CHAPTER SIX

SHOW ME THE MONEY: HOW TO FINANCE YOUR ENTREPRENEURIAL VENTURE

It takes money to make money. It doesn’t matter if you’re at the blackjack table, investing in stocks, or starting your own business. In each instance, you need money just to get in the game, and you need more money if you want to see a meaningful return on your investment. (Although, in the case of blackjack, the less invested the better.)

I thought about this a lot as I interviewed each of the entrepreneurs in this book. How were they doing it? When I put together those traveling plays for three summers after Star Trek was cancelled, I used savings to start but then flipped the box office receipts from each stop’s week-long run to finance and produce the next week’s performances. I didn’t get rich off it, but the system worked, I got to act, and I supported my family.

Where were these entrepreneurs getting their money? How much did they need? How much did they actually get? The answers, like everything about these inspiring business owners, were all over the map. Thomas Betts sold his boat and the house where his children grew up to buy farmland and his first seven alpacas. Jeff Frank partnered with a silent investor to start Simplicity Sofas. Geri Brin got a loan from her sister to build the website that became FabOver50. Cliff Brahm got a small business loan from his local regional bank to buy his 1-800-GOT-JUNK franchise. Julie Cole bootstrapped Perfect Rubber Mulch on the side of her landscaping business until it got so profitable that it became her main business.

Five different businesses, five different ways to shave a cat.

You’re probably saying to yourself, ‘That’s great, but how can I get the money I need to start my business?’ That’s a fair question. Individual stories are unique and can tell you only so much about where you can go or what you can do. So I went back to Michael Grottola: the man whose story opens this book and whose new consulting business helps aspiring entrepreneurs find funding and get on their feet.

“Most startups don’t fund themselves,” Michael explained. “They have a grand idea and they need somebody to fund that idea.”

Playing with someone else’s money – what’s not to love about that? Plenty, Michael cautions. “You have to expect income that is few and far between in the beginning. You have to live with spotty cash flow,” he cautioned. “If you’re a 40-hour a week person, don’t even start.” Most of you reading this book are not the 40-hour type, or you were in the first half of your lives and then realized you wanted more.

So where do you go to fund your idea or your business? There are really four potential sources of cash: 1) Yourself, 2) Friends and Family, 3) Investors, 4) the Banks. Each of them has its benefits. Each has its particular drawbacks. Understanding your needs and your tolerance for these elements will go a long way it determining what path to take.

Funding it Yourself.

The first place to look when it comes to funding your business is the mirror. Can you fund it yourself? How much of it can you fund and for how long? Should you fund it yourself considering a) the size of investment needed and/or b) the other responsibilities you have? Do you have any other options? The answers to those questions will determine to what extent you might fund this yourself and how far down the rabbit hole you go with it. But first, let’s go over your self-funding options: Sweat Equity – No matter your financial outlook, you will always have your sweat equity. What is that? I’ll let Michael tell you. “Sweat equity means working your butt off. Weekends, nights, working around the clock.” Some ideas don’t necessarily require a lot of money at first, they just need hard work. Julie Cole can tell you all about that with the growth of Perfect Rubber Mulch. Most ideas, though require both money and hard work. Just ask Jeff Frank. Despite decades in the business, he wasn’t able to contribute a cent to the formation of Simplicity Sofas. He brought the designs and the hard work to build the company from the ground up. His contribution was sweat equity. By the way, don’t confuse it with something that’s free. We only get so many hours on this Earth.

Bank Accounts – The essence of self-funding is pulling from your own personal bank accounts to pay your business expenses. Brian Hess used $800,000 of his own money to perfect and market his TattleTale security system. He took investors eventually, but he got the prototype built and the business off the ground with his own money. If he had failed, he would have been flat broke. But that didn’t stop him. The only alarm bell he heard was the one he invented.

Maybe you don’t have $800,000 like Brian did. Maybe you have a savings account that you created as a rainy day fund. Maybe it’s your normal checking account where your current salary gets deposited. Maybe it’s a 401k, an IRA, or a money market account. Whatever these accounts are, their value to you as an entrepreneur is that they hold some generally available form of cash. You may have to pay a penalty or taxes to get to it, but it has a definable cash value that you can use. Michael Grottola has a warning for those aspiring over-50 entrepreneurs with cash in the bank and their hand on their ATM card however. “You need to research and test your market,” he told me. “You can have a great idea, but the broad question is, ‘Will anyone buy it?’ Then the second, narrower question is, ‘If they will, why would they buy it from you?’”

