Seldom logical | Banking on a Startup loan? http://seldomlogical.

com/

Seldom logical Search

new ideas, ideal solutions are seldom logical. attaining a desired goal always is
articles about login

Banking on a Startup loan?

Friday, 06 February 2009 04:00 Hrs
seldomlogical.com / articles / Banking on a Startup loan?

Summary What do people think about NAB's young entrepreneur program? [0]

Would you think of using a Bank as a source of credit for your Startup? This idea surfaced
recently on the Silicon Beach Startup[1] newsgroup. Why?

Why is this question being asked?

1 of 11 08/03/09 18:15
Seldom logical | Banking on a Startup loan? http://seldomlogical.com/

Funding for Startups is a hard problem. The task of securing funding involves both time and
effort. A distraction from the task of creating. Why is raising capital so difficult? One word,
risk. New companies without a financial track record are unknown quantities. Avoided by all
except for the most adventurous of lenders. [2] First-time finance is to Startups what drink-
driving is to newly licensed drivers, trouble. [3] For inexperienced Entrepreneurs, even
searching for funding is an alien skill. New Startup founders show about as much skill in
hunting for finance as 21st century man suddenly thrust back into early Africa. Hungry for
food, they sometimes see prey, but have no idea how to trap and kill it, let alone know how
to look for spoor. A Bank loan may look like an easy kill. But inexperience has it's downside
where knowledge means survival. A lack of the right kind of knowledge can mean a quick
financial death.

Harsh financial environment

Founders also have to contend with harsh environments a partial product of local
conditions. Geographic location, culture and business climate all play their part defining the
quality and sophistication of funding. If you happen to be lucky enough to live in the
Amazon Jungle equivalent of finance, Silicon Valley, finance is difficult, but the money is
there. If you live in Australia, the financial equivalent of a desert, finance is almost
impossible because money is scarce. [4] So the act of questioning all potential sources of
finance strikes to the heart of the local funding problem. Asking the question, "What do
people think about NAB's young entrepreneur program?" makes absolute sense.

Why are Banks lending now?

"... NAB's Microenterprise Loan for Start Ups - Learn more about a
Melbourne Florist whose business is blossoming with the help of a NAB's
Microenterprise Loan ..." [5]

The real reason I think Banks are targeting non conventional companies right now has less
to do with "social justice" [6] than traditional higher yield customers shedding debt. [7] Debt
is now a four letter dirty word in business circles and Banks know it. Banks still have to
invest money and small business at the moment, with its lower finance requirements are
probably the only types of companies that might show promise of growth. With growth,
profits may follow. What is a Startup? Startups come in many different shapes and sizes,
are they all the same? What kind of Startup are we talking about?

What kind of Startup?

The idea to "start up" a traditional small business say a hair dresser, a book keeping firm or
newsagent is not the same as "Starting up" a new technology based company like Google
did or Scribd is in the process of doing. [8] The definition of a Startup for someone not
working in technology appears to be a woolly interchangeable label applied to any
entrepreneurial or small business activity. By contrast, technology Startups are made up of

2 of 11 08/03/09 18:15
Seldom logical | Banking on a Startup loan? http://seldomlogical.com/

two essential ingredients, new ideas and technology with the caveat of smart people
working at the core. What makes technology Startups different and so appealing is the idea
that not all Startups are born equal. Not all Startups are born equal because small teams of
smart engineers, can aggressively attack hard problems to create new technologies,
productively. Technology Startups have the advantages of leverage and barriers of entry,
that traditional small business can never emulate. [9]

When Corporations shed staff and shrinking economies weed out financially weak
businesses, more people are exposed to the idea of combining new ideas, risk and effort
for profit. Creating wealth at the forefront in peoples mind. But the language used to
describe the mechanism to create wealth is still playing catch-up. How do Banks describe
such activity? Banks like to use loosly defined, catchy words like "Young Entrepreneur",
"Start Ups", [10] "Micro Enterprise" and pepper their documents with terms like ENYA. [11]
But don't be fooled by the MBA-speak. Indecipherable terms describing what is really a
simple set of ideas.

