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Looking for some advice on staffing/funding a software startup

Our company is currently <10 people and are a service provider for an OEM software solution and over the last 4 years have developed our own product. We've recently starting showing the product, under NDA, and the response is very positive. We're currently looking at booking a few orders in the next few weeks and will need to add staff to ensure we meet deadlines and have successful implementations. From a cash flow standpoint I suspect we'll need to hire more than the cash flow will allow - SaaS model solution. I prefer not to go down the road of investment capital, and the current line of credit isn't substantial, so I'm looking for some unique ideas on how to add staff while maintaining good cash management. Based on early signs we'll need to be at 25+ by end of year [likely more than 40, but working with conservative planning] FYI: We've shown the product to a myriad of companies - Fortune 1000 to >$10mm and the reviews, as mentioned, are positive. Some have already offered up PO's, unsolicited. - the clock is ticking and we need to act now to make sure we don't miss the bigger opportunity. Options on the table: 1) re-mortgage the house 2) offer low salary, but include stock options? [we only have partner shares at the moment - so not sure how to address this piece yet] - whole new bag of worms 3) Friends/Family Investments 4) run lean and mean, which will inhibit growth I appreciate any insight Thank you

Answers

Philip Rooms
Title: Board Member
Company: Smartesting
(Board Member, Smartesting) |

I think the first question you should ask yourself is why you have eliminated VC funding. It will provide access not only to money but to people who have the relevent knowledge and experience to help your company grow. They are on your side. Their primary goal is to help you succeed.

Marcel matte
Title: CEO
Company: BMI-Cloud Solutions
(CEO, BMI-Cloud Solutions) |

Philip, I haven't eliminated VC's at this point, but prefer to find funding sources that would leave the ownership control and shares in tact. However, I do agree that the value they bring would be welcome and their expertise would allow us to focus energy on our strengths.

We do have an outside reviewer that's associated with a couple VC's and he does believe we would be a decent candidate...but also warned that we should show a bit more progress - ie, orders.

Thank you for the response and we'll keep this in mind.

Topic Expert
Jaime Campbell
Title: Chief Financial Officer
Company: Tier One Services, LLC
(Chief Financial Officer, Tier One Services, LLC) |

Consider temporary compensation arrangements at a % of the gross proceeds. Also consider barter arrangements with outside consultants. There are important details to consider with both of these which I would be pleased to discuss with you privately.

Marcel matte
Title: CEO
Company: BMI-Cloud Solutions
(CEO, BMI-Cloud Solutions) |

Jamie, very interesting idea - never heard of anyone doing this..I'm intrigued.

Let me mull this one over for a couple days.

Topic Expert
Paul Benedetto
Title: CFO, Director of Finance, Consultant
Company: Nextwave Software, Rethink Fabrics
(CFO, Director of Finance, Consultant, Nextwave Software, Rethink Fabrics) |

Having lived through somewhat parallel situations, my first reaction is to see how you can get a bank or hybrid asset based lender involved. I would start with updating your financial model, to see what the scope of your cash needs are over the next 3, 6, 12 and 24 months. For the immediate you may need to cover the bases in bootstrap mode, until you can get the cash for growth. Some avenues are quicker than others and all are a diversion when you least need it. Note that the VC route will likely take the longest and I would throw up caution flags. Lots of positives, but many negatives - again, having lived through this with several startups...

My gut tells me from your initial overview - staff figures is that you first need to revisit your financial model. The tighter your figures, the easier the process and hopefully "yes" answer will be to come by. I would also caution doling out stock options to attract talent, at least initially.

Would be happy to give you more of look (complementary) if you want to private message me; as I am currently working with a couple firms to shore up cash needs now and do this often.

Roger Whitham
Title: Managing Director
Company: Bassett Bridge Associates
(Managing Director, Bassett Bridge Associates) |

If market response is as positive as you've indicated then try to front load your purchase orders with up front payment of all or at least a substantial portion. In the past I've boot strapped two startup software companies by getting up front support from early customers who know the truth about the business. If they believe in you and your team they'll lend you the support, but you'll owe them big time and they'll always be priorities even if the revenue stream isn't there. But don't worry because if you deliver the goods they'll be your biggest supporters and life long friends.

Marcel matte
Title: CEO
Company: BMI-Cloud Solutions
(CEO, BMI-Cloud Solutions) |

Roger - I like this idea and will start a dialogue with one of our prospects. If I can get them to agree to a multi-year deal, with pre-payment that would help move us along.

