Chapter 3. Myth No. 3: It Takes a Lot of Money to Start a Business
Truth No. 3: It Might Not Cost as Much as You Think

How much do you think it costs to start a business? If you’re thinking about a biotechnology, semiconductor, or medical product firm, you’d probably say a lot, and you’d be right. But how much do you think it costs to start an average business, like the privately owned businesses you deal with every day? And where do you think the majority of the start-up capital for these businesses comes from? According to the Wells Fargo/Gallup Small Business Index, the average small business is started for about $10,000, with the majority of the money coming from the owners’ personal savings.¹

If this figure strikes you as low, you’re in good company; it strikes most people as low. That’s because when most people think of businesses, they think of the types of businesses that they interact with the most frequently, like grocery stores, restaurants, gas stations, and large retail stores. These types of business do take a lot of money to start and run. But chances are if you start a business, it won’t be like these businesses—at least initially. It will be more like the businesses highlighted so far in this book. Most of these businesses didn’t take a tremendous amount of money to start. Even aggressive growth firms, in most cases, don’t take an arm and a leg to get started. Each year Inc. magazine compiles a list of the 5,000 fastest-growing privately owned firms in the United States. In 2006, the medium amount it took to start one of the businesses on the list was $75,000.² That means that half of them were started for less than $75,000. And these firms cover a wide swath of businesses, from building contractors to advertising agencies to retail stores.

There is somewhat of a catch, however, involved with starting a business with limited funds. The catch is that most people simply don’t have any experience or insight when it comes to determining how much it will cost to start a business, how to economize on start-up expenses, or how to raise money if needed. These are topics that there is no reason to think about until you start seriously thinking about starting a business. To provide insight regarding these issues and to further dispel the myth that it takes a lot of money to start a business, this chapter is divided into three sections. The first section provides insights into how to think about money as it relates to starting a business. The second section focuses on the techniques that enable business owners to minimize the costs associated with starting a business. The third section focuses on the choices that small business owners have for raising start-up funds if needed.

Insights Into How to Think About Money as It Relates to Starting a Business

For most people, the topic that consumes the majority of their thinking as it relates to money and starting a specific business is "How much money will it take to get the business off the ground?" While this question makes perfect sense, there is no concrete answer. The same exact business might cost one person $10,000 to start and another person $25,000—trust us, this isn’t an exaggeration. The amount needed typically depends on how a person thinks about money as it relates to starting a business, how frugal a person is, and how resourceful a person is in gaining access to money and other resources.

While money is obviously needed to start even the most basic business, many of the observations that successful business owners make about money are surprising. While you’d think money would be held in high esteem, many business owners discount the importance of having plentiful funds as a key to new business success. Instead, they tend to see the absence of money as a motivator for developing qualities such as resourcefulness, creativity, focus, frugality, and drive.

The following are three insights about the role of money in the start-up process. As you read through each insight, think carefully about how each topic relates to your own attitudes about money. One of the reasons that many businesses are started for as little money as they are is that people adjust their attitudes about money as they become more acquainted with the start-up process.

Now let’s look at three insights regarding the role of money in the start-up process.

Skimpy Finances Can Be a Blessing Rather Than a Curse

The first insight regarding money and the start-up process is that there is a silver lining to having limited start-up funds. Many successful business owners, when they reflect back on their start-up years, feel that having limited funds forced them to focus, become self-reliant, and develop a mindset of frugality—qualities that have served them well as they’ve grown their firms.

The importance of focus is affirmed by Caterina Fake, cofounder of Flickr, the popular photo-sharing Web site, which was started in 2002. In reflecting back on the role of money in the early days of her firm, Fake said:

"The money was scarce, but I’m a big believer that constraints inspire creativity. The less money you have, the fewer people and resources you have, the more creative you have to become. I think that had a lot to do with why we were able to iterate and innovate so fast."³

Flickr’s first product was a multiplayer online game called Game Neverending. At one point mid-way through the development of the game, the programmers, on a lark, added an instant messenger application to the game’s environment, which allowed users to form communities to share photos. Surprisingly, the photo-sharing feature quickly passed the game itself in terms of popularity. As the photo-sharing feature continued to gain momentum, the game itself was dropped because the company couldn’t afford to work on both projects simultaneously. Flickr (www.flickr.com), as a photo-sharing Web site, became extremely popular and was acquired by Yahoo! in 2005 for somewhere between 20 and 30 million dollars. Ironically, it was the lack of money, rather than the abundance of it, that caused the founders of Flickr to drop the game and focus on the photo-sharing site, a decision that turned out to be very profitable for the company.

