BOOTSTRAP FINANCE

1. BOOTSTRAP FINANCE • How can you start a great business with no (or little) money down? • How do you get ‘table stakes’ so you have a place in the game? Professor Bruce M. Firestone

2. Professor Bruce M. Firestone • CDN Banks lend only to people who don’t need the money • Only Grameen Bank led by Nobel Peace Prize Winner Dr Muhammad Yunus lends money to people who need it • Sir Terence Matthews: “We’ll lend you $7.5m provided you establish a cash collateral acct of $7.5m for Newbridge • Only uses CDN Banks to clear funds

3. Professor Bruce M. Firestone • The rule today is, if you have cashflow, you will get financed • Not the other way round • Mark McCormack started IMG, International Management Group, with $500, his law degree and Arnold Palmer as first client • Doesn’t hurt if your first client is Arnold Palmer

4. Professor Bruce M. Firestone Golden Rule? S/he who has the Gold, Rules

5. Professor Bruce M. Firestone • In five year period to 2010, approximately 91.6% of all tech startups in the US self-funded/bootstrapped • 8.1% were Angel-backed • Just 0.3% VC-funded

6. Professor Bruce M. Firestone • Makes for stronger enterprises  • More focused on results and clients • Schumpeter 1934, ‘Entrepreneurs are innovators who use a process of shattering the status quo of existing products and services, to set up new products, new services.’

7. Professor Bruce M. Firestone • Entrepreneurs are persons who efficiently use scarce resources, most of which not their own, to disrupt status quo • Discussions of business valuation, first round financing, second round, mezzanine financing, bridge financing and IPO are almost wholly irrelevant to vast majority of startups around world today

8. Professor Bruce M. Firestone • “Empty pockets never held anyone back. Only empty heads and empty hearts can do that,” Norman Vincent Peale • Texts on financing new ventures focus either on micro-finance for tiny businesses mainly in Third World or VC-track enterprises • Leach and Melicher (Entrepreneurial Finance, J Chris Leach and Ronald W Melicher, South-Western College Publication, 2009) refer to early stage financing as ‘seed funding’ whose ‘primary source of funds at the development stage is the entrepreneur’s own assets’ • Only reference to self-cap in entire text

9. Professor Bruce M. Firestone • In 2009, trade credit (or supplier credit) surpassed bank lending as source of finance for business in US • TC amounted to $2.15 trillion that year versus $1.5 trillion in bank lending (which was down more than 6.5%, year over year) according to data from US Federal Reserve

10. Professor Bruce M. Firestone • For startups, trade credit or supplier credit key source of funding • For tech startups, supplier inputs include—software and hardware (both off shelf and custom), consulting services, office space, fabricators, designers and developers (GUI, packaging, website, mobile app), product managers, HR, law firms (corporate/commercial and IP advisors) and accountants as well as IT and telecommunications infrastructure

11. Professor Bruce M. Firestone • • For startups, inputs may be contributed by suppliers on credit • • Why would they do that? • • First of all, they do it because they trust the business they are providing credit to, to eventually pay them • • Secondly, they want to expand the market and their market share—one of their key weapons for doing this is to provide credit to firms that buy from them

12. Professor Bruce M. Firestone • • Thirdly, this tends to lock clients into their business ecosystem—once a client has been approved for trade credit, they tend to buy from the same source over and over again using their approved credit facility on a revolving basis. They also tend to be less price sensitive than retail buyers since they are using credit instead of their own cash and they often have the ability to pass on higher costs to their clients • • Fourthly, once they establish good credit, they may apply for a higher credit limit to expand their business further

13. Professor Bruce M. Firestone • • Fifthly, suppliers expect to be paid not by their clients but by their clients’ clients. So a supplier is actually funding (indirectly) credit worthiness of their client’s clients • • Sixthly, suppliers want their clients to survive for a long period. They will often go out of their way to help out a loyal client who gets into financial difficulties by giving them improved terms for their financing, forgiving portions of their debt or trading debt for equity. Commercial banks may call their loans if they learn a new business is experiencing cashflow issues. Suppliers tend to remain supportive (to a point)

14. Professor Bruce M. Firestone • ‘Bootstrap Capital’ on UrbanDictionary.com • Also known as self-capitalization, this is how most start-ups actually capitalize themselves. Sources of bootstrap capital include: soft capital (Mom/Dad/Rich Uncle Buck), home equity loans, supplier credit, consulting, credit cards, retainers, deposits, progress payments, receivables factoring, partners, sponsorships, guarantors, pre-sales, launch clients and more. Bootstrap capital allows the ownership to keep control of their own enterprises and not lose them to VCs and other debt or equity holders.