John Argo
Title: Consultant
Company: Independent Advisory Services
(Consultant, Independent Advisory Services) |

Lean and mean #1 always.

I'll echo Paul's comments that VC funding is slow, expensive, and a big distraction, especially if you're pre-revenue. Think of venture funding as plan B or C, not as an exclusive choice but only if you're successful with plan A and B.

Rumor has it the SBA will be easing their collateral requirements (i.e., your home) in 2014. You might check into eligibility for 7a (SBA) backed loans (find a bank that does them) and whether the scale will fit.

Options are a mixed bag. They may be the best choice given near-term cash constraints but they're best done with experienced guidance. A VC would require an option pool, anyway, so if this is an option that allows you to stave off VC funding, you should consider it. Remember, a VERY small percentage of companies that seek venture financing actually get it.

Friends and family is also a mixed bag. If you need significant equity financing later, some investors will see it as a positive (bigger incentive not to fail) or a negative (more unsophisticated investors on the cap table creates risk).

Making sure you have pricing right (money from customers is best capital) and revenue model (discount for annual/other subscription basis) and focus on MVP (minimum viable product)--release early and often let's you make course corrections easier.

Remember that as founders, if you ask people to share the risk (below market wages during early stages), you need to share the rewards appropriately.

Marcel matte
Title: CEO
Company: BMI-Cloud Solutions
(CEO, BMI-Cloud Solutions) |

Thanks John - Appreciate your thoughts and insight. This is a new area for me and all the responses have open my eyes to a few options..and concerns I need to consider.

Gary Honig
Title: President
Company: Creative Capital Associates Factoring Co..
LinkedIn Profile
(President, Creative Capital Associates Factoring Company) |

All things being equal, as you have rightly considered - investment capital is quite expensive and could potentially alter the trajectory of your business if your new partners feel a pivot is needed to enhance their return.

This emerging small business profile is a good match for utilizing accounts receivable financing. It would require switching completely from your existing conventional line of credit. The situation you describe is quite typical. As a company grows, it's momentum outpaces a bank line which relies on historical performance.

Your performance is now in front of you not behind. With invoice financing the question of funding is based solely on the customer's ability to pay. As long as the customer is deemed creditworthy you have uninterrupted access to working capital based on completed and accepted work. You can literally go from zero to sixty without having to re-qualify for a larger line amount.

As you attract larger customers (ie. Fortune 100) they will dictate the sales terms. Being able to safely offer 30 days terms will be a selling point.

So, you retain complete control over the company, and eventually as you reach a critical mass of revenue, the plan is to graduate back to conventional lending with the bank. To put this in play, your business plan does not matter, you don't have to sell your projections or test your elevator speech.

J.G. Collins
Title: Managing Director
Company: The Stuyvesant Square Consultancy
(Managing Director, The Stuyvesant Square Consultancy) |

Anonymous, you have been presented with some good notions here. I would offer only two:

First, building on Roger Whitham's, notion, you might wish to ask those enthusiastic prospective customers to introduce you to their bankers, with them present, so that you can explain your situation and, perhaps, leverage the prospective customers' good standing with their bankers into a good relationship of your own. Sometimes, a good introduction from a trusted client will ease the way for financing that would be rejected out-of-hand were you to approach the bank "cold".

Second, the move toward crowd funding comes with lenders as well as equity investors. You might want to look at crowd funders like SoMoLend.

As your business grows, its vital that you keep days working capital to a minimum so that only a very small amount of cash is tied up in work in progress.

For example, Roger Whitham had suggested front-loading payment from those early, enthusiastic, supportive customers. I would suggest that you should at least consider this strategy as part of your business plan as an alternative scenario. If customers are willing to pay you early (even in an SaaS model), and you can build that as your "standard" pricing arrangement; then you can ask other customers who are unwilling to pay up front to compensate you for carrying their float (e.g., by putting an interest charge into "late" collections.)

If you can show your lenders several quarters of very short days working capital, together with a "golden" client base of highly credit-worthy customers, they'll be far more willing to lend, other things being equal. And if you should run into short-term cash flow shortages then you and your partners can use personal LOCs or even credit card funding, knowing that you can repay the debts promptly.

Anonymous
(CEO) |

J.G. - you're absolutely right. There's been some good advice and I'm working with our largest prospect on securing a multi-year contract where they would front load the payment and receive some incentive for doing so. We've also already secured a multi-year agreement where we'll receive pre-payment on our second year sale once we get sign off on a completed implementation.

