Sources of Bootstrap Capital

How can you start a great business with no money down? How do you get 'table stakes' so you
can have a place at the table too? The rule today is, if you have cashflow, you will get financed,
not the other way round.
 
There really are no 'no money down startups'; there are only those with little money down. In
reality, every business requires some investment. What we are talking about is starting a business
with an amount of money that is really de minimus with respect to the size of the opportunity.
 
Mark McCormack started a world-leading sports management business (IMG, International
Management Group) with $500, his law degree and Arnold Palmer as his first client. Mind you,
it doesn't hurt if your first client is an Arnold Palmer.
 
Probably less than 1% of all startups ever get any funding from VCs; that means that 990 out of
1,000 new enterprises are forced to use bootstrapping as their only means to success. Some
observers feel that bootstrapped businesses, ones that start with �nothing�, are actually or can
be better businesses because they are more focused on results as well as efficiency and economy
of effort. They certainly appear to be hardier if they manage to get by their first few years.
 
Maybe it�s the same difference as between people who win the megabucks lottery as their way
of becoming rich and the self-made entrepreneur. Many million-dollar lottery winners are worse
off five years after their big win than before�by that time, they have blown their dough on
�can�t miss� opportunities and they have no J.O.B. to go back to. Whereas, someone who
earned it himself or herself knows how hard it is to do it and are less likely to throw it away.

Here are some sources of Bootstrap Capital. This is a partial list�which is all it can be: there are
as many varieties of bootstrap capital as there are ideas out there in the minds of clever
entrepreneurs.

