Where does the money to
start a business come from?
The most frequently asked question by anybody thinking of starting a business is: “Where do I get the money to start?”
There are a million
responses given by the most credible sources such as the SBA, Harvard MBAs,
lawyers, bankers, promoters, consultants, priests, Boy Scout leaders, experts
in any number of Internet Newsgroups and Chat Rooms. Most will say ”Develop a
sound business plan and submit it to your bank.”. But in my forty plus years of
helping over 89 startups and over 400 senior level managers, owners and CEOs, startup
money comes from converting somebody’s time into something of value. To
this, add a 5% Aunt Jennie factor and 50% maximizing one’s credit cards.
The focus of this paper will
be on the power of the Mastermind concept as outlined by Napoleon Hill in his
best selling (year after year) “Think and Grow Rich” and my personal experience
with success.
It all starts out with an
idea as told by somebody to somebody else.
Every business starts
without a penny in capital. Every business starts with an idea. Write this with
indelible ink on the cortex of your thinking apparatus. That idea is converted
into a ‘sales pitch’ for use in recruiting talent, maximizing money leverage,
getting market, expanding market and innovation. The idea becomes something
like a ship at sea, with a rudder, a working compass and a definite
destination. Without these elements there can be no business.
We call this the ten second
sound-bite. The idea being that you find yourself on an elevator next to a
clean-cut person with sparkling eyes and by the time you reach the fourth floor
this person wants to either:
1-
Join
your team
2-
Buy
stock in your company or lend you money
3-
Buy
or recommend your product/service
4-
Give
you ideas of how to expand your business or discover new opportunities
So just how do you go about
converting people’s time into something of value?
Unless you were born rich or
a thief, the only source of future income to you will be in your ability to
convert your time into something of value which can be saved, accumulated and
then spent as capital in such a way as to generate further revenues.
True?
But creating a company all
by your lonesome is almost impossible. Thus the concept of the Mastermind in
which you ‘recruit’ people to share your dream and your eventual wealth. Not
with the impossibly stupid sandbox agreement “Half for you, half for me”, but
one which is the cornerstone of capitalism. I will buy stock in your company,
betting that you will leverage that money into something greater than it is
now. I will not consider my purchase of stock in your company as a loan; where
a return is guarantied. If you fail, I know I have no recourse. If you win –
which is why I am putting my lettuce in your salad – I win.
Capitalism is the most
benevolent of all forms of distribution of income and creation of wealth.
As you will see in the
following examples, consultants and the like are able to put their talents to
work for you while you pay them nothing thus saving whatever cash you have to
start with to be spent on tools, inventory, advertising and real revenue
producing actions.
Almost every company starts
with a founder and co-founders. Some of these co-founders become members of
your board of directors, while others may never even see your product/service
or business. These people have flocked to you because of your idea, your
enthusiasm, your charisma and the possible lure of a pot of gold at the one end
of the rainbow. This paper will deviate from the normal in that it will contain
actual written documents used over the years. To start with, is a letter I
wrote to Diane expressing my joy at having had the chance to work with her
during the startup phase of her company.
It belongs here to highlight the idea that money is not always the key
motivator for people to work.
My ChromaLite II experience
By Wayne Lundberg
”Colorpuncture, or
chromo-therapy as it is often called is so powerful, so easy to use and so much
a possible benefit to mankind that I am compelled to do whatever necessary to
make it available to the whole world at truly affordable prices…” Diane H.,
And I bought into the dream.
For a year I made models, ran up north or Diane ran down south in her camper.
Her dog nearly ate our cat! And we had fun. We got
Every meeting resulted in
something positive and everybody went back to their projects with new energy
and determination. We never counted the money to be made, it was never a part
of the program. The idea was to make the light available to as many people as
possible. And we gave, and gave and gave.
And we had fun! We were
creating a business with a whole new concept - where people could actualize
themselves, contribute to the well being of mankind. Make enough money to grow
the business! Put our money into the future.
We developed a business plan
with just this in mind. I promised to convert my royalties into tooling and stuff
to make more, better for less. A paper was written proposing everybody put in
their time and shares in a mock company would be issued based on actual
contributions by one and all. A true revolution!
I want to thank you Diane,
Al, Gladys, Penny, Randy, Charlotte and Eric for having this super opportunity
to put creativity and expectations together in creating something which may yet
achieve success.
There is no way money can
buy the kind of fun I’ve had - especially on those days when everybody was saying
such wonderful things about the light, how powerful, how really effective, how
great looking!, and the ohs and ahs and all the feedback from people using it -
building a long list of testimonials.
