Financing Options For Small Tech Companies

I went back and looked at all the MBA Mondays post I've written to date and what jumped out at me was a lack of discussion of financing options. Since the audience for MBA Mondays is largely entrepreneurs and the technology industry, I will frame this discussion in the context of what options are available for small tech companies. In this series of posts we will discuss the following financing options:

Common Stock

Convertible Debt

Preferred Stock

Venture Debt

Capital Equipment Loans


Bridge Loans

Accounts Recievable Financing

These are the options I've seen used most frequently in my time working with small tech companies. If you have suggestions for other financing options to be covered, please leave them in the comments and I will consider adding them to the list.

We will start next week talking about common stock and go from there.

#MBA Mondays

Comments (Archived):

  1. Morten Josefsen

    Didn’t Dell famously use customer prepayments as financing when he first started? I guess an internet equivalent option would be offering some kind of long term subscription with a “large” prepayment.Another option could be to get advertisers to prepay.

    1. fredwilson

      i was thinking of thati would call it customer financingit’s not available to every company but i’ve seen it used a bunch

      1. Siminoff

         Customer financing is the best way to go if your market works for it.  In my first company selling pre-paid phone cards on line we were able to get the cash up front and the outlay occurred over 120 days.  This positive cash flow allowed us to expand quickly based on the “loan” that our customers gave us.A second example of this is that I am advising a few lawyers that put together a platform for legal firms.  They are now pre-selling the service to a few firms to raise the final +/- $2 million they need to finish the product.  In order to make the deal juicy they are adding a tiny equity kicker to the firms that sign on now.The only issue with customer financing is that you have to make sure you deliver as the repercussions can be much more extreme then not preforming for investors.

        1. fredwilson

          yeah, nothing worse than a customer scorned 

      2. CM

        I would say Amazon is one of the best examples of how their operational excellence has led to high levels of positive cashflow which is an often overlook facet of their success – I can’t see many startups that can run with this model though unfortunately. 

    2. David Shellabarger

      Sounds like Kickstarter to me. 

      1. Ally

        agreed david…i tot i d only think like . how can bos of a big company stop other from buying em(i meant investor) out b4 they are ready to sell…?? hurm…Allyhttp://www.remediesforacnev…

    3. JLM

       Dell has the most interesting financial model.You “buy” your computer and pay for it before the assembly even begins.  Dell has your cash.Dell orders tons of parts from their vendors and inventories them subject to “net 30-60” payment terms.  The parts sit in trucks at the truck dock doors of their production facilities.  Dell pays no cash for your computer parts.Dell makes your computer and ships it to you.  Dell still hasn’t paid for the parts which make up your computer.A month later, Dell pays for the parts with your money having had it for about 30-60 days.They are really not in the computer business, they are in the check kiting or money laundering business.  In the nicest possible way, mind you.I was over at Dell one day watching them reconfigure a production line from PCs to servers (just bigger PCs, mind you) in about 90 minutes.  Everything is on wheels.  In 90 minutes they can change their production facilities to meet their actual book of business.Pretty damn impressive.

      1. Guest

        Aye; get $$$ first and relinquish $$$ later is a nice model, if you can build it.{Update: I actually wrote a little something about this topic on my blog about 10 days ago using Advanced Ticket sales of concerts as the example. Truly a great thing if you can get it for sure.}

      2. PhilipSugar

        Walmart is in the same business.  They don’t get the money before you get your product but they take longer to pay suppliers, 90 daysI sat on the board with the person in charge of East Coast Operations of Walmart.He said for every store they opened they generated enough cash flow to open two more.  At Walmart they want every item to turn at least 18 times a year.  That is their metric.  He would tell me in his Southern draw…”we’re simple Wharton finance boy”

  2. William Mougayar

    Government credits financing, but that could probably fall under Account Receivables.

    1. fredwilson

      we don’t have that in the USbut it exists in Canada, Slovenia, and Israel (that i know of)

      1. William Mougayar

        Right. I should have specified, if they exist.

        1. Team Luv@FirstTweet

          For some industries wouldn’t government research grants be applicable though?

      2. ShanaC

        why don’t we have? 

  3. Scott Barnett

     I’d like to see your thoughts on pros/cons of each option when you write about them, and if you do that, then also include bootstrapping/friends & family financing.

    1. fredwilson

      will do

    2. Charlie Crystle

      I’ll tell you one thing–when things don’t go well, it makes for uncomfortable family & friends events (especially in a smaller city). They like you when you win, and don’t take it well in the process of getting there when you’re making tough decisions to hep the company but that they don’t understand and feel effected by. But it’s a great source of capital. 

      1. paramendra

        Get back your Avatar, Charlie. 