In regard to developing a culture of self-reliance, having limited start-up funds often instills discipline in a firm and forces the founders to substitute ingenuity and hard work for financial resources. An example of how this played out in one firm is provided by Doris Christopher, the founder of The Pampered Chef. Christopher started The Pampered Chef in 1980 and ran the company out of her home well beyond its start-up years. Explaining how having limited start-up funds helped set her on a lifelong track of financial discipline, Christopher wrote:

"With a bankroll of only $3,000 to start my business, I didn’t have any choice; I had to watch my overhead. It taught me discipline, which I have been mindful of throughout my business career."⁴

The Pampered Chef, which was started in 1980, has been an enormously successful company. It sells kitchen utensils through home parties, utilizing a direct sales approach (like Tupperware). At last count, the company had nearly 70,000 Pampered Chef consultants and 12 million people attending its home parties each year. To this day, the main theme of Christopher’s speaking and writing is to caution business owners to avoid debt, minimize overhead, and remain self-reliant.

Finally, limited funds at the outset often help a firm develop a mindset of frugality—a quality that is often very helpful as a firm grows and expands. For example, many businesses that are started on a shoestring learn to function very inexpensively and continue to watch their money very carefully, even after they become successful.

Raising or Borrowing Money Is Trading One Boss for Another

The second insight regarding the role of money and the start-up process has to do with raising equity capital or borrowing to fund a business. One of the first things that many people do when they decide to start a business is to try to raise money through a bank or an investor. There are several choices that business owners have for raising money, including commercial banks, SBA guaranteed loans, investors, grants, supplier financing, and several others. Of these choices, many people automatically assume that the only way they’ll raise the amount of money they need is via a commercial bank or an equity investor. While the other choices might hold promise, most people’s initial reactions are that the alternatives pale in comparison to the amount of money that can be raised from a bank or through an investor.

While in some cases it is necessary to go the bank or investor route, the problem with obtaining money from these sources is that there are consequences that business owners often don’t fully anticipate. Bankers and investors typically assert considerable control over the businesses they provide money to as a means of protecting their investments. While the majority of bankers and investors have good intentions, the level of scrutiny and control their investments allow them often has an impact on the firms they fund. For example, banks are inherently conservative and often caution their clients to grow slowly, while investors are the opposite and regularly pressure the companies they invest in to grow quickly to increase their valuations. What’s missing here is what the business owner wants. So for people leaving traditional jobs to start their own businesses, obtaining money from bankers or investors is often like trading one boss for another. You might be freeing yourself from working for a boss in a traditional sense but could have an equally influential boss in the form of a banker or an investor.

An additional consideration when taking money from an investor is that you exchange partial ownership in your business for funding. This aspect of the small business owner–investor relationship can also be problematic. Unlike the business owners introduced in this book, who started their businesses to fulfill personal aspirations or follow their passions, the majority of investors are not in it for the long term—they want their money back in three to five years along with a sizeable return. This means that a business owner like Daryn Kagan, the former CNN reporter who started a "good news" Web cast, will probably have to sell her business in three to five years from the time it was started if she accepted investment capital. Although this scenario will undoubtedly net Ms. Kagan a handsome financial return, assuming her business is gaining traction and is profitable, she’ll lose direct control of the business she was so excited to create.

The solution to avoid these potential problems is steering clear of bank financing or equity funding or, at the minimum, having a clear understanding of the nature of the relationship you’ll have with your banker or investors. It’s possible for a small business owner to have a healthy relationship with a banker or an investor. The overarching point, however, is that small business owners should go into these relationships with their eyes wide open, fully understanding the parameters of the relationships they’re developing.