How not to fund Startups

So lets get back to the problem of Entrepreneur funding and Startups. I'm not going to
explore "How to fund Startups" because the existence proof has already been written up. It
also comes with the added benefit of dozens of "guinea pig" technology companies field
testing these financial hacks, real-time. [12] I'm more interested in why "taking money from
a Bank is not the best way to fund your Startup". To illustrate this idea, I went through the
documents supplied by the Bank [13] and conducted a quick "thought experiment" into the
potential dangers you might face.

The three Amigos of funding

In this "fictional scenario", you the founder are put into a room with three potential suppliers
of finance. You have to decide which is the best source of finance for your Startup. For the
lender, the job is to determine the risk to return ratio. Are you worth it? Lets start. First
there's John, formally dressed and business-like. A representative from the local "Big"
Bank. Next is "Fat Tony" the local "loan shark". Immaculately turned out in an expensive
foreign suit. [14] Finally Joel, a successful technologist turned Angel Investor. Casual in
both dress and manner.

John breaks the ice...

JOHN "So I hear you are interested in the 'Microenterprise Loan for Start
Ups' our Bank is offering?"

FOUNDER "Yep. Funding is so hard to do. Where do you start?"

JOHN "Lets go through the steps required. Are you eligible for 'ENYA'?"

3 of 11 08/03/09 18:15
Seldom logical | Banking on a Startup loan? http://seldomlogical.com/

FOUNDER "That Celtic singer my mum listens to in the car?"

JOHN "No, the 'Enterprise Network for Young Australians'?"

FOUNDER "'Shite... thinking to self, 'MBA speak'. Danger Will Robinson...

Danger!"

JOHN "Tell me about your 'Microenterprise'. Do you know Where your

customers come from? Who they are?"

FOUNDER "Yes, no idea."

JOHN "Do you have a reliable and steady income stream?"

FOUNDER "Ramen profitable just this week."

JOHN "Ramen profitable? Is that a global economic indicator like the

McDonalds Index?"

At this time both Fat Tony and Joel have been silent. Then Tony pipes up...

FAT TONY "Suit-boy over there is going to... how shall we say, 'compromise
your dignity', filling out forms and jumping through unnecessary layers of
bureaucratic hoops."

FOUNDER "Forms, hoops... compromise?"

FAT TONY "We on the other hand at the 'Legitimate Businessman's Social
Club' have less formal requirements. No forms, just a quick shake of the
hand and a big bag of cash. We pride ourselves in only getting involved in
your business if you fail..."

Fat Tony pauses for dramatic effect...

FOUNDER "What? Broken knee-caps, knuckle dusters?"

FAT TONY "No. We are strictly legit. We do everything a Bank does - take
all your worldly good and possessions, but over a short-black and some
Penne al'arrabiata." [15]

FAT TONY "John and the 'Big Bank boys' on the other hand want you to self
assess, be Australian, young and take a minimum of 5 monkeys up to
20G's. Wait there's more, not to be a bankrupt"

Becoming increasingly annoyed, John replies...

JOHN "Hang on Anthony. To be absolutely correct, that's only stage one of

four. First you have to talk to ENYA, devise a business plan in conjunction
with our fully trained business advisors.

4 of 11 08/03/09 18:15
Seldom logical | Banking on a Startup loan? http://seldomlogical.com/

FAT TONY "... and listen to their advertisers, I mean advisors for 12
months."

JOHN "Every thing hinges on the business plan and any support issues we
identify. You cannot progress to the 'Loan assessment interview' until we
have the plan and support letter."

FOUNDER "You mean there's more? ... just for 20 gorillas?"

JOHN "The terms are pretty generous. An unsecured loan from as little as
$500 up to $20,000. An interest rate of around 9.95%, a three year
repayment period and 90 days interest free."

FOUNDER "The interest rates are pretty high. Can I spend it as I see fit?
Can I get GuitarHero for the team? What if I fail?"

JOHN "Thats why we pre-screen you. You have to follow the process. Most
of it's online but..."

FOUNDER "So I have to waste my time with some crappy online

application, then attend meetings?"

JOHN "No ENYA, no business plan, no support letter, NO Finance."

FOUNDER "But that will take too long. I need to build the product now. Not
next week, month"

JOHN "The process will take some time to approve."

FOUNDER "What? Do any of you blokes create, code?"