      2. Scott Barnett

        Charlie – could not agree more – all the more reason why I’d like F&F to be part of this new “series”.  It’s critical that people understand the pros/cons of each of these options – both from the VC and entrepreneur point of view.  Given that a large percentage of early stage startups start out as boot strapped or financial assistance from people close to the founders, I think it’s an important part of this discussion.

        1. Charlie Crystle

          I can pipe in with specifics on that one once @fredwilson blogs on F&F. Andwould love a post on the phrase “hair on the deal”

          1. Scott Barnett

             LOL Charlie I hear that phrase WAY too much! :-)One VC I spoke to recently said they call it “bad hygiene” – I thought that was classic.

          2. Charlie Crystle

            that’s pretty good. folks what he’s referring to is the complications thatarise when you have too many angels, different terms over different timesand rounds. It’s really easy to create a bit of a crappy capital structureand scare off investors, who will want it cleaned up before they even lookat it.So when you’re taking friends and family money, consider grouping them intoa partnership and having just one person represent the partnership. Itshould have a single set of terms with the company; what it does internallyis up to the people in it, but it’s always better to treat peopleconsistently and fairly. The only thing I’d consider changing is honoringearliest investments with a bigger discount on the round, but you have to bereally careful to draw the line.

        2. PhilipSugar

          Very good point.  I haven’t experienced F&F firsthand, but I have seen the results from outside when things didn’t go as planned.  That has dissuaded me from ever considering.  Of course I have a very limited sample size. 

          1. Scott Barnett

            I’m stealing some thunder if/when Fred ever does post about this, but in the times I’ve needed funding, I’ve told F&F that they should EXPECT to lose all the money they put into my crazy idea, should they want to do it.  So far, nobody has taken me up on my offer.  I guess my terms haven’t been too good :-)In all seriousness, there has been plenty written about would-be angels who put money into 1 or 2 deals and are disappointed when they flame out.  Investing is HARD and you lose a lot more than you win.  So F&F need to know this beyond a shadow of a doubt before they put any cash in.

          2. PhilipSugar

            I guess I should wait too, but the problem I’ve seen is that while you can tell people to expect to lose money, nobody is graceful at doing it.Again my sample size is very small, but in my experience nobody likes losing money but around 25%-50% are crazy irrational.  That isn’t a dig on F&F, I’m saying that about everybody including VC’s. The problem is that like a broken up couple that has one crazy partner, nobody will want to come near for fear that the shit bomb which is going off is going to spray all over them.

  4. mike gilfillan

    Don’t forget Gold Card financing.  Remember all those “pre-approved, no interest payment, high limit credit card offers”?  — I mailed back 6 at the same time and got approved for all of them.  I bootstrapped my first Internet company with $60,000 in credit card debt.  I was 3 years out of college.  Paid it all off in first year of business.  Although this probably isn’t as easy today due to financial crisis, but probably will be in the next few years.

    1. fredwilson

      Yeah. Bootstrapping amex style

    2. Charlie Crystle

       you have to be careful with that, but yeah, you can simply move balances around. But eventually ya gotta pay up…:)

    3. Kasi Viswanathan Agilandam

      That is very interesting. It will be a good learning experience for everyone to read the details (not today in U.S… but would help someone from China/India.). May be you can write the detailed story on how you managed the fund moving things around as post in AVC MBA-mondays.

    4. BoochZilla

      +1At RevZilla, we did this as well. It floated us for a time as we moved toward customer financing within the first 90 days and beyond.

    5. ShanaC

      I keep thinking this solution is very high risk and that there should be better ways of getting that loan with lower liability…. 

      1. mike gilfillan

        Actually, at the time given the circumstances it was pretty low risk:  no loan to personally guarantee, no equity to give up, no friends and family relationships to put on the line.  No loan sharks to come break your legs.I was fresh out of college and knew that the only risk would be negative marks on my credit score/ratings.   I had grown up hearing stories from my father (an accountant) of how he helped a few of his struggling blue-collar clients negotiate their credit card debt debt way down.  He always said “pay the State first (sales & payroll taxes), then IRS, then secured creditors (loans, equip, rent, etc) … then last on the list pay down your unsecured credit card debt”.