Excess Funds Can Enable a start-up to Operate Unprofitably for Too Long

The third insight regarding money and the start-up process is that having excess funds often masks problems and enables a firm to operate unprofitably for too long. Many businesses lose money their first several months while they ramp up and gain customers. That’s normal. But at some point, a business has to operate profitably to prove that it is a viable, ongoing pursuit. People who start businesses with limited funds typically find out quickly if their businesses are capable of turning a profit. Because they don’t have excess funds to rely on, they must make adjustments quickly, like cutting expenses or increasing sales, to turn a profit. Ultimately, if the business doesn’t work, it is shut down. In contrast, if a person starts a business with abundant funds, the business can operate for months at a loss and stay open if the owner relies on excess funds to keep the business afloat. The owner may never feel pressured to cut costs or generate additional sales, thinking that the business simply needs more time to prove itself. If the business ultimately fails, it will normally lose more money and more of its owner’s time and prestige than the less well funded startup.

A related complication associated with having abundant funds is that a business’s cost structure and clientele is often determined by the amount of money it has initially. For example, if you decided to open a clothing store and were offered $200,000 by an investor to start the business, you might rent space in an upscale mall, hire experienced salespeople, buy the latest computer equipment, and launch an expensive advertising campaign. While this sounds good, once the business is started and the $200,000 is gone, you might be locked into a high overhead business that has to sell high margin products to an affluent clientele to make the business work. Conversely, if you had started with less money, you might have signed a shorter tem lease in a more modest facility, hired your initial salespeople part-time to see which ones worked out the best, bought used computer equipment, and found inexpensive ways to spread the word about your store. Utilizing this approach, you’d actually have more flexibility and room to maneuver than the better funded scenario.

Collectively, the purpose of these three insights is to put the importance of money in starting a business in its proper perspective. While many people think, "If I only had the money, I’d start my own business," the insights provided here show that having money isn’t a panacea. In fact, the discipline imposed by having limited funds is often an advantage and creates a healthier business in the long run.

The next section of this chapter focuses on techniques that enable business owners to minimize the costs associated with starting up. While many businesses ultimately do need to raise some money to get started, the amount needed can be greatly reduced through creative and novel cost-cutting techniques.

Techniques That Enable Business Owners to Minimize the Costs Associated with Starting a Business

As mentioned earlier in the chapter, the numbers reported for the average cost of starting a business strike most people as low. When you think about the cost of buying a car or even a major household appliance, it’s easy to question whether the average business is really started for around $10,000. The answer is that while it might cost $10,000 to start the average business, that figure doesn’t tell the whole story. Many business owners put a tremendous amount of free labor into starting their firms and become experts at scraping and scrounging to gain access to resources at reduced cost. In fact, many observers believe that a business owner’s ability to "bootstrap" all or part of its resource needs is a key to business success. The term bootstrap comes from the German legend of Baron Munchausen pulling himself out of the sea by pulling on his own bootstraps. In start-up circles, bootstrapping means finding ways to avoid the need for bank financing or investor funding through creativity, ingenuity, thriftiness, cost-cutting, or any means necessary.⁶

This section of the chapter focuses on three techniques that enable business owners to minimize the costs associated with starting a business. The techniques include selecting an appropriate business to start, seeking help, and cutting costs and saving money at every available opportunity.

Selecting an Appropriate Business to Start

The first step involved in minimizing the costs associated with starting a business is to select an appropriate business. If you have limited funds, you should start a business that requires a small up-front investment, has a short sales cycle (meaning the customer decides quickly whether to buy), has short repayment terms (30 days or less), and has a high degree of recurring revenue. Businesses with the opposite characteristics generally take too much money for a business owner with limited resources to start and run.

Fortunately, there are many businesses that meet the criteria described. Home-based businesses, which now represent more than half of the 26.8 million U.S. small businesses, are popular largely because they take very little capital to start and have low overhead. The cost savings that are realized by operating a home-based business often help these businesses earn profits from the start, which helps them accumulate the funds necessary to move into larger quarters when needed. This is exactly what happened in the case of Emily Levy, the founder of EBL Coaching, the tutoring service for children introduced in Chapter 2. Commenting on her start-up experience, Levy wrote:

"My start-up costs were minimal since I was working out of my apartment. Now that the business has grown, however, I have to pay for office space, insurance, advertising and tutors, but EBL Coaching has been profitable from the start. There are many businesses that you can start with minimal capital, especially if you start small and grow organically as demand increases."⁷

Service businesses are also fairly inexpensive to start depending on the nature of the business. Though not exhaustive, a list of service businesses that typically meet the criteria discussed above are shown in Table 3.1. An example from the table is a home inspector. Nearly every real estate transaction requires a home inspection, making it a fairly lucrative business. The up-front costs of becoming a home inspector are fairly modest, which include training and certification and a basic set of home inspection tools. The sales cycle is short, considering that once an inspection is ordered, it is normally completed within a few days. The repayment term is also short because the inspector usually requires payment the day of the inspection. And there is normally a high degree of recurring revenue. Even though the same people don’t normally require repeat inspections, the vast majority of a home inspector’s business comes from referrals from builders and real estate agents.

