Posted by: DrAlanRae | August 5, 2009

Cash – In part 2

Whenever we’ve been putting up the money we’ve bootstrapped. In our second business I spent 6 months on the phone cold calling and managed to get enough orders to finance an office manager and the first salesman. Once it was rolling it was a nice little business that lasted 10 years. This is not to say that we didn’t use overdraft facilities nor that we didn’t use our suppliers to fund it.

Basically I used to ask for cheque on installation (we were selling CAD systems) and expect to get paid in 15 days and I would take 45 days credit instead of the 30 we were supposed to have. That meant I had 70%+VAT of a month’s turnover (usually around £50-60k) of other people’s money in the bank to fund the business.

However if we had wanted to expand seriously I would have had to raise some more money (I didn’t know that then – I still believed in continuous organic growth.) That would have meant an angel.

Angels are generally good for a couple of hundred thousand and they will see you through the development phase until the point at which you are ready to go through the full scalability transition to dominate a small global niche. This is going to need the full VC treatment to pay for that expandable IT system and all that marketing. They’ll be looking for a proven business model and a strong team.

Angels are more flexible. But as it says on the diagram in the previous post, they have a maximum amount of money to lend while a VC has a minimum amount that they’ll commit to. As the old saying goes it’s easier to get £250k than £25k.

Anyway back to our angelic experiences.  Uncle Zak was mustard in some ways. We used to call him dealmaker pro. He was really good at trying to get 4 major players to fund his schemes by telling them that the other 3 were in the running. I’ve known him raise £40k like that. But being a corporate lifer he had no real idea of what running a small business was about. Ruthless control of costs is easy to say but needs an attention span greater than you have if you’re in hot pursuit of the next deal.

Don’t get me wrong – I enjoyed working with him and liked him as a man. But 25 years of running businesses leads to a hard dry wisdom. And angels want their money back. We had some great times and did some great work but in the end he took too much money out chasing pet projects. (Been there too – we used to have pretensions to be software developers once upon a time) and he ended up merging us with some corporate weasels who I didn’t really like very much.

So we jumped ship after about 6 months to set up our current business which has been funded from retained profits except for the bank loan to buy the nursery. As you can see, banks have their uses – but don’t expect them to understand your business or advise you.

Business plans are about people and proven business models. In our current business we’ve managed to meet the targets that we gave to the bank – which were less than we expected to hit. You need some wriggle room after all. That’s what you need to be able to come up with if you are going to get serious players to part with their money. However friends fools and family are often more forgiving.

So start with them.

Don’t unless you’re desperate, max out your credit cards and I would say that Rich Dad’s advice to always pay yourself first is good advice. It forces you to go out and earn to pay the others. Otherwise you become used to genteel poverty. Which is not what you signed up for – I hope.

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