        1. ShanaC

          Ok, then I guess I should hear more about what you did.Card rates have been getting increasingly usurious. It used to be a lotsafer to get out of college and carry the debt _ I now tell my friends tostay away and pay down quickly (lots of credit card debt floating aroundalready from college)

          1. mike gilfillan

            Yes, for college grads working on a career then credit card debt should be paid down (highest interest rate), then save for largest down payment on car/house/etc. However, for life-long entrepreneur to self-finance first business, the interest rates are simply the cost of short term non-secured loan to self from (hopefully) future earnings.  Basically, going “all-in” on my desire to start a business.   Nothing makes you strive harder for success than knowing you have to pay the bill for failure. I didn’t do anything special other than applying for cards all on same day (so banks couldn’t see that what I going well beyond the avg. debt capicity) and then just working hard to gain my first customers to pay off the debt.  Was working out of my small apartment, wiring my own network, building my own computers and desk (2x4s) and visiting customers in a barely running ’72 Olds.   Became profitable in first 16 months and grew to nearly $5m in sales in 4 years with 30 employees with 15% profits.It wasn’t until I took on VC money that I learned how to run an unprofitable business 🙂  but that’s another story….

          2. ShanaC

            Well worth hearing

          3. Guest

            very good

    6. JLM

      Brilliant.  Well played.  Well paid.You should form an association of folks who have founded businesses w/ credit card equity.  Priceless!

      1. mike gilfillan

        Not a bad idea!  I’m sure there are many.I actually had the opportunity to meet the CEO of Visa International at my lead investor’s conference in ’99 and personally thanked him for being such an early investor in my company!    He had a very confused look on his face until I explained.

        1. PhilipSugar

           Add me to the list.

      2. mike gilfillan

        I should also acknowledge that it was mostly my wife’s idea (we had just gotten married) and I think half the credit cards were in her name.   We were both young and naive, but were both the product of self-employed parents.  She ran the company with me as CFO.  I was going to chime in on last week’s 50/50 co-founders conversation but didn’t know where to begin — so many more dynamics when you sleep with your partner!   (fortunately we are still married :).

        1. JLM

          New twist on the ideal wife — “a lady in the kitchen and a courtesan in the bedroom.”A CEO in the Boardroom and a credit card kiter in the bedrooom?  I may have this twisted up just a bit.Of course, I am married to an attorney so the possibilities are endless. Getting screwed in the courtroom………….Let’s not go there!

          1. JamesHRH

            JLM – my wife’s joke is that I could not afford her as a partner. Would you be open to a direct email contact? I have found myself agreeing with 99% of your posts & we have a few touch points ( wives who are lawyers, YPO, Seasons of a Mans Life).I can certainly explain my objective concisely in an email & a few 2 pagers.Thanks in advance.

          2. JLM

            Txt to 512-656-1383 and I will reply w/ e-mail address. 

          3. JamesHRH

            JLM – my wife’s joke is that I could not afford her as a partner. Would you be open to a direct email contact? I have found myself agreeing with 99% of your posts & we have a few touch points ( wives who are lawyers, YPO, Seasons of a Mans Life).I can certainly explain my objective concisely in an email & a few 2 pagers.Thanks in advance.

    7. Paul Smith

       This can work, if you know what you’re made of, and you’re *sure* you have both feet in — even if your wife, your mother and your grandmother will all hate you before you’re done building the thing.If you’ve never tested your mettle & are just trying the “your own business” thing for the first time, at least go on Shark Tank first to find out what stands between you & the end game you see in your head.

  5. Gerald Buckley

    Judging by the frequency of the things – startup competitions (biz plans, biz models, etc) – seem to be popping up all over the place. Prize money with no strings seems to be a new seed round for those who score them. That was a turning point for us. Also, matching funds from the State helped. While they’re carried as Venture Debt they matched any/all equity funds dollar for dollar up to $100K. Our source was a State of Oklahoma outfit called OCAST and our “award” (as it’s classified) is called TBFP. I gather there are many others like them around the U.S. to help fuel the entrepreneurial fires out here.Many have better odds of winning a quick competition as attracting an angel round. It’s certainly a non-traditional path but it’s getting quite a few of us across the threshold.

  6. The Private Equiteer

    If making an acquisition, there’s Vendor Financing too.Also, Government Grants can provide sustenance.Just a few other thoughts on financing…1) Most investors/lenders are looking for a risk/return profile, and the financing options are the tools to provide their desired risk/return profile. 2) Experienced investors/lenders can also use these tools to skew value in their favor, often without the knowledge of the entrepreneurs. This is when you’ll hear the phrase ‘debt risk for equity returns.’3) The cost/benefit of an investment/loan isn’t just based on type of equity/debt and the valuation; the terms in the stockholders agreement can skew value more than most entrepreneurs realize.Debt risk for equity return…Preferred stock can often include a coupon. That’s getting pretty close to ‘debt risk for equity returns’ because you’re essential paying interest and the equity subordinates other equity. If there’s no debt/debtors in the company, well, preferred stock is basically the debt. Convertible debt can get just as close to ‘debt risk for equity returns’ depending on the conversion factor and terms.Consider contract terms too…Legal terms are also levers in the value equation. You and an investor may both have common stock, but terms in the stockholders agreement can easily push value in one party’s favor. Consider rights of refusal, non-competes, indemnification, lock-up provisions, drag-along rights, exclusivity, and more. These have real value. Entrepreneurs can inadvertently hand their company over to an investor that’s only buying a minority stake. It’s happened before and it will happen again.The Private Equiteerhttp://www.theprivateequite…