Table 3.1. Examples of Service Businesses That Are Attractive Alternatives for Prospective Business Owners with Limited Funds

The types of businesses that aren’t good choices for prospective business owners with limited funds are businesses that bring new products to market, businesses that are capital-intensive like manufacturing firms, and businesses that require a lot of employees like a call center. While these businesses might have more potential profitability than home-based businesses and service firms, they simply take too much money to start for someone with limited start-up funds.

Seek Out Help

The second technique that helps business owners minimize the costs associated with starting a business is to seek out coaching and assistance. There are many ways for new businesses to get this type of help. The Small Business Development Center (SBDC), for example, is a government agency that provides free management assistance and coaching to small business owners. Your local SBDC can be identified at www.sba.gov/sbdc. Another good choice is the Service Corps of Retired Executives (SCORE), which is a nonprofit organization that provides free consulting services to small businesses. SCORE’s 10,000+ volunteers are retired business owners who counsel in areas as diverse as finance, operations, ecommerce, and sales. You can find your local SCORE chapter at www.score.org. Both of these organizations can provide business owners concrete advice and suggestions for how to minimize the costs of starting a specific business.

Prospective business owners should also identify local small business and entrepreneurship organizations to plug into. These organizations offer seminars, sponsor networking events, hold business plan competitions, and introduce their members to service providers and potential sources of financing or funding. An example is the Oregon Entrepreneurs Network (www.oen.org), an organization that services prospective business owners in Oregon and southwest Washington. The organization, which charges a nominal membership fee, provides its members a full slate of programs and services. A similar example is the Venture Lab at the University of Central Florida in Orlando, Florida (www.venturelab.ucf.edu). The Venture Lab provides coaching and advice to anyone in Central Florida who has a business idea and needs help assessing the merits of the idea and shaping it into a viable business. There are similar organizations in almost every city in the United States.

Finally, there are organizations that provide coaching, advice, and support to specific groups of business owners and tailor their offerings to fit the groups. An example is Ladies Who Launch (www.ladieswholaunch.com), an organization that sponsors workshops and provides materials that encourage and support female business owners. The workshops include discussions, case studies, stories, and anecdotes that help women leverage their unique abilities to launch businesses efficiently and effectively. Similar organizations and support groups are available for veterans, members of minority groups, college students, senior adults, and other demographic groups.

Cut Costs and Save Money at Every Opportunity

The most obvious way to minimize the costs associated with launching a business is to cut costs and save money at every opportunity. The most effective way to do this is to develop a mindset of frugality and resourcefulness. While these attributes might seem obvious, in many cases, frugality and resourcefulness are learned skills. Many people aren’t naturally frugal or resourceful, but as a result of an intensive desire to make their businesses work, they foster these qualities to help get their businesses off the ground and to minimize the costs of their ongoing operations.

A list of common cost-cutting and cost-saving techniques is provided below. While the techniques are well known, the trick is to put them into action. An example of a business owner who put the third item on the list, "Look for opportunities to barter," is provided by Clara Rankin Williams, the founder of Clara Belle Collections, a jewelry design business. When asked for words of advice regarding how to start and run a business, Williams said:

"Take advantage of random situations. I was at a truck show and I heard a friend talking with a marketing consultant. I asked the consultant whether there was any chance she might be interested in helping me with my marketing and swapping jewelry for services. She was. As an entrepreneur, you have to think out of the box, especially if you want to survive in an increasingly crowded marketplace."⁸

This type of behavior exemplifies a mindset of frugality and resourcefulness. There are other cost-cutting and cost-saving techniques that aren’t as well known as those shown in the following bulleted list. A sample of these techniques includes employing open source software instead of more expensive proprietary software packages, writing or participating in blogs as an alternative to buying advertising, utilizing online tools such as Skype instead of paying for long distance, and eliminating the cost of buying a fax machine by utilizing an online fax forwarding service such as eFax.

