dragged through the mud pit? Yes—and you will, too. To minimize the damage of these muddy encounters, though, you must make and live by rules.

 

It is vital that you understand the importance of making rules for your company and for yourself. But, as Rich will explain, it is not enough to just make the rules. You must have the discipline required to live the rules. To help you remember that first foundational rule, Rich will give you a firsthand look at some of the rules he has created for his bootstrap tug-of-wars.

 

In the next section, Rich will address the issue of how people frequently confuse their original lifestyle vision when creating their business. So many entrepreneurs build a business to support a chosen lifestyle, only to end up creating the exact opposite. Rich will explain this intriguing dichotomy and show you how to stick with your original intent.

 

In memory of our rock-’n-roll days, Rich and I have entitled the third section, “Hold on Loosely, But Don’t Let Go.” He will tackle the challenge of knowing when to let a business go in order to move on to the next opportunity. This is much easier to write about than to do, which brings us back to that same old tug-of-war.

 

What about the slippery slope of setting proper expectations with your trust relationships? How do you negotiate business and life with your significant other, family, partners, investors, bankers, and team members? In the fourth section, you’ll see that the outcome of this tug-of-war has lasting consequences. But winning on the business front and on the personal front is possible if you stick to the rules outlined in all of five sections of this chapter. We have both done it.

 

Finally, Rich will boldly advise you to not risk what you can’t lose. Do you really want to play Russian roulette with your kids’ college funds? If things go south, is mortgaging the house to fund your venture something you can live with? Should you really be sucking gas out of your retirement tank? Think carefully about these questions as you read on and learn to stick to your rules.

 

 

Start thinking at this point about what your rules might be.  We’ll dig into Rich’s rules next time. 

 

 

 

Fund the Runway: Porter’s Points

March 11th, 2009 by Sharon Larsen

Now that we’ve reviewed all five funding possibilities for entrepreneurs, we’ll get Rich’s closing thoughts on the matter. 

 

 

For me, the choice to fund or bootstrap isn’t a matter of right or wrong. It’s just a matter of preference (and, granted, I have strong preferences). There are plenty of pros and cons for each approach. If you choose funding, whether you find an angel, family member, credit card, or VC, you must be cognizant of one potential roadblock: distraction.

 

This past year I have been working with a brilliant young entrepreneur. I watched with great interest as he reported to me every several weeks the marked and smooth progress he was making with his selected VC. Knowing my own living hell in dealing with snakes, his optimism piqued my interest. I truly hoped to witness a positive experience. Knowing that his required funding event was two million dollars, I was horrified and confused when the VCs convinced him that he needed ten million, not two.

 

One day he walked into my office, and instantly I knew what had happened. Emotionally bloodied and bruised, he explained the waste of the last three months of his life. He was sure the funding would execute based on a completed term sheet. He had stopped doing the side engineering work that covered his personal expenses. It was right then that the VC turned out to be disreputable. The deal fell apart at the due diligence phase—no gigs…no funding…no fun!

 

At one time, Ron worked in a building with a sister company in a thriving, high-demand industry. The sister company operated both on a bridge loan and on revenue generated by sales of services and products. It started taking off, and its executives decided that with additional funding, they could scale the business rapidly to make a nice return in a short period of time.

 

The process to secure the funds was at once grueling and exciting. The entire company got caught up in the pursuit of funding; as a result, other vital parts of the business were ignored. The executive team spent countless hours building pro formas, gathering data, and presenting to VCs. Then the executives, based on the anticipated funding, decided it was time to start building a new facility. They used their existing funds to get the construction started. Heady and exciting times, right? Well, they forgot a minor detail: running the business. You can’t neglect day-to-day operations pursuing funding.

 

You know the outcome of the story. The funding fell through, the company could no longer make payroll, and, instead of growing, it downsized. No need for a brand new building now! The only highlight was that the company Ron worked for watched and learned from the process while preparing for its own funding event. It was during one of the executive team’s planning sessions that they heard the sad tale. Then and there, they adopted a plan to assign a “tiger team” of executives to go after funding, while the rest of the executive team ensured that day-to-day business operations moved forward. And what happened to the new office building that was under construction? The company Ron worked for got to move in.

