Bootstrapping is an effective strategy for startups who have limited cash available to start a business. With any new business there are a series of milestones that have to be hurtled before you reach escape velocity and are covering your expenses and making a profit. Initially, at the idea stage, the costs are minimal since it is mainly focused on brainstorming, research and planning. At this stage, most founders can easily cover their expenses. Further down the road, however, each successive milestone will require more and more capital to accomplish as you ramp up from an idea to a viable business.
Inevitably, most startups will arrive at a point where they lack the capital to achieve their next milestone. Oftentimes, these founders will then go to family and friends to raise seed capital. In the US, over $60 billion of seed capital is raised this way annually. Although this is a friendly source of money, it has its limitations. The average amount of seed capital raised from this source ranges from between $25,000 to $100,000.
After your company has tapped out your friends and family for money, you will be forced to either borrow money or raise money from outside sources. If you are like most new business founders, you’ve already maxed out your credit cards. You may have also tapped out your home equity. Without collateral, borrowing money is not a realistic option. Outside sources of money, such as Angel inventors, is oftentimes not an option either. This is because the scale of your new business is often not large enough to attract Angel investment. Another reason investors might not be comfortable investing in your company, is that you might not have achieved enough of your business milestones to reduce your risk of failure.
When you are stuck in neutral, and you can’t get a small business loan or raise equity financing, you need to consider outside-the-box solutions. One possibility is to create a listing on NewBusinessTrade.com. This web site brings entrepreneurs together with people or businesses that can provide research and development, services, materials, equipment, finished products, office space, retail space, warehouse space, or marketing. In return, these entrepreneurs will give equity, future royalties or a percentage of sales in their business.
These types of arrangements can potentially work out very well for everyone concerned. However, they should be mostly reserved for businesses that are not planning on raising capital from Angel investors or venture capital firms in the future. The reason for this is that investors want clean deals. You will find it very difficult to get them on board if you have promised royalties, a percentage of sales or if you gave away equity to business-to-business vendors.
Another thing you must always keep it mind whenever you give away shares in your business for someone’s participation is that you should only do it when it is absolutely necessary. You should also strive to retain as much ownership as possible. Keep in mind that you will most likely be undergoing further equity dilutions if you end up seeking angel or venture capital at a later time. As a result, the more of your company that you retain over time, the higher your payday will be when your company makes it big in the end.
Another potential negative about giving equity for someone’s participation is that it can often be very difficult and expensive to reverse an equity deal once shares are already given. You need to consider worse case scenarios when doing deals like these. Oftentimes a potential partner will be very enthusiastic in the beginning, but loose interest as time goes on. One option you can consider to mitigate your risk of giving away equity and not getting the goods is to have an agreement where the shares are vested over time. When you do this you can limit the number of shares given if your relationship sours or if they fail to deliver on what they were suppose to give you for shares in your company.
There is another factor you must contend with when you use equity, future royalties or a percentage of future sales to obtain someone’s participation. Since they are more of a promise of potential earnings rather than actual earnings, they inherently have less value. Therefore, when you use this approach you will almost always be forced to give away a lot more equity or future profits than what it would cost you if you paid them up front. In order to reduce this cost differential you’ll need to give a compelling pitch that will persuade potential participants that your business idea has legs and that it will generate them a great deal money.
One other thing you need to do when doing these kind of deals is to have a licensed real estate broker or business broker or an attorney in your area finalize any potential transactions you initially come up with. Getting the contract done right is critical in order to prevent misunderstandings and to provide remedies if the deal goes sour.
In summary, NewBusinessTrade.com is an effective tool for Bootstrapping your startup when you have limited cash available to accomplish your business goals.
So if you can’t obtain working capital, consider using equity, future royalties or a percentage of future sales as a bargaining tool to get someone’s participation in your business. NewBusinessTrade.com, is the best place to make a connection with a person or business that can solve your critical need.