When you read about a young CEO selling his start-up company for millions, entrepreneurship seems so glamorous. What people don’t know is that being an entrepreneur can be a pretty difficult lifestyle and it requires focus and dedication to lead a company to a successful exit.
The most common route to starting a company involves raising venture capital (VC) funding; however, this is not the only option. Many successful companies start off by bootstrapping. I founded PK4 Media towards the end of 2009, and instead of going through rounds of funding from investors, I chose to bootstrap. In order for the company to grow organically, I have prioritized my attention to 3 specific areas, all of equal importance: Cash Flow, Time and Focus.
1. Cash Flow
Without the perceived “safety net” of VC funds, it is critical to keep a watchful eye on your cash flow. Tracking cash conversion cycles and understanding the tightrope balance between receivables from your clients and payables to your vendors is crucial. Inevitably, floating a customer’s net payment terms while trying to keep your vendors happy will lead to some tense times (and grey hairs!), but it is not an impossible feat. No matter how well you understand your business model, the balancing act will never work out perfectly every time.
A company in growth mode will always be short on cash. For those times when the balancing act tips in favor of your vendors, you need access to short-term, flexible cash alternatives. The most common options for bootstrapped companies are lines of credit from your bank, a receivable factoring company, or even loans from your friends and family.
A line of credit from the bank is my personal preference, since your company only has to pay minimal interest while the line is in use. Think of it like an emergency fund at a reasonable interest rate. Unlike a bank loan, if there is no balance on your line of credit you do not pay any interest. Traditional bank loans are better for purchasing assets, while lines of credit help cover cash-flow needs. Lines of credit stay open for a specific period, and can be adjusted up or down as needed. Creating a relationship with your bank is very important. In addition to your financials, the bank needs to understand your story and your business. Select your bank carefully and make sure you can grow with them long-term.
Even with the relationship, a line of credit can still be difficult to obtain. A bank may require you to be in business for two or more years before approving a loan or line of credit. If you find this to be the case, factoring or even a loan from friends and family may be a valid option.
In early stage start-ups, factoring companies can be useful by paying you early on your receivables. The difficulty with factoring is that the interest adds up quite a bit, perhaps as much as 36% per year. The key with factoring is these are short-term loans that you want to pay back quickly and only rely on if you absolutely need them. A source of cash with more favorable terms may be short-term loans from friends and family. When dealing with loans from friends and family, be sure to protect your relationship and put everything in writing. Treat it as you would any other loan and be sure to make payments in accordance with the terms you agree upon.
When running a bootstrapped company, your time is the most valuable asset you have. Time is the only truly limited commodity in the world. Being a start-up entrepreneur, there’s no doubt you spend every waking minute of your day thinking about your business. It is important that you are efficient in the usage of your time. Think about every minute and hour you spend working on a project, or segment of your business, as leading to incremental growth of the company. If what you’re working on isn’t adding value, drop it and focus on the parts of the business where you can create more value. Spending your time efficiently will allow for the maximum growth of your business objectives.
The time you spend on your company should be 100% tied to focus on the core of your business. What did you build your company for? This seems like an elementary concept, however, it is easy to be distracted by a myriad of opportunities that can chip away at your focus. Many young entrepreneurs get distracted chasing opportunities that don’t completely mesh with their business model simply because they are there. An easy dollar, low-hanging fruit, etc. But if these easy dollars come at the expense of shifting your focus from the core of your business you will stretch the company’s resources (and your time) too thin. Of course there are times when chasing the low hanging fruit may lead your company in different strategic direction. But if that is the case, shift your focus 100% as well. Staying focused allows you to maximize your resources and produce the highest ROI.
For the past four years, my team and I have put our heads down and focused on the core business, minded our time and kept an overly close eye on our cash flow. Only recently have we picked our heads and seen the amazing strides forward we’ve taken. Venture capital may seem like an attractive way to build a business, but it’s not the only way. So put on those boots, pull yourself up and keep your feet out of the mud!