Lessons for Start Ups Seeking Money in Perilous Economic Times

The recent market meltdown presents challenges for entrepreneurs with new business start ups. Where will they find customers prepared to buy from them if prospective customers are cutting budgets? How will they capitalize their businesses when suddenly angel and other investors begin husbanding their money rather than funding new ventures? How will they deal with banks that suddenly change the rules about lending? Here are some practical tips to overcoming the obstacles of a challenging economic climate.

1. Keep your costs to operate as low as possible. If you can operate your new start up virtually, do so for as long as possible. There is no need for opening an office when the tools of the Internet allow you to be virtual. There are web meeting places, conferencing tools, business centers with boardrooms that can be rented, and lots of other ways to carry on your business without tying up precious cash in leases. I use Skype as much as possible because I can place calls through the Internet using a headset and microphone and even setup teleconferencing. There are many inexpensive web tools like Glance and Go-to-Meeting for doing online presentations. I recommend these all the time to the start ups I work with.

2. Make the product you are launching a "killer application." "Nice-to-have" applications will not fly in these economic times. So choose what to work on with that in mind.

I recently came across a Canadian company that has created Pipe Shield, a water pipe rehabilitation technology that applies a non-toxic epoxy to the interior of pipes in buildings, industries and municipal water systems extending their usefulness for years without requiring replacement. This by anyone's definition has the potential to be a killer application.

How about a technology that combats chemical spills by shutting them down quickly using a simple, yet sophisticated device that acts like a drain plug? ChemiGreen has developed just such a device and software to eliminate environmental consequences from these types of industrial accidents. This is another potential killer application.

Web 2.0 applications seem to be a dime a dozen these days. What constitutes a killer application in the software world? Recently I began working with a company that is trying to address a growing social problem, high school dropouts and their societal impact. How can software play a role? This company, Enable Consultants, came up with the idea for an academic social network that engaged kids, teachers, parents and schools in the after school time period. The product, Recess, includes reward points for student contributions to the network and for academic achievement. Points are converted into products or services provided by corporate sponsors, from banks to sports teams to consumer electronics suppliers. In addition, the software integrates a mentor network that matches students to successful individuals in business, sports, entertainment and politics. It does all of this in a private network that is secure from the potential bad behaviours that can occur on public social networks like MySpace and FaceBook. This is more than a nice to have Web 2.0 application because the consequences to society of disengaged youth are enormous.

These are just three examples of killer applications or products that are compelling to an angel or private investor even in tough economic times.

3. Check out all sources of funding, not just angels. Here are 3 methods of self investment:

a. In the U.S. and in Canada, retirement savings in government registered plans can be reassigned to become a personal investment in a business. 401K or RRSP rollovers shouldn't be done lightly but the means to do them is available. If you would rather invest and believe in yourself rather than the current stock market, you may want to explore the potential of this type of financing. There are a number of U.S. companies who can expedite this type of self investment. One is Guidant. Canadians can use RRSP savings in novel ways without tax penalty. Ask an accountant who understands the ins and outs of RRSP usage in loaning money to your business. Not all accountants know what can and cannot be done.

b. Tax credits, small business incentive grants or labor subsidies provided by government, are other ways to capitalize your new business. In Canada, the Canada Revenue Agency or CRA offer orientation meetings on claiming Scientific Research tax credits. A company can recover as much as 70 cents on the dollar invested in research and development this way. There does not appear to be an equivalent program currently in the U.S., the last similar tax credit program having expired in 2006.

c. Small business loans, backed by government assistance are still available even in these tough economic times. Canadian and U.S. programs are typically managed and administered by local banks. In many cases these types of loans are partially guaranteed by the government so that your self-investment risk is somewhat mitigated.

As I think of additional ways for new business start ups to find the money, I'll post them to this blog. In the meanwhile, if you, my readers, have discovered novel ways to fund your businesses, please feel free to share.