    1. ShanaC

       I think we should talk about this further (i mean here)

  7. Kasi Viswanathan Agilandam

    Stocks based on performance (mostly on the entrepreneurs side) Is it covered in any of thetopics mentioned above? We recently signed a document based on performancei) 26% for the investment and we achieve 100% of what we say we will doii) 33% if our performance goes down to 60%(by performance … it is only financial performance … meeting our target numbers).Is this a common practice in VC circles? (he is not a formal VC but a successful entrepreneur who has created a fund). Would like to hear your opinion on such thing … it won’t help me now (as i have already signedand pledged part of my stocks in escrow account) but will help others who may go through this.

    1. Charlie Crystle

      Bad incentives lead to bad decisions, just to preserve equity.Anyone remember where the term “shipping bricks” came from?

      1. Kasi Viswanathan Agilandam

        Yes i understand where the “driving-things-hard leads to bad ” comes from.But i have seen it with another company who did the same with a well known VC firm (i don’t want to mention the name of it). I thought it is done sometimes. I found the guy logical … he is ready to go to 20% if we perform better thanwhat we promised….he will distribute the 6% to employees … which convincedme that he is genuine in driving thing better than harder. Only time will tell whether my judgement is right. Thanx charlie for the reference.

        1. Charlie Crystle

          I have specific experience with this and made a ton of mistakes pushing for arbitrary milestones instead of properly building a new division. I’d avoid it, settle on a valuation, and don’t get distracted by tying milestones to valuation. 

          1. Kasi Viswanathan Agilandam

            Thanx for the advice and I understand … but we have already signed the docs (2-months back). Now i have to wait to learn whether it is a big-mistake or just another risk we are taking. There are 3 of us … the other 2 were convinced and so am i with  distributing the earned 6% to employees if we perform better.Well there are some learnings that we have to “learn the hard-way”. May be this is one of them for me. Thanx again for the advice and hope this conversation help someone. 

          2. Kasi Viswanathan Agilandam

            I could not find a “reply” button to your last reply so i am replying here (tried 2-refresh, re-load). I could see only the like button so i liked it :-).We decided to give the 6% for those who stick around after the judgement day (2-years  and 10 months from now ) based on the options % they have right now.

  8. Guest

    What about Revenue Share agreements? A startup getting financing/revenue lift via Biz Dev relationship with a larger, established company.{Update: I have seen this mostly w/ service type companies. For example, VAR uses a sell-thru or install deal with a larger company to bootstrap their startup.}

    1. fredwilson

      hmmi’m not that familiar with this approach. maybe because we don’t invest in services businesses 

      1. Guest

        Yeah, I almost did not mention it because your post talked about this topic in relation to ‘small tech companies.’ I decided to go ahead and throw it out there because I have seen it used with VARs, etc. that do touch on tech space; just not likely USV portfolio profile companies. It is just a specialized form of bootstrapping (revenue/profit generation). It is unique in that a small startup can practically self finance from day one because they have an agreement with a larger company to perform some aspect of a larger project (e.g. Large Co sells project &Small Co might do install/service/diagnostic testing, etc.). There are unique risks to this approach obviously (key customer being just one) but it is an option for some folks in certain industries and it can keep upfront investment to a minimum.

  9. Sebastian Wain

    In US I think you can apply to financing via agencies such as DARPA and NIST. Obviously your project must be compatible to the “financing call”. I remember reading about Tom Sawyer Graph Visualization Software financing. This is the link from NIST with this and other case studies:…In Argentina (and probably in other “developing” countries) there are  NRF (Non Refundable Funds) where you receive the 50% of funding of a winning project (i.e. from a government agency). Our company won one of them for a specific innitiative.I don’t know if a exactly similar financial instrument exists in US but I am sure that EU has a lot of initiatives to help companies financially. In Chile there is a program called “Start-Up” chile.More information:- NRF in Argentina (in english):…- Start Up Chile discussion:

  10. Charlie Crystle

    Customers. Number one best source of financing, and I mean through sales, service contracts, and sometimes, prepayments. (spelling: ‘receivable’ not ‘recievable’)Some others:Kickstarter-type optionsFoundation grantsGovt grants (DARPA, etc)Options on firstborn (but limited to one per employee)

    1. Geoff

      Nothing to beat pre-payments! you then know you have VERY keen customers 🙂 

    2. awaldstein

      Prepayments for early stage products is a dream not often realized.If I change this to NRE based development for early customers, it starts to sound more realistic.