JOHN "IT? no we outsource all that kind of typing stuff. Bottom line and all
that..."

Pregnant Pause as the reality sets in...

FAT TONY "Tell 'em about the interview John. Tell 'em about what happens
if the founders don't meet the conditions you'll roll them over to a business
loan..."

JOHN "Well there is the final hurdle to make sure your not getting into a
worse position. You are taking out a loan. We need to ensure, check,
access, confirm, search. We have to be careful and do our due diligence."

FOUNDER "So let me get this right. I have to assess myself, go through
ENYA, business plan, go through a loan assessment and all I get is access
to a lousy business loan from a Bank?"

5 of 11 08/03/09 18:15
Seldom logical | Banking on a Startup loan? http://seldomlogical.com/

Fat Tony "Johnny. It's a pity you didn't do you the same due-diligence on all
those housing loans."

John "Look who's talking. I see your business associates taking a hit."

FAT TONY "A Hit?... You and your firm thinking on taking a contract out on
me?"

WHACK, WHACK, WHACK, WHACK, #$@$, THUMP...

Some time later the ambulance leaves with John. Fat Tony is speaking to the local Police.
Joel speaks for the first time.

JOEL "How about if I make you an offer over some coffee. You've been
recommended by colleague at 'The HIVE'. I've use your App. It's the best in
the market. I've seen the changes you made with user feedback. Growth
looks good."

FOUNDER "You mean no ENYA, no MBA speak. I don't have to eat

meatballs at the Social club on Wednesdays?"

JOEL "I've been where your going before. Are you 'Ramen profitable' yet?
[16] I'm a hacker/founder made good. I mostly do strategic investments,
Angel stuff. Even though the market has crashed I'm still on the lookout for
Startups that have potential and are starting to make money. [17] Shhh."

FOUNDER "Mums the word."

Back to reality

Letting a Bank evaluate your idea, bash out a business plan and then audit your finances
might be financially prudent from the Banks point of view. But predefined strategies like
business plans hinder Startups more than they help. Time bound, rigid processes punish
fast moving Startups, crippling the advantages they have over normal business. [18]
Startups need flexibility. Is it really worth your time to be told you by a Bank, you are too
young or too old? That your business plan needs working on? Only to be offered a business
loan if you fail to meet their set criteria?

Startups have different financial needs

Do you expect Banks to understand that the idea you propose is a question, not a business
plan? A starting point that evolves over time from listening carefully to what customers
want and willing to pay for? Limited funding opportunities and the lack of Angel investors
who understand and fund technology, hamper local Startups. But short of uprooting to
Silicon Valley, the most sophisticated funding environment in the Startup world, the best
Startup financial hack is still to build a demo, release it informally to users and continually

6 of 11 08/03/09 18:15
Seldom logical | Banking on a Startup loan? http://seldomlogical.com/

modifying your product to make what users want... and will pay for. Then hit the local
Startup events with your demo. Tell by showing.

Ramen profitable?

Are you "Ramen profitable" yet? If not, get "ramen profitable" fast. Be frugal. If you can get
away without borrowing funds, all the better. If you can't, find alternative sources of
finance. [20] If your idea flops, or if you can't make any money or simply fail, you avoid
serious debt. Avoid debt. [21] Especially at a time where the costs to execute an idea and
informally introduce it a community of users are at an all time low. Needing money from
anybody other than your customers also weakens your position as an Entrepreneur in
future negotiations. And it's not like Banks are currently the best at evaluating financial risk.
Just think sub-prime.

References

[0] Silicon Beach Australia, "An online discussion list to 'create a more unified supportive
Australian Information, Communications and Technology sector.'
http://SiliconBeachAustralia.org

[1] Elias Bizannes, "Is 20k from NAB a good idea?", Silicon Beach Australia.
http://groups.google.com/group/silicon-beach-australia/browse_thread/thread
/248cd19e3dbc66b4?hl=en
[Accessed Wednesday, 21 January 2009]

[2] Banks requesting Startups to demonstrate financial stability pretty much kills any idea
of investment to Startups. The risk of not knowing if the original loan can be repaid is
simply to great. This didn't stop Banks lending 100% finance to home owners on the
assurance they have a mortgage on properties. Even if the property is over valued. For this
reason alone I think the current risk analysis industry is to some degree broken.

