Posts Tagged ‘Research in Motion’

7 ways to raise money for your start-up

Tuesday, February 19th, 2008

One of the biggest issues with starting a company – and keeping it running – is finding the cash to stay in business. Even if you work hard at saving money, only spending on the things that are necessary, it is fairly likely that there will be a time when you need more capital.

I am still in the early stages of my start-up, and only have first-hand experience with angel investments, but the following is a rundown of the common ways to raise money for your start-up. Once again, I’m drawing heavily on the stories of the entrepreneurs from Founders at Work by Jessica Livingston for the quotes included here.

SevenThe good news for anyone who has limited resources when starting a company is that entrepreneurs seem to agree that this can be a good thing. The need to conserve resources often leads to creativity, hard-work, and a drive to succeed that can be missing when money is available and things are easier and more comfortable. So the first piece of advice when you’re thinking about raising money is to make sure that you really need it before going after cash.

“One of the things we’re seeing that we really don’t care too much for is that way too many companies are taking money when they don’t need it. And the whole idea we had was that having too little money is a great way of getting great product because it’s a way to get focused.” – David Heinemeier Hansson, partner, 37signals

“The money was scarce, but I’m a big believer that constraints inspire creativity. The less money you have, the fewer people and resources you have, the more creative you have to become. I think that had a lot to do with why we were able to iterate and innovate so fast.” – Caterina Fake, cofounder, Flickr

“I really liked the discipline that came from a bootstrapped startup. I think that everybody that goes and does a startup – even if they don’t do a major startup that way – should start a business that is having to make people happy with them day one, through contracts, through small scale sales, whatever it is. How low can you go? How can you build something really inexpensively? How can you not spend money on furniture and matching carpet and those sorts of things?” – Brewster Kahle, founder, Internet Archive/Alexa Internet

“The advice I would give is to avoid [raising money]. I would say spend as little as you can, because every dollar of the investors’ money you get will be taken out of your ass – literally in the sense that it will take stock away from you, but also the process of raising money is so horrible compared to the other aspects of business. You can’t work your way out of it like you can with other problems. You’re at other people’s mercy.” – Paul Graham, cofounder Viaweb

“I think in general being overcapitalized is a path to failure. The VCs want you to spend. There are general ills with being overfunded.” – Joshua Schacter, founder, del.icio.us

1) Use your own money
In my opinion, this is the best way to fund a start-up if you have the capital to invest. Not only will this ensure that your decisions are not controlled by outsiders, it will also guarantee the highest percentage of profit if you sell. It’s also incredibly motivating if your own money is on the line every day. Of course, if you don’t have extra capital and you’re trying to self-fund, that can be a painful process of skimping and saving every dime – as well as living day-to-day with poverty and uncertainty. So this is probably only a viable option if you have significant personal wealth, or have put money aside in savings.

“There are pros and cons to taking money. The best kind of company is one where you don’t have to take any money…I funded the first few years myself. But eventually, I took some money from Mitch Kapor and then others. Not so much because I needed it at that point, but because I knew that, ultimately, you cannot accomplish something completely on your own. You really need to develop a network of people who win when you win.” – Ray Ozzie, founder, Groove Networks

2) Get a loan
There seems to be a general sentiment that small businesses and start-ups are not able to get bank loans. The truth is, there are loans that are earmarked for small businesses. Bank loans can require collateral to secure them, however, and the terms make all the difference in the world, so be sure to read the agreement closely.

“We lucked out and got an interest-free loan from the Canadian government. We’d applied for it, and gotten rejected, and then just sent the same application in again when it was open again, and much to our surprise, we got it.” – Caterina Fake, cofounder, Flickr

3) Apply for grants
From the research I’ve done, it appears that the United States government does not have any grants for small businesses owners, but there are state-based grants available. This list from About.com includes links to the state-based programs. If you’re based in Canada or elsewhere outside the U.S., you may have more luck finding government grants.

“We heard about these government programs, and we started applying for them. It was a lot of work to actually apply for these things, and then it was a lot of paperwork to maintain them. In the early days, they weren’t really big grants. They were rather small, and sometimes you wondered if it was worth all the trouble. But it was very helpful when we needed it. As you become experienced, and as the government agencies that we were working with became comfortable with what we were doing and recognized that we were onto something, the grants became more interesting.” – Mike Lazaridis, cofounder, Research In Motion

4)Put it on your credit card
While it can be difficult to get a bank loan or a government grant, most small business owners (depending on their personal credit histories) are able to obtain some kind of business credit card. The typical issues related to spending on credit apply, with the biggest concern being that the business will fail leaving the entrepreneur with a huge credit card bill to pay off. According to Joe Knight, co-author of the book Financial Intelligence, in a BusinessWeek article, “the worst thing in the world is to have your business fail and be stuck personally with $50,000 in debt at 21% interest.”

“There are more choices nowadays for people – angel money, for example. And many things are much less expensive to do now. You can go further on your credit card than you could before. I want entrepreneurs to make informed choices when it comes to financing. Understand what the impacts and implications are for different financing options.” – Mitchell Kapor, cofounder, Lotus Development 

5) Get consulting work or side jobs
This suggestion is something I covered in an earlier article about how to save money on your start-up. It’s a popular way for flexible start-ups to get some extra cash – money earned from side projects assigned to the company or one of the start-up founders can then be used as an infusion of cash for the business.

