Startups · Early stage

Best way to build and make scratch as a cash-strapped startup founder with multiple paths to take?

Anonymous

April 10th, 2016

So I'm an industry consultant with several years experience living in one of the nations tech hubs. Currently solo founder within the same industry I've consulted in for over 5 years - with clients ranging from small businesses to large fortune 500 and even well known .Coms.

I'm currently strapped for cash, have spotted a fantastic multi-billion dollar market, and am working on several patents. I have an incredible strategy put together and am completing prototype. The R&D caught up with me. Though my costs are extremely low, because I have several roommates I do have a few debts I've racked up in this time. Nothing bigger than $10k. I can launch soon my first prototype within about three months.

Last year I was able to sell two contracts of my consulting services - they kind of fell in my lap I didn't go out and find them - and each netted about $25k. Both strong multimillion dollar clients. I am confident in my ability to sell, and back up what I sell. One of my products helped a company net a multimillion dollar set of contracts. The other company gained one million dollar contract. I've also worked on very large software platforms.

The consulting industry has become a little saturated though - so I find that clients haven't just been falling into my lap as before. There are a lot of newbies that say they are experts but are really not. So I know I'd have to do a bit more work in advertising, but at the same time I wonder if it's worth it. I don't want to have a mm agency in several years, but rather a successful tech startup.

Also, it's important to me to maintain control over the product and direction of the company - to save time and money. It's one reason I haven't raised capital or gotten partners. These days it can be tough. People want to put in a needle and pull off an arm, and I've already spent about one year work of work to complete 80% of the startup (from the tech, to branding, and business processes to make the vision and strategy come together).

I'm a straight shooter that's extremely honest - one handshake deal kind of a guy. I understand that I need to share the pie to grow the pie, but I trust myself to be fair and honest more than others, whether it helps or hurts me. Integrity means a lot to me and that's the kind of businessman I've strived to be. I've been burned by one sales guy that I took a chance on - friend of a friend - I was super busy with work and he walked away with $3k. At the time he was desperate when I forwarded him the cash, then he quit two weeks early. Lessons learned.

Same time, companies are trying to hire more. I have been approached with sr., director, and vp level positions. I'm taking many many career risks to accomplish my vision but am confident that it will happen. Most pay minimum $130k-$200k (plus benefits, and stock).

So I'm in a little bit of a vacuum. I just turned 33 and don't have a wife or kids - and kept it that way to grow the startup. I've risked a lot to get here and it's paid off, now just thinking through next steps.

I've been on a super-shoestring budget so can make due on $1500 per month. The Startup - to get it off the ground - will be another $500 a month. So I can launch this solo..pretty sure. Gather data. Build more and in stealth mode. Then ramp up production speed as cashflow is generated, partners are plugged in, and investors are on the horizon. That's kind of the plan here, to build solo and then leverage my position.

There are a few options but each comes with it's own setbacks. I'll explain. Please provide your input on best option. Thanks!~

1. Take full time job making min $60/hr ($120k annual). Complete startup on side. Launch startup, save money, get investors and partners then leave day job.
-> Advantages: able to work on project, fund personal and project expenses.
-> Disadvantages: won't have as much time. Will be consumed by 50-60hr a week job and might miss opportunities.

2. Take remote part time job making $60/hr minimum, invest in marketing campaign, sell more contracts. Generate cash.Launch startup, save money, get investors and partners then leave day job.
-> Advantages: able to work on project, fund personal and project expenses.
-> Disadvantages: won't have as much time. Will be consumed by 70-80hr a week job plus advertising efforts and miss even more on opportunities.

3. Take part-time job for option 1 or 2 above.
-> Advantages: able to work on project with ample time.
-> Disadvantages: won't be able to make as much as I would consulting.

4. Take remote job for option 1 or 2 above.
-> Advantages: able to work on project, save time on commute, maybe even sell a contract with team.
-> Disadvantages: will not make as much as I did consulting.

5. Stick to consulting.
-> Advantages: more cash plus freedom to work on R&D.
-> Disadvantages: might be one month or more before new sale, and have to invest in marketing and infrastructure and maintenance to keep sales steady.
A great idea is 1% of the work. Execution is the other 99%. In this course, we’ll teach you how to conduct market analysis, create an MVP and pivot (if needed), launch your business, survey customers, iterate your product/service based on feedback, and gain traction quickly.