[3] Dave McClure, "Great Entrepreneurs are PASSIONATE about Customers & Products,
NOT about being Great Entrepreneurs", I got this idea from Dave McClure where he talks
about first time Entrepreneurs: "first-time entrepreneurs are just as friggin' dangerous as
drunk teenagers behind the wheel of a speeding automobile". The description is apt.
http://500hats.typepad.com/500blogs/2009/01/great-entrepreneurs-are-passionate-about-
their-customers-products-not-about-being-great-entrepreneur.html
[Accessed Wednesday, 4 February 2009]

[4] The funding pipeline for Startups in Australia is much less understood and clearly
defined than Silicon Valley. Thats why events like, "The Hive", http://www.thehive.org.au/
and "Silicon Beach Australia", http://siliconbeachaustralia.org/ are so important. They act as
a ground up movement to funding as apposed to top-down "The Churchill Club",

7 of 11 08/03/09 18:15
Seldom logical | Banking on a Startup loan? http://seldomlogical.com/

http://www.churchillclub.org.au/

[5] I was worried that I was confusing the term, "Entrepreneur" with "Startups" but I found
reference to the term on the Banks own site. So I think I'm on the right track. Here is an
example of the NAB (National Australian Bank) using the term, "Startup",
http://www.flickr.com/photos/bootload/3214408943/ And another example while randomly
reading up on US based small business classes http://www.flickr.com/photos/bootload
/3214408947/. In the images, notice the misapplication of business terms.

[6] NAB (National Australia Bank), "Young Entrepreneurs", "... NAB's partnership with ENYA
is recognition that an organisation which supports and promotes the active participation of
young people in enterprises is the best way to reach young entrepreneurs. ..." is The NAB
claim but read in conjunction with "... NAB's partnership with ENYA is recognition that an
organisation which supports and promotes the active participation of young people in
enterprises is the best way to reach young entrepreneurs. ..." it reads more like marketing.
a) NAB , Young Entrepreneurs
http://www.nab.com.au/wps/wcm/connect/nab/nab/home/about_us/4/3/2/2/
[Accessed Wednesday, 4 February 2009]
b) NAB MicroEnterprise Loans, Young Entrepreneurs (18-29 Years)
http://www.nab.com.au/wps/wcm/connect/f95aac004bc636b1818e932345045098
/MED_young_entrepreneur.pdf
[Accessed Wednesday, 4 February 2009]

[7] ABC News, "Figures show Australians continue to shed debt"

http://www.abc.net.au/news/stories/2009/01/19/2469106.htm
[Accessed Tuesday 20 January, 2009]

[8] The greatest source of confusion is the use of the term Startup in what is two entirely
unrelated fields. To label a dog-washing firm a Startup might be technically correct but it
misses the point. The greatest gains are made by technology Startups because of the way
new technology is adopted. Not because of some arbitrary label. Another source of
confusion I see is non technology Startups mimicking every Google business practice in
the hope they will somehow replicate Google's growth. Google is far past it's Startup stage
but Scribd shows the type of growth possible in technology Startups. TechCrunch, Erick
Schonfeld, "Scribd Had A Blowout Year, And So Did the Web Document",
http://www.techcrunch.com/2008/12/31/scribd-had-a-blowout-year-and-so-did-the-web-
document/
[Accessed Tuesday 3, February, 2009]

[9] Technical Startups have better leverage than small business because they create new
technology. The leverage comes from lots of people using the technology. Business not
creating new technology miss out on this leverage and the wealth it generates. A good

8 of 11 08/03/09 18:15
Seldom logical | Banking on a Startup loan? http://seldomlogical.com/

article to read (and one I re-read) to help explain the relationships between Software
Startups, small teams, hard problems and wealth can be found in "How to Create Wealth"
by Paul Graham. Read the section on "Technology = Leverage".
http://www.paulgraham.com/wealth.html
[Accessed Thursday 22, January 2009]

[10] I was worried that I was confusing the term, "Entrepreneur" with "Startups" but I found
reference to the term on the Banks own site. So I think I'm on the right track. Here is an
example of the [Big Bank] using the term, Startup. http://www.flickr.com/photos/bootload
/3214408943/ Here is another example I found randomly searching for US based small
business classes http://www.flickr.com/photos/bootload/3214408947/. Notice the confusion
of business terms.

