In a recent post, I explained a previously-undocumented law of physics that can be a nightmare for entrepreneurs: Your ability to raise startup capital is inversely proportional to your need.
Faced with this Catch-22, our creativity as entrepreneurs needs to extend beyond product design and beyond business models to funding strategy.
How do we fund “the gap” between when we first launch the business and when it eventually becomes attractive to outside investors? There’s no one answer, and every situation is different, but here (in no particular order) are some approaches I see as I interact with hundreds of entrepreneurs each year:
- Validate the business concept before you quit your day job – Writing a business plan isn’t enough. While moonlighting on what I call the “midnight-to-4am shift,” see if you can build a prototype, get the preliminary product in front of customers, get their feedback, and see if you can even close some sales (even if they’re contingent on completing the product).
- See if your boss will let you go part-time – A lot of organisations accommodate flexible work hours, and your current employer may be willing to accommodate you dialling back to part-time or contractor status, as a lower-risk alternative to summarily quitting your day-job before your startup is “baked” yet.
- Before you leap, evaluate your personal finances – Have an honest conversation with yourself (and your significant other if you have one) regarding how many months you can reasonably go without pulling a paycheck or benefits from your new business. A runway of 24 months or more is a good idea.
- Line up complementary consulting business – You may not be able to float the business on product revenue right away. But so many successful entrepreneurs, particularly those building tech-enabled product or service offerings, lower the cash burn rate in the early stages by taking on consulting engagements in their field of expertise. It pays the bills, can cement relationships with lead customers, and fund product development.
- Look into Government Grants – Through SBIR (Small Business Innovation Research) and STTR (Small-Business Technology Transfer) grants, a number of federal government agencies provide funding of up to $1 million to small businesses to investigate tech-enabled innovations. The small business owns the resulting intellectual property, and books the grant dollars as revenue.
The bottom line is: Create your own luck. Don’t allow yourself to get in a position (either personally or as a startup) of being financially desperate. Be willing to play “small ball” until you can get your new business up and running. Then success will beget success.
Jim Price is a serial entrepreneur and Adjunct Lecturer of Entrepreneurial Studies at the Zell Lurie Institute at The University of Michigan Ross School of Business. ©2012, James D. Price.
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