Mike Moyer

April 10th, 2016

Whatever direction you decide to take, please use the Slicing Pie model for equity allocation and recovery. The Slicing Pie model provides a formula for creating a perfectly fair equity split for all participants in a bootstrapped startup. This will allow you to easily work with others and make sure each person (including you) gets the equity he or she deserves, but also it will protect the company (and the participants) from getting taken advantage of.

Slicing Pie is the only equity model on the planet that can guarantee a fair equity split. 

If you want to learn more you can search "Slicing Pie" online or send me a note through SlicingPie.com and I will provide everything you need to know. 

Joe Emison Chief Information Officer at Xceligent

April 10th, 2016

I don't think you'll find many startups that got anywhere near product-market fit without the CEO being full-time. It's the very rare exception that managed to do that.

That said, it is certainly possible for the CEO to be focusing full-time and everyone else to be working day jobs. But someone has to be waking up every day and have the focus and energy to move the ball every day.

Matthew Stroul IT Business Analyst & Support Engineer helping people, processes and tools be more awesome versions of themselves.

April 10th, 2016

Joe Emison's response is direct and simple, and I am approaching a similar transition but 10 years older than you. 

I have been in the mechanics of dozens of startups or spun off divisions over the years, and there is no difference. The hustle is the hustle. 

Here are my challenges to you: 
  1. The business is separate from you. It has it's OWN needs for cash, staff, mechanicals, etc.
  2. YOU are first because without you the company cannot be formed if you are homeless or dead, but be rest assured someone else is already working on your concept.
  3. There is an investment group, think tank, incubator, funds, etc for EVERY stage of your business's life

If you are a consultant already then you can and should market yourself to make ends meet FOR YOURSELF. As an entrepreneur any J.O.B. is temporary anyway and should be treated as a contract. 

You mentioned patents, you bragged on your compensation rates a little, and even shared that you are a straight shooter. You said your concept was a billion dollar level. What you did NOT mention is where you are in your ability to have conversations about investment at each stage. 

I will focus the rest of my response on this gap, and illustrate a potential pathway forward, and help you better manage expectations for next steps. 

SEED / Pre-GoLive
Seed capital is exactly what you are describing you need. You have the business concept down, you are working on securing core components via patent applications (takes forever), and you are likely chipping away at those relationships required to manufacture the technology demonstrator (unless you are the inventor/scientist) in which case you should be cultivating relationships with those to help wrap a business around your discovery/technology/solution etc. 

SEED Capital Investors: Friends, family, and those that may potentially benefit from the application of your tech/solution/interruption (aka pre-sales). These amounts will be small-ish, and you should ONLY take on just enough to get the core team together and a demonstrator built.

The number of rounds you will need of seed will be based on you and your team's ability to produce a working model that demonstrates the viability of your solution AND the business collateral showing how you are going to go to the next level. 

ANGEL / Post Solution
You and your team have your solution, and now you need to construct the business around it. You will need a COMPLETE business plan, financials, the end to end mechanics in order to get the larger investments to push for refinement and adding business personnel to take on your first customers. 

Angel Investors: Angel investors are a VERY special kind of human. If you choose wisely - they will likely be active and help mentor you, while others may just be looking for you to fail. Your first customers become de-facto Angels as well, and they will know this. They will have extraordinary access to you as you grow, and they will help themselves by shaping the first versions to benefit them the most. 

The more flexible & interactive your business plan while presenting an easy to relate business model the easier it is to find fewer Angels and for higher commits. 

Stage 1, 2, 3 // I, II, III // A, B, C
With a handful of customers, a refined business model, plan & staff, plus a year of operations experience you will EITHER be preparing to SELL or BUILD, and in EITHER case you will need BOTH sales AND investment capital to scale. How masterful you are at marketing, delivery of your product to the market, and support of your product's implementation will determine sales and volume of sales will determine how much you will need. 

If you are going public / selling : taking on too much Stage 1 & 2 too quickly is a concern. Knowing how much staff, how much business activity via analytics to create a derivative for the investment community will be necessary. If you business is a one-time disruption then scaling for public is the fastest way to sell to an established brand and exit early. 

