Finding Cheap Capital for Your Small Business

Mezzanine financing or subordinated debt is an option for entrepreneurs who have positive cash flow and little collateral

by Karen E. Klein

Nelson Carbonell knows what it's like to be a startup entrepreneur struggling to find funding. In the early 1990s, he bootstrapped a technology company that he ran from his basement—using his own savings and $10,000 in credit card debt to get it off the ground.

Now that Carbonell is the chief executive officer of an investment firm, Snowbird Capital, he has directed nearly $50 million in funding toward small businesses over the past two years. He spoke recently to Smart Answers columnist Karen E. Klein about various strategies that small firms can employ to find the capital they need at the cheapest cost. Edited excerpts of their conversation follow.

You bootstrapped your first company, Cysive, before taking it public in the late 1990s. What was the appeal of entrepreneurship for you?

I'm something of a lifelong serial entrepreneur, I guess. I started my first company when I was 10, selling candy from my best friend's dad's ice cream shop. I became a software engineer, and in 1993 I started a company to build a software product. We had grand designs about building the next-generation document-management system, selling it to millions of people, and riding off into the sunset. But we couldn't raise the money, so my partner and I decided to provide software services and cut deals with our customers where we would own the intellectual property on all the projects we built.

What happened was we got so busy, and got such a great reputation working for companies like Sun Microsystems (SUNW), that we never built the software. What I tell entrepreneurs now is, 'Whatever you plan to do is not what you end up doing.' That's why the people involved in a company are more important than the plan. I will invest in a mediocre plan with a great team behind it anytime over a mediocre team with a great plan.

You wound up taking your company public during the technology boom of the late 1990s, then taking it private during the dot-com bust, and eventually spinning off some bits of it and liquidating others. Along the way, did you feel a lot of the pain that entrepreneurs typically encounter with financing?

Oh sure. My partner and I started with $10,000, each putting in $5,000 of our own money. For the longest time we didn't pay ourselves, and our office was in the basement of my house, so it was free. We were as thrifty as possible, and we financed a lot of things with credit cards. We always had big problems with cash flow.

My wife was our first chief financial officer and she used to take our biggest client's check to the bank to deposit. They wanted us to wait two weeks for that check to clear, but we had a newborn at the time, so she'd go into the bank with the baby and say, 'Hey, could you clear this right away? We have to make payroll,' and sometimes they'd help us out.

Eventually, when we were doing $3 or $4 million in annual revenues, we got an unsecured line of credit from the bank. But we were always running one step ahead of the game. I still remember the year I realized we had three months' worth of cash in the bank. That felt awesome! Way better than when we had three weeks' worth.

How did you wind up starting Snowbird Capital in 2004?

By the time we finished with Cysive, I realized I wasn't a software engineer anymore. I'd spent 10 years figuring out how to start up, finance, and grow a business from scratch. A lot of people encouraged me to start another tech company, but that felt kind of like going back to high school again. I wanted to try something else.

My goal with Snowbird Capital is to focus on the kinds of businesses that I knew well. That is, those earning between $10 million and $50 million annually, that are growing and looking for ways to finance that growth, but that are not at the point where they've got venture capitalists or bankers clamoring to finance them.