• Buy used instead of new equipment.
• Coordinate purchases with other businesses.
• Barter.
• Lease equipment rather than buying.
• Obtain payments in advance from customers.
• Minimize personal expenses.
• Avoid unnecessary expenses, such as lavish office space or furniture.
• Buy items cheaply but prudently through discount outlets or online auctions such as eBay, rather than at full-price stores.

There are many examples of business owners who dramatically reduced the cost of launching their businesses by utilizing combinations of the techniques described here. One example is provided by Michelle Madhok, the founder of SheFinds (www.shefinds.com), a company that helps people find bargains on the Internet:

"I financed SheFinds myself and have spent about $5,000 of my own money to get the business off the ground. The most expensive items were forming the LLC [which is a form of business ownership], legal costs, and public relations. My [Web] site was built for about $250 by a guy in the Ukraine who I found on Craig’s List (www.craigslist.com). My photos were done for barter, and I got a good deal on the illustrations on my site because the artist had downtime. I worked with many independents—my lawyer was an independent, because I [didn’t] see the value in paying for a big, fancy firm. And I looked for discount resources on the Internet—if you search around, you can find companies that will make quality color copies for about 20 cents a copy."⁹

Madhok’s experience is a clear example of a firm that cost $5,000 to start but could easily have cost $25,000 absent her frugal mindset and deliberate attempts to cut costs.

Choices That Small Business Owners Have for Raising Start-Up Funds if Needed

Some startups do need to raise money to get their businesses off the ground. In these instances, it’s been our experience that the most knowledgeable and well-informed business owners have the most success. The most common mistake that prospective business owners make is not having a business plan. Although some books and magazine articles suggest that a business plan isn’t necessary, our experience has taught us that this advice is dead wrong. It’s almost inconceivable that a business would be successful obtaining money from a bank, an investor, a granting agency, a supplier, or future customer without a business plan that describes the business and validates its financial potential. Help for writing a business plan can be obtained from the SBDC, SCORE, or other small business support groups. There are also books detailing how to write a business plan available at Borders, Barnes & Noble, and Amazon.com. The first author of this book has a business plan book titled Preparing Effective Business Plans: An Entrepreneurial Approach, which can be obtained via Amazon.com or a similar online bookstore.

A second mistake people often make when looking for financing or funding is that they don’t cast their nets wide enough. There are many sources of financing and funding available for small businesses. As a result, it is poor strategy to place too much reliance on some sources of funding and not enough on others.

This section of the chapter outlines the choices that small business owners have for raising start-up funds if needed. The alternatives include bank financing, equity funding, grants, and a few others.

Bank Financing

Historically, commercial banks have not been a practical source of financing for start-up firms. Most banks are relatively conservative and won’t loan money to a business that doesn’t have a proven track record and some type of collateral. That’s not to say that you can’t get a home equity loan to fund part or all of the money you need. It’s just that most banks won’t assume the risk of loaning money directly to a business with an unproven track record. They would rather loan money to an individual who has equity in a home to pledge as collateral.

The Small Business Administration (SBA) Guaranteed Loan Program is a realistic alternative for many business startups. The SBA does not have money to lend but makes it easier for business owners to obtain loans from banks by guaranteeing the loans. Approximately 50% of the 9,000 commercial banks in the United States participate in the Guaranteed Loan Program. The most notable SBA program available to small businesses is the 7(A) Loan Guaranty Program. The loans are for small businesses that are not able to obtain loans on reasonable terms through normal lending channels. Almost all small businesses are eligible to apply for an SBA guaranteed loan. The SBA can guarantee as much as 85% (debt to equity) on loans up to $150,000 and 75% on loans over $150,000. In most cases, the maximum guarantee is $1.5 million. A guaranteed loan can be used for working capital to start a new business or expand an existing one. It can also be used for real estate purchases, renovation, construction, or equipment purchases. The best way to learn more about the SBA Guaranteed Loan Program and determine if you are eligible is to meet with a participating lender.