    3. ShanaC

      Charlie, you’ve been having login options. 

  11. Kyle S

     For bigger (non early stage) companies, you might write about asset-based lending (i.e. AR and inventory facilities, as distinct from factoring AR) as well as mezzanine debt.

    1. fredwilson

      i wrote AR Financing in the list, but i should probably call is asset based lendingthanks 

  12. markslater

     Goodwill? 😉

  13. ShanaC

     Can we discuss these in context of “size of your business” and “where are you going with your business?”Eg: is it better to take a loan when you are a small business and you are slowly scaling up?

    1. Guest

      Even if Fred does not frame each of these in this manner, the broader community can touch on this. They are good contextual parameters to frame a part of the discussion.

      1. ShanaC


  14. paramendra

    Great pick. This was a big hole in the offering indeed. 

  15. Guest

    SBIR grants ( can work for academic types spinning their research out into the commercial marketplace. But it tends to be a major distraction — you might want to list it as a funding type to avoid.can work for academic types spinning their research out into the commercial marketplace. But it tends to be a major distraction — you might want to list it as a funding type to avoid.

    1. Guest

      Good comment and resource highlight. I have heard both positive and negative comments about SBIR process. I have zero experience with this to the best of my recollection. However, I recently attended a seminar on grant writing for some non-profit stuff I am doing. I was provided the name of a local resource that works SBIRs. If Fred includes this I can try and see if they can provide some information for discussion.

      1. Gorilla44

         I know the process very well and have secured a number of Phase 1 and Phase 2 SBIR grants. It is only a distraction if you deviate from your goals and apply for grants on topics outside of your main focus.I would never count on grants and only see them as “gravy.” But $200K – $1M+ of gravy is pretty darn good.I agree with Guest that it is very good for academics spinning things our of their lab, but I do think it can be very good for companies as well. It is all about focus.It is definitely not something to avoid.

        1. Guest

          @168eabd0f099d310caf76736f858376a:disqus  thanks for chiming in with your experiences as well. Appreciate the opportunity to listen to differing experiences and thoughts.

        2. JLM

          That is a very nice thick tasty gravy. 

  16. Peter Sullivan

    Subordinated debt was alwaysssss something I had a hard time understanding.

  17. jameyjeff

    When you cover preferred stock, it would be valuable to touch on different variables including participating, liquidation preference, participating w/ caps, etc.  More importantly than just describing the structural difference is covering how the influence / alter incentives for the investor and the entrepreneur, depending on different valuation and exit scenarios.Separately, how about warrants?

  18. ErikSchwartz

     I got a $500K state grant for a previous company. The problems are:The process is epic and convoluted (8 months from application to award). The reporting and accounting requirements are a PITA.These organizations do not understand that the technology world moves rapidly and companies who adjust their plans are to be commended not punished.You need someone nearly full time to manage the process and you need to control information very closely. We had a board member who went shooting their mouth off (and was incorrect in his statements) to one of the state grant people. It took me months to undo what this guy did.Finally, ours required a match. If I can raise the first $500K for a match, raising the second $500K is easy.Whenever anyone talks about the government getting into the VC business I cringe.

    1. Guest

      PITA made me LOLCan you talk more about the ‘matching’ aspect if this topic gets touched on in the future – or share now if you have time. I understand this is not always dollars invested but can include in-kind as well. Do you recall if that is/was the case?

      1. ErikSchwartz

        It required a 1 for 1 dollar match. It could be in kind match, but in kind match required more discussions with bureaucrats and paperwork to discuss the value of the in kind match. Here’s the real rub. The agency puts about $5M a year to work. Not counting the actual investment decisions (which are made by 3rd party volunteers and contractors) the agency has something like 15 administrative staff members. Those people need to do something that makes their employment seem important. So everything is about “their process”. Everything is backwards. All the companies put together a ~40 page application package. Every single one of those huge packages are reviewed. The top ~10 are invited to pitch live. But those pitches are limited to 15 minutes. Basically they pay to do due dili on EVERYONE and if you pass dili you get a speed pitch.

        1. Guest

          Thanks for taking time out of your busy schedule Erik to share this information from your experience. #appreciation

    2. petermengo

      Fred’s article – as always – great timing.  BTW – Also tried the grant and state funded convertible debt process.  Wasted our time – took two months for them to read the app, and then two more months to respond to a question.  We had applied for others with similar results. Talked to numerous other companies with same results. If you have to move quick, this is not the way to go. States as a whole, still don’t get it.

