In today’s media climate of irrational entrepreneurial exuberance, it’s all about raising that venture capital. Reality, however, is much different.
Most businesses, especially of the freelance and solopreneur variety, will never raise money from investors, nor should they. Bootstrapping is even making a comeback that resembles a movement in reaction to the silliness of the venture world.
In today’s episode, Rainmaker Digital CFO Sean Jackson joins us to share his experiences with various forms of business finance, ranging from the buttoned-up to the ultra-creative.
We discuss:
- The virtues of savings and bootstrapping
- How to avoid the perils of “friends and family cash
- Strategically using personal credit cards
- The ABC approach to funding your business
- How to think about lines of credit and home equity
- Why pre-selling and Kickstarters work so well
- What professional investors are looking for
- The hidden power of collaboration
The Show Notes
Transcript
How to Get Money to Make Money
Sean Jackson: This is Sean Jackson, CFO of Rainmaker Digital, and I am highly unemployable.
Voiceover: Welcome to Unemployable, the show for people who can get a job, they’re just not inclined to take one — and that’s putting it gently. If you’re a freelancer or solopreneur, Unemployable is the place to get actionable advice for growing your business, improving your processes, and enjoying greater freedom day to day. To get the full experience, register at no charge at Unemployable.com. You’ll get access to upcoming webinars and more. That’s Unemployable.com.
Brian Clark: Hey there, Everyone, welcome to Unemployable. I am your host, Brian Clark. I am the CEO of Rainmaker Digital. Today I have my business partner and super financial whiz Sean Jackson on the line. We’re going to talk about creative and maybe not so creative ways to get money for your business.
Now, we’re talking about it could be a startup. Maybe you’re just about to leave the j-o-b, and you’re trying to figure out how you’re going to make it through that crucial initial startup period. Or perhaps, and probably more likely, you’re already out there and you need to expand your business. Or you’re trying to do your side hustle to grow into a new business and a little more capital would certainly help you get things done. This is an eternal question.
As a multiple time bootstrapped entrepreneur, I have been nothing but creative in finding ways to get things done that haven’t involved investors. Now, we will touch on investors at the end, because it’s not something we should just dismiss outright, but it’s definitely something you should save for last.
Sean, thanks for being with us. How are you doing today?
Sean Jackson: Fantastic, Brian. Thank you for having me on.
The One General Rule of Small Business Finance
Brian Clark: Absolutely. Okay, so I know we both agreed that there’s one general rule of small business finance, which is the most frustrating thing I think I’ve ever encountered, but then again, that’s what forces the creativity, and what is that Sean?
Sean Jackson: It is when you absolutely don’t need the money, everybody wants to give it to you. And when you do need the money, nobody wants to give it to you.
Brian Clark: Amen.
Sean Jackson: Yeah, it’s really frustrating. I mean, there’s no question. And it’s really about risk. That whole statement, while very funny, is also about when you don’t need it, your risks are at the lowest, and when you really do need it, your risks are at the highest. That’s why it becomes so difficult. It’s all about risk.
Your Own Money in the Bank
Brian Clark: Yeah, absolutely. So, let’s kind of take this in order of “It would be great if it were this way and then we’ll work our way through that.
So, when I quit practicing law in 1998, I took the leap and we know how clueless I was at the time and how that turned out to be a blessing. But it was still crazy, and I had money in the bank. Not enough, frankly. It’s interesting, because if you would’ve asked me that day I quit, “Brian, you’re going to end up practicing law again as a solo on your own, developing your own clients, all that, I would have scoffed at you and said, “There’s no way.
And yet, it was the initial struggle and then figuring out things, thanks to Mr. Godin in Permission Marketing that I needed something to sell. I owe everything to the fact that I ran out of savings and had to make due. And then that law firm, it led to a lot of opportunities to finance the next thing. But most importantly, it just paid the bills while I figured out the next business.
So, you started several things. Was there ever a time where it was just you and some cash in the bank?
Sean Jackson: Yes, there was actually. I’ve gone back and forth between owning my own business, selling and coming out. And I remember when I worked for this company, I had a big giant bonus and that was the best time for me to quit, because I had this bonus, this cash money right there. It was fairly significant, and I said, “If I’m going to leave, now’s the time to do it.
But here’s the thing, I always think about money, especially capital in business, you either have too little or too much. It’s never just the right amount. And in that case, it seemed like a lot, but it was actually too little, because things always take more time than you think they are.