There are a variety of other avenues that business owners can pursue to borrow money. Credit cards should be used with extreme caution. One channel for borrowing funds that is getting quite a bit of attention is Prosper (www.prosper.com), a peer-to-peer lending network. Prosper is an online auction Web site that matches people who want to borrow money with people who are willing to make loans. Most of the loans made via Prosper are fairly small ($25,000 or less) but might be sufficient to meet a new business’s needs. There are also organizations that lend money to specific demographic groups. For example, Count Me In (www.countmein.org), an advocacy group for female business owners, provides loans of $500 to $10,000 to women starting or growing a business. An organization that is aligned with Count Me In and American Express, named Make Mine a Million $ Business (www.makemineamillion.org), lends up to $45,000 strictly to female-owned startups.

There are also lenders who specialize in "microfinancing" which are very small loans. For example, Accion USA (www.accionusa.org) gives $500 credit-builder loans to people with no credit history. While $500 might not sound like much, it could be enough to start a home-based business such as an eBay store.

Equity Funding

Equity funding is obtaining money from an investor. Investors are typically interested in businesses that plan to grow rapidly and can capture fairly large markets. These businesses normally have a unique business idea, a proven management team, and are shooting to capture large markets.

There are two types of equity investors. The first are referred to as business angels. Business angels are individuals who invest their personal funds directly into startups. They generally invest between $10,000 and $500,000 in a single company and are looking for companies that have the potential to grow 30–40% per year before they are acquired or go public.¹¹ Jeffrey Sohl, the director of the University of New Hampshire’s Center for Venture Research, estimates that only 10–15% of private companies meet that criterion.¹² The one exception that might help you get your foot in the door with an angel investor, if your business doesn’t meet the traditional criteria, is if the purpose of your business is aligned with a personal interest or passion of the investor. For instance, if you’re starting a company to make a safer car seat for infant children and meet an angel investor who has an intense interest in child safety products, you could capture the investor’s attention even if your firm isn’t capable of a 30–40% per year growth rate.

Most business angels remain fairly anonymous and are matched up with business owners through referrals. If you’re interested in pursuing angel funding, you should discreetly work your network of acquaintances (bankers, lawyers, accountants, successful entrepreneurs) to see if anyone can make an appropriate introduction.

The second type of equity investor are venture capitalists. Venture capital firms are limited partnerships of money managers who raise money in "funds" to invest in startups and growing firms. Some of the better known venture capital firms are Kleiner Perkins, Sequoia Capital, and Redpoint Ventures. Similar to business angels, venture capital firms look for a 30–40% annual return on their investments and a total return over the life of investments of 5 to 20 times the initial investments.¹³ The major difference between venture capital firms and business angels is that venture capital firms lend very little money to startups (preferring to wait until a firm proves its product and market) and normally don’t invest less than $1 million in a single firm. As a result, venture capital funding is only practical for a very small number of business startups.

Grants

A potential source of small business funding that does not get enough attention are grants. A grant is a gift of money that does not have to be repaid. While there is no nationwide network for awarding grants to start-up firms, almost every state, city, and local community is trying to find ways to encourage people to start businesses as a means of growing their economies. As a result, there are a growing number of programs available at all levels of government, through the private sector and via foundations, to provide grant money to promising business startups.

Obtaining a grant takes a little detective work. Granting agencies are by nature low-key, so they normally need to be sought out. The best place to inquire about the availability of grants for a particular business is via the SBDC, SCORE, small business incubators, and similar organizations. Although these groups might not have grant money available, they might be able to direct you to organizations that are awarding grants to small businesses in your area.

A typical scenario of a small business that received a grant is provided by Rozalia Williams, the founder of Hidden Curriculum Education (www.hiddencurriculum.com), a for-profit company that offers college life skills courses. To kick-start her business, Williams received a $72,500 grant from Miami Dade Empowerment Trust, a granting agency in Dade County, Florida. The purpose of the Miami Dade Empowerment Trust is to encourage the creation of businesses in disadvantaged neighborhoods of Dade County. The key to William’s success, which is true in most grant awarding situations, is that her business fit nicely with the mission of the granting organization, and she was willing to take her business into the areas the granting agency was committed to improving. After being awarded the grant and conducting her college prep courses in four Dade County neighborhoods over a three-year period, Williams received an additional $100,000 loan from the Miami Dade Empowerment Trust to expand her business. There are also private foundations that grant money to both existing and start-up firms. The MacArthur Foundation, for example, is a private grant awarding agency which recently dedicated $2 million to fund projects dealing with digital media and learning.

