Show Me the Money!
No two companies are built exactly alike. As a result, the amount of start-up capital entrepreneurs need -- and where they get it -- can vary greatly. That's especially true for young entrepreneurs, who rarely play by the usual rules.
Bobby Kim and Ben Shenassafar of The Hundreds, for example, took out a mere $400 from their bank accounts to launch their popular apparel line. Noah Lehmann-Haupt, on the other hand, had enough initial capital to buy a Ferrari, and used subsequent rental fees to purchase more cars for his then-fledgling exotic car rental service, Gotham Dream Cars.
For young entrepreneurs, who often lack substantial savings and credit because of their age, finding those precious few dollars to get a company off the ground can be tough. Reaching out to family members and taking out small-business loans are among the most common methods. But in many cases, aspiring CEOs dip into their own savings. Maxing out credit cards, while not the most responsible method, isn't that uncommon either.
John Ready and Brendan Ready, founders of Ready Seafood and Catch a Piece of Maine, spent most of their college weekends trapping lobsters and hand-delivering their catch to buyers before driving back to class in the morning. Revenue was minimal, but having learned the art of lobster harvesting as children, the two were confident enough in their plan to purchase a fishing boat with their own savings.
"That was my college career," John Ready recalls. "I had a lot of fun, but for me it was all business."
After graduating in 2004, the brothers launched Ready Seafood, with a plan to purchase lobsters directly from local fishermen and sending them to wholesalers. Beyond acquiring a Small Business Administration loan of $50,000 -- "it lasted for about three days," John says -- the two agreed to continue harvesting lobster and give the catch back to the company without taking out a paycheck. After securing a number of wholesale buyers on both coasts and in the Midwest, the company pitched their idea to a Spanish seafood company.
"We started shipping small amounts to them," John says. Two-thousand pounds a week, and then it grew to 4,000, 6,000, 8,000. We sold almost $3 million worth of lobster to them in an eight-month period." Two years after opening the business, the brothers began turning profit, and by 2007, Ready Seafood was making $10 million in revenue.
While the Ready brothers sunk their profits directly into their venture over a number of years, some entrepreneurs on this year's 30 Under 30 list started virtually with nothing. Others relied on support from friends and family.
Rachel Hollis, for example, started her event planning company from her Los Angeles basement, using a single phone line, her personal computer, and the help of an intern. "Nobody needs the added stress of owing the bank a million," she says.
Julia Alkire and Stephanie Goldman founded their egg donor agency by supplementing a bank loan with an investment from Goldman's father, Ken, a CPA who regularly deals with start-ups. She had initially consulted her father's help while drafting the financial aspects of her business plan, and was surprised when he offered to make a monetary investment.
"When Julia and I showed our business plan to my father and his partner, they studied it and asked many questions, fully vetting the concept," Goldman says. "Ultimately they saw the potential and wanted to be a part of Family Creations, so they became our investors. They continue to manage our finances and our banking relationships."
Peter Bielagus, an author and financial coach who lectures about entrepreneurship to college students, says that he often advises parents to contribute to their sons' or daughters' business ventures. As long as the loan or investment is treated as seriously as one from an outside source, collaborating with family members can be a comparatively painless way to get a business off the ground.
Bielagus also suggests that young entrepreneurs build up a good personal credit score and set -- and meet -- realistic goals.
"What any entrepreneur should want to focus on is to just get the cash flow," he says. "A lot of entrepreneurs start them because they have big dreams. They want to franchise, they want to get the investors, and raise a million. I tell them to show first that their business can make $100."
Going to an investor or a bank should only happen when a company is turning profit, Bielagus points out. "If you can show investors that no matter how small it is, your company is making a profit, that's a great time to approach them," he says. "And talking to a bank, they are probably going to want to see pretty much everything that an investor will want to see."
A failed pitch to a bank lender and the need to seek funding beyond personal credit cards are some of the most common reasons that send young entrepreneurs to SCORE, a non-profit entrepreneurship advisory group, says Norm Mangano, chairman of the organization's Citrus County chapter in Lecanto, Fla.
"Some come to us because they have been referred by a financial institution," Mangano says. "The institution has said that you have to go to SCORE and come up with some ideas about business planning, and after you have all that together, come back and see us and we'll go forward. And there's a group of people who have started a business and have been trying to succeed on using their credit cards."
Mangano adds that he strongly advises most young business owners to move from their personal credit cards to a business loan as quickly as possible. "If you're going to charge on your credit card and pay it off every single month, that's fine," he says. "But once it goes on and there's a carryover, and you get a big minimum because of the business demand of your other finances, then it becomes an 18 to 22 percent interest rate. Whereas a regular business loan can be 7 to 8 percent and turns out to be a lot more advantageous."
Despite the risk, it's not uncommon for successful entrepreneurs to have used their personal credit cards as initial business capital. Marc Lotenberg of 944 Media, for example, financed his start-up publishing venture in 2001 by dipping into his Bar Mitzvah savings and getting himself into credit card debt. "I maxed out seven our eight credit cards," he says.
Bielagus says it's an unfortunate reality. "I can't really publicly support this, but I've seen many entrepreneurs survive and do extremely well with credit card financing, simply because it's the one loan that you don't have to answer to anybody to get," he says, describing them as a double-edged sword. "If you have a credit card with a $5,000 limit, that's your money that you can borrow and pay back."
"You have to have the cash flow at some point to pay that off," he adds. "And if you don't, not only is your business in trouble, but your own personal credit history is going to be in trouble as well," he says.
Young entrepreneurs are often branded irreverent risk-takers, but Mangano says the slumping economy has witnessed the birth of a much more vigilant, contemplative young business owner.
"I'm seeing quality come through my door, not quantity," he says. "People are coming in here with really solid ideas. Not that I'm guaranteeing success, but they have thought it through. We're not getting those who come in and say, 'I really enjoy eating food so I think I'm going to open up a restaurant.' Those people have been backed off to the side for a while."