“The first year was entirely self-funded. It was just doing this work mostly for HP. HP basically funded Pyra for the first year, unbeknownst to them, because at the time you could charge a decent amount of money for doing pretty simple web application development. If one of us was working on that full-time, it would pay for three of us (not that we were paying ourselves much).” – Evan Williams, cofounder, Pyra Labs

6) Find angel investors
Angel investors are typically wealthy individuals who use their own money to fund a start-up in exchange for repayment of the investment (with interest), or a percentage of the company or both. Angel investors are often friends, family members or previous business partners or associates – or people who are in the start-up founders’ extended network. (This is a good reason to start networking now!)

Angel investments provided me with the initial funding for my business, and angel money has been an excellent way to make sure that I have the capital to fund my start-up, while at the same time having the flexibility to work on a variety of things in different markets without too much outside control. This is how Chris’ company is funded, as well, and it is an increasingly popular way to fund companies, especially in high-tech.

“We all tried to get $3,000 from each of our parents, and five of the six parents put up, so we had $15,000. After graduating, three of us lived in one house in Palo Alto, and three of us lived in another. We set up shop in the garage of the house that I was living in. It was the classic setup. My parents came up and they saw the garage and wound up buying us some nasty carpet. The tables were all Formica. I won a fax machine at Office Depot. We stole our chairs from Oracle Corp.” – Joe Kraus, cofounder, Excite

“We were very encouraged that the angel investors wanted to invest. We gave demos to two investors. We only wanted to raise $50,000, but both of the investors who saw the demos said yes. So we thought, ‘All right, we’ll raise $100,000 then, since they both said yes.'” – Paul Graham, cofounder, Viaweb

7) Take on venture capital
For me, and for most of the founders featured in the book, venture capital is the type of money that is surrounded in the most mystery. Typically, start-up founders don’t understand venture capital or how it works until they go through a funding round with the venture capitalists. There is also a great deal of fear surrounding the idea of working with venture capitalists, and often a great deal of resistance to taking money from them. However, for companies that need a lot of cash to see their idea come to life or to push them to the next stage of growth, venture capital can be a good option.

“Once you start down the treadmill of taking venture capital, it’s ‘How many rounds before people give up on your or you have a positive exit event?’ So you’re really setting yourself up. The best by far is to structure it so that you don’t have to take money.” – Ray Ozzie, founder, Groove Networks

“We took no investments because there were so many horror stories about what VCs would do to you. ArsDigita was the most public one, obviously, of kicking out the founders and then mismanaging the company and bringing in the so-called professional management.” – Joel Spolsky, cofounder, Fog Creek Software

“We didn’t have any desire to take money. We had heard all these horror stories about people receiving venture money, and even though we didn’t think we could have the aspirations to be something huge, we certainly didn’t want to crash and burn because we took money when we shouldn’t have. And we didn’t know anything about it. Are you supposed to pay them back? We didn’t understand that investors put money in and they own a part of your company. All we had heard were bad things that happened, and we didn’t know why.” – Mena Trott, cofounder, Six Apart (they eventually did take VC money)

“It’s one of those things where, if you look back now, when everyone walked away with a ton of money, everyone loves everyone. We had this great time, etc. It’s generally more complicated than that where, when the company is doing well, they’re happy and they think they’re great. The company’s not doing well; they’ve overpaid and they’ve been too nice. It’s half and half.” Max Levchin, cofounder, PayPal

“Then we found one venture capital firm, Brentwood Venture Capital. Jeff Brody, a VC there, saw it and he thought it was great. He said, ‘We want to invest.’ And they were prepared to put in $4.5 million…It was great, since we were plumb out of money. I would have lost everything; my house; I would have been deep in debt; the company would have folded; it would have been a bad scene.” – Steve Perlman, cofounder, Web TV

The next article in this series on start-ups will talk about one of the key attributes of an entrepreneur – the willingness and ability to change plans quickly, and to adapt to outside pressures and influences.

Four hurdles to jump after starting a business

Wednesday, February 13th, 2008

Making the decision to start a business is just the beginning. Along with all the actual work you have to do (which I’ll write about later this week), there are other early hurdles, some of them mental, to jump. Here are four:

1) Telling other people. For me, this one was tough. I had worked with the people at my company for almost 8 years, and many of them were like a second family. But telling them was nothing compared to telling my real family. Breaking the news to my parents that I was thinking of quitting my job was difficult, but they were supportive. Both of my parents were elementary school teachers, my dad taught at the same school, the same classroom and grade, for more than 30 years before he retired. He told me that doing something that I loved was incredibly important because I will spend too much of my life working to not love what I’m doing. Good advice, I thought.