Answer those questions before you punch in your pin code. Because you only get one shot to spend your life’s savings.

Credit Cards – “Some people go out on the limb for their idea and they use zero percent credit cards,” Michael said as he ran me through the self-funding options. They even use their current credit cards that already carry a balance for household expenses; credit cards that are often with the same bank where they have their checking account and their mortgage. They are so confident in their idea— or so desperate for it to succeed—that when all other options run out they put it on plastic, hoping their ship comes in before their bills come due.

“It’s a dangerous game, hoping,” warns Michael.

Still, there some amazing stories of startups that got going on maxed out credit cards. Some of them are surely apocryphal, but a number of them are real. The popular room-renting website, AirBnB, famously bootstrapped its way through its early days on those 16 magic digits. Andrew Warner, the founder of the entrepreneurial-focused website Mixergy.com, built his very first successful business by going back and forth with his brother opening and maxing out a gambler’s deck of credit cards.

Those are two compelling success stories, not to be ignored. But nor should you ignore the vast sea of anonymous business failures that funded themselves on revolving credit. Tellingly, none of the entrepreneurs in this book started their businesses this way, in large part because they recognized just how risky a proposition that is. If you search “using credit cards to fund your business” in Google, the results page might as well just flash “DANGER WILL ROBINSON, DANGER!” across it.

Equity Loans – “Some people believe in their ideas so much they will take even greater risks, like taking out equity loans.” This typically takes the form of a home equity loan, as Michael described it. This is especially true for aspiring business owners over 50 who more often than not are deep into a 30-year fixed mortgage and have built up a significant amount of equity to borrow against. No one’s using those other two bedrooms, anyway, right? You might as well get something out of them.

There are two ways to do this: one is a basic home equity loan, where you borrow a lump sum against the equity you’ve built up in your home. This is something you might consider if your idea requires a big upfront capital infusion for equipment or materials or land to get the business off the ground. This is a path Thomas Betts could have pursued, for instance, when he purchased the land and the 7 alpacas to start his alpaca farm (he chose a different path, if you remember).

“The second way is called a Home Equity Line of Credit,” Grottola explained, “or HELOC for short.” A HELOC uses the same source of collateral as a normal home equity loan—the equity built up in the home—but instead of advancing the entire sum, the borrower uses it piecemeal. Debt can be run up or paid down, not unlike a credit card. But interest is typically quite low, very much unlike a credit card. New entrepreneurs have been known to use a HELOC for unexpected one-time expenditures, covering payroll on months when they’re short, making small to mid-size improvements.

The benefit of the home equity line of credit is that it doesn’t feel like you’re taking on massive debt or leveraging yourself to the hilt. The downside is that you really are – and it’s a slippery slope. It’s very easy to borrow that first $5000 when you’re playing with $250,000. Before you know it, though, you tack another zero onto the end of that $5000, you do it twice in 18 months, and boom you’re $105k in debt. That is not a place most new businesses want to be.

Physical Assets – This is the route Thomas Betts chose to finance his alpaca operation. He looked at his assets, measured their value and their importance to him, and then he pulled the trigger. He sold his family home to buy farmland and a house on the other side of the Cascade Range. He sold his prized racing yacht to buy the first seven alpacas. Out went the mainsails, in came the hay bales. For a man at his wits end with the corporate grind, his decision makes all the sense in the world.

Using your physical assets to fund your company is perhaps the least risky of the other self-funding options because you are not putting yourself in hock to a bank or a credit card company. You are converting physical assets into a different type of physical asset: cash. The tricky part is to convert only enough of those assets to finance your vision, while still leaving you with a house to sleep in, a car to drive, and a few suits to wear to meetings. Because if your dream goes up in smoke, you at least want to own an ashtray.

As you can see, there are a number of ways to fund your idea yourself; a number of assets both tangible and intangible. But as Michael Grottola reminded me, “Thinking in advance is the most valuable asset you have. You will want to test a lot of things before you pony up your savings or go deep into debt for an idea.”

Where do you test these things, though? Who do you test them on? I asked Michael both questions, out of sheer curiosity. His answer: the same group of people who can help get you off the ground if you pass muster with them.