    3. Chris

      This is a really important point that I think is essential for founders to understand – here in London I am often hearing about entrepreneurs wanting to chase Government grants but they really are not as simple and hassle free as they may sound. Often, if you don’t know exactly what you are doing you can be much better to avoid them all together! 

    4. fredwilson

      well i’m now convinced i should add government grants to the list of financing sources. i’ve head plenty of stories like this

  19. Alexander van der Touw

    Equity for services. Providers of services ranging from technology development to housing may offer their services in exchange for equity, thus effectively providing a part of the funding. I have seen this a few times but I’m not a big fan of it. Although it may look attractive in the beginning, the start-up is in a very difficult position when it needs to discuss terms with the supplier/shareholder. In general, the combination of these two roles is a guarantee for problems.

    1. DrTC

      Why do you think it is a guarantee for problems? It seems like a good idea, but I’m curious about your opinion.Thanks!

  20. Gorilla44

    I know the vast majority of participants on are tech-focused, but for the life science folks you have the following (in addition to what has been discussed):- SBIR grants from the NIH, NSF, DoD – very competitive, time-consuming and can take 1 year to get. But free money and often can be big ($1M+).- appropriations or earmarks – time consuming, you need a lobbyist, can be stopped if Congress gets a bug up their a**, but can be very big ($3M+)- R&D partnerships or collaborations with bigger companies. Big pharma is voraciously hungry for products and is getting more aggressive with these types of deals and with earlier-stage companies.

  21. John Ayers

    For software developers, NREs (non-recurring engineering fees) are also used both for early and later stage companies to build out features for a client that in reality can help both fund the company and be used to build out the feature set for other clients.

  22. Passing Through

    Funny, I was thinking about business school until I saw this.

  23. goldwerger

    I would add both vendor and customer financing, in the specific context of tech startups, which typically means:1. Vendor side – getting IT services against equity or loan – e.g. I talked few weeks ago with a startup that did a deal with a Chinese offshore dev team to do their product in exchange for equity.2. Customer side – most commonly this would be a major beta customer that would be willing to fund a customized project (the price the team would pay for getting financing to run the rest of its business). More common in b-2-b. Often this is done for free, so there needs to be a strategic/unique value, but totally doable.Eyal

  24. mike gilfillan

    Yes, for college grads working on a career then credit card debt should be paid down (highest interest rate), then save for largest down payment on car/house/etc. However, for life-long entreprenuer to self-finance first business, the interest rates are simply the cost of short term non-secured loan to self from (hopefully) future earnings.  Basically, going “all-in” on my desire to start a business.   Nothing makes you strive harder for success than knowing you have to pay the bill for failure. I didn’t do anything special other than applying for cards all on same day (so banks couldn’t see that what I going well beyond the avg. debt capicity) and then just working hard to gain my first customers to pay off the debt.  Was working out of my small apartment, wiring my own network, building my own computers and desk (2x4s) and visiting customers in a barely running ’72 Olds.   Became profitable in first 16 months and grew to nearly $5m in sales in 4 years with 30 employees with 15% profits.It wasn’t until I took on VC money that I learned how to run an unprofitable business 🙂  but that’s another story….

    1. PhilipSugar

       I love that last line!

    2. fredwilson

      back in the late 90s, we invested $10mm into a business that was doing $5mm and making money. they quickly turned into a business making $5mm and losing money 

      1. mike gilfillan

        Yeah, once you’ve figured out how to actually make money running a lean organization, it can be difficult to get the company to shift gears and “spend money to make money” in the right way. 

  25. Richard Burton

    I’ve been looking around at the different options for funding. I’ve been trying to really understand when convertible debt is better than say common stock/preferred stock and the side effects related to it.Convertible debt allows you to postpone the valuation process and avoid all of the long drawn out legal processing. On the other side, it comes at a cost of reduced pricing when the company goes for a Series A funding.Richard L. Burton IIIFound of

    1. JLM

       I have had some great experiences in forming and sponsoring purchasing cooperatives in highly regulated businesses.  The savings are huge.I am interested in your new website and company.There is quite a bit of law out there about these kind of organizations.  One major US university — name escapes as I am not at my regular computer — has an entire purchasing coop institute.There is also a business to be built about forming selling cooperatives.

      1. joeagliozzo

        Was the “highly regulated business” qualifier important? – Curious! 

