Whether you run a startup or have been in business for years, chances are at some point you’ve wanted access to more money.
But how do you get that cash injection, and what is the right financial tool for your business?
This week we’ve got Don Gooding on the show, talking about the Four Colors of Money. What are these four colors you ask? Read on!
Yury Nabokov: Our guest today has worked in and around entrepreneurship his entire career as an investor, small business owner, mentor, ecosystem catalyst and thought leader. Recently he produced a blog, Four Colors of Money for Entrepreneurs, and a podcast, The Funding Coach, about entrepreneurs’ funding options. He’s now early in launching start up Singity, while chairing an AI software company, Introspective Systems, and leading program development for Portland’s new immigrant business center. He was research partner in the early days of top tier venture capital firm Accel partners, owned the real world version of hit acapella movie Pitch Perfect. Ran Maine Center for entrepreneurial development. Was vice chair of the Maine Angels and EMC Entrepreneur television show, Greenlight Maine. We are very excited to welcome to the show Don Gooding.
Don Gooding: Good morning
Rich Brooks: Don great to have you here. You and I have known each other for quite some time and you’ve been involved with the main startup community for quite some time. How did that all come to be?
Don Gooding: Well in 2010 my wife and I moved from Mount Desert Island where I had lived for 14 years running my acapella business down to the Portland area and I wanted to figure out what to do. The short story is that instead of getting a master’s in economics at age 50 I instead decided that I wanted to help entrepreneurs and one thing led to another and I ended up being recruited to run the Maine Center for Entrepreneurial Development, which is the first business incubator in the state of Maine. So I was executive director number, I don’t know, four or five.
Rich Brooks: Very cool. Very cool.
Yury Nabokov: It’s very exciting to be early to the game. Don, your blog talks about the four colors of money. I’m pretty sure here in the US there’s only one color and it is green. What are the four colors in your currency rainbow?
Don Gooding: Well, I talk about the four colors of money because many entrepreneurs, depending on what kind of business they’re trying to build, they think of just one type of business. So for example, Yuri in your world, everybody thinks about debt as a form of capital, but in fact for pretty much all companies, you start off with bootstrapping, which I’ll come back to in a second and then there are grants and then there is debt and then there is equity and equity is the world of the Maine Angels where I was chair and venture capital, which is where I started the beginning part of my career. And each of those financing choices is designed for different kinds of companies, different stages of companies, and it’s useful to understand all of your financing choices to make sure that you’re trying to find the right color of money, if you will. That’s right for your business. At this point in time.
Rich Brooks: So Don, we’ve got a bootstrapping, grants, debt, equity. Let’s start by digging into bootstrapping first. When is this most appropriate for businesses looking for funding?
Don Gooding: Oh, well, certainly at the very, very earliest stages, pretty much all entrepreneurs start bootstrapping and I think of it in a couple of different ways. Part of it is converting your own personal assets into business assets. And those can include financial assets like savings. It can include things like using a home office or using your own vehicle. But it can also include things like using your contacts, your education, to turn those into something that can be useful to launch your business. So that’s, that’s part of the bootstrapping, but also importantly, it also includes ongoing, once you’ve launched your business, managing your cash flow. Cash comes in, cash goes out, and it turns out if you think hard and work hard at getting cash to come in faster and to go out slower, than that can have a very positive impact on your business. And not every entrepreneur necessarily thinks about the cash flow in that way. And there are lots of clever ways that entrepreneurs have come up with to figure out how to do that. So that’s, that’s a brief overview of bootstrapping. And I’ve actually spent a lot of time trying to dig in deep into it just because it is such a useful and universal entrepreneurial financing tool.
Rich Brooks: Don, I definitely want to talk a little bit more about cash flow, but just in the bootstrapping world, how much of this is bootstrapping just ourselves and how much of this are we tapping into family and friends or does that fall into one of your other colors of money?
Don Gooding: I would put that into other colors of money in it. Now other people will describe bootstrapping as including friends and family money but, from my position, if you are getting other people’s money, OPM, you don’t want to get hooked on opium, that is another form because typically, if you’re getting your parents to loan you some money, well that may be a loan, a debt, it may be a grant or it may be that they want piece of your company and that’s equity and it’s good to be explicit about that because each of those different kinds of money has different strings attached, if you will. No matter who it’s coming from.