FRIENDS & FAMILY

Your friends and family are the perfect focus group for judging your idea. They are removed enough from it to give you an honest, objective 3rd party opinion, but close enough to care about you and weigh how important the idea is to you. If the idea has flaws, or it’s just plain bad, they will bring you back to Earth and keep your feet on the ground. If it’s great and they’re excited about it, they can give you just the boost you need to get your fledgling business off the ground with seed money. And if you ever show up on their doorstep wearing nothing but a barrel, at least they won’t have to ask why.

Geri Brin went the friends and family route for seed money to start both her first business and her current one, FabOverFifty. She went to her younger sister, a very successful businesswoman. Her sister loved her ideas, told her to go for it, and cut her a check. It wasn’t a lot — just enough—but it was more than a loan; it was a vote of confidence.

That is the beauty of seed money, especially when it comes from family and friends. It’s validation of your idea—your passion—from people whose opinions you care about and trust, delivered in the most meaningful way possible for an entrepreneur: financial support.

But sometimes friends and family can only offer you their moral support. Cash, for any number of possible reasons, isn’t on the table. At that point — in addition to looking for some new family — you have to look for a different class of financial backers: investors.

INVESTORS

Like the suits many of them favor, investors come in many stripes. There are angel investors who have essentially made a profession out of giving companies seed money. There are venture capitalists (VCs) who typically fund at much higher levels than seed money investments and at various stages as your company grows. And now there is crowdfunding, where you can solicit backers via social media in exchange for rewards or equity.

ANGEL INVESTORS

An angel investor is pretty much just a rich person who likes to support startups whose ideas they believe in. Just like striking out on your own and hiring yourself feels very risky, investing in someone who is going out on their own to hire themselves is also risky. That’s why most angel investors ask for a lot in return for their money. Since most startups fail, they have to account for that risk, so they will ask for an amount of equity that seems out of line for the amount of money they’re willing to give. You may be a good person with a great idea, but from their perspective you’re still a longshot.

Not very angelic, is it? Unfortunately, them’s the breaks when it comes to angel investing. If you don’t have assets to leverage or credit to work with or friends and family who can help, angel investors are your next best bet when it comes to getting your idea up and running. And this is how the angel investing game is played. Look at it this way: it’s better to have 75% of something than 100% of nothing.

VENTURE CAPITAL

Venture capital is a much bigger beast than angel investing. It involves much, much larger sums of money, many more laws and SEC regulations, and a degree of maturity as a company that many new entrepreneurs have not reached when they’re still trying to figure out how to fund their idea.

You know what a silent partner is? Well venture-capital firms are the opposite. They often come onboard not just as investors but as advisors. For those of you who are tired of the corporate rate race and want to be your own boss, free and clear, dealing with venture capital firms might induce some anxiety or a bit of PTSD.

After talking with Michael Grottola about venture capital, it seems pretty clear that you shouldn’t worry about this path until your business plan is fully fleshed out and your idea requires a big chunk of change.

CROWDFUNDING

Crowdfunding is by far the most exciting development in the area of entrepreneurship since the invention of the Internet. Websites like Kickstarter and IndieGogo allow fledgling companies to solicit financial support from users for a variety of things—product development, product launch, equipment needs, marketing campaigns, etc.—in exchange for rewards. Sometimes that reward is a simple “thank you.” Other times it’s one of the first products off the assembly. Still other times it’s an invitation to a VIP launch party where crowd funders can meet the star of the show — you!

Since Kickstarter launched in 2009, its listed projects have received over $1 billion in pledged support. The companies who list those projects are raising a ton of money in the process. The smart-watch company Pebble raised $10 million and sent its profile into the stratosphere. Pretty smart! The writers and producers of the canceled TV show “Veronica Mars” raised north of $5 million to do a movie version, including nearly $3m on the first day! Where are all the TJ Hooker and Denny Crane fans, that’s what I want to know!

There are a few of things that make crowdfunding a great opportunity for over-50 entrepreneurs with a product idea. First, it allows you to raise money to build your product without having to give up equity. (Now that’s more like an angel!) All you have to do is come up with cool things to give the people who have agreed to support you. Second, it gives you a giant pool of your first customers, all of whom have conveyed that they like what you’re doing. Customer acquisition is one of the most difficult problems new businesses face, Michael Grottola tells me, and crowdfunding seems to have cracked that nut. Sounds good to me. Lastly, because most of the people operating on Kickstarter and IndieGogo are young, an older person with a great idea really stands out. You have a great opportunity to get attention not just from site users but from the press. By its very nature, crowdfunding makes a very public splash for your enterprise.