 

The major risk with pursuing venture capital is that you can easily end up doing crazy things, things completely at odds with your rules, objectives, and dreams. I have watched colleagues change their entire business model to adapt to venture capitalists who didn’t even understand the market they were in. If that works for you, work it—but remember to manage emotion with logic and to keep your numbers in line, making sure that everything falls into place.

 

Porter’s Points: Fund the Runway

 

  • Once you have worked out your pro forma and set some ground rules, look into how you will get your funding. Do you need an initial funding event? How large?
  • Never discount bootstrapping in favor of more traditional methods. Remember that the unconventional, slower route may be more rewarding in the end.
  • Always know who and what you are dealing with. Weigh the pros and cons for your specific venture before taking action, and be sure to learn from other ventures around you.

 

 

With that, we wrap up Chapter 4: Got Gas.  Chapter 5: The Rules, is up next!

 

Fund the Runway: Angels and Snakes

March 10th, 2009 by Sharon Larsen

We’re now ready to discuss the last of our highlighted small business funding options, angels and snakes. 

 

 

#5 Angels and Snakes

 

Angel investors typically are wealthy individuals who provide capital for startups. They might contract for convertible debt or equity in the business as a return on their money. Some angel investors have begun to organize angel networks in an effort to share their pool of investment dollars.

 

Venture capitalists (called VCs, though we unaffectionately refer to them as “snakes”) are institutions that manage a pool of wealthy, qualified investors’ money. It is not uncommon for them to be the face of a trust, business, investment fund, or other entity. They have a responsibility to the members of that group to ensure the success of the businesses their money is invested in, which results in a very active involvement.

 

My experience has been that dealing with angel investors is far better for your blood pressure than dealing with VCs. That can be good or it can be bad. If you have the discipline to execute on all aspects of your entrepreneurial climb, you may benefit from the more hands-off approach the angels take. However, if you need structure, leadership, and occasional bullying, the snakes may be the right solution for you.

 

Many businesses simply require VC funding to start. If you are after the grand slam, you will want to consider it. If you do, then this book will give you some great guidance, but you will want to browse around for an additional entrepreneurial bible. In fact, it might be best to have an entrepreneurial clergyman. When you work with snakes, a critical resource to have among your senior staff or advisors is an individual who has had a successful VC exit. Having this experienced person will help you navigate the maze of VC demands. The attitude that a VC brings to the table is all or nothing. If a VC invests a million, they want ten million out of it.

 

Some have done well with VCs, but I have never had a good experience with venture capital funding in my entire career. Traditional venture capitalists can be very difficult. Management gets restructured and goals get realigned. With VCs, you will do it their way, not yours. So why the bad taste in my mouth? Hmm—let me count the ways.

 

I worked as the CEO of a small company, making repeated attempts to get funding. I cannot count the number of times that venture capitalists led us down the rosy path, wasted our time and resources, jerked us around, and then proclaimed, “We’re out.” The truth of the matter is that many VCs don’t want to be first in. Because they have money to protect, they often hold off on commitment. But once you get one in on the deal, others clamor to climb aboard.

 

Angel’s Pros:

§  They are less threatening than a snake.

§  They tend to leave you alone.

§  They are friendlier on the ownership terms.

 

Angel’s Cons:

§  Legal costs can get high.

§  No pressure from them can cause laziness in your team.

§  Typically, you’ll need more than one angel.

§  Usually, an angel is someone you know.  You don’t want to risk the friendship.

 

Snake’s Pros:

§  A massive infusion of funds allows you to quickly get to market.

§  The financial oversight keeps pressure on and momentum high.

§  Potential board contacts and cross-relationships with other funded ventures can open more doors.

§  You get visibility with funding from a notable VC.

 

Snake’s Cons:

§  You lose some control.

§  You build product for the capital rather than the market.

§  It seems like a VC’s job is to make your life difficult.

§  If you don’t like audits, you had better cultivate that taste!

 

 

We’ve now learned about the five main funding options for entrepreneurs: debt financing, credit cards, bootstrapping, family and friends, and angels and snakes.  Be thinking about which fits best with your needs and situation.  Tomorrow we’ll finish up Rich’s thoughts on the various options.

 

 

 

Fund the Runway: Friends and Family

March 9th, 2009 by Sharon Larsen

So far, we’ve talked about three way of funding your small business: debt financing, credit cards, and bootstrapping.  Today we’ll review a fourth option – friends and family. 