Rich Brooks: Mom, keep your hands off my business.
Don Gooding: Well, you know, it tends to lead to the awkward Thanksgiving discussions if business isn’t going as well as it should. And so I like lots of other people advise entrepreneurs to think hard about what Thanksgiving would be like if they didn’t end up being successful with their business. Cause that’s one of the strings that’s attached that could go on for a very long time depending on your family dynamics.
Rich Brooks: Right, or if you’re too successful. And then they’re like, “Where’s my piece?”
Don Gooding: Exactly. And that’s why it’s very important to put all of these kinds of things in writing up front because if it’s in writing then it’s super clear and frankly that’s one of my scars on my back from my first acapella business where I didn’t put everything in writing and I ended up out regretting it a lot later down the road.
Yury Nabokov: Is there a platform or a resource where people can find somewhere like a blueprint that they can utilize when they go through the thought process of what they need to discuss with all their potential partners or family members? Where should they start on that journey?
Don Gooding: Well there are lots of resources and I want to separate discussions with part business partners, with discussions with family members about getting money because those are two very, very different discussions. If you want to go into business with somebody, it’s also important and there’s a lot of great resources online. I hate to fall back on Google, but that’s where I would start. I don’t know of a single source that’s the single place to start to look about how you talk to partners, but there are, I would encourage people to look for lists of questions to ask a potential business partner to make sure that you’re both on the same page. And I say both because typically two people is what you see in business partnerships. And it’s very easy to assume, which we all know it’s a dangerous thing to do. It makes an ass out of you and me, to assume that the other business partner is thinking about things the same as you are. And again, that’s something that can blow up. And in fact it often blows up. Business divorces are actually more common than personal divorces. I’ve been through both around the same time in my life and neither was fun.
Yury Nabokov: All right, for those who are listening today, please remember, do not assume and a to avoid analysis paralysis, just Google it and you know, find the first resources and try to extract some insights. So Don, thank you for very much for, for the recommendations. But I wanted to ask you the following question. Grants feel like something for nonprofits. So how do businesses apply for grants and how is it applicable to small businesses or big businesses if there is a difference?
Don Gooding: Well, yes. So first of all, there are federal and state grants connected to technology development. So in the state of Maine, the Maine Technology Institute does give grants for technology development. At the federal level there is something called SBIR’s, Small Business Investment Research grants. And in fact the company that I chair, Introspective Systems, has cumulatively gotten about two and a half, $3 million of those kind of grants over a five year period of time. So if you’re in a technology business, it’s something to look at. Other non technology business, it’s harder to get those kinds of grants. However, there are some specific grants for specific demographics of entrepreneurs. So for example, in the state of Maine there’s something called a Libra Future Fund. It’s sponsored by the Libra Foundation, which is old intel money and that is for entrepreneurs in the state of Maine under age 30 and they are grants of up to $5,000, very useful for starting a business.
Don Gooding: In fact, there are a number of businesses that have successfully used Libra future fund grants to get all of the working capital that they needed to start up at the beginning. So absolutely it is available to for-profit corporations, but just like with all kinds of grants, the organizations that are trying to give those grants have a particular outcome that they’re trying to achieve in the world and whether or not you help them achieve that outcome will depend on the kind of business you’re in and also who you are. Oh, another important part of the grants is business plan or business pitch competitions. So I hosted the TV show Greenlight Maine, the for the first two seasons, there’s a $100,000 prize that is a grant. So you can think of grants and prizes maybe as a coherent category and there are lots of other competitions that do give out cash with no strings attached. Some are Maine specific, but others are national. I believe the FedEx big competition is going on now and again, there are competitions for a specific entrepreneurial demographics. You may fit into that and end up, if you’re highly competitive in your pitching capability, with some cash to use with as you see fit in your business.
Yury Nabokov: Are they any specific categories that are more preferential at this time in history? Is it more tech, is it more health? Is it more something else that we’re not even thinking about?
Don Gooding: Well, I think in terms of grants specifically, I would say that the scalable businesses that includes tech, but it also includes some other things, are those that are most highly prized if you will by the competitions out there. So if you’re quote, unquote, just going to be doing a main street business, there are a few grants available, but from what I’ve seen, most of the competitions focused on main street tend to have banks as partners and they end up giving out loans as opposed to grants to the winners there.