For some of you, however, raising $50,000 and getting several hundred paying customers isn’t enough. Maybe you have a service business or a product that has institutional customers, or maybe you have a more sizeable funding issue. For companies like yours, the newest form of crowdfunding is opening doors that were previously guarded jealously by hedge funds and venture capital firms.

It’s called equity crowdfunding. Just like it sounds, equity crowdfunding allows you to raise money online in exchange for an ownership stake. If Kickstarter is for enthusiasts who want to be part of something new, these platforms are for real investors who want to make real money. A world of investors who were previously out of your league can now find you and decide if your plan is worth a few bucks — or a few hundred thousand.

At the top of the class are sites that do due diligence like a normal venture capital firm. They scrutinize your business plan, your financials, they examine the market you’re operating in and the size of the opportunity. It’s a high bar to clear, but if you make it you’re looking at smart, clean, reliable money that won’t magically disappear or get tied up when it’s time to cash the checks.

Sites like MicroVentures.com based out of Austin, Texas, run by two smart guys named Bill Clark and Tim Sullivan. Or AngelList.co based in San Francisco, run by Naval Ravikant. When Michael Grottola broke down this crowdfunding revolution for me, I was so intrigued that I went online to search for some of these sites. These were the two that kept coming up as being the most reliable with the best opportunities. If your idea is at the point where you can confidently seek investment from a crowdfunding platform, this is probably how you want to do it.

A word of warning though. At the bottom end of this young industry are sites that will post your investment opportunity with as little as a business plan and a fancy PowerPoint deck. The barrier to entry here is low, but so is the reliability and sophistication of the typical investor who commits money. As with anything else, if a crowd-funding site seems too good to be true, it probably is.

Of course, crowds are not known for their patience. If your idea is still in the planning and building phase, your next best bet is to actually go a more traditional route and seek funding from an institution whose job it is to hand money out to promising businesses. Luckily, your town is full of them.

THE BANK

It’s a classic scene of terror and doubt: Walking into a bank with your hopes and dreams neatly laid out over several dozen sheets of paper. Sitting before a loan officer with a big rubber stamp. Suddenly wondering if you were nuts to even think this thing up. Fundamentally it’s no different than going to any of the previous money sources we’ve discussed, but it turns a lot of people inside out.

Here’s the thing though: a bank’s whole job is to lend you money. Assuming you’re qualified, of course. It’s how they make money— on the interest and fees they charge. Ask any loan officer and they’ll tell you that they are looking for a reason to give you the money. It’s your job to present your idea in a way that gives them that reason. So go ahead and give them one!

Before he bought a 1-800-GOT-JUNK franchise, Cliff Brahm failed at this the first time he went to his bank for a small business loan. He had what he felt was a strong idea related to the field he had just left with a number of very talented people on board to make this idea a reality. But here’s all the bank heard: “Junk!” Cliff was right, of course; it was a great business idea! But his job at that moment was to make the bankers as comfortable about going into the trash business as he was.

If you’re a creditworthy applicant with a good idea and a strong business plan, a straight bank loan or a small business loan is not outside the realm of possibility. In fact, it might be your surest bet after utilizing your own physical assets. So don’t let the bank intimidate you. You’re on the same team: they want you to succeed as much as you do.

Once you’ve made the leap to becoming an entrepreneur — surely one of the scariest decisions in a person’s life — the next step is almost as daunting: pulling your idea out of your head and planting it in the earth. Turning it into a real business. You owe it to yourself and your vision to consider every source possible to fund your dream.

The entrepreneurs in this book have businesses that are about as wide-ranging as you can get, but if they have anything in common (other than their lovely salt-and-pepper hair) it is that they pursued all possible avenues to make their dreams a reality, then chose the path that made the most sense for them.

You can, and should, do the same.

* A fair amount of people want to be entrepreneurs but are 40-hour types at heart. There is no shame in this, and you will find out if you are one of those people when you take the Personal Inventory checklist at the back of the book.