 

 

#4 Friends & Family

 

“Hey Dad, you got ten dollars you can loan me?”

 

When attempting to finance your business, the thought of funding with a loan from friends or family members may cross your mind. If it does, take a minute to think it through. What happens if the business fails and you can’t pay back the loan? What happens if the business finds the sweet spot and becomes wildly successful? Will your “banker” expect a percentage of the gain in addition to repayment of the principle and interest? Think for a moment about your next family Christmas get-together. Santa—or Grandpa—just might bring a hefty load of coal.

 

You need to recognize the serious nature of these kinds of commitments. Be careful and thoughtful in accepting funding from family and friends, who are sometimes as willing to provide it as you are to receive it (with neither side thinking it through carefully). In any partnership or business relationship, you should ensure that everything is clearly understood and delineated in writing.

 

I have never had the luxury or curse of borrowing from family and friends, but multiple business associates of mine have utilized this form of financing. Through marriage, I have some relatives who are extremely well-off. They created one of the largest construction companies in the western United States, a cash cow for the whole family. Each member of their extended family has the opportunity to leverage off of this success. As a result, many have developed successful companies ranging from sand and gravel outfits to road sign businesses. If this option is available to you, consider using it. Just remember that borrowing money from your family and friends is not the same as bootstrapping. You are still accountable to an outside source: you are putting your relationship up as collateral.

 

Pros:

§  Wealthy relative can support each other.

§  Friends and family are quick to your aid.

§  Success and failure, if handled right, both make for fond memories.

 

Cons:

§  If you can’t repay your financier, things can get ugly – and it’s easier to avoid seeing your banker than your father.

§  Even with a carefully drawn-up contract from the outset, success can be hard for a family to deal with.

 

 

We’ll finish up tomorrow with the last of the funding options Rich discusses: angels and snakes. 

 

Fund the Runway: Bootstrapping

March 5th, 2009 by Sharon Larsen

Today we discuss two other options for funding your startup, besides debt financing. 

 

 

# 2 Credit Cards

 

As crazy as it sounds, I have seen credit cards work financing wonders in the entrepreneurial world. I have an associate who was working for a company when it went defunct. He saw a quick path to cash, and, understanding the company’s business model, decided to roll the dice. He had no equity, but he had a credit card with a $12,000 limit. He drew out the money, took several team members with him, and started a new company. Off to the races they went!

 

Within two months, they were profitable. He put his team members and himself on full salary. One year later, he had purchased a fleet of BMWs and Mercedes, allowing his employees to drive them. Two years later he purchased a complete office complex for his business, and within three years sold the company for $20 million dollars—all from a $12,000 credit card.

 

As for me and my house, I don’t have the nerve. I personally don’t believe in exposing my family to that level of risk. However, my associate was in his late twenties when he did this. He had a small family, and his risk of failing and having to start over was not overly significant. He was bright and capable.

 

You have to assess your own risk threshold. Although a fun story, this is not a financial model I would recommend to most people.

 

Pros:

§  Credit cards are quick to cash.

§  You maintain ultimate decision-making power.

§  You retain ownership.

 

Cons:

§  There are high interest rates and merciless deadlines.

§  Long startup times make for heavy debt (and the servicing of that heavy debt).

§  There is an increased risk to family and dependents.

 

#3 Bootstrapping

 

You know by now that bootstrapping is my favorite method of funding. It’s critical to remember that to get your venture started, you have to chase cash. This won’t get you rich quick—the pie in the sky often has to be postponed while you build up your fuel reserve—but it makes up for its zigzag approach by giving you full autonomy and stability. Simply stated, you sacrifice your rate of ascent, but it’s your flight, Captain!

 

To bootstrap, many people dip into their own funds: retirement, emergency savings, or a 401K. Wherever you get the money, set your limit of risk and stick with it. (Remember those rules?) When you bootstrap, your initial efforts are often measured as opportunity versus strategy.

 

Our most recent venture is a perfect example. Ron and I came up with three venture ideas: SEO work, engineer outsourcing, and link building. We wanted to pursue link building, because we knew that it would be the most scalable, profitable, and successful; however, starting our venture with only $5,000 required us to get quick to cash. We knew the SEO idea would give us just that. With my contacts and skill in search engine optimization, we put a simple plan together and proceeded toward building a service business.

