And if Ottawa-Gatineau is going to have a seat at the table, it will be because we produce tough, competitive entrepreneurs. To that end, we need to provide far more intensive education for all ages and stages of life. We also need unconventional mentoring for startups and more effective promotion and sales of their products and services. Plus, when warranted, let’s celebrate their achievements.
You’ll note that I didn’t say they need more bank financing or more VC funding, however.
That’s because I think early-stage companies should focus on and rely on building real cash flow – finding real launch clients and holding onto real customers, as done by the companies honoured at the recent OCRI/Exploriem Bootstrap Awards.
I have been doing work in this area since 1999 and it proves that, if you wear an old suit long enough, it will eventually come back in style. And that has happened here – much of the world has come to share this view.
Most people can’t grasp the idea of bootstrapping a new business. I’ve found through more than a decade of research and nearly three decades of practice that I can give a three-hour lecture on the subject but, the following week, I’ll be asked by a student entrepreneur: “Sure, that worked for Eseri.com but I still need $3 million to start my business, don’t I?”
Eseri.com, started by PhD entrepreneur Bill Stewart, provides lightweight Internet-based (actually cloud-based) desktops that use widely available and proven freeware. Eseri is located in Ottawa and Montreal and was started with nothing; Bill still gives $1,000-per-day seminars on project management software so that he can fund his real passion – building a great business of his own. He also uses stock options to keep his core group of developers on the job. Plus, he leverages what money he puts in with federal IRAP grants.
Fresh credit source
In the U.S., the number-one source of financing for SMEs in 2009 was supplier credit. Sometimes called trade credit, it amounted to $2.15 trillion and dwarfed bank lending to SMEs, which totalled $1.5 trillion. As entrepreneurs well know, Canadian banks have a habit of lending money only to people or businesses that don’t need it. Loan-to-value ratios typically are in the 50-per-cent range for commercial lending – entirely useless to entrepreneurs who, by definition, start with almost nothing.
Suppliers, on the other hand, want a new enterprise to be successful – that way they will have helped create a new client. If you’re going to start, say, a new fencing and deck company, the way you bootstrap it is to arrange supplier credit from a friendly lumber store, and you’ll get funding from your clients too.
Many people think equity is free. Not so. VCs want to see at least a 20-per-cent, per-annum return on investment. But today you can get a variable rate home line of credit for just 2.15 per cent. -
For example, say you get an order for a new deck for $8,000. You ask your client for a deposit of 50 per cent when you get the order with the other 50 per cent paid when you finish. You then order $5,000 worth of materials from a supplier who has extended credit to you.
Perhaps, for example, they give you 45 days to pay for what you’ve just purchased. Now you’ve got $4,000 in cash in the bank and $5,000 worth of supplies on site – so you have enough cash to pay your workers and yourself until the job is complete and then, with the balance in hand, you’ll have enough to pay your supplier.
Two former students of mine, Fred Carmosino, a Sprott School of Business grad, and Brian Saumure, a Carleton University School of Architecture grad, started their successful firm, Maple Leaf Design and Construction, exactly this way – with launch client money and supplier credit.
After all, what’s cheaper – debt or equity? Many people think equity is free. Not so. VCs want to see at least a 20-per-cent, per-annum return on investment. But today you can get a variable rate home line of credit for just 2.15 per cent, so now you know, debt is much less expensive. Even if you use second-mortgage type debt, you may pay eight to 12 per cent, still cheaper than equity.
But what is cheaper than debt? Supplier credit and launch client money, because they usually charge you nothing for it. Clients give you their money in the form of deposits, retainers and progress payments for free because they want to buy your products and services, they want you to survive and they trust you.
If you build your business this way, it will have a cash conversion cycle (basically, accounts receivable plus inventory minus accounts payable) that’s very short or, better yet, negative. This means that as your sales grow, you generate cash instead of needing to raise more cash – crucial to entrepreneurial, bootstrapped startups.
Lastly, bootstrap capital is much faster than going the VC route. VCs, if they even consider funding you, usually take six to 12 months to make up their minds. Banks take … well, forever.
So instead of just talking about doing it, go out there and start your new enterprise and, once you’ve built it, hold onto to it.
Professor Bruce M. Firestone is entrepreneur-in-residence at the University of Ottawa’s Telfer School of Management; founder of the Ottawa Senators; executive director of Exploriem.org; and broker at Partners Advantage GMAC. You can read his blog at www.eqjournalblog.com.