Thank you for having asked
me to your party.
As you can see, being
involved with something new and being led by someone with vision is a key
element to happiness. Being on the road toward an objective is often much more
rewarding than money alone. You must understand this if you intend to start a business
with little or no money. You must learn how to get others emotionally involved
with your dream and then provide some kind of future remuneration strategy.
This future payback strategy may be of great importance to some of your
co-founders, and to others it will simply be an expression of your willingness
to share, with no further expectation. As was the case with my work with Diane
and her Chroma-Lite II.
In a nutshell:
Doing ‘it’ without $
(Founders formula)
Establish a one-million
shares paper corporation and issue stock according to the following:
· 50% set aside
· 25% for future sale to limited number of investors
· 12% to be issued to the founder immediately
· 12% to be issued as follows:
· X shares per hour of consulting, legal, accounting
· X shares per hour to any contributor in sales, machining, design…
· One share per Dollar of whatever spent by a contributor
500,000 shares - To be used as future collateral
When it succeeds - incorporate!
125,000 to be issued to those who help make it all
possible 250,000 shares - To be sold 125,000 shares for the founder from the get-go
Here is an actual E-mail to a client suffering from
severe shop discipline problems. Bill, his shop foreman was instrumental in
getting this business up and running and promises were made, without
documentation nor follow-up by either party. Ten years have gone by and Bill is
still in the shop and getting to be a real pain as he feeds his own self-pity,
turning his angst into activities clearly designed to make the boss unhappy.
Unfortunately the message failed to get into Mark’s mind because he was intent
on discipline rather than solving the problem.
Here it is:
Mark, after some deep thought, I think Bill is feeding
himself some envy
based on the fact that what he makes in the shop for $3,000 is sold for
$12,000. Most shop people tend to think they are being cheated because few
of them are really aware of what a business is all about. Few of them
understand the true cost of loss for a scrapped unit which may have cost
$100 in materials and $100 in labor but which results in a loss to the
company of the selling price, which could be three to five or more times the
actual cost of material and labor.
The trend today is for small businesses to share financial information with
rank and file members so they fully understand the costs associated with
lost time, rework, productivity and so on.
My recommendation is for you to think about stock options, even if you are
not incorporated, to key people based on a formula yet to be developed
designed to reward superior performance and without watering down your
ownership.
The formula I teach, and is right out of the Entrepreneurial Manual, is to
issue, say 1 million shares of stock. Hold 500,000 in the company safe for
future use when cash is needed and the bank will use some of these shares as
collateral. Set 250,000 shares aside for sale to people who want to simply
invest, but not participate in management or any other way. The remaining
250,000 shares are to be split with you keeping 125,000 and setting the
other 125,000 aside to distribute according to the plan. You can use a part
of those shares to pay for consulting, design, engineering, accounting,
legal, public relations and so on by getting people like me to work for you
at some established and equitable rate agreeable by all, in stock. Say one
share for one hour of consulting. You will never lose control in that you
will always be in control of the 500,000 shares plus your own.
At year end, you make distribution of net profits according to the
percentages of issued stock. 50% will be reinvested in the company by
default, 1/8th will go into your pocket by default, and the rest distributed
according to outstanding shares. This puts each stockholder in a position
which forces us all to think of our work as contributing to the company and
receiving a fair return on our investment in time and money.
I recommend you think this through, then call a meeting where you will
explain the cash flow of the company, and that even by selling the shops
production, and the support supplies at huge apparent margins, you are
barely covering costs. But that by reducing scrap, rework, lost time, doing
work on the job that is not creating sales revenue, that a fair and
equitable return on their time will be a reality. Then issue your key people
promissory stock notes to reflect the formula. Now they will feel more like
stockholders and less like employees. Emphasize that once a share of stock
is held, that profits from the business will be split year in and year out,
not only to the employees today, but for their families forever in the
future and that it will be much, much more if the company grows in such a
way that it can be sold and everybody will either cash-out, or exchange
their shares for the new company.
Then issue a weekly summary of throughput. Throughput as I have used it in
every operation I have run, is a simple subtraction from gross sales of all
expenses broken down into overhead, direct labor and estimated materials
costs. It's easy to set up and it can be posted for all your stockholders so
they can take immediate action to make course corrections to maximize
throughput while minimizing all other expenses and increase productivity.
Let me have your thoughts.
Following is an actual rough draft of a business plan
from which a new business can get started. The emphasis is on the sizzle of the
product and actual work to be done. One line item indicates the creation of
another business plan for use in getting capital. At the end of this basic plan
there is a letter explaining how the founders can contribute their efforts,
talents and resources in exchange for some future benefit.