 

Although our SEO business required intense lifting and was neither strategic nor scalable, we knew it was quick to cash. A few calls and a well-timed trip to New York landed us several large SEO accounts. We got gas in the tank. As we built that business, we kept an optimistic eye out to transition into our other two desired opportunities. We zigzagged our way to our ultimate goal: the cash from SEO allowed us to engage engineers, which bridged to link building, which has now led us to where we create our own assets. It took nine months to make our move to where we are now.

 

Bootstrapping requires more patience and more brain power, but the pros outweigh the cons. You force yourself to literally watch every dollar and make sound decisions. Those attitudes are powerful allies. Additionally, chasing cash makes you zig and zag to the final destination. That slows down the whole process, but exposes more opportunities and allows more time for the analysis of your perceived ultimate destination.

 

Pros:

§  You dictate all of the rules.

§  The need to zigzag opens unforeseen opportunities.

§  Whatever your initial level of discipline, you come out that much stronger.

 

Cons:

§  Bootstrapping can be stressful.  It requires intense personal effort, firm commitment, and a high level of discipline to get the ball rolling.

§  You can’t go directly for the big opportunity.

§  You have to slow down.

 

 

Tomorrow we’ll talk about the fourth funding option, friends and family. 

 

Fund the Runway

March 5th, 2009 by Sharon Larsen

Today we begin discussing the funding options when you’re starting a business.

 

 

There are a variety of methods you can pursue when funding your venture. I’ve seen associates use each of these methods, and I have used a number of them myself. It is interesting to note that I’ve experienced and seen both success and failure on each of these tracks. In many cases, the type of venture you embark on determines the type of funding you’ll need. Lengthy technology buildups take venture capital; but family businesses can be kick started with family funds, and quick-to-cash service businesses can be bootstrapped.

 

I’ll set forth several alternatives and discuss the pros and cons of each. There is no right or wrong answer on how to fund a company. It frequently depends on your present financial circumstances, what type of business it is, and your preference. Of course, I prefer to bootstrap, and my bias will come out—but remember to consider your specific situation.

 

Potential Funding Sources:

§  Debt Financing

§  Credit Cards

§  Bootstrapping

§  Friends and Family

§  Angels and Snakes

 

#1 Debt Financing

 

Debt financing is a classic: simply get a loan from your local bank. Banks require collateral. Often, they choose to tie up your house. This may not be a bad option if you have equity in your home and don’t mind losing it if things fail. Of course, you want your venture to be successful, but if you put something on the line, you must be emotionally prepared to lose it. Don’t risk what you can’t afford—and really, truly don’t want—to lose.

               

I’m sure that debt financing has its place, but I hate it because I have to go sit in front of some stodgy banker who pretends that he understands what I am setting out to do. I remember one business I created that required a line of credit. The business was growing so fast that I needed gas to fuel the rapid growth. Online sales was our model; I would get paid thirty days after the end of the month, but I had to pay for the advertising up front.

 

At one point during the term of the line of credit, the bank called me in for a formal discussion about their little $100,000 loan. They proceeded to express concerns. I proceeded to erupt into laughter. See, their biggest concern was that I had only one company paying me. Banks are used to seeing businesses collect only from most of their customers most of the time. To them, it looked like I had all of my eggs in one basket. They were right, it was only one company—but it was Google! After an hour of attempting to explain the business model to them, the president finally came in and vouched for me. Forty pages of terms and conditions later, I had received my line of credit. Needless to say, we never missed getting paid by Google.

 

So what was the value of that debt financing? Well, I did not have to give up ownership in the company, and I instantly had funds to draw on for uninterrupted business growth. Outside of calculating the risk, the cost of such capital is very low. If you choose debt financing to fund your company, use a Small Business Loan (SBA). Interest rates are nominal, and these loans are fairly easy to obtain with a structured business plan. Of course, you have to provide a personal guarantee (in the form of collateral) and are obligated to make payments on the loan. If things go wrong, there is a chance you could end up paying for a dead dog.

 

Pros:

§  SBAs are relatively easy to obtain.

§  You maintain ownership.

§  There is a low initial cost.

 

Cons:

§  You have ultimate responsibility to pay back the loan with or without success.

§  The loan requires material and emotional collateral.

§  You account to a banker who may or may not know your market.

 

 

We’ll begin next time with discussing credit cards as a means to fund your small business.