Invent It, Sell It, Bank It!: Make Your Million-Dollar Idea Into a Reality (17 page)

The best time to get a bank loan is after you have gotten your first purchase orders. Scrape together just enough money to get you to that point from other sources, then go to the bank and use your purchase orders as collateral. Once you have purchase orders, the bank will see that you’re credible and will be more likely to believe that you will be able to pay it back. Bank loans will typically involve a higher interest rate than anything you would negotiate with friends or family, but this additional cost is probably worth it if it helps you launch your business and makes you beholden to a neutral party rather than someone whose relationship matters to you.

I had always known that I would have to take out a loan to make my organizer. I had about $25,000 of my own money that I could use to get the prototype made and to pay for various expenses such as traveling to make pitches; but like most entrepreneurs, I couldn’t
cover the manufacturing and packaging costs on my own. As you’ll recall, I got a $120,000 quote to make the tools for my organizer. By the time I found out that number, I knew I had orders coming in (more on how that happened later). So, to determine how much I’d need to borrow from the bank, I had to calculate how much it would cost to create inventory, hire a graphic designer, get packaging made, and pay for all the other expenses that would surely arise. Ultimately, I got a $300,000 line of credit, and I ended up drawing out a total of $250,000, which covered the following:

Do everything you can to maintain a personal relationship with your banker. Make all your interest payments on time, and when possible, keep your banker informed of your seasonality or low and high cash periods. Doing this won’t guarantee that you’ll get a little leniency should the maturity date come and you’re not flush enough to pay, but you never know—it might make your banker willing to work with you to buy you some time. Remember, the bank is a business, too. Often, no matter how good the prospects look for your company, if you haven’t paid your debt, the bank will grab whatever assets you have at that moment, cut their losses, and move on. Building a good relationship with your banker—just as with anyone else with whom you do business—can only help if you ever find yourself with your back against the wall.

$120,000 for tools

$5,000 for graphic design and photography

$25,000 for packaging

$100,000 for a first run of 20,000 units

These numbers would probably be slightly different today, and may not even be applicable for your particular product, but one thing is still true: once your orders start coming in, it’s amazing how fast the money starts going out. Fortunately, once I was up and running I was able to use the profits from my first orders to fund the business. Larger orders allowed me to get better terms from our suppliers—for example, instead of having to pay half up front and half on delivery, we were able to negotiate payment due thirty days after delivery. I was also able to increase my credit line so I could accommodate more customers. As I started getting mega orders from QVC, our credit line expanded quickly to about $5 million.

Government SBA Loans

Loans are available from banks or institutions that have been backed by the U.S. government’s Small Business Administration (SBA). Basically, the SBA puts up collateral for different kinds of loans ranging from general loans to be used for establishing your business or growing it, to microloans for smaller sums of money, to 504 loans that can be used to purchase long-term machinery and equipment. Applicants are required to meet different SBA criteria, depending on what loan is desired. Visit
www.sba.gov
to find out more about applying for a government loan.

Venture Capital Firms

If you are denied a bank loan, the next place to turn may be a venture capital, or VC, firm. These VC firms are basically pools
of money from high-wealth individuals who are looking to get a high rate of return on their investments. They are willing to take much greater risks than banks, but they also set a much higher interest rate for loans and often take a piece of the business. It is painful to give up equity at this early stage, but it can be worth it if the alternative is no funding at all.

When presenting to a VC firm, go in overprepared. Pull out all the stops with that market research you just completed to prove that your business is bringing to market a unique and desirable product. Make sure your business plan is detailed and fact-supported or you won’t last five minutes before the firm rejects your proposal.

There are many VC firms to choose from, and each one usually specializes in a single industry or business type. They are experts in evaluating business ideas and risk against existing market conditions, competition, and manufacturing alternatives, among other factors. To find the right VC fund for your business, attend local chamber of commerce or other business group meetings and start networking. Find out who in your area might specialize in your industry and has a good reputation. That banker who turned you down for your loan might still be able to help you by referring you to a VC firm with a good reputation. Each firm operates differently, so investigate several before selecting which one you want to do business with.

Crowdfunding

It can be extremely difficult for a small business or an individual inventor to get funding through traditional pathways when he or she has little collateral to offer and no sales track. Fortunately, over the past few years a new type of fund-raising system, called crowdfunding, takes advantage of Internet-based social networks and has gained in popularity. Crowdfunding is like friends’ loans on steroids; it gathers money from a lot more people than just your friends. There are basically two types—donation-based and equity-based—as well as some hybrids that combine these models.

DONATION-BASED CROWDFUNDING

The donation-based model of crowdfunding is an online fundraising strategy that seeks donations from large pools of individuals, stretching well beyond any one inventor or entrepreneur’s immediate circle, in exchange for rewards or, increasingly, with pre-orders if the donation is funding the production of a consumer good. Rock bands have financed albums and tours through crowdfunding; teachers have funded classrooms; nonprofits have matched grants. Countless organizations from every sector of the economy have sought and received support for their projects this way.

