1. How much money do I need to start a growth company?
Not a whole lot. More than a third -- 41% to be exact -- of this year's Inc 500 CEOs launched their businesses with $10,000 or less. And get this: more than a third of those bootstrappers started with less than $1,000. This year's list looks very much like the lists of years past when it comes to the number of founders who started companies with little seed capital.
Of course, that hardly means that starting up with more money will keep you off the list. Consistently, some 20% of Inc 500 CEOs begin with more than $100,000 in capital. (For more about the ways in which start-up capital affects long-term prospects, see " A Little Goes a Long Way.") Founders' funding sources vary from personal savings, to investments and loans from friends and family, to credit cards, to second mortgages.
2. Should I take out a second mortgage on my house?
It's a method that has worked for several entrepreneurs on our list. But expect your priorities to change -- quickly. "In a word, taking out a second mortgage made me feel committed," says Ryan Simons, president of Print-Tech (#358). "By putting your house on the line, failure is not an option. I knew I would have to do whatever it took to make the company successful."
But will you be able to sleep at night? Sure, says Kevin Price, president of AccuCode (#154). "As it was, all my financial resources were dedicated to the company," he says. "So if I failed, I wouldn't have been able to make my house payments anyway."
3. Should I get money from a partner or two?
By all means. Over the past few years, more than half of Inc 500 CEOs said they started their companies with partners -- 62% of the companies on this year's list started with partners, as did 62% last year and 55% the year before. This year 28% of CEOs reported that their cofounders contributed seed capital.
87 % of the Inc 500 CEOs surveyed used personal assets to start their companies.
But evaluate your prospective partner first. Does his long-term vision for the company match yours? Will he want to grow the company as quickly as you do? Thomas Santamorena, CEO of TLS Service Bureau (#450), faced just that issue with both of his partners last year. In 2000 about 80% of TLS's $1.4 million in sales had come from 20% of its clients. Santamorena, worried about depending too much on those customers, wanted to grow the company's client base. But his partners, who Santamorena says were complacent, didn't court new customers. Eventually, Santamorena convinced one partner of the need to pursue new business aggressively and bought out the other. Still, the conflict tainted Santamorena's views on partnerships. Now he advises, "Look for another alternative."
Still think that a partnership is the best way to go? Take some practical advice from Louis Meeks, cofounder of the Service Source (#102). Before starting the company, Meeks and his cofounder had their lawyers draft a buyout agreement -- essentially stipulating the rules of the game. One of those rules: a partner has only 30 days to agree to a proposed buyout or to buy out the other partner himself. An arrangement like that ensures that any serious partnership dispute won't last longer than a month -- and that any partner who wants a divorce can get one. The deal "really puts your feet to the fire," says Meeks.
Meeks and his cofounder each own 40% of the business, with a third partner owning 20%. The third partner serves in the role of "tiebreaker," arbitrating most disputes between the cofounders.
| The Money Tree |
| Among the 1999, 2000, 2001, and 2002 Inc 500 lists, the percentage of the CEOs surveyed who raised seed money from |
|
2002 |
2001 |
2000 |
1999 |
| Cofounders |
28% |
39% |
36% |
8% |
| Family or friends |
19% |
30% |
33% |
14% |
| Strategic partners and customers |
7% |
11% |
6% |
4% |
4. How can I persuade bankers to lend me money, and what do I do if they say no?
Banks will come through with loans if you can convince them that doing so isn't risky business. If a bank won't lend you money because your company looks iffy on paper, try for a loan backed by your personal assets. That's what Stephen R. Satterwhite, founder of Entelligence (#320), did in late 2000, when a dot-com customer that owed him $250,000 closed down overnight. Suddenly, Entelligence faced a cash crunch and needed financing to meet expenses. Satterwhite explained the problem to his company's banker, who offered to extend a $150,000 line of credit but required that the loan be secured not only by the company's assets but also by the personal assets of Satterwhite and those of an Entelligence investor and board member.
28 % of the Inc 500 CEOs surveyed tapped their cofounders' personal assets to start their companies.
Still in need of $100,000, Satterwhite approached his private banker. The banker gave him a $100,000 line of credit. "He never even hesitated," recalls Satterwhite. "He required only my personal guarantee, and he was just a super guy about it."
5. Credit cards -- how many are too many?
The answer to that question depends greatly on your willpower and personal risk tolerance, because let's face it, the credit-card solicitations will keep coming in the mail. And there's no legislation afoot that's going to stop them from coming, according to Elizabeth Warren, a Harvard Law School professor who specializes in bankruptcy law.
