Earlier this week I met with an entrepreneur that has had a business for quite sometime, but it has been very stagnant for years. He works a full time job and has never focused full time on the venture. Consequently the venture has not reached its potential.
He wants to take his business to the next level and focus on it full time,
but is seeking to raise $50,000-$100,000 to pay himself a salary to do so. I explained to him that this is not what investors typically want their money to go towards and suggested that he build himself a runway. He replied, “what is a runway?” I explained.
So many times people think they need a large capital infusion to focus on their business, but that is only one type of runway. There are so many other ways to get a business off the ground.
So what exactly is a runway?
In aviation a runway is: A leveled strip of smooth ground along which aircraft take off and land.
In entrepreneurship a runway is: A foundation that enables your living expenses to be minimized or covered that enables you to dedicate time and focus on growing your venture.
*Note: the same can be said for building a runway for venture as a whole. A runway enables you to cover all of the startup costs needed before breakeven and reaching profitability.
For the purpose of this post we are focusing on helping entrepreneurs themselves understand and build runways. Truth be told, raising money for a venture can be close to a full time job in itself and investors are more likely to fund you if they know you are dedicated and have lots of time to commit. And you cannot do that, without building a runway.
Major Types of Runways for Entrepreneurs
I have leveraged essentially all of these runway methods during one time or another. Often I combined numerous runways as I sought to bring visions into existence.
1. Leverage Your University (or High School if you’re younger)
Whether you’ve gotten a scholarship or relying on student loans, attending college can be a great runway. While most students are taking classes then spending their time drinking, chasing parties or their next date; you can focus on the love of your life…your startup. The student loans that you are paying anyway provide a runway that enables you to focus time on your venture. You can also plugin into and leverage the network of the university (successful alumni, knowledgeable professors, other studentpreneurs, etc), which could lead to great friendships, mentors, potential customers, future employees, employers if your venture doesn’t pan out, and more. Consider taking online classes or night classes can give you even more time to dedicate to your venture.
2. Prize Money from Business Plan Competitions & Pitch Events
There are many organizations that host business plan competitions and pitch events for local entrepreneurs. Some are organized specifically for students and others are open to the community. During college I was able to win over $18,500 in funds through several different business plan competitions. This kind of money can go a long way especially if your living expenses are not very high.
3. Consulting Clients or Virtual Part-Time Jobs
Having your own clients, or being a part-time employee that can work virtually can enable you to bring funds to cover your costs while you are able to spend much of your time working on your business venture.
4. Starting a Service Business & Investing Profits (Hunting to Survive. Gardening to Thrive)
The example I tend to give related to this is a young entrepreneur starting a local landscaping business to bring in funds (hunting for clients) then using the income not only to live on, but to invest in some sort of product oriented venture that isn’t leveraging your time, but using the asset to make money (gardening). I did this through my service-based business (Marketing Agency) Brand Advance. I actively invested our profits into supporting various business ventures such as GroupTable, Bright Impact, ApartmentsUCF (since sold), OrlandoEntrepreneurs.org and most recently GiftsPeopleWant.com. By investing in ventures out of your profits you are starting to garden and these seeds you plant can lead to passive income or great gains in the future.
5. Invest in Income Producing Real Estate
Back in 2010 I realized how risky entrepreneurship can be. It can be a constant grind and you are never guaranteed a venture is going to work out no matter how passionate you are, how great of an idea it is, or what traction you have. Things happen. Life happens. Markets change, hardships happen, clients get lost, employees or partners can have substance abuse issues, legal troubles can occur, or a large company can roll out a similar venture or innovation that makes what you’ve been working so hard on obsolete. Investing in quality real estate deals is something I have grown quite fond of. It helps me hedge my risk as an entrepreneur and angel investor. My first investment was a duplex with my girlfriend now wife. We lived in one side while renting the other out and virtually eliminated our rent / living expense. Here’s how we did it.
After one of my software ventures generated a good amount of income, I struggled with scaling the software to other customers. After many market-fit conversations and tests I decided investing more into my software was too risky without a validated strategic direction. I decided to take this profit, distribute it and my wife and I purchased another duplex in 2014. We made decent income along the way then sold it two years later for a great gain.
6. Live with an Understanding Significant Other or Family Member
Growing a business isn’t easy. There can be long nights, lots of stress and financial hardships. If you are fortunate to having a significant other or family member that is working and willing to float the bills for you during your startup journey that can be a great runway. This could involve moving back in at home, or even couch hopping. It isn’t a sexy lifestyle and may not be ideal for your dating life, but if utilized effectively can be very valuable for your startup. Back in 2008 and 2009 I was working very hard. My girlfriend, now wife had moved down to Florida after one year of long distance. She believed in me, but couldn’t understand why I wasn’t bringing in the money she knew I was worth. I remember we got in a big discussion after a while because she wanted me to just take one of the full time job offers I received (some of which were very strong especially for a recent grad). I wouldn’t budge. She has guest posted here about the experiences of being the significant other of a startup entrepreneur here:
My wife is wonderful and very supportive. Interestingly enough, within the last years the tables turned and she co-founded a business that merged her passions of helping people and horses. I had to be the one supporting her as she had long hours with no pay.