There are many donation-based crowdfunding sites—for example, Quirky and RocketHub—each catering to a specific demographic and type of industry. At the time of this writing, by far the two most popular such sites are Kickstarter and Indiegogo.

KICKSTARTER
Known for hosting the most highly funded campaigns to date,
Kickstarter was launched in 2009, and since then, donors
have pledged more than $450 million to the projects of their choice (the average campaign runs about $5,000). Projects are highly selective and limited to a specific number of categories, generally involving entertainment, the arts, and technology.
Increasingly, however, Kickstarter is becoming known as a place where entrepreneurs can find backing for new, cool consumer products.

Here’s how it works: An inventor creates a page for his product, essentially pitching it to explain why it’s a worthwhile investment and why it’s important. Then he sets a funding goal and deadline. If people get excited about the product and want to see it succeed, they can pledge money, essentially pre-ordering the product. There is usually an incentive attached to each level of pledge—for example, your name on the company website for $100; a first edition of the product and your name on the company website for $150; a year’s supply of the product, two tickets to the launch party, and your name on the company website for $200, and so on and so forth. If the project reaches its funding goal by the deadline, the donors’ credit cards are charged, they receive whatever reward accompanied their pledge, and Kickstarter receives a 5 percent fee. If the project falls short, no one is charged and the inventor receives no money. Funding on Kickstarter is all-or-nothing. Project initiators retain all control over their product and business.

Two of my
Shark Tank
entrepreneurs, Kelley Coughlan and Jenn Deese, are the inventors of the Pursecase, a phone case designed to look like a tiny purse for the woman who wants to go out carrying only the essentials. It protects your phone, but also holds credit cards, cash, and ID. They successfully raised enough money to fund their first product run on Kickstarter, though the process was not as seamless as they would have hoped.

First, they researched other successfully funded Kickstarter projects to see what those entrepreneurs did right, and ascertained
what financial goal they thought they could reasonably attain. They created a polished video, did a photo shoot of their product, and wrote compelling marketing copy. At the time of their launch, in early 2013, Kickstarter’s success stories were receiving a significant amount of coverage from online media outlets like TechCrunch and Mashable, and Coughlan and Deese hoped to reap the benefits of the heightened awareness.

Beginning with a heavy social media campaign to their friends and family networks, the pair quickly raised about $3,000 in the first week. Then donations stalled. Coughlan and Deese now say, “We were prepared for [a stall], but we weren’t prepared for how long that stall would last.” No matter how hard they worked to expand their donor base and get media attention for their project, donations remained at a trickle, and in fits and starts. The Kickstarter audience just wasn’t responding to Pursecase’s product.

That’s when Coughlan and Deese realized something. As might have been surmised by the type of online media covering the Kickstarter story, which addressed primarily a tech and innovation audience, the Kickstarter donor population was heavily male. It was the women in the audience who liked their idea; there just weren’t enough of them on the site.

One welcome Kickstarter connection they did make, however, was a manufacturer who found them through the site and offered to make their purses for less than their current manufacturer. Realizing that they would never meet their fund-raising goal in time, but reassured by the fact that now they no longer needed as much of a down payment to get their product made, they decided to go with plan B.

When a fund-raising project stalls, donors get discouraged and generally opt to save their money for something that has a
better chance of succeeding. To keep the project moving forward and encourage further donations, the inventionistas asked a generous friend to loan them money in the form of donations made in small increments over time, so the pledge total would continue to increase. This encouraged further giving. Ultimately, the pair earned only $13,000 of their $35,000 target and had to infuse the project with their own cash to meet their goals and keep the money they had actually raised. They immediately returned the money they owed the benefactor who kept the project going, and in the end they did earn enough cash to pay for their first round of inventory. Though the ride was a little bumpy, Coughlan and Deese have no regrets. Not only did they raise the money necessary to launch their company but they also made connections through Kickstarter that have proved invaluable to their business, including their current equity partner.

Coughlan and Deese’s story is a classic example of how inventors have to be prepared for anything, and turn every situation, no matter the outcome, into a learning experience that will ultimately benefit their business. And the Pursecase is a great seller to date!

INDIEGOGO
Similar to Kickstarter except that it does not curate projects, Indiegogo’s level of innovation represented is generally somewhat lower, but there is a broader range of products and business for donors to choose from. In addition, charities and even individuals can raise money on the site for any cause,
such as the campaign to send a bullied bus monitor in New York State on a well-deserved vacation (which raised over $700,000). Though the cachet of some projects may sometimes be a little lower, Indiegogo’s advantage over Kickstarter is that it only charges a 4 percent fee for successful projects; for a 9 percent fee, it allows
you to keep whatever funds you raise even if you fail to meet your projected goal.
Indiegogo projects only have about a 20 percent success rate, however, compared to Kickstarter’s 44 percent.