If you are "staying and playing" :
then your goal will be to add the right staff, marketing, and focusing on channelizing your sales. This is a slower road, but you are able to take in all of the scenery and arrive at your destination enlightened from all that you have seen on the way. 

AT ALL POINTS the more well designed your investor experience is, the more clear yet rich the business plan, and the more readily it is to be shared with investors and soon employees alike - the easier it is to gain both the capital you need AND the talent pool required to execute your awesome. 

Prem Bajaj Chief Advisor at PB Corp Advisors

April 10th, 2016

hi. my opinion, the option 2 (remote part time) is better provided you are able to project the earnings and meet the requirements. being remote/part time will also permit flexibility in developing your startup plans and improvise further before full launch. although, if the remote/part time will accomplish the income goals targeted to meet the monthly dues and related expenses for the startup development, you may have to sacrifice time on the startup and go the full time…. make good money, and review the launch plan. meanwhile, you will always be connecting with people and sharing ideas/plans from the day job, and the hobby startup - and good probability to find a suitable partner.

Joe Emison Chief Information Officer at Xceligent

April 10th, 2016

I would honestly look if you could get some friends/family funding, or, barring that, angel funding that won't require control or a huge percentage of equity.

You need to focus on the opportunity if you're going to do it properly. I personally don't think part-time works if you're the CEO, because whether the venture goes forward, and the focus with which the venture goes forward is entirely on you. What you think is 3 months of work if you could dedicate yourself full-time to it is going to be 12+ months if you have the "distraction" of working a job to pay to eat and house yourself.

One other option you have that you haven't mentioned is pre-selling your solution to future customers. If you're talking to multi-billion-dollar firms that will want the product, you presumably could get some pre-sale commitments to help fund development. You could pre-sell the product as bespoke development for the company, and structure it so that you keep the IP and can relicense to others.

You could also leverage some pre-sale LOIs to help raise debt funding from friends/family or friendly angels (harder to do, but if they're strong enough contracts, doable).

Eugene Gekhter CEO, Memorable. Founder, SharePay.

April 10th, 2016

We have a lot in common and I would love to chat with you so we could figure this out together. Feel free to reach out.

Martin Omansky Independent Venture Capital & Private Equity Professional

April 10th, 2016

You can't do a start-up without your own cash. Even early-stage companies need funds for (1) patent searches; (2) legal services; (3) filing fees; and (4) 1-2 yrs. salary to support you during development time and ramp-up. Don't go into business without your own cash. Very early money from investors is confiscatory money. Sent from my iPhone

Martin Omansky Independent Venture Capital & Private Equity Professional

April 11th, 2016

I have lots of scar tissue.  Was an inventor, CEO, investment banker, & fund manager. Willing to help.

RP

April 12th, 2016

You said a couple of things in your overview that make a path forward clear at least from my perspective:

1) you need $1500 + $500/mo
2) you've had a number of offers (or approaches) for $130-200K

- at $60/hr, your combined run rate is 33 hours per month
- offers translate to $60/hr, or at 60 hrs/wk, $40-60/hr

It seems to me that you need a part time job (or contracts) that get you to your minimum "ramen rate", freeing you up to work the other 75% of your time on your startup.  Perhaps those that approached you would be open to you helping them in a part time capacity.  If they are as impressed with you as I inferred from your overview, that should be convertable.

You also said you're three months away from first prototype, meaning you're $6,000 from the stage at which it will become feasible to pre-sell or work with your first customer for next stage.  $6K should be beg/borrow from friends/family, and if your solution has as much potential as you say, you should be able to convince them.  Yes, you will have to give away some of the farm - which is why I also echo Mike's comments about Slicing Pie - he wrote it, I read it, I love the concept and how it speaks to being a person of integrity.

Take a part time (remote better to save travel) only to get you to your ramen rate, spend the rest of your time on your startup then presell after first prototype.  Use the Slicing Pie formulae to bring on help without feeling like you're giving away your arm (you'll need it ;)

Andre Sr. Managing Partner | Business Funding | Speaker | Mentor

April 11th, 2016

Lots of information missing. What is your proof of concept for your product? Has anyone suscribed or written you a check? What is your value proposition? You should not ask for advise if you can't or are unwilling to give a better understanding of what tou do! You need to be able to explain what you do without giving away your secret sauce and if you can't you don't have a business! Don't be a pretend-preneur.