As I type this, I'm sitting in a cushy corporate office at the top floor of our executive tower overlooking the river and city skyline, remembering what life was like 8 years ago when I started my first real company. A group of guys and I (see www.juntopartners.com) were working out of a building that was in the process of being gutted for renovation. One of my partners happened to be friends with the owner, who allowed us to work there for free until renovation made its way down to the 2nd floor, at which time we would need to find a new home. We paid for internet and phone service. We painted some walls, but never got around to the moldings and other finish work. Often, we'd be hammering away at our work past midnight when someone would suggest a run to Circle K for a Diet Coke or a trip to Beto's for an authentic Mexican breakfast burrito (since we were all Mormon guys, there was no coffee pot to keep us alert). Every desk, chair, printer and white board was acquired for cheap or free…and it showed. We wore designer jeans and sports coats most days, because it was the trendy thing to do and also probably because we couldn’t afford the full suit. I moved into a crummy basement studio which still gives me nightmares to this day.
We had secured a small amount of seed capital totaling $287,500...which felt like a lot to me as a 23 yr old kid still working to finish my undergrad. Soon we started to see how quickly business expenses can escalate and learned to master an important skill: commandeering resources. In less euphemistic language, this meant we learned to beg, borrow or "steal" whatever we possibly could in order to survive as a business. I don't know that any of us actually stole anything of material value, but we certainly overpromised suppliers and business partners in a less than straightforward manner. I had set off as an entrepreneur believing that good ideas and hard work could overcome any challenge ahead. In some ways I proved myself right. Looking back however, I now know how critical it is to be sufficiently capitalized in order to maintain momentum as a small business...especially in the face of life's other challenges. That's why entrepreneurs give so much attention to what is happening in the private equity landscape, and place VC's on such a high pedestal. While most young entrepreneurs know very little about the specifics of that world, they know that when their baby (their start-up) is sick and fledgling, VCs or Angels might be their only lifeline. Why is this the case? I’ll offer up a few reasons…
1. Unlike the Winklevoss twins (if you haven’t heard of them, just read into the founding of Facebook), most entrepreneurs in America do not come from wealthy families. In fact, many are second generation Americans like myself whose inheritance consists solely of being an American. Most entrepreneurs have few friends and family to turn to when they need an influx of capital. Or often they’ve already exhausted those sources.
2. Traditional banks do not like to risk capital on unproven entrepreneurs. They typically require collateral and long (flawless) credit histories in order to lend money to an entrepreneur. After the financial debacle of 2008, this has only gotten stricter. Even if lending laws were relaxed, few bankers would stomach the risk for early stage startups.
3. Because entrepreneurs face a life of uncertain and unpredictable income, they rarely have a large nest egg or significant home equity accumulated. If they had they probably would’ve used that to seed their business, and would still find themselves in a pinch as the business hits difficult times.
4. Lastly, and perhaps one of the main reasons for the scarcity of startup capital, SEC regulations prevent entrepreneurs from actively seeking investments from the general public.
Game Changer
According to the New York Times one aspect of proposed job stimulus packages that has bipartisan support is a proposal to loosen securities regulations for small businesses in raising capital. Specifically, the proposal would allow for crowdfunding, or pooling small investments from many sources in exchange for interest or equity. Currently, this is against the law. Services such as Kickstarter and Kiva provide opportunities for people to donate funds to ideas they believe in. However, as the NYT points out, this is philanthropy. You see, under current laws, only wealthy investors (aka sophisticated investors) may invest in non-registered ventures. This has worked great for VCs and Angels, and one might even argue it has protected less sophisticated investors from being conned by shady entrepreneurs…but it has been severely limited cash infusion for entrepreneurship, and thereby has limited job creation. It’s time that the government allows people to be individually accountable for their investment decisions. This will open the door to great opportunities for wise investors and trustworthy entrepreneurs.
Back to my story…
A few years into my startup, (a garage makeover company called Garage Mahal) my life circumstances changed at the same time that the economy (specifically the residential construction sector) began to cool off. My young wife was pregnant with our second daughter and we were feeling the financial pressure. I had a backlog of work orders, and a sizable sum in accounts receivables, but my revolving line of credit at Wells Fargo was nearly maxed out, I had burned through the seed money above, and I had already tapped my friends and family to the limit. I tried everything I could to collect on the tens of thousands of dollars in accounts receivable, but as they say, “you can’t pump water from a dry well.” Contractors that I sold to were up to their ears in debt and because the market had slowed they were getting killed on the interest they carried from financing their construction projects. Wells Fargo wasn’t ready to extend my credit limit since we were still new as a company. VCs were focused on high-tech sexy startups…not cash strained (albeit profitable) garage makeover companies. I couldn’t exactly go door-to-door and ask for an investment (remember the SEC regulations)… so I was stuck with what I saw as two options. Option 1: my family would starve while we continued to struggle to create organic growth and fight to collect the cash owed to us; or Option 2: we could liquidate the assets, allowing us to break-even on our debts and walk away with a relatively clean slate. I believed I could find a steady job that provided insurance, a critical need for my young family with another baby on the way…so that’s the direction we went. I often wonder, however, what could have happened differently if we had another funding source at that time (E.g. crowdfunding), to help the company through that period of friction. There were signs that Garage Mahal could have been big, or at least successful enough to fund my next venture in what would have been a lifelong commitment to entrepreneurship. Instead, I’ll have to look for another opportunity to pursue that lifelong dream…delaying the jobs that would have been created and the opportunities that would have followed.
I hope our public leaders will take this seriously and empower more entrepreneurs to pursue their dreams.