But yes, starting a business with cash in the bank right there does make you a little bit more prudent in how you spend your money. It also gives you a little bit of security, because you can really map out how long that’s going to last you. So yes, absolutely, cash in the bank or if you sell an asset of some sort and put that cash in the bank, that’s probably one of the better ways to just start off.
Brian Clark: Yeah, absolutely. I seem to recall that I quit that nice law firm job in January after my Christmas bonus.
Sean Jackson: Exactly.
Money from Friends and Family
Brian Clark: Been reading some recent articles that were kind of jarring in a way, because it was basically an indictment on our entrepreneurial culture that said the people that succeed as entrepreneurs are the kids of rich people who get funding from their parents or other relatives or maybe even friends. And the friends and family thing, it is fairly common.
I’ve never done it, because I have my own issues with what happens when that goes sideways. I know you have done it one time, and without specifics, I think you learned some lessons from that. Maybe you could share those.
Sean Jackson: Yeah, that’d be a whole podcast show called “Regrettable. Let me explain why. Obviously next to your own funds, friends and family becomes the next logical choice. Old Aunt Millie that’s sitting around with tons of cash and loves you to death and is willing to invest, if you will, in your highly speculative adventure.
That’s okay, but it does cause a huge amount of problems. Here’s one. First off, when you’re asking for friends and family, they’re really doing it 100% based on their faith, love, appreciation, respect for you. And that’s perfectly great. So, you get the money, and then inevitably something bad happens, something that you’re kind of embarrassed about. Maybe you make a tactical mistake.
So, what ends up happening is you take their money and then you stop communicating with them about what’s going on with your business. Now, if things are going great, you’re telling everybody in the world. But it’s not when times are good that you have to sit there and worry about friends and family money, it’s when times get bad.
The key, if you do take friends and family money, and I know this very firsthand, you have to overly communicate when times are bad. I don’t mean that you’ve tried every option and now it’s time to break the bad news that this adventure that you’re going on is a bust. No, you’re keeping everyone updated and apprised of what’s happening. And the moment you stop communicating, the moment you try to hide from them, is the moment when Christmas dinners become really awkward.
Brian Clark: Yeah, absolutely. And I just think that was, among other reasons, I mean, my family didn’t have a ton of cash to begin with, so it wasn’t like… I guess I’m the exception to the general rule that entrepreneurs are well-funded. But I think there are a lot of people out there that don’t have the family resources, and I don’t think that article was completely fair, but I can see the perspective.
It was very damning toward “Only the privileged succeed. Well, I’m a case study there, but I’ve used every other trick in the book though.
Sean Jackson: And it doesn’t have to be a lot. I think with the last analysis I saw that most businesses that do go out and get money from friends and families is about a $30,000 range, which is a lot for certainly a working class family. But if you’re an upper middle class or certainly in the top 2% of income out there, $30,000 is not as much.
So, it is probably the rich kid perception, because it’s skewed to the higher end. But you know what, there are a lot of people who have friends too — your friend that worked in XYZ Industry. He got his bonus in January and bragged about it.
Brian Clark: And I think that happens more often now, because we just have this entrepreneurial — I don’t want to call it “envy. But it wasn’t this way. I didn’t self-identify as an entrepreneur even when I started my first business. And yet, now there’s an entire culture in it, and most of it is mythical. It’s fitting that a billion dollar company is called a unicorn. The entire thing is like The Princess Bride.
Other People’s Money aka Credit Cards
Brian Clark: Let’s talk about other people’s money, well, in the sense that they are not related to you or you have a valuable relationship with them. And this was always more comfortable to me, even though the risk. I mean, I’m talking about credit cards.
Let’s start with credit cards, because in my experience, and I don’t know what it’s like these days, obviously my position is different than it was before 2008, the financial crisis and all that. But it always seemed to be easier to get a personal credit card to spend on junk that I don’t really need than it would be for me to say, “I’m starting a business, and they slammed the door in my face.
Sean Jackson: Yeah, I remember walking into a bank and opening up a business account and how they were pressuring me to get that $30,000 business credit card at that beautiful 15, 18% interest rate. They were falling over themselves to give it to me. And then, of course, in 2008 when the crash happened, they were all like, “Oh, that $30,000 line of credit is now down to $5,000.