        1. JLM

          Only in the context that our efforts were subject to intense regulatory scrutiny and therefore we probably did a bit better job than just satisfying the business implications from a purchasing discipline perspective.The licenses we held in this industry would have precluded our involvement under normal circumstances.  We were forbidden from being involved in the operations and could not use our existing corporate structure to undertake any purchasing functions.We formed a wholly owned corporate subsidiary which we positioned as a “consulting”company and therefore not acting in a capacity which required a license.We had this blessed by the regulators who begrudingly acknowledged that our strategy would dramatically reduce the cost to the entities they regulated.The consulting company then created and operated the purchasing coops.The resultant savings were huge.

          1. joeagliozzo

            Are you kidding me with this? Statute of Anne in 1709?  JLM’s areas of expertise – military history  – checkmilitary strategy – checkconstitutional law – checkpre-revolutionary English common law – checkcorporate finance – checkworld history – checkus history – checkaccounting – checkoperations – checkaviation (pilot) – checkBBQ – checkJLM – you are amazing and an inspiration!

          2. JLM

            Actually, I have not yet shared my greatest expertise — fishing.  Fishing.  I love fishing.  I adore fishing.

  26. kidmercury

     credit markets in the united states are in the process of collapsing. the result will be massive dollar devaluation, decline in buying demand for all goods purchased with credit, higher interest rates. as such, debt-based financing in the US dollar economy will thus become increasingly unfeasible. dollar-denominated equity financing may still have plenty of opportunities, but in all, the pie will continue shrinking until monetary and financial reform is properly implemented. 

  27. Jeff Bodle

    I would add in somewhere a discussion of quasi-government funding (ie NYC seed and other funds that act like investors but are primarily backed by or have a significant backing by local or state govt) and then also accelerators (and variations on that theme) and whether or not to join one (and if so which one) and get some initial funding that way as they have increasingly become a part of the discussion (although that could probably be a whole separate series). 

    1. fredwilson

      yes, that is going onto the list 

  28. Donna Brewington White

    Well, I’m not the target audience — at present, that is — but really looking forward to this series!Just recommended your series on equity to a founder at a crossroads on the subject. Great to have these MBA Mondays as a resource to offer.

  29. Eunice Apia

    I have questions:1. (This is the only time I will reference “The Social Network”), In the scene where Eduardo Saverin loses all his stockholding in the company because he was “inactive” in his position. How did that happen without his knowledge. How can a stockholder prevent that from happening in early, mid or late stages? Was it legal? If yes, why?2. How can a company or CEO prevent investors, partners etc…,from buying them out forcefully before they are ready to sell?I might have more questions after reading future blogs.

    1. fredwilson

      i never saw The Social Network. and i don’t plan to. it is fiction not fact. but beyond that i can’t help since i didn’t see the movie 

      1. Eunice Apia

        Don’t worry, you are not missing out (by not seeing the movie).If you do decide to write on the suggestion I gave in the future, I have resources if you want any.The problem as a new enterpreneur is that there are so many resources that I’m overwhelmed. I don’t know whether to narrow my choices in funding or try for all of them. So the question because which is a better fit to reduce time consumption.I would hate to spend months working on a business plan for a business competition which I found myself doing only to find out the investors don’t really care for them. I would not want to be a part of an incubator and down the road realize that I’m giving 6% to a entity that is not passionate about my vision. And then there’s is how do you find a seed investor without a prototype if you don’t have funds to create a prototype. So many questions…

  30. Cristopher Boyer

    I’d personally like to see something on crowdsourced financing, like Kickstarter and Profounder.

    1. fredwilson

      our firm is an investor in Kickstarter. i can’t be unbiased in a post on that topic 

  31. JLM

    Apropos nothing, speaking of finance, Google sold some bonds today at a ridiculously low price and comparable to the WalMart bonds sold in Oct 2010.The proceeds were used to pay off virtually all of their short term debt.This shows the benefits of “new” economy companies with huge amounts of cash on their balance sheet being able to finance ANYTHING at costs which are absurdly low.These guys are currently borrowing money within a half to a point higher than the US Gov’t.While I think the nonsense about the Nation’s debt ceiling is all a bunch of baloney, it will be very interesting to see what this does to the bond market wherein it may be cheaper to borrow because investors like Google more than they like Geitner.

    1. Tom Labus

      Well, Geithner and Bernanke seem to be still alive after the Pimco short and in fact the Government bond market has rallied.  Low rates, at this stage of the economic cycle, are beneficial for both government and private borrowers. 

  32. Antony Evans

     Two extra items I might consider discussing for your list:1) Financing via revenue (an interesting discussion on the merits of bootstrapping vs the other financing options you discuss)2) Getting grants to pay for your business.  This is more common in Europe (esp. Germany) where several entrepreneurs I know have done this.  The huge downside is the long lead times for this kind of financing and the fact that you end up having to contort your business to fit the grant making bodies needs (eg locating yourself in a deprived town, or targeting specific sectors of interest)

  33. Peter Saal

     Thanks Fred, looking forward to reading it. I agree with Charlie, perhaps Kickstarter should be another option, for certain kinds of startups, at least.

