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29 Jan "Bubble Gum & Duct Tape" — A Lesson in Entrepreneurial Bootstrapping

A conversation I had with a potential client this last week went something like this:

Me: “Tell me about your financing to date”

Client: “We’ve had no outside financing other than from the founders’ savings. In other words, we did our best with bubble gum & Duct Tape.”

He later referred to their frugal attitude as something like when you “try to make a stone bleed.” Such language typically comes from the mouth of the truly cost-conscious and frugal entrepreneur. The company itself was highly successful. A producer of a patented medical equipment device that was fairly ubiquitous and tied directly to Medicare reimbursements, the company was well on their way to either a substantial reverse merger or an IPO, depending on their motivation.

Just by nature of what we do, we receive a great deal of inquiries from company founders and owners that want us to raise large amounts of capital for companies with little to no revenue or even an idea that hasn’t been fully flushed-out yet. In other cases, the owners are in 100% startup mode and are looking to raise enough capital in the public markets where they can quit their job and then begin building the business–all while they keep their current position. Further still are those who think that just because we represent an alternative to VC funding that they can get the same amount of promised capital in a public offering without having to give up a large portion of equity. Unfortunately, the world doesn’t work like that.

My previous example included corporate officers who had not only gone without salary for a couple of years, but also paid the salaries of others from their personal savings– a huge risk I would never advise anyone to take, but they were that convinced they could make it. Incidentally, that tenacity helped to convince the big investors to come later.

First, let it be clear: we don’t raise capital, we don’t sell securities. We have partners that assist in this process. We simply structure for capital growth. This process could include setting up share warrants that, if exercised at the right price can bring in capital to the business. The expense required is some equity, but the cost of sacrificing such equity in a public offering is much, much less than if a venture capitalist gets ahold of you. That’s why I’m amazed when we discuss some of the ways in which being public provides incentives for investors to invest that many entrepreneurs balk at the cost to be public, especially since going public can be done rather cheaply. If done patiently and correctly, companies can save thousands on their public offering, allowing them a bit more cash–the most precious commodity in business– to aid in furthering their growth.

With that said, here are some of the lessons I would give to the bootstrapping entrepreneur:

1. Don’t assume someone is going to pay you without FIRST producing something. Oh, the stories I could tell.

2. A patent, an idea and a single customer contract is not a full-fledged business. It’s a good start, but it’s typically not something investors get excited about (unless of course the company has all the other components to back it up–which may or may not be the case).

3. Squeeze the rock, make it bleed. Be frugal, be frugal, be frugal, but don’t be cheap. Pay no more than you have to, but remember you often get what you pay for. That includes the advice given on this blog.

4. Be in a perpetual state of fundraising. Public companies that are still growing are often still sourcing capital to fund the next stage of growth. As a founder, keep yourself out there as, “everything is for sale,” including my company–or at least a portion of it…for now.

We all have to kiss a great deal of frogs before we find our prince, but sometimes it helps to educate the true frogs a bit so they don’t waste their own time and our time with nothing more than ideas and no financial backing to take the business to the next level. First get something real going, then take it public. When you do eventually get there, unless you’re going public in a truly full-blown way, make sure you do all you can to use the bubble gum and Duct tape you’ve been used to for so long.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.