Brian Clark: That’s what happened to me. And this was actually in the form of a personal line of credit. When you say, “I’m an attorney and I have my own firm and they see in your bank account that, yes, money is coming in, all of a sudden I had a $50,000 line of personal credit and that did come in handy at different times. I never really abused it, but it was a good float mechanism. You had to know how you were going to pay it back.
But then after the end of my real estate run where that didn’t go well, the sale to my partners was a farce and I’m just now starting Copyblogger, they take the line of credit away.
The Rule of ABC
Sean Jackson: And that’s often the case.
There are some things that the listeners can do to protect themselves in this situation, because there are credit facilities available from banks and other financial institutions. And I always like to call it “The rule of ABC with C being credit. A, of course, is whenever you’re going to somebody else outside of your friends and family, if you will, your accounting really matters a lot.
I know nobody wants to be an accountant, which is why they should hire an accountant the very first thing they do when they decide to go out there on their own. Because what your spreadsheets basically show, your P&L and your balance sheet, they’re like a scorecard. They’re a scorecard that you can show to others that, “Here’s how we are doing over time.
I will tell you, if you have solid financials prepared by somebody else, not by yourself and QuickBooks but by somebody else, you’d be surprised how institutions value that third-party compiled financial statement. And that’s important, because this “B part of ABC is going to the right bank. Because while there are credit cards out there, lines of credit and other credit facilities from traditional institutions, they want to see great financials, hence the A. But the bank that you go to is probably not just going to be your local big giant retail bank — the Chase, the Wells Fargo, the Bank of America.
Here’s why. If you’re successful, you’re going to outgrow those banks, because they really only have two tiers — really small people under 20 million and then everybody else. And so, the regional banks, the smaller banks that are in your community where you can get to talk to an actual commercial lending officer, not the person sitting at the front desk, but a true commercial banker. They’re going to be able to work with you based on your financials and talk to you a little bit about what other credit facilities they have.
The beauty of that is if you’re getting money from a bank, it’s usually the lowest interest rate they will charge, probably have to personal guarantee, but that’s where the accounting statements come in. The balance sheet that you have, your P&L, and of course, your personal taxes and personal financial statement.
The more prepared you are to walk into a bank, the easier it is to get C, which is credit. Because at the end of the day, it takes the right bank and the bank is going to want really good financials.
Brian Clark: Yeah, that’s interesting. I just recalled the bank who gave me that personal line of credit was Wells Fargo and they’re obviously the one who took it away. But when I had the two brokerages, I went right down the street in Dallas, Live Oak Bank. You know where Live Oak Bank is? Little community bank, and I guess I got that advice from someone at the time. “Go to someplace you can talk to a person. So, my business accounts were held there and I had a really good relationship with them, but I had totally forgotten that until this point.
What About Home Equity Loans?
Brian Clark: Let me ask you this, because I think in the entrepreneurial or freelance lore, there’s always the story about, “And then he mortgaged his house. Now, again, post-2008, is a home equity loan doable, much less feasible?
Sean Jackson: Oh, absolutely. Home equity loans are as easy to get as anything. The problem is that when you go to your significant other and say, “We have to sell the house, because my adventure in XYZ business…
Brian Clark: Yeah, that’s worse than borrowing from your dad.
Sean Jackson: Yeah, exactly. I would say that at the end of the day, home equity lines are the least attractive options. You’re better off getting a credit card or you’re better off using a home equity line to pay off your credit card. So, at least you’re reducing the overhead you have just to live every month.
Home equity lines, because they are tied to your primary residence should be treated as very unique, rare occurrences. Just because the money is cheap and just because it may be easy to obtain does not mean that you should get it. Just like with credit cards, anybody can fill out an application and get something, but just because it’s easy doesn’t mean it’s the best. And if you’re starting on your own, why add in the penalty of the risk being you lose your home in the process.
Brian Clark: Yeah, I agree. I mean, I would always have it on the table, especially if you have substantial equity somehow. But odds are, that’s usually not the case. It’s usually worst case scenario. You desperately want to keep your house, you don’t have the hugest amount of equity built up in it, and you’re really forced to try to go back to, I think, the ABC approach. Although when you’re starting, as opposed to when you’re in play, it’s kind of a different story.
Sean Jackson: Right, because if you’re in play, I mean, that’s a very good point. You’re eliminating risk as you’re going on this business journey. So, the risk — will people pay and will they buy, will they come back and buy more? There’s a journey that you’re taking and every level you’re decreasing a certain amount of risk or unknown factors. So, if you ever do decide that a home equity line or a credit card or other type of financing comes into play, you want to do it when you have a lot of risk factors eliminated.
