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“Every growing company has one thing in common,” a CPA said in the earlier stages of my startup career. “They perpetually need about $100,000 more than they have.”
I laughed, knowingly. But in every startup I’ve been part of or have advised as a PR practitioner, the tongue-in-cheek remark has been true. In two of my partnerships, it even proved to be the ultimate deal-breaker, as my cofounder in each case attemped to take over as leader, with me in the role of perpetual-billable-hours-machine to fill in the gap.
Thankfully, I’ve learned better in the years since, and I’ve made a conscious effort to avoid inflicting this kind of “shortfall” job description or thinking on others. So how do you surmount the inevitable growth-stage shortage?
Closing the funding gap
In recent years, I’ve reevaluated the “work like a machine and don’t expect to take the revenue” mentality. It’s worth noting that the growth stage of your venture is especially problematic — possibly even company-killing — because as you ramp up operation, the increases in infrastructure and business rely on the revenue you billed 30, 60 or 90 days before. The faster you grow, the bigger the gap — and the closer that cliff you can’t see while you’re cheering about your phenomenal growth.
Here are some options for managing the gap:
- Bill earlier, or bill in advance. Just be sure you’ve accrued the early revenue as “sacred funds” to cover expenses as they occur.
- Collect faster. It may sound elementary, but if you bill and collect even one day earlier, the difference over time may astound you. But in a phase of high growth this may still not accrue fast enough.
- Get an operating line of credit. Use it with care. It will generally be collatorized by your receivables, your building and in the early stages, maybe even your house.
- Consider outside loans. They can help support infrastructure and training costs that may arrive in spurts as you grow.
Or, of course, there’s the least appealing means of surmounting the gap:
- Work harder.
- Postpone getting paid. As a founder, delay or remove the need to be paid, or pay yourself less than a market-level salary. Clearly, this can only work for so long and in fact would be a detrimental mark, not an act of heroism, when you apply for classic investment or are positioning to be acquired.
The moon rock story
One of the most interesting stories I’ve heard on this subject comes from Eric Lapp, founder of The Raleigh House mental-health and addiction facilities in Colorado. Today, the center is one of the largest privately owned facilities in the state. In 2008, however, it was a grass-roots startup that grew out of Lapp’s early life experiences and his dedication to creating better models for the treatment of others.
About 10 years ago (and three years into his business), Lapp was sitting on a friend’s back patio when he observed what appeared to be a shooting star. “Let’s chase it,” he said. He and the friend took off with flashlights and ran through the surrounding fields, ultimately arriving at a railroad track.
When Lapp looked down, he saw a fist-sized rock about the size of his palm. Eerily, it looked a bit iridescent. “Oh my God, this looks like a meteorite,” he exclaimed. He took the rock home, Googled it, and sure enough, its origination seemed clear.
“So who could I sell this to?” He mused. Based on the internet findings, he estimated its monetary value at $50,000, laughingly named it “the moon rock” and put it away on a shelf.
The next year, as his business reached its magic three-year mark, the company needed a cash infusion for growth. Lapp took stock of his possessions and assets as he decided whether he should cover the investment himself.
Lapp thought of the moon rock, and he added it to his asset list at a value of $50,000. Seeing the $50,000 number was a turning point — it gave Lapp the necessary courage to make the investment because he felt that he would have a cushion left if all of the money were lost.
Thankfully, the venture did well with the relatively small investment. The company continued to grow and ultimately achieved the market cap of multiple millions that sustains it today.
Several years later, a scientist friend walked into Lapp’s office, where the moon rock is still on display to this day. “Hey, let me see that meteorite of yours,” the friend said.
“Sure,” Lapp responded, handing him the rock. After looking it up and down, the friend laughed. “Well, I’m pretty sure what you’ve got here is railroad slag.”
According to Google, iron slag is generally a waste product or an aggregate component for products like driveways. In the best of cases, an antique piece of slag glass could fetch a sum of $50 to $1,500. It was nowhere near the cash cushion Lapp believed it to be when he made the fortuitous choice to invest.
In Lapp’s case, the moon rock continues to sit on the shelf in his office to remind himself and all others that sometimes, courage exists where you find it. There are no guarantees in entrepreneurship. But there are plenty of times, as fear is mounting, that the strongest leaders have taken a leap of faith assisted by a “moon rock” belief — and it’s helped them excel.