Chroma-Lite II
Business Plan
Rough Draft
“…. Colorpuncture, or
chromo-therapy as it is often called is so powerful, so easy to use and so much
a possible benefit to mankind that I am compelled to do whatever necessary to
make it available to the whole world at truly affordable prices…” Diane H.,
Thus began the search for an
inexpensive, reliable and easy-to-use instrument that anybody in the world
could afford. After seven months and some eight prototypes the Chroma-Lite II
has evolved. And although not as affordable as it will be once high-volume
manufacturing gets underway, it is the least expensive instrument available on
the market today.
The Chroma-Lite II plan is to apply state-of-the-art
manufacturing processes in a factory in
Most great innovations,
discoveries and advances in the world are very simple once recognized. Their
very simplicity often obscures their value. For instance, the developers of the
Postits never got anywhere until they gave some units to the executive
secretaries - who used them, then demanded them. Then there’s the paper-clip,
the button and the staple. To appreciate their value, one must use them.
The world will not beat a
path to the door of the inventor with the best mousetrap. It must be sold.
Selling is a process of demonstrating the value of a product. Thus, the
Chroma-Lite II problem will be in teaching, showing, demonstrating the value of
the procedure. Experience has shown that belief is not a key factor in the
effectiveness of the instrument – it works just as well with cats and dogs. But
for it to be recognized it must be experienced.
Thus traditional marketing
such as point of purchase sales in retail outlets, massive advertising and even
direct mail are not suitable venues. To recruit and hire a sales force would be
beyond the expected capitalization of the venture. At present an intensive
search is being conducted to define the best marketing strategy to achieve the
founder’s objective which is to make as many units available to as many people
as possible.
The business plan is based
on the following proven points;
1-
The unit is producible in
large quantities which will result in affordable list prices even under the
structure of several commissions.
2-
The concept must be
demonstrated and once demonstrated over 60% of the people will want to have a
unit for themselves and for their family, friends and pets. This data is based
on nearly one year in which the founder has used the unit in a casual manner –
to be told that they (the people being ‘treated’) would like one.
3-
Production must ramp quickly
as the demand would appear to be without limit, or at least measured in
thousands of units per month within six months. If the proportional formula is
applied to item 2 above, the demand would be exponential.
4-
Rather than pursuing patent
protection, the strategy will be to use continuous process improvement as a
means of staving off the competition. This means forever lower prices, higher
quality and increased variety of models. This, in lieu of complex and expensive
patenting procedure. Today’s business strategy is based on rapid deployment of
new product followed by continuous improvements. Product life cycle is measured
in months, not years.
To date the venture is on
the following project tasks:
1-
Develop, manufacture, market
test 17 pre-production prototypes. Get feedback, make corrections and
improvements, tool for first production run of 150, issue purchase orders,
begin manufacturing.
2-
Establish legal presence in
3-
Initiate training seminars,
development of training materials and methods.
4-
Initial contact with
prospective marketing directors.
5-
Establishment of legal entity
under Los Angeles Power and Light in the state of
6-
Write business plan straw
man for eventual polishing and use in acquiring capital either through equity
or debt sources.
7-
A team of highly qualified,
experienced, successful founders - see appendix A for resumes.
Over the next six months the
following project tasks will be initiated
1-
Tool the Mexican plant with
turret lathe, plastic injection molding machine, anodizing vats and other
automated and semi-automated manufacturing tooling, jigs, fixtures and
machines. (see analysis)
2-
Launch Marketing plan
3-
Intensify training seminars,
training aids, training materials
4-
Office automation to include
marketing software and Internet presence for representatives, clients, vendors,
etc.
5-
Ramp production from 150
units per month as required under market feedback.
6-
Develop VLC (Very Low Cost)
unit for sale to third world countries.
7-
Develop model corporation
and issue IOU-based quasi-stock to founding members. Incorporate only when
deemed necessary.[i]
The balance sheet - all your time and my time converted
to money, all your expenses for the business, all the assets we can call up
for the business - All business liabilities to date, and the third item
will be capital. I will do this when you get data from your accountant.
The plan concluded with a
spreadsheet analysis and projection for production costs for one year along with
anticipated revenues and the like. A traditional approach intended as a
communication to future players as to just how the business was expected to
grow. To start your own spreadsheet, take a Federal Tax form Schedule C, break
it down into additional components but keeping the broad descriptions and put
your future vision to work by filling in the blanks on a month to month basis
for a year, then for five years.