Funding

[ Just added this to my new series on Antipatterns ]

A mistake I myself have made as well as many other smalltime entrepreneurs is that we have wanted to appear like a business to early. Symptoms of this are things like:

• Incorporating
• Renting office space
• Buying a fax machine (You know a business needs one)
• Fancy stationary
• Fancy graphic designers
• Multiple fault tolerant high availability servers
• Human resources officer (If you’re a startup and have one these you really are on the slippery slope)
• etc. etc.

These are all fine at the correct phase of your business, but don’t waste these huge money suckers without an actual need.

I for example have rented a server which hasn’t really been in use since february. That is ¢49 out the door every month. Stupid really. Now is when I need it and I could have saved ¢147.

I also just bought business cards from VistaPrint because I’m going to Reboot in a couple of weeks and it’s handy to have at such events, but if not it would have been a waste of money at this time.

If you think about it one of the traps that leads to big businessitis is playing a business. This is often necessary if you want to attract venture capital, after all they want to know that you are serious and have things like a fax or an hr department. But really, I think the businesses who really succeed are the ones that focus on their business model and not how they appear outwards.

Last year I wrote a long pice The Electronic Micro Venture in which I outlined these 6 simple rules to help launch and fund a transparent micro venture.

As these are very important to what I am doing right now it I will keep an updated version of the 6 rules here.

These rules are somewhat inspired by The Cluetrain Manifesto, The Agile Manifesto and Joi Ito’s essay Emergent Democracy :

1. Focus on one and only one clearly defined economic activity.

You need to be able to model and audit this in real time. Create another entity for each related activity. If you need to group them together create a new parent entity, whose only focus is as a kind of mutual fund investing in it’s child entities. This also distributes it’s profits that it receives from it’s holdings direct to it’s share holders.

The revenue model should be very easy to understand. Model it out and create an online revenue calculator. This will help share holders understand and focus on the business at hand.

2. Distribute revenue early and often.

Depending on the exact revenue model, distribute in realtime or on a weekly basis. If deemed necessary keep a limited reserve in the venture, but distribute everything else to the share holders. This helps the transparency and motivates all parties to focus on 1.

3. Attempt to eliminate the burn rate.

If at all possible reduce all fixed costs. I’m not just saying what the GAAP says are fixed costs. The idea that consultants fees and monthly hosting fees are dynamic expenses are a left over from the industrial era. Any fixed costs need to be funded by you or an investor. So keep them small and transparent. Each one should be justified publically. If at all possible eliminate the burn entirely by offering shares to a stakeholder responsible for managing one particular function (see 6.)

4. Pay stakeholders with shares, not cash.

Salaries, wages and consulting fees are NOT transparent nor do they make sense in a massively networked world. Pay developers, staff and suppliers with shares. Due to rule 2. they will start receiving funds quickly. This focuses all parties on Rule. 1.

5. Keep a flat democratic command structure.

Representative democracty is NOT transparent. We are all on the internet now, there is no longer a need nor excuse for the traditional 3 layer structure of (officers, directors and shareholders). Utilize Blogs, Wiki’s, Discussion Forums and email to maximum ability.

6. Outsource Capital Costs

The traditional lump sum funding method is not transparent. If there are any major capital costs outline each one them when seeking funding. As an example in my hosting company we have the following capital costs:

• Server hosting
• Completed Transaction Processing Server customized for the hosting business.

For me the two of them are worth each say 25% of the company. Now an investor might want to offer $20,000 so I could buy the servers and pay for hosting until the venture is profitable. However I would receive the same value if a hosting company offered to handle the physical server hosting on an ongoing basis in return for 25 of the shares. The same thing is true for the software development. Traditionally the vc would pay a large lump sum to handle all the developers salaries. Offering 25 of the company to whoever solves the problem is better. Maybe a guy with big pockets could hire a team of developers in Hydrabad to do it or maybe a guy in Hydrabad or Talinn decides to bid for it himself.

If you do end up with a burn rate. Fund it as a kind of reverse option. Investor B. guarantees a maximum of $500pm for 12 months. When the venture needs it to cover it’s burn, it calls the monthly option.

update I have created a presentation over on my latest project SoapBX following up on my ideas for micro ventures. Have a look your self Six simple rules for Micro Ventures

When you are bootstrapping you are basically starting from scratch, using your own savings, income and as soon as possible cashflow generated from the new business to grow. When you are bootstrapping though it isn’t only cash you need, but also sweat … and lots of it. Which is why balancing your time is really part of the funding process.

I think most bootstrappers start out like me with a day job. I have tried it the hard way before from meager savings and it aint fun. You start loosing focus from your business by worrying about where the next meal is going to come from. Which is why I left the comforts and low costs of Panama to live with a day job in high cost Denmark.

The day job thing is tricky though. Consulting is great for us IT types as it is generally project oriented work. You also don’t want the kind of job where you have to worry about it when you leave the office. Strictlyish 9-5 is key. Of course at times you need to be flexible, but you really want to have the kind of job where you have energy to work on your startup in the mornings and/or evenings. All of these I know from experience.

So how do I do it right now? I am working as a consulting technical architect at a major Danish financial institution. Once I leave work I really don’t have to think about it again until I come back the next day. It’s probably as perfect as a 9-5 comes.

I do about an hours worth of work on my startup in the mornings, about 4-6 in the evenings and most of the weekend. If you are married like I am this requires a patient wife. How we do it is that on weekends and mornings I work in my office. During the evenings I work with my powerbook on my lap in the sofa next to my wife, so we can still talk, laugh and what have you together while I’m working. It works out pretty good, but seriously Lety I love you, you are an angel.