On management: Where do you go after you blow through your startup money?
Out of work, a 45-year-old consultant (read: engineer without a job), in the beginning funnel of what would become a deep recession, with something like $3,000 in the bank, three kids in college and a keen desire to be in my own business.
Sounds like the conditions of today. But this was me in 1981 when we started Wiesner Publishing, although I think that conditions today are much tougher.
The fundamental problem is and was financing. Your idea may be great, but the thing I learned over and over was, “When you are out of cash, you are out of business!” Note that cash does not include “money, profit, notes, etc.” These things count in a different way, but the lack of cash can put you under in a flash. This is true the day you hang out your shingle and after you have been in business 50 years ( e.g. Barnes & Noble).
We got our original toehold through personal borrowing. After that for the first year or so we financed our receivables. This is an expensive way to get money from a bank or a factoring service. It serves a purpose, i.e., you get the money necessary, and the bank has less risk.
We needed to find better funding!
So what are the choices? Not much different now than then; banks, venture capitalists, angels, private investors and Aunt Agatha. I didn’t have an Aunt Agatha (a rich family member who would just love to help you start a new business), so I went to my bank – the bank that had all my accounts for two years, the bank that had been financing my receivables for that time and that had told me it was eager to help new companies grow.
I went with my CPA, and we gave a full presentation on how we were going to pay them back complete with five years of balance sheets and P&Ls. A few days later they called and told me “no” because they had a new head of accounting who decided our magazines had no value because they were only 2 years old. In other words, they explained, if we had a building to use as collateral we would be fine, but not magazines. For them, our product was too new to have value.
Banks are of little value to a startup. Startups have too much risk for banks because almost half of all startups fail for one reason or another. Bank loans with their relatively low interest are available to more seasoned companies less likely to fail. Later on, banks would loan us a multiple of earnings on existing properties that we were buying. This way we would come up with part of the purchase price, and the bank would loan us the rest.
Venture Capitalists are interested in big deals. Big now or ones that they see as becoming big. Like FedEx or Facebook. VCs do 10 deals hoping that two will hit. Therefore they want lots of control and a big payback. You can make a lot of money and lose control of your company. It sure didn’t fit our circumstances. I wanted to start a little publishing company, and I wanted it to be mine.
Angel investors are interested specifically in small businesses. They are usually made up of groups like dentists, doctors or other professionals that pool their money. Typically they own apartment buildings, shopping malls, etc. I couldn’t find one interested in publishing.
Individual investors: I talked to a number of them and found one who was interested. Your problem with investors of all types is that if they believe you have a winner, they want all the profit and control they can get without destroying your incentive. They want you to know that if you fail, you will be broke. The more mature your business the better you can negotiate this.
The deal I made in 1983 was to give him 45 percent of the company in exchange for $450,000. We would get back the 45 percent when we repaid principal and interest. In the first year we paid him twice his original investment, and we got back our shares. We did the same kind of deal twice more with this investor and it launched our company.
After you solve your money problem, the bigger one is the “people” problem.