Starting out, it is the worst option. But, you know what, if you’re at a point now where you know the risk and you need just a little bit of a bump to go over and you’re very comfortable that this is going to pay off, then sure, it becomes a valid option. But if you’re starting off from scratch where you have all the risk and unknown, never even come close to it.
Creative Ways to Fund a Project or Business
Brian Clark: All right, let’s talk about some more creative ways to fund either a project or a business. This is something, I guess, if we look back at the beginning of our company, technically started in 2010 but the genesis of things started with the launch of Copyblogger in 2006. At that time, I had an audience and no products or services, but I had delivered a lot of value. I had people literally asking me to sell them something, which is a good position to be in.
But I really went about 18 months there, and then that was when I started collaborating with Tony Clark, who’s our COO. We came up with what we thought people wanted from us. And that was an online education program. But the interesting thing is I sold it with a PDF and it didn’t exist yet.
With online education, I think this is kind of a natural. And so, those of you thinking about getting into courses and training, keep this in mind, because not only does it tell you if people actually buy — I mean, this is the most minimum of minimum viable products which is, “I promise to make this for you.
That’s what we did with Teaching Sells. And we went from zero to six figures in a week. And then we created the course over the next year, which brought us to seven figures. And that was really the beginning of the first company that we all merged together in 2010.
Nowadays, people go, “That sounds like a Kickstarter. Well, it is, but Kickstarter didn’t exist at that time. And the difference being that Kickstarter tries to aggregate an audience for you, but there’s really no substitute for your own audience. Although there are ways around that, you could do a joint venture with someone who does have an audience or whatever.
Customer Funding Through Sales
Brian Clark: What are your thoughts on this kind of more presale buzz building and then build it kind of approach?
Sean Jackson: So in 1995, I was dirt broke. I mean, furniture repossessed from the rental company, my girlfriend who became my wife having to buy me food. I was broke, Brian.
And I still had a lot more, I guess, just temerity in this, and I got a chance to go to GTE, the precursor of Verizon. And I walked into a room filled with executives and I sold them on a software platform that only existed in my head. And I went from being dirt broke to signing three weeks later a half a million dollar contract with GTE because of an idea and my presentation skills to do it.
It is my favorite funding technique. And when I first met you and you told me that story, I was like, “This is a guy who shares the same type of thinking process, which is there’s nothing better in this world than having customers finance your business through things called sales.
Brian Clark: Absolutely. And even with us, we launched one line of business and that provides us not only with revenue, but it’s the cash to build the next thing or the next part of the thing.
Last week I talked about the perpetual side hustle. People think that’s only a concept for people who have jobs trying to get out of them or freelancers and solos. But no, we’re a fairly substantial company and we had that same mindset. You’re always looking for ways to pay for things that don’t obligate you to other people other than your customers.
Sean Jackson: Yeah, but I think it’s now easier. I mean, if you think about a Kickstarter campaign, you think any crowdsourcing, you think of your site, it’s all about the work that it goes to build an audience with a value proposition that they find so appealing that they’re willing to spend money on it.
Now, you can do that in person, selling something like I did that was just completely nonexistent. Or you can, like you did, start building an audience online and getting a feel for what they need, what they look for, so that the product actually becomes exactly attuned to their needs, because you started with their needs first in the design of the product.
I think at the end of the day, this is probably much better than any other financing option out there. Because, at some point, even if you took money from a bank or friends and family, you’re still going to need to communicate out a value proposition to an audience and have them exchange that proposition for money. And if you do it to begin with, trust me, you don’t have to worry about your house being foreclosed on or whether you’re going to pay Aunt Millie back the money she gave you.
Brian Clark: Yeah, and just because you have money to build something, doesn’t mean you’re building something people want. The presale approach, if no one buys, then you know not to do that. I mean, that’s valuable information.
I’ve always felt that having money can be a detriment, because you relax, your creativity turns off a little bit. You just kind of show up and do the work. But is it the right work? You don’t know. You really don’t.
Sean Jackson: And that’s why I always say you have too little or too much. Too much means you may be taking too many risks. You may be willing not to follow through on something. And too little means that you’re constantly making compromises, so that you never have the right amount. No one ever has the right amount. And it’s all about that execution.