Yury Nabokov: Thank you don. That was very helpful.
Rich Brooks: So the third color, Don, is debt and debt is one of those words that to me just sounds negative. Can you put a positive spin on it?
Don Gooding: Well, debt is a tool like many other tools that humans have invented. It can be used for good. It can be used for bad. So bank loans can be an extremely effective tool for growing your business. If you get the right debt at the right terms and the right amount. We all pretty much have had mortgages on our house and we don’t think of mortgages as being evil. You can also use credit cards. Again, a credit card used correctly can be a very effective way to improve your cashflow. You can get on average about 45 days of extra cash flow because you’re deferring the payment. However, if you rely on any of these too much and you have too much debt relation to where your business is today in terms of free cash flow, that’s where you start to get into problems. So you just have to be smart about getting the right amount of debt and don’t be afraid of the word in and of itself.
Yury Nabokov: Gotcha. Well quite a balancing act right there. You’ve got to understand your options and you’ve got to know when is the right time to utilize and be reliant on a specific one.
Yury Nabokov: Don, I’m curious about equity. It is something that I don’t know much about so can you explain a little bit what it is, how it works and how it can be beneficial for young entrepreneurs or business owners.
Don Gooding: Sure. I’ll talk about what you might think of an institutional equity. There is also the world of kind of random friends and family who want to buy a piece of your company in return for early financing, but in general Angel Investors who are individuals who are investing their own cash or venture capital firms who go out and raise money from places like pension funds and university endowments and are investing on behalf of those providers they’re funding. Those have been around in the US and they’re also available elsewhere in the world for a very long time. Early in my career, I worked in the early days of Accel Partners, which is now one of the largest venture capital firms and they made their huge hit. One of my partners that I worked with back in the day did the Facebook deal. So they in that case. they invested in the stock of Facebook when it was a young company still losing lots of money.
Don Gooding: They bought roughly 10% of the company for $10 million and over time that $10 million, which it turned into I think it was about a thousand fold return. So it’s one of the best venture capital deals of all time. So typically the people who are interested in equity investment are coming from a position that they have lots of, there are lots of different investment choices out there and it turns out it’s rational to set aside five to 10% of whatever your own investment portfolio is, to the high risk, high potential return types of investments. And if you are smart about it and you’d do enough of those than the wins, which can be huge more than make up for the losses. So you end up overall with a, 20 to 25% annual return, but with taking very high risks. So it’s one of the things that a lot of entrepreneurs don’t necessarily understand that the people who are trying to make these investments, have a very specific goal, which means that they are looking for companies with a very specific profile that is a company with pretty close to unlimited upside and a company that typically will be appropriate for being acquired by some larger company in the industry in the five to 10 year time frame.
Don Gooding: So it’s a very specialized kind of capital and on the other hand, it gets a disproportionate amount of press because Silicon Valley style companies are kind of sexy, they’re very newsworthy. And so you hear a lot more about that kind of investing than you hear about the other colors of money.
Rich Brooks: Don, we’ve talked today about bootstrapping, grants, debt, and equity. I’m sure a lot of people who are listening right now, are like, “That’s great, but how do I decide what color is right for me?” What would you say to that person or is it a huge, it depends?
Don Gooding: It is a huge, it depends. I put them in that order because bootstrapping is always plan A and you want to first figure out “Do I have assets that I can turn into business assets or can I do something with my cashflow maybe on a clever way to get to where I want to be financially?”. So you start there. It’s not unusual for businesses not to be able to get all the way without bootstrapping. And so then I do recommend people to look at grants and then after that, then start looking at a variety of debt options. And I say a variety because are 50 shades of debt, if you will. I never quite got to that post on the four colors of money blog. But there are many, many different options. I do have on that blog, a post on my 16 favorite choices of funding. And so I think that’s actually a good place to start to get your sense of what the different options are and that’s what I designed the blog for is to give the beginning tools for entrepreneurs to be able to navigate through what is a very complicated and often confusing and field which has a lot of words which people don’t necessarily understand.
Yury Nabokov: Awesome. Ladies and gentlemen, that is four colors of money for an entrepreneurs and we are going to have a link to the blog in our show notes, so please check it out. Earlier you mentioned the importance of cash flow, so how do we understand our cashflow? What goes into it?
