In the second of a two-part series, the author explains how to fund your business from within, via customers, consulting, and cost control. Sometimes it’s best to bootstrap before seeking a structured financing round with outside sources. In this column, I’ll talk about financing your business without going to someone else for money — via customers, consulting, and cost control. Customers One of the most traditional ways to fund your company is to have your customers fund your growth. Wow, what a concept! In the days of the high-tech Internet boom, entrepreneurs all but forgot what spurred a lot of the biggest businesses around: selling products to customers and funneling the revenue back into the company’s operations and development. This is a great way to maintain control of your company and generate positive cash flow. Take this example: One of the startup companies I worked with had a client that needed its sales executives to be more effective at managing its third-party resellers. The startup company had a sales-force compensation product that, with a few enhancements, would have solved the customer’s problem beautifully. Trouble was, the startup didn’t have the funding to take on this project. Solution? We negotiated with the customer who agreed to fund the product development. We knew that, in time, the startup could sell this enhanced product to other companies, so it was worth what initially appeared to be a distraction. The customer paid $200,000 for the product enhancements and agreed to license it on an annual basis. The startup agreed to give the customer an exclusivity period, meaning that it wouldn’t sell the product to a short list of direct competitors for 90 days. Dollars and Sense Customer-funded product development deals have come in handy many times. The biggest deal I’ve seen was an $800,000 infusion to a startup from a chip manufacturer to fund the development of technology that the manufacturer planned to license. To make this type of deal happen, you usually need a couple of customers first so that the funding customer has confidence in your ability to deliver. You also should have sophisticated board members or advisers to help you negotiate the deal if you haven’t done one before. If you must offer an exclusivity period, start with three months. If you have to increase that to six months to get the deal done, make sure it makes business sense. Get a guaranteed order size (and make it big). And, of course, have your attorney involved in the entire process so he or she can make sure product-ownership is abundantly clear. You own it, and the customer licenses it for a period of time. You will also want to make sure you’re filing patents for any key technology you develop. Consulting If you can offer consulting services to fund the cost of operations and product development, do it. Your knowledge can be a valuable commodity. In the first example I mentioned above, the startup provided consulting on how to compensate both internal and external sales forces, how to track sales quotas, and how to administer payments. Many startups have self-funded this way. Later, when the company was ready to release its first product, it was already in a great financial position. It had existing sales, happy customers, and a nice cash cushion. It had maintained full ownership and control of the company due to not needing outside investors. Now it could choose to take on equity or debt financing, and the company would have a higher value than if it had chosen external financing. Cost Control Whenever you can cut costs without reducing your ability to develop and sell products or services, do it. Potential financiers will want to know your “burn rate”—the rate at which your company is consuming cash on a monthly basis. Knowing this helps financiers evaluate the current and projected amount of cash your company will require for general operations. If, for instance, your company has significant infrastructure expenses or complicated manufacturing, your financing needs will be larger and your deal will be scrutinized more closely. In this case, you will have to justify every significant expense and offer ideas for reducing them. When I say “every significant expense,” I mean it. Don’t neglect the obvious. Full-time employees are expensive. Several roles can be filled by either part-timers or by hourly contractors. For sales and marketing needs, several companies I know have hired unemployed actors on an hourly basis. Actors are great at reading scripts and infusing their voice with enthusiasm. If managed properly, they can generate and qualify sales leads over the phone. Take the ones with the strongest selling skills, the ones who are comfortable asking for sales orders, and have them do telephone or Web-based sales. Give them a quota. In my previous companies, we used contract salespeople and paid them commission only—20% to 25% on their sales. Contractors may not be as committed as employees, but you can offer incentives to increase their loyalty. Pay them bonuses based on results, refer other clients to them, and know what your contractors care about and help them achieve their goals. If you are a key source of business for them, they’ll have a lot at stake in maintaining the relationship. Check out Web sites such as http://www.elance.com, http://www.craigslist.org, and http://www.teamdoubleclick.com to find contractors with varieties of skill sets. Ask around, too. Through friends, we found a guy based in India for graphic design, marketing materials, and Web site design work. He does terrific work at a reasonable price. Drop a Line No matter which of the three Cs you rely on — and I’ve tried them all (often at the same time) — internally bootstrapping your business will help you keep control and will certainly put you in a powerful position. And if you do seek external financing later, you will do a better job negotiating knowing you can always walk away and fund yourself on your own terms.