The federal government has a pair of grant programs for technology firms. The Small Business Innovation Research (SBIR) program is an established program that provides over $1 billion in cash grants per year to small businesses that are working on projects in specific areas. Each year, 10 federal departments and agencies are required by SBIR to reserve a portion of their research and development funds for awards to small businesses. A list of the agencies that participate, along with an explanation of the application process, is available at www.sba.gov/sbir. A privately owned Web site, SBIRworld (www.sbirworld.org), provides useful tips and advice on how to apply for SBIR grants.

The second program, the Small Business Technology Transfer (STTR) program is similar to the SBIR program except it requires the participation of researchers working at universities or other research institutions. Information about the STTR program can be obtained from the Web sites just identified.

Other Potential Sources of Funding

There are other potential sources of funds available for business startups. Similar to locating grants, finding the money takes a little detective work but could be time well spent. For example, there are an increasing number of business plan competitions held across the United States. Many of the competitions offer cash prizes. There are also an increasing number of small business contests sponsored by companies that sell products to small businesses. An example is the Visa Business Breakthrough Contest, which offers five $10,000 awards to businesses that submit essays explaining how they can become more efficient in one of five categories (finance, marketing, organization, team building, and technology). A simple Google search using the keywords "small business contests" will produce similar examples.

More sophisticated ways of obtaining start-up funds involve asking for cash advances from suppliers or potential customers. Some suppliers, if they recognize that your business has the potential to become a regular customer, will invest in your business or provide your business financing to help it get off the ground. Similarly, if you feel that your product or service will add considerable value for a particular customer and save the customer money, the customer might be willing to prepurchase a certain amount of product, which is a way for you to generate start-up funds. If you’re buying a franchise, you can typically obtain financing through your franchisor. These alternatives need to be investigated on a case-by-case basis.

There are also ways that business owners tap into personal funds, beyond using savings and cash-on-hand. Examples include borrowing against the cash value of a life insurance policy and tapping into a retirement account. You’ll normally need advice from a tax accountant to draw funds from a tax deferred retirement account to finance a business venture.

Summary

It’s important to have the right frame of mind regarding money and the start-up process. Often having abundant funds isn’t necessarily the best thing. Many business owners look back on their start-up years and recall that it was the lack of money that caused them to get creative and develop sound financial habits—attributes that are still serving them well today. Money is also a topic where it pays to be somewhat of a sleuth. There are many sources of start-up funds available, such as grants, business plan competitions, and SBDC guaranteed loans. These sources of funds, however, have to be sought out and tracked down to make an impact on a new company.

The next chapter focuses on the myth that it takes a lot of business experience to start a successful firm. Because most of the businesses we deal with are established companies, it’s easy to believe that they were started by experienced business people and have always run as smoothly as they do. In reality, most businesses were started by people just like you. There are also many forms of experience that are helpful in the business start-up process. You might have vastly underestimated the value of the skills and experiences that you presently have.

Endnotes

1. "How Much Money Does It Take to Start a Small Business?" Wells Fargo/Gallup Small Business Index, (San Francisco: Wells Fargo Bank), August 15, 2006.

2. "Inc. 500," Inc., Special Issue, 2006.

3. Jessica Livingston, Founders at Work: Stories of Startups’ Early Days (New York: Apress, 2008), 259.

4. Jack Canfield and Mark Victor Hansen, Chicken Soup for the Entrepreneur’s Soul (Deerfield Beach: Health Communications, Inc., 2006), 47.

5. Livingston, Founders at Work, 444.

6. Jay Ebben and Alec Johnson, "Bootstrapping in Small Firms: An Empirical Analysis of Change Over Time," Journal of Business Venturing 21 (2006): 851–865.

7. Ladies Who Launch, accessed September 12, 2007 (see chap. 1, n. 4).

8. Ladies Who Launch, accessed April 7, 2007 (see chap. 1, n. 4).

9. Ibid.

10. Caprial and John’s Kitchen home page, http://www.caprialandjohnskitchen.com (accessed September 14, 2007); Shelly Herochik, "Restaurateurs Fit More on the Plate With Help of Loan Program," Bizjournal, http://www.bizjournals.com (accessed September 14, 2007).

11. Jim Melloan, "Angels With Angels," Inc., July 2005.

12. Ibid.

13. PricewaterhouseCoopers, Three Keys to Obtaining Venture Capital (New York: PricewaterhouseCoopers, 2001).