Don Gooding: Well there are several different ways to understand in like a spreadsheet format of what is going into it. The most confusing tends to be for businesses that have to report on an accrual basis versus a cash basis. And I don’t want to get too far down into the weeds, but I included a blog post about a Microsoft provided cash flow template that I found useful for people to look at all the ins and outs but to, to try to simplify it you want to understand it when and if you’re going to run out of money because lack of cash is what kills businesses. So you don’t want to go there.
Don Gooding: So you have to understand that timing of all of your expenses as well as the timing of the money coming in and just see how they line up. Monthly is a good place to start but, if you are extremely tight in terms of your available bank balance, you may want to start looking at it weekly and just map out. I know it’s a pain. I know a lot of people don’t like to look at numbers, but there’s not a lot of other options. But just saying, okay here’s what I have to pay. This is when the money’s going to disappear from my bank account and here’s what it’s going to come in and see what that bottom cash is and just figure out what you’re going to do if things go wrong because we all know that things don’t go exactly as you planned and so it’s good to have some contingencies on what you’re gonna do if, let’s say a big customer delays a payment by a week. Pretty often that kind of thing’s going to happen with businesses and what are you going to do to make sure you don’t run out of cash?
Rich Brooks: Don, you’ve been involved with the Maine startup and entrepreneurial world for so long. You might have a unique insight on this. If there was one thing that you could do, wave your magic wand, whatever it would be to change the Maine business ecosystem, what would it be?
Don Gooding: Well, I’ll have to show my bias of being an investor early on in my career. I would say we don’t have enough successful tech entrepreneurs who are reinvesting their cash back into the ecosystem. It’s one of the hallmarks of places everywhere from Silicon Valley to New York to the Research Triangle Park in North Carolina that when entrepreneurs have a successful exit, they’ve made a bunch of money that they take some of that and they reinvest in startups in their local area. We do not have enough of that. We’ve seen some major exits recently. There are a few of those entrepreneurs who are reinvesting, but my perception is not enough and so I’m not one of those people, but if I could persuade those 10 people to say, “Hey, take 10% of your winnings and invest it over the next 10 years in Maine, that would go a long way to help build scalable businesses in Maine because that tends to be smart money. It’s not just the green cash of equity, but it’s also advice and experience that comes along with that, that really helps grow and overall entrepreneurial ecosystem
Rich Brooks: Don, that’s a great point and obviously I talked about a magic wand, but there are things that we could do. Is there something that we can put in place now so that when the next person cashes out that they may recognize, maybe obligation isn’t the right word, but a commitment to the Maine economy, are there things that we can be doing along the way through groups like MCED or some other things that give people a reason to give back when they do sell out, when they do sell their business?
Don Gooding: Well, I probably form a small group of the entrepreneurs that are committed to doing that and getting them to build the club where admission to the secret club with special benefits means that you have to be an investor. Maine Angels has been successful for people at lower tiers of success, but the people with more zeroes needs some leadership to help get people comfortable with the fact that this is an important thing to be doing.
Yury Nabokov: Awesome. So if you’re that person with those extra zeros, please, please, please connect with Don Gooding. Learn a little bit more about how you can support the ecosystem and let’s make Maine exceptional together. So as a follow up in the on the last note to our very exciting conversation, Don, could you tell us, where do you spend most of your time online and where can we connect with you?
Don Gooding: Well, I’m an avid LinkedIn user so you can easily find Don Gooding on LinkedIn. My blog, which has been discontinued, but it’s still up and running, “Four colors of money”. That’s F,o,u,r, colorsofmoney.com. Highly recommend it to check those out. My podcast isn’t up anymore, but then my new startup, if you are somebody who thinks you can’t sing but would like to learn how, you’re my target market for Singity, SINGITY.co and I’m given out free lessons right now.
Rich Brooks: Don, I could use all the free lessons in the world. I might be a hopeless cause, but I’m guessing you would say no one’s a hopeless cause.
Don Gooding: Yeah. Unless you flunk the online tone deaf tests at tonedeaftest.com, you are not hopeless.
Rich Brooks: We’re going to check that link out in a little bit. Don, this has been awesome. Thanks so much for coming by today. Really enjoyed learning about the four colors of money and, and how businesses in Maine can get those different types of funding.
Don Gooding: My pleasure and kudos to both of you for doing the good work that you’re doing here.
Yury Nabokov: Don, Thank you very much.