Smart Startup Funding Strategies From a Seasoned CEO
by Hesam Lamei
They say the first three to five years are the toughest and most critical for startups, but in reality, the biggest hurdle comes way before you even get the business off the ground. You have to fund it first. For small businesses in particular, it’s hard to know where to start. Having overcome the obstacles in building two successful businesses, startup strategies are a subject near and dear to me. I find myself wanting to share what I have learned to save others the setbacks I encountered throughout the process.
Don't Get All Your Funding from One Source
One of the biggest myths out there is that you must get all of your funding from one place. That simply isn’t true and in most cases won’t happen when dealing with a small business venture. When I first started my second business, Aventis Systems, I knew the hardware equipment business well enough to know it wasn’t feasible to start out by filling up a warehouse full of expensive product overhead. However, I also knew that I needed a moderate amount of product inventory to meet initial customer demands. Unlike my first venture, I would need employees, rent, and other expenses I hadn’t faced before. For that, I needed money.
Banks are not the most likely source of funding for small businesses, but I decided to try that first. I had a strong history with this bank, including a great credit score, standing business account, and even offered a personal guarantee. However, while the bank didn’t decline my request, they didn’t offer me a full line of credit, only a credit card. I then tried other options but I found myself right in the middle of the banking crisis with tough restrictions on capital. At that moment, I realized I needed to be creative and look for alternative solutions.
I proceeded to open multiple credit accounts to provide me with purchasing power I needed, but it still was not enough. I made a list of friends and family I felt might be interested in investing their money without causing them any financial distress. I made contracts with those who wanted to participate, making sure they knew I would pay interest and gave reasonable payback time periods. They personally knew me and believed in what I was doing. With the help of all of these tactics, I was able to reach my financial goals to get my business off the ground.
Think Outside the Box When It Comes to Vendors
The next thing I tried was looking into terms with vendors. Most vendors look at this as a risk, as it isn't a high margin business and most don't even consider it. But what I think is crazy is small businesses don't even remember to ask. My advice is think "outside the box" and don’t be afraid to ask for something that isn’t business as usual. In today’s competitive marketplace you need to align with vendors and suppliers that will work with you.
I shopped around, filled out forms, gave personal guarantees, and found some willing to accommodate. Most vendors came through with 30 day terms; some were generous enough to go 45 days. For those that I committed to doing business with, I made sure to go to them first with the goal of building trust and loyalty over time. With that trust came increased lines of credit and ability to buy different types of merchandise.
Hard Work Pays Off for Everyone
I know talented employees are the key to a successful company. However, I didn’t have the capital to attract top talent with high salaries and sign-on bonuses. Many start-ups use equity stake in the business to attract good talent. However, equity stake at our company was not attractive early on. It was 2008, and we were an online business with no history without anything proprietary. We were a VAR and there were plenty out there. Looking from the outside in, I knew that equity wasn’t going to attract strong talent. So once again, I tried to be creative and came up with the concept of offering a lower base salary and offering guaranteed bonuses that were large and significant based upon achievable milestones. Many saw this as an opportunity to make good money and work for a high-growth company with the caveat of being a part of it early on. The employees had vested interest in meeting the milestone goals and achieved them time after time. This provided with the talent I needed until the business became more profitable and I was able to offer higher salaries.
All said and done, building a business has definitely been a rewarding experience. My business is in a great place right now and the sacrifice and hard work have paid off. I agree that the first three to five years are extremely challenging, but if you stay committed, keep reinvesting in the business, and think creatively, you can beat the odds and find success.