But telling them that I was starting a company – and an Internet company that starts other companies – was a whole different story. My mom’s response: “Thank God Chris has a job.” The real issue, though, was that they didn’t (and probably still don’t really) understand what it is that I do. This is not surprising because very few people understand what I do. But I knew for sure that they were both on my side when I went home for a visit at Thanksgiving, and my mom had print-outs of my Web sites (she actually printed copies of the sites on her color printer) propped up on her hutch in the dining room. Adorable.

“My mother and father thought I had lost my mind, because I had this great job at Xerox, a nice big office overlooking the whole Bay Area. They said, ‘What are you doing?'” – Charles Geschke, cofounder, Adobe Systems

“[I had to tell my parents that I wasn’t finishing school], but what was actually harder was having to go to the president of the university and ask for a leave of absence. I had never met him before. It was quite interesting because he apologized for having to try to disuade me from it. After he finished his speech, he wished me the best of luck and shook my hand with a big smile. I rememberd that, and ironically, 20 years later he’s one of RIM’s board members.” – Mike Lazaridis, cofounder, Research In Motion

“My parents thought I was pretty much over the top because I had this very prestigious job at the Federal Reserve Bank and went to work every day from my apartment to this beautiful bank and got promoted and made a bunch of money for my age. Why would I quit? It was very hard to communicate to people who weren’t in the very small software industry what you were doing. People didn’t question you; they couldn’t even converse with you. At Thanksgiving: ‘What do you do again?…OK, thanks, that sounds really interesting.’ …People didn’t quit their jobs and start these companies. Although once you become an entrepreneur, it’s sort of like becoming an alien. You notice there are other aliens!” – Ann Winblad, cofounder, Open Systems

Hurdles
Photo by iowa_spirit_walker

2) Having faith that it’s going to work. You have to believe that your idea is going to work before you decide to start the company, but continuing to have faith in your vision is something that you have to choose to do every day. For me, it’s hard when I read articles about how many small businesses fail because I tend to make decisions based on probability and best-case scenerios. So the probability is (based on the stats) that my business will fail. But I have to have faith, I have to decide every day that I will beat the odds, that my company will not become a statistic. That I will succeed. The good thing for me is that my business model has failure built in, which is fantastic, because I’m already planning to fail. I’m starting a number of things at the same time with the full knowledge that some will not succeed. But the trick is to hold onto the faith that some of them will succeed.

“It took a lot of faith. You call it vision, but it’s a combination of vision and faith that 1) it’s going to happen someday, and 2) it has value, and 3) you can actually accomplish it in an economic way and promote it so that you can fund the development and growth of the business. That’s pretty tricky stuff.” – Mike Lazaridis, cofounder, Research In Motion

3) Embracing the uncertainty. When you start a business, you may be trying to hold onto faith that it will be a success, but you don’t really know that it will be. Along with that, you don’t always know where you’re next client will come from. Or employee. Or dollar. So you have to come to a point of accepting the not knowing, embracing the uncertainty. For me, it’s kind of a thrill to be working this all out as I go because I have come to believe that no matter what I face, I’ll figure it out. It might not be today or tomorrow, but eventually, I’ll either determine a way to get around the issue, find someone to help me with it, or overcome it in some way.

“Part of the excitement was just seeing how the world would respond. I kind of like uncertainty to some extent, because it’s a little bit of suspense and excitement and adventure, almost, right? And you can learn a lot even if things don’t work out. But not everyone likes adventure. A lot of people seem to be against uncertainty, actually. In all areas of life.” – Paul Buchheit, creator, Gmail

4) Remembering that there are pros and cons. I got married fairly recently (May 2006) and for at least a year following that event, almost everytime I saw someone I hadn’t seen in awhile, they would ask, “How’s married life treating you?” That exact question. Since starting a business, the question has morphed to, “How’s the business coming along?” I love that people ask about both my marriage and my business, but the truth of the matter is that with both, there are pros and cons. The trick is making sure that there are more pros than cons.

For the first few months after starting the business, I had a really hard time with the isolation of working at home, alone, with no one else around to talk to all day or who fully understood what I was doing. I tried a lot of things to overcome this, and the thing that ended up working the best was going to Panera Bread and using their free wi-fi. At least there I was around people, and the din from the conversations helped me feel not-quite-so-alone. Lately, that con has turned into more of a positive. I love being able to set my own schedule and to work at my own pace, and I’m able to get things done faster than ever. The good can become bad and the bad can become good in the blink of an eye – the key is remembering that, and working constantly to turn the negatives positive.

“Startups are just so amazingly fun; they are so amazingly stressful. Whether you are an engineer or whether you are a founder, at least for me, it takes every emotion you’ve got and multiplies it 100-fold. Higher highs, lower lows than any other work experience. A startup is all-encompassing, so do it when you are young and when you don’t have a family because you’ll lose it all.” – Mark Fletcher, founder, Bloglines

“It’s a combination of sudden freedom to run things as you please and crushing responsibility in which you know you have to do certain things in a certain way at a certain time. That eradicates all of that freedom.” – Joshua Schachter, founder, del.icio.us

Tomorrow, I’ll continue this series with a discussion of the financial issues that go into a start-up.

All of the quotes in this article are from the wonderful book Founders at Work: Stories of Startup’s Early Days, by Jessica Livingston.