Think Creatively About Early-Stage Capital

Starting a company on a shoestring practically guarantees the founders will seek money through their own bootstrapping efforts. It Is a given that early stage entrepreneurs need the least expensive and most accessible sources of seed capital they can possibly find.

However, getting by on a tight budget can be challenging. To avoid the devils of both undercapitalization and over-commitment to powerful investors, start-up founders must think creatively!

Validate with real customers before you seek investors

Your business idea may take years to develop into a salable product. I see far too many companies fail to develop a strategy to optimize their sales and profitable revenue growth in this early phase. And yet, sales and profitability exponentially increase your chances of attracting seed capital. The solution, I submit, is to validate your products with real customers BEFORE giving up equity in your company. Limit yourself to the cheapest sources of financing possible while you discover the market challenge or opportunity you can uniquely address for your customers. The only market validation any investor cares about is paying customers!

Finding a successful value proposition may require navigating a long and winding road. Savvy entrepreneurs start the prototype of a business, planning for evolution as the company begins to work with customers to identify their true pain points and the resources they are willing to invest to cure that pain.

When you bootstrap your initial stages, you will find it far easier to be flexible and change directions in response to market signals. The biggest mistake I see at this stage is entrepreneurs who keep pursuing a market where there is no need of their offering, or the solution is far ahead of the target market’s requirements. It is simply too easy to run out of money before sales are realized. If you are not tempted by too much early-stage capital, you can retain a healthy stake in the company, allowing you to quickly respond to market demand, even if it requires a revamp of your entire company’s focus. No one wants to have to convince major investors in widgets of the need to shift to whatsits.

Find uncommon sources of early stage capital

If you opt to take only a modest sum of early investments, and instead rely primarily on sales and customer revenues, you position your start-up for maximum opportunity and flexibility. Bootstrapping while your business is at its lowest value early on allows you to avoid giving away too much, too early in the lifecycle.

Most entrepreneurs have more access to capital than they think. How much cash could you access if you added up your liquid assets—credit card limits, unused equity in your house, the cash value of your insurance policies, your 401(k)?

Bridge loans can be a short-term vehicle to fund your operations as an interim step between bootstraps and longer-term financing, but the terms and options can be difficult to evaluate. Before you opt for traditional financing, consider these less-common sources of capital:

• Business plan competitions
• Grants from government agencies
• Innovation contests
• Supplier financing
• Low-interest SBA Loans
• Business incubators

Strong financial statements are your golden ticket

The “golden ticket” you need won’t admit you to a magical chocolate factory, but it can open the doors to significant funding at a price even a start-up can afford. That golden ticket includes:

• Your business and personal financial statements for the past three years, plus interim statements for the current year;
• Balance sheets from the last three fiscal year-ends;
• Income statements revealing your business profits or losses for those years;
• Cash flow projections showing how much cash you expect to generate, i.e. your proof of ability to repay loans.
• Aging reports of accounts receivable and accounts payable, in 30-, 60-, 90- and past-90-day categories.
• Personal financial statements for all owners, partners, officers, and stockholders owning 20 percent or more of the business. These should list personal assets, liabilities and monthly payments. Also gather personal tax returns for the past three years.

How accurate and credible are your financial statements? Next to delivering real value for customers, accurate financial statements should be your highest priority! Attention to financial health and stewardship may not be the fun part of entrepreneurship, but nothing contributes as much to your ability to attract early-stage capital as these two assets: trustworthy financial statements and bona fide paying customers.

To lay the groundwork for a successful start-up, think creatively about early-stage capital and keep your commitment to outside investors to a minimum.

Nour Takeaways

1. Your business idea may take years to develop, so keep the emphasis on flexibility when seeking with early-stage capital, in order to find the value proposition that reliably generates profitable sales.

2. Think outside the venture capital box to find uncommon sources of early-stage capital, like business plan competitions, supplier financing, and government programs.

3. Keep your financial house in order. You will need complete, trustworthy financial statements for the company as well as for all the individuals involved owning 20 percent or more of the business.