We'll also continue to look at other options for additional funding as we go. We've already been approached by a few advisors stating they could make the introduction to Venture firms - should we need to really scale.

I truly appreciate everyone's feedback and I'm sure I'll be reaching out to a couple of you for some additional insight.

Best

Steve Breitman
Title: President/CEO
Company: Mindful Business Solutions
(President/CEO, Mindful Business Solutions) |

I think its important that you seek out many sources of funding simultaneously. Each source requires different amounts of time and effort to come to fruition. Here are some ideas.

I would not be so quick to throw out equity funding. If you know the right places to look and have prepared an enticing investor package you might be able to hook some Angel investors relatively quickly. This type of investment will not require that you give up control of the company, but could give you the cash needed to get over the current hump.

P.O. factoring could be a viable, but expensive, option. You mentioned that you have or could get several purchase orders for your product. There are companies out there that are willing to give you an advance on them. I would save this option to last because of the high interest rates charged.

Look to friends, family and investors with an affinity for your product to give you a convertible note. Convertible notes tend to lower the entry bar. People who might think an equity investment is too risky may be more likely to lend money when they know they'll earn interest. They also have the ability to convert the debt into equity if the company is as successful as you think it will be.

Depending upon what your product is, you may be able to solicit advance orders with deposits. If you have enough of them, the deposits might carry you through.

The bottom line is be creative and don't limit yourself to only a one or two options or only to the options you really like. Throw it all at the wall as see what sticks.

Gary Honig
Title: President
Company: Creative Capital Associates Factoring Co..
LinkedIn Profile
(President, Creative Capital Associates Factoring Company) |

Steve, Purchase Order Financing and Invoice Factoring are two different forms of financing. One is based on the ability to perform, the other is based on the account debtor's ability to pay. Each has limits of when and how it can be utilized.

Save commercial financing for last? High interest rates compared to what? What do you expect any investor of any stripe or color would consider as an ROI? How many equity partners would you be able to attract with "interest rate" returns? The cost of funds is relative to bank financing, which in these cases is unavailable for the task at hand. Thus....

Gennady Shenker
Title: President
Company: GDS Solutions
(President, GDS Solutions) |

Dear Anonymous,

First of all, Again, you provide way to little info about your company, product, target market, etc. to give you a concrete advice. Given these limitations and quality advice above, my suggestion will be a combination +.

of the bat, I would NOT exclude any option. Having said this, I would certainly ONLY reach out to smart money VC with ability to help you quickly scale up your business in addition to VC investment including access to additional finance sources, quality tech staff, access to companies within and outside your target markets, etc. etc. etc.

For the right opportunity, smart money moves quite quickly and, not the least, will validate your idea to the outside world.

If smart money is not available, I would consider all the options suggested above, prioritizing and moving from more to less preferred. The preference is yours to establish.

Depending on your geography you may be able to find tech help for cash only, equity only, or combination. I would also consider suggesting your enthusiastic customers to pre-pay part or all of the project or even invest (the terms will most likely be better than smart money VC and costs will be according).

Again, restricting info about your company, customers, competition, collaborators, product, etc. etc. precludes concrete quality advice.

Best,
Gennady $henker
C: 312 890-9549
E: ChicagoBoothMBAataol [dot] com
L: www.linkedin.com/in/gennadyshenker/

L Lau
Title: Investment Scout
Company: partnership
(Investment Scout, partnership) |

@Gennady, the problem with traditional VCs is that they only look for certain types of startups, namely the thunder-lizards that would be a potential Netscape or Google. Some of the micro-VCs or super-Angels may be interested if it fits their particular investment thesis (cloud is the fad-du-year). As it sounds like enterprise software, targeting friends & family may be hard and by law, there are limits, even the crowd-investing tends to be < $1M. If you do want to go down that path (after due consideration) here's a roundup of the landscape
http://www.inc.com/magazine/201306/eric-markowitz/how-to-choose-a-crowdfunder.html

Topic Expert
Patrick Dunne
Title: Chief Financial Officer
Company: Milk Source
(Chief Financial Officer, Milk Source) |

If there is not a VC that will help, you can at least talk with a bank and walk through options. A well presented business model/budget and supporting open PO's will help establish credibility as a borrower. This is not just a short term problem. You are going to constantly have a working capital constraint until you are profitable enough and your current size/book of business levels off. You need external financing help based on what you presented

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