November 29, 2014

Leaving the Elusive Dream of Easy Money Behind

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Editor’s Note: The following is the weekly feature, Today’s Trend, from the Small Business Trends Radio program of April 11, 2006.

Anyone who became an entrepreneur before or during the DotCom boom days of the late 1990s and early 2000s, soon became aware of all the easy money.

Or so they thought.

Who among us has not heard a story that goes something like this: an entrepreneur scribbled an idea for an Internet business on a sheet of paper or even the back of a napkin, and managed to get some venture capital firm to invest millions in it.

Not that I personally know of anyone who successfully used the back-of-the-napkin business plan. But it makes a great story. It’s become an urban legend.

Which brings me around to Today’s Trend. It seems that for a period of several years we were all fixated on venture capital. VC money. Other people’s money. It seemed like money was there for the asking. You just needed to be aggressive enough to go out and get it.

The DotCom crash in 2001 taught us otherwise. Suddenly those VCs were not as friendly anymore. The flow of new fundings dried up. The market for IPOs (initial public offerings) — the end-game for most VCs — dropped out. Reality set in.

Today, with the benefit of hindsight, we see that time as an aberration. Yes there are still technology companies that are getting millions of dollars. But they are few and far between. According to 2002 figures from the Kauffman Foundation’s Global Entrepreneurship Monitor, only 38 in 100,000 businesses received VC money worldwide.

Most entrepreneurs today realize that they have to fund their businesses on their own. The 4 main sources of funding are:

  • credit cards
  • investments from family and friends
  • small business bank loans, including SBA loans
  • customer funding, or what is also known as bootstrapping

Bootstrapping for most small businesses is going to be the main path toward success. Even if you use your credit cards for initial business expenditures, eventually you have to pay those charges back. Money coming in the door from selling your products or services to customers is the ultimate source of financing for the vast majority of small businesses.

Yes, we went through a period of several years where we got confused and thought VC money was the answer. Today we know better. In fact, it has become the “in” thing to finance your own business. Bootstrapping is where it’s at today.

And that concludes Today’s Trend.

To listen to the Small Business Trends Radio program that included this segment, go to “How to Start a Business with No Money” for download options and show notes.

4 Comments ▼

Anita Campbell - CEO


Anita Campbell Anita Campbell is the Founder and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses, and also serves as CEO of TweakYourBiz.com.

4 Reactions

  1. Hi Anita,

    I did know someone who did receive VC money on the back of a napkin plan. He was a computer hardware salesman with no aspirations of becoming an entrepreneur. He had an idea (which I didn’t think was sound) but had a friend who knew someone who made lots of cash in the dot com boom. Bottom line I agree, getting this sort of funding is a rare occurrence and budding entrepreneurs will need to be self-funded for good ideas rather than chase the VCs.

    Regards
    Black
    LeverageYourEffort.com

  2. Hi Black,

    Somebody who actually used the back of the napkin business plan!

    Those were crazy days. Sometimes a little part of me wishes we could go back and “party like it’s 1999.” But, then I come to my senses — all good parties have to come to an end. Eventually you have to get back to real life.

    Thanks for sharing that. I appreciate the story.

    Best,
    Anita

  3. I read years back that VC money is not the route to go. I can see why its desired. Why be concerned with where funding comes from when there are bigger things to worry about?

    Nevertheless, this is a good reminder.

  4. Need to realize that there are a lot of us who went the VC route the last time, who do not want VC money this time. There is a lot of VC out there and though the VC’s may be more critical in their evaluations, there is less demand for VC today because many entrepreneurs like me do not want it. That skews the results from the study.

    We’re focused on revenues and early profitability from the get go. In addition, the costs of web development and the like are a fraction of what they were in the late ’90’s.

    Getting money from a VC is no sign of success. In some cases it may even mean you need to go back and examine your business model. Working on getting VC takes an entrepreneur away from operations in soliciting dollars, structuring a deal, and ties up a lot of time on reports to and working with the VC’s after the money has been obtained.

    Finally, getting VC money is agreeing to sell the company. There is not going to be an IPO. Selling or merger is the only liquidation event for a VC. So if quick flip of company is not goal, then there may be an early conflict of interest between entrepreneur and VC.

    VC may be right for some folks, but for many of us self funding is more desirable.

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