1. Soft Capital: Mom, Dad and rich Uncle Buck; basically this is a friends (Angel Investors) and
family round of financing either formally or informally organized.
2. Home equity loans.
3. Business plan competitions for cash (e.g., the Wes Nicol Competition or the Celtic House
Competition.
4. Future customers, clients or launch clients (e.g., homebuyers in Ontario can be asked for
deposits of up to $20k in advance).
5. Future suppliers can sometimes be persuaded to extend long term credit to you (e.g., Vendor
financing of 30, 60, 90 days or more) or invest cash in your business since they have a lot to gain
if you become another (good) customer of theirs. They will probably want a long-term supply
agreement though.
6. Strategic partners (like Ogden was for the Ottawa Senators�in return for a 30 year arena
management deal plus F&B deal, they invested, loaned and guaranteed significant capital to/for
the nascent team.)
7. Micro capital lending and grant programs; for example, the GOC�s SBL Program (Small
Business Loan or other government-sponsored sources of start-up capital like the Ottawa
Community Loan Fund.)
8. Supplier rights, product placement and licensing fees (for example, Molson's purchased
pouring rights for the Corel Centre and the Civic Centre after the City of Ottawa was awarded a
franchise by the NHL in December 1990 but before they commenced play in October of
1992.� Another example was the selling of 15,000 PRNs (Priority Registration Numbers)
during the Bring Back the Senators campaign of 1990 for $25 each. Each PRN holder the right to
purchase a season ticket in their preferred location in numerical order, if the team was awarded
to the City of Ottawa in the NHL expansion round of December 1990. Note, however, that there
were no refunds if they were not successful. For $25, one got the right to purchase a season ticket
and a bumper sticker and a cool looking certificate too.)
9. Patent or other IP licensing fees and royalty payments (e.g., Noma Industries purchase of the
rights to LED Xmas light strings).
10. Consulting services (a lot of entrepreneurs support their startups by providing consulting
services at the same time).
11. Partners.
12. Debentures.
13. Financial leasing of fixed assets.
14. Receivables factoring.
15. Publisher�s advance on a book or script.
16. Sponsors (see for example the signing up of 500 Corporate Sponsors at $500 each and 31
Original Corporate Sponsors at $15,000 each for the Ottawa Senators before the team was
awarded.)
17. Trading activity: buying low and selling high, taking advantage of arbitrage opportunities
(like finding out what percentage of dot-CA holders do not have their dot-COM equivalents and
the dot-COM equivalents are available and then selling them the dot-COM extensions),
building-businesses-to-sell, buying and selling and buying and selling and trading up, ... Check
out this site:http://oneredpaperclip.blogspot.com/. This person traded a paper clip for a pen and
traded the pen for a � and then for a generator and then for a snowmobile and then for a truck�
His idea is eventually to get a home for himself. �
18. Credit cards (oft used strategy but dangerous because of high interest costs and what can
happen to you and your credit rating if you fail to make payments).
19. Scientific R&D Tax Credits (e.g., SR&ED from the GOC).
20. Extracting upfront value from your lease for office space-- an example of a services company
that got $800,000 upfront.
21. Reverse or Negative Pledging of Assets (e.g., O & Y not pledging the value of an office
tower to anyone and extracting loans from banks based on the value of their real estate and based
on their not agreeing to pledge it to anyone� Another dangerous strategy because you can end
up over-leveraged.)
22. Co-guarantor: borrowing someone else's stronger credit rating (e.g., Corel Centre Suite
Leases pledged for construction financing or Mom or Dad co-signing a loan...)
23. Accretive buying: buying another company with the target company's balance sheet as
collateral where you end up with more cash than before. (E.g., Disney buys the Mighty Ducks of
Anaheim for $50m: $25m goes to the NHL and $5m per annum for 5 years goes to the LA
Kings. Then could borrow $35m against the asset and, after receiving a $20m leasing
inducement to enter into a 20 year lease for Arrowhead Pond, they could have more cash on hand
after than before).
24. Accretive Selling: sell products or services with financing in place where you end up with
more cash after the sale than before (e.g., Leon's don't pay a cent until.... (OAC). Leon's than
turns around and sells the sales contract for cash.)
25. Employee ESOPs (Employee Stock Ownership Plans).
26. Pre-sold services. (For example, here is an example from Craig deSchneider, a student in EC
491 (2003): "In looking for some start-up capital for our automotive related business, myself and
my partner offered potential investors future discounts through our business. In selling
automotive parts, we had accounts set up with distributors, accounts which could only be set up
through having a business license, tax numbers, and some negotiating, so the average person off
the street does not have access to these discounts. We set no specific investment amounts, simply
the most the person could afford. We kept these contributed amounts a secret among the different
investors as we offered them all the same return. Therefore, in return for a fair investment, we
extended to our investors cost prices for all of their future purchases through our company. The
only limit we set on this agreement was that the investors' annual purchases could not exceed our
company's sales revenue from our average monthly sales figure (not including cost purchases
made from investors). The overall idea was to provide our investors a very fair return on their
investment, and at the same time, these investors would promote our company. Why you may
ask, well the greater our monthly sales were, the greater the amount of goods they could buy for
themselves at a cost price." Ed.: Basically, Craig and his partner turned their investors into
customers and their customers into investors. Nice going.)
27. Collectibles sales and auctions. Here is a new one. Michael Moshier put the original version
of his SoloTrek flyer up for auction on eBay, hoping a museum would pick it up. It didn't even
fly but by January 12th, 2003, the bidding on eBay had already reached $6.5 million USD:
money he planed to use to fund his Trek Aerospace startup. Cool.
28. Extended family savings and investment fund�an old style of acquiring start up capital is to
have the extended family contribute to a pool of funds to help family members acquire or build
businesses.
29. Vendor take back mortgages�typically used in real estate transactions, the Vendor provides
some or most of the financing for the sale by way of a (first or even second) mortgage back to
the Purchaser.
30. Swear equity.
31. Investor syndicate or investment club.
32. Retainers (typical for consulting services or legal and accounting services) and deposits on
sales.
33. Collecting early and paying late (boosts cashflow in the short term).
34. Progress payments on contracts.
35. Advance ticket sales.
36. Becoming a reseller (this is big in the Internet age where you can set yourself up for
practically nothing as an agent to resell services such as domain names or web hosting). There
are a huge number of things that can be resold on the Internet�many sites generate large
revenues by reselling ads powered by Google or other providers. Check out this silly site which
generates up to 8,000 �facts� on Chuck Norris and got 18 million hits in December 2005.
Really the purpose of the site is to generate clicks (by asking people to rate the �facts�) which
generates a new ad and maximizes revenues for the site�s owner: http://www.4q.cc/chuck/. Or
have a look at this site: http://www.milliondollarhomepage.com/. Here the young person (age 21,
based in the U.K.) apparently wanted to pay for his tuition and so he created a million pixel
home page. You could buy an ad for $1 per pixel (minimum ten pixels) linked to your site. He
sold all 1,000,000 pixels so guess what? He got his tuition and a lot more. I presume the ads are
for a limited time so he also has the chance to resell the million pixels over and over again. The
site gets a LOT OF TRAFFIC� Remarkably, this might be a sustainable business (a Personal
BusinessFor Life!)
37. Importing.
38. Distributing.
39. Exporting.
40. Exploiting signage rights.
41. No money down, land speculation.
42. Using OPM (other people�s money).
43. Asset flipping.
44. Buying under power of sale (again, real estate related).
45. Buying distressed companies and turning them around.
46. Day trading.
47. Asset speculation.
48. Franchising.
49. Branchising.
50. Training and uniform fees (e.g., GradeAStudent.com required each of their contractors to be
�Grade A� certified before they could provide services to clients and customers and get access
to the billing system and the appointments calendar (a system called GASnet). To be certified the
contractors had to pay in advance to take the course�)
51. Pre-sales in real estate allows you not only to ask for cash deposits but also may give you
access to Bank or private lender financing. For example, if you pre-sell 50% of your condo or
townhouse project, you can usually qualify for construction lending where, in
essence, your Bank or private lender is advancing you money to build the condos or townhouses
on the basis of the strength of the credit ratings of your customers (buyers) and not your credit
rating per se.
52. The same type of thing can help you a lot if you are a manufacturing business�if you have a
guaranteed supply contract with a credible client or customer, you can often finance against that.
53. Land options�sometimes you can convince a landowner to give you an inexpensive option
to buy his or her land at a fixed price at a later date. You can then use the time to set up a sale
office and begin pre-selling. As discussed above, you can then take cash deposits (which are
impressed with a �trust� in that the money doesn�t really belong to you until you actually
have delivered the condo, townhouse, single family home, whatever), finance against
Agreements of Purchase and Sale executed by you and your clients, approach a Bank or private
lenders for funding (often through a mortgage broker), arrange for private equity lenders or other
investors to invest in your project, etc.
54. I recently learned about a new method of bootstrap capital from my 13 year old daughter,
Jessica. One of her best friends lives in a single parent family. Her friend�s parent is unable to
work and lives on a modest income. However, every year they are able to take a family vacation
to a nice destination in a rented van. How do they afford to do that? Bootstrap capital. They take
with them five other kids�each kid pays $250 for a week�s holiday�that�s a total of $1,250,
enough for a camping holiday and some neat adventures too. It pays for the gas, the van rental,
food and a few outings. The kids� parents contribute cash and their children, Jessica�s friend
and her parent go for �free� but they provide the opportunity. Everyone wins�
Copyright. Dr. Bruce M. Firestone, Ottawa, Canada. April 2004.
No Money Down Startups
Bootstrap Marketing
Small Business Management Front Page
Entrepreneurialist Culture Front Page