  34. Rebecca Levey

    So looking forward to this!  We are preparing to do a friends and family round for and the conflicting advice about various funding methods is both confusing and frustrating.  Hoping for some clarity.

  35. Morgan Linton

    Really looking forward to this series, great idea Fred and as always I’m ready to learn!

  36. Ian

    Not really for startups generally, but Export financing is available for export businesses and for large infrastructure projects through export credit agencies, such as Ex-Im in the US, Coface in France and EDC in Canada. I mention them since they have been active in financing satellite projects lately, including startup O3b

  37. Jules Maltz

     I heard someone say: “You can finance your business with revenue from customers or equity from VCs…and believe me that the customers are far less dilutitive”

    1. andrewparker

       A similar saying I heard: “If you start generating revenue you can be fundraising everyday.”

  38. Paul Dimoh

    Looking forward to this. 

  39. michaelaiello

    A friend of mine managed to build a business with a “Credit for Equity” exchange. It worked like this.Entrepreneur approaches several successful professionals in his area (medical devices) and proposes that they get shares in his new company without putting anything down if they co-sign a bank loan with him.The professionals agree and everyone walks into the bank together and cosigns for a large bank loan.The professionals only have to pay if the business fails, but they get upside without putting any money down.This story ended with my friend buying a cosmetic surgery practice, turning it around and then selling it off for significantly more than he bought it for.

    1. fredwilson

      wow. that’s interesting 

  40. The Mayor

    I advise my clients to seek strategic partnerships. Collaborating with more established companies can lead to both funding and marketing/distribution possibilities.

    1. Emma Hobes

       Sweat and blood will be the cost for this in my case. Big companies tend to be snobby and will almost ask you to dance in front of them first before they “might” consider to take the time of reviewing your proposal. Outsourcing could be an option though.

  41. Eunice Apia

    I would love to hear your thoughts on the pros and cons of Incubators, Business Competitions and Accelerators vs Loans, Seed funds and Investment firms.  Which work best for a small entrepreneurs and the technology industry.

    1. fredwilson

      good suggestions 

  42. Ward Supplee

    The Founders Institute (a rapidly growing incubator) employs both warrants and a special class of stock called “Class F” shares. It might be interesting to cover those topics as well. 

  43. Graham Arthur Munro

     You have to talk about the three F’s (Friends, Family, Fools).  It’s where most of the the unproven entrepreneurs get started.  I used this option for my first company – it was the only option at the time.  And also for my most recent company launching in a week – because it was the quickest option.

    1. fredwilson

      i will do that. it is part of the common stock section 

  44. BuyGiftsItems

    I had grown up hearing tales from my sister (an accountant) of how they helped a number of his struggling blue-collar clients negotiate their credit card debt debt way down.Kamagra

  45. Tereza

    When I’m combing the market for women who are actually getting it done, I’m seeing a very different set of financing options.  Would be great if we could explore these as well:–Have a Rich Dad (Ivanka Trump)–Marry a Wealthy Guy (Arianna Huffington)–Get Cast on a Reality TV Show (Bethenny Frankel)–Publish a Book and Plow the Cash into the Startup (Amanda Hesser, Lauren Leto)

  46. awaldstein

     Thanks Charlie, checking out the link.

  47. paramendra

    Looks like a fake Charlie Crystle has showed up here. Oh well, what fame can do to you. 

  48. ShanaC

    problems, typed too quickly, too many things on my mind

  49. ShanaC

      I’m trying to finish up a webpage with my resume on it (actually, technically, two, though over time I may add more versions) for job hunting reasons.  I’m ready to shoot jquery ui in its proverbial foot – the theme disappeared!  And I need to figure out where it went (I probably connected it incorrectly, because I have been swapping in and out themes).

  50. fredwilson

    you are channeling Jerry on that comment Charlie 

  51. ShanaC

    i need to email you off of here about that (nothing bad) 

  52. Donna Brewington White

    Regarding your comment below — I know I haven’t gotten back to you on FB resume thing.  Too much happening but should peace out in about a week or so.  Keep me posted. Would like to check it out!

  53. Donna Brewington White

    Re: @fakegrimlock:twitter  Why do you ask?Yeah, where is he (it?) lately?Miss him/it.He, Kid and Mass Man (or whatever that was) never seem to show up at the same place at the same time.





  56. ShanaC

    i’ll keep you posted down to the numbers (the numbers should be very interesting) when I finally can figure out my jquery theming problem