15. Professor Bruce M. Firestone • Terry Matthews again: • “Get close to the customer—early and often.”  • All new personnel in his Wesley Clover startups spend six months in sales  • Same thing at Ottawa Senators—start everyone in sales • Next time star player or agent wants extra million, everyone understands how many season tickets or hot dogs or signs have to get sold 

16. Professor Bruce M. Firestone • Other ‘Terryisms’ • “Follow the fastest (least effort) route to revenue.”  • “Pursue only those goals that are consistent with the overall objectives of the enterprise.” • “Leverage your investment with government grants and OPM, Other People’s Money.” • To read all of Terry’s 10 Rules, See: http://www.eqjournalblog.com/?p=780

17. Professor Bruce M. Firestone Is lack of access to capital really main barrier to entry for entrepreneurs? More of an excuse in my view

18. Professor Bruce M. Firestone The reasons most VCs aren’t interested in most startups are as follows: 1. Most business startups don’t have the growth prospects to attract VC funding.2. Most startups are in industry sectors that don’t appeal to VC funds anyway.3. Most startups should be much further along in their development before they go after VC funding, if they ever do. If their business has real cashflow and real customers and clients, they are on a much more even footing with respect to negotiating a fair agreement with VCs, if that is what they choose to do.4. Finally, it is much more efficient for Canada if VCs fund more mature companies that are at a stage where large capital injections are: a) less risky, b) more inclined to be put to wise use by (now) experienced entrepreneurs.

19. Credit: Conn. Technology Council, 2008

20. Professor Bruce M. Firestone • Build and Hold • Lightning in a bottle • Mark Zuckerberg and Fb • Scotty B and SignCo

21. Professor Bruce M. Firestone • Roger Duarte • Former Investment Banker/club promoter/cigar seller • Started George Stone Crab in Miami in 2009 • Now delivering $10,000 of crab per day during May to October season • DV = frozen gel packs/hammer/mustard sauce/lower price

22. Professor Bruce M. Firestone • Investment Banking– uncool and a peon • Did not want to do MBA • No particular interest in food industry • Reads biz books e.g., Blue Ocean Strategy • Looking for low startup cost/to be alone in small market w/in larger one (e.g., Chobani and Greek Yogurt)/high cashflow

23. Professor Bruce M. Firestone • Treats daily crab haul like day trader would– no inventory left at day’s end • Limited competition (dominated by Joe’s Stone Crab) • Bought No. 2 in market (D&D) w/ $200k raised from delivery customers

24. Professor Bruce M. Firestone • $3 million in volume this year (2013) • Private equity offered to purchase 30% stake in 2010 • Valued company at $4.5 million • Now significantly bigger

25. Professor Bruce M. Firestone • Marketing dimension: • ‘George’s’ sounds like ‘Joe’s’ • Mini Cooper delivery vans/total paint • Foodie and wine shows • Duarte all-night partying/earned media • Bloggers/ e.g., foodiesunite.com • T-shirts, flyers, opening offer– priced 60% less than Joe’s

26. Professor Bruce M. Firestone • Operations: • “Fire your relatives, scare your employees, and stop whining,” NYT biz article • Hires two people for every position; fires one after two weeks

27. Professor Bruce M. Firestone • Threats? • Diversification into restaurant chain (My Ceviche) with partner Sam Gorenstein • Not going to BUILD AND HOLD • Plans to sell off George’s • Go into commercial real estate • More vacations • (Source: Joel Stein, Bloomberg Businessweek, March 31, 2013)

28. Professor Bruce M. Firestone • Hamdi Ulukaya • 40-year-old Turkish immigrant to US • He is founder & sole owner of Chobani Inc

29. Professor Bruce M. Firestone • Ulukaya came to U.S. in 1997 • In Turkey family operated dairy farm • Ulukaya takes business courses at State University of New York at Albany • Begins by making feta cheese • Background, family history, preparation, passion, focus, seeing, carpe diem --> success!

