How do I take those first steps to get my business off the ground?
In The Founder’s Dilemmas, Noam Wasserman identifies two primary roads that will lead a business from the drawing board to start up and to profitability: social capital, “the durable network of social and professional relationships through which founders can identify and access resources;” (47) and financial capital…well, cash money (48). Founders with years of experience can often tap into a network of professional and personal contacts which can lead to the other type of capital–human–as well as access to financial capital. Some founders survive the period preceding profitability with financial capital in the form of savings, loans, even severance packages from former employers. (48)
Wasserman points out that over half of all enterprises fail to leave the drawing board due to a lack of financial capital, because let’s face it: we’re all adults here and we have kids to raise and bills to pay and your mortgage lender doesn’t care how great an idea you have if you can’t make your house payment and start ups can take a while to reach that happy place where they pay the bills.
Erica Drake, founder, CEO and Chairman of Maverick Entrepreneurs, breaks down the three types of financial capital entrepreneurs generally resort to, with the caveat that “(t)o tell an entrepreneur that a prospective investor may not be ideal is like telling a starving man that the food doesn’t taste very good.” Ninety-five percent of companies start out bootstrapping, “a combination of your own money, savings and credit, mixed with money from friends and family.” Some founders choose debt–borrowing money to start your business and survive until profitability–and equity, selling off parts of your company to investors who believe in your vision and your team.
All of these have positives, negatives and roadblocks. Bootstrapping takes a lot of time, but when/if the company reaches profitability, all decision making and profit goes to the founder(s). Borrowing is fast, but forces a founder to put up collateral like houses, cars, property, etc. Sure, nothing says you’re all in like a lien on the family home, but then failure has some pretty dire consequences even worse than just failing at business. Additionally, not all entrepreneurs possess assets or sufficient credit rating to even qualify for financing. Equity at start up feels like free money, but one of two outcomes are assured when accepting investment capital: 1) Your business succeeds, but now the company has other stakeholders with a say; or 2) Your business fails and hopefully your investor(s) were not also good friends and/or in-laws. (The lesson here: it’s better to borrow from strangers).
There’s a pretty simple reason 95% of businesses start out bootstrapping: the founder(s) don’t have the financial or social capital to do it one of the other ways because frankly, no entrepreneur is going to say no to any type of funding on start up. Wasserman points out that having copious amounts of one type of capital can lead to what he calls “a virtuous cycle” where social capital begets human capital like more founders and a quality management team which in turn begets the kind of seed money that speeds up the road from drawing board to start up to profitability. (48) Drake might add that many companies bootstrap their start ups because “most investors won’t fund a new start-up, so they have to bootstrap it until they can get the company to the next stage (i.e., early-development or development) before funding becomes possible.”
“The reality is,” according to Drake, “most funding inevitably is a combination of debt and equity, which is often contributed by the entrepreneur, at least initially.” Drake also adds some innovative solutions to surviving the bootstrapping phase that we here at Abundance endorse 100%:
- Crowd funding, getting a lot of people to contribute small amounts for a small payoff down the road like a finished product when the business is up and running;
- Strategic alliance, where businesses work together to barter services, refer customers, and offer reduced rates to each other; and
- Joint Venture, a little closer than a strategic alliance where companies requiring each other’s competencies can form a more formal partnership, share departments, services, and assets.
All of these methods, of course, fit under the rubric of social capital. Because unless you have a nice trust fund or win the lottery, you are gonna need a little help from your friends.
Wasserman, Noam. The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup. Princeton University Press, 2012.
Drake, Erica. “3 Types of Capital – An Overview for Entrepreneurs,” LinkdIn, 12/20/2016.
This is not only my Professional Blog where I post my assignments for my Master of Entrepreneurship program at Western Carolina University, it’s also my Professional Blog on my actual business web site for my actual functioning business! Since they overlap so neatly in my personal Venn Diagram, I think clients, potential clients, or just idle passersby will find some value in my analysis as much as my classmates and instructors. Enjoy!