As a young entrepreneur you want to know the easiest way to finance your business. How are you going to secure this funding, keep your business costs low and start making money in the most efficient manner? Your answer is “bootstrapping”.
Your objective in this stage of your business is going to be to spend as little money as possible and test your model. Why would you want to pour your own money into something that you don’t even know works? You will want to prove your concept while outlaying very little capital. At that point you can consider spending more of your own money, raising it from other people and pursuing professional investments, but they too will want to know you’ve already made this business work. This is commonly known as “proof of concept” and Tim Ferriss, author of the Four Hour Work Week simply calls it “testing”.
During this point of your life you will want to cut your living expenses to a bare minimum. Remember, the Under30CEO methodology calls not for your life as an entrepreneur to be filled with material possessions and large monthly expenses like our corporate friends want us to do. The Under30CEO mentality creates cashflow so we can gain experiences and build impactful businesses that support our lifestyle. Consider selling your unneeded things on Craigslist, selling your car or moving in with an extra roommate while you build your business. Don’t fall into the trap like your friends who graduate school, get that first job and pile up the debt with a big car payment!
Entrepreneurs live like other’s won’t for a few years so they can live like others’s can’t for the rest of their lives.
It might not be glamorous, but trust us, it will pay off. When you start your business it might be tempting to instantly go find expensive office space, purchase a new computer, fax machine, phone and create lots of overhead, but we are here to tell you what you need and what you don’t. In the 21st century it’s now possible to build something from nothing because technology allows us to tap mass markets inexpensively. No more big marketing budgets and expensive .com era websites. It’s time to bootstrap from the virtual office–the Under30CEO way.
But where do I get my first few dollars to start my business?
Let’s think…savings (we did it), mowing lawns (we did it), moonlighting–working a part time job and hustling all night (we did it), or finding creative partners to barter for services with (we did it). That should give you a jump start and will at least prove to others who will invest in your business that you have “skin in the game”. In other words, you aren’t just looking to risk their capital, you’ve contributed money to it too and you are committed to making this business work. You’ll want your startup to generate revenue as soon as possible so you can reinvest the earnings back into the business. During the bootstrapping phase, you won’t be taking much salary. Most investors will want to see you make a serious sacrifice, so start eating peanut butter and jelly and start dreaming of a future of filet mignon.
Friends, Family and Fools!
Your “friends and family round” of capital will come next. It’s time to go find a rich neighbor or relative who believes in your. This can even go so far as to ask your parents to refinance their house like founder of Jeff Bezos of Amazon did. Now do you see why the “testing” phase better work if your parents are risking your sister’s college education on your crazy idea? This is serious business, families can be torn apart if you squander their hard earned money, not to mention Thanksgiving dinner can get extremely awkward. You know your friends and family better than anyone, so pick the right time, and present your idea to them.
Remember that often you won’t need much to at least test your idea. Get a bunch of family members all together to contribute a small amount. Just have your plan laid out and know exactly how much you need. You should bring your idea to your family just as professionally as you would bring it to an outside investor.
If you ask for a loan, you’ll need to have a plan for when you can pay it back. It will make your lender (could be your parents) feel at ease because you are making them a personal guarantee to return their money and they will feel less risk. Offer to pay them back interest so they get something out of this deal, this way you won’t come to them like a charity case. If you squander this, you’ll still have to figure out a way to pay them back. If you spend this money on physical capital like a lawn mower, this has a resale value so you can sell it if you need to liquidate the company. If it is for office space or to pay an employee that money will be gone forever. Burn though this money carefully.
If you ask for an investment in your company for a percentage of your company. The percentage of your company you give up is up to you. You’ll be doing all the hard work and they’ll be risking the money. Agree on what seems sensible. Also make sure your investor knows when they’ll be getting their money back. This will happen either when the company gets bought, they’ll get their percentage of the pie, or, you offer to start giving them a percentage of the revenues as it comes in.