30. Professor Bruce M. Firestone • Got into yogurt biz in 2005 • SAW classified ad for factory near Utica that Northfield, Illinois-based Kraft Foods Inc shuttered • Bought it with help from SBL, Small Business Administration loan • First cases of Chobani Greek yogurt shipped to Long Island supermarkets less than 2 years later

31. Professor Bruce M. Firestone • Shuttered plant + SBL + Americans’ growing taste for Greek-style yogurt = 17% of US yogurt market + net worth of $1.1 billion for Hamdi in 5 years

32. Professor Bruce M. Firestone • What’s in a name? • Co formerly known as Agro-Farma Inc • Ugh • Chobani processes > 3 million pounds of milk/day • Since 2009, sales increase almost 400% • Chobani name derived from Turkish word for shepherd

33. Professor Bruce M. Firestone • Greek-style yogurt contains less sugar/more protein • Strained to remove excess liquid, • Leaves concentrated whey protein behind • 6-ounce serving contains 13 grams protein

34. Professor Bruce M. Firestone • Threats? • Ex-wife suing Hamdi for $1.5 billion, says he indirectly used her funds to start Chobani • Wants 53% stake in Chobani

35. Professor Bruce M. Firestone • Alpina Foods, U.S. arm of Bogota, Colombia-based food manufacturer Alpina Productos Alimenticios SA, and Purchase, New York-based PepsiCo, Inc. -- through JV with German dairy company Theo Muller GmbH -- building Greek yogurt plants 175 miles from Chobani’s HQ

36. Professor Bruce M. Firestone • U.S. plant of second-most popular Greek yogurt, Fage, ~ 90 miles away in Johnstown • Fage sales grew at an average annual rate of 34% since 2009

37. Professor Bruce M. Firestone • Opportunities? • Opened first retail store, in Manhattan’s SoHo neighborhood • London Olympics sponsor summer 2012 • Source: http://www.bloomberg.com/news/2012-09-14/hidden-chobani-billionaire-emerges-as-greek-yogurt-soars.html

38. Professor Bruce M. Firestone • Runamok Party Rentals • Wanted to go beyond party rentals • Add an Amusement Centre for kids and adults

39. Professor Bruce M. Firestone • Conditional lease for 38,000 sf • City of Ottawa zoning question • Difference between The Athletic Centre & Runamok Amusement Centre?

40. Professor Bruce M. Firestone • Arcade • Mississauga’s Playdium • Go karts, baseball domes, bumper cars and games • Drive, blast and dance your way to a great time within our indoor playground

41. Professor Bruce M. Firestone • Stairmaster versus bounce house for kids? • $1m startup • Funding sources?

42. Professor Bruce M. Firestone • $200k equity • $350k SBL • $300k signage/sponsorship deals (Bell Sensplex does $700k in sponsorship v avg Ottawa arena <$10k) • $50k product rights • $100k season tickets

43. Professor Bruce M. Firestone • City of Ottawa planning department insists on OPA and rezoning • Tells Runamok that they will oppose both • Shameful, disgraceful

44. Professor Bruce M. Firestone PERSONAL BUSINESS FOR LIFE, PB4L Urban Lens Photography

45. Professor Bruce M. Firestone • Urban Lens Photography • Wedding photography business • Started by Jennifer Schweers in Vancouver

46. Professor Bruce M. Firestone • Working in Banking/hated it/told it was safe • Always wanted to be entrepreneur • Then came recession of 2008/09 • No money/not even for camera and lenses/parents laughed at her • Mark Zuckerberg to rescue!

47. Professor Bruce M. Firestone • Just $500 in fb ads • Girls who changed their status from single to engaged and lived in Vancity or Victoria • Downpayment on 1st two weddings enough to buy camera/rent lenses • Used her nature shots to convince brides she could do it • Turned her biz into a downtown Van condo • Rule: anything she buys and brings home/something has to be thrown out it’s so small

48. Professor Bruce M. Firestone • Eseri.com, started by PhD entrepreneur, Bill Stewart (now cirruscomputing.com) • Provides lightweight Internet-based (actually cloud-based) desktops using proven freeware • Eseri based in Ottawa and Montreal • Started with nothing • Bill still gives $1,000 per day seminars on project management software • Uses stock options to keep his core group of developers on the job. • Leverages what money he puts in with GOC (Government of Canada) IRAP grants

49. Professor Bruce M. Firestone • Great Depression of 1930s • King Clancy built old Maple Leaf Gardens same way • Paid his workers with ‘script’ • If ‘Carleton Street Cash Box’ failed, script wld be worthless • Fortunately for workers and Toronto Maple Leaf fans, it wasn’t • Able to redeem it for more familiar currency and feed themselves and their families

50. Professor Bruce M. Firestone • Reynolds Brothers ran sawmill (est in 1870 by Orson L. Reynolds) in Adirondacks