The reason for going to customers first is they can help be that tie breaker. They can help you understand where you should be allocating money to meet the benefits that they are willing to spend money on. So, I think of all the approaches, it’s the best.
Brian Clark: Yeah, I tend to agree with that, not just because I did it.
Money from Investors
Brian Clark: Interestingly, the thing we’re saving for last, and somewhat even marginalizing, I guess, is raising money from investors. Now, they’re venture capitalists, they get all the press. And there are people like private equity investors that a company like ours might deal with as a profitable established company.
For a startup and/or a freelancer, solopreneur with the idea for the next thing, number one, try everything else first, I guess, would be my advice.
But number two, if you are going to deal with an investor, it’s probably going to be an angel investor, which has historically been your local lawyer, dentist, some professional with investible income looking to get their home run while they have their nice safe, steady professional practice.
Nowadays, especially in the tech industry, we’ve got syndicates of angels, networks, people who band together to actually do bigger deals.
What’s your advice for someone looking to work with an outside investor?
Sean Jackson: Well, the first thing is you can’t be a solopreneur, because most outside investors, professionals, I should say — not your local dentist or attorney, which instead of going to Vegas, they may give you $10,000. I’m talking about the professional investors, your seed stage funds, your accelerators, your venture capitalist, etc..
First off, they want partners. They don’t want one guy walking in with a big idea. They generally want three, four people sitting around a table who have a vested interest in this. They really abhor this idea of the solo practitioner, because they know that it takes a team to build it up.
The other thing too, of course, is that you can do that. If you’ve got like-minded individuals who are willing to go on this journey together, then certainly some of these accelerator, startup facilities that are out there, maybe a great way to start to collaborate on an idea. But raising money from a professional investor, being an angel or a venture capitalist, etc., is almost an exercise in frustration.
Let me explain, because you’re going to probably talk to not just five, not just 10, not just 20. You may end up talking to 100 different types of professional investors and you’re going to go through unimaginable agonizing time periods of just, “You’re the stupidest team that has ever walked in here to, “I really like that idea. I’ll get back with you, and you’ll never hear anything from them.
Raising money is truly like selling a product to a very limited audience and it requires inordinate sums of time. And not just your time, but a team’s time and going on meeting after meeting after meeting to sit there and convince someone to give you $5,500 or $5 million.
Building a Collaboration or Partnership
Brian Clark: Yeah, it’s true. And here’s the thing I truly want to end on. And you just led the answer to that question with it, which is collaboration. You’re saying these investors are looking for a team and I know that’s absolutely true. But how do you build a team if you don’t have the cash to hire people?
Well, my number one thing, we’ve talked about presales. We’ve talked about all these ways that you can get the money that you need, but in reality, even before Copyblogger, but especially this company was built on collaboration. It was startup after startup after startup launched off of Copyblogger with a partner. A partner who could do things that I couldn’t. And that was the case with you as well. That’s really what drove this.
I’m a big fan, because you’ve got people working together, you’re building a team, which is ultimately more important than money. With a lot of these businesses that people want to start digital products and services, Internet-based companies, what you need is time and talent, not money so much.
A lot of times when I see someone with an app idea who is going around begging for money, I’m like, “Why don’t you find a programmer and do a deal and get it made? You know what I’m saying?
So, let’s end with that — collaboration, find partners, build something bigger than yourself that makes you personally more money than you would’ve made going in alone. Simple math.
Sean Jackson: Collaboration is probably, again, very powerful and yet it’s also a little tricky way of getting a business done. At the end of the day, you’re going to spend more time sometimes with your business partners than you do your own spouse. And so, it’s a mixture of an interpersonal relationship. Can you get along with them? Do they have complimentary or supplementary skills?
But the way to navigate through partnerships, I’ve found, is for everyone to share a common idea, a purpose, if you will. Because if everyone shares in that common idea and purpose, you are going to disagree with how you get to it, but at least they’re all going in the same direction and not going someplace else.
I’ve always thought the key to a collaborative business financing is finding people that share the same concepts, ideas, thought process on business and life. And through that, you’ll find that those partnerships, which will be a little tricky at times, will in the end be a very successful way to collaborate your way to success.
Brian Clark: I absolutely agree. Without that initial shared vision, you’re not going to make it when things get a little rocky, and they always do.
All right, Sean. Thanks, man. I appreciate you sharing your time and wisdom with us.
Everyone, we will be back next week with John Lee Dumas and some other cool stuff, so make sure you tune in. Until then though, keep going.