7. Finance through Customer Sales
This is one of the best ways to grow. When I was looking to fund a startup I decided to start a marketing agency to provide me an income and flexibility as I did so. I took no initial loans for the marketing agency and had no investor, but in our first full year (2009) we had $220,000 in sales. I had a strong marketing background, but had a model that enabled me to finance my growth through sales without carrying much overhead. I would simply understand the needs of a client, spec out the project, obtain estimates from contractors I knew and trusted then receive a deposit from the client to get started before paying the contractor. This way, the first year we didn’t come out of pocket at all to grow. I eventually hired an account manager to coordinate the projects then brought on more full time employees as we grew. However my initial approach enabled us to get off the ground without outside funding.
So consider putting together enough of your concept to sell it to your customers for a deposit. Then using that money to support you and fund your venture. Make sure you have a long enough lead time, or a way to refund the customer if you are not able to deliver. Many businesses rely on merchant services to facilitate payments.
8. Obtaining an Anchor Client
This is similar to financing through Customer Sales, but it involves finding a great customer that can pay you a lot to cover your costs. The risk in this is that you are not diversified and if that client goes away, so does your runway. Nevertheless I have found that often times bigger companies with big budgets can be much less stressful and pay far more than certain smaller clients that could even be entitled at times and demand far more than the value of what they are able to afford.
9. A liquidity Event (Earning a large bonus, commission, or selling an asset such as another business, home, car, stocks, etc.)
If you are fortunate enough to have built or acquired a valuable asset(s), or have a large commission or bonus coming, this can be a great runway for your startup. When acquiring a good sum of money there are always risks and rewards. What are you going to do with it? Do you want to be safe or risky as an investor? If you truly believe in your startup and have done proper planning including many validation conversions and tests to determine market/fit then go for it.
10. Parent or Relative Financial Support or Gifts
Originally my parents were pushing me to become a teacher. Primarily because they were educators and had contacts for me to get a good job out of school. My junior year at a school in Pittsburgh I decided to switch majors, move to Florida and attend UCF.
My parents were not very supportive at first, especially because I decided to redirect my focus education and playing college basketball to entrepreneurship. I remember my father telling me that the only people that are successful in business were family legacy type businesses, and large corporations.
My parents and family eventually came around as they started seeing my success and know are huge supporters. However, they have never given me money for any of my businesses or co-signed on a business loan. After graduating college I paid all my bills including my car, rent, phone, etc.
I do know several people, including friends, that have had parents pay for their cars, large deposits on their houses, and even give gifts of money to help them focus on their business. This can be a great runway if you are fortunate enough to have this opportunity. If you are accept it with gratitude and a thankful heart realizing that many don’t have this opportunity.
11. Getting a Loan or Line of Credit
A loan is another commonly sought way to get a runway. Loans are a very important, but risky tool that must be used with care. However, with the right loan you can move far faster than with bootstrapping while maintaining ownership of your company. I’m a huge fan of having lines of credit for your business and real estate. Rather than get a loan for a lump sum and pay interest on the balance, with a line of credit you are not charged unless you use the funds, however you have the ability to move quickly on opportunities and invest in specific initiatives to help grow your business.
12. Raising Investment Rounds
This is probably the most common runway that people focus on. Working with angel investors, wealthy individuals that will invest for your business for a percentage, or early-stage venture capital firms seek to fuel the growth of startups with hopes to receive a 5-10X+ return on their money in a specific period of time (3 years, etc). This kind of runway can potentially give you a very solid runway to take flight, however there are risks with this approach as well. Finding the right investor is very important. If you are relatively new to the business world, you should typically look for experienced entrepreneurs that have turned into investors that can not only give you money, but also guidance. This is known as “smart money”. On the flip side, you may not want to give up control of your business and some investors are very adamant about the direction you should go and that direction may differ from the vision you have. It’s possible that both approaches could be successful, but if there is dissension causing the venture to be slit in multiple directions this can cause a lot of problems.
You’ve heard the saying…”A house divided cannot stand.” or the “Too many cooks in the kitchen” problem.
Starting and growing a business to profitability is not easy. Startups are like babies. They are needy and crave attention. They want what they need when they need it or the market and opportunity may pass them by. In order to provide for the business you first have to be able to cover your own basic needs (Like on the airplanes you must put your mask on first before helping your child). Nobody will care for your startup like you, the founder(s). Building runways give you the ability to explore the potential of your venture. But it is important to remember that no runway lasts forever. If your runway is running out, then you have to build another one ASAP or you risk going off the runway and crashing.
I hope that you found this post to be valuable and useful on your startup quest.
Are there any other runways you would add? Drop me a comment or contact me.