[11] ENYA stands for 'Enterprise Network for Young Australians'. It's also a name for a
Celtic singer
a) http://www.enya.com/
b) http://en.wikipedia.org/wiki/Enya
[Accessed Tuesday 20 January, 2009]

[12] Paul Graham, a) "The Hackers guide to Investors" and b)"How to fund a Startup". Both
articles provide ample evidence on how best to fund your Startup. The only complaint is the
location bias. If you are not in Silicon Valley your chances of funding are reduced. However
a word of caution. The ideas suggested are not a perfect solution to funding but more of a
clever-financial hack. Like all hacks they are subject to failure. The experiment is still
underway and funding results may change in the recession market. In fact the latest
change to c) "Make something users want" is "... to pay for".
a) "The Hackers guide to Investors"
http://www.paulgraham.com/guidetoinvestors.html
b) "How to fund a Startup"
http://www.paulgraham.com/startupfunding.html
c) "Paul Graham, YCombinator recommends Startups make something people want... to
pay for"
http://startup2startup.com/2008/11/25/paulgraham-ycombinator-recap/
[Accessed Tuesday 3, February, 2009]

[13] I downloaded and went through the following documents:

a) NAB MicroEnterprise Loans, Young Entrepreneurs, Ibid.
b) NAB Terms and conditions (PDF, 332kb)
http://www.nab.com.au/wps/wcm/connect/c1edfc804bc6170eb56fb72345045098
/NAB_Microenterprise_Loan_Terms_and_Conditions.pdf
c) NAB's minimum requirements for a business plan (PDF, 256kb)
http://www.nab.com.au/wps/wcm/connect/ec5af5004bc61a4182bf932345045098

9 of 11 08/03/09 18:15
Seldom logical | Banking on a Startup loan? http://seldomlogical.com/

/NAB_minimum_requirement_for_a_business_plan.pdf
d) NAB Microenterprise Loan Application Form (PDF, 249kb)
http://www.nab.com.au/wps/wcm/connect/e4ebe8804bc60dbf98e79b2345045098
/NAB_Microenterprise_Loan_Application.pdf

[14] Fat Tony, "Fat Tony is know by various aliases as William 'Fat Tony' Williams or
Anthony 'Fat Tony' D'Amico, even Marion."
http://simpsons.wikia.com/wiki/Fat_Tony
[Accessed Thursday 22, January 2009]

[15] BBC Food, Penne al'arrabiata, "Penne al'arrabiata ia pasta with a tomato and chilli
sauce"
http://www.bbc.co.uk/food/recipes/database/pennealarrabiatapast_83813.shtml
[Accessed Thursday 22, January 2009] [16] Events such as "The Hive" Ibid. and online
resources such as "Silicon Beach Australia" Ibid. allow informal introductions than attending
more formal VC/Angel events such as "The Churchill Club", Ibid.

[17] "Ramen profitability" is the ability to (barely) cover living expenses from your Startup
revenue. The idea is a play on the idea of spending so little you eat nothing but "Ramen
Noodles". The idea was originally described by Paul Graham in "A fundraising Survival
Guide",
http://www.paulgraham.com/fundraising.html
[Accessed Tuesday, 3 February, 2009]

[18] New York Times, "Claire Cain Miller & Brad Stone" "Angels Flee From Tech Start-Ups"
http://www.nytimes.com/2009/02/03/technology/start-ups/03angel.html
[Accessed Wednesday, 4 February, 2009]

[19] Rigid processes punish fast moving Startups, crippling advantages they have over
normal business because they restrict speed and flexibility, ie: the ability to create new
technology by working in small fast teams on hard problems and profit levering new
technology.

[20] Paul Graham, "How to fund a Startup", Ibid.

[21] You might be able to do this working on an obscure idea but if you are in a race to
build something where the idea is already in the public domain, your competitors might
accelerate past you with the aid of funding.

All articles »

10 of 11 08/03/09 18:15
Seldom logical | Banking on a Startup loan? http://seldomlogical.com/

Peter Renshaw Copyright 2008 creative commons license.

11 of 11 08/03/09 18:15