When it comes to financing options, the debate is usually between debt and equity. In equity financing, one gives up control of the business to have the opportunity to grow faster, whereas with debt financing one keeps control, but risks growing more slowly. If your business is highly capital intensive or research-driven -- for example, if you want to roll out a national chain of tea parlors or develop a cutting-edge killer app -- then you may need the deep wallets of an acquiescent venture capitalist.
However, if you can slug it out and grow organically without selling your first-born, then you may want to carefully consider the alternatives before taking the equity plunge. The key is avoiding the desperation that might prompt you to rush into an arrangement that could be premature.
THE CASE FOR DEBT. So how did my company,
Casauri, do it? I get asked this question -- how did we financed our business through the startup stage? -- all the time. First, we analyzed what made us comfortable and uncomfortable. The second consideration was to determine our desired result. Our sources of capital at the various stages of startup included loans from families and friends, an SBA micro loan, credit cards, a manufacturer's advance, bank lines of credit, and -- my personal favorite -- upfront cash deposits from customers.
On Day One of our business, we had no cash to finance anything. I was graduating from Columbia University Graduate School of Business with a student loan to repay, no job, no signing bonus, the prospect of even more debt -- and the dream of entrepreneurship firmly rooted in my head. But what I did have was stellar credit, as a result of carefully managing credit-card use throughout my college and graduate school years. Good credit paved the way for our financing, and it still does.
Moreover, I had a mission for my business: to introduce a stylish alternative to hideous laptop cases, especially for women. No one was doing it, so I decided that I should. The summer after my graduation, in 1999, my company, Casauri, was born, and the question became how to finance by objective
EARLY TACTICS. I got a part-time job as a temp, then at a handbag store, while playing my violin in the New York City subways, and selling scarves in Times Square that my sister, Helena, made. Helena, who is my only business partner, was working full time, and that helped with the cash crunch until she was downsized out of her job. Throughout this time, I was steadily working on the business concept, doing research, finding suppliers, and exploring our market opportunities.
I applied for a micro loan sponsored by the Small Business Administration, and that provided our first external capital infusion of $25,000, enabling us to make our first production-quality bag samples and to participate in our first trade show. Then we received a $4,000 grant for women business owners from the state of New Jersey.
By some standards, we may have been taking the slow boat to China, but we decided that it was preferable to the fast-track alternatives. Moreover, we were comfortable with taking that slow-but-steady approach. Nonetheless, we did explore other avenues for financing, including meeting various angel investors, who proved to be anything but angelic.
One of the most onerous investor situations was the proposal to sign away 50% of our business to an investor who not only knew little about our industry, but had actually lacked sufficient funds to fund our venture. His cash infusion of $28,000 immediately became an equity-to-debt transaction. This was a defining moment in our business. We decided there should be no equity partners unless it made sense, it was the right time, and above all, it was the right partner.
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