3 Tips on Start Up Cash

Start up cash is always going to be on your mind.  Everything in having a start up revolves around cash.

Maybe your start up needs a lot of cash, maybe it only needs a little cash.  Either way, you have some very simple questions revolving around that to ask yourself, as well as what investors will ask.

As you’re answering these questions about start up cash, give yourself two different projections for each question.

  • Plan A (bootstrapping).  Simple stuff, reduce costs.
  • Plan B (investor money).  This requires far more planning around start up cash so you’ll need help.  Use a tool like EZ Numbers, as you’ll need 5 year financial projections, accurate tax and benefits calculations…the whole kaboodle.

Why the need for two different plans?  1 is reality.  1 is fantasy.  As you’re pitching to investors, you’ll need to have Plan B with you.  That start up cash should act as though you are a full scale operating corporation.  Plan A, however, is done like you are working a full time job…and investing a little back each month into building your start up.

Over 80% of start up cash is funded by the Entrepreneur’s credit cards with less than $10,000.  That’s reality.

Only 1% will get venture capital as start up cash.

The other 19% or so will be successful in raising start up cash from family/friends, or possibly an angel investor.

I call the venture capital start up cash scenario fantasy (not saying you can’t be that 1%, but that 1% is someone who is deeply connected to VC money).  Not  you?  I thought so :).  However, that is not to say you won’t be successful in raising venture capital later, after you start up.  So if I were you, I’d go ahead and plan on bootstrapping.

Just remember, time is the VC’s best friend.

But, time is the Entrepreneur’s worst enemy.

I’ll provide the way to answer these questions for each.

1.  How Much Start Up Cash Do You Need?

Bootstrapping Scenario:

Cut start up costs as much as possible!  Chop down your start up plan into basic steps: logo, website, product (or service).  Get quotes for each.  Make a goal to set aside 1/12th of that total cost per month.  You may have to take on a few side jobs to make that happen, or take back that new car.

Each month, try to outsource something small.  Maybe your logo this month, then your website over the next 2 months.  Don’t go with the best quality, but make sure it’s decent.

There’s plenty of cost effective design services that are 75% less than graphic designers…but still have good quality.  Try:

Investor Scenario:

Investors want higher quality being invested into your business.  They know the better the quality, the more profit the business will make.  That’s the benefit their cash is giving you, and that’s what they expect to see it reflected in how much start up cash you need.

Many Entrepreneurs make the mistake of presenting a bootstrapping type scenario to the investor when he asks “How much start up cash do you need”?  The investor doesn’t want your brother writing your code.  He’s looking for a professional, or an experienced Entrepreneur to take on this role.

Until that investor invests though, I’d say go ahead and let your brother write your code.  But help him understand, he will likely have to be replaced with someone more experienced when an investor comes in.  You should definetley pay him out retail price for his service though when you get your start up cash.  Don’t screw people over.

2.  How Much Cash Can Your Start Up Make?

Bootstrapping Scenario:

The fastest way to answer this is by using this simple formula:

Revenue – Cost to Acquire Customer= X

X – Operating Costs= (Hopefully) Profit

Obviously paying $3 per click on Google Adwords, with an average 1% conversion rate, selling a product at $5 each…does not equal profit.

If your formula does not equal profit, that doesn’t mean you have to fold.  You have to innovate.  Cut costs, and maximize profit.

Investor Scenario:

This takes a little more effort on your part, and a lot more thinking.  You really, I mean really, have to come up with a creative strategy to maximize cash for an investor (he seeks an ROI on his investment of 20-41%).

While you’re thinking about how your start up will make so much cash, consider:

  • How can you deliver your product for less money?  Strategic partnerships?
  • How can you cut down on operating costs?  Share resources with other businesses?
  • How can you maximize revenue?  Increase your market reach?  Or target your customers better?

3.  How Soon Can Your Start Up Make Cash?

Bootstrapping Scenario:

Time is of the essence applies here at all times.  You have a limited amount of time to get to market & make that start up cash flow when you’re bootstrapping.  To help compensate you can:

  • Start a blog targeting your future customers.  You are building your brand, while earning advertising revenue.
  • Take on consulting or freelancing projects.  It will give you flexibility to work on your start up, while paying the bills.
  • Get other Entrepreneurs involved to speed things up.  Maybe there is a stay at home mom who used to do web design, with time on her hands.

Remember, bootstrapping start up cash requires creativity, and doesn’t follow a logical process.

Investor Scenario:

This follows a slightly more logical approach.  As start up cash is being invested, legalities begin to become a larger concern than the creativity to recruit people for less money.  You’ll also be financially planning to be a large corporation, so will naturally have more legal expenses, employment expenses, etc than a creative bootstrapping small business may.

Most investors will be looking for you to break even on your start up cash within the next 18-36 months, or receive a Series A